FREE BUDGETING TOOLS

Prior to setting up the Financial Tip of the Week as a blog about 6 months ago, I’d never read a blog. I now find myself reading various personal finance blogs on a fairly regular basis. I have found some to be very useful sources of information. I came across this blog recently that provides links to several free budgeting tools. The vast array of options to me underlies the importance of evaluating different methods of budgeting before ‘giving up’ altogether simply because one didn’t work for you. Given that all are free, perhaps you can give them a whirl before dropping some money on the most talked about budgeting tools (i.e., Quicken and MS Money). You may find something that works for you; you may find something that will spark some creative juices within you to modify something you’re currently doing … [I’d begun typing explanations of the different programs, but it was getting too long. I’ll let you explore them on your own. All of the links have been verified]. If you find something of interest, I’d be interested in your feedback. Also, if you are aware of other online resources that are free that aren’t listed, let me know – I’ll add them. Take a few minutes to peruse these – lets face it, most people are YNAB (You Need A Budget).

FREE Budgeting [Download] Resources.

• AceMoney Lite
• Buddi
• Budget Ace
• BudgetOnWeb
• GnuCash
• Grisbi
• KMyMoney
• PearBudget
• Moneytrackin'
• MS Office Accounting Express
• MySpendingPlan
• SimpleD Budget
• StackBacks
• Yodlee MoneyCenter
• Zero-Based Budget
  

FREE Budgeting Spreadsheets.

1. Spreadsheet A
2. Spreadsheet B
3. Spreadsheet C
4. Spreadsheet D
5. Spreadsheet E

ORDERING YOUR FREE CREDIT REPORT

“I’m thinking of a number …” says a smiling host that then brags about how high his number is – his credit score that is – and how much money it saves him when he gets a new car loan or mortgage. Certainly true – a good credit score will allow you to borrow at lower rates than those with low credit scores. I’m sure most of you have seen it – the advertisement for FreeCreditReport.com. These types of advertisements for your “free” credit report are some of the most misleading you’ll encounter. The fine print - if you use this [Experian owned] site, you will begin your “free” trial membership in Triple Advantage Credit Monitoring Service; if you don’t cancel your membership within the 30-day trial period, you will automatically begin being billed monthly. Thousands of people mistakenly go to FreeCreditReport.com to order the free credit report that they are entitled to under FACTA legislation.

When you want to see your credit report, you want to use the official government site: http://annualcreditreport.com – there you actually get your credit report for free, without strings attached. You have the right to see your report every year for free, so there is no reason to visit any “pay” sites. The easiest way to identify if you’re in the ‘wrong place,’ will be if you’re asked for credit card information. September, 2005 marked the date that every consumer in America was eligible to obtain a free credit report [can obtain one report per agency (Experian, Equifax, TransUnion) per 12 month period]; ironically, it was only two weeks prior that the Federal Trade Commission announced a lawsuit against Experian [and freecreditreport.com] and other companies for “misleading” and “deceptive” claims for ‘free’ reports aimed at consumers. Obviously they largely benefited from the confusion over news stories telling consumers that they were entitled to a free copy of their credit report [and the importance of reviewing it]. While admitting no wrongdoing, Experian agreed to give consumers refunds and make the terms of its product clearer. 18 months removed, where are we? I don’t know that people have any clearer picture than they did then … I give students in my classes an assignment to pull one of their credit reports, providing the direct link for the free government site and without fail, some students will wind up at freecreditreport.com. Recent polls suggest that about 70% of American adults are aware of their right to obtain a free credit report – this is an amazingly high awareness rating. The challenge – to make sure people are going to the right site! FYI – the Federal Trade Commission has contacted more than 130 impostor sites (websites that misspell or sound similar to the real government site). There are 233 "scam sites" at last count.

Considerations.
- Go to http://annualcreditreport.com to order your free report
- Remember - no purchase is required when ordering free report(s)
- If you find mistakes on your report, fix them
- Stagger ordering your reports (order one every four months)
- Staggering enables you to monitor your own credit
- Don’t provide your credit card unless purchasing your credit score

Web Resources.
- FTC - Free Credit Reports
- Call, Don't Click
- Consumer Tips

DO YOU UNDERSTAND YOUR DEBIT CARD?

Debit cards are commonly seen as a good thing – a way to spend only money I have [unlike a credit card where you can obviously spend money you don’t have]; in theory, this is a good thing, but is this reality? It used to be - not any more. Did you know that if you don’t have enough money in your account to cover a debit card purchase (including ATM transactions) you probably won’t be denied? What? Isn’t that the reason most people use debit cards – to avoid that problem? A recent study has discovered that most banks will actually allow the transaction to go through …

Today, many financial institutions enroll customers [by default] in overdraft (“bounce protection”) programs when they open checking accounts. Under the program, the fee a customer pays when a withdrawal exceeds the available account balance is actually a finance charge for a loan. These overdraft loans are usually very short term and very costly. When these fees are converted to APR (the common measure to express the "true cost" of credit), the APR is often quadruple digits (or higher)! A 2005 report published by the Center for Responsible Lending (CRL) found that checking account holders will pay more than $10.3 billion in overdraft loan fees each year. The number one cause of overdrafts? Debit card purchases! These debit card overdraft loans have proportionately much higher APRs because they carry the same flat-rate fee on what is typically a much smaller transaction amount.

To me, the irony of this all is that banks have the technology capable of warning customers at the time of a debit transaction or ATM withdrawal that their account has insufficient funds, yet most do nothing about it. They can also decline the transaction and save the customer the overdraft fee, yet most do nothing about it. Yet, the CRL study learned that most people would prefer that the bank deny their withdrawal or purchase when they don’t have adequate funds in their account to pay for it.

Summary of CRL Findings.
- 46% of all overdrafts were triggered by debit card transactions.
- 72% of overdrafts were for electronic transactions (debit, ATM, etc.)
- Debit card overdrafts cost [median] $2.17 for every dollar borrowed
- Check overdrafts cost [median] $.86 per dollar borrowed.
- Expressed as an APR, the median debit overdraft rate is 20,000%+.
- 61% would prefer a denied purchase than an overdrafted account.
- 98% would cancel an ATM withdrawal if warned of insufficient funds.

Given what we know (in the past decade, debit card use for purchases has grown at an explosive 20% per year), it is likely the problem will continue. It is anticipated that a fee-based overdraft loan program will boost a bank’s overdraft revenue by 200% to 400%. I bring this to your attention primarily to enable you to be aware of the potential, costly trap of debit card overdrafts. In the study, over 60% of respondents who overdraft thought that they had enough money in their account to cover their purchase or ATM withdrawal.

Bottom Line.
Monitoring your account(s) regularly and maintaining a check register are a couple of simple things you can do to help avoid the problem created by overdrafts.

- CRL Report
- Montana State University Extension Check Register
- OFS Budgeting and Money Management Resources

FREE TAX ASSISTANCE (VITA)

Back-to-back tax tips – good indication that it’s that time of year again. Numerous resources are available to assist the majority of taxpayers with free tax preparation assistance as well as free electronic filing of tax forms.

Resources.
At the University of Missouri, students in the Personal Financial Planning Department and University of Missouri Extension Faculty have partnered to sponsor several community VITA (Volunteer Income Tax Assistance) sites as well as a campus site (that will be housed in the Office for Financial Success). These IRS-certified volunteers will prepare tax returns for students and working individuals/families with incomes under $40,000. The returns are prepared and filed electronically with the opportunity to have refunds direct deposited into checking, savings, IRAs, and other types of accounts (up to three) – see last week’s tip for more information. This is a great resource to help consumers avoid preparation fees and costly refund anticipation loans. This filing also includes your state returns and everything is done at no cost! Services will begin next Monday – January 29th. Walk-ins only – no appointments needed. Locations and availability are provided below.

Additional Tax Helps.
Additional information on tax issues is available at the OFS site. Information available includes:
- Current tax info (standard deductions, exemptions, tax brackets, etc.)
- Information on deducting student loan interest
- Do I have to file? [normally is worthwhile even if you “don’t have to”]
- Information on earned income tax credit
- Information on education tax benefits
- Tax forms
- Link for free online filing (AGI below $52,000)
- Tax tips, recent law changes, and other tax topics
- “Understanding Taxes” – an interactive, instructional IRS tax program

Getting FREE Assistance.
Free volunteer tax preparation sites are available across the country. VITA locations are available in most communities as is AARP locations for the elderly. Missouri VITA sites can be found by clicking here... The VITA link above can help you locate VITA sites if you live outside Missouri. Andrew Zumwalt is the University contact for VITA.


Columbia Locations (1/29 – 4/14/07).
*MU Location
OFS – 61 Stanley Hall (basement)
Tuesday & Wednesday (4:30 – 8:00), Saturday (10:00 – 1:30)

*Bank of Missouri
3610 Buttonwood Drive
Monday (4:30 – 8:00) FEBRUARY ONLY

*Central Missouri Community Action
400 Wilkes
Monday & Wednesday (10:00 – 1:30)

1500 Vandiver
Friday (10:00 – 1:30)

*All sites closed March 24 – April 1 (Spring Break).

SPLITTING YOUR TAX REFUND

Three months ago I sent a tip about the Pension Protection Act of 2006; a bill passed late last summer that primarily included provisions geared toward helping consumers improve on long-term savings habits. Item #3 of those mentioned was an interesting change, one that you will likely have the opportunity to participate in shortly … splitting your tax refund.

Each year, more than 75% of U.S. taxpayers are entitled to a refund (of more than $2,000 on average). Studies have demonstrated that individuals are more likely to save if it is easy and automatic. The government is attempting to accommodate this tendency. In the past, the majority of refunds were provided via direct deposit to one’s checking account. With the new “split refund” option, individuals can opt to have their refund split into up to three different accounts. Account options include checking, savings, IRAs, and health savings accounts. Doing so appears very simple. Just include Form 8888 – Direct Deposit of Refund to More Than One Account – with your return. Indicate the account number and routing number for the financial account(s) where you want your refund deposited and instruct how you want the refund allocated among the accounts.


What you need to know …

- What is a split refund? A split refund allows you to divide your refund [in any proportions you want] among up to 3 accounts with U.S. financial institutions.

- Does my refund have to exceed a certain amount to be eligible? The deposit into each account must be at least $1.

- Can I split my refund among different financial institutions? Yes.

- Must I split my refund equally? No. You have the flexibility to divide your refund however you choose.

- What types of accounts are eligible? Checking and savings accounts, IRAs, Health Savings Accts, Archer MSAs, and Coverdell Education Savings Accts.


Things to do …

- Confirm that your financial institution will accept direct deposits.

- Confirm your account numbers and routing numbers.

- YOU WILL NEED TO SET UP YOUR ACCOUNTS FIRST! If you want to have all or a portion of a refund put into [for example] a Roth IRA, you will need to have an account established in order to have money directed to the account.


More information about splitting your Federal Income Tax Refund can be found at the FAQ section of IRS.gov.

STUDENT LOAN INTEREST RATE FOLLOW-UP

Last week I commented on potential legislation that would ultimately cut in half the current interest rate on Subsidized Stafford Loans for undergraduate students (click here to read). Good news to report - yesterday (1/17/06), the House of Representatives passed the legislation (356 to 71 vote). Next step - the Senate. I'll keep you informed as things hopefully continue to progress positively ...

If you are interested in reading more about this piece of legislation, or about the expected reintroduction of the Student Debt Relief Act (which proposes to: cut student loan rates, increase Pell Grant Assistance, cap student loan payments, and provide loan forgiveness options to individuals in public service areas). Here are some helpful resources:

- National Association of Student Financial Aid Administrators
- Student Debt Relief Act Press Release

UNDERSTANDING YOUR CREDIT CARD STATEMENT

The monthly credit card statement is one of the most commonly overlooked financial documents we receive. Why? It could have something to do with the high volume of information that is ‘squished’ into a small page of paper. It could be the complexity of the information provided. It could be the small font size used. Regardless of the reason, it is time to take a closer look. Although statements from different companies will look slightly different, there are many common elements [here are a few]:

Monthly Charges.
Reviewing your monthly charges is very important. The most obvious reason is to make sure that your actual expenses match what the credit card company is reflecting (mistakes do happen); but this will also alert you to fraudulent charges as identity theft is becoming a bigger problem by the day. By law, you have 60 days to dispute [in writing] errors on your credit card statement.

Minimum Payment.
This is the smallest payment (normally 2% - 4% of your balance) your credit card company will allow you to make and remain in good standing. Making this payment on time is important for maintaining your credit; ideally you will pay the balance in full and thus avoid all interest charges.

Interest Rate/Annual Percentage Rate (APR).
Most of us are familiar with the interest rate – the amount of interest paid per month typically stated as an annual rate. The APR, however, documents the “bottom line” cost you’re paying for your card. The APR includes not only interest charges, but also fees [such as late and over-limit] and other transaction costs.

Grace Period.
This is the “free” period of time that you can avoid interest charges by paying your balance in full each month. The law requires the grace period to be minimally 14 days (meaning that the bill must be mailed at least 14 days before the due date). Most cards have grace periods of 20-25 days. If you fail to pay your balance in full, you will forfeit the grace period (in addition, most cards will forfeit your grace period when cash advances, balance transfers, or convenience checks are used – even if you paid the balance in full the prior month).

Credit Card Limit/Available Credit.
This is the maximum debt allowed by the credit card company on the particular card. Your maximum credit as well as your available credit (maximum credit minus current balance) will be listed on each statement. Keep an eye on your limits – card companies will regularly increase your limit when you pay on time as they want to encourage you to spend more. You can call and request that they lower your limit if you’d like.

Owning a credit card includes with it the responsibility of learning how to use the credit card. Understanding the monthly credit card statement is essential to your success as a consumer. Take the time to review the information on your credit card statement and seek assistance if you have questions/concerns/problems.

LEGISLATIVE INFORMATION FOR CURRENT STUDENTS ...

It wasn't long ago that I sent a weekly tip regarding the legislation that locked the interest rate on all Stafford Loans [taken out after 7/1/06] at 6.8%. Well ...

This week [expected tomorrow], the new House of Representatives leadership plans to introduce legislation that would cut the interest rate on certain student loans in half!

The Project on Student Debt has prepared a brief analysis of this bill, which would reduce interest rates on Federal Subsidized Stafford Loans for undergraduates from the current 6.8% to 3.4% over the next five years. When fully phased in, borrowers on a 10-year repayment plan would see their payments reduced by 14% and save $4,000 in interest costs on $20,000 in covered loans.

The proposed interest rate phase-in would occur according to the following schedule:
6.12 percent in 2007
5.44 percent in 2008
4.76 percent in 2009
4.08 percent in 2010
3.4 percent in 2011 and subsequent years.

To read more ...
- Project on Student Debt
- Inside Higher Education

FAFSA

The beginning of the year triggers a lot of financial events for most [or at least resolutions]: Evaluating your financial situation, perhaps rebalancing investments, getting your finances organized, beginning the process of getting out of debt, starting a Roth IRA, etc. If you’re an MU student, taking one of our one-credit personal finance courses (financial survival or financial success) would be a great way to get your financial goals for the new year off to a good start. Links to register for a course are available under the “Mizzou Resources” section of the blog site (http://financialtip.blogspot.com). Another student [or parent of a student] event at the start of each year is completing the Free Application for Federal Student Aid, better known as the FAFSA.

The FAFSA is the first step in the financial aid process. It is used to apply for federal aid such as grants, student loans, and work study or University aid in the form of scholarships. Even if you don’t think you are eligible for financial aid, you should still fill it out because schools also use it to award non-federal aid. Schools have different “priority deadlines” for submitting the FAFSA (March 1 at Mizzou) – students meeting the appropriate deadlines are given first consideration for aid. After that, aid will be administered based upon fund availability.

Even if you don’t have a need for loans, you can fill out the FAFSA to apply for scholarships, work study, etc. and you can refuse the loans if you don’t want or need them. You aren’t required to take the loan because you filled out the FAFSA. Don’t wait till the last minute to file – if you [and/or your parents] haven’t filed your taxes and the priority deadline is approaching, you can estimate the needed information [use last year’s tax info if the situation is similar]. You can then update the numbers when you get them.

Information you will need to fill out the FAFSA.
- Student driver’s license and Social Security card
- Income tax returns or as close an estimate a possible
- W-2 forms and other records of money earned
- Parents tax return [if dependent student]
- Current bank statements
- Records and documentation of other untaxed income received
- Records of investments (stocks, bonds, etc.)
- Current mortgage information
- Your alien registration card [if not a U.S. citizen]
- Business or farm records [if applicable]

Additional FAFSA Resources.
- http://www.fafsa.ed.gov (fill out the FAFSA online)
- 1-800-4-FED-AID (Dept of Ed can address questions or complications related to completing the FAFSA)
- Financial Aid – your financial aid office is another great resource for addressing FAFSA-related questions.
- Five common mistakes/errors to avoid (https://sfa.missouri.edu/FAFSA_Errors.pdf)

PRIVATE STUDENT LOAN CONSOLIDATION

Last week I wrote about federal loan consolidation and emphasized the importance of reviewing offers closely. There are two changes I wanted to point out: (1) Educational Loan Company - mentioned as a good baseline for comparing “medium-term” repayment offers – had required a minimum consolidation amount of $20,000; that has been reduced to $10,000. (2) The North Carolina Program, which had offered a 2% rate reduction incentive, offers incentives totaling 2% for on-time payment and an additional .25% reduction for auto payment (2.25% total rate reduction benefit available).


Contrary to popular belief, private loans can be consolidated … Here is what you should know if you have them and are considering consolidation:

• DO NOT consolidate them with federal loans even if they provide the option.

• They can’t be consolidated until you’re out of school and beginning repayment.

• In most cases, consolidating private loans will leave you with a variable rate loan – it will not typically fix your loan rate [like federal consolidation].

• Keep in mind that the best option is often to leave them alone. How to know?

1) Look at the benefits of your current lender. There are only about ten lenders that will consolidate any private loans. Most companies require that you have loans with them to be eligible to consolidate with them. The amount will vary – some will require that you have one or more loans with them – some will require 50% or more of the consolidating amount be with that lender. Researching your lender is a good start …

2) Shop around. As mentioned, there are a few companies that don’t have stipulations in order to use their consolidation/refinance program. Here’s a published list - http://finaid.org/loans/privateconsolidation.phtml. The lender, not the government, dictates the interest rates provided [most are linked to the Prime Rate or LIBOR].


Private loan are credit-based loans [as is the refinancing/consolidation process]. If you had poor credit when getting the loan initially, consolidating them may make sense if you now have better credit and/or a co-signer with good credit. The difference in rate from poor to excellent credit can be as much as 6%+ with some lenders. If you had good credit from the beginning, consolidation is not likely to provide much benefit to you. There are distinct costs to weigh in the decision. All of the criteria used to assess the ‘utility’ of the original loans should be examined when evaluating consolidation options. See my alternative loan article on the OFS website - http://financialsuccess.missouri.edu/altloanselection.pdf - for more detailed information about ‘cost’ considerations such as fees, potential prepayment penalties, borrower benefits, etc.

FEDERAL STUDENT LOAN CONSOLIDATION

As the end of the semester is upon us, it seems timely to review the issue of student loan consolidation. This week I’ll address consolidation of federal loans and will address consolidation of private loans next week.

First off, some reminders about some of the recent law changes:
- In-school consolidation is no longer an option. You will need to be out of school in order to be eligible to consolidate.

- You are no longer required to have multiple lenders in order to be able to choose your lender – even if all of your loans are with one lender [i.e., DMU], you are able to shop for the best deal for you.

- You are now unable to consolidate your loans with your spouses’ loans – this was never smart, but is no longer an option.


Other important consolidation considerations:
- You do not want to consolidate Perkins loans [or other loans] if they may be forgiven or repaid by your employer, state, etc. It is ok to consolidate them otherwise.

- If a lender is offering to combine your federal loans with private loans, credit cards, or any other non-federal loan debt, RUN!

- You can AND SHOULD consolidate even if you consolidated prior to take advantage of lower rates. You can always reconsolidate (to combine) loans as long as you have loans to consolidate that haven’t been consolidated prior. As most of you heard last year from me, doing this WILL NOT negatively impact your interest rate. Your overall rate will be a weighted average of your loans rounded up to the nearest 1/8th. For example, if you consolidated $5,000 of loans at 6.8% and $5,000 at 4.8%, you would now have a $10,000 consolidation loan at 5.8% … view resources below to access a calculator to find out your weighted average.

- Some people are afraid to consolidate because their repayment will be extended (thus more interest paid). Keep in mind that you can select the repayment option you want as well as choose to pay whatever amount you want (no legitimate program will assess a penalty for early payoff). Consolidation, however, is the only way to ‘lock’ the rate of otherwise variable rate loans.


“How do I decide where to consolidate – I get so many offers?”
This is perhaps the most important question to address … My experience with consolidation issues over the past several years has drawn me to one primary conclusion – the ‘financially smart’ place to consolidate is not going to be the same for every student; it is largely a factor of how you plan to repay your debt.

(1) If you haven’t borrowed much or plan to repay your debt quickly, you should search for a company that will reward you for doing so. This benefit will normally come as a principal balance credit. For example, Key Bank offers a 5% credit for consolidating with them. Some companies will provide a max credit, as well as other ‘fine print’ caveats, so read the application. While a couple ‘Benjamins’ is nice if this is my situation, if I have a long-term repayment scenario, being enticed by this type of benefit would be a big mistake!

(2) If I find myself in a ‘long-term’ repayment situation (I’m going to define this as 10 years or more of repayment anticipated), the best “deal” for me would be the company that will reduce my interest rate the most. This won’t solely be people that have large debt levels; these will also be individuals that wisely consolidated during the past couple years when rates were at historic lows and they see an opportunity to repay their debt at amazingly low levels and want to minimize that payment while they invest, prepare for homeownership, and focus on other financial goals. Your baseline when comparing rate benefits is to understand that an “average” company will offer a 1.25% reduction (normally .25% reduction for auto pay will be provided along with a 1% reduction in rate for on-time payments [normally of 36-48 months]). As part of the resource links below, I provide links to state programs that provide ‘above average’ benefits, like North Carolina, which offers a 2.25% total benefit for automatic and on-time payments. Information about the programs as well as other information are available below …

(3) The first two scenarios will cover most individuals, however, some individuals will have borrowed too much to pay off quickly; others may be debt averse and don’t want to extend it, so they fall somewhere in between the above two options. In this case, where you plan to repay your debt over an ‘intermediate’ term, review a company that will provide interest rate benefits (these will almost always work out better than the principal credit benefits) where the benefits are offered up front. For example, the Educational Loan Company offers a better than average rate reduction benefits (1.75%), but rather than needing 4 years of on-time payment, .5% of the benefit is up front for auto pay and 1.25% is available after only 24 months of on-time payments.

NOTE. Three things I want to emphasize. (a) These are general guidelines/rules of thumb – run the numbers to see what will make sense for YOUR LOAN SITUATION. (b) Read the applications to see if there are caveats – for example, the principal balance credit by Key Bank is foregone if you defer or forebear the loans during the first 36 months of repayment; Educational Loan Company requires you to be consolidating at least $10,000 total in debt. So read through to make sure the program fits with your situation. Don’t, however, assume that you’re not eligible either. It’s easy to say “I’m not from North Carolina, so I can’t do that” when the reality is that if you’re willing to spend 5 minutes, you can create a connection that will enable you to be eligible for their program. Thus, (c) BE SMART and take a few minutes to figure things out, it will be well worth your time!


*CONSOLIDATION RESOURCES.
- Calculating your loan payment
- Calculating your weighted average
- Consolidation strategies
- Repayment options
- State consolidation programs

* All of these links are available via the OFS site click on the “student issues” button …

EXTENDED WARRANTIES - UNWARRANTED?

A lot of electronics will be purchased this holiday season. For those of you that will find yourself in this situation, the inevitable question awaits … “Would you like to purchase our extended warranty?” What do you do …?

What do the experts say … Consumer groups [and common sense] will normally tell you to turn down the urge to accept the offer. A fast-growing $15 billion dollar industry has been built on the likelihood, however, that you’ll succumb to the impulse to say yes. Millions of people each year pay anywhere from 10% to 50% of a product’s original purchase price to extend a warranty. The decision to buy the extended warranty defies the recommendations of most economists, consumer advocates, and product quality experts who warn that the plans rarely benefit consumers and are almost always a waste of money.

What are they … Extended warranties were first introduced as a high-pressure sales tool by large electronics stores in the late 1980s. Now, they are a core product sold by all kinds of retailers and cover a wide range of products. The warranties are technically insurance products where the premium is paid in a lump sum at the time of purchase. Extended warranties generally lengthen the coverage provided by the manufacturer’s warranty on a product. While terms vary dramatically, the plans typically add from one to three years of protection.

How do they work … In terms of service, most warranty providers use third-party contractors to repair broken items, and consumers don’t get to choose who performs a covered repair. Many policies won’t cover accidents or normal wear and tear (the most common causes of breakdowns in common household goods). Most importantly, however, is the fact that the vast majority of extended warranties are never used.

One distinct disadvantage for consumers is its vast difference versus selecting other “insurance-type” products. When buying auto insurance, for example, it’s relatively easy to make an informed purchasing decision by comparing terms and prices among different providers. It’s not nearly as simple a process to comparison shop for an extended warranty at the checkout counter. Not all salespersons are provided a commission for selling the product but be certain that they’re trained to make sure you know about the warranty and its benefits.

By the numbers … Warranty Week, an industry publication, last year estimated that of the $15 billion in premiums charged to consumers in 2004, $7.5 billion went straight into the pockets of the stores that sell warranties. Of the remaining $7.5 billion, it was estimated that only $3 billion was paid in claims by the insurance companies that back the plans (20% payout ratio). Contrast that with the auto insurance industry that paid out $66 in claims for every $100 in premiums during the same year (Insurance Information Institute).

Bottom line … Consumer Reports almost never recommends buying an extended warranty, especially on automobiles. But even Consumer Reports makes exceptions to the rule. Last year, for the first time, they discovered that repairs on some products (namely laptop PCs, treadmills, and plasma TV sets) were common enough and expensive enough that a decently priced extended warranty would make sense. So what does that mean for you? More times than not, an extended warranty is an unnecessary, expensive option – think twice about it when making that purchase this holiday season.

(SOURCE – Washington Post, October 2006)


ADDITIONAL RESOURCES:
- Extended Warranties & Service Contracts (Univ of FL)
- Extended Warranties: Are They Worth Buying? (Univ of KY)
- Take a Hard Look at Extended Warranties (CUNA)

ELIMINATING DEBT (Psychological vs. Financial)

Is one way better than another to get rid of debt? The answer to your question will likely differ depending on who you’re asking.

“FINANCIAL” METHOD. Nearly every ‘financial’ person will advise that debts should be paid off in a particular order: start with highest interest rate and move to the lowest interest rate (done by rolling the payment from one debt to another as debts are paid off). While this method makes perfect sense from a mathematical point of view, more and more people are finding that there is another method [often overlooked] that works better on their psyche ...

PSYCHOLOGICAL METHOD. This system of debt repayment, often referred to as the “debt snowball,” organizes one’s debt from the smallest balance to the largest balance. This method is not likely to save the most money or time (as the interest rates are not likely to align in that manner), but many find this approach very empowering and motivating because they see progress quickly. Focusing on the smallest balance first will accomplish this end.

In both of these methods, pay the minimum amount on all debts except for the “focus” debt (smallest balance in psychological method; highest interest rate in financial method); pay as much as possible on the focus debt until it is eliminated and then approach the next debt in the list with similar intensity.

I’m not arguing against the merits of the financial method as outlined above. Obviously, if someone has the discipline to adhere to the plan, you’ll save the most time and the most in interest expenses. The psychological method merely takes a seemingly more “human” approach to finances that suggests that people will be more likely to stick with their ‘financial diet’ if they see some ‘debt pounds’ come off quickly … that is what Personal Finance is all about – doing what works best for you (which very well may be something different than the next person). After all, the point is getting out of debt [the end]; don't get caught up in the means to the end. How you decide to do it is much less important than doing it.

Check out the following Excel spreadsheet if you want to play around with the different methods …

NEGOTIATING A LOWER CC RATE

There have apparently been some 'issues' with registration for the 1-credit Financial Success class. They should [hopefully] be resolved now - there are no prerequisites or requirements for class entry. More info below ...

Negotiating a lower credit card rate:
Any “get out of debt” strategies/plans you come across will consistently tell you to lower your credit card rates. Obviously this is good advice and a no-brainer strategy – if I can repay my credit card debt at 10% instead of 20%, I’ll be better off. What most of these plans leave out is how you go about getting a lower rate on your credit card. Let me share some ideas with you if you find yourself in a high rate CC situation.

1. Call your credit card company and ask for a lower rate. Most have lower rates available to good customers (customers paying on time every month), but they don't volunteer the information ... you have to ask. This is likely to work if your high rate was the result of a missed payment and not a long-term problem.
   
2. If your card refuses to give you a lower rate, find one that will. Do some homework – there are over 30,000 credit cards out there. In this highly competitive industry, if someone won’t treat you the way you deserve, someone else will. A few websites to search for no-fee, low rate cards [assuming you haven’t already gotten several acceptable offers in the mail] include:
   - CardRatings.com
   - CardWeb.com
   - CreditCards.com
   - Index.Credit.Cards
   
   After you’ve done your homework, contact your company to inform them of your offer. Being specific is important, because an offer in hand will create leverage for you. Let them know that you wanted them to have the opportunity to match the competitors offer before you transferred your balance. Ask to speak with a supervisor if necessary. Click here for a sample script.
   
3. Be prepared to switch. If what you’ve tried to this point hasn’t worked, consider switching to a card that is more interested in your business [willing to work with you]. If you have a card without a balance, call that company first to see if they have a balance transfer special prior to opening a new account.

Call confidently – a 2002 study found that more than half of the people [from a wide variety of credit situations] that called to request a lower credit card rate were granted their request – from an average starting rate of 16% to a lowered rate of 10.47%. I met with a student this afternoon and we talked about her credit card rate and tactics she could explore to try to lower her rate. All of these things above were discussed – the source of these three suggestions to negotiating with your CC …? AMERICAN EXPRESS!


Seats in the 1-Credit courses for spring are filling quickly ...
Financial Survival -- FIN PLN 1183 (Ref #43500) - (68 seats left)
Financial Success -- FIN PLN 4318 (Ref #43587) - (117 seats left)

The "award winning" Financial Tip of the Week is a service of ...
University of Missouri-Columbia
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director

For those receiving the weekly blog via e-mail, you can click this link [or go to http://financialtip.blogspot.com] to view prior tips and other resources.

SUCCESSFUL MODELS IN FINANCIAL EDUCATION

As I sit here in a hotel room in Washington D.C. contemplating what to write about in this week's tip, I think I'll take the opportunity to toot our horn a little bit ...

Since arriving at the University of Missouri about 15 months ago, the Personal Financial Planning Department has been supportive of just about everything I've wanted to do in starting/operating the Office for Financial Success. We've had many rewarding successes along the way - today among those. I was very honored to be invited to D.C. by Freddie Mac to receive two awards that provide national validation to the good things being done at MU.

2006 Successful Models in Financial Education Awards:
Freddie Mac today announced their 2006 successful models within four financial education categories. The OFS was proud to be recognized in two of the four!

• Successful Outreach and Marketing Efforts for Financial Education.
  We received the top recognition in this category for our Financial Tip of the Week. Time has only increased the popularity/readership of the tip; the new conversion to a weekly blog has been popular as well.
  
• Successful Tools or Resources Used in Financial Education Initatives.
  We were runner up in this category for our Financial Survival course for college students. The unique 1-credit pass/fail Financial Success course that hasn't even been offered yet (next semester will be the first offering) is already receiving attention.

Seats in the 1-Credit pass/fail courses are filling quickly ...
Financial Survival -- FIN PLN 1183 (Ref #43500) - (<100 seats left)
Financial Success -- FIN PLN 4318 (Topics) (Ref #43587)


The "award winning" Financial Tip of the Week is a service of ...
University of Missouri-Columbia
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director

PERSONAL FINANCE - EDUCATIONAL RESOURCES

It is amazing the amount of resources available in the area of Personal Finance. Some resources are stellar, some are poor, and a whole lot fall in between. My objective this week is to expose you to some of these resources [the better ones]. Keep in mind that this is not an endorsement for any of them – my hope is that you’ll be able to find some that will be beneficial to you [as a teacher, a parent, a student, or whatever situation you find yourself in]. You will find that some of the resources are geared toward beginners; others are geared toward individuals that have a good understanding of beginning personal finance principles … all of these resources [at least the basic information] are available at no cost. This should not be considered an exhaustive list of resources, merely a broad brush stroke. Here are a dozen different resources covering various aspects of personal finance:

• Checkbook Basics
• FDIC - Money Smart
• Florida State - Fundamentals of Financial Planning
• Freddie Mac - Credit Smarts
• MoneySKILL
• MU Extension - Info Sheets
• My Money
• NEFE - Get Smart About Your Money
• NEFE - High School Financial Planning Program
• Practical Money Skills for Life
• Rutgers - Investing for your Future
• Smart Money - Investing 101
  

SUMMARY of LAST MONTHS WEEKLY TIPS:
- 10/05 - 8% Rule
- 10/12 - Pension Protection Act of 2006
- 10/19 - Credit Card Trap Widens
- 10/26 - Credit Myths
--> TIP ARCHIVE

THE FINANCIAL TIP OF THE WEEK IS A SERVICE OF...
University of Missouri-Columbia
Personal Financial Planning Department
Office for Financial Success
Dr. Mark Oleson - OFS Director

CREDIT MYTHS ...

Myth [mith] – noun – an unproved or false collective belief that is used to justify something; any invented story, idea, or concept. In the world of credit, innumerable myths abound. Let’s explore a few …

MYTH. When delinquent accounts, judgments, missed payments and other “negatives” are paid, they will be removed from my report. TRUTH – the information will remain. Your credit file is a credit HISTORY, it will simply reflect that it has been paid [which is obviously better than unpaid].

MYTH. Credit reporting agencies make credit decisions. TRUTH – credit reporting agencies provide information [nothing more] to lenders who make the decisions.

MYTH. Personally viewing my credit report will lower my credit score. HUGE MYTH. TRUTH – viewing my credit report will have no negative bearing on my credit score.

MYTH. In the case of divorce, the divorce decree will always carry more weight than the credit obligations. TRUTH – the credit obligation will override a divorce decree.

MYTH. I need to keep a balance on my credit cards and other debts to build a credit history. TRUTH – credit use and on-time payment are what build a credit history. I can do this and still pay the balance in full each month.

MYTH. Shopping for the best rate for an auto loan or home mortgage is not a good idea because the multiple inquiries will be a negative. TRUTH – while many inquiries can hurt one’s credit, inquiries for auto loans and mortgages will be lumped and treated as one inquiry. Shop for the best deals!

MYTH. While poor credit has obvious financial consequences, it doesn’t really affect anything beyond that. TRUTH – an estimated 70% of employers will review your report prior to a hire. Money problems have been linked to less productivity at work, more missed work days, problems at home, and other “baggage” many employers don’t want.

MYTH. I must give permission for a company to see my credit report. TRUTH – with the exception of an employer, permission is not needed. Just look at the inquiry section of your report and you’ll see a lot of people that “pre-approved” you for a credit offer that you never gave consent to.

MYTH. If I’m responsible with credit, I have no need to review my reports. TRUTH – depending on which study you read, it is estimated that as much as 80% of consumer reports contain errors; about 1/3 of those errors are big enough to result in the denial of credit! Ensuring the information in your report is accurate is ultimately YOUR responsibility.

MYTH. Credit reports are the same from company to company. TRUTH – although most companies will report to all three bureaus (Experian, Equifax, and TransUnion), this was not always the case. Also, the speed at which they update information is not the same. I’ve never seen a scenario where the reports were identical with all three …

MYTH. Credit repair companies can fix my credit problems. TRUTH – most are scams. Most are attempting to either (1) work illegally; or (2) try to fix errors that I can fix myself for no cost. Be careful.

MYTH. Credit is too difficult to understand. TRUTH – everyone can AND SHOULD understand their credit. Schedule an appointment if you need help.

HELPFUL CREDIT RESOURCES.
- Ordering your free credit report(s)
- Credit Scoring - MYFICO
- Improving credit, Disputing errors - OFS Resources

- Register for 1 credit Financial Survival (PFP 1183)
- Register for 1 credit Financial Success (PFP 4318)


The Financial Tip of the Week is a service of ...
University of Missouri-Columbia
Personal Financial Planning Department
Office for Financial Success
Dr. Mark Oleson - OFS Director

CREDIT CARD TRAP WIDENS

Credit card companies are notorious for many of their “business” tactics. Many consumers [often students] fall prey to various credit card traps. Many of the more common ‘traps’ are well documented – others, not so much … I want to take the opportunity this week to talk about the more common [as well as new] traps. This is not intended to be an exhaustive list. My initial intent was to write about the most recent trap I’ve read about (Trap #10) – as I started, however, I thought it might be also beneficial to remind you about some of the other more common traps as well.

1. FEES. Fees continue to become an ever-so-important part of a credit card companies revenue. The most common fees include: over-the-limit, late payment, convenience check and balance transfer fees. According to Carddata.com, over-the-limit and late fees have risen 138% and 160% respectively over the past 10 years.

2. PENALTY RATES. More and more companies are becoming less forgiving of late payments. Bank of America, Citibank, and other notable card companies currently raise rates to 30%+ for a single missed payment! OUCH.

3. INTRO OFFERS. Most people are aware of the tactic used by companies to lure in customers with a low rate offer for a short period of time – most people aren’t aware of the cards terms once the intro period expires.

4. USING A CARD WHERE YOU’VE TRANSFERRED A BALANCE. If taking advantage of a intro rate or balance transfer “special” be certain not to use the card for other purchases – your payments don’t go to your higher rate purchases, the payment will go to the ‘special rate’ portion of the balance.

5. CONVENIENCE CHECKS. These are awfully enticing – the checks often come made out to you and advertise that you can use them for anything. The catch? Most charge cash advance rates (~20%), most charge an average transaction fee of 3% of your check amount, and you normally will lose your grace period [even if you pay in full at the end of the month]. Not a great deal in most instances.

6. UNIVERSAL DEFAULT CLAUSE. A tactic initiated in recent years that creates penalty rates not only in the instance where you miss a payment with that particular card. In this agreement, the card is entitled to raise your rates even if you miss a payment elsewhere!

7. “YOU’RE PRE-APPROVED”. This ‘announcement’ makes many feel warm and fuzzy. The reality? All this means is that the company has reviewed your credit report and won’t reject your application based on that information. If you apply for the card, you can still be turned down because of insufficient income or other reasons that won’t be reflected within your credit report.

8. BAIT AND SWITCH. I’ve got a credit card that I use to obtain benefits – cash back on gas and other purchases, etc. If someone else were to apply for that card [or any other credit card requiring someone to have excellent or well established credit], instead of being turned down, on the application, there will be a statement where you are essentially giving permission to the CC company to give you their ‘base’ card if you are turned down for the card in which you are applying.

9. DECREASING MINIMUM PAYMENTS. One of the most financially rewarding tactics (for the CC company) is to decrease your required minimum payment as your balance decreases, essentially keeping you in debt longer. This is a smart tactic on their part because many people that can’t afford to pay the balance in full will simply pay the minimum payment. This required payment will decrease over time, extending the repayment period and interest paid over time.

10. NO MISSED PAYMENT PENALTY RATE. I’m sure this heading is perplexing. The idea of an interest rate going up because of missed payments is rational. But is it legal for a rate to go up for someone that doesn’t miss any payments? That’s what I’ve been reading recently. More and more “savvy” consumers in past years have taken advantage of 0% balance transfers, intro offers, and other “deals.” What many consumers saw as a loophole is now beginning to be closed by CC companies. Smart Money magazine wrote of an individual with what most would consider near perfect credit (790 credit score) – never missed a payment, never over the limit … He carried $8,000 on a credit card because he was taking advantage of the 0% rate for life offer. It was obviously quite a shock to open his statement and see a rate of 29.99%! Apparently, his card company viewed him as a higher credit risk because of his debt and thus, according to the card agreement, had the right to bump him to the ‘default rate’ … Normally, default rates are triggered by missed payments, but apparently, high balances can also trigger a default rate [due to higher risk on the part of the company]. A 2005 study by Consumer Action found that 90% of card issuers would use a universal default rate hike if a customer's credit score decreases, 86% would do so if they paid a mortgage or any other loan late. Nearly half (43%) would hit you with universal default if they decide you have too much debt, while 33% would do it for the exact opposite reason: too much credit available. You can see a rate hike even if all you do is get a new credit card (33%) or shop around for a car loan or mortgage (24%). BE CAREFUL – THE CREDIT CARD TRAP IS WIDENING!

*Schedule a Financial Counseling/Planning Session at the OFS
*Monday/Wednesday walk-in appointments at SSC

The Financial Tip of the Week Blog is a service of ...
University of Missouri-Columbia
Personal Financial Planning Department
Office for Financial Success
Dr. Mark Oleson - OFS Director

PENSION PROTECTION ACT OF 2006

Last August, The Pension Protection Act of 2006 was passed, providing many benefits to savers. It was created with an eye on helping to “Protect pension and retirement plan participants and promote individual savings.” In a nutshell [don't worry, we won’t dive into the entire 1,304-page Act today], we’ll focus on five of the prominent areas in the plan …

1. Permanency to retirement plan and savings incentives. Contribution limits to IRAs, 401(k)s, and other workplace savings plans were increased in 2001 but were due to expire in 2010. This legislation makes these increases permanent. It also makes permanent the relatively new Roth 401(k) option which was slow to catch on for fear it would also disappear in 2010.

2. Automatic 401(k) enrollment. The new plan makes it easier for corporations to set up automatic enrollment in 401(k) plans. They can also set the plans to increase contributions automatically over time. I think this is great. If you don’t, you can ‘opt out’ – the issue now is that you may need to opt out of your company plan rather than opting in. In a study of four large companies that made 401(k) enrollment automatic, researchers found that 96% of employees were saving in a 401(k) plan six months after being hired [compared with 43% that were saving after six months prior to the switch to automatic enrollment]. According to the Employee Benefit Research Institute, it is expected that automatic enrollment would increase 401(k) participation from about 66% (currently) of eligible workers to more than 90%. Employers will be able to start contributions at 3% of salary and increase it over time to 6%. “Lifecycle” or “Target Retirement” funds are likely to be the default fund.

3. Deposit your tax refund automatically into an IRA. Starting in 2007, you can directly deposit all or a portion of your federal tax refund into an IRA. Consider this – the average tax refund of $2,400 is more money than the average person now saves for retirement annually!

4. Other IRA Enhancements. Beginning in 2010, it will be possible for anyone to convert eligible workplace savings plans or traditional IRA assets into a Roth IRA [regardless of income]. There are many other enhancements [primarily estate planning-related] which you can read more about below.

5. 529 College Savings Plan benefits are now permanent. The benefits of this college savings tool, established in 1996, were set to expire in 2010. This uncertainty kept many potential parents on the sidelines or in other vehicles because of their uncertain future.

ADDITIONAL RESOURCES.
- White House Pension Act Fact Sheet
- Fidelity Investments
- TIAA-CREF – Pension Protection Act of 2006 Guide


*Schedule a financial counseling/planning session at the OFS
*Walk-ins (M/W from 3-5pm) at the Student Success Center

The Financial Tip of the Week is a service of ...
University of Missouri-Columbia
Personal Financial Planning Department
Office for Financial Success
Dr. Mark Oleson - OFS Director

8% RULE ...

In an interview earlier this week, I was asked the question of what financial pitfalls most befall college students. I’ve come to the conclusion that I am much more concerned about pride (why students don't come to seek financial assistance than why they do come). Aside from pride, the biggest financial problem I’ve witnessed is student loans. There are a lot of potential factors here: overspending, no budget, borrowing more than can afford to be repaid, having a ‘head in the sand’ approach and not really having a clue about what they owe or anything else about their financial situation, and increasing educational costs, just to name a few.

I want to share a couple of free resources designed to help people evaluate their student loan situation. One uses a needs-based approach, and one uses a rule of thumb to gauge your financial situation.

Financial Path to Graduation.
The Path, developed at Brigham Young University nearly ten years ago, takes a needs-based approach to asking questions to evaluate your situation. Where will my current course of action take me? Will I be able to afford this situation? This process requires a student to evaluate their individual path to determine if it will lead them to firm footing at graduation, as opposed to an all-too-common scenario of owing more than can be afforded. After witnessing the benefits of the program for students, BYU began requiring that students complete The Path prior to being given new loans – the results have been impressive: lower default rate, fewer borrowers, lesser loan amounts … not bad in the current environment of more borrowers and more borrowing. Read more about early results of their Path program.

SLOPE Calculator (8% Rule).
I think when reviewing ones student loan situation that a rule of thumb can also offer insight into the “path” that one is on. A generally accepted rule of thumb in the student loan arena is that one can afford a payment that is 8% or less of your gross income (if you don’t have an idea of what starting salaries are in your field of study, The Path can help). Obviously 8% is a guideline only, 8% for one person may create a hardship (picture someone with a large car payment, credit card debts, etc.) vs. someone with similar student loan debt but no other debts. That is the exact reason I prefer a needs-based approach. The advantage of the 8% rule is it allows me at any stage of my education to take stock in where I am. A really nice tool to help in this process was developed by the Colorado Student Loan Program. The Illinois “Mentor” program uses this tool and provides detailed information about what it is and how it works. It is well worth the few minutes it would require to examine your current student loan borrowing.

- Schedule a financial counseling/planning session
- Walk-in sessions available Mondays/Wednesdays (3-5pm) at the Student Success Center

The Financial Tip of the Week is a service of ...
University of Missouri-Columbia
Personal Financial Planning Department
Office for Financial Success
Dr. Mark Oleson - OFS Director