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