Credit scoring, used in Florida in part to determine insurance rates is being challenged by Florida Insurance Commissioner Kevin McCarty. Seems a blind study has shown a fictional blue collar vs white collar driver with identical records were given a 15% higher quote in Florida and a 40% higher quote nationally. The only difference was occupation and educational levels but the applicants were placed in high risk pools and not even allowed "preferred" pricing because low income profiles indicate lower credit scores.
From the Daytona Beach News Journal
EDITORIAL
January 30, 2007
A logical leap
Job, schooling shouldn't affect insurance
For years, Florida has prohibited automobile insurance companies from discriminating on the basis of race, income or other factors that have no bearing on a person's trustworthiness.
For years, insurance companies have tried to weasel around those restrictions.
And they've been successful -- astonishingly so, given the straightforward nature of the anti-discrimination rules. The most onerous provision allows Florida insurers to base rates partially on credit scores. Because low-income people are far less likely to have established credit (or to have troubled credit histories) this provision ensures that they pay more.
The most agile mind would have trouble establishing a cause-and-effect relationship between paying Visa bills late and crashing your car into a light pole. But that stretch looks easier, compared to the practice uncovered last year by the Consumer Federation of America, and under investigation now by Florida Insurance Commissioner Kevin McCarty.
Last year, the federation conducted an investigation, comparing rates for fictional drivers whose history, vehicle and other factors were nearly identical. The only variants the group used were occupation and education level.
The differences were astonishing. Nationally, rate quotes for blue-collar workers averaged 40 percent higher than quotes provided for highly educated professionals. The gap in Florida was less, but a blue-collar price quote still came in $112 higher for a six-month policy -- a gap of more than 15 percent.
The federation targeted GEICO, a company that advertises car insurance nationwide, for its study. The rate differences were largely due to the fact that GEICO, like many insurance companies, divides its business among sub-corporations. Blue-collar workers -- even with spotless driving records -- were not eligible to be covered by GEICO's "preferred" company and were shuffled into subsidiaries with higher base rate structures.
GEICO isn't alone. Other companies -- Allstate, Progressive and Liberty Mutual -- also use some form of occupational and educational rating.
Companies argue that there's a numerical correlation between occupation, education level and the number of claims filed. In fact, they may be able to demonstrate a statistical coincidence -- but it's hard to imagine how the companies could prove a solid, causative relationship between driving skill and education or occupation. Particularly one that doesn't trace back to the forbidden factors of race or income.
The federation makes a compelling case that these policies do constitute illegal discrimination. Black and Hispanic Floridians are less likely to have advanced degrees, and more likely to work blue-collar jobs. Even if the insurance companies didn't intend to discriminate based on race or income, this policy may well do so.
In the long run, state leaders should see good public policy isn't behind a move to make insurance less affordable for the people who can least afford it already. McCarty is right to be looking into this -- and lawmakers should take heed, making these illogical rate structures off-limits -- a prohibition that should include credit scores as well as occupation and educational level.
Tuesday, January 30, 2007
Monday, January 29, 2007
Distinguished Professor of Law Testimony to the Senate Banking Committee
Here is the link to Dr. Elizabeth Warren's testimony to the Committee on Banking, Housing and Urban Affairs of the United States Senate. Ms Warren is the Leo Gottlieb Professor of Law at Harvard Law School. She is also the author of, "The Two Income Trap: Why Middle Class Mothers and Fathers are Going Broke". Her testimony is gripping and powerful.
http://banking.senate.gov/_files/warren.pdf
http://banking.senate.gov/_files/warren.pdf
Sunday, January 28, 2007
Teens are paying with plastic but know you can get burned.
The good news is that this generation of teens are seeing the massive amount of debt their parents and friends are incurring with credit cards and 38% don't think it is a good idea. The bad news is, 62% think it is ok to have credit card debt as a teen.
Plastic is a hot teen accessory
Credit, debit card youths' increasing use concerns many
By LESLIE A. PAPPAS, The News Journal
Posted Sunday, January 28, 2007
Amanda Jett (left), 17, was a little older than her 14-year-old sister, Brittany, when she started paying with plastic. Though Amanda uses a debit card, she said she's not ready for a credit card, and her parents agree.
The News Journal/WILLIAM BRETZGER
Amanda Jett has paid with plastic since she was 15 years old.
The 17-year-old from Bear uses her PNC Bank debit card, linked to a checking account her mother co-signed, to buy gas and occasionally clothes.
"I'd rather carry it than cash," she said.
She's not alone. Whether their wallets hold debit or credit cards, teenagers under 18 are using plastic more than ever.
According to Teenage Research Unlimited, a research firm based in Northbrook, Ill., 15 percent of teens ages 16 to 17 have their own debit card, and 5 percent have a credit card in their name.
"Recent research shows that the fastest growth of credit-card use is among 16- to 18-year-olds," Robert Manning, the author of "Credit Card Nation," told the U.S. Senate Committee on Banking, Housing, and Urban Affairs last week.
Children under 18 are unable to apply for a credit card on their own, but can become an authorized user on a parent's card.
Now credit card companies are trying to increase the amount teenagers put on plastic by introducing new products like prepaid credit cards, such as the VISA Buxx card or MasterCard's Allow card, which are essentially gift cards that teens can use at any retailer. Parents and authorized adults, such as grandparents or employers, can load money onto the card. Card companies profit through fees.
Credit-card issuers "definitely are aiming at teenagers," said Ellen Cannon, who covers the credit card industry for Bankrate.com. "It's an untapped market. There are millions of them."
And they're spending more every year. America's 33.5 million teenagers (ages 12-19) spent a record $179 billion in 2006, Teenage Research reported in its fall 2006 survey.
Some financial educators worry that teenagers won't be able to handle credit cards.
"Cognitively to really understand the nature of credit, it doesn't really hit until we're 23 or 24 years of age," said Maria Pippidis, who teaches financial literacy classes at the University of Delaware's Cooperative Extension. As a group, teenagers are often unaware of the pitfalls of credit, she said.
Part of the problem is that many teenagers don't have good examples to learn from, said Robin Smith, who teaches personal finance classes at Smyrna High School. She advises her students to freeze their credit cards in a block of ice if they're not able to pay the entire bill off each month.
"Many of them comment, 'My father should be in here,' " Smith said.
Credit-card debt in the United States has skyrocketed to $872 billion. As a nation, Americans now charge over $1.8 trillion on more than 640 million cards annually.
Senate Banking Committee chairman Christopher J. Dodd, D-Conn., pointed out last week the average American household has more than $9,300 of credit-card debt.
But there are signs that America's teenagers may be growing up more financially savvy than previous generations.
Hannah Rittenhouse, 17, of Newark, said she buys what she wants with the cash she earns at her job at Friendly's restaurant. She doesn't have a credit card and doesn't want one.
"I'd end up getting in debt with it," she said. "Once I get cash it burns a hole in my pocket."
Amanda said she's not ready for a credit card either, and her parents agree.
"We would probably never consider credit cards at that young age," said Amanda's father, John Jett. "We're trying to instill in her that you only purchase what you can afford."
A Teenage Research survey in 2004 showed that teens, though familiar with plastic, are wary of credit card debt. About 38 percent of adolescents 12 to 19 said cards should be limited to adult use. Only 3 percent believed it was OK to make purchases on a credit card without having the money to pay off the full monthly bill.
"I think they're very realistic about debt," said Teen Research's vice president Michael Wood. "If there's one word to describe this generation of teens, it's pragmatic."
Wood also said that this generation, which has grown up counting cell-phone minutes, has learned earlier how to manage credit-card-type accounts. Open discussions with their parents about finances has made many more aware of the dangers of debt. And the increasing use of cards in general has taken the cachet out of owning a credit card.
"Their wallets are full of plastic, whether it's a phone card or a gift card or an ATM card," Wood said. "It's no big deal."
Contact Leslie A. Pappas at 324-2880 or lpappas@delawareonline.com.
WHICH IS RIGHT FOR MY TEEN?
DEBIT CARD
Pros: Uses money in checking or savings account. Easy to set up.
Cons: Risk of overdrafting account and incurring fees. Does not build credit history. Must report lost or stolen card within two business days or may be liable for $500 of unauthorized transactions.
PREPAID OR STORED-VALUE CARD Pros: Spending limited to amount loaded on card. Online checking of balances and spending. Authorized adults can load funds. Employers can load wages onto some cards. Can be used many places.
Cons: Fees are charged for activation, loading money, monthly maintenance and many more actions. Does not build credit history.
JOINT CREDIT CARD Pro: Builds credit history.
Con: Parent and teen responsible for debt.
SECURED CARD Pros: Credit limit set by savings account balance. Builds credit history.
Con: Fully collateralized account may have higher interest rate than noncollateralized account. Really.
AUTHORIZED USER
Pro: Easy to set up.
Cons: Teen can piggyback on parent's credit history. Parent solely responsible for debt. Potentially puts parent's credit score at risk.
Source: Bankrate.com
Plastic is a hot teen accessory
Credit, debit card youths' increasing use concerns many
By LESLIE A. PAPPAS, The News Journal
Posted Sunday, January 28, 2007
Amanda Jett (left), 17, was a little older than her 14-year-old sister, Brittany, when she started paying with plastic. Though Amanda uses a debit card, she said she's not ready for a credit card, and her parents agree.
The News Journal/WILLIAM BRETZGER
Amanda Jett has paid with plastic since she was 15 years old.
The 17-year-old from Bear uses her PNC Bank debit card, linked to a checking account her mother co-signed, to buy gas and occasionally clothes.
"I'd rather carry it than cash," she said.
She's not alone. Whether their wallets hold debit or credit cards, teenagers under 18 are using plastic more than ever.
According to Teenage Research Unlimited, a research firm based in Northbrook, Ill., 15 percent of teens ages 16 to 17 have their own debit card, and 5 percent have a credit card in their name.
"Recent research shows that the fastest growth of credit-card use is among 16- to 18-year-olds," Robert Manning, the author of "Credit Card Nation," told the U.S. Senate Committee on Banking, Housing, and Urban Affairs last week.
Children under 18 are unable to apply for a credit card on their own, but can become an authorized user on a parent's card.
Now credit card companies are trying to increase the amount teenagers put on plastic by introducing new products like prepaid credit cards, such as the VISA Buxx card or MasterCard's Allow card, which are essentially gift cards that teens can use at any retailer. Parents and authorized adults, such as grandparents or employers, can load money onto the card. Card companies profit through fees.
Credit-card issuers "definitely are aiming at teenagers," said Ellen Cannon, who covers the credit card industry for Bankrate.com. "It's an untapped market. There are millions of them."
And they're spending more every year. America's 33.5 million teenagers (ages 12-19) spent a record $179 billion in 2006, Teenage Research reported in its fall 2006 survey.
Some financial educators worry that teenagers won't be able to handle credit cards.
"Cognitively to really understand the nature of credit, it doesn't really hit until we're 23 or 24 years of age," said Maria Pippidis, who teaches financial literacy classes at the University of Delaware's Cooperative Extension. As a group, teenagers are often unaware of the pitfalls of credit, she said.
Part of the problem is that many teenagers don't have good examples to learn from, said Robin Smith, who teaches personal finance classes at Smyrna High School. She advises her students to freeze their credit cards in a block of ice if they're not able to pay the entire bill off each month.
"Many of them comment, 'My father should be in here,' " Smith said.
Credit-card debt in the United States has skyrocketed to $872 billion. As a nation, Americans now charge over $1.8 trillion on more than 640 million cards annually.
Senate Banking Committee chairman Christopher J. Dodd, D-Conn., pointed out last week the average American household has more than $9,300 of credit-card debt.
But there are signs that America's teenagers may be growing up more financially savvy than previous generations.
Hannah Rittenhouse, 17, of Newark, said she buys what she wants with the cash she earns at her job at Friendly's restaurant. She doesn't have a credit card and doesn't want one.
"I'd end up getting in debt with it," she said. "Once I get cash it burns a hole in my pocket."
Amanda said she's not ready for a credit card either, and her parents agree.
"We would probably never consider credit cards at that young age," said Amanda's father, John Jett. "We're trying to instill in her that you only purchase what you can afford."
A Teenage Research survey in 2004 showed that teens, though familiar with plastic, are wary of credit card debt. About 38 percent of adolescents 12 to 19 said cards should be limited to adult use. Only 3 percent believed it was OK to make purchases on a credit card without having the money to pay off the full monthly bill.
"I think they're very realistic about debt," said Teen Research's vice president Michael Wood. "If there's one word to describe this generation of teens, it's pragmatic."
Wood also said that this generation, which has grown up counting cell-phone minutes, has learned earlier how to manage credit-card-type accounts. Open discussions with their parents about finances has made many more aware of the dangers of debt. And the increasing use of cards in general has taken the cachet out of owning a credit card.
"Their wallets are full of plastic, whether it's a phone card or a gift card or an ATM card," Wood said. "It's no big deal."
Contact Leslie A. Pappas at 324-2880 or lpappas@delawareonline.com.
WHICH IS RIGHT FOR MY TEEN?
DEBIT CARD
Pros: Uses money in checking or savings account. Easy to set up.
Cons: Risk of overdrafting account and incurring fees. Does not build credit history. Must report lost or stolen card within two business days or may be liable for $500 of unauthorized transactions.
PREPAID OR STORED-VALUE CARD Pros: Spending limited to amount loaded on card. Online checking of balances and spending. Authorized adults can load funds. Employers can load wages onto some cards. Can be used many places.
Cons: Fees are charged for activation, loading money, monthly maintenance and many more actions. Does not build credit history.
JOINT CREDIT CARD Pro: Builds credit history.
Con: Parent and teen responsible for debt.
SECURED CARD Pros: Credit limit set by savings account balance. Builds credit history.
Con: Fully collateralized account may have higher interest rate than noncollateralized account. Really.
AUTHORIZED USER
Pro: Easy to set up.
Cons: Teen can piggyback on parent's credit history. Parent solely responsible for debt. Potentially puts parent's credit score at risk.
Source: Bankrate.com
Thursday, January 25, 2007
Senate Banking Committee looks at credit card rates and fees. And not favorably!
Presidential elections are still two years off but I predict this kind of Congressional oversight is going to intensify as Democrats continue to gain control of committees. The situation is affecting just too many people adversely and is a viable issue of major concern for voters of every demographic and age. Oversight is long overdue and abuse is now plainly visible to anyone that has a credit card. And now, with 640 MILLION cards in circulation, pretty much everyone has experienced the abuse of credit card companies with their contemptible practices of hidden fees and usury rates. Even members of Congress.
Critics urge Congress to rein in credit card companies
Posted 1/25/2007 12:50 PM ET
WASHINGTON (Reuters) — Consumer advocates urged Congress on Thursday to limit the rates and fees that credit card companies can impose, saying the industry's heavy-handed tactics are piling on debt for many Americans.
"No industry in America is more deserving of oversight by Congress," Travis Plunkett, legislative director of the Consumer Federation of America, said in prepared testimony for a Senate Banking Committee hearing.
The panel, led by Democratic presidential hopeful Christopher Dodd of Connecticut, is looking at billing, marketing and disclosure practices in the U.S. industry.
Critics say some credit card issuers use practices that victimize lower income households with an unexpected rise in interest rates or extra fees because of a drop in their credit scores. Meanwhile, richer Americans are able to pay off charges each month and enjoy perks such as frequent flier miles.
For example, if a consumer is late in paying another credit card bill, home mortgage, utility bill or even a book club membership, some credit card issuers declare a "universal default" and trigger higher interest rates on their credit card.
Dodd put the credit card industry on notice.
"If you currently engage in any business practices that you would be ashamed to discuss before this committee, I would strongly encourage you to cease and desist that practice," Dodd told credit card executives at the hearing.
But Dodd also said that consumers must take more responsibility for understanding their credit card contracts.
In 2005, about 44% of credit card issuers surveyed by the non-profit group Consumer Action assessed universal default interest rates. Those issuers included Citigroup, Washington Mutual, HSBC Holdings and Wells Fargo, according to the group.
"Even consumers who always pay on time cannot avoid the price abuses," said Michael Donovan, an attorney at the National Consumer Law Center.
Donovan and Plunkett urged senators to protect consumers by limiting rates and fees charged by credit card issuers.
Credit card companies defended the industry.
Richard Vague, chief executive of Barclays Bank Delaware, a unit of Barclays, said it is not in his company's interest to issue credit cards to consumers who cannot pay back money they have borrowed.
"For that reason issuers strive to provide credit cards only to consumers who can handle the credit offered them," Vague said.
Capital One Financial, the fifth-largest issuer of credit cards with 30 million accounts, said it does not use the practice of universal default.
Capitol One General Counsel John Finneran told the panel the company has limited what circumstances can trigger higher rates. "There is only one circumstance in which a customer might be subject to default pricing — if they pay us more than three days late twice in a 12-month period," Finneran said.
JPMorgan Chase's Chase Bank USA acknowledged that some credit card disclosures are too complex for consumers to understand.
"Disclosure language should be simple, clear and focused on the most relevant terms and conditions consumers need to understand," Carter Franke, chief marketing officer at JPMorgan Chase, said in testimony.
Critics said many credit card issuers have lowered the monthly minimum payment amounts to about 2% from about 5% in the 1970s. This has encouraged consumers to accept more credit offered by the companies, resulting in lengthier periods to pay off the debt, they said.
Other questionable tactics involve applying penalty interest rates retroactively to prior purchases and lowering loan limits that trigger fees and higher rates.
Based on Federal Reserve figures, Plunkett estimated outstanding credit card debt amounted to $750 billion to $800 billion in November 2006. The industry has more than 640 million cards in circulation.
Copyright 2007 Reuters Limited.
Critics urge Congress to rein in credit card companies
Posted 1/25/2007 12:50 PM ET
WASHINGTON (Reuters) — Consumer advocates urged Congress on Thursday to limit the rates and fees that credit card companies can impose, saying the industry's heavy-handed tactics are piling on debt for many Americans.
"No industry in America is more deserving of oversight by Congress," Travis Plunkett, legislative director of the Consumer Federation of America, said in prepared testimony for a Senate Banking Committee hearing.
The panel, led by Democratic presidential hopeful Christopher Dodd of Connecticut, is looking at billing, marketing and disclosure practices in the U.S. industry.
Critics say some credit card issuers use practices that victimize lower income households with an unexpected rise in interest rates or extra fees because of a drop in their credit scores. Meanwhile, richer Americans are able to pay off charges each month and enjoy perks such as frequent flier miles.
For example, if a consumer is late in paying another credit card bill, home mortgage, utility bill or even a book club membership, some credit card issuers declare a "universal default" and trigger higher interest rates on their credit card.
Dodd put the credit card industry on notice.
"If you currently engage in any business practices that you would be ashamed to discuss before this committee, I would strongly encourage you to cease and desist that practice," Dodd told credit card executives at the hearing.
But Dodd also said that consumers must take more responsibility for understanding their credit card contracts.
In 2005, about 44% of credit card issuers surveyed by the non-profit group Consumer Action assessed universal default interest rates. Those issuers included Citigroup, Washington Mutual, HSBC Holdings and Wells Fargo, according to the group.
"Even consumers who always pay on time cannot avoid the price abuses," said Michael Donovan, an attorney at the National Consumer Law Center.
Donovan and Plunkett urged senators to protect consumers by limiting rates and fees charged by credit card issuers.
Credit card companies defended the industry.
Richard Vague, chief executive of Barclays Bank Delaware, a unit of Barclays, said it is not in his company's interest to issue credit cards to consumers who cannot pay back money they have borrowed.
"For that reason issuers strive to provide credit cards only to consumers who can handle the credit offered them," Vague said.
Capital One Financial, the fifth-largest issuer of credit cards with 30 million accounts, said it does not use the practice of universal default.
Capitol One General Counsel John Finneran told the panel the company has limited what circumstances can trigger higher rates. "There is only one circumstance in which a customer might be subject to default pricing — if they pay us more than three days late twice in a 12-month period," Finneran said.
JPMorgan Chase's Chase Bank USA acknowledged that some credit card disclosures are too complex for consumers to understand.
"Disclosure language should be simple, clear and focused on the most relevant terms and conditions consumers need to understand," Carter Franke, chief marketing officer at JPMorgan Chase, said in testimony.
Critics said many credit card issuers have lowered the monthly minimum payment amounts to about 2% from about 5% in the 1970s. This has encouraged consumers to accept more credit offered by the companies, resulting in lengthier periods to pay off the debt, they said.
Other questionable tactics involve applying penalty interest rates retroactively to prior purchases and lowering loan limits that trigger fees and higher rates.
Based on Federal Reserve figures, Plunkett estimated outstanding credit card debt amounted to $750 billion to $800 billion in November 2006. The industry has more than 640 million cards in circulation.
Copyright 2007 Reuters Limited.
Millionaire in the making: Sherelle Derico Valuable Lessons to be Learned
What I love about this lady is that she has accomplished all that she has without CREDIT CARDS!! While she has sacrificed more (and therefore appreciates what she has) than may be required of the average person, she is demonstrating what is really the key to staying out of the quicksand of "bad" debt. She also understands what "bad" debt is and what "good" debt is as evidenced by her $460,000 in home equity and almost $140,000 in savings!
Millionaire in the making: Sherelle Derico
Single mother sacrifices, then savors, prosperous course for herself and her daughter.
By Christian Zappone, CNNMoney.com staff writer
January 25 2007: 9:48 AM EST
NEW YORK (CNNMoney.com) -- Sherelle Derico, 36, had a three-week-old daughter and no job when she and her husband split in 1996. But the challenges of the separation and single motherhood didn't deter her from seeking financial success.
"It was frightening. Most definitely," said Derico of the experience.
At the time of her divorce Derico, who held an accounting degree, was already considering earning a master's degree.
"As soon as the baby turned one I started on a Masters in Financial Management at the University of Maryland," she said.
The period brought changes not just in her educational and career goals but in her spending habits, too. Derico, who enjoys interior design, says she used to spend a lot of money on clothes and furniture. She used to travel more.
Today, she prefers to pay off debt and to save money down to the penny. When this journalist contacted Derico on her cell phone, one of the first things she asked is, "Can you call me back on my land line? I want to save on my minutes."
Derico's personal history helps explain her habits. After becoming a mother and getting divorced she returned to a former employer who hired her back - for a lower-paying job. Then 9/11 happened, and she got laid off.
"I found myself in lots of debt. That's when I started to save a lot of money," said Derico, who now works as senior consultant in project management for Booz Allen Hamilton in the Washington, D.C., area.
25 rules to grow rich by
Derico has paid off roughly $25,000 in student debt, personal loans, and credit cards debt she racked up in 10 years. She paid for her master's degree mostly in cash along with matching plans from her employers.
Also, five years ago she started receiving a small amount of child support which is now $700 a month.
As for her own money, Derico puts 20 percent of her income into her 401(k) and IRA.
She says she's adamant about paying into her savings like she would any other bill.
She has $95,000 in an account with TIAA-CREF. Her Booz Allen 401(k) account has $36,000. She keeps about $8,000 in her regular savings.
"My friends say I'm pretty obsessive [about my savings]," Derico says, pointing out that she 'loses it' if her savings fall below a certain amount.
Buying a home
Although Derico faced lean times, she has managed to set and keep financial goals - like homeownership.
But Derico's 1999 purchase of the four-bedroom, two-bath, 1,300 sq. foot Fairfax, Virginia, town home didn't come without sacrifice.
She was enrolled in her master's program at the time and had to ask for a refund on that semester's tuition in order to come up with the down payment for the house.
To scrimp for the rest of the payment, she says she didn't go to the grocery store for three months and instead ate only the food she had stockpiled in her pantry.
"The majority was canned food," she said. "Spam. Ramen noodles soup."
But her daughter Sharmon didn't mind. Sharmon, who was 4 years old at the time, wanted to be able to jump; living in an apartment with neighbors in the unit below meant she couldn't.
Derico succeeded in making the down payment and took out a 30-year mortgage on the $114,000 home.
Not long after, she refinanced and brought the length of the mortgage down to 15 years.
More Millionaires in the Making
The value of the property has soared in Fairfax County's overheated real estate market. Similar homes in the area sell for $500,000-$600,000.
Derico has racked up $460,000 in equity in the town home.
She wants to pay off the mortgage in 10 years, which would mean she would own the home outright by 2009.
She points out that "any extra money goes towards [her] mortgage."
Although Derico still sacrifices today, she no longer has to buy ramen.
Money handling
Today her one indulgence is a new 2007 LS460 Lexus. She bought it after paying off her 1996 ES300 Lexus. She financed the new car through her credit union.
Derico has no credit cards and pays for everything in cash with the exception of her Lexus. If she can't use cash, she uses a debit card. She also uses coupons and savings cards when eating out and for groceries and toiletries.
She eats turkey sandwiches every day at work and never eats out during the week. Her entertainment/dining out budget is $100. For the month.
One trick that has helped Derico, who still confesses to a weakness for impulse buys, is to save money in her ING money market account. Once you contribute money to it, you can't touch it for two or three days, which she says prevents spur-of-the-moment purchases.
In terms of stretching dollars, "my friends try to figure out how I do so much on my little income. I've been called a penny-pincher, a thrift-saver, a cheapskate."
Derico says she learned little about financial management from her parents. Instead, her money education came from financial literacy lessons she took at her church.
She wants to pass those lessons on to her daughter.
Sharmon doesn't get a fixed allowance, but Sherelle makes sure she always has some money on hand. Sherelle expects her daughter to save at least 10 percent of the money. As an incentive, at the end of each month, Sherelle matches whatever Sharmon takes to the bank. Including change.
Sherelle then shows Sharmon what's going into her account every month and how much her money has grown.
"My friends say [Sharmon] knows a lot more about finances than they do now," Sherelle says, noting, "she understands credit cards aren't a good thing."
Sherelle does the same with the 529 education plan she opened up for her daughter last year, which so far has more than $3,000 in it.
And finally, Sherelle has Sharmon tithe 10 percent to the church, as Sherelle does when not contributing to the renovation of her grandmother's 30-year-old house.
Future plans
Since Derico is on track to be debt-free in five years, including her mortgage, her prospects of a comfortable retirement are substantially raised.
She says she would like to retire from her current profession one day and move back to her home state of Georgia to teach financial literacy in the schools there. She'd also consider working part time.
She toys with the idea of starting an interior design business if it didn't mean going back to school. Sharmon, now 11, would one day like to be a graphic designer.
With the financial lessons applied to her own life, Sherelle Derico says she doesn't understand people who don't pay attention to their money. "It's nothing you can ignore," she said.
She marvels at people who can't make their finances work while they're employed, because if they can't succeed now that they're making an income how will they survive when they're not working?
"You can finance everything else," said Derico. "But retirement is the one thing that can't be financed."
Millionaire in the making: Sherelle Derico
Single mother sacrifices, then savors, prosperous course for herself and her daughter.
By Christian Zappone, CNNMoney.com staff writer
January 25 2007: 9:48 AM EST
NEW YORK (CNNMoney.com) -- Sherelle Derico, 36, had a three-week-old daughter and no job when she and her husband split in 1996. But the challenges of the separation and single motherhood didn't deter her from seeking financial success.
"It was frightening. Most definitely," said Derico of the experience.
At the time of her divorce Derico, who held an accounting degree, was already considering earning a master's degree.
"As soon as the baby turned one I started on a Masters in Financial Management at the University of Maryland," she said.
The period brought changes not just in her educational and career goals but in her spending habits, too. Derico, who enjoys interior design, says she used to spend a lot of money on clothes and furniture. She used to travel more.
Today, she prefers to pay off debt and to save money down to the penny. When this journalist contacted Derico on her cell phone, one of the first things she asked is, "Can you call me back on my land line? I want to save on my minutes."
Derico's personal history helps explain her habits. After becoming a mother and getting divorced she returned to a former employer who hired her back - for a lower-paying job. Then 9/11 happened, and she got laid off.
"I found myself in lots of debt. That's when I started to save a lot of money," said Derico, who now works as senior consultant in project management for Booz Allen Hamilton in the Washington, D.C., area.
25 rules to grow rich by
Derico has paid off roughly $25,000 in student debt, personal loans, and credit cards debt she racked up in 10 years. She paid for her master's degree mostly in cash along with matching plans from her employers.
Also, five years ago she started receiving a small amount of child support which is now $700 a month.
As for her own money, Derico puts 20 percent of her income into her 401(k) and IRA.
She says she's adamant about paying into her savings like she would any other bill.
She has $95,000 in an account with TIAA-CREF. Her Booz Allen 401(k) account has $36,000. She keeps about $8,000 in her regular savings.
"My friends say I'm pretty obsessive [about my savings]," Derico says, pointing out that she 'loses it' if her savings fall below a certain amount.
Buying a home
Although Derico faced lean times, she has managed to set and keep financial goals - like homeownership.
But Derico's 1999 purchase of the four-bedroom, two-bath, 1,300 sq. foot Fairfax, Virginia, town home didn't come without sacrifice.
She was enrolled in her master's program at the time and had to ask for a refund on that semester's tuition in order to come up with the down payment for the house.
To scrimp for the rest of the payment, she says she didn't go to the grocery store for three months and instead ate only the food she had stockpiled in her pantry.
"The majority was canned food," she said. "Spam. Ramen noodles soup."
But her daughter Sharmon didn't mind. Sharmon, who was 4 years old at the time, wanted to be able to jump; living in an apartment with neighbors in the unit below meant she couldn't.
Derico succeeded in making the down payment and took out a 30-year mortgage on the $114,000 home.
Not long after, she refinanced and brought the length of the mortgage down to 15 years.
More Millionaires in the Making
The value of the property has soared in Fairfax County's overheated real estate market. Similar homes in the area sell for $500,000-$600,000.
Derico has racked up $460,000 in equity in the town home.
She wants to pay off the mortgage in 10 years, which would mean she would own the home outright by 2009.
She points out that "any extra money goes towards [her] mortgage."
Although Derico still sacrifices today, she no longer has to buy ramen.
Money handling
Today her one indulgence is a new 2007 LS460 Lexus. She bought it after paying off her 1996 ES300 Lexus. She financed the new car through her credit union.
Derico has no credit cards and pays for everything in cash with the exception of her Lexus. If she can't use cash, she uses a debit card. She also uses coupons and savings cards when eating out and for groceries and toiletries.
She eats turkey sandwiches every day at work and never eats out during the week. Her entertainment/dining out budget is $100. For the month.
One trick that has helped Derico, who still confesses to a weakness for impulse buys, is to save money in her ING money market account. Once you contribute money to it, you can't touch it for two or three days, which she says prevents spur-of-the-moment purchases.
In terms of stretching dollars, "my friends try to figure out how I do so much on my little income. I've been called a penny-pincher, a thrift-saver, a cheapskate."
Derico says she learned little about financial management from her parents. Instead, her money education came from financial literacy lessons she took at her church.
She wants to pass those lessons on to her daughter.
Sharmon doesn't get a fixed allowance, but Sherelle makes sure she always has some money on hand. Sherelle expects her daughter to save at least 10 percent of the money. As an incentive, at the end of each month, Sherelle matches whatever Sharmon takes to the bank. Including change.
Sherelle then shows Sharmon what's going into her account every month and how much her money has grown.
"My friends say [Sharmon] knows a lot more about finances than they do now," Sherelle says, noting, "she understands credit cards aren't a good thing."
Sherelle does the same with the 529 education plan she opened up for her daughter last year, which so far has more than $3,000 in it.
And finally, Sherelle has Sharmon tithe 10 percent to the church, as Sherelle does when not contributing to the renovation of her grandmother's 30-year-old house.
Future plans
Since Derico is on track to be debt-free in five years, including her mortgage, her prospects of a comfortable retirement are substantially raised.
She says she would like to retire from her current profession one day and move back to her home state of Georgia to teach financial literacy in the schools there. She'd also consider working part time.
She toys with the idea of starting an interior design business if it didn't mean going back to school. Sharmon, now 11, would one day like to be a graphic designer.
With the financial lessons applied to her own life, Sherelle Derico says she doesn't understand people who don't pay attention to their money. "It's nothing you can ignore," she said.
She marvels at people who can't make their finances work while they're employed, because if they can't succeed now that they're making an income how will they survive when they're not working?
"You can finance everything else," said Derico. "But retirement is the one thing that can't be financed."
Here is a lesson plan for teaching financial literacy from the previous post.
This is one of the courses from the previous post.
Money Math: Lessons for Life
is a teacher's guide for helping middle school math students learn how to manage their money, stay out of debt, and save for retirement. Lesson plans, reproducible activity pages, and teaching tips are included in the 86-page guide, which draws on real-life examples from personal finance. (Department of the Treasury)
Money Math: Lessons for Life
is a teacher's guide for helping middle school math students learn how to manage their money, stay out of debt, and save for retirement. Lesson plans, reproducible activity pages, and teaching tips are included in the 86-page guide, which draws on real-life examples from personal finance. (Department of the Treasury)
20% of 12 year olds have at least one credit card!
The most recent statistic that I have seen says that 20% of 12 year olds in this country have a credit card! Fifty percent of 18 year olds have at least one but more often have two.
This is a FREE site that teaches Financial Literacy and is provided by the Federal Government. It targets teenagers to them finance basics. Educators and others can obtain these materials free of charge and is a good resource.
The link is: http://www.free.ed.gov/
subjects.cfm?subject_id=189&res_feature_request=1
This is a FREE site that teaches Financial Literacy and is provided by the Federal Government. It targets teenagers to them finance basics. Educators and others can obtain these materials free of charge and is a good resource.
The link is: http://www.free.ed.gov/
subjects.cfm?subject_id=189&res_feature_request=1
Wednesday, January 24, 2007
"Credit card companies have a special word for the customers who pay in full every month. They're called deadbeats."
This couple, the Peterson's, story was shown on ABC and their situation is not atypical for many Americans even though the numbers are higher than most. While the couple profiled do bear personal responsibility, it also true that credit card company's don't want the average consumer to pay off their credit card debt each month. Hence, the term "deadbeats" because these people don't make them any money.
"Nothing helps the credit card companies' bottom line more than the fees and high interest rates they earn from consumers who are struggling with their payments.... According to the Government Accounting Office, credit card issuers make 70 percent of their profit from the interest payments made by cardholders who carry a balance every month."The issue for me and for many consumer advocates, is that if the Peterson's bear some responsibility for their circumstances, so too do the credit card companies both on a personal level and corporately for charging usury interest rates and exorbitant fees.
Certainly, the corporate culture and mentality that classifies anyone that pays off their monthly bill as a "deadbeat" because the prohibitively excessive fees and interest rates are lost on them, is a violation of two hundred years of American business ethical standards and in any other setting are and would be considered criminally predatory.
I also vehemently disagree with the strategy of selling their home and rental property to pay off unsecured debt. While downsizing to cut expenses is not a bad thing, there are alternatives to trading the roof over their heads and most of their home equity to pay unsecured credit card debt. Short term gain, long term mistake in my opinion and very poor one dimensional advice.By LEE HOFFMAN, JONEIL ADRIANO, and JESSICA HORNIG
ABC News
They live in an upscale
How do they do it? They're in debt up to their eyeballs.
"I know that we don't make ends meet each month, and to make ends meet, we use credit cards, and then the credit card payments start increasing, and you just can't make ends meet even doing that," Suzie said.
Their monthly household income of $8,750 isn't enough to cover all of their expenses, which total $15,000 a month. For over a year, the Petersons have relied on credit cards to keep afloat financially.
Using one card to pay off the other, their credit card balances eventually ballooned to $60,000. Their Bank of America Visa alone has a balance of $19,000, at an interest rate of nearly 33 percent.
The burden of their debt is something that keeps Suzie up at night. "I woke up at
An Epidemic of Debt
The Peterson's financial situation may sound shocking, but they are not alone. Nationally, credit card debt is growing — almost tripling since 1989. Today, American consumer debt is over a trillion dollars. More than half of all cardholders don't pay their cards off each month and carry an average balance of around $2,000.
Ironically, families like the Petersons — who struggle to make the minimum monthly payments — are more valuable to credit card companies than customers who pay in full every month. According to the Government Accounting Office, credit card issuers make 70 percent of their profit from the interest payments made by cardholders who carry a balance every month.
Still, credit card companies insist they are not banking on customers' inability to pay.
"Credit card issuers are concerned about people who are only able to make the minimum payment because those people are at significant risk of not repaying the loan in the short term and that means the bank loses the money," said Nessa Feddis, a lawyer with the American Bankers Association, an industry trade group.
For that reason, Feddis says, credit card companies are constantly adjusting their policies to minimize the number of customers paying only the minimum amount.
Read the Fine Print
Elizabeth Warren, who teaches bankruptcy and commercial law at
Nothing helps the credit card companies' bottom line more than the fees and high interest rates they earn from consumers who are struggling with their payments. For example, one of the Petersons' credit cards charges a $39 fee for going over the spending limit or being late on a payment.
And even if the Petersons always pay their bill on time, the bank can still increase their interest rate to 32 percent if the Petersons are late with a car or mortgage payment, or any other payment to a creditor. That's because a "universal default" clause is buried in the fine print of the Peterson's credit card agreement, the terms of which can be changed by the credit card company "at any time for any reason."
"There's no contract like that anywhere else in
"We agree that the disclosures could be better," said Feddis. But she also argued that some responsibility has to fall on the consumer. "Pay off at the end of the month and pay no interest. Every cardholder has that opportunity. They make that choice."
They Never Stopped Spending
In the Peterson case, a series of bad choices contributed to their massive debt. Six years ago, Matt lost his job and spent more than a year out of work. During that time, Suzie decided to open two scrapbooking stores. When her business folded last year, they ended up losing about $200,000 — most of it borrowed money. There were also some bad real estate and stock investments.
Even as their financial situation worsened, however, the Petersons continued to spend. Last year alone, they took three vacations — a cruise through the Carribean, a trip to Whistler,
he cruise was a contest prize, while other expenses were covered by their time shares. But all together, those vacations still cost the Petersons $4,000.
Matt concedes the vacations may have been unwise, given their dire finances. "OK, we need to be punished, I guess," he said.
Suzie, however, has no regrets. She saw the vacations as a way to bond with her daughters. "The cruise was my gift to my family."
'The Ship Is Starting to Go Down'
To help them dig out from under all of their debts, "20/20" introduced the Petersons to financial planner Robert Pagliarini, author of "The Six-Day Financial Makeover," a step-by-step guide to transforming your financial life.
After reviewing the Petersons' financial records, Pagliarini calculated that they were about five months away from bankruptcy. All of their debts translated to a loss of $200 each day.
Pagliarini, the president of Pacifica Wealth Advisors in
"You've already hit the iceberg," he explained. "The ship is starting to go down. That's the bad news. The good news is you still have a small window of opportunity to make some changes."
Taking Action
Pagliarini devised a six-month action plan to rescue the Petersons from economic ruin. First, he advised them to dump their expensive time shares, even though this will mean the Petersons will lose $46,000 on their investment.
Pagliarini hopes they can recoup some of those losses by also selling their home and their second rental property. He believes those transactions will net the Petersons about $113,000.
Pagliarini then wants the Petersons to use that money to pay off their $60,000 credit card debts. If they take all of these steps, Pagliarini believes, the Petersons will actually have a few thousand dollars leftover to save and invest.
The catch? It's an all or nothing proposition. "Do all the big things or do none of them, because if you just do one, two or three, it's not going to work," said Pagliarini.
Matt Peterson is excited by Pagliarini's plan. "We can't wait. I mean we literally can't wait," he said.
Suzie was less enthused, saying, "We have no place to live and $3,000."
Digging Out of Debt
But by getting rid of all of their real estate, the Petersons will also unload expensive tax bills, mortgage payments and maintenance fees — drastically cutting their monthly expenses.
When all the dust settles, Pagliarini believes the Petersons will be able to afford to rent a house in their neighborhood on Matt's current salary, and still have about $1,200 extra cash every month to save and invest. Compare that with the $6,250 the Petersons are now losing every month.
Pagliarini told them, "At the end of the day, after the cameras are off, it's you two. And you really have to decide, 'Are we willing to make these kinds of changes?'"
In the last week, the Petersons have begun contemplating some of those changes. They spoke to a real estate broker about listing their house and rental property. Pagliarini says he is always a phone call away to offer support, but whether this family can dig out from all that debt is now up to two people — Matt and Suzie Peterson.
Tuesday, January 23, 2007
From 1992 to 2004, the percentage of households 55 and older with overall debt grew faster than the rate of the overall population.
Retirees up against debt
Updated 1/23/2007 2:12 PM ET
Tommie Nell Hettick, 74, of West Palm Beach, Fla., in her senior-living efficiency that she shares with her dog, Myssy, used credit cards to cover medical costs not paid for by insurance. Enlarge By Andrew Itkoff for USA TODAY Tommie Nell Hettick, 74, of West Palm Beach, Fla., in her senior-living efficiency that she shares with her dog, Myssy, used credit cards to cover medical costs not paid for by insurance.
PAY OFF MORTGAGE, GET LOW-INTEREST CREDIT CARDS
By Kathy Chu, USA TODAY
How seniors can get out and stay out of debt: Build up an emergency fund.
Try to save three to six months' worth of expenses in an account you can access for an emergency. This stash will keep you from using high-interest-rate credit cards if you run short of cash for medicine or home repairs. Consider paying off your mortgage while you're working. This will free up cash for unexpected expenses. If you're paying a higher rate on your mortgage than you're earning on investments, you can clear your mortgage debt and focus on growing your portfolio. There is a drawback: You'll lose a tax deduction on your mortgage interest. That might not matter much, though, if you're in a low tax bracket or receiving only a small deduction because your mortgage is nearly paid off. Get low-interest-rate credit cards. Look for a card with no annual fee, low late fees and low rates on purchases and cash advances.
Curtis Arnold of CardRatings.com says consumers with an average credit score around 665 to 685 should be able to find an average interest rate for purchases of 15%. If your score is higher, you should get even better rates. Charge purchases to credit cards only if you can pay them off each month. If you're already in heaps of debt, stop using plastic and pay off as much debt as you can. Also, call your card company and ask for a lower rate. If you have good credit and pay on time, you have better odds of reducing your rate.
Avoid payday loans.
The annual rates on these short-term loans you can borrow money for a week or a month average close to 400%, says Jay Speer of the Virginia Poverty Law Center. Instead, ask your employer if you're working if it will give you an advance on your paycheck. Ask creditors if they'll give you more time to pay or reduce the payment for a month or so. And don't be afraid to ask a relative for help. Seek credit counseling. Counselors try to negotiate lower rates and a flexible payment schedule with your creditors. They can also craft a debt-repayment plan. Avoid credit counseling agencies that charge high fees or offer you advice without reviewing your situation closely. For more tips on finding a reputable counselor, check AARP's website, http://www.aarp.org, and the Federal Trade Commission's site, at www.ftc.gov.
By Kathy Chu, USA TODAY
Across the nation, seniors are becoming the face of the indebted. In Austin, Ronald and Carol Godwin, 65 and 63, depleted their savings years ago and have since turned to credit cards and home equity to pay medical bills. They're struggling in retirement to pay off loans they took out years ago for a grandchild's college education. In Scott Depot, W.Va., Carl Brown, 68, has an impossible decision to make every month because his Social Security check usually doesn't cover all of his mortgage, utility, food and medical costs. "I know there's no way for people to believe this, but there are times when I get my Social Security check and just send everybody I owe $15 to $20," says Brown, a widower who has suffered a heart attack and stroke. "There are times when I can't buy groceries or medicine."
Retirement used to be a time for people to enjoy life without a mortgage or high credit card bills, a time when heavy debts were mostly a thing of the past. Increasingly, that's no longer true. Some seniors are taking on debt in retirement to fund a trip they've always wanted to take. But a growing number are in debt because they have no choice, according to debt counselors and a growing body of research.
Soaring health care costs are hitting seniors at a time when more employers are cutting back on retiree medical and pension benefits. People are living longer. Yet many seniors subsist on fixed incomes and have little means to boost their incomes. For them, debt provides a temporary — and often costly — reprieve from unexpected expenses.
From 1992 to 2004, the percentage of households 55 and older with overall debt grew faster than the rate of the overall population. Those 75 and older packed it on most quickly: The average load for those households with debt shot up 160% to an average of $20,234 during this time, according to research by the Employee Benefit Research Institute, a non-partisan group that studies economic security.
Among households 65 and older, the average amount of credit card debt more than doubled from 1992 to 2004, to $4,907, according to Demos, a New York think tank. Seniors' debt levels are catching up to those of younger people.
Seniors in and approaching retirement — such as the oldest baby boomers — are carrying "debt loads that their parents would not have considered," says Sally Hurme of AARP, the advocacy group for people 50 and older. "This does not bode well for financial health."
Unmanageable debt is forcing some older people to delay retirement. It's nudging others already out of the workforce back in. And it's causing a record number of seniors to seek bankruptcy-court protection.
Seniors 65 and older represent the fastest-growing group seeking bankruptcy protection, though they made up only 5% of all bankruptcy filers as of 2001, the last year for which figures are available, according to research by Deborah Thorne, assistant professor at Ohio University; Elizabeth Warren, a Harvard Law School professor; and Teresa Sullivan, a former professor at the University of Texas at Austin.
As the first wave of the 79 million baby boomers begins retiring, debt problems are likely to swell. "People are having their cycle of expenses later in life," because they're postponing marriage and children, says Deanne Loonin, a staff attorney at the National Consumer Law Center. "They're resolving expenses later."
Mary Alice Jackson, an elder-law attorney in Sarasota, Fla., says, "We're at the tip of the iceberg.This generation will have no problem at all racking up debt and worrying about it later."
Seniors' debt levels began surging in the 1990s as health care, housing and energy costs soared. Their incomes failed to keep up with higher consumer prices.
The booming stock market of the late 1990s offset higher prices by boosting most investors' wealth on paper. But seniors didn't benefit as much because most of their assets were in conservative investments, such as bonds and certificates of deposit.
Fixed incomes
Complicating matters is that many seniors live on fixed incomes. One illness or disability can plunge them into crushing debt. Retirees "don't always have the ability to say, 'I'll work harder, I'll work more,' " if they need more money in retirement, says Howard Krooks, an elder-law attorney in Boca Raton, Fla.
Seniors such as Irvin Towson, 84, find themselves needing a job to pay off debt. Towson, of Goldsboro, N.C., was laid off as a fire-department fundraiser in 2005 after having a heart attack and a stroke. For about a year, he's been unable to pay the minimum on about $15,000 in credit card bills. "They send you credit cards in the mail, and you take them and use them because you don't have any idea that you're going to get sick one day," Towson says. "I had no plans to retire. I was going to go as long as I could."
Card debt is one of the top reasons seniors seek bankruptcy protection, according to an analysis of bankruptcy filings in central Florida by professor Rebecca Morgan and associate dean Theresa Pulley Radwan of Stetson University College of Law in Gulfport, Fla. "We've heard anecdotes of individuals who would get a credit card offer in the mail and didn't understand that when youhave a credit card, you have to pay it back with interest," Morgan says.
Those seniors who are less accustomed to spending on plastic are more vulnerable to falling into a cycle of card debt, fed by rising interest rates and late fees, says Loonin of the consumer law center.
The good news is that fewer older people live in poverty compared with other age groups, largely because of Social Security benefits, experts say. But as baby boomers retire, that may change because of "the combination of higher debt levels and the (possible) erosion of this safety net," Loonin notes.
Gail Storer, 58, and her husband, Donald, 61, left the workforce early because of disabilities. Now, they live on Social Security payments of $1,800 a month. They also receive Medicare because they've both been disabled for more than 24 months. But it's not enough to cover expenses related to Gail's breast cancer and Donald's lung disease.
That's why in 2005 the couple began turning to payday loans — month-long loans with interest rates that work out to a heart-stopping 180% or more annually — to pay rent, car repairs and health costs. The Storers, of Smithfield, Va., owe $4,255 on 12 payday loans. They just want to get themselves out of what they call a "vicious merry-go-round" of debt. So they're talking to financial experts about how to get rid of the debt.
"I say to people all the time, 'Our golden years have a lot of rust on them,' " says Gail. "Major health problems put a dark cloud on what were supposed to be these great years of our lives."
Tommie Nell Hettick, 74, didn't expect to be saddled with credit card debt in retirement. Nor did she figure on being unable to afford to maintain a car or to visit her three kids — who are spread around the country — whenever she wants.
"I had the impression I'd do more" in retirement, says Hettick, who lives on $1,100 a month from a pension and Social Security. With her limited income, "If I have to visit someone, I can't do it. I had to give up the car because it costs so much in insurance."
After breaking her arm, dislocating her hip and hurting her back in recent years, Hettick used credit cards to pay for medical costs not covered by insurance. The debt — accruing at rates of 20% to 30% — eventually became too much to handle, prompting her to seek help last year from a credit counseling agency. She owes more than $6,000 in card debt and pays $200 a month, aiming to erase the debt in three years or so.
"It hit me all of a sudden that I was never going to get it paid off" because of the high interest rates, says Hettick of West Palm Beach, Fla. "I don't have 30 more years." She doesn't ask her kids for help, she adds, because of what she calls "old Southern pride" and the desire to "stand on my own two feet."
Yet Krooks, the elder-law attorney, says roughly half the seniors he counsels receive financial help from their adult children.
Getting help
Across the USA, a rising number of seniors like Hettick are flocking to counselors for help with debt. David Jones, president of the Association of Independent Consumer Credit Counseling Agencies, says he's noticed a "major uptick" in older clients seeking counseling. The trend is most pronounced in states such as Florida and West Virginia, which have the highest proportions of residents 65 and older.
Cathy McConnell of West Virginia Senior Legal Aid says seniors' "unbelievably easy access to credit" makes it all too easy for them to topple into debt. Surging health care costs are also causing more seniors to turn to credit cards as a safety net, experts say.
"The biggest complaint I hear is, 'I pay and pay and pay every month, and my debt doesn't go down much' " because of high interest rates and a slew of penalty fees, McConnell says.
In desperation, some seniors will pay off their bills at the expense of their health and well-being. In Scott Depot, W.Va., Brown says he often makes monthly payments toward his $8,000 in medical bills, $5,000 in credit card debt and $78,000 in mortgage debt before buying groceries or medicine because, "My word ismy bond. You tell someone you're going to do something, you're going to do it."
On Jan. 3, Brown received his monthly Social Security check of $1,100. Two days later, after paying bills, he had $24 left to buy food — less than $1 a day to get him through the month.
Homes at risk
Amid the soaring housing market of recent years, those 55 and older, like others, have piled up record amounts of mortgage debt. They've refinanced their homes and cashed out equity. They've also turned to reverse mortgages, borrowing from home equity to receive a stream of income. From 1992 to 2004, the percentage of households 55 or older with housing debt rose to 36% from 24%, the Employee Benefit Research Institute found. The median amount of mortgage debt rose 63% during this time, to $60,000.
Rising mortgage debt poses a serious threat to seniors' financial well-being, says Craig Copeland of the research institute, because they're "putting at risk their most important asset, their home."
Worse, a growing number of seniors with mortgage debt also carry credit card debt, says Loonin of the National Consumer Law Center. "The two are interconnected, because if you're taking on more debt because you're short of cash, then you're going to be taking on both kinds of debt."
Some seniors use one creditor to pay off another. This strategy becomes especially dangerous if seniors tap out all their lines of credit, debt counselors say.
Over the past decade, the Godwins of Austin used credit cards to pay off about $140,000 in medical bills that insurance didn't cover. The bills piled up after Ronald Godwin lost most of his vision in the late 1990s and Carol Godwin was diagnosed with cancer in 2005. As interest rates on the cards jumped, the Godwins moved into a smaller house. Then they refinanced the house to pay off credit card bills. Now, they're crossing their fingers that they won't have more unexpected health costs.
"I didn't expect all this (debt)" in retirement, Ronald says. "I had saved money, but it just seemed like it went away overnight."
Retirees up against debt - USATODAY.com
Updated 1/23/2007 2:12 PM ET
Tommie Nell Hettick, 74, of West Palm Beach, Fla., in her senior-living efficiency that she shares with her dog, Myssy, used credit cards to cover medical costs not paid for by insurance. Enlarge By Andrew Itkoff for USA TODAY Tommie Nell Hettick, 74, of West Palm Beach, Fla., in her senior-living efficiency that she shares with her dog, Myssy, used credit cards to cover medical costs not paid for by insurance.
PAY OFF MORTGAGE, GET LOW-INTEREST CREDIT CARDS
By Kathy Chu, USA TODAY
How seniors can get out and stay out of debt: Build up an emergency fund.
Try to save three to six months' worth of expenses in an account you can access for an emergency. This stash will keep you from using high-interest-rate credit cards if you run short of cash for medicine or home repairs. Consider paying off your mortgage while you're working. This will free up cash for unexpected expenses. If you're paying a higher rate on your mortgage than you're earning on investments, you can clear your mortgage debt and focus on growing your portfolio. There is a drawback: You'll lose a tax deduction on your mortgage interest. That might not matter much, though, if you're in a low tax bracket or receiving only a small deduction because your mortgage is nearly paid off. Get low-interest-rate credit cards. Look for a card with no annual fee, low late fees and low rates on purchases and cash advances.
Curtis Arnold of CardRatings.com says consumers with an average credit score around 665 to 685 should be able to find an average interest rate for purchases of 15%. If your score is higher, you should get even better rates. Charge purchases to credit cards only if you can pay them off each month. If you're already in heaps of debt, stop using plastic and pay off as much debt as you can. Also, call your card company and ask for a lower rate. If you have good credit and pay on time, you have better odds of reducing your rate.
Avoid payday loans.
The annual rates on these short-term loans you can borrow money for a week or a month average close to 400%, says Jay Speer of the Virginia Poverty Law Center. Instead, ask your employer if you're working if it will give you an advance on your paycheck. Ask creditors if they'll give you more time to pay or reduce the payment for a month or so. And don't be afraid to ask a relative for help. Seek credit counseling. Counselors try to negotiate lower rates and a flexible payment schedule with your creditors. They can also craft a debt-repayment plan. Avoid credit counseling agencies that charge high fees or offer you advice without reviewing your situation closely. For more tips on finding a reputable counselor, check AARP's website, http://www.aarp.org, and the Federal Trade Commission's site, at www.ftc.gov.
By Kathy Chu, USA TODAY
Across the nation, seniors are becoming the face of the indebted. In Austin, Ronald and Carol Godwin, 65 and 63, depleted their savings years ago and have since turned to credit cards and home equity to pay medical bills. They're struggling in retirement to pay off loans they took out years ago for a grandchild's college education. In Scott Depot, W.Va., Carl Brown, 68, has an impossible decision to make every month because his Social Security check usually doesn't cover all of his mortgage, utility, food and medical costs. "I know there's no way for people to believe this, but there are times when I get my Social Security check and just send everybody I owe $15 to $20," says Brown, a widower who has suffered a heart attack and stroke. "There are times when I can't buy groceries or medicine."
Retirement used to be a time for people to enjoy life without a mortgage or high credit card bills, a time when heavy debts were mostly a thing of the past. Increasingly, that's no longer true. Some seniors are taking on debt in retirement to fund a trip they've always wanted to take. But a growing number are in debt because they have no choice, according to debt counselors and a growing body of research.
Soaring health care costs are hitting seniors at a time when more employers are cutting back on retiree medical and pension benefits. People are living longer. Yet many seniors subsist on fixed incomes and have little means to boost their incomes. For them, debt provides a temporary — and often costly — reprieve from unexpected expenses.
From 1992 to 2004, the percentage of households 55 and older with overall debt grew faster than the rate of the overall population. Those 75 and older packed it on most quickly: The average load for those households with debt shot up 160% to an average of $20,234 during this time, according to research by the Employee Benefit Research Institute, a non-partisan group that studies economic security.
Among households 65 and older, the average amount of credit card debt more than doubled from 1992 to 2004, to $4,907, according to Demos, a New York think tank. Seniors' debt levels are catching up to those of younger people.
Seniors in and approaching retirement — such as the oldest baby boomers — are carrying "debt loads that their parents would not have considered," says Sally Hurme of AARP, the advocacy group for people 50 and older. "This does not bode well for financial health."
Unmanageable debt is forcing some older people to delay retirement. It's nudging others already out of the workforce back in. And it's causing a record number of seniors to seek bankruptcy-court protection.
Seniors 65 and older represent the fastest-growing group seeking bankruptcy protection, though they made up only 5% of all bankruptcy filers as of 2001, the last year for which figures are available, according to research by Deborah Thorne, assistant professor at Ohio University; Elizabeth Warren, a Harvard Law School professor; and Teresa Sullivan, a former professor at the University of Texas at Austin.
As the first wave of the 79 million baby boomers begins retiring, debt problems are likely to swell. "People are having their cycle of expenses later in life," because they're postponing marriage and children, says Deanne Loonin, a staff attorney at the National Consumer Law Center. "They're resolving expenses later."
Mary Alice Jackson, an elder-law attorney in Sarasota, Fla., says, "We're at the tip of the iceberg.This generation will have no problem at all racking up debt and worrying about it later."
Seniors' debt levels began surging in the 1990s as health care, housing and energy costs soared. Their incomes failed to keep up with higher consumer prices.
The booming stock market of the late 1990s offset higher prices by boosting most investors' wealth on paper. But seniors didn't benefit as much because most of their assets were in conservative investments, such as bonds and certificates of deposit.
Fixed incomes
Complicating matters is that many seniors live on fixed incomes. One illness or disability can plunge them into crushing debt. Retirees "don't always have the ability to say, 'I'll work harder, I'll work more,' " if they need more money in retirement, says Howard Krooks, an elder-law attorney in Boca Raton, Fla.
Seniors such as Irvin Towson, 84, find themselves needing a job to pay off debt. Towson, of Goldsboro, N.C., was laid off as a fire-department fundraiser in 2005 after having a heart attack and a stroke. For about a year, he's been unable to pay the minimum on about $15,000 in credit card bills. "They send you credit cards in the mail, and you take them and use them because you don't have any idea that you're going to get sick one day," Towson says. "I had no plans to retire. I was going to go as long as I could."
Card debt is one of the top reasons seniors seek bankruptcy protection, according to an analysis of bankruptcy filings in central Florida by professor Rebecca Morgan and associate dean Theresa Pulley Radwan of Stetson University College of Law in Gulfport, Fla. "We've heard anecdotes of individuals who would get a credit card offer in the mail and didn't understand that when youhave a credit card, you have to pay it back with interest," Morgan says.
Those seniors who are less accustomed to spending on plastic are more vulnerable to falling into a cycle of card debt, fed by rising interest rates and late fees, says Loonin of the consumer law center.
The good news is that fewer older people live in poverty compared with other age groups, largely because of Social Security benefits, experts say. But as baby boomers retire, that may change because of "the combination of higher debt levels and the (possible) erosion of this safety net," Loonin notes.
Gail Storer, 58, and her husband, Donald, 61, left the workforce early because of disabilities. Now, they live on Social Security payments of $1,800 a month. They also receive Medicare because they've both been disabled for more than 24 months. But it's not enough to cover expenses related to Gail's breast cancer and Donald's lung disease.
That's why in 2005 the couple began turning to payday loans — month-long loans with interest rates that work out to a heart-stopping 180% or more annually — to pay rent, car repairs and health costs. The Storers, of Smithfield, Va., owe $4,255 on 12 payday loans. They just want to get themselves out of what they call a "vicious merry-go-round" of debt. So they're talking to financial experts about how to get rid of the debt.
"I say to people all the time, 'Our golden years have a lot of rust on them,' " says Gail. "Major health problems put a dark cloud on what were supposed to be these great years of our lives."
Tommie Nell Hettick, 74, didn't expect to be saddled with credit card debt in retirement. Nor did she figure on being unable to afford to maintain a car or to visit her three kids — who are spread around the country — whenever she wants.
"I had the impression I'd do more" in retirement, says Hettick, who lives on $1,100 a month from a pension and Social Security. With her limited income, "If I have to visit someone, I can't do it. I had to give up the car because it costs so much in insurance."
After breaking her arm, dislocating her hip and hurting her back in recent years, Hettick used credit cards to pay for medical costs not covered by insurance. The debt — accruing at rates of 20% to 30% — eventually became too much to handle, prompting her to seek help last year from a credit counseling agency. She owes more than $6,000 in card debt and pays $200 a month, aiming to erase the debt in three years or so.
"It hit me all of a sudden that I was never going to get it paid off" because of the high interest rates, says Hettick of West Palm Beach, Fla. "I don't have 30 more years." She doesn't ask her kids for help, she adds, because of what she calls "old Southern pride" and the desire to "stand on my own two feet."
Yet Krooks, the elder-law attorney, says roughly half the seniors he counsels receive financial help from their adult children.
Getting help
Across the USA, a rising number of seniors like Hettick are flocking to counselors for help with debt. David Jones, president of the Association of Independent Consumer Credit Counseling Agencies, says he's noticed a "major uptick" in older clients seeking counseling. The trend is most pronounced in states such as Florida and West Virginia, which have the highest proportions of residents 65 and older.
Cathy McConnell of West Virginia Senior Legal Aid says seniors' "unbelievably easy access to credit" makes it all too easy for them to topple into debt. Surging health care costs are also causing more seniors to turn to credit cards as a safety net, experts say.
"The biggest complaint I hear is, 'I pay and pay and pay every month, and my debt doesn't go down much' " because of high interest rates and a slew of penalty fees, McConnell says.
In desperation, some seniors will pay off their bills at the expense of their health and well-being. In Scott Depot, W.Va., Brown says he often makes monthly payments toward his $8,000 in medical bills, $5,000 in credit card debt and $78,000 in mortgage debt before buying groceries or medicine because, "My word ismy bond. You tell someone you're going to do something, you're going to do it."
On Jan. 3, Brown received his monthly Social Security check of $1,100. Two days later, after paying bills, he had $24 left to buy food — less than $1 a day to get him through the month.
Homes at risk
Amid the soaring housing market of recent years, those 55 and older, like others, have piled up record amounts of mortgage debt. They've refinanced their homes and cashed out equity. They've also turned to reverse mortgages, borrowing from home equity to receive a stream of income. From 1992 to 2004, the percentage of households 55 or older with housing debt rose to 36% from 24%, the Employee Benefit Research Institute found. The median amount of mortgage debt rose 63% during this time, to $60,000.
Rising mortgage debt poses a serious threat to seniors' financial well-being, says Craig Copeland of the research institute, because they're "putting at risk their most important asset, their home."
Worse, a growing number of seniors with mortgage debt also carry credit card debt, says Loonin of the National Consumer Law Center. "The two are interconnected, because if you're taking on more debt because you're short of cash, then you're going to be taking on both kinds of debt."
Some seniors use one creditor to pay off another. This strategy becomes especially dangerous if seniors tap out all their lines of credit, debt counselors say.
Over the past decade, the Godwins of Austin used credit cards to pay off about $140,000 in medical bills that insurance didn't cover. The bills piled up after Ronald Godwin lost most of his vision in the late 1990s and Carol Godwin was diagnosed with cancer in 2005. As interest rates on the cards jumped, the Godwins moved into a smaller house. Then they refinanced the house to pay off credit card bills. Now, they're crossing their fingers that they won't have more unexpected health costs.
"I didn't expect all this (debt)" in retirement, Ronald says. "I had saved money, but it just seemed like it went away overnight."
Retirees up against debt - USATODAY.com
The first candidate that stakes out this issue in the Presidential Election will have a substantial block of voters in his/her corner.
You are going to see this becoming a bigger and bigger issue as the number of Baby Boomers continue to increase. Studies are showing the fastest growing population of credit card debt is seniors and it is for necessities rather than luxuries. Also, unlike their parents, Baby Boomers have no savings, so in times of medical emergency credit cards are now their safety net. This is a huge and growing problem.
| Using credit cards to pay medical bills adds to debt, says study | ||
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NEW YORK: Increasing use of credit cards to pay medical expenses in the U.S. is allowing debt levels of families that resort to this measure to escalate and putting them at financial risk, according to an analysis by a public policy advocacy group.Thursday, January 18, 2007
Supreme Court Case to Watch Carefully - Can Insurance Companies Use Credit Reports to Set Rates Without Telling the Consumer?
This is one to keep an eye on and will have huge implications for consumers throughout the country.
After pouring in millions and millions of dollars on the state level, insurance companies have won most of the highest profile initiatives placed on the ballot during the last election aimed at stopping the use of credit reports to set rates. The most successful tactic used was the claim by the insurance companies that all rates would go up if they couldn't target the reprobates who had bad scores.
This Supreme Court decision would require the consumer to at least be notified if credit reports were used to set the rate and would allow the consumer to sue the insurance companies for violating the FCRA if they don't notify.
With 70% of all credit reports containing serious errors, there is room for significantly higher rates, and therefore higher profits, to be imposed on an uninformed consumer with no knowledge of erroneous information existing on their report. Not to mention the nightmare the consumer will face getting incorrect negative items off their report.
If the insurance companies win this case, rates can be based on credit report information (whether correct or not) without the knowledge of the consumer and without them ever having to be notified. Nice.
Posted: 1/16/2007 10:39:00 AM
Court ponders insurance credit scores
Source: AP
SUPREME COURT -- Should auto insurance companies be required to inform consumers when their credit scores are used against them?
That's the issue today before the Supreme Court in the case of an Oregon man who didn't get a preferred rate from GEICO. He said he should have been told that his credit scores weren't high enough to lower his rate.
The Fair Credit Reporting Act holds businesses liable when they fail to inform customers of adverse decisions made because of credit reports.
GEICO and another insurance company, Safeco, are appealing a federal appeals court's decision that would make it easier for consumers to prevail when they sue corporations for allegedly violating the law.
Much of the business community has lined up behind the insurers. But consumer groups complain that insurance companies are looking for ways to avoid notifying customers when credit reports are used in making a decision.
After pouring in millions and millions of dollars on the state level, insurance companies have won most of the highest profile initiatives placed on the ballot during the last election aimed at stopping the use of credit reports to set rates. The most successful tactic used was the claim by the insurance companies that all rates would go up if they couldn't target the reprobates who had bad scores.
This Supreme Court decision would require the consumer to at least be notified if credit reports were used to set the rate and would allow the consumer to sue the insurance companies for violating the FCRA if they don't notify.
With 70% of all credit reports containing serious errors, there is room for significantly higher rates, and therefore higher profits, to be imposed on an uninformed consumer with no knowledge of erroneous information existing on their report. Not to mention the nightmare the consumer will face getting incorrect negative items off their report.
If the insurance companies win this case, rates can be based on credit report information (whether correct or not) without the knowledge of the consumer and without them ever having to be notified. Nice.
Posted: 1/16/2007 10:39:00 AM
Court ponders insurance credit scores
Source: AP
SUPREME COURT -- Should auto insurance companies be required to inform consumers when their credit scores are used against them?
That's the issue today before the Supreme Court in the case of an Oregon man who didn't get a preferred rate from GEICO. He said he should have been told that his credit scores weren't high enough to lower his rate.
The Fair Credit Reporting Act holds businesses liable when they fail to inform customers of adverse decisions made because of credit reports.
GEICO and another insurance company, Safeco, are appealing a federal appeals court's decision that would make it easier for consumers to prevail when they sue corporations for allegedly violating the law.
Much of the business community has lined up behind the insurers. But consumer groups complain that insurance companies are looking for ways to avoid notifying customers when credit reports are used in making a decision.
Minorities Fighting Credit History in Hiring and Insurance Rates
This is just a wonderful article that addressing the increased use of credit history in the hiring process. The only problem is that studies have validated that there is no correlation to job perfomance and credit history. I hope this lady wins hands down!
from the January 18, 2007 edition - http://www.csmonitor.com/2007/0118/p01s03-ussc.html
The spread of the credit check as civil rights issue
Minorities are starting to fight employers over the use of credit history in hiring.
By Ben Arnoldy | Staff writer of The Christian Science Monitor
BOSTON
Lisa Bailey worked for five months at Harvard University as a temp entering donations into a database. When the university made the job a salaried position, Ms. Bailey, who is black, saw a chance to lift herself out of dead-end jobs.
Bailey's superiors encouraged her to apply, she says, but turned her down after discovering her bad credit history.
Bailey, with her lawyer, has lodged a complaint against Harvard charging racial discrimination. The reason: Studies show that minorities are more likely to have bad credit, but credit problems have not been shown to negatively affect job performance.
Some privacy and minority advocates are now seeing credit as a civil rights issue as minorities start to fight employers and insurers who base decisions on credit histories. Their effort could slow the near doubling in credit checks by employers in the past decade, which impacts millions of Americans who are struggling with debt.
"It's definitely a civil rights issue because of the growing use of credit reports and credit scores for hiring, renting an apartment, insurance, and the fact that people of color have not been integrated into the credit scoring system as much as traditional, white, middle-class America," says Evan Hendricks, author of "Credit Scores & Credit Reports: How the System Really Works, What You Can Do."
In a 2004 study involving 2 million people, the Texas Department of Insurance found that blacks have an average credit score roughly 10 percent to 35 percent worse than whites; Hispanics have scores 5 percent to 25 percent worse than whites.
Credit checks are a growing factor in hiring, with 35 percent of employers checking applicants' credit in 2003, up from 19 percent in 1996, according to the Society of Human Resource Management (SHRM). Typically credit reports are done if a person is going to deal with money, says John Dooney, a manager of strategic research at SHRM.
A case for considering credit
Employers should look at credit only for jobs where the information is relevant, says Lester Rosen, president of Employment Screening Resources, a national background screening firm in California. He cites a few examples:
• For jobs handling money, people may have the motive to steal if their debts surpass their salary.
• For jobs requiring travel, bad credit could bar applicants from renting cars or buying tickets.
• For jobs managing money, the report can offer some clues on how applicants manage their own.
Particularly in that last scenario, he cautions employers to be circumspect since blemishes might be errors or beyond the person's control, such as sudden medical expenses. Legally, employers must receive written permission from applicants to do a credit check, and must give those denied because of credit a chance to respond.
Mr. Rosen defends the careful consideration of credit in the hiring process. "If Harvard hired a person and did not use a credit report and the person embezzled, what would the headline be?" he asks.
So far, there's a lack of data supporting a relationship between bad credit and theft by employees. In perhaps the only study published on the subject, Jerry Palmer and Laura Koppes at Eastern Kentucky University in Richmond in 2003 found no correlation between employee credit reports and negative performance or termination for dishonesty.
Antidiscrimination laws bar a hiring practice that disadvantage minorities – even inadvertently – unless a company can prove it's related to measuring a person's capability to do a job. Bailey's lawyer, Piper Hoffman, has taken on several cases in which companies used credit as a factor in the hiring process. In one 2004 case, she says, an employee's lawsuit against Johnson & Johnson resulted in a settlement that changed the way the company used credit in its hiring practices.
"In the larger picture, we're hoping to get Harvard and other employers to stop using credit as a criterion in hiring," Ms. Hoffman says.
Bailey lodged her complaint in November with the Equal Employment Opportunity Commission (EEOC), which reviews all such cases before any lawsuits can be filed. Agency officials say there's anecdotal evidence these cases are on the rise.
"Employers seem to be assuming that somebody with a poor credit history is more likely to steal, and I don't think there's any kind of evidence that supports that," says Dianna Johnston, assistant legal counsel with the EEOC. "To the extent that the employer has done an in-depth look and found other indices of dishonesty, they would be on more solid ground."
In a statement, Harvard noted that a "relatively small percentage" of jobs at the university require a credit check.
"The university conducts credit history reviews for employment purposes as required by credit card issuers, as well as to fulfill our fiduciary and data privacy responsibilities," says the statement. "Those responsibilities include protecting the private credit card data of our students, faculty, parents, and alumni."
Bailey says that if Harvard was concerned she might steal, the university should have looked at criminal records instead. "I was a cashier for many years and I've never been rich and I've never stolen money," she says.
She ran into credit-card debt she couldn't pay back when she spent some time unemployed. Harvard, she says, offered to reconsider if she could clear up her report in one week.
"The only way I can get it cleaned up in seven days is if I have money, so there was no way," says Bailey.
Catch-22 for poor people
Ernest Haffner, an attorney adviser with the EEOC, notes that employers who screen for credit are setting up a Catch-22 for poor people: They need jobs to get good credit, but employers won't hire them because they don't have it.
The racial component to credit histories has been challenged in the insurance arena, too. The Texas Department of Insurance study found a relationship between credit scores and claims filed.
However, a class-action lawsuit against Allstate has just been settled, which resulted in the company changing the way they evaluate credit reports, says Wendy Harrison, a Phoenix-based lawyer who brought the case.
"What we've argued in our [insurance] cases is that you can adjust for [racial bias]," Ms. Harrison says, who has also handled cases of credit screening by employers.
Employers, however, are probably not relying on a number rating that can be adjusted, since, according to Rosen, agencies only give them specialty reports that don't include a score. Harvard says their report had no score.
As for Bailey, she still wants the Harvard job, and says there would be "no hard feelings." But first she wants to change the system for herself and others. "I hope I win. It might be beneficial to other people, too," she says.
from the January 18, 2007 edition - http://www.csmonitor.com/2007/0118/p01s03-ussc.html
The spread of the credit check as civil rights issue
Minorities are starting to fight employers over the use of credit history in hiring.
By Ben Arnoldy | Staff writer of The Christian Science Monitor
BOSTON
Lisa Bailey worked for five months at Harvard University as a temp entering donations into a database. When the university made the job a salaried position, Ms. Bailey, who is black, saw a chance to lift herself out of dead-end jobs.
Bailey's superiors encouraged her to apply, she says, but turned her down after discovering her bad credit history.
Bailey, with her lawyer, has lodged a complaint against Harvard charging racial discrimination. The reason: Studies show that minorities are more likely to have bad credit, but credit problems have not been shown to negatively affect job performance.
Some privacy and minority advocates are now seeing credit as a civil rights issue as minorities start to fight employers and insurers who base decisions on credit histories. Their effort could slow the near doubling in credit checks by employers in the past decade, which impacts millions of Americans who are struggling with debt.
"It's definitely a civil rights issue because of the growing use of credit reports and credit scores for hiring, renting an apartment, insurance, and the fact that people of color have not been integrated into the credit scoring system as much as traditional, white, middle-class America," says Evan Hendricks, author of "Credit Scores & Credit Reports: How the System Really Works, What You Can Do."
In a 2004 study involving 2 million people, the Texas Department of Insurance found that blacks have an average credit score roughly 10 percent to 35 percent worse than whites; Hispanics have scores 5 percent to 25 percent worse than whites.
Credit checks are a growing factor in hiring, with 35 percent of employers checking applicants' credit in 2003, up from 19 percent in 1996, according to the Society of Human Resource Management (SHRM). Typically credit reports are done if a person is going to deal with money, says John Dooney, a manager of strategic research at SHRM.
A case for considering credit
Employers should look at credit only for jobs where the information is relevant, says Lester Rosen, president of Employment Screening Resources, a national background screening firm in California. He cites a few examples:
• For jobs handling money, people may have the motive to steal if their debts surpass their salary.
• For jobs requiring travel, bad credit could bar applicants from renting cars or buying tickets.
• For jobs managing money, the report can offer some clues on how applicants manage their own.
Particularly in that last scenario, he cautions employers to be circumspect since blemishes might be errors or beyond the person's control, such as sudden medical expenses. Legally, employers must receive written permission from applicants to do a credit check, and must give those denied because of credit a chance to respond.
Mr. Rosen defends the careful consideration of credit in the hiring process. "If Harvard hired a person and did not use a credit report and the person embezzled, what would the headline be?" he asks.
So far, there's a lack of data supporting a relationship between bad credit and theft by employees. In perhaps the only study published on the subject, Jerry Palmer and Laura Koppes at Eastern Kentucky University in Richmond in 2003 found no correlation between employee credit reports and negative performance or termination for dishonesty.
Antidiscrimination laws bar a hiring practice that disadvantage minorities – even inadvertently – unless a company can prove it's related to measuring a person's capability to do a job. Bailey's lawyer, Piper Hoffman, has taken on several cases in which companies used credit as a factor in the hiring process. In one 2004 case, she says, an employee's lawsuit against Johnson & Johnson resulted in a settlement that changed the way the company used credit in its hiring practices.
"In the larger picture, we're hoping to get Harvard and other employers to stop using credit as a criterion in hiring," Ms. Hoffman says.
Bailey lodged her complaint in November with the Equal Employment Opportunity Commission (EEOC), which reviews all such cases before any lawsuits can be filed. Agency officials say there's anecdotal evidence these cases are on the rise.
"Employers seem to be assuming that somebody with a poor credit history is more likely to steal, and I don't think there's any kind of evidence that supports that," says Dianna Johnston, assistant legal counsel with the EEOC. "To the extent that the employer has done an in-depth look and found other indices of dishonesty, they would be on more solid ground."
In a statement, Harvard noted that a "relatively small percentage" of jobs at the university require a credit check.
"The university conducts credit history reviews for employment purposes as required by credit card issuers, as well as to fulfill our fiduciary and data privacy responsibilities," says the statement. "Those responsibilities include protecting the private credit card data of our students, faculty, parents, and alumni."
Bailey says that if Harvard was concerned she might steal, the university should have looked at criminal records instead. "I was a cashier for many years and I've never been rich and I've never stolen money," she says.
She ran into credit-card debt she couldn't pay back when she spent some time unemployed. Harvard, she says, offered to reconsider if she could clear up her report in one week.
"The only way I can get it cleaned up in seven days is if I have money, so there was no way," says Bailey.
Catch-22 for poor people
Ernest Haffner, an attorney adviser with the EEOC, notes that employers who screen for credit are setting up a Catch-22 for poor people: They need jobs to get good credit, but employers won't hire them because they don't have it.
The racial component to credit histories has been challenged in the insurance arena, too. The Texas Department of Insurance study found a relationship between credit scores and claims filed.
However, a class-action lawsuit against Allstate has just been settled, which resulted in the company changing the way they evaluate credit reports, says Wendy Harrison, a Phoenix-based lawyer who brought the case.
"What we've argued in our [insurance] cases is that you can adjust for [racial bias]," Ms. Harrison says, who has also handled cases of credit screening by employers.
Employers, however, are probably not relying on a number rating that can be adjusted, since, according to Rosen, agencies only give them specialty reports that don't include a score. Harvard says their report had no score.
As for Bailey, she still wants the Harvard job, and says there would be "no hard feelings." But first she wants to change the system for herself and others. "I hope I win. It might be beneficial to other people, too," she says.
Wednesday, January 17, 2007
The first of a four part post prepared by the Credit Union National Association
This is an excellent series! Just fantastic information. I will post each of the four chapters over the next day or so. Even though it was created back in '97, it still has much, much to say.
Credit Union Car Facts
Vehicle Buying Guide
Prepared for CUNA by Remar Sutton
©1997 by Credit Union National Association Inc. All rights reserved, including the right of reproduction in whole or in part in any form.
Contents
What's Really Happening Down at the Dealership?
Buying a Car the Right Way—the Car Facts Way
Dealing With the Dealership—Negotiate the Right Way
Buying a Used Car
Chapter 1 - What's Really Happening Down at the Dealership?
To listen to the ads, you'd think saving money on a vehicle was as easy as going down to the showroom and signing your name. But it's much more complex than that. Did you know a dealer can sell you a car for exactly what he paid the manufacturer and still make $500 to $1,000 on just the car? Or that "zero percent" financing may cost you more than financing at a credit union—even if the credit union's rate is 10%?
The entire automotive market is about the last place in America where you must survive on your bartering skills. To save money, to get the car that's right for you at the best price, you must know what you're up against and how to negotiate in that high-pressure arena. This Credit Union Car FactsSM Vehicle Buying Guide will give you that valuable education. If you will read and work carefully, you might keep up to $3,000 or so hard-earned dollars in your pocket—rather than putting them into the dealer's. Ready to learn how?
Start by looking at what you're up against. You need to understand this first. Then we'll discuss how to find the right car—new or used—and how to negotiate its purchase the right way—the Car Facts way.
The pressure game starts even before you get to the dealership. Just look at dealer ads: They promise low payments, big sales, big money for your trade, and respect for your intellect. But, often, these promises come with some crossed fingers. For example, did you know that many dealers make more during sales than they do at "nonsale" time? That's because we consumers automatically equate the word "sale" with "save." That's dangerous math. Dealer advertising really has another purpose: to get you to rush down in a fit of excitement ("Really? Just $99 a month?!") without stopping to think or, not coincidentally, stopping to compare costs or products.
Then dealers put you in the dealership "track system," a tried-and-true selling process with one objective in mind: to get more money from each part of the transaction than you were planning to pay. Want to spend $250 a month? A savvy dealership will get you to pay $300. Or they happily will sell you a car for $250 a month—but it will be a car you could have bought for $200 a month.
Even if their ethics are clean, face it—they're pros at selling cars, and you're likely an amateur at buying them. The people at the dealership, nice and smiling though they may be, simply have a different objective in the car transaction than you do. Their goal always is to maximize profit.
And that might mean leaving out an important fact or two. To take one example, what would you do if you owned a dealership that sold cars ranked lowest on the government crash safety reports? Would you tell all your customers, "Oh, don't forget—our cars are the most dangerous on the road."
See the problem? To survive, dealerships generally can't give you all the answers you need to questions about such matters as a car's safety, reliability, or resale value, or its cost to the dealer, or the amount you should budget to pay for a new vehicle.
But those questions are important, aren't they? And you'll need the answers before you even look in the direction of the dealership. Why? Because once you're there, the "track system" will take over—whether you like it or not.
What are track systems?
Track systems are simply different ways to control you, confuse you, and put you on the approach to maximum profit for the dealership. Recognize and understand the system, and put yourself on the approach to saving big money. Here are the most popular track systems and selling techniques:
The deposit/driver's license technique. You're barely seated when the salesperson requests your driver's license, or your Social Security number, or a deposit "to show my boss you folks are serious." Two things are happening here: If they get your money, you won't leave; and if they have your driver's license and/or Social Security number, they can run a credit check on you. Oh, did they forget to ask you first? Why would they do that? To plan the amount of profit they'd like to make.
The "T.O." system. T.O. stands for "turnover." You're sitting in a salesperson's office, thinking about how much more fun it would be to live in a dentist's chair than go through this, when your salesperson returns with reinforcements. The new smiling face asks for more money. And then the salesperson asks for more. And then the dealership chaplain comes in.
The T.O. system operates on the principle of "fresh faces can work miracles." A miracle, in this instance, is defined as more profit. And as long as you give, they'll keep asking.
The note system. Rather than send in reinforcements, the salesperson steps out, returning with a nice note from the sales manager asking for more money. And then another note, then another. Usually, they come back with five, and usually the last two ask for raises of odd amounts of money—for instance, $113.29, or, finally, $23.19. The note system has one basic problem. It makes you think the dealership is negotiating when it's really only play-acting.
Consider the odd raises. These are designed simply to make it look like you're really a shrewd bargainer. You know, you think you've got them "down to the pennies." At note system dealerships, customers generally are given all five notes asking for more money—even if the customer already has agreed to pay full list price!
The "foursquare" system. The salesperson divides a piece of paper into four squares and then asks for your "wish list": What do you want to pay a month? What do you want for your trade? What do you want to pay for the new car? However ridiculous the sums, each is written in a square. Then they ask for your signature in the fourth square and a large deposit.
Then they begin to "work" you on each square separately, starting with a figure far from yours and very slowly negotiating down, constantly scratching through figures. By the time they finish, the paper is illegible, you're so frazzled you've forgotten your name, but the salesperson is smiling. You've agreed to pay an additional $1,200 to $1,500 profit.
The foursquare system probably is the worst system in use today because it negotiates the four squares as if they're not interrelated. For instance, as if changing the down payment and trade-in allowance doesn't affect the payment. Baloney. Don't deal with dealerships that use this system.
Spot delivery. "You can take it home today!" That is the most expensive statement any car dealer can make. Spot delivery means emotion is ruling you, rather than good sense. It also means you (very conveniently for the dealer) won't have the opportunity to compare costs and terms. Never buy a car on your first visit. Wait a day and the price will tumble.
The finance manager approach. Even if you have the cash in your pocket, you'll be forced to talk with most dealerships' finance people. Why? Because dealerships make the real profit in the finance office. If the dealership can convert you to its financing, it'll sell you credit life and credit disability insurance that's almost always more expensive than a credit union's but sounds downright cheap on a "pennies a month" basis. Then they'll sell you "protection" packages—rustproofing, undercoating, fabric conditioning—"for just $19 per month." Why, you can afford that! But over 60 months, you will pay more than $1,140 for products you don't need—or if you think you do, could get for $800 less elsewhere. The same approach works for extended warranties or mechanical breakdown insurance, too.
Remember: Finance managers, even if they're called "advisers" or "counselors," are simply high-pressure salespeople.
The "leasing is better" approach is the newest ploy in system selling. Even if you've negotiated a great deal (as a matter of fact, especially if you've negotiated a great deal), most dealerships these days have one final surprise for you: They're going to try to "switch" you to leasing rather than buying. They're not doing this as a public service, either. Leasing a vehicle generally is much more profitable to a dealership than selling that very same vehicle. Most of the time, it's thousands of dollars more profitable.
Leasing can be a smart way for some of us to finance a vehicle. And your credit union may offer either a leasing program, lease-like loans, and/or our Car Facts Vehicle Leasing Guide. But leasing is smart only if you've done your homework. Don't lease a car from a dealership or even from a credit union without really understanding the transaction and its actual costs, both in the short run and the long run.
Track systems, in any shape or form, are not friends of your pocketbook. Please repeat. And daily, the methods grow more sophisticated and subtle. For instance, many dealerships now track customers' movements by computer, rate their moods on scales entered into computers, and flash their progress in the buying process on computer screens so managers and other salespeople throughout the dealership can monitor the careful plan to sell. How can you avoid the traps? Read on.
"This beautiful custom van can be yours for $1 under invoice. Unbelievable! And we got zero percent financing. Even more unbelievable. Take it home tonight! We're open to midnight. No gimmicks, just good deals. Come see us."
Credit Union Car Facts
Vehicle Buying Guide
Prepared for CUNA by Remar Sutton
©1997 by Credit Union National Association Inc. All rights reserved, including the right of reproduction in whole or in part in any form.
Contents
What's Really Happening Down at the Dealership?
Buying a Car the Right Way—the Car Facts Way
Dealing With the Dealership—Negotiate the Right Way
Buying a Used Car
Chapter 1 - What's Really Happening Down at the Dealership?
To listen to the ads, you'd think saving money on a vehicle was as easy as going down to the showroom and signing your name. But it's much more complex than that. Did you know a dealer can sell you a car for exactly what he paid the manufacturer and still make $500 to $1,000 on just the car? Or that "zero percent" financing may cost you more than financing at a credit union—even if the credit union's rate is 10%?
The entire automotive market is about the last place in America where you must survive on your bartering skills. To save money, to get the car that's right for you at the best price, you must know what you're up against and how to negotiate in that high-pressure arena. This Credit Union Car FactsSM Vehicle Buying Guide will give you that valuable education. If you will read and work carefully, you might keep up to $3,000 or so hard-earned dollars in your pocket—rather than putting them into the dealer's. Ready to learn how?
Start by looking at what you're up against. You need to understand this first. Then we'll discuss how to find the right car—new or used—and how to negotiate its purchase the right way—the Car Facts way.
The pressure game starts even before you get to the dealership. Just look at dealer ads: They promise low payments, big sales, big money for your trade, and respect for your intellect. But, often, these promises come with some crossed fingers. For example, did you know that many dealers make more during sales than they do at "nonsale" time? That's because we consumers automatically equate the word "sale" with "save." That's dangerous math. Dealer advertising really has another purpose: to get you to rush down in a fit of excitement ("Really? Just $99 a month?!") without stopping to think or, not coincidentally, stopping to compare costs or products.
Then dealers put you in the dealership "track system," a tried-and-true selling process with one objective in mind: to get more money from each part of the transaction than you were planning to pay. Want to spend $250 a month? A savvy dealership will get you to pay $300. Or they happily will sell you a car for $250 a month—but it will be a car you could have bought for $200 a month.
Even if their ethics are clean, face it—they're pros at selling cars, and you're likely an amateur at buying them. The people at the dealership, nice and smiling though they may be, simply have a different objective in the car transaction than you do. Their goal always is to maximize profit.
And that might mean leaving out an important fact or two. To take one example, what would you do if you owned a dealership that sold cars ranked lowest on the government crash safety reports? Would you tell all your customers, "Oh, don't forget—our cars are the most dangerous on the road."
See the problem? To survive, dealerships generally can't give you all the answers you need to questions about such matters as a car's safety, reliability, or resale value, or its cost to the dealer, or the amount you should budget to pay for a new vehicle.
But those questions are important, aren't they? And you'll need the answers before you even look in the direction of the dealership. Why? Because once you're there, the "track system" will take over—whether you like it or not.
What are track systems?
Track systems are simply different ways to control you, confuse you, and put you on the approach to maximum profit for the dealership. Recognize and understand the system, and put yourself on the approach to saving big money. Here are the most popular track systems and selling techniques:
The deposit/driver's license technique. You're barely seated when the salesperson requests your driver's license, or your Social Security number, or a deposit "to show my boss you folks are serious." Two things are happening here: If they get your money, you won't leave; and if they have your driver's license and/or Social Security number, they can run a credit check on you. Oh, did they forget to ask you first? Why would they do that? To plan the amount of profit they'd like to make.
The "T.O." system. T.O. stands for "turnover." You're sitting in a salesperson's office, thinking about how much more fun it would be to live in a dentist's chair than go through this, when your salesperson returns with reinforcements. The new smiling face asks for more money. And then the salesperson asks for more. And then the dealership chaplain comes in.
The T.O. system operates on the principle of "fresh faces can work miracles." A miracle, in this instance, is defined as more profit. And as long as you give, they'll keep asking.
The note system. Rather than send in reinforcements, the salesperson steps out, returning with a nice note from the sales manager asking for more money. And then another note, then another. Usually, they come back with five, and usually the last two ask for raises of odd amounts of money—for instance, $113.29, or, finally, $23.19. The note system has one basic problem. It makes you think the dealership is negotiating when it's really only play-acting.
Consider the odd raises. These are designed simply to make it look like you're really a shrewd bargainer. You know, you think you've got them "down to the pennies." At note system dealerships, customers generally are given all five notes asking for more money—even if the customer already has agreed to pay full list price!
The "foursquare" system. The salesperson divides a piece of paper into four squares and then asks for your "wish list": What do you want to pay a month? What do you want for your trade? What do you want to pay for the new car? However ridiculous the sums, each is written in a square. Then they ask for your signature in the fourth square and a large deposit.
Then they begin to "work" you on each square separately, starting with a figure far from yours and very slowly negotiating down, constantly scratching through figures. By the time they finish, the paper is illegible, you're so frazzled you've forgotten your name, but the salesperson is smiling. You've agreed to pay an additional $1,200 to $1,500 profit.
The foursquare system probably is the worst system in use today because it negotiates the four squares as if they're not interrelated. For instance, as if changing the down payment and trade-in allowance doesn't affect the payment. Baloney. Don't deal with dealerships that use this system.
Spot delivery. "You can take it home today!" That is the most expensive statement any car dealer can make. Spot delivery means emotion is ruling you, rather than good sense. It also means you (very conveniently for the dealer) won't have the opportunity to compare costs and terms. Never buy a car on your first visit. Wait a day and the price will tumble.
The finance manager approach. Even if you have the cash in your pocket, you'll be forced to talk with most dealerships' finance people. Why? Because dealerships make the real profit in the finance office. If the dealership can convert you to its financing, it'll sell you credit life and credit disability insurance that's almost always more expensive than a credit union's but sounds downright cheap on a "pennies a month" basis. Then they'll sell you "protection" packages—rustproofing, undercoating, fabric conditioning—"for just $19 per month." Why, you can afford that! But over 60 months, you will pay more than $1,140 for products you don't need—or if you think you do, could get for $800 less elsewhere. The same approach works for extended warranties or mechanical breakdown insurance, too.
Remember: Finance managers, even if they're called "advisers" or "counselors," are simply high-pressure salespeople.
The "leasing is better" approach is the newest ploy in system selling. Even if you've negotiated a great deal (as a matter of fact, especially if you've negotiated a great deal), most dealerships these days have one final surprise for you: They're going to try to "switch" you to leasing rather than buying. They're not doing this as a public service, either. Leasing a vehicle generally is much more profitable to a dealership than selling that very same vehicle. Most of the time, it's thousands of dollars more profitable.
Leasing can be a smart way for some of us to finance a vehicle. And your credit union may offer either a leasing program, lease-like loans, and/or our Car Facts Vehicle Leasing Guide. But leasing is smart only if you've done your homework. Don't lease a car from a dealership or even from a credit union without really understanding the transaction and its actual costs, both in the short run and the long run.
Track systems, in any shape or form, are not friends of your pocketbook. Please repeat. And daily, the methods grow more sophisticated and subtle. For instance, many dealerships now track customers' movements by computer, rate their moods on scales entered into computers, and flash their progress in the buying process on computer screens so managers and other salespeople throughout the dealership can monitor the careful plan to sell. How can you avoid the traps? Read on.
"This beautiful custom van can be yours for $1 under invoice. Unbelievable! And we got zero percent financing. Even more unbelievable. Take it home tonight! We're open to midnight. No gimmicks, just good deals. Come see us."
This is a good article from MSN Money
Sometimes I find the "advice" handed out by columnists tend to err on the side of the advertisers that buy large blocks of space in their publications. However, this one is full of good info by Liz Pulliam Weston.
7 home-buying traps - MSN Money
Liz Pulliam Weston
The Basics
7 home-buying traps
First-time home-buyers face an unfamiliar road and risk purchasing the wrong place at the wrong time. Here's a guide to the potholes.
By Liz Pulliam Weston
Buying your first home is an exercise in faith. You don't really know what you're getting into, you're awash in unfamiliar terminology and everyone you meet seems to have strong (and utterly contradictory) ideas about which way the housing market is headed.
You may not be able to avoid every home-purchase mistake, but you can keep your regrets to a minimum by avoiding the following traps:
Blindly using your agent's inspector
Your agent may recommend a home inspector because he does a good job -- or because he keeps his mouth shut about problems that could torpedo the sale.
Yes, it's terrible to have to be so suspicious, but this is a big investment you're making. A good home inspection can keep you from buying a money pit. You can ask your agent for a recommendation, but get referrals from other recent buyers and try to interview at least three potential candidates before making your choice.
Few states regulate home inspectors closely, so real-estate columnist Ilyce Glink recommends you choose someone who belongs to the American Society of Home Inspectors, which requires its members to complete at least 250 inspections (or 750 if they don't have other licenses and experience). Ask about fees (which typically range from $300 to $700) and whether the inspector is licensed, bonded and insured, said Glink, author of "100 Questions Every First-Time Home Buyer Should Ask." Make sure you get a detailed, written report and, if at all possible, accompany the inspector so you can discuss the findings while they're still fresh.
Taking advice about what you can afford
Your agent, your broker and your lender don't know what you can afford. At best, they know the underwriting guidelines for various loans, which are designed to minimize the lenders' losses, not ensure that you'll maintain your financial health.
As I wrote in "8 big mortgage mistakes and how to avoid them," lenders know that you'll do whatever it takes to pay your mortgage, even if that means shortchanging your retirement, forgoing vacations and piling on credit card debt. You need to be the one to set limits on how much you want to borrow and how you borrow it. In general, limiting your housing costs -- including mortgage, property taxes and homeowner's insurance -- to 25% of your gross income will ensure you have enough money left over to cover other goals, like retirement savings.
Getting a 'temporary' loan
I'm hearing this potentially dangerous advice more often now that so many markets are spiraling out of the reach of first-time home-buyers: Get a mortgage with a low payment now, then refinance in a few years when your income is higher. This is the way some brokers and lenders are hawking adjustable-rate mortgages as well as their more exotic cousins, interest-only and flexible-payment loans.
There are a couple of problems with this advice. The first and most obvious is that no one can predict where interest rates will be five years from now. If they're substantially higher, you will have just passed up the opportunity to lock in rates when they were near generational lows. If your payment has been rising with those rates, you may not be able to afford your home even if your income is higher.
The other problem if you opt for one of the exotic mortgages is that you may not be building any equity in your home. If prices drop, you may owe more on your house than it's worth, which is going to make refinancing pretty tough unless you can come up with a ton of extra cash.
More experienced homeowners who are disciplined about money might be able to handle a trickier mortgage.
The better advice for first-time home-buyers may be to opt for a loan that will remain fixed at least as long as you plan to be in the home. If you plan to move after five years, for example, a good choice might be hybrid loan that remains fixed for five years before becoming an adjustable-rate mortgage. If you'll be in the home for a decade or more, or aren't sure how long you'll be there, you might want to opt for the security of a 30-year fixed-rate loan.
"You're locking in your housing costs for the next 30 years," said real-estate investor Gary W. Eldred, author of "The 106 Common Mistakes Homebuyers Make (and How to Avoid Them)." "If interest rates go up, your payment stays the same, and if they go down, you can refinance." Before you decide on a mortgage, spend some time in MSN Money's Home Financing Decision Center and educate yourself about the options.
Opening or closing credit accounts
Both can hurt your all-important credit score, the three-digit number lenders use to help gauge your credit-worthiness. That can result in your getting stuck with a higher interest rate or losing the loan you want all together. (Read more about credit scores at MSN Money's credit rating Decision Center.)
Real-estate columnist Tom Kelly knows how important credit scores are, but didn't think much about the ramifications when he applied for a new credit card while in the process of applying for a home-equity line of credit. That, plus his wife's closure of a few other accounts, shaved more than 30 points off the couple's credit score.
It was "really bad timing," Kelley said. "The lender for our proposed line of credit basically said, 'What have you guys been doing?' after our application had been filed and the new FICO scores had arrived."
Failing to investigate the neighborhood
"One common mistake is not looking at the property and the neighborhood at various times," said Dick LePre, senior loan consultant for RPM Mortgage in San Francisco and author of the RateWatch newsletter. "Look at it during the day, the late afternoon when kids tend to cluster, at night and on both weekdays and weekends."
This ongoing inspection can reveal good news, bad news or both. You may find your home is on a popular shortcut for commuters or near the gathering place for local kids, but only for a few hours a day.
"Something which you construe as a problem might only happen one day a week or at a certain time of the day," LePre said.
He also recommends quizzing a few neighbors about what they like and don't like, and about which direction the neighborhood seems to be going.
"Find out if there are any 'crazies' on the block," he said. "If there is empty space nearby, ascertain what the zoning is for that empty space. Is the next block over ... zoned commercial? Do you want a McDonald's as a neighbor?"
Buying when you're not ready
Buying a home is a great way for the average person to build wealth over the long run, but it's not for everyone in all circumstances.
If your finances are uncertain or your job prospects are up in the air, you might want to wait. Renting is also a better option if you're planning to move in a year or two.
Not buying when you are ready
All that said, you shouldn't let fear or uncertainty keep you on the sidelines if you're otherwise ready to buy a home.
Eldred notes in his book that the media have been decrying the high cost of housing and predicting price peaks at least since the 1940s. Although prices have fallen in various cities at various times, the overall trend has been upward.
Eldred recommends being cautious if your market is showing signs of weakening, such as:
* Properties staying on the market longer.
* A widening gap between the costs of owning and the costs of renting.
Even then, don't put off a purchase if you're able to stay put for several years -- long enough to ride out any downswings.
"In five or 10 years, prices will be higher than they are today," Eldred predicted.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
7 home-buying traps - MSN Money
Liz Pulliam Weston
The Basics
7 home-buying traps
First-time home-buyers face an unfamiliar road and risk purchasing the wrong place at the wrong time. Here's a guide to the potholes.
By Liz Pulliam Weston
Buying your first home is an exercise in faith. You don't really know what you're getting into, you're awash in unfamiliar terminology and everyone you meet seems to have strong (and utterly contradictory) ideas about which way the housing market is headed.
You may not be able to avoid every home-purchase mistake, but you can keep your regrets to a minimum by avoiding the following traps:
Blindly using your agent's inspector
Your agent may recommend a home inspector because he does a good job -- or because he keeps his mouth shut about problems that could torpedo the sale.
Yes, it's terrible to have to be so suspicious, but this is a big investment you're making. A good home inspection can keep you from buying a money pit. You can ask your agent for a recommendation, but get referrals from other recent buyers and try to interview at least three potential candidates before making your choice.
Few states regulate home inspectors closely, so real-estate columnist Ilyce Glink recommends you choose someone who belongs to the American Society of Home Inspectors, which requires its members to complete at least 250 inspections (or 750 if they don't have other licenses and experience). Ask about fees (which typically range from $300 to $700) and whether the inspector is licensed, bonded and insured, said Glink, author of "100 Questions Every First-Time Home Buyer Should Ask." Make sure you get a detailed, written report and, if at all possible, accompany the inspector so you can discuss the findings while they're still fresh.
Taking advice about what you can afford
Your agent, your broker and your lender don't know what you can afford. At best, they know the underwriting guidelines for various loans, which are designed to minimize the lenders' losses, not ensure that you'll maintain your financial health.
As I wrote in "8 big mortgage mistakes and how to avoid them," lenders know that you'll do whatever it takes to pay your mortgage, even if that means shortchanging your retirement, forgoing vacations and piling on credit card debt. You need to be the one to set limits on how much you want to borrow and how you borrow it. In general, limiting your housing costs -- including mortgage, property taxes and homeowner's insurance -- to 25% of your gross income will ensure you have enough money left over to cover other goals, like retirement savings.
Getting a 'temporary' loan
I'm hearing this potentially dangerous advice more often now that so many markets are spiraling out of the reach of first-time home-buyers: Get a mortgage with a low payment now, then refinance in a few years when your income is higher. This is the way some brokers and lenders are hawking adjustable-rate mortgages as well as their more exotic cousins, interest-only and flexible-payment loans.
There are a couple of problems with this advice. The first and most obvious is that no one can predict where interest rates will be five years from now. If they're substantially higher, you will have just passed up the opportunity to lock in rates when they were near generational lows. If your payment has been rising with those rates, you may not be able to afford your home even if your income is higher.
The other problem if you opt for one of the exotic mortgages is that you may not be building any equity in your home. If prices drop, you may owe more on your house than it's worth, which is going to make refinancing pretty tough unless you can come up with a ton of extra cash.
More experienced homeowners who are disciplined about money might be able to handle a trickier mortgage.
The better advice for first-time home-buyers may be to opt for a loan that will remain fixed at least as long as you plan to be in the home. If you plan to move after five years, for example, a good choice might be hybrid loan that remains fixed for five years before becoming an adjustable-rate mortgage. If you'll be in the home for a decade or more, or aren't sure how long you'll be there, you might want to opt for the security of a 30-year fixed-rate loan.
"You're locking in your housing costs for the next 30 years," said real-estate investor Gary W. Eldred, author of "The 106 Common Mistakes Homebuyers Make (and How to Avoid Them)." "If interest rates go up, your payment stays the same, and if they go down, you can refinance." Before you decide on a mortgage, spend some time in MSN Money's Home Financing Decision Center and educate yourself about the options.
Opening or closing credit accounts
Both can hurt your all-important credit score, the three-digit number lenders use to help gauge your credit-worthiness. That can result in your getting stuck with a higher interest rate or losing the loan you want all together. (Read more about credit scores at MSN Money's credit rating Decision Center.)
Real-estate columnist Tom Kelly knows how important credit scores are, but didn't think much about the ramifications when he applied for a new credit card while in the process of applying for a home-equity line of credit. That, plus his wife's closure of a few other accounts, shaved more than 30 points off the couple's credit score.
It was "really bad timing," Kelley said. "The lender for our proposed line of credit basically said, 'What have you guys been doing?' after our application had been filed and the new FICO scores had arrived."
Failing to investigate the neighborhood
"One common mistake is not looking at the property and the neighborhood at various times," said Dick LePre, senior loan consultant for RPM Mortgage in San Francisco and author of the RateWatch newsletter. "Look at it during the day, the late afternoon when kids tend to cluster, at night and on both weekdays and weekends."
This ongoing inspection can reveal good news, bad news or both. You may find your home is on a popular shortcut for commuters or near the gathering place for local kids, but only for a few hours a day.
"Something which you construe as a problem might only happen one day a week or at a certain time of the day," LePre said.
He also recommends quizzing a few neighbors about what they like and don't like, and about which direction the neighborhood seems to be going.
"Find out if there are any 'crazies' on the block," he said. "If there is empty space nearby, ascertain what the zoning is for that empty space. Is the next block over ... zoned commercial? Do you want a McDonald's as a neighbor?"
Buying when you're not ready
Buying a home is a great way for the average person to build wealth over the long run, but it's not for everyone in all circumstances.
If your finances are uncertain or your job prospects are up in the air, you might want to wait. Renting is also a better option if you're planning to move in a year or two.
Not buying when you are ready
All that said, you shouldn't let fear or uncertainty keep you on the sidelines if you're otherwise ready to buy a home.
Eldred notes in his book that the media have been decrying the high cost of housing and predicting price peaks at least since the 1940s. Although prices have fallen in various cities at various times, the overall trend has been upward.
Eldred recommends being cautious if your market is showing signs of weakening, such as:
* Properties staying on the market longer.
* A widening gap between the costs of owning and the costs of renting.
Even then, don't put off a purchase if you're able to stay put for several years -- long enough to ride out any downswings.
"In five or 10 years, prices will be higher than they are today," Eldred predicted.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
Monday, January 15, 2007
Banks Gone Wild
Banks Gone Wild - New York Times
The other day I heard a fact that takes what is said here even to another level. There are now more Payday Loan centers in this country than there are McDonald's hamburger stands. The interest rates these guys are charging are ruinous, shoud be against the law and make the 29.99% he mentions in this article laughable. Try 400% interest.
What this guy recommends is to let some state legislators know you thoughts on a couple of things like usuary interest (which can be controlled on the state level). I agree. Have a look at this article and note that bankruptcies have encreased 443.5% between 1985 and 2004.
Op Ed
By JOE LEE and THOMAS PARRISH
Published: January 13, 2007
Lexington, Ky.
I OWE about $12,000 in unsecured debt, and my payments just keep going up,” a troubled citizen signing himself T. P. recently informed a personal-finance columnist. He always paid more than the minimum amount due on his credit card bill, but “still the balance never goes down,” T .P. wrote. “Is there any way to get the interest rate down?”
The interest rate that so oppressed T. P.? A towering 29.99 percent. At this rate, the columnist said, if T. P. continued to pay little more than the monthly minimum, it could take him more than 30 years to pay off his balance — even if he never went shopping again.
Trying to fight off a collection agency while paying little or nothing on his credit card debt, another desperate borrower, R. Z., appealed to this same columnist. How could he prevent interest charges and late fees from mounting? He couldn’t, replied the columnist, as long as he legally owed the money.
Consumers like T. P. and R. Z. find themselves caught in the complexities of today’s bankruptcy laws. And their predicament is increasingly common.
Thirty years ago, the unlucky R. Z. would probably have struck many of his acquaintances as something of a deadbeat: Hadn’t he voluntarily run up a debt and then tried to slip out of the deal? T. P., on the other hand, would have received sympathy as the victim of a heartless usurer (if interest rates equal to one-third of the principal had been legal in those days).
But in today’s strange alternative universe of credit card banks, the term “deadbeat” refers not to the improvident borrower but to the solid citizen who prides himself on paying off his balance every month. As anybody with a mailbox knows, credit card issuers make unrelenting efforts to lure accounts from one another as well as to establish new accounts. And what these lenders seek are “revolvers,” people like R. Z. and T. P., who are likely to pay little more than the monthly minimum — and who eventually find themselves in thrall to mushrooming interest payments, abundantly garnished with late fees.
As for the morality involved in lending money at exorbitant rates, the word “usury” itself has taken on a quaint, archaic sound, like “jousting” or “necromancy.” What happened?
In 1978, the United States Supreme Court delivered a landmark decision that freed banks to charge the interest rates allowed in their home states to customers across the country. This decision, at a time of high inflation, unleashed a national credit storm: states scrambled to relax usury laws in order to attract banks, while banks rushed to establish affiliates in states that weakened or abolished such laws. R. Z. and T. P. are the natural products of this unhappy change. One obvious recourse for people like them is to file for bankruptcy. There’s the stigma to consider, of course. But making such a move would allow R. Z. to end the harassment by the collection agency and both men to make fresh starts free of unsecured debts.
Unsurprisingly, in the 25 years since the credit explosion began, personal bankruptcy filings have risen sharply. Bank advocates have argued that this reflected debtors’ increasing abuse of the protections granted by the Bankruptcy Reform Act of 1978. Personal bankruptcies, said the industry, were costing every household a hidden tax of $400 a year, in the form of rising prices and higher interest rates. It mounted a campaign against what banks called an “epidemic” of defaults by debtors.
In 2005, these suffering financial institutions succeeded in securing the adoption of new federal legislation, the marvelously named Bankruptcy Abuse Prevention and Consumer Protection Act. Nobody who favored this bill chose to see that the bankruptcy epidemic had been produced in large measure by the banks, or that the real hidden costs were the usurious interest rates these banks charged borrowers.
Two simple comparisons demonstrate the point: From 1980 to 2004, personal bankruptcy filings increased 443.45 percent, which is certainly impressive. But over the same time, consumer credit debt rose a bit more, by 501.29 percent. In 1980, less than one personal bankruptcy case was filed for each $1 million in consumer credit outstanding; the figure was slightly smaller in 2004.
Bankruptcies tend to rise as amounts of credit rise. No mystery there, and certainly no epidemic. It all suggests that the bankruptcy code was performing remarkably well.
But the banks got what they wanted from Washington. Since the law has been on the books, people like R. Z. and T. P. have continued to receive all kinds of credit offers (no limits there), but they may have a much harder time now fending off disaster through bankruptcy protection.
A group of credit-counseling firms that provide bankruptcy screening — a step the new law requires — report that 97 percent of the clients could not repay any debts at all, and 79 percent sought relief for reasons beyond their control, like job loss and large medical expenses and, notably, rising credit card fees and predatory lending practices.
A boomerang effect has appeared, too. The new law contains a provision forcing many debtors into Chapter 13 compulsory repayment plans. The bill’s backers expected this fresh squeeze on debtors to produce more cash for the banks, but the trend appears to be downward.
In adopting the provision, Congress disregarded the advice of every disinterested group that has looked at the question, including three presidential commissions, the Congressional Budget Office and the Government Accountability Office. It also ignored a past House Judiciary Committee report, which declared that such compulsion might well amount to the imposition of involuntary servitude.
So the lending goes on. People classed as the “working poor,” now beginning to be tapped by the credit card vendors, no doubt constitute a rich supply of coveted potential revolvers — fresh customers for the banks to draw into the credit maze, with its minimums and its unending late fees. In signing the 2005 act, President Bush declared that it would make more credit available to poor people. Unquestionably so. And 30 percent interest was just what they needed, wasn’t it?
Joe Lee is a federal bankruptcy judge. Thomas Parrish is the author of “Roosevelt and Marshall.”
The other day I heard a fact that takes what is said here even to another level. There are now more Payday Loan centers in this country than there are McDonald's hamburger stands. The interest rates these guys are charging are ruinous, shoud be against the law and make the 29.99% he mentions in this article laughable. Try 400% interest.
What this guy recommends is to let some state legislators know you thoughts on a couple of things like usuary interest (which can be controlled on the state level). I agree. Have a look at this article and note that bankruptcies have encreased 443.5% between 1985 and 2004.
Op Ed
By JOE LEE and THOMAS PARRISH
Published: January 13, 2007
Lexington, Ky.
I OWE about $12,000 in unsecured debt, and my payments just keep going up,” a troubled citizen signing himself T. P. recently informed a personal-finance columnist. He always paid more than the minimum amount due on his credit card bill, but “still the balance never goes down,” T .P. wrote. “Is there any way to get the interest rate down?”
The interest rate that so oppressed T. P.? A towering 29.99 percent. At this rate, the columnist said, if T. P. continued to pay little more than the monthly minimum, it could take him more than 30 years to pay off his balance — even if he never went shopping again.
Trying to fight off a collection agency while paying little or nothing on his credit card debt, another desperate borrower, R. Z., appealed to this same columnist. How could he prevent interest charges and late fees from mounting? He couldn’t, replied the columnist, as long as he legally owed the money.
Consumers like T. P. and R. Z. find themselves caught in the complexities of today’s bankruptcy laws. And their predicament is increasingly common.
Thirty years ago, the unlucky R. Z. would probably have struck many of his acquaintances as something of a deadbeat: Hadn’t he voluntarily run up a debt and then tried to slip out of the deal? T. P., on the other hand, would have received sympathy as the victim of a heartless usurer (if interest rates equal to one-third of the principal had been legal in those days).
But in today’s strange alternative universe of credit card banks, the term “deadbeat” refers not to the improvident borrower but to the solid citizen who prides himself on paying off his balance every month. As anybody with a mailbox knows, credit card issuers make unrelenting efforts to lure accounts from one another as well as to establish new accounts. And what these lenders seek are “revolvers,” people like R. Z. and T. P., who are likely to pay little more than the monthly minimum — and who eventually find themselves in thrall to mushrooming interest payments, abundantly garnished with late fees.
As for the morality involved in lending money at exorbitant rates, the word “usury” itself has taken on a quaint, archaic sound, like “jousting” or “necromancy.” What happened?
In 1978, the United States Supreme Court delivered a landmark decision that freed banks to charge the interest rates allowed in their home states to customers across the country. This decision, at a time of high inflation, unleashed a national credit storm: states scrambled to relax usury laws in order to attract banks, while banks rushed to establish affiliates in states that weakened or abolished such laws. R. Z. and T. P. are the natural products of this unhappy change. One obvious recourse for people like them is to file for bankruptcy. There’s the stigma to consider, of course. But making such a move would allow R. Z. to end the harassment by the collection agency and both men to make fresh starts free of unsecured debts.
Unsurprisingly, in the 25 years since the credit explosion began, personal bankruptcy filings have risen sharply. Bank advocates have argued that this reflected debtors’ increasing abuse of the protections granted by the Bankruptcy Reform Act of 1978. Personal bankruptcies, said the industry, were costing every household a hidden tax of $400 a year, in the form of rising prices and higher interest rates. It mounted a campaign against what banks called an “epidemic” of defaults by debtors.
In 2005, these suffering financial institutions succeeded in securing the adoption of new federal legislation, the marvelously named Bankruptcy Abuse Prevention and Consumer Protection Act. Nobody who favored this bill chose to see that the bankruptcy epidemic had been produced in large measure by the banks, or that the real hidden costs were the usurious interest rates these banks charged borrowers.
Two simple comparisons demonstrate the point: From 1980 to 2004, personal bankruptcy filings increased 443.45 percent, which is certainly impressive. But over the same time, consumer credit debt rose a bit more, by 501.29 percent. In 1980, less than one personal bankruptcy case was filed for each $1 million in consumer credit outstanding; the figure was slightly smaller in 2004.
Bankruptcies tend to rise as amounts of credit rise. No mystery there, and certainly no epidemic. It all suggests that the bankruptcy code was performing remarkably well.
But the banks got what they wanted from Washington. Since the law has been on the books, people like R. Z. and T. P. have continued to receive all kinds of credit offers (no limits there), but they may have a much harder time now fending off disaster through bankruptcy protection.
A group of credit-counseling firms that provide bankruptcy screening — a step the new law requires — report that 97 percent of the clients could not repay any debts at all, and 79 percent sought relief for reasons beyond their control, like job loss and large medical expenses and, notably, rising credit card fees and predatory lending practices.
A boomerang effect has appeared, too. The new law contains a provision forcing many debtors into Chapter 13 compulsory repayment plans. The bill’s backers expected this fresh squeeze on debtors to produce more cash for the banks, but the trend appears to be downward.
In adopting the provision, Congress disregarded the advice of every disinterested group that has looked at the question, including three presidential commissions, the Congressional Budget Office and the Government Accountability Office. It also ignored a past House Judiciary Committee report, which declared that such compulsion might well amount to the imposition of involuntary servitude.
So the lending goes on. People classed as the “working poor,” now beginning to be tapped by the credit card vendors, no doubt constitute a rich supply of coveted potential revolvers — fresh customers for the banks to draw into the credit maze, with its minimums and its unending late fees. In signing the 2005 act, President Bush declared that it would make more credit available to poor people. Unquestionably so. And 30 percent interest was just what they needed, wasn’t it?
Joe Lee is a federal bankruptcy judge. Thomas Parrish is the author of “Roosevelt and Marshall.”
Tuesday, January 9, 2007
Home Equity Loan to Pay Credit Card Debt, Bad Idea!
Home Equity Loan to Pay Credit Card Debt, Bad Idea!
I couldn’t help but notice there have been a few articles circulating around espousing the merits of taking a home equity loan out to pay off your high interest credit card debt or other types of unsecured debt. Did you notice they often are written by mortgage brokers?
Here is my problem with consumers taking out these types of loans. One, they are attempting to borrow their way out of debt, which is impossible and overall, just a terrible idea. Secondly, they are borrowing from what is essentially the savings account of their home equity. For most people, this is their single biggest investment and financial asset. So, this loan to pay off unsecured debt is secured by the roof over their heads which costs more each month when a loan is taken out against it.
Let's look at a worst case scenario that is all too common. It might help you if you envision it before taking out one of these types of loans. You get a bigger house payment with the borrowed money, your credit cards get paid off but you don’t cut them up. Six months to a year later, you have them maxed out again but now you get laid off. The cards may never be paid and you have all the credit problems associated with being unable to pay them along with a higher mortgage payment. If you can’t make the payment on it, you are in more danger of losing your home than you were before you took it out. But most tragically, you have nothing to show for the thousands more you now owe on your home. Thousands you may have spent years paying down from the original debt.
Even in the best case scenario, you are now years longer away from paying the house off and if you pay off the cards and cut them up, you have less equity in your home in exchange for items you bought with high interest credit cards. In my opinion, it is a bad trade and only the credit card companies and the companies that originate the home equity loans win. You get stuck with a higher house payment, less money in your equity “savings account” and unsecured creditors get paid with funds taken from your most important asset. What do you really have to show for borrowing more money to pay off money you effectively borrowed at 18% to 29%?
What is the alternative? Negotiate with the credit card companies; that’s what! There are ways to make the creditors and collections agencies stop harassing you instantly and in some cases they are trying to collect a debt from you that you no longer owe. Remember, you have the one thing they want: MONEY. And even if you don’t have much or any, you still can get them to lower the interest rate, maybe even to 0% or knock off the late fees and get the debt to a manageable level. In addition, you have the ability to dictate your terms to them!
If you listen to the collectors, they will have you terrified into thinking the only options are for you to get a loan to pay them or to declare bankruptcy because they will have you convinced they will automatically get a judgment against you and ruin your credit. While a judgment certainly is a possibility and I don’t take the threat of it lightly, it must be done through the courts and you do have options to stop a judgment. When you can’t make your house payments it is much harder to stop a foreclosure. Additionally, your credit can be addressed with the credit reporting agencies and is not necessarily going to cause you problems for seven years as they would have you believe.
So, take the time to think through all the ramifications of a home equity loan to pay off credit cards and go to the trouble to educate yourself on some of your rights along with the protections offered to consumers through federal laws and statutes. You can get out from under the crushing load of credit card debt with a fresh start, without risking your home.
Believe this! You can overcome or solve or successfully live with any problem you will ever have to face including credit card debt. If you are committed to making a plan, setting some goals, working your plan, and doing the things that are proven to work, you will end your credit card nightmare without worrying about a foreclosure nightmare.
Pat Hicks is the author of "The Negotiate Your Way to Financial Freedom from Credit Card Debt Ebook", located at http://www.Iwantafreecrediterport.com, a web site providing competitive priced credit reports and scores with no tricks or misleading advertising.
I couldn’t help but notice there have been a few articles circulating around espousing the merits of taking a home equity loan out to pay off your high interest credit card debt or other types of unsecured debt. Did you notice they often are written by mortgage brokers?
Here is my problem with consumers taking out these types of loans. One, they are attempting to borrow their way out of debt, which is impossible and overall, just a terrible idea. Secondly, they are borrowing from what is essentially the savings account of their home equity. For most people, this is their single biggest investment and financial asset. So, this loan to pay off unsecured debt is secured by the roof over their heads which costs more each month when a loan is taken out against it.
Let's look at a worst case scenario that is all too common. It might help you if you envision it before taking out one of these types of loans. You get a bigger house payment with the borrowed money, your credit cards get paid off but you don’t cut them up. Six months to a year later, you have them maxed out again but now you get laid off. The cards may never be paid and you have all the credit problems associated with being unable to pay them along with a higher mortgage payment. If you can’t make the payment on it, you are in more danger of losing your home than you were before you took it out. But most tragically, you have nothing to show for the thousands more you now owe on your home. Thousands you may have spent years paying down from the original debt.
Even in the best case scenario, you are now years longer away from paying the house off and if you pay off the cards and cut them up, you have less equity in your home in exchange for items you bought with high interest credit cards. In my opinion, it is a bad trade and only the credit card companies and the companies that originate the home equity loans win. You get stuck with a higher house payment, less money in your equity “savings account” and unsecured creditors get paid with funds taken from your most important asset. What do you really have to show for borrowing more money to pay off money you effectively borrowed at 18% to 29%?
What is the alternative? Negotiate with the credit card companies; that’s what! There are ways to make the creditors and collections agencies stop harassing you instantly and in some cases they are trying to collect a debt from you that you no longer owe. Remember, you have the one thing they want: MONEY. And even if you don’t have much or any, you still can get them to lower the interest rate, maybe even to 0% or knock off the late fees and get the debt to a manageable level. In addition, you have the ability to dictate your terms to them!
If you listen to the collectors, they will have you terrified into thinking the only options are for you to get a loan to pay them or to declare bankruptcy because they will have you convinced they will automatically get a judgment against you and ruin your credit. While a judgment certainly is a possibility and I don’t take the threat of it lightly, it must be done through the courts and you do have options to stop a judgment. When you can’t make your house payments it is much harder to stop a foreclosure. Additionally, your credit can be addressed with the credit reporting agencies and is not necessarily going to cause you problems for seven years as they would have you believe.
So, take the time to think through all the ramifications of a home equity loan to pay off credit cards and go to the trouble to educate yourself on some of your rights along with the protections offered to consumers through federal laws and statutes. You can get out from under the crushing load of credit card debt with a fresh start, without risking your home.
Believe this! You can overcome or solve or successfully live with any problem you will ever have to face including credit card debt. If you are committed to making a plan, setting some goals, working your plan, and doing the things that are proven to work, you will end your credit card nightmare without worrying about a foreclosure nightmare.
Pat Hicks is the author of "The Negotiate Your Way to Financial Freedom from Credit Card Debt Ebook", located at http://www.Iwantafreecrediterport.com, a web site providing competitive priced credit reports and scores with no tricks or misleading advertising.
Minorities Pay the Price
When Citibank was being sued for abusive credit card charges and collection activities, one of the collectors was quoted as saying that when they got an elderly person or minority on the phone they knew they could abuse them. They looked for the uneducated and the weak. This article clearly shows how minorities are targeted for higher rates and begs the question of why the lending industry is not under closer scrutiny.
As N. Texas minorities overpay on home loans, questions arise
Exclusive: Data shows disparity, prompts fairness concerns
12:00 AM CST on Sunday, January 7, 2007
By PAULA LAVIGNE / The Dallas Morning News
Minorities in Dallas-Fort Worth are buying homes like never before, but they're more likely than whites to accept higher-interest loans that could lead to foreclosure, according to a Dallas Morning News analysis.
REX C. CURRY/Special Contributor
Calvin McDavis attends a class for first-time homebuyers by ACORN Housing Corp., a nonprofit that offers home loan counseling to low- and moderate- income people. The News found that about 34 percent of home loans taken out by minorities in 2004-05 were considered higher-cost, compared with 17 percent for whites.
On average, minorities make less money than whites. However, the interest rate disparity remains even when comparing only middle- to higher-income borrowers of both groups.
TOM FOX/DMN
Thysen Smiley says she got a 10 percent adjustable-rate loan to refinance her Forest Hill home. A loan counselor later told her she should have qualified for a lower, fixed rate. Federal regulators and lending experts say the difference is wide enough to warrant a closer look at whether lenders are taking advantage of minority borrowers.
Even if lender practices aren't illegal, real estate experts say some minority borrowers are still paying more than they should for their home loan. Recent borrowers who took out adjustable-rate mortgages are feeling the pinch right now – or soon will – as rates continue to rise.
"It's definitely a problem because there are borrowers out there who are ending up with loans that are inappropriate for them," said Ann Graham, a professor of law at Texas Tech University who has studied lending patterns.
Only since 2004 has the federal government required lenders to disclose information on interest rates for individual loans when the rate exceeds a threshold set by federal regulators.
The News found the racial divide by analyzing a public Federal Reserve database of more than 600,000 loans from 2004 and 2005. It included rate information and other details on the loan and applicant, such as Hispanic ethnicity and race (white, black, Asian, American Indian or Pacific islander).
However, the data didn't include information on borrowers' debt, credit ratings or sale prices – all of which affect a mortgage loan's final interest rate and terms.
Regulators say a loan becomes problematic when lenders stick borrowers into pricey, riskier loans when they could qualify for something better.
Thysen Smiley, who is black, went to a mortgage broker when she wanted to refinance her three-bedroom home in Forest Hill, a town of 13,000 people south of Fort Worth.
Ms. Smiley, a 47-year-old former postal clerk, said the broker offered her one set of terms and then asked her to sign a contract for different terms. She didn't think she had a choice and agreed to a 10 percent adjustable-rate loan, which could go up after two years.
She later worked with a loan counselor who told her she should have qualified for a lower fixed rate that wouldn't change.
"A lot of people don't know there are other opportunities available to them," said Sherry Randall, office director at ACORN Housing Corp., a nonprofit organization that provides home loan counseling to low- and moderate-income people. "One of the biggies is a promise to set one set of terms once the client applies and then give them another set of terms when they're ready to close."
Denying loans
Concerns about fair lending used to focus on redlining, the discriminatory practice of denying loans based on the race or ethnicity of the borrower or neighborhood.
Lenders still deny loans to minorities more often than white applicants. As a demographic group, however, minorities are steadily climbing the homeownership ladder.
In 1990, minorities owned 17 of every 100 Dallas-Fort Worth-area homes. Last year, that number had grown to 31 of every 100 homes.
More flexible lending rules and increased competition among lenders made it possible for more people to become homeowners. Those changes created an especially big boom for minorities, local lending experts say.
Federal rules require financial institutions, such as banks, to invest in minority neighborhoods. As a result, some will pay a premium to buy loans that other lenders gave to minorities, said Marty Green, general counsel for CTX Mortgage in Dallas.
And, he said, the mortgage industry is so competitive today that lenders are looking for borrowers wherever they can find them.
"The pendulum has swung," said Alfreda Norman, community affairs officer for the Federal Reserve Bank of Dallas. More minorities are getting loans, but they're paying a higher price for what they borrow, she said.
Credit scoring
Credit scoring – which plays a big role in the type of loan anyone can get – could explain some of the disparity. A recent study by the Texas Department of Insurance showed that blacks maintain average credit scores 10 percent to 35 percent lower than average scores for whites; Hispanics were 5 percent to 25 percent lower than whites.
But local loan counselors, real estate agents and brokers say credit scores and finances don't explain the high interest rates for many minority borrowers.
ACORN Housing's Web site estimates that up to half of borrowers who receive higher-cost loans could have qualified for something less expensive.
Cranston Alkebulan, a mortgage broker for All Real Estate who has several minority clients, said he believes that 60 percent to 70 percent of those stuck with higher interest rates or fees should have done better.
"Some lenders look at it as, 'I can charge them as much interest as I want as long as they don't bark,' " he said. "I've seen scenarios where people have full documentation [of income] and their debt-to-income ratio is just solid. A greedy mortgage banker or broker took advantage of them."
Minority borrowers often don't object because they're thrilled that someone would lend to them in the first place, he said.
Mr. Alkebulan blames history, saying that past discriminatory practices have discouraged many minorities from trying to buy a home. He said others feel at a disadvantage when they start the application.
"The African-American community has been able to actually practice in the free-market economy in this country somewhat legitimately for only four decades," he said.
Lenders realize their power and their authority and use questionable methods regardless of the community, he said. It's just that minority borrowers are "not as financially savvy as someone whose family has had this wisdom and knowledge for generations," Mr. Alkebulan said.
'Sub-prime' lenders
Minority borrowers often stumble when picking a lender.
Many simply assumed they could only use a "sub-prime" lender, which specializes in lending to people with credit dings and little savings. They justify making loans that prime lenders would not make by considering things such as future income, time on the job and debt repayment plans.
Prime lenders – often banks and large mortgage companies – tended to give loans only to borrowers who had a solid financial history and higher credit scores, income, and savings for a down payment.
Loans from sub-prime lenders generally charged higher interest rates, in part to compensate for the lenders' risk in gambling on someone whose payments might fall behind.
Changes in lending practices have morphed those categories. Many prime lenders can find loans for people with not-so-hot credit, and some sub-prime lenders can offer terms competitive with prime lenders.
But people in minority neighborhoods still shy away from banks and well-known lenders because they just assume they won't qualify, Mr. Alkebulan said.
"They're not walking into Bank of America or Chase saying, 'Hey, I need a home,' because the tradition is that they'll have to put down 20 percent," he said.
Instead, they'll call the number from a television ad promising, "Bad credit OK, and no money down." Or they'll use the same person their friend, co-worker or cousin used.
A mortgage company representative contacted Derek McCutcheon, 34, and Micaela Cotton, 26, after they filled out an online survey looking for a lender. The couple, who are both black, planned to a buy a house in South Dallas large enough for their three young boys. The family had been cramped in their Irving apartment.
Mr. McCutcheon's credit was OK, but a few missed college loan payments and a credit card hurt Ms. Cotton. Together, they had about $7,000 in debt.
Their annual household income was about $50,000. They spied a newly remodeled house they wanted for $72,000, and they figured they could put 5 percent down.
They didn't realize at first that they were using a mortgage broker – someone who contacts various banks or mortgage lenders to find a loan for a client.
Their mortgage broker's company frustrated them and delayed their closing through paperwork errors, ignored phone calls, a questionable inspection and other mishaps.
They ended up borrowing about $68,000 with a 9.75 percent adjustable-rate mortgage. Since then, others, including someone else's real estate agent, told them they probably could have done better.
Allen Kingsley agrees.
Mr. Kingsley, president of the Dallas Association of Mortgage Brokers and a local broker at Merit Mortgage, looked at the couple's income, loan and credit scores. He said a lender could have done the loan differently and secured a 30-year fixed rate between 6.75 and 7.5 percent.
Mr. Kingsley said some brokers put people into higher-interest loans because they don't understand their own profession.
"Loan officers are loaning by fire," he said. "The training in our industry is terrible unless you, as an individual, take it upon yourself to become educated. Some people are really being taken, but I don't think they're being taken maliciously."
Some lenders break the law when they put borrowers into higher-cost loans. These "predatory lenders" scam customers by misleading them about rates and terms, asking them to falsify information and tacking on excessive fees.
It's not just small-time brokers who get in trouble. Last year, lending giant Ameriquest Mortgage agreed to pay $325 million to 49 states to settle predatory lending allegations.
When higher-cost loans end in foreclosure, that obviously hurts the borrower, but it also takes a toll on the community, said state Sen. Royce West, D-Dallas, who has worked on predatory-lending issues.
If a failed borrower moves into public housing or needs other public assistance to bounce back, then taxpayers will have to foot the bill, he said.
"If we're not our brother's keeper, then we're going to have to pay for our brother," he said.
Mr. West says greater scrutiny of the lending industry would be in the public interest.
Federal regulators say they're constantly reviewing data to weed out predatory lenders and determine whether the industry needs to do more to meet minority borrowers' needs.
In the meantime, consumer advocates, lenders and brokers agree that education is the best way to avoid a higher-cost loan.
People who know how to repair their credit and shore up their finances ahead of time can qualify for a lower interest rate. And they'll know to shop around for the best deal and avoid lending scams, said Ms. Randall with ACORN.
Financial educational opportunities are expanding, as several government and private agencies offer home-buying classes.
And Texas schools now require high school students to take lessons in personal finance, including instruction on credit card debt and home loans.
Ms. Cotton, the new South Dallas homeowner, said she's already looking into credit counseling and plans to quickly pay off her debt.
Both she and her boyfriend have agreed that they're going to check out different lenders and negotiate for a better rate when it's time to refinance.
Right now, she said, she's going to enjoy the privileges of home ownership.
As N. Texas minorities overpay on home loans, questions arise
Exclusive: Data shows disparity, prompts fairness concerns
12:00 AM CST on Sunday, January 7, 2007
By PAULA LAVIGNE / The Dallas Morning News
Minorities in Dallas-Fort Worth are buying homes like never before, but they're more likely than whites to accept higher-interest loans that could lead to foreclosure, according to a Dallas Morning News analysis.
REX C. CURRY/Special Contributor
Calvin McDavis attends a class for first-time homebuyers by ACORN Housing Corp., a nonprofit that offers home loan counseling to low- and moderate- income people. The News found that about 34 percent of home loans taken out by minorities in 2004-05 were considered higher-cost, compared with 17 percent for whites.
On average, minorities make less money than whites. However, the interest rate disparity remains even when comparing only middle- to higher-income borrowers of both groups.
TOM FOX/DMN
Thysen Smiley says she got a 10 percent adjustable-rate loan to refinance her Forest Hill home. A loan counselor later told her she should have qualified for a lower, fixed rate. Federal regulators and lending experts say the difference is wide enough to warrant a closer look at whether lenders are taking advantage of minority borrowers.
Even if lender practices aren't illegal, real estate experts say some minority borrowers are still paying more than they should for their home loan. Recent borrowers who took out adjustable-rate mortgages are feeling the pinch right now – or soon will – as rates continue to rise.
"It's definitely a problem because there are borrowers out there who are ending up with loans that are inappropriate for them," said Ann Graham, a professor of law at Texas Tech University who has studied lending patterns.
Only since 2004 has the federal government required lenders to disclose information on interest rates for individual loans when the rate exceeds a threshold set by federal regulators.
The News found the racial divide by analyzing a public Federal Reserve database of more than 600,000 loans from 2004 and 2005. It included rate information and other details on the loan and applicant, such as Hispanic ethnicity and race (white, black, Asian, American Indian or Pacific islander).
However, the data didn't include information on borrowers' debt, credit ratings or sale prices – all of which affect a mortgage loan's final interest rate and terms.
Regulators say a loan becomes problematic when lenders stick borrowers into pricey, riskier loans when they could qualify for something better.
Thysen Smiley, who is black, went to a mortgage broker when she wanted to refinance her three-bedroom home in Forest Hill, a town of 13,000 people south of Fort Worth.
Ms. Smiley, a 47-year-old former postal clerk, said the broker offered her one set of terms and then asked her to sign a contract for different terms. She didn't think she had a choice and agreed to a 10 percent adjustable-rate loan, which could go up after two years.
She later worked with a loan counselor who told her she should have qualified for a lower fixed rate that wouldn't change.
"A lot of people don't know there are other opportunities available to them," said Sherry Randall, office director at ACORN Housing Corp., a nonprofit organization that provides home loan counseling to low- and moderate-income people. "One of the biggies is a promise to set one set of terms once the client applies and then give them another set of terms when they're ready to close."
Denying loans
Concerns about fair lending used to focus on redlining, the discriminatory practice of denying loans based on the race or ethnicity of the borrower or neighborhood.
Lenders still deny loans to minorities more often than white applicants. As a demographic group, however, minorities are steadily climbing the homeownership ladder.
In 1990, minorities owned 17 of every 100 Dallas-Fort Worth-area homes. Last year, that number had grown to 31 of every 100 homes.
More flexible lending rules and increased competition among lenders made it possible for more people to become homeowners. Those changes created an especially big boom for minorities, local lending experts say.
Federal rules require financial institutions, such as banks, to invest in minority neighborhoods. As a result, some will pay a premium to buy loans that other lenders gave to minorities, said Marty Green, general counsel for CTX Mortgage in Dallas.
And, he said, the mortgage industry is so competitive today that lenders are looking for borrowers wherever they can find them.
"The pendulum has swung," said Alfreda Norman, community affairs officer for the Federal Reserve Bank of Dallas. More minorities are getting loans, but they're paying a higher price for what they borrow, she said.
Credit scoring
Credit scoring – which plays a big role in the type of loan anyone can get – could explain some of the disparity. A recent study by the Texas Department of Insurance showed that blacks maintain average credit scores 10 percent to 35 percent lower than average scores for whites; Hispanics were 5 percent to 25 percent lower than whites.
But local loan counselors, real estate agents and brokers say credit scores and finances don't explain the high interest rates for many minority borrowers.
ACORN Housing's Web site estimates that up to half of borrowers who receive higher-cost loans could have qualified for something less expensive.
Cranston Alkebulan, a mortgage broker for All Real Estate who has several minority clients, said he believes that 60 percent to 70 percent of those stuck with higher interest rates or fees should have done better.
"Some lenders look at it as, 'I can charge them as much interest as I want as long as they don't bark,' " he said. "I've seen scenarios where people have full documentation [of income] and their debt-to-income ratio is just solid. A greedy mortgage banker or broker took advantage of them."
Minority borrowers often don't object because they're thrilled that someone would lend to them in the first place, he said.
Mr. Alkebulan blames history, saying that past discriminatory practices have discouraged many minorities from trying to buy a home. He said others feel at a disadvantage when they start the application.
"The African-American community has been able to actually practice in the free-market economy in this country somewhat legitimately for only four decades," he said.
Lenders realize their power and their authority and use questionable methods regardless of the community, he said. It's just that minority borrowers are "not as financially savvy as someone whose family has had this wisdom and knowledge for generations," Mr. Alkebulan said.
'Sub-prime' lenders
Minority borrowers often stumble when picking a lender.
Many simply assumed they could only use a "sub-prime" lender, which specializes in lending to people with credit dings and little savings. They justify making loans that prime lenders would not make by considering things such as future income, time on the job and debt repayment plans.
Prime lenders – often banks and large mortgage companies – tended to give loans only to borrowers who had a solid financial history and higher credit scores, income, and savings for a down payment.
Loans from sub-prime lenders generally charged higher interest rates, in part to compensate for the lenders' risk in gambling on someone whose payments might fall behind.
Changes in lending practices have morphed those categories. Many prime lenders can find loans for people with not-so-hot credit, and some sub-prime lenders can offer terms competitive with prime lenders.
But people in minority neighborhoods still shy away from banks and well-known lenders because they just assume they won't qualify, Mr. Alkebulan said.
"They're not walking into Bank of America or Chase saying, 'Hey, I need a home,' because the tradition is that they'll have to put down 20 percent," he said.
Instead, they'll call the number from a television ad promising, "Bad credit OK, and no money down." Or they'll use the same person their friend, co-worker or cousin used.
A mortgage company representative contacted Derek McCutcheon, 34, and Micaela Cotton, 26, after they filled out an online survey looking for a lender. The couple, who are both black, planned to a buy a house in South Dallas large enough for their three young boys. The family had been cramped in their Irving apartment.
Mr. McCutcheon's credit was OK, but a few missed college loan payments and a credit card hurt Ms. Cotton. Together, they had about $7,000 in debt.
Their annual household income was about $50,000. They spied a newly remodeled house they wanted for $72,000, and they figured they could put 5 percent down.
They didn't realize at first that they were using a mortgage broker – someone who contacts various banks or mortgage lenders to find a loan for a client.
Their mortgage broker's company frustrated them and delayed their closing through paperwork errors, ignored phone calls, a questionable inspection and other mishaps.
They ended up borrowing about $68,000 with a 9.75 percent adjustable-rate mortgage. Since then, others, including someone else's real estate agent, told them they probably could have done better.
Allen Kingsley agrees.
Mr. Kingsley, president of the Dallas Association of Mortgage Brokers and a local broker at Merit Mortgage, looked at the couple's income, loan and credit scores. He said a lender could have done the loan differently and secured a 30-year fixed rate between 6.75 and 7.5 percent.
Mr. Kingsley said some brokers put people into higher-interest loans because they don't understand their own profession.
"Loan officers are loaning by fire," he said. "The training in our industry is terrible unless you, as an individual, take it upon yourself to become educated. Some people are really being taken, but I don't think they're being taken maliciously."
Some lenders break the law when they put borrowers into higher-cost loans. These "predatory lenders" scam customers by misleading them about rates and terms, asking them to falsify information and tacking on excessive fees.
It's not just small-time brokers who get in trouble. Last year, lending giant Ameriquest Mortgage agreed to pay $325 million to 49 states to settle predatory lending allegations.
When higher-cost loans end in foreclosure, that obviously hurts the borrower, but it also takes a toll on the community, said state Sen. Royce West, D-Dallas, who has worked on predatory-lending issues.
If a failed borrower moves into public housing or needs other public assistance to bounce back, then taxpayers will have to foot the bill, he said.
"If we're not our brother's keeper, then we're going to have to pay for our brother," he said.
Mr. West says greater scrutiny of the lending industry would be in the public interest.
Federal regulators say they're constantly reviewing data to weed out predatory lenders and determine whether the industry needs to do more to meet minority borrowers' needs.
In the meantime, consumer advocates, lenders and brokers agree that education is the best way to avoid a higher-cost loan.
People who know how to repair their credit and shore up their finances ahead of time can qualify for a lower interest rate. And they'll know to shop around for the best deal and avoid lending scams, said Ms. Randall with ACORN.
Financial educational opportunities are expanding, as several government and private agencies offer home-buying classes.
And Texas schools now require high school students to take lessons in personal finance, including instruction on credit card debt and home loans.
Ms. Cotton, the new South Dallas homeowner, said she's already looking into credit counseling and plans to quickly pay off her debt.
Both she and her boyfriend have agreed that they're going to check out different lenders and negotiate for a better rate when it's time to refinance.
Right now, she said, she's going to enjoy the privileges of home ownership.
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