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Getting Smart before Going Broke

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If the current U.S. financial pains teach us anything it’s that debt doesn’t just show up one day. It’s almost always the result of poor, or uninformed, borrowing choices.

Understanding the ins and outs of credit will make you amongst the smartest consumers anywhere, and will save you a lot of money in interest, charges, fees, and pain later on.

By the time you say to yourself “if only I had known” it’ll be too late and all the hoping and wishing won’t turn back the clock. After all, nobody else has any interest in looking out for your financial well being. Here are the five most common pitfalls:

-Never assume, or take anyone’s word, for clauses, penalties or rights and promises on anything. Lenders, car dealers or retailers will quickly move on to the next clients while you’re the only one stuck with the contract, the payments and the debt.

-Whatever payments you’re taking on always need to fit your budget or don’t do it. Payments will never magically self-adjust to your real financial situation or money challenges down the road. When it comes to monthly payments, it’s not the time to be wildly optimistic, but rather to stop, think it through, weigh your budget, the cost of what you’re spending in interest and fees and how many years this payment will now be around.

-Remember that monthly payments are exactly the same as taking a big pay cut. It’s money that you still have to earn each month but now don’t get to keep. For years, large chunks of your income are now re-directed to a bunch of creditors who are now getting rich at your expense.

-If a credit offer sounds too good to be true – it generally is. If it seems like there’s a catch and you can’t see it – stay away.

-If you can’t understand the terms – or you’re getting promises that are not written into the contract – walk away.
You don’t speak credit – they do – so you need to get it translated into English. Oh sure, nobody wants to sound stupid or uninformed, but if you don’t do your homework, and ask the questions, paying thousands of extra dollars in interest and fees will always be a lot more painful down the road.

Phishing and Whaling

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A few months ago we covered a little about phishing – with a “ph.” It’s the millions of e mails sent blindly hoping to get you to click on the link and supply personal information. They’re often from Paypal, E Bay or the Royal Bank claiming your account has been frozen for irregularities. I received three about the Royal Bank and I sure don’t deal with the mega banks. They’re always, always fraudulent so never ever click on them. Think about it, I’d bet your bank doesn’t even have your e-mail address and they never communicate with you by e-mail.

The newest, and way more sophisticated con is called whaling. Whales are big – that’s the implication here. These are e-mails specifically targeted to executives, business owners and big cheeses. These are researched and written very well.
They are generally claiming to be from the Better Business Bureau, a vendor request for invoice information, from a lawyer with a summons or a recruiting firm.

What the crooks want in this case is to have you click on the attachment. Once that’s done, the spyware installs a key logger program that detects all your key strokes on the computer.

They’re not looking to tap that note to your sister, but the spyware is sophisticated enough that the crooks can detect when you’ve logged onto a bank site, your brokerage account or the likes. It then picks up the log in and passwords you’ve entered and as soon as you’re logged out, the crooks go in and clean out the account.

This is a really, really nasty scam that’s hit hundreds of executives already because it’s well researched, written and targeted.

Just make sure you run your anti-spy software regularly and follow my number one rule for these things and any attachments you don’t recognize: Just don’t click!

We’re Certainly Miles Ahead of the Information Curve!

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A month ago we talked about the tools and insights of how to get your credit card interest rates lowered and here comes the NDP.

Their web site now has the same information we last month. That’s great – the more people have these tools the better. But the NDP takes it another step beyond what I believe is logical.

The web site actually states: Help Jack Layton take on the Harper government to lower credit card rates. Yup, in politics anything is possible – even blaming the government for credit card rates. Bet you didn’t know it was Prime Minister Harpers’ fault. Maybe the government is to blame for the Canucks missing the playoffs, too… Give me a break.

Peggy Nash is the NDP Industry critic, and I actually heard her being interviewed. Yes, the NDP believes that banks should be forced to lower credit card rates across the board. How about we force Canadians NOT to carry credit card balances? How about we outlaw credit cards? Wouldn’t that be a lot more logical?

She was asked whether it isn’t reasonable to conclude that forced lower rates wouldn’t really be part of a free-market economy and wouldn’t a lower rate get people to just increase their debts? Nope – she didn’t see that at all.

Perhaps it’s time we pass a law for car dealers to lower prices and everyone should pay the same amount. Come on!
Reflecting about this backwards thinking got me wondering if there is ever a time where I might confuse someone. The government isn’t responsible for our financial situation. They don’t use our credit cards, didn’t sign our mortgages and didn’t force us to get a line of credit or car payments that are way longer than the life of the car.

Getting into debt was our choice. It’s always a choice – and getting out is a lot harder. But the party ends eventually and there is always a price to pay for all of our financial actions. But perhaps it is less and less politically correct to talk about personal accountability in so many areas of our life.

Credit Crunch, Mortgage Crisis – Everything’s a Crisis

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Last week you gave me the heads up on a newly release International Monetary Fund report. This IMF report claims that the “global credit crunch will cause losses of nearly $1 trillion worldwide.”

But I’ve got a question: How can a credit “crunch” cost $1 trillion? That was the headline in the USA Today report but think about it. A credit crunch is NOT lending. And NOT lending can’t create a loss; it saves lenders from potential losses.

With these types of headlines, there’s often the choice to be dramatic instead of informative, I’m afraid. What they meant to highlight is that the mortgage problems, mostly subprime, that is poor credit mortgages, will create huge financial losses. Now the IMF is a pretty political body and they’re often late to the party, because I would suggest it’s going to be well beyond $1 trillion when the dust settles. Try $1.5 or $2 trillion, but that remains to be seen and it’s only my opinion.

But there’s some good news, because not every lender was caught up in the subprime fever where financial institutions from Germany and Denmark to Asia and North America were somehow caught by surprise that the loans to bad credit customers could possibly go sour.

And both these good news stories are from right here in Canada. One is ING Direct and here’s the difference: They keep all their mortgage loans on their books. So they’re really really invested in making sure they’re good quality. They weren’t taking whatever they could get their hands on and re-selling it before it started to smell.

The other one is Canadian Western Bank. There is a great quote from CEO Larry Pollock: “We’re not smart enough to understand that stuff,” which he gave as a reason for not investing in these off-balance sheet SIVs. Oh, they’re plenty smart and it’s the reason it’s the best performing bank stock in North America!

Here Are Five New Insights That Are Definitely Worth Knowing About:

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Shell has just rolled out “Pay By Touch” biometric payments. We talked about it a few months ago and now it’s here. Yes, you just need to give them your fingerprint as payment, which is hooked to your credit card. Right now, don’t look for it here, it’s just in Chicago area Shell stations and stores.

E-bay recently started their very own gift cards, for sale through 10,000 grocery stores. But you can also get them on-line to e mail to anyone you choose for amounts under $500. But I have a question: With tens of billions of gift cards sold each year, stores get a commission for selling them. What? You thought they sell them to help you out? Nice try. So when we buy the directly from the retailer how come we don’t get a discount?

There is now something called a virtual or disposable credit card. It’s a one-time use card. You get a temporary number that’s linked to your real credit card number and it’s governed by your same cardholder agreement. But it makes nervous people happy as they can use it on-line, and with merchants they don’t really trust. Right now they’re issued by Bank of America and Citigroup. But I never understand why so many people spend all that energy worrying about this kind of stuff. Repeat after me: By law, you are NEVER on the hook for any fraudulent charges on your account. Relax…

An RBC Survey last fall reported that about half of all new mortgages made in Canada are 40-year terms. Great news for lenders – probably the worst news for those who actually do it. It’s financial suicide: On a $200,000 mortgage the payment might drop $160 a month, but you’re adding $173,000 of interest. I can think of at least five or six ways to make a 25-year mortgage work, instead of this, and it’s not a stretch to figure there are hundreds of things I’d rather do with $173,000 interest than gifting it to one of the mega banks!

Last month, Visa issued a $19 billion public offering. That was one of the biggest private offerings ever, and on March 18th, the first day of trading, the shares opened at $44. By the end of that day, they were at $56. Debt really does pay if you’re a shareholder, but NOT if you’re broke and paying the interest on the other end of the food chain!

A big Heads Up About Our Chequing Accounts

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If you’ve got a chequing account here’s something that’ll be of interest. And since that’s almost 99% of us, it’s worth knowing:

A number of U.S. banks have recently purchased some special software to use for their computers. This software is designed to maximize N.S.F. charges on accounts.

Now before we go any further, I have no clue if any Canadian banks have similar software. I have no reason to think they do or to think they wouldn’t be interested in it.

This was a report on the Atlanta based Clark Howard show two weeks ago, and it’s pretty scary. Let me explain: Let’s say you have $500 in your chequing account and there are a number of cheques that you’ve written. You’ve written 6 cheques for $50 each and one big one for $460. That’s a total of $760, so there’s going to be an N.S.F.

Don’t get judgmental right now, because stuff does happen, or banks wouldn’t be making billions in N.S.F. charges. Sometimes it’s carelessness, sometimes it’s as simple as not realizing that a deposit had a hold on it before writing cheques on the money.

Now logic in this example says put through the six small cheques for $50 each and bounce the big one. That’s one N.S.F. fee, now about $42. But this software is designed to get the most service charges out of the account. So the software works out that the $460 cheque should get cleared because then the six cheques for $50 each will all bounce!

So instead of one N.S.F. charge, that U.S. bank can charge six times $42 or $252 in service charges and it’s all legitimate.
In fact, one caller walked through, and documented this type of scenario and had $580 in service charges in one day, where it could have been $70 or so if the order of clearing the cheques had been done in his favour from smallest to largest.

No, this is not a reason to get an overdraft. Quite the opposite, since they just charge a lot of service charges and high rates on a permanent basis. I don’t even care if banks make a ton of profit, I just don’t want them to make it all from your listeners or anyone who uses the tools out of the It’s Your Money book.

(for US IYM: file complaint with the Office of the Controller of the Currency. Occ.gov!!

Life Does Go On Without Credit Cards

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A year or so ago we talked about the drive of credit card companies to hook college and university students on their cards, and to have them broke as soon as possible. It’s their training ground for life, and they pay literally tens of millions of dollars to colleges to be able to buy their marketing lists and sell their products on campus.

But here’s something different and quite surprising: A couple of weeks ago the University of Alberta announced that they were going to be discontinuing taking credit cards for tuition fees. The U of A made the move, according to their statements, to be more fiscally responsible. In other words – to save the huge merchant fees they pay to Visa and MasterCard. Want to take a guess of how much the U of A pays in merchant fees a year? $1.3 million! Now think about all those retailers and what they pay because you know that’s included in the prices they charge.

Their hands aren’t totally clean as they have previously done work with MBNA and have sold their student lists to credit card companies. But I’m prepared to forgive and forget, because this is just great news and Phyllis Clark, the V.P. of Finance is absolutely my hero of the month!

Sure, they did it for selfish reason, but I won’t look a gift horse in the mouth: A major institution in Canada is actually going to stop contributing to having students go broke! THAT is great news. Education should include not contributing to the financial ruin of their students – simple as that.

And a note to the person from the student union whaling, whining and complaining how awful this was, and that most students don’t have any other payment options: Think before talking!

Other payment options include: Debit cards, cash (remember what that is), cheques or money orders. If he was alluding to the fact that students don’t have the money, the comment is even more ridiculous: Think part-time job, think saving BEFORE deciding to enroll for the next year, think budgeting or using student loans for course fees – no, not all students use the money for what it was intended…I know that’s shocking.

If that spokesperson believes huge student credit card debt is a great idea – go get a cash advance off your card. It’s THE best way to go broke but surely your job isn’t to help students get ripped charging stuff at 19% is it?
So congratulations to the U of A, and I hope they become the first of many to set this example in weaning student off credit cards and setting a financially responsible example! Now if they could just take the next step and implement a policy that they will not take money from credit card companies, sell their student lists or help them with promotions on campus…

Lowering Your Credit Card Rate

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I was surprised to get a number of media calls about a story the CBC did last week. They went to a Winnipeg mall, randomly picked 10 people, and asked them to call their credit card company to get a lower rate, which six out of ten did accomplish.

Can we lower our obscene credit card rates that the no-service mega banks charge us? In the words of Barrack Obama: Yes we can! Let’s face it, credit card rates run 19% plus when prime is around 5%? Give me a break. Besides, full rates are like sticker price on a car – and who pays sticker?

In 2006, North America wide, credit card companies mailed out over 6 billion junk mailers but their response rate is less than a third of one percent. It’s not only very hard to get new clients, it’s also very expensive. So good business practices say keep the customers you have loyal to you and that’s all this amounts to.

You don’t really need a script, you just need to know you can do it and call the toll free number on the back of your credit card. You should have one of the junk mail offers in front of you. Best if it’s one from Capital One or MBNA offering a fixed rate card at 9.9 or 10.9%. Don’t use one of the teaser rates they use to suck you in for 1.9% or so. That’s only temporary – you’re looking for a fixed rate that doesn’t end next week!

Simply tell customer service you have this offer and would like them to match it because you’re a loyal and good customer. The rate on the offer in the mail is way better and you’re considering switching to save money. If they don’t cooperate, ask to speak to a supervisor.

You’ll likely get it if you have a credit score over 720, have dealt there for a while and have a good payment track record. You’re exactly the kind of client they want to attract and keep!

You’ll likely strike out if you’re at your credit limit, have been in arrears and are only making minimum payments. Card issuers aren’t dumb. They know most of those customers are lucky to have a credit card, and switching is more of a threat than reality.

But remember: If you don’t carry a credit card balance each month – who cares what the rate is and THAT is the situation we should all be in. It’s the start of financial freedom!

Going Further Into Debt: Up, Up and Away

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The recent headline in the newspaper was pretty direct: “Canadians’ overspending is escalating.” As though we haven’t talked about that for a long time now.

This was a study by Mackenzie Investments that reinforced what you’ve have heard me say for some time: Try saving a little and stop impulse spending with money we don’t have. In this case, it’s pretty much a generational divide, breaking down the over and under 50 age group. In the over 50 age group, only five percent are chronic over-spenders, while those under age 34 are the biggest debtors at 29%.

The key findings are a lot of common sense. It’s just that common sense is so uncommon these days. Factors to overspending include an almost non-existent social stigma to being in debt and vast amounts of available credit. Just sign here, quick approvals, and introductory rates designed to make you feel like you’re saving today, just to get the rug pulled out from under you later.

The online survey actually had 53% of people under age 50 admitting they use their credit cards to buy stuff when they don’t have enough money. THAT is impulse purchases and not having a clear understanding between needs and wants.
What was even more eye opening was the admission by almost half the respondents that they have purchased something without any consideration of the long term implications of the debt, and costs to their personal finances.

And things will get worse – way worse. Remember that I’ve been saying for two years what happens in the U.S. will happen here in Canada. 90% of Canadians now have more debt than they did just five years ago, and last year we barely reached seven percent of our RRSP contribution room.

Singles are twice as likely to be over-spenders than married people, which stands to reason. But what was an interesting insight is that women are also twice as likely to be over-spenders, than men!

The best line of this article from Canwest News had to be the sub-title: “We don’t deny ourselves much – except for a dose of reality.”

Identity Theft: The Fastest Growing Crime in North America

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During a typical traffic stop, an Edmonton police officer questioned the legitimacy of a woman’s drivers’ license. It was just a lucky traffic stop that started to really unravel for an alleged identity theft ring.

The police ended up finding computer files with more than 30,000 credit card files, stolen passports, birth certificates and a ton of other stolen identities.

Yes, it was two women who were arrested and according to the police, it’s often women involved in identity thefts. After all, it isn’t violent, it’s working from home and isn’t about a gun – just a computer.

There are actually web sites, just like E-bay where you can bid on stolen personal information and buy stolen credit cards. The crooks will even give you one for a test to prove that they’re legitimate crooks.

In fact, it’s a huge volume game, as well as the fastest growing white-collar crime in North America. You can buy a stolen credit card for under a buck and a full set of identification right down to mothers’ maiden name and debit card PIN number is around $20 bucks. Isn’t that sick?

I can assure you, I could talk about identity theft for an hour or more, but here’s a few things to remember:

The vast majority of identity theft involves someone you know. If you find out, call the police. Do not minimize it, cover it, ignore it or try to explain it away. It’s robbery – pure and simple.

Get a shredder. Never throw out personal information of any kind, especially offers from credit card companies with applications on them, your bank statements, convenience cheques or anything with your name and address on it.

Don’t carry your social insurance card or a bunch of extra credit cards in your wallet. You’re a half hour away from home and don’t need half the stuff you have in your wallet or purse. It’s not worth the risk of theft. Treat that stuff like you would treat your cash.

Don’t give out personal information unless it’s a legitimate application. And 90% of the time, that’s not the case. Ask why they need it and use your head.

And don’t respond to e mails from Paypal, Amazon, brokerage firms or banks asking to update your information. They’re phishing e-mails sent by crooks looking for your personal information. None of those places will ever e mail you with that type of request.

Repeat after me: Don’t press reply!