I’ve become somewhat of an expert mail sorter over the years. It’s almost like I’ve developed a robotic sixth sense for detecting worthless mail at first glance. I pull out a stack that weighs 5 pounds from the mailbox, sit it on the counter, and in less than 60 seconds I walk away with a few more wedding invitations in hand and a healthy contribution of unopened junk mail for the shredder.
I must admit I get duped from time to time. Those letters that really look like they’re from your mortgage company and say “Time-Sensitive Documents Enclosed” are my worst enemy. For a split second they always cause me to hesitate and lose focus. Inside I really want to open them to see if they’re for real, but my sixth-sense tells me “Don’t waste your time - it’s just another ad!” I cave in on occasion and risk another painful papercut to appease my curiosity. I’m usually disappointed.
Unfortunately, I’ve had to devote extra time lately to this daily process because we should all be thinking twice about throwing away any unopened letters from our lenders or credit card issuers. In this recessionary climate, it’s a well-known fact that credit card companies and home lenders are taking drastic measures to tighten the reigns on consumers and minimize their exposure to risk. That letter you are throwing away might be notifying you of a large interest rate hike, a reduced credit limit, or a home equity line that will be canceled. You might expect them to notify you by email as well, but that’s not always the case. An actual letter is often required by law.
I received one the other day from Citibank for a credit card I’ve had for a long time but rarely use. It had a sizable credit limit, I’ve never missed a payment, always paid the balance in full, and still used it from time to time. Obviously not often enough. Citibank said they wanted to help me “better manage my credit accounts”, so they closed the account due to inactivity. Thanks a lot Citibank! So thoughtful of you. My east-coast sarcasm should be shining through right now.
So, if you have mad mail sorting skills too and can fly through a huge stack in under 60 seconds, I suggest training your eye to catch anything that could possibly be from your lenders or credit issuers. Take a few minutes to read the letters and make sure you understand what’s going on with your accounts. If you’re unhappy about the new conditions or an account closure, pick up the phone, give them a call, and ask to speak to a supervisor who has authority to make changes to your terms. You may be surprised how much you can actually accomplish when making a reasonable request to the right person.
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Author: Joshua Heckathorn, Date posted: November 19th, 2008
Category: Credit Cards, Credit News
The latest estimate I saw for US credit card debt stood at $915 billion. I don’t know exactly where it stands today, but the number seems to rise 10 billion or so every time I hear it mentioned. It may sound like a familiar number to you as well, since it’s a mere $15 billion more than the amount of consumer debt that drove the subprime mortgage meltdown earlier this year.
Should you be concerned about this rise in US credit card debt? I think so. You would be crazy if you’re not concerned. Especially if some of it is held by yours truly. As major credit issuers such as Citigroup and American Express report their worst quarterly earnings since 2001, many analysts fear that rising unemployment and subsequent credit card delinquencies will be catalysts for the next meltdown in global credit markets. But is a credit card “crisis” really next in line? I’m not convinced quite yet.
I can’t deny there are similarities between the issues we’re experiencing with credit cards and subprime mortgages; however, I see one major difference that leads me to believe things will not be as bad as many predict. It’s a well-known fact that mortgage delinquencies were at all-time highs and dramatically increasing months before the subprime meltdown. On the other hand, credit card delinquencies are actually coming off unusally low levels. And according the American Bankers Association, credit card delinquencies increased just slightly to 4.54% during the second quarter this year. That was an increase of only 3 basis points compared to HELOC default rates that continue to see double digit increases quarter after quarter. So not only are we starting out in a much better place, but it’s also clear that people are keenly aware of what we just experienced in the mortgage markets. There’s a heightened sense of awareness, and all signs indicate that many consumers are cutting back on spending, trying to save as much as they possibly can, and pay off more of their debt.
Credit card default rates will likely continue to increase in the coming months, as they did in the third quarter, but I don’t expect the fallout to be so severe that we will see substantial downgrades to securities backed by credit card receivables like we did with subprime mortgage-backed securities. So, the next important question is whether President-Elect Obama will be able to implement a stimulus package that will create more jobs and convince corporations to get out and hire more talent. Because if companies continue to shed employees like a bad sunburn after a week at the beach, we may be in for a long dry spell before any of us get a much-needed vacation. What do you think?
Author: Joshua Heckathorn, Date posted: November 12th, 2008
Category: Credit Crisis, Credit News
It’s a rare day when you are able to walk through any major city’s downtown or financial district without being asked at least once: “Can you spare some change?” My answer is always, “No, sorry!” It’s not that I’m void of all compassion or that I don’t want to give away the money I’ve worked so hard to earn. But unless the panhandler has a credit card machine in his pocket, I literally can’t spare change because I don’t physically have any! I cannot remember the last time my wallet even came close to smelling the scent of a USD bill of any denomination.
What are my reasons for living a completely cashless life?
First, cash is hard to come by. Even though I live in the same building as my bank, direct deposit and automatic payments give me no reason to step foot in the branch. And frankly, I don’t miss having to try and remember my bank account number to fill out a deposit slip and then wait in a long line just to deposit a check with an amount that eventually seems insignificant compared to the time it took me to even deposit it! And then if I want cash, I’d have to either go back to the branch and stand in line or go in search of an ATM that won’t charge me $3 just to use it.
Second, I love me some points! I personally use the Citi PremierPass Elite credit card for most of my purchases and earn points I can redeem towards free travel around the world. Cash gains me no points whatsoever, so why not at least get something back for the money I’m spending?
Third, I’ll take a 30-day interest-free loan anytime I can get it. I learned from the day I turned 18 the importance of only spending on credit what I could pay back upon the due date. So while my credit card allows me to spend now and pay back later, I put my cash in an online savings account that earns one of the highest interest rates in the country until the payment is due.
Fourth, when I charge all purchases, I have a record in the form of an online credit card statement of every single purchase I have made on my credit card. At the end of each month, I know exactly how much I have spent on food, gas, entertainment, apparel, etc. When I pay using cash, it’s all gone before I know it, leaving me to wrack my brain to try and figure out how every penny was spent.
A cashless life is not for everyone. Some of you may be recovering credit-a-holics and part of your recovery program is to learn how to live on a budget by using only what cash you have. And some of you may prefer to use cash instead of credit just because you like the feel of cold hard cash in your hands. Whatever it is you choose, I’d love to hear what you prefer and why. Feel free to leave a comment below.
Author: Elisabeth Chan, Date posted: November 6th, 2008
Category: Credit Card Reviews, Credit Cards
“How can I save your money”, answered the ING customer service rep. I responded and said, “By giving me a good rate on a home loan with low closing costs.” He uttered a fake courtesy laugh in return. I did the same.
I’ve been planning to call ING since a bright orange postcard arrived in the mail a few days ago marketing the popular Orange Mortgage. Low closing costs and a 5.25% rate sounded pretty good, and since I’m in the market for a new place, I thought I would check it out. I’ve always been impressed by ING’s customer service and the ease of doing business with them as well, so I was interested to experience first-hand how things have changed in their lending division given the current state of the credit markets. It didn’t take long to see that they too have become like everyone else.
I’m serious. Have you talked to anyone at a bank lately? It’s like talking to a bunch of zombies! Everyone is wound up so tight they have completely forgotten how to actually take care of a good customer, listen to what you say, and try to meet your needs. You would think that if anyone could hold onto the customer-centric approach, it would be ING. But alas, tightened underwriting standards and the fact that they are just plain scared of any risk have forced them to become internally focused. I can certainly understand why, but it’s still a shame.
So, if you’re in the market to finance the purchase of a new condo, don’t even bother calling ING. They won’t care if you’ve been a long-time customer with excellent credit history, solid credentials, and a big chunk of cash to make a down payment. All they will care about is following the new underwriting standards by the book, which require at least a 55% down payment on new-construction condos. That’s right, the maximum loan they can offer is a measly 45% of the purchase price. In regards to the estimated closing costs, they weren’t that low either. So, my search for a lender who actually wants to “lend” continues, and ING has lost the opportunity to make a great deal of money off someone who has never made a late payment in his life.
Have you had difficulties securing a loan lately? We would love to hear about your experience, so send us an email at creditcents@creditnet.com, or post a reply below.
Author: Joshua Heckathorn, Date posted: October 29th, 2008
Category: Credit Crisis, Mortgages
Real estate values continue to do a big cannonball in the deep end, and some lenders are trimming their exposure to home equity by shutting down idle lines of credit on their books. If you’re lucky, you may receive a nicely written letter in the mail explaining how you haven’t drawn against your line in quite some time, so the bank wants to give you the opportunity to close the HELOC before the agreement permits. How thoughtful, right? They want it to sound like they’re doing something nice for you, but it really has nothing at all to do with you or what the original agreement states. They’re just hoping you won’t have the time to sit down and write a letter back within 14 days so they can terminate the HELOC at will. But at least they gave you a chance. Other banks may send zero correspondence before shutting it down. The bottom line - they want the exposure off their books.
If you currently have a HELOC that hasn’t been shut down yet, perhaps it’s a good time to think about how you can safely use it before the bank attempts to snatch it away? There are certainly some risky ways you can use home equity to invest in stocks or real estate, which have the “potential” to provide a high yield. However, I wouldn’t suggest you take that risk in this market, unless you have some serious investment skills and plenty of reserve cash to bail you out in an emergency. It’s generally never a good idea to gamble with your home. But if you want to get some of the cash in your hands, avoid letting your HELOC get terminated without notice, and invest it safely for a small return, then try this simple arbitrage method.
The prime rate is currently 4.5%, which means your HELOC’s interest rate is probably less than 5%. You should be able to easily locate your current rate by looking at your last bank statement or checking your account online. The next step is to apply for a 0% balance transfer credit card that should provide you with a reasonable credit limit. Let’s say $15,000.
Now, it’s time to spend a few minutes shopping around for the best place to park cash these days. For example, take a look at an I Savings Bond, which provides a return of 4.84% if purchased before November. Using your HELOC, you could purchase $5,000 in I-Bonds, and then take advantage of your new 0% balance transfer card by using it to pay off the HELOC. For the next 12 months you will enjoy a low-risk investment returning 4.8%, and your HELOC will no longer be considered inactive by the bank. At the end of 12 months, cash out of the I-Bond, pay off the balance on your 0% credit card, and pocket the difference. Voila - you have made money without using any of your own actual cash. Of course, your total profits will depend on how much money you’re willing to move around and what kind of fees you’ll have to pay. I just chose $5,000 to keep it simple.
If anyone has a personal experience applying this strategy, I would love to hear about it! Post a reply or send us an email at creditcents@creditnet.com.
Author: Joshua Heckathorn, Date posted: October 24th, 2008
Category: Investments, Mortgages
If you’re paying attention at all to our current economic crisis, then you’ve probably heard the term “credit default swap (CDS)” enough to at least make you wonder what it is. Most recently, credit default swaps played a vital role in the federal government’s decision to bail out AIG, since they determined that a huge chain of failures across the international financial system might occur if AIG were to fail and default on the swaps it sold. Must be a big deal, right? They are. The market is estimated to be worth approximately $55 trillion, which is more than double the size of the US stock market.
So what the Sam Hill is a credit default swap anyway? Unless you just happen to be a finance junky or an investment professional who needs to clearly understand the complexities of the CDS market, I wouldn’t waste your time trying to grasp anything more than the basic concept of how they work. If that’s what you want, then here’s the most basic explanation you will find anywhere.
A credit default swap is simply a contract between a buyer and a seller. The seller is providing insurance to the buyer that he will be made whole in the event a financial investment fails. The seller is willing to do this because she collects nice fees in return and expects that most of the time the investment will not fail. On the other hand, the buyer wants to enter into the contract to protect his investment at a reasonable price.
Sounds like basic insurance right? Well, it’s not. In fact, the inventors of credit default swaps were very cautious to never call it that because if it were insurance, it would by definition be highly regulated. So they called it a “swap”, which by definition is completely unregulated by the federal government. This lack of regulation has resulted in sellers not posting enough collateral to support their potential future obligations, so try to imagine what would happen if insurance companies insured risks they really didn’t have enough money to insure? If a bunch of claims were all received at once, they would just end up closing shop and going out of business.
There you go. That’s a credit default swap in the most simplistic of terms. Things get quite a bit more complex from this point on, so the key point to remember is that the credit default market is best compared to an under-collateralized and unregulated insurance market. If you understand this concept now, congratulations! You likely know more about credit default swaps than 99% of the general public.
Author: Joshua Heckathorn, Date posted: October 19th, 2008
Category: Credit News, Investments
Market down over 36% from last October, unemployment rising, and uncertainty everywhere we look. You don’t need me to say it, but we are in a “Bear Market”. What about the 700 billion dollar bailout and the .50% rate cut? Wasn’t that supposed to save us? It appears as if nothing is working and the market will continue to spiral down into the abyss. This is another classic sign of a bear market. People simply loose hope and continue to sell everything until there is no one left that wants to sell. I understand these are scary times. I, like everyone else in the market, have lost a lot of money. However, I remain optimistic, and so should you.
The main reason I am so optimistic is that on average the market drops 35% during a recession. As of last week we are down around 36%. We could and probably will drop more, but last week’s action got us closer to the bottom much quicker than I had imagined. You see, I believe the market goes up over time. Unfortunately, the media is doing its best to make us think differently. Markets are also forward looking, and they tend to go up well before the end of the recession. I don’t know when the recession will end, but I do know the market will go up before it is over.
The other reason I am optimistic is because the government is no longer ignoring the problem. The bailout, rate cuts, and insuring money markets amongst other things indicate the government will not let this problem turn into a full-blown depression. However, these remedies take time. Rate cuts take around nine months to have an effect, and the bailout plan will also take time to work. The market is sick, and sometimes the flu lasts longer than we would like. The government and the fed are providing the needed medicine, and it will work. I believe the bailout was necessary and that in the end it will be much less costly than the alternative of doing nothing. This is in stark contrast to the great depression when the fed actually raised rates, the FDIC didn’t exist, and we didn’t have as much practice averting this type of crisis.
The market will turn, and each day it goes down brings us that much closer to the bottom. My advice is to add more money if you can, make sure you’re diversified, and don’t panic. We will make it through.
Author: Matthew Shriber, Date posted: October 12th, 2008
Category: Credit Crisis, Credit News, Investments
The more I listen to Obama, McCain, and the Senate talk about how increasing the insurance ceiling to $250,000 will in some magical way help with the financial crisis we are experiencing, the more I want to seriously vomit. I’m not saying it’s necessarily a bad thing to raise the FDIC limit. It hasn’t been raised from $100,000 for a long time, so perhaps it’s time? But why can’t people just see through the smoke and realize that this is purely a political move? They are clearly using it as a way to gain more support for the bailout plan while they pat themselves on the back for caring so much about helping out the American public.
Ask a smart friend who truly understands financial markets and institutions, and they will likely tell you that the increase will have little or no effect on the failing credit markets we are dealing with now. Yes, some small businesses and individuals may feel better about putting their cash in the bank, but if they are rational investors they will already have their money spread out across various banks or accounts within the same bank. The cost of protecting yourself at $100,000 is so low and so easy to do, why wouldn’t you?
The fact is less than 2 percent of the American population makes more than $250,000 per year, and according to the U.S. Department of Commerce, the personal savings rate is hovering just under 3 percent of “disposable personal income.” So, for those who have saved enough cash and desire to park it all at the local bank in their checking account, get prepared to do a little celebration jig. For the vast majority of the population that couldn’t care less, I suggest you look past the political smoke and focus on the real issues at hand.
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Author: Joshua Heckathorn, Date posted: October 3rd, 2008
Category: Investments
In yet another effort to cut the cost of card issuance and increase consumer activation and usage, Visa announced last week “it will begin supporting the issuance of unembossed credit cards in the U.S. for Visa consumer debit, business debit, and consumer credit cards.” I’m not sure what the world will be like without textured credit cards, but I suspect things will not change too much. Our country’s leaders will still be trying to fathom just how much “$700 Billion” really is, and Oprah will still have more influence on the American public than the President of the United States.
So, is this announcement good news, bad news, or not really news at all? Visa has permitted unembossed prepaid cards in the U.S. since 2005, so this isn’t a brand new marketing ploy. The difference is that now they are jumping into a much larger market, which includes consumer debit and credit cards as well as business debit cards. I believe this is great news for financial institutions, since they will no longer have to deal with the added cost and complexity of producing cards offsite and mailing them to new cardholders. Of course, most will need a lot more than this to dig them out of the financial crisis we are currently experiencing.
Consumers will also be pleased to immediately receive their personalized plastic, instead of having to wait several days before the card arrives and they can activate it. But what will become of the old “zip-zap” machine? Some “mom-and-pop” stores across the country still love the zip zap. In fact, the one and only reason we still have embossed credit cards is because these machines need to take an imprint of the card instead of simply reading the information contained in the magnetic strip.
Although there aren’t many U.S. merchants left that require a manual imprint for each transaction, the zip-zap machine is actually thriving in retail locations across the globe. I just returned from a business trip that took me to Hong Kong, China, and Korea, and it seemed like I ran into the zip-zap everywhere I went. By the end of the trip, the silver paint on my credit card’s numbers was completely gone from all the vigorous rubbing and swiping.
So if the notion of unembossed credit cards gets you excited, I would make sure you keep both types of cards in your wallet at this point in time. You may be able to get away with only carrying unembossed in the U.S., but don’t plan on putting dinner on the card at the local Chinese hot-spot. If you try, chances are they will only accept cash anyway.
Author: Joshua Heckathorn, Date posted: September 29th, 2008
Category: Credit Cards, Credit News
Having worked at the World Trade Center, Merrill Lynch, Washington Mutual, and one of the country’s largest insurance firms, I feel very connected to many of the institutions and events that are in the news every day. I never could have imagined the changes the financial industry has experienced over the last seven years, and with this most recent crisis I know that many are wondering, “what in the world is going on” and “how does it affect me?”
Let me first say that despite what the media would have you believe, we have seen this before and we will get through it. Yes, you read that right, we will be just fine. In fact, I am more excited today about investing than I have been in my entire career. Think about this, the market is down over 20% the last year. Even if it takes two years to get back to where we were prior to this drop, that means you will earn 10% per year on your money. Where else can you invest and get 10% on your money?
There is no doubt that the past 12 months have been difficult for many investors. I would like to assure everyone reading this that the market will go up. I can guarantee that. I know the market will go up based on one simple fact - it always does.
There are a lot of people trying to explain what is going on in the market right now. Really what it comes down to is that companies took on more debt, in the form of mortgages, than they could handle. It really is no different than running up a credit card balance during good economic times, and then loosing your job and not having enough income to pay off the interest.
The lesson we should all take away from the current economic crisis is threefold. First, have an emergency fund. Everyone should have a minimum of 3 months income saved and should be working toward 12 months. Second, just because you qualify for a high credit limit doesn’t mean you should use it. Finally, and most importantly stay focused on the long term. As long as you are diversified properly, the best thing to do
right now is at a minimum nothing. If possible, add more money to your investments.
Author: Matthew Shriber, Date posted: September 21st, 2008
Category: Investments
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