Thursday, December 13, 2007

Federal Student Loan Consolidation

The end of the semester is always a useful time to remind people about options for consolidating federal student loans. A few starting points (general do’s and don’ts):

- You CANNOT consolidate until you graduate.
- If you consolidated in the past to take advantage of lower rates (good for you!), you CAN [and want to] reconsolidate assuming you have borrowed something since then.
- You CAN consolidate wherever you want – you are not required to use your lender even if they are your only lending source.
- NEVER consolidate federal loans with private loans (for those with private loans, I have a link in the resource section to provide information about refinancing them).
- ALWAYS shop around for the program that will best meet your needs.

The most commonly asked question is always where to do it. Keep in mind that as long as you are doing a federal consolidation loan (which is the only thing you should do), the only difference between the products are (1) who you are paying each month; and (2) the financial benefits the companies offer [or don’t offer]. Everything else about the loans (eligibility for deferment, etc.) are identical, the lender chosen won’t offer anything better than another. Those two items listed are the only real differences with one ‘new’ (as of October 1, 2007) exception which I’ll outline later.

For the vast majority of people, item one (who you pay) is obviously not a real big deal – whether I make my payment to Sallie Mae, MOHELA, Dept of Ed, Citibank, or anyone else doesn’t matter. The second item (financial difference in benefits offered) is really the primary criteria that should be used in evaluating loan consolidation offers. How you look at the products is based upon how you intend to repay your loans.

If you plan to repay your debts quickly (2 years or less).
Find the program that offers the largest “up front” (principal balance) credit. Key Bank used to offer a 5% principal balance credit; I’ve been told this is still available, but it is not listed on their website, so you’ll want to do some homework. I’ve never seen a principal balance credit larger than this.

If you plan to repay your debts over time (graduated/extended).
If paying over time, an upfront benefit will be much less meaningful than a reduction in your interest rate. There are two states that currently offer the most substantial interest rate incentives. New Hampshire (which is open to anyone) offers a .5% reduction for auto payment, an additional 1% reduction when repayment begins, and a $250 principal balance reduction after 12 consecutive on-time payments (so the total rate benefit is 1.5%, given on day one). North Carolina offers a slightly larger benefit (2.25%), but the benefit is provided in a tiered fashion over time (.25% reduction for paying automatically; .5% additional interest rate reduction after 24 on-time payments, .5% additional after 12 more months (36 total), and 1% more after 12 more months (48 total) – 2.25% total rate reduction after 4 years). Obviously if I’m planning on repaying my debt in ~5 years, a program like New Hampshire where that benefit is immediate would serve me better than a principal balance credit and will also serve me better than a program like North Carolina where I have to wait 4 years to fully realize the benefit. North Carolina is going to best serve those intending to utilize an extended repayment (12+ years) option. North Carolina does require people to have a “state connection” in order to utilize their program. The easiest way to create that connection is to open up a 529 college savings plan for a child, sibling, niece/nephew – you can do so online in about 5 minutes with as little as $25. Once that is opened, you then have your connection and are eligible for their State Consolidation program.

I mentioned above that there is one exception where I would not consolidate with a company offering the best financial incentives – that case would exist if I am being hired [and plan to continue working] as a “public service” professional. The best working definition I’ve seen is at (is still being crafted). If I fit this definition, then I am the “potential” exception. An example of who this new program would serve is a student that just completed a graduate program in a field like social work; has a high level of student loan debt working in a field where their salary will never likely dramatically increase over time. This is the prime person for this program. How it works: Consolidate with the Department of Education (ONLY scenario where consolidating with the Dept of Ed will make financial sense) and select the income sensitive repayment. After 10 years of payment, the remaining balance will then be forgiven [you’ll be responsible for taxes on the forgiven amount, but the remaining loan amount will be wiped away]. This scenario is ONLY available if you use the income sensitive repayment option and ONLY if you consolidate through the Dept of Education. Even if I am a public service employee, if my debt level will not require me to repay my debt over more than a 10 year period, I will be better served by one of the other programs previously outlined!

Additional Resources.
Accessing your Federal Loan Info
OFS Consolidation Resources (Weighted interest rate calculator, repayment plan information, payment calculator, and other resources)
Private Loan Consolidation (READ PRIOR TO DOING – often not smart)

Thursday, December 6, 2007

Credit Cards ('Risk-Based Re-Pricing')

Congress has been talking about revising current regulations surrounding credit cards for several months now. Some members of Congress are being very vocal about current practices in the credit card industry (practices described by one critic as “abusive and confusing”). You’re likely aware of one common practice referred to as ‘universal default clause’ – a provision in a card agreement that enables the cardholder to raise your rate if you miss a payment to anyone [doesn’t need to be that particular card]. Universal Default is a concept I’ve outlined in prior tips on card management.

Earlier this week I read about a Senate subcommittee scrutinizing a newer practice that was being called “risk-based re-pricing.” Ultimately, this takes universal default one step further. The idea behind universal default was to raise the interest rate because of the increased risk placed on the card company; with risk-based re-pricing, rather than raising rates due to missed payments, rates can be raised in any circumstance where your credit score is lower than it was when they initially gave you the card. Keep in mind that 30% is commonly the rate charged when one’s rate is raised! Obviously the high rates were of concern to the subcommittee, but they were also concerned about consumers having little notice of the increased rate [often automatically triggered by unexplained declines in ones credit score]. In some cases, merely opening another account (i.e., dept store card) triggered the downgrade in credit score … One of the curious cases cited was a consumer that had four credit cards from the same company (the argument is that she should have similar rates based upon this type of model); her current interest rates: 8%, 14%, 19%, and 27%.

My opinion – legislative change often never occurs; I wonder how much of this “conversation” is in hopes that the credit card companies will change questionable practices on their own prior to changes in law. Not a bad start. Citigroup and Chase recently have said they will discontinue the practice (Citigroup has already stopped) and Chase will take effect in March. We’ll see if others follow suit.

What are legislators seeking? Ultimately, everything I’ve read really boils down to two requests:
(1) Clarity for Consumers. The Truth in Lending Act [specifically Regulation Z] is designed to promote consumer awareness of loan terms. The argument on the part of consumer advocates is that credit card billing and interest rate practices are much too complex for an “average” person to understand. The proposed rule change would require card issuers to ultimately redesign card applications and solicitations [enhancing disclosures] providing clearer [more easily understandable] information on fees.

(2) Mandatory Notification. The second item currently being requested would require card companies to give its customers at least 45 days notice before ‘penalty pricing’ (raising rates).

Additional Resources.
- AP Article: Credit Card Execs Defend Rate Policies
- Truth in Lending Act

Thursday, November 29, 2007

Debt Settlement

Debt has in many ways become “The American Way” … it has become so commonplace that meeting someone debt-free is often more surprising than meeting someone with substantial debts. Once someone finds themselves in the debt trap, the question becomes ‘now what?’ Several potential options are often thrown around: using a credit counseling agency to administer a DMP (debt management program) to manage the unsecured debts, arranging lower rates/ payments directly with your creditors, bankruptcy, and debt settlement/ negotiation. If you watch much TV late at night, you are aware that advertisements for debt settlement abound – it sure sounds good – “cut your debts in half,” “eliminate your debts in ½ the time,” “drastically reduce your monthly payments,” and other amazing claims. What is the truth? How does it really work? Let’s explore the issues and realities of debt settlement as a potential option in managing one’s debts …

What is it? Simply put, debt settlement is attempting to negotiate [‘settle’] a debt with a creditor in an effort to get them to take less than the amount owed. So what is the rub? Obviously, a creditor has no reason to settle on a debt unless there is evidence that you can’t pay it back. So, if you anticipate calling your creditors when you’re current on your accounts expecting to negotiate down the balances, don’t hold your breath. The account will normally need to be past due several months (typically 6 months for most debt settlement companies to work on your behalf; some will do it within 120 days of non-payment). So, if you were to see an advertisement and call them, they will inform you to stop making payments on your accounts and then they will ride in on the proverbial white horse and attempt to negotiate the debts on your behalf. A couple points of fact: if the debt is legitimate, a creditor isn’t required to negotiate; they can refuse to accept a settlement. Realize that becoming delinquent on debts is not a sure-fire way to get out of paying the full amount owed; you don’t have that guarantee [and avoid any company making such promises]. Second, if you are delinquent on your debts, you may be as successful negotiating on your own behalf as a debt settlement company would (without the cost – typically 10% to 25% of the amount you’re being saved).

The Federal Trade Commission offers the following suggestions [steer clear of companies that]:
- Guarantee they can remove unsecured debt
- Promise debts can be paid off with pennies on the dollar
- Claim their system will let you avoid bankruptcy
- Require substantial monthly service fees
- Demand payment of a percentage of savings
- Tell you to stop making payments and communicating with creditors
- Require you to make monthly payments to them, not creditor
- Claim that creditors never sue consumers for non-payment of debt
- Promise that using their system won’t negatively impact your credit
- Claim they can remove negative information from your credit report

With that said, there may be times when approaching debt settlement as a strategy may make sense [assuming you’ve also examined other options]:
- You have enough money set aside to offer a settlement
- You are paying the debt of another without obligation (i.e., parent)
- The debts are already approaching 6 months past due
- The debts are fairly small (<$1,000) or large (>$10,000)
- The impact on your credit isn’t going to matter
- The total costs of settlement are less than what you owe
- You are “judgment proof” (your assets [if any] are exempt)

Helpful Resources:
National Consumer Law Center – (An investigation of debt settlement companies)

Federal Trade Commission – (Ads promising debt relief may be offering bankruptcy)

Thursday, November 15, 2007

Spring Courses - OFS Award Winner!

I'm out of state at a conference this week ... Tomorrow I will be accepting an award on behalf of our Office for Financial Success which is being recognized by the Association of Financial Counseling and Planning Educators as the Financial Counseling Center of the Year.

A couple things I wanted to bring to your attention this week:
- In addition to the tip being e-mailed, the tip is also posted to a blog site each week ( - this is a good way to read the tip if the e-mail comes 'garbled' ...

- An archive of tips [sorted categorically] is available at:

- The Financial Survival & Success one-credit courses are available this spring (see below). There are NO PREREQUISITES for either class.

FINPLN 1183 (Financial Survival).
A one-credit course geared to underclassmen; class focus is on "student-specific" financial issues: credit cards, student loans, debt management, avoiding common financial pitfalls, credit issues, etc. Offered pass/fail.
Reference #77602
Thursdays -- 2:00-2:50
Meets once/week for full semester
Instructor - Dr. Mark Oleson

FINPLN 4483 (Financial Success).
A one-credit course geared to upperclassmen; class focuses on common post-graduation financial issues: Beginning Investing (stocks, mutual funds, bonds, etc.), Retirement Planning (401(k)s, IRAs), Managing loan and other accumulated debt after graduation, Insurance issues, Purchasing a home, etc. Offered pass/fail.
Reference #82422
Tuesdays -- 2:00-2:50
Meets once/week for full semester
Instructor - Dr. Mark Oleson

Thursday, November 8, 2007

Credit Card Selection

The debate on the good, bad, and ugly about credit cards is one not likely to end anytime soon. The reality is that most people have them, few people understand them, and many people create untold credit and financial problems as a result of misuse. What I want to address are some of the common criteria that should be evaluated when considering what card I should get [the whether I should or shouldn’t get one is a post for another day] … the type of card should largely be a byproduct of how you will use the card (pay in full each month, carry balance, etc.). There are plenty of options – 30,000+ to choose from.

ANNUAL FEE. Fee charged for membership privileges – typically $50 to $100 per year. By shopping around, this is a fee I can/should avoid – 75% of cards do not charge an annual fee.

INTEREST RATE. This is obviously a high priority if my tendency is to carry a balance. Rates can vary dramatically – common rates on the low end are around 8.9% (you can get lower – I have a card I got a while ago with a fixed rate of 4.9%); on the high end, I’ve seen fixed rates approaching 30%. For students, a ‘normal’ range for a “good rate” will be 12% - 16% (unless of course you already have established credit). Pay attention to the fine print: introductory vs. long-term rate, variable vs. fixed rate, and default rate (if I am late on a payment) are all important elements.

BENEFITS. More and more credit cards are offering ‘perks’ to members for card use … the benefits vary dramatically: cash back, flight miles, insurance (rental car, flight, etc.), shopping discounts, gas rebates, and donation of % of charges to your charity are some of the more common examples. Read the fine print – Do I have to spend a certain amount to receive the benefit? Are there limitations on how much I can receive? Do the rewards expire? Are there other caveats/ stipulations? Ultimately, ask yourself ‘does the benefit exceed the cost?’ It doesn’t make sense to pay 21% to a credit card company in exchange for 1% cash back …

FEES. Annual fees can be avoided – if I’m late, or over-the-limit, my card is going to charge me. The question is how much? The answer is $35 [or more] per ‘offense’ in most cases. Balance transfer, convenience check, and cash advance are all other transaction fees to inquire about.

OTHER ISSUES. The items mentioned above are some ‘general’ questions to ask about – you may have other ‘specific’ questions you want to have addressed: customer service, level of credit limit, penalties (universal default?), how widely is the card accepted (Discover, AmEx), etc.Many websites are available to help you examine these criteria more closely as well as search amongst the wide array of card options to find one that will be most suitable for your needs.

- Bankrate
- CardRatings
- CardTrak
- Credit Card Clients
- Credit Cards Compare
- Credit
- Index Credit Cards
- LowCard$

- Bankrate
- Choosing a Credit Card – FRB
- Credit Card Blog
- Getting Credit – FTC
- Wikipedia – Credit Cards

Thursday, November 1, 2007

Credit Inquiries

Properly managing credit is a common concern for many people. Being able to do so effectively involves balancing many issues, one of which is understanding the impact of inquiries on credit. Fair Isaac (the company that developed the most commonly used credit scoring model – the FICO score) estimates the impact of inquiries to be 10% of one’s overall credit score. This definition of “new credit” as it is referred is comprised of:

  • Number of recently opened accounts.

  • Number of recent credit inquiries.

  • Time elapsed since recent account openings; by type of account.

  • Time elapsed since inquiries.

A credit inquiry is “an item on a credit report that shows a business with a ‘permissible purpose’ has previously requested a copy of the report.” What do I need to know about inquiries?

  1. Personally viewing your credit DOES NOT negatively impact your credit.
    If you get nothing out of this tip other than this one fact, I’ll be happy. Don’t be afraid to review your credit because of the negative impact the inquiry will have. IT DOES NOT HURT YOU. Viewing your credit for mistakes, potential fraudulent activity, etc. is the responsible thing to do. Remember to use the government’s free site to order your report(s) - one free report per year per bureau.

  2. Understand the two general types of inquiries.
    There are two main types of credit inquiries – often referred to as “hard” and “soft” inquiries/pulls. Hard pulls are voluntary, meaning that you initiated the action for a particular company to view your credit. Fair Isaac mentions that the impact of hard inquiries can vary (depending on your ‘level of credit’ – the more established the credit, the less the impact); but they can temporarily lower one’s credit score up to 5 points [it will lower the score for 6 months after which time it will go back up]. Soft pulls on the other hand, are involuntary (offers for pre-approved credit, credit checks by prospective employers, inquiries by companies with whom you do business, etc.) they are visible on your report but only for informational purposes. Soft inquiries have no impact on your credit, although both types of inquiries will stay on your report for two years. Only hard inquiries are visible to people looking at your report; they won’t see soft inquiries (only you will see them). This fat wallet resource documents which companies will use a hard pull when reviewing your credit and under what circumstances. Some banks will do a hard pull when you apply for a checking account, cell phone account, [or other “non-credit” account] – others will do a soft pull to open the same account. I think it’s helpful to know how they do it since one impacts you and one doesn’t …

  3. Don’t be afraid to shop for rates.
    Many people [because of the impact of inquiries on credit] are afraid to shop around to find the best loan terms for auto/mortgage or other loans. Shopping for a loan [through multiple sources] will show up as multiple inquiries on your report (since they are viewing your report). To compensate for this (since someone obviously isn’t going to get four mortgages), a credit score will ignore all mortgage and auto inquiries made 30 days prior to scoring. For inquiries more than 30 days old, the model will treat inquiries made in a “normal shopping window” as one inquiry. If your lender is using the ‘new’ scoring model, that window is 45 days; the window in the ‘old’ model is 14 days.

Thursday, October 25, 2007

Financial Planning Resources

There are a lot of financial topics that I find challenging to address in this type of venue. Investing is one – in part because of the diversity of perspectives – i.e., load vs. no load, do-it-yourself vs. broker, actively managed mutual funds vs. ETFs, etc. Another struggle is the fact that most ideas build upon other concepts … For example, a mutual fund is a basic investment product, but to understand them well, you should also have an understanding of stocks, bonds, diversification, risk, and other key planning concepts. Doing this in a class is doable, doing this where you introduce one concept per week (to a huge group of people at various life and financial stages) is difficult to say the least … SO, rather than bypassing topics such as these [which are some of the most important concepts in your financial life], I will instead direct you to some of the best planning resources I’ve come across. You’ll find that most of these are laid out in a ‘curriculum’/class-type format. It allows you to handpick what you want to learn about or start from the beginning and work your way through the information sequentially. To avoid overwhelming you with sites, I’ve selected five “investing 101” free resources to share today.

1. Dollars from Sense. The purpose of DollarsFromSense is to provide a hands-on environment whereby consumers can learn crucial investment lessons that promote consideration of long-term financial security. It is an interactive tool that instructs in the basics of investing so people can make smart investment choices in the early stages of their working lives.
2. Fundamentals of Financial Planning. A comprehensive web course developed by Florida State University to address the fundamental issues related to financial planning. Modules cover general topics including investment planning, taxes, insurance, retirement, and estate planning. Much of the content areas are still in development.
3. Investing for Success. Investing for Success is a 10-unit interactive, multimedia web course on the basics of investing provided in partnership with the National Urban League and the Investment Company Institute Education Foundation. The primary objective of the program is to help bridge the “knowledge gap” that keeps people from becoming investors.
4. Investing for Your Future. The 11-unit home study course was written collaboratively by a consortium of schools (Rutgers, Cornell, Clemson, Virginia Tech, Michigan State, and Idaho) and created with beginning investors in mind. IFYF lays out basic topics such as setting goals, investing terminology, types of investments, selecting an advisor, and other helpful information.
5. Path to Investing. Sponsored by the Foundation for Investor Education, this resource offers helpful, practical information to help you become a more educated investor. The site offers guidance from investment professionals; perspectives for various lifecycle stages, quizzes, calculators, and other resources to sharpen your investment focus.

Thursday, October 18, 2007

Improving Your Credit

It is no secret that having good credit can pay large dividends. Consider the following that I pulled from the Federal Reserve Board website: “People with a good credit rating will pay approximately $250,000 less in interest throughout their working lives than those without. The impact of credit on financial well-being goes beyond access to credit and debt. Credit not only helps families buy a home, a business, or an education, but impacts opportunities for rental housing, transportation, employment, and access to checking, savings, and investment accounts.” Pretty large dividends indeed ...

Although some steps you can take are very simple and immediate, the bottom line is that building credit takes time. There is no overnight solution available and you should avoid resources that would suggest otherwise.

1. Review Your Credit. A very easy [but essential] first step – you won’t be able to move forward very well without knowing where you currently stand. Remember that you can do this for free under federal law. You are entitled to one report per agency per year for free.

2. Consistency. Pay your bills on time. The best way for someone to determine if you are a good “credit risk” is to look at how you have handled credit in the past … many banks offer bill-pay and other forms of auto pay (for little if any cost) to assist you in performing this task. Paying on time is the single most important thing you can do to build/maintain good credit.

3. Know How the Game Works. Companies will evaluate your creditworthiness based upon your credit score. Understanding how a score is calculated and the criteria involved is critical to improving one’s credit. The most common scoring model, Fair Isaac, considers five general areas:
--> Payment History (35%)
--> Amounts Owed (30%)
--> Length of Credit History (15%)
--> New Credit/Inquiries (10%)
--> Types of Credit Used (10%)

You can learn more about credit scoring at the MYFICO site. Also, Fair Isaac offers specific suggestions for improving your score.

4. Fix Mistakes. Some studies suggest that as many as 70% of credit reports have errors on them. Mistakes will count against you the same way that correct information will … make sure you take the time when reviewing your report (step 1) to correct inaccurate info.

5. Avoid Scams. Well-intentioned consumers are easy targets for scamsters offering to ‘fix’ one’s credit. These “credit repair” agencies offer [for a fee] to clean up your credit report so that you can enjoy the benefits of good credit (as outlined above). The reality? These companies don’t have the ability to do anything [legally] that you can’t do on your own behalf for free … STAY AWAY! The Federal Trade Commission offers helpful information to avoid scams.

Common warning signs of credit repair scams:
- Request payment prior to performing any services.
- Companies not informing you of your rights.
- Suggesting to not contact the credit reporting agencies.
- Companies offering to create a new identity for you.

6. Avoid Credit Myths. The world of credit is mired in misinformation. Avoid making mistakes out of ignorance.

7. Know the Law. Take time to familiarize yourself with the laws associated with credit. The Fair and Accurate Credit Transactions Act (FACTA) and Fair Credit Reporting Act are the primary ones.

8. Know Yourself. Building a positive credit history has value; however, understand yourself [and your personal vulnerabilities]. I would argue that the positive benefit of building credit isn’t worth the cost if it leads one to credit card or other financial problems … One recommendation for avoiding the potential financial problems that exposure to credit creates is to start small. Start with one account [with a specific purpose; like fuel purchases] and a small credit limit. A credit card is the easiest tool available to build credit, although any open-ended account (like a store card) reporting your payment history to the credit bureaus will work. An unsecured card with a low credit limit is a reasonable way to get started … you can also use a cosigner [who has good credit] to ‘lean’ on to open your first account if necessary.

9. Avoid Having Too Many Accounts. As you begin building credit, it is easy to quickly find yourself in a situation where you have more accounts than you know what to do with (let alone manage). Keep your situation simple – don’t burden yourself [or tempt yourself] with having too many credit accounts.

10. Be the Tortoise. People with poor [or no] credit are often impatient and wanting to quickly improve their credit and overall financial situation. Unfortunately, the only way out is a slow process. Although 7 years of information [for most items] will be visible on your credit report, the most recent 2 years are typically deemed to be the most important. So even if you’ve made mistakes in the past, you can resolve the problems but it will take time. Any invitation to fix it quickly is likely a scam.

Thursday, October 11, 2007

Loan Consolidation and Credit Freeze Updates

I wanted to offer an update regarding some issues that have come to light in recent days …

(1) RE: Federal Loan Consolidation.
About a month ago, I notified you of pending legislation [at the time it was awaiting the signature of Pres. Bush] and the impact it would have on students, particularly as it relates to loan consolidation. The law has now been signed, so I wanted to discuss some of the direct impacts (this law ONLY ADDRESSES federal, not private loans).

+ Increase in Pell Grant Funds.
+ Income Based Payment Plan – I’ll write about this separately in a future tip.
+ Interest rate cut – will introduce phased reductions in interest rates on subsidized Stafford Loans for undergraduate students (6.8% currently; 6% on 7/2008; 5.6% on 7/2009; 4.5% on 7/2010; 3.4% on 7/2011; on 7/2012 would revert to 6.8%).
+ Loan Forgiveness for Public Service – borrowers spending 10+ years in public service professions and make income based payments through the Direct Loan program would be eligible to have remaining loan balances forgiven after ten years. Click here for eligible professions.

- Adverse impact on loan repayment for resident physicians.
- Reduction in government subsidies to lenders.
Unless you’re a lender, this probably doesn’t mean anything to you. Ultimately what it resulted in is the elimination of loan consolidation with private companies (or at least a minimization of benefits to the point that they are no longer "financially legitimate"/smart options). That was disheartening to me due to the fact that most of the best borrower benefit programs (reduction in loan rates for automatic and on-time benefits) were offered by private companies. My biggest fear, however, was that these consolidation programs would go away all together since the benefits were funded through these government subsidies (which are now being used to fund the increase in Pell Grants and the other ‘positives’ mentioned above). FORTUNATELY, the cuts were not as drastic to non-profit consolidation companies. As a result, some of them look the same as they did before the October 1st change. Most notably are programs offered by the State of North Carolina and New Hampshire; programs that have been talked about for a long time due to their strong borrower benefits. So it appears now that unless you’re in a loan forgiveness scenario [as outlined above – in which case you want to consolidate with the Dept of Ed], a non-profit company will be your best financial alternative and where you should begin your informational search. Shopping around is important as there are non-profit programs that offer poor borrower benefits - simply being a non-profit won't guaratee good benefits. For more information, visit the OFS site for links to additional consolidation and loan resources.

(2) RE: Credit Freeze.
I wrote last week about the positive news shared by TransUnion and Equifax wherein they will allow all consumers the ability to freeze their credit (a privilege held only by consumers in certain states where laws had been passed prior to this). Experian was the last of the major credit bureaus to hold out, but I was optimistic they would follow suit. Apparently they read my blog [well, maybe not] as they announced the change the same day last week that I posted it. Much of their fine print looks similar to that established initially by TransUnion:

COST: *Free to victims of identity theft; $10 to others ($10 to freeze; $10 to “thaw”) OR the cost will be whatever your state legislation (if applicable) mandates – whichever $ is less. Click here for an updated list of current state legislation (freeze requirements, fees, etc.).
* Equifax details regarding fees and other specifics are still forthcoming.

- Experian – freeze available beginning November 1
- TransUnion – freeze available beginning October 15
- Equifax – freeze available beginning early November (no specifics announced yet)

This is obviously great news for the estimated 10 million + victims annually of identity theft!

Thursday, October 4, 2007

Credit Freeze Update ...

Good news for residents of Alabama, Alaska, Arizona, Georgia, Idaho, Iowa, Michigan, Missouri, Ohio, South Carolina, and Virginia – the last 11 states yet to pass credit freeze legislation (you may as well add Arkansas, Kansas, Mississippi, and South Dakota to that list as they have adopted security freeze laws but they only cover you after you’ve become a victim of identity theft). Starting on October 15, TransUnion will begin offering consumers in all 50 states the ability to freeze access to their credit files, a right that has side-stepped many people to this point. Every day, an average of 27,000 Americans have their identities stolen. A credit freeze allows you to “freeze” access to your credit file against anyone trying to open up a new account or get new credit in your name. When YOU want to apply for credit, you can temporarily lift the freeze using a PIN to allow legitimate applications for credit to be processed.

After TransUnion made the announcement, Equifax responded that they too would follow suit in October (at this point, no procedural details have been provided by Equifax). Hopefully, Experian will also follow suit [seems likely]. A security freeze should be placed at each of the three major credit reporting agencies in order to effectively curb identity theft.

TransUnion has announced that it will provide the security freeze at no charge to identity theft victims and charge others $10 to initiate a freeze and $10 “thaw” it [temporarily or permanently]. States with the most consumer-friendly laws typically charge $5 to initiate the protection. TransUnion has indicated that it will meet or exceed the requirements of those laws for consumers in those states. Consumers will be able to initiate the freeze by mail and lift it by mail or phone. They will also offer an immediate, online option for $14.95/month.

Beginning in September of 2008, a number of states that have passed security freeze laws will require all three bureaus to enable consumers to lift the security freeze within 15 minutes of making an electronic request. Under these laws, the bureaus will have to comply with quicker requests without charging any additional fees. Utah was the first state to initiate this practice …

Additional Credit Freeze Resources.
- Order Your Free Credit Report
- Prior Financial Tips:
o Credit Freeze Legislation
o Identity Theft Resources
- State Freeze Laws
- TransUnion Credit Freeze News Release

Thursday, September 27, 2007

Finding Scholarship Dollars

For those that have been successful finding scholarships (“free money”) to assist in funding their education, the overriding theme mentioned is persistence. When searching for scholarships, use all of the resources at your disposal: the Internet, family and friends, the library, your school/potential school, as well as basing your search on different “levels.” Your search should be done at the national, state and local level, as well as by school.

There are LOTS of FREE national scholarship search tools – no need to pay the $50+ that many agencies charge. FastWeb ( is one of the most popular (it is the largest, most frequently updated database) scholarship searches – other free search sites/tools are listed at:

Your State Department of Higher Education is a great place to start (State of Missouri = as is your State Loan Guarantee Agency (MOHELA in Missouri - There are likely others [depending on your State's educational resources], but these are two offices I’d suggest starting with to find money regardless of where you reside …

Numerous scholarship opportunities are available within the community in which you reside. Kiwanis, Elks, Church Groups, and Rotary Clubs are common examples.

The notion of conducting ‘levels of searches’ also holds true at Universities/Colleges. There will normally be school-wide options (i.e., In addition to applying at the University level, seek out money offered by your college and department of interest. For example, if you were interested in Personal Financial Planning (great idea!), talk to the PFP department about scholarship possibilities, I’d also look at scholarship opportunities within the College of Human Environmental Sciences [in that example]. I’d approach things similarly with any department/college I was applying to. Something else to consider is if you’re interested in a specific field of study. Many “special programs” (loan forgiveness, scholarships, etc.) are available for particular fields of study such as teaching, nursing, social work, etc.

- Start early!
- Pay close attention to deadlines
- Read [and follow] the directions closely

Look outside the box. Everyone knows about scholarships awarded on academic performance or financial need, but don't overlook scholarships offered by professional or trade organizations. Healthcare, engineering, education, computer science, and social work are all examples. The military offers scholarships if you’re willing to serve …

There are also plenty of “oddball” scholarships – awards for left-handed students; graduates of specific high schools. Heck, you and your prom date can enter the scholarship fray if you’re willing to wear outfits or accessories made out of duct tape to the prom! Don’t believe me? Check it out -

When searching for scholarships, be cautious, NUMEROUS scams abound.

(1) Guaranteed scholarship or your money back …
(2) This information isn’t available anywhere else …
(3) “You’re a finalist” but never entered the competition …
(4) I’ll need a card/bank information to hold the scholarship for you …
(5) A scholarship search service will do the work for you [hefty fee] …

Thursday, September 20, 2007

Payday Lending

Tuesday of this week, the Council of the District of Columbia voted to bring Washington DC payday lenders back under the 24% annual interest rate cap. 24% is a far cry from the 350% to 550% that consumers had been charged since an exemption granted to DC payday lenders in 1998 allowed them to ignore the usury cap. Reading the comments of the council members was rather telling: “It’s like an alien species let loose in our midst.” “They steal money; they steal futures with their practices.”

Payday lending is the practice of using a post-dated check or electronic account information as collateral for a short-term loan. The industry sells themselves as a “short term financial solution” … the research, however, suggests that the payday lending business model is designed to keep borrowers in debt, not to provide one-time assistance during a time of financial need.

Consider the following:

* 91% of payday loans are made to borrowers who use 5+ payday loans/year.
* 99% of payday loans go to repeat borrowers.
* The average payday borrower pays $800 to borrow $325.
* Average APR charged nationally – 680%.

These numbers support those found in Washington DC where the 60,000 residents using payday loans last year had over 700,000 transactions (an average of nearly 12 per borrower per year). That sounds more like a long-term problem than a short-term solution …

Congress recently passed legislation capping annual rates of 36% for loans to military families. While this is set to take effect on October 1st, there are many consumer advocates that are worried that predatory products will still be sold because of the narrow definitions that are established in the law. It is estimated that over ¼ of military households have been caught up in payday lending (NY Times). In many college towns, students are a primary target – be careful!
(Source – Center for Responsible Lending).


* Alternatives to Payday Loans
* Consumer Federation of America Resources
* Get Help
* Inside the Payday Lending Industry (video)
* What is the cost of a Payday Loan (calculator)
* What are your States Regulations

Thursday, September 13, 2007

Purchasing a Textbook?

If you haven’t had to shop for a college textbook for yourself or your college student recently, consider yourself lucky! The costs can be enormous [that’s not even delving into the issue of what you get back at the end of the semester during sell-back]. Do I have a choice??

Aside from attempting to check textbooks out from the library, I’ve met students that don’t buy books because they view the cost as greater than the benefit. I don’t know that I’d go that far in advocating saving money. I do know, however, that more and more online outlets are selling college textbooks (both new and used), often for significantly less. While I don’t make personal recommendations/ endorsements, I think it is definitely worth the look to understand what alternatives are available to you.

Buy it Used.
Campus Book Swap
Valore Books

Swap it.
I’ve also read of students that have used resources like Facebook, Craigslist, and MySpace to swap books with other students, sell books the bookstore won’t buy back, and find used book groups to chat with students to get personal insights. Websites like CollegeSwapShop focus specifically on linking students up that would like to swap books. Buying college textbooks will always be an expensive proposition, but perhaps there are options available to you that could lighten the pinch on your wallet a little.

Thursday, September 6, 2007

"Credit Piggybacking"

“Credit piggybacking” is a term that describes an authorized user ‘piggybacking’ off the strong credit of another (normally a parent or spouse). Lately, credit repair companies/scams have started selling this ‘privilege’ to individuals with poor or marginal credit, having them piggyback off an individual with good credit (the company would pay someone with good credit a fee per account to ‘rent’ their credit). When the individual is added as an authorized user, their credit history with that account is automatically updated – presto, an overnight improvement to one’s credit score. Obviously this practice has a lot of negative implications for lenders who largely base their loan criteria upon this score. Regulators haven’t stepped in because they say that technically it isn’t illegal. Credit card companies are reticent to change their policies to limit authorized users – too profitable for them. So Fair Isaac, the behemoth of the credit scoring industry (company that developed the FICO credit score), has decided to change their scoring formula to ignore references to authorized-user accounts. So even if companies continue to report the information to the credit bureaus, it won’t impact the bottom line (your credit score).

What You Need to Know:
- TIMELINE. No one [that’s talking] knows exactly how or when this change will occur. This month, the ‘new’ scoring formula will be introduced at one of the bureaus, followed by the other two during the next year. Even then, the benefit of the authorized user won’t likely diminish overnight, as not every lender will immediately switch to the latest FICO version.

- WON'T IMPACT JOINT ACCOUNTS. The change will only impact authorized users – joint account holders will continue to both be reported.

- REACH. While this doesn’t impact the majority of people, 41 million consumers are currently listed as authorized users on accounts - pretty dramatic. Obviously the greatest impact will be the 2 million who only have information as an authorized user in their credit file – typically young people (often college students), and spouses that don’t have credit in their own names.

- BOTTOM LINE. Although it may take time for lenders to adopt the new scoring model, authorized-user accounts are no longer a reliable way to boost someone’s credit score.

Related Resources:
· Credit Issues
· Credit Scoring
· Order your Free Credit Report

Thursday, August 30, 2007

CC Balance Transfers

Transferring debt using low-rate balance transfer offers provided by credit card companies is commonplace. As with any financial decision, there are pros and cons to consider in this matter. I don’t want to focus on weighing the merits of balance transfers. Rather, I want to address what you should look [look out] for if you’re considering this strategy as a method to get out of debt more quickly …


Look past the 0% offers. This may sound counterintuitive, but the best offers [for long-term transfers] typically are not at 0%. The 0% offers that come in abundance are typically for 6-12 months with a 16% or 18% rate to follow. Knowing the duration is normally limited, is it any surprise to hear that 86% of offers between January 2005 and September 2006 were 0% offers? Obviously this is a problem if the balance isn’t paid off by then. Most “fixed for life” transfer offers are in the 2.9% to 5.9% range. 0% fixed for life offers are out there, but are few and far between; 7.5% of the 0% offers, many of which have other catches, keep reading ...

Look at the costs. In the “good old days” finding a 0% no fee balance transfer was a piece of cake. Those days are long gone. No fee transfers are nearly extinct – in addition, many companies that traditionally charged a fee (commonly a 3% fee with a $50 or $75 maximum) have removed the maximum so that if you’re transferring $10,000 – that 3% fee would tack on $300 to the transaction (in other words, a year worth of interest in the no fee/2.9% offer).

Look at the facts. It should come as no surprise that these types of offers are marketing ploys to play with our human psychology. Obviously the company is making money or they wouldn’t do it. Smart Money has a tool on their website that will enable you to plug in the numbers related to the balance transfer to determine what it will really cost.

Talk to your current creditor. Before diving into the murky water, a suggested first step is to call your current creditor [with the offer you’re considering in hand] and ask for something comparable. Obviously they want to keep your business. This will also be much better for your credit than continually opening new accounts to ‘hop’ between.

Use only for transfer. If you decide to transfer a balance, make sure you don’t use the card for anything else (i.e., everyday purchases). According to Mintel Comperemedia (a company that monitors direct-mail solicitations), nearly ½ of balance transfer offers also include promotional rates for new purchases. Enticing? Keep in mind that any payment you make on the card will go to the smaller interest rate and the promotional rate will eventually go up. Some companies will require a certain number of purchases (often 2 or more) or a minimum dollar amount of monthly purchases (often $35+) in order to receive the special balance rate. Be cautious!

Beware the bait and switch. Beware the offers for rates “as low as” … essentially that means that if you have excellent credit we will offer you X, but if you don’t, you’ll get a much less desirable Y. Some suggest responding to transfer offers over the phone so that you can cancel the application if the terms don’t meet your liking.

Universal default. You don’t have to read far to see that doing balance transfers isn’t for the faint of heart – it’s also not for the individual that has a tendency to miss payments. Many creditors employ a ‘universal default’ strategy, meaning that a missed payment to any creditor (doesn’t have to be the card with the deal) will immediately result in the interest rate being set to the default rate – some companies will jump the rate to 30% for a single infraction … ouch!

Make sure you look before you leap. Review the Financial Tip archive as well as the credit card section of the OFS website to aid in learning about other credit card-related issues …

Thursday, August 23, 2007

High Yield Savings Accounts

As people become more technologically savvy, more and more financial products are being offered online. There have been many resulting benefits: faster processing times, broader access to financial products, convenience, and cost (often competitive interest rates and lower fees than traditional brick-and-mortar financial institutions). If you haven’t yet taken the “e-banking” plunge, perhaps you should consider.

The Federal Reserve Bank of New York provides useful instruction regarding online banking. A brochure on “Tips for Safe Banking Over the Internet” is also provided to benefit consumers.

While the Internet offers the potential for safe, convenient ways to conduct business 24/7, safe online banking involves making good choices to avoid costly mistakes and scams. Is XYZ bank legitimate? Are my deposits insured? Is my personal information private/secured? What are my rights? All of these questions are addressed in the Tips for Safe Banking, free New York Fed brochure.

Where to begin looking.
If you’re trying to find the best rates for savings accounts, CDs, and other financial products, a great place to start is the Bankrate website. Bankrate offers information that is free, objective, and as comprehensive as any site I’m familiar with. A couple of other resources I’ve come across recently are Banking My Way, and a blog that is dedicated to these issues.

Several online banks are currently paying 5%+ on FDIC insured savings accounts – some of the prominent ones [which have no minimums to open the account and have no fees]:

- Amboy Direct
- AmTrust Direct
- Capital One
- Emigrant Direct
- E-Trade
- First National Bank of Omaha
- Flushing Savings Bank
- HSBC Direct
- Savings Square
- UFB Direct
- Univest Direct

- ING Direct, the pioneer of online banking, currently offers a rate of 4.5% on savings – they also offer a high yield checking account (4%). They have a promo offering $25 to individuals opening a savings account – you can e-mail me if you want promo code info …

Thursday, August 16, 2007

The Road to Eliminating Debt

* For individuals that will graduate this summer or graduated this past May, see note below on potential law changes that may have a dramatic impact on your loan repayment.

It seems like everything in the news these days is debt-related – housing concerns, sub-prime loans, unethical student loan practices, predatory lending, credit card issues, credit problems – more so than ever, we’ve become a society that is driven by debt. On the other end of the spectrum, it seems that more and more individuals are fighting this trend and have started down the road to reducing personal debt.

University of Nebraska-Lincoln Extension has created a nice resource to assist people in this journey. Their website identifies 10 ‘road signs’ to follow while walking down the path to “debt freedom” …

1. Don’t wait to act. It’s no secret that getting started is the hardest part of everything! The sooner you begin, the sooner you’ll arrive.
2. Stop using credit. The recommendation offered is to cut up cards and stop using them altogether. This may be advisable for some. Regardless, this plan should have you keep from taking on new debt. Avoid taking one step forward and two back.
3. u>Make getting out of debt a family affair. Differing attitudes/values about money are a large potential source of conflict – communicating about your plan will enhance its likelihood of success. If you’re single? Talk with your family; talk with roommates and others that can offer support.
4. Organize financial records. A workable budget is critical. I talked about several different resources in a recent blog; UNL also talks about common budgeting methods.
5. Learn about your debt. Winning financially requires that you have an understanding of financial concepts. Do you know what your interest rate is? What does APR mean? What is a grace period? …
6. Create a written debt plan. Who should I pay first? Am I in a position to negotiate lower rates? UNL provides links to worksheets and other information to assist in one’s plan development. You may remember my blog that addressed different perspectives for developing a debt reduction plan.
7. Find ways to cut expenses. All of us spend money on things we don’t need. 66 ways to save money is a popular resource for considering ways to cut expenses.
8. Find ways to increase income. Obviously finding additional resources is a great way to get out of debt sooner. 2nd job? Seek a raise? …
9. Make sacrifices. I’ve always liked the sentiment commonly shared with students: ‘You can live like a student now and a professional later or you can live like a professional now and live like a student later’ … anything worthwhile will require sacrifice.
10. Once you get there, stay there and begin a savings plan. Once you arrive, staying out of debt is one part of the challenge; the other is to begin saving and investing money to continue moving forward. Mutual fund companies like T. Rowe Price, TIAA-CREF, Ariel Funds, and Homestead Funds are all examples of institutions that cater to beginning investors [by waiving a large required initial investment for individuals willing to make monthly automatic investments ($50 in most cases)].

* This past month while I was on vacation, the government was busy talking about changing existing student loan legislation. I’m not going to take the time now to outline all of the potential changes for you because changes have yet to occur. You can view the pending legislation at NASFAA, the professional organization for financial aid administrators. Many of the changes seem smart (increasing funds in Pell Grant program, increasing transparency in the private loan industry, etc.). As is usually the case, some of the changes leave you scratching your head …

There is one potential change that would dramatically impact individuals that have yet to begin repayment on their student loans; individuals that graduated this summer and past May have the opportunity to get around the possible roadblock by taking action (this change WOULD NOT impact individuals that are currently in repayment on their student loans). Without going into unnecessary detail, one of the proposed law changes would severely cut the subsidies [money provided by the government] that are given to lenders. In many cases, these subsidies are passed along to students in the form of borrower benefits (the rate reductions given for automatic and on-time payments). In conversation with lenders, it is clear that if this law is passed [which seems likely based on its overwhelming support by the Senate], borrower benefit packages as we currently know them will be dramatically altered. It will likely push many of the smaller players out of business. It would also change things based on the date the loan is disbursed … this is a critical distinction because typically, things related to student loans are based upon the date of signature (for example, in the past, if you signed a consolidation application before July 1st, you received the pre-July 1 interest rate). With this change, it would impact the date the loan is disbursed (i.e., for those who graduated in May and are planning to keep their grace period until November, November X will be the disbursement date and if the law is passed before then, you will not receive the borrower benefits that you anticipated getting when you signed up for them in May)! If the law is passed, it will take effect [as currently drafted] on October 1 which means if you have not consolidated, you will want to consider consolidating immediately as the process normally takes 4-6 weeks. By having the loan disbursed prior to October 1st, you will lose a bit of your grace period, but it seems like a small price to pay in order to maintain your borrower benefits. If you still don’t have a job and can’t afford to begin repayment, don’t worry – after the consolidation is completed, if you are unemployed, you will still be eligible to defer your loan payment until you find a job.

If you’ve got a ‘good’ lender, they’ve likely already contacted you about these potential impacts to your situation. Hopefully they have – if they haven’t, you should contact them and talk to them more about this potential change and how it could affect you. If you have questions about this or other financial issues, visit our website ( to schedule an appointment to visit with a financial counselor or planner.

Dr. Oleson

Thursday, July 19, 2007

Eliminating Credit Card Debt

I’ve received a lot of questions recently related to credit card debt … What is the best strategy to repay it – loan consolidation? Balance transfer? Other? Obviously there are a lot of individual questions and factors involved in the decision. There are times when any of these options may be advisable. A few questions I would ask before proceeding:

- Is the reason I’m in debt behavioral (i.e., spending problem)? If so, I should address this problem before proceeding with anything else.
- What are the costs/fees associated with this decision?
- Is the interest rate offered temporary or permanent?
- How am I with making payments on time? [Most cards will bump your rate with one missed payment – even if it is a payment missed on another debt].
- Do I have good credit? If so, I should be able to find an alternative with a ‘respectable’ rate and cost …

An interesting tool I came across recently helps you compare offers from other credit cards to assist you in determining whether a different card or a balance transfer special would result in financial savings to you. This credit card “savings agent” gathers some basic information regarding your situation: what is your current card, how much do you owe, annual fee [if any], interest rate, whether or not you currently use the card, what you pay monthly on the card, if you know what your credit score is, and whether or not you’ve declared bankruptcy. From these questions, the tool examines about 200 different credit card offers and will rank the ten that will save you the most money (based upon its current ‘offer’ – includes any balance transfer fees, transfer rate or intro rate, etc.) … Looks like it could be helpful if you find yourself in credit card debt and are trying to find a viable financial alternative. The tool is free and doesn’t require any personal information [by personal, I am referring to your name, address, phone, e-mail, etc. – obviously it requires “personal information” such as how much you owe, etc.]. The site is located at:

*FYI – The Financial Tip of the Week blog will join me on vacation until mid-August.

Thursday, July 12, 2007

Compensation for Financial Advice

The idea of ‘you get what you pay for’ is as true today as it ever was. If you want objective advice, you’ll likely have to pay for it. How much you pay will vary according to the compensation method used by your financial professional. The value of this information will likely hinge to some extent upon the ‘fiduciary’ relationship; a fiduciary responsibility is one in which there is a requirement to place the needs of the client above that of the company/advisor. Many people assume this is always the case. There are, however, financial relationships where a fiduciary duty is not required.

It is important to understand [and be comfortable with] how your financial advisor gets paid. You need to make sure their compensation method is suited to your specific needs and situation. The International Association of Registered Financial Consultants provides a nice summary of these general compensation methods. Generally, financial advisors are compensated in one of four ways – solely by fees, a combination of fees and commissions, solely by commissions, or through a salary paid by an organization that receives fees. In some cases, you may be offered more than one payment option.

Fee Only.
Fee-only advisors charge an hourly rate (often $75 - $250/hour) for time spent in research, reviewing a plan with you, discussing implementation, etc. Some may charge a flat fee for a quoted service (such as developing a financial plan, drafting a will, etc.). More and more are moving into this category that don’t charge an hourly rate for services, but rather manage assets and charge a fee of 1% to 2% of total assets under management. They receive this classification because they make money from the management fee, not the sale/purchase of products. Obviously entirely different services, so categorizing them the same is confusing to many.

Fee & Asset Management.
Some financial advisors charge a planning fee and then will advise you on investments, insurance, and other financial vehicles; most will help with the implementation of recommendations using mutual funds and other investments. The fee for helping select and monitor these investments is usually a percentage of the assets assessed monthly or quarterly.

Fee + Commission.
Some advisors charge a fee for assessing your financial situation and making recommendations. The fee covers the data collection, analysis, recommendations and delivery of the plan. They may then help you implement their ideas by offering certain investment or insurance products. They typically earn a commission on the sale of those products. If so, that should be disclosed to you at that time. Commissions and other sales charges can vary dramatically from product to product. Don’t hesitate to ask your advisor for the amount of the commission and to explain how the commission will affect the return over the life of the investment.

Commission Only.
Some financial advisors charge no fee but rather are compensated solely by the commissions earned by selling investments and insurance plus services necessary to implement their recommendations. A commission-only advisor will develop recommendations for your situation and goals, review these with you and discuss ways to implement these recommendations. The only way they receive compensation is when you choose to buy the products and/or services being offered. The ultimate quality of any financial professional is independent of the method of compensation used. Competence and compensation are not necessarily correlated. No matter the method of compensation, the possibility of conflict of interest always exists. An advisor should be honest and straightforward about how they are compensated.

Helpful Resources.
- Checklist for interviewing a financial professional.
- Find a financial professional.
- Find a professional based on area of specialty.
- How a financial planner can help and choosing the right one.
- NAPFA – the National Association of Personal Financial Advisors – primary organization that represents fee-only financial planners. You can search for fee-only professionals in your area via their site.
- Your rights as a client.

Thursday, July 5, 2007

Payment Myopia

I was reading some articles this morning written by Dr. Jack Guttentag, Emeritus Professor of Finance at the Wharton School of the University of Pennsylvania. One of the issues he wrote about was ‘payment myopia’ – a phenomenon where people base decisions solely upon the affordability of monthly payments. Myopia is ‘near-sightedness,’ a defect in the eye where one can see close objects clearly but distant objects appear blurred (wikipedia, not an opthalmologists definition). What a great analogy for examining a very common mistake …

Unfortunately, many people are payment myopic when making major purchases. The questions are often “What will the monthly payment on that house be?” or “How much would my payment be if I want this car?” What is wrong with those questions? Loan products can easily be manipulated to provide almost whatever monthly payment you’d like (just take a closer look at some of the available products – 40 year [or 50 year] home loans, interest-only mortgages, negative amortization loans, etc.). Focusing on the payment is a short-term ("near-sighted") focus. Short-term decision making seldom results in long-term success. So what would be a long-term perspective in this example? Contact the lender after having already reviewed your budget to determine what YOU can afford based upon how quickly you would like to repay the debt. Ensure that YOU are comfortable with that payment relative to your other financial goals (savings, investment, and other objectives should be considered).

The “Mortgage Professor” (as Dr. Guttentag is referred) has a website with a lot of great housing resources. The site isn’t the prettiest, but the content is solid. Here are a few links to direct you to some of his resources:

- Homepage
- Mistakes in Buying, Financing, and Refinancing a Home
- Mortgage Calculators
- Mortgage Spreadsheets
- Table of Contents

Additional homeownership resources are available from the OFS website

Thursday, June 28, 2007

Sunk Cost Effect

Personal Finance – “the process of planning your spending, financing, and investing so as to optimize your financial situation.” Doesn’t sound so hard does it? Much of personal finance is rational and quantifiable. Why then do so many struggle with their finances? Obviously there are a lot of potential explanations. I want to focus on one common problem – the sunk-cost effect.

The sunk cost effect is the tendency to persist in an endeavor once an investment of effort, time, or money has been made. This is problematic because it often leads to emotional rather than rational decision-making. We know [rationally] that “sunk costs” (past investments that are now irrecoverable) are irrelevant to decision making. Sunk costs are the same regardless of the course of action that we choose next. If we are to evaluate alternatives based solely on their merits, we should ignore sunk costs. We’d be better off making the decision by weighing future gains and losses. Yet, the more we invest in something (financially, emotionally, etc.) the harder it becomes for us to give up on that investment. Much research has been done in this area with interesting results. For example, one study arranged to have similar tickets for a theater performance sold at different prices; people with more expensive tickets were less likely to miss the performance. A study of NBA [basketball] players found that the higher a player was selected in the draft, the more playing time he gets [and longer career], even after adjusting for differences in performance.

Why is it so difficult to free oneself from sunk cost reasoning? We feel obligated to keep investing because, otherwise, the sunk cost will have been ‘wasted.’ We would then need to admit that we made a mistake.

Techniques for countering sunk cost bias:
1. Seek opinions from people who were uninvolved in the original choice.
2. Be alert to sunk cost bias in the decisions and recommendations made by others. “We’ve invested so much already” …
3. Don’t be afraid to admit when you are wrong.
4. Sometimes even smart choices (taking into account what was known at the time the decision was made) can have bad outcomes. Cutting your losses doesn’t necessarily mean that you were foolish to make the original choice.

A guy who knows a thing or two about money (Warren Buffet) said it well: “When you find yourself in a hole, the best thing you can do is stop digging.” So if you’re hanging on to a bad relationship or a bad financial investment, consider if your decision-making is rational or emotional … You can read more about the sunk-cost effect in the July, 2007 edition of ‘Smart Money’ magazine in the ‘7 Money Mistakes to Avoid’ (Throwing good money after bad) section.

Thursday, June 21, 2007

Open Courseware

Nearly two years ago at a financial counseling conference, I learned about a newly established consortium of Universities around the world that had collaborated to provide free, open access to educational materials. It sounded like an interesting idea at the time; I hadn’t heard anything about it since until this past week when I was reading the most recent edition of Kiplinger’s Magazine. The article – “Audit a course for free at Online U” shares a little more about this consortium that is a literal ‘who’s who’ of Universities – Johns Hopkins, Notre Dame, Tufts, Michigan State, Harvard Law, and MIT (the pioneer of this ‘open courseware’ movement) who will have at least some teaching materials from all 1,800 of their undergraduate and graduate courses this fall. While access to the materials is free, you won’t get credit toward a degree or have the ability to interact with other students or a professor.

I was able to find a couple of the courses that were personal finance-related. One is offered through UC-Irvine and appears to offer some valuable information related to ‘Fundamentals of Financial Planning;' Utah State also shares information about their undergraduate Family Finance class. The general content available from each course will vary dramatically – some have little more than a syllabus/ reading list. Others provide full PowerPoint slides for lectures, audio podcasts, video webcasts, exams … the whole nine yards. The link below to the list of consortium members will allow you to visit Universities that provide resources associated with a myriad of course topics.

The current consortium consists of more than 100 institutions of higher education. Additional information is available at

Sampling of other free online Personal Finance courses:
- Consumer Debit Resource – ‘Checkbook Basics’
- FDIC – ‘Money Smart’
- Florida State – ‘Fundamentals of Financial Planning’
- Freddie Mac – ‘Credit Smart’
- IRS – ‘Understanding Taxes’
- Money 4 Living
- Money SKILL
- NEFE – ‘High School Financial Planning Program’
- Rhode Island Center for Personal Financial Education – ‘Credit 101’
- Rutgers – ‘Investing for your Future’
- Smart Money – ‘Investing 101’
- Spend 2 Success
- Visa – ‘Practical Money Skills for Life’

This list should not be considered exhaustive by any means nor expected to represent an endorsement of any curriculum or program. The resources are merely informational. If you are aware of other good resources, please share them with me.

Thursday, June 14, 2007

Your Credit -- Your Rights

Numerous agencies (lenders, insurers, employers, landlords, etc.) view your credit when making decisions about you – how familiar are you with your credit and your rights? The Fair Credit Reporting Act (FCRA) and the Fair and Accurate Credit Transactions Act (FACTA) are legislation designed to protect you and your credit.

This act is designed to promote accuracy, fairness, and privacy of information in the files of every consumer’s credit report.


  • You must be told if information in your file has been used against you (denial of employment, credit, insurance, etc.)

  • You have a right to know what is in your file.

  • You are entitled to a free report at any time if: You are unemployed and plan to seek employment within 60 days; you are currently on welfare; you are a fraud victim or you are denied credit, employment, insurance, etc. based on report info.

  • All consumers are entitled to one free report (per credit reporting agency) every 12 months upon request -

  • You have the right to ask for a credit score (a numerical summary of your creditworthiness). You will have to pay for the score, but you now have access to it.
  • You have a right to dispute inaccurate information.

  • Inaccurate or unverifiable information must be corrected or deleted.

  • Outdated information may not be reported (FCRA specifies duration). 2 years for inquiries; 7 years for 'most' negative information; 10 years for judgment liens and most bankruptcies; 10 years [or more] for 'positive' information.

  • Access to your file is limited - may be used for consideration of applications such as employment, insurance, credit and landlords.

  • Forces identification of individuals inspecting your file.

  • Consent is required for reports provided to employers or reports containing medical information. An estimated 70% of employers examine credit reports prior to hiring.

  • You have a right to file a lawsuit against collector if FCRA has been violated.

  • You may limit 'pre-approved' offers for credit and insurance. You may opt-out by calling toll free (1-888-5-OPTOUT). Additional information is available at: and

Maintaining the accuracy of your credit report is YOUR responsibility. To read the entire FCRA, go to

Signed into law by Pres. Bush in December of 2003, the Fact Act [as it’s often called] was designed to ensure that all citizens are treated fairly when applying for credit. Specifically, the bill was designed to significantly increase consumer protections against the growing problem of identity theft. FACTA also extends the current provisions (mentioned above) of the Fair Credit Reporting Act.

Some of the major provisions of FACTA:

  • Provide consumers with a free credit report every year.

  • Give consumers the right to see their credit scores (for a fee).

  • Provide consumers with the ability to opt-out of information sharing between affiliated companies for marketing purposes.

  • Ensure that consumers are notified if merchants are going to report negative information to the credit bureaus about them.

  • Allow consumers to place "fraud alerts" in their credit reports to prevent identity thieves from opening accounts in their names (includes special provisions to active duty military).

  • Allow consumers to block information from being given to a credit bureau and from being reported by a credit bureau if such information results from identity theft.

  • Restrict access to consumers' sensitive health information.

  • Provide consumers with one-call-for-all protection by requiring credit bureaus to share consumer calls on identity theft, including requested fraud alert blocking.

  • Require creditors to take certain precautions before extending credit to consumers who have placed "fraud alerts" in their files.

  • Stop merchants from printing more than the last five digits of a payment card on an electronic receipt.

Consumer credit is a vital thing for many – the ability to have protections in place to help consumers protect the credit they work so hard to build and develop is critical.

Thursday, June 7, 2007

New Loan Rates + New Hampshire

The past few years have been very attention-grabbing at this time of year; with students and grads awaiting word of where student loan rates would go on July 1st. Things this year are much less eventful for three reasons:

1. Last year’s law change prohibits students now from consolidating until graduation.

2. The new legislation changed the nature of Federal [Stafford and PLUS] loans borrowed after 7/1/06. Loans borrowed after that date are a fixed 6.8% for Stafford (7.9% or 8.5% for PLUS). You should have already ‘locked’ the rates on all of your variable rate federal loans during the low rate environment of the past three years, making this rate change moot - hopefully that is the case.

3. Lastly, the rate change is very minimal. Rates will go up on July 1st to 6.62% from it’s current 6.54% level (that is in-school/in-grace rate; rates are .6% higher for out of grace); variable rates on PLUS loans will go from 7.94% to 8.02%. Not a very dramatic move considering the nearly 2% jump each of the past two years … Loans affected by the new rate are those taken out between 7/1/98 and 6/30/06 that have not been consolidated.

The Department of Education’s press release on the new variable interest rate is available at:

New Hampshire.
Several consolidation programs have been mentioned in the past because of their borrower benefits: Educational Loan Company, The Loanster, and North Carolina are often discussed because of their deep interest rate benefits (preferable for those using extended repayment options). Key Bank and FinanSure provide the most competitive principal balance credits (beneficial to those planning to pay loans off promptly). Now entering the arena ... New Hampshire. A state program that no longer has residency requirements. They are the first program in the country to offer substantial rate reduction benefits immediately (rather than the typical reductions after 3-4 years of on-time payments).

The New Hampshire program offers the following:
- ½% rate reduction for setting up auto pay
- 1% rate reduction when repayment starts
- $250 principal balance reduction after 12 on-time payments

It is unlikely this program will be able to save more time and interest payments for those with large student loan debts opting for extended repayments; it will likely best serve those looking at repaying their student loans off in 10 years or less … another good option available nonetheless. Also, NH has a small required loan minimum (only $5,000); many programs require $20K+ … You can learn more about New Hampshire’s program at: ... information about all of the consolidation programs is available at the OFS website (

Wednesday, May 30, 2007

Office for Financial Success

For many of you, aside from receiving the Financial Tip of the Week, you may not know a lot (anything?) about what other educational efforts we’re involved in. Let me share more with you about our Office for Financial Success (OFS).

About two years ago, several ingredients came together (an open faculty position in the Personal Financial Planning Department/ College of Human Environmental Sciences; generous funding from State Farm Insurance to remodel office space; and me [Dr. Mark Oleson]. I had been at Iowa State for the prior 6 years running their Financial Counseling Clinic when the opportunity came knocking). The OFS officially opened its doors in fall of 2005 with two primary missions in mind: (1) Provide training opportunities for undergraduate and graduate students in the Personal Financial Planning Department; and (2) Provide educational services and resources to the University and University Community. The OFS is in place to provide unbiased information to individuals at all stages of life [with the obvious primary target being college students]. We provide resources in all aspects of personal finance: remedial issues (debt management, bankruptcy, credit card, student loan problems, etc.); productive issues (investing, insurance, homeownership, etc.) and all areas in between. This service function is the one that I will outline in this weeks tip …

Financial Tip of the Week.
The weekly blog, our most visible service [tens of thousands of subscribers nationwide], has received national recognition for its educational efforts. I’ve been sending a “Financial Tip of the Week” for over seven years (about 10 months in the blog format). The weekly tip is the primary springboard directing people to OFS services (classes, workshops, etc.). You can view current/ past tips and in a ‘topical’ format.

Individual Counseling Services.
The OFS offers personalized financial counseling services [free to students]. We offer counseling face-to-face, over the phone, and via e-mail. We try to make our services as accessible to as many as possible. The OFS houses one of the MoTAX (Missouri Volunteer Tax Assistance) offices that assisted over 1,000 people [in the OFS – more were served in other parts of the State] with taxes this past season. We are also the only University-run program in the country approved by the US Dept of Justice to provide the pre-filing financial counseling required for those seeking bankruptcy.

Group Workshops/Seminars.
We regularly provide information [on a myriad of topics] to different groups: residence halls, fraternities/sororities, professional student groups, classes, summer/new student orientation, community groups, etc. Workshops can be requested via the OFS website.

Personal Finance Courses (Financial Survival/Financial Success).
The Personal Financial Planning Department offers many valuable classes on a wide range of personal finance topics. Since arriving at MU, I have added two 1-credit courses to that curriculum (designed for non-majors). Financial Survival is written as a ‘front end’/underclassmen course: understanding student loans, credit/ credit cards, financial pitfalls, etc. Financial Success is designed to be a class taken on the back end [as one approaches graduation] to address issues such as managing debt after graduation, 401(k)/IRA plans, general investing, insurance, homeownership, and other post-graduation financial issues. Both courses [currently] are available fall and spring semesters; Financial Survival is also available this summer.

Web Resources.
Most people today use the Internet to gather information. The OFS website was created to provide a resource that could direct consumers to useful financial information. Information about budgeting, debt management, credit/credit cards, investing, taxes, insurance, student loans, and a lot of other issues are all available on the OFS website.

I am pleased with the great things the OFS has done in such a short period of time. The Personal Financial Planning Department, the financial backing for the OFS, deserves much of the credit for its early successes since their support is the reason we exist!

Director – Dr. Mark Oleson
Student Assistant – Sam Miller (2006-07)

Website –
Blogsite –

E-mail –
Phone – (573) 882-2173

Thursday, May 24, 2007

Student Loan Consolidation - "What if my loan is sold?"

I almost feel apologetic in writing on this topic since it seems I do it so frequently; it is, however, one of the most commonly queried topics (student loan consolidation) as well as one of the least understood/most confusing issues. When consolidating federal loans (after graduating), seek out the program that will save you the most money: Educational Loan Company, North Carolina, The Loanster, FinanSure, and Key Bank are examples of programs that offer the best borrower benefits (depending on your selected repayment strategy – see 4/25/2007 tip).

Many students become confused thinking they need to consolidate with their existing lender or the Dept of Ed (in the event that’s not their lender) in order to get the benefits of “federal consolidation” – neither case is true. You can consolidate wherever you want; and regardless of the federal consolidation program you use, the loan will always be regulated by the federal government (meaning your ability to defer the loan, and the other benefits associated with a federal loan will apply regardless of who you choose for your lender to be) … Many students have been asking the question “What if the lender sells my loan?” The obvious concern is that I don’t want to find a program with good financial benefits that I will lose when/if they sell my loan to someone else (an obvious [and common] bait and switch tactic). Asking the question of whether a lender will sell your loan is the wrong question to ask, however – the question you need to ask is whether or not the lender will offer something in writing that will enable you to keep the advertised benefits in the event that the loan gets sold to a different lender. Ultimately, does it really matter who you’re paying if you’re receiving the best benefits? I don’t think so. I share the example regularly of moving to Columbia about two years ago. When shopping for a mortgage, my only real interest was in getting “the best deal” (lowest interest rate; lowest loan fees). About two or three months later, our loan was sold. Did that bother me? No. The rate that we’d contracted earlier was established, so the only change was who payments were made to. This is what you want to ensure with your federal consolidation – don’t be concerned about whether or not the lender will sell your loan; rather, find out whether or not they will guarantee your benefits in the event that it does get sold.

NOTE. I'm sure several of you have already consolidated your loans, not fully understanding the issues I just outlined (the primary irrelevance of who your lender is [from the standpoint of deferment and other general 'federal loan' benefits], or the vast difference in benefits that companies may offer). Understand that if you're in your grace period and the loan has not yet been consolidated [it is scheduled to be done at the end of your grace period], you can likely "get out" of the loan and reconsolidate elsewhere ...