Recently a friend asked me the following question: “If I have 4 Visa cards, 1 American Express, and 3 Store Cards, is that too much? I am never late and pay off almost all of them. Should I be closing some or just keep them open without using them?” -Jeffery

The Answer
The amount of credit cards you have open do not directly impact your credit score. However, your amount of debt to credit ratio does. For example if you have $10,000 worth of credit and $2,000 worth of debt, then you debt to credit ratio would be 20%. The higher this percentage is, the lower your credit score will be. It is a good rule of thumb to use less than 30% of your line of credit on any single credit card.

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We have all heard about ARMs - Adjustable Rate Mortgages and Interest Only Mortgages and Balloon Mortgages, but how did this debacle start? In 1929 the Glass-Steagall Act was passed to prohibit banks from accepting both deposits and underwriting securities. In 1999, the Gramm-Leach-Bliley Act was passed which effectively repealed this separation for many large financial institutions.

Investment banks had previously assisted lenders in raising more lending funds. They had the ability to offer longer-term fixed interest rates by converting loans into bonds. The banks would make house loans in the form of a mortgage, and then use the investment bank to sell bonds to fund the debt. The money from the sale of the bonds can be used to make new loans. This is called securitization. The banks began to securitize loans themselves, and the investment banks also became lenders.

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There are many saying that Secretary Henry Paulson’s bailout plan is not the best way to deal with the credit crunch crisis. Paulson came from Goldman Sachs. Is he trying to protect his buddies? Are they taking advantage of the fact that the administration of the country will change soon and then the new leaders can blame their predecessors?

The bailout shifts the burden of the losses to the taxpayer. Another problem with that is that we are not even getting fire-sale prices. They say the bailout will not be effective if bottom dollar is paid. So they are trying to speculate on what it will all be worth in the future.

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Devil’s Advocate It’s funny how everyone has fallen into the credit world of credit cards and credit score. Credit cards are like tricky games of who can out smart who and credit scores are just silly numbers that companies and institutions with trust issues use to size you up. Wouldn’t your life be so much better if you never have to worry about juggling your money on credit cards or have to stress about getting a high credit score? Wouldn’t that be great?

If you think it is impossible, then I am glad to tell you that you are wrong because people live without credit every day.

The Secret
The secret to living without credit is…

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There is good debt and bad debt. Good debt is called good debt because it is tax deductible if you itemize your taxes. This includes mortgages, some types of student loans and business loans. It makes no sense to speed up paying off low-interest, tax-deductible debt if you have any other kind of debt. You should first pay off your highest-rate, nondeductible debt first. Do not pay more on your mortgage at the expense of not saving more for retirement. The sooner you start saving for retirement the more you will save because of compounding. Plus you can’t get back an opportunity to contribute to a tax-advantaged retirement plan once you have missed your chance. Withdrawing from your retirement early should never be considered. The money you will lose in the long run, plus the taxes and penalties that you will have to pay now make this a very bad choice. You will sacrifice 1/4 to 1/2 of what you withdraw to taxes and penalties. Borrowing from your retirement is a bad idea also. An additional risk to borrowing from your 401(k), is if you lose your job, you have to pay back the loan in a short amount of time or it will be taxed and penalized as a distribution.

A Mortgage is Good Debt - Don't Pay It Off Credit Cards are Bad Debt - Pay Them Off

If things get really bad and you end up in bankruptcy, the credit card debts can be wiped away. You don’t want to risk losing your retirement money also.

Focus on paying off bad debt which consists of credit cards, unsecured loans, and loans that are not tax deductible. Start with the highest interest bad debt and pay more towards it each month until it is paid off. Then focus on the next highest.

Hank Paulson the Treasury Secretary, and the government are working on a plan today to set up a government facility to take on bad debts from financial institutions to prevent the global credit crisis from worsening. They say that the problem is that companies who borrow to keep their businesses running cannot get credit. There are questions as to how fast the government can actually implement such a plan. Some say it could take weeks. I don’t know what the repercussions of a move like this would be other than we the American taxpayers would be taking on more debt.

White House spokeswoman Dana Perino questioned whether doing something in the middle of a market correction was wise and acknowledged it could be difficult to approve something quickly.

The government says that the facility would be similar to the Resolution Trust Corporation which was set up on 1989 to take on all the failed thrift assets during the savings and loan crisis.

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The FDIC is the Federal Deposit Insurance Corporation. It was created by the Glass-Steagall Act of 1933. It insures up to $100,000 per depositor per bank. Runs on banks are nothing new. When there were economic downturns and high unemployment in the 19th century there were runs on banks. There was a particularly severe panic in 1893. A national bank guarantee fund was
proposed. Although deposit security measures were adopted at the state level, the federal government chose the Federal Reserve System as a lender of last resort.

In 1933 the system failed and 4,004 banks closed. Under the federal government’s supervision, these banks were merged into stronger banks.

President Franklin D. Roosevelt was personally opposed to insurance because he thought it would protect irresponsible bankers, but yielded when he saw Congressional support was overwhelming.

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If you see a charge on your credit card that you did not make, it may just be an error of a miskeyed number. These are easily fixed by calling the credit card company. But if there is more than one charge, or your credit card was stolen, or you see a new credit account on your credit report that you did not apply for, then you are probably a victim of fraud. Follow these steps if you believe that you are a victim of fraud.

1. Add a 90-day security alert to your credit report. There is no cost for this. The alerts allow you to include a telephone number so that businesses can call you when an application is submitted using your identity.

2. Contact each creditor of your accounts with fraudulent activity. If it is a new account that you didn’t establish, be sure to tell them that the account is fraudulent.

3. Document all contacts. Make notes of everyone that you speak to and the date that you speak to them. Get their names, department names, and phone extensions.

4. Understand each creditor process because they can be different. Make sure you understand exactly what is expected from you, and then ask what you can expect from them.

5. At the conclusion of the investigation, ask the creditor for a document that states that you are not responsible for the debt.

6. If you are a fraud victim, add a 7-year victim statement to your credit report. The statement tells lenders to take extra precautions when considering an application because there is an increased risk that fraud is being perpetrated. The statement can delay you being able to get credit, but is a worthy inconveniece to protect your credit.

7. Follow up. Make sure all required documentation was received by the creditor and/or credit reporting agency. It is always a good idea to place a follow-up call or send a letter for confirmation.

8. Review reports regularly. It would be best to subscribe to a service like FreeCreditReport.com for monitoring your credit report or Life Lock for more identity protection. If you do not subscribe to a monitoring service, obtain another credit report several months after you believe everything is cleared up.

If a new fraudulent account is discovered, you know how to handle it. Be sure to check your credit report again in six months and a year later.

Keep all your notes and correspondence in an accessible file in case they are needed in the future.

What a Credit Freeze Is A credit security freeze stops anyone from obtaining access to your credit report without your approval (see the exceptions listed below). You are provided with a personal identification number or password to use for authorizing temporary release of your credit report for a specific requestor or period of time. The pin or password will also have to be used to remove the freeze.

There are state laws that vary about what can be released during a freeze. A security freeze generally does not apply to companies that you already have an account with. Your existing creditors can still review your account for collection, review, or fraud control. Prescreeners are also allowed access, even though you will probably have to release the freeze to actually get the credit.

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You receive unexpected “convenience” checks in the mail from your credit card company. Should you use them? Read the Fine Print Before using convenience checks you need to look for the following:

• Does it have a fee - such as a 3% to 4% same as cash fee?
• Does it have a higher interest rate? Cash advances have a higher rate.
• Does it go to the higher cash advance interest rate after an introductory period?

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The Federal Reserve Board does a survey every three years of Consumer Finances. This post is based on the results published from the 2004 survey. The results for 2007 have not been published yet. The 2004 survey is based on 4,522 families that were interviewed.

Average Debt Has Increased

The average debt for families from 1998 to 2001 increased by 5.2%. From 2001 to 2004 the average debt increased 33.9%. The reason for the large increase was home-secured debt, home equity lines of credit and second mortgages were taken out against the increased value of homes. Normally this is seen more in the higher income brackets, but the lowest wealth group in 2004 had the highest rate of borrowing - 86%. Home-secured debt rose 27.3% from 2001 to 2004.

The Tax Reform Act of 1986 created an incentive for homeowners who needed more funds to borrow against their home equity. They could no longer deduct the interest payments on other types of loans from their taxes, but they could on their residence.

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Thank you everyone for your participation! We went through 4 winners on the It Pays to Ask contest before we had a response. Our next contest will be coming along in the next few days!

Budget Isn’t a Four-Letter Word The word budget makes most people cringe. It used to make me run in the other direction when someone mentioned the word. But after many years, I’ve come to realize that budget is not a four-letter word after all. However, it didn’t happen over night.

When I worked 8 to 5, I was paid every other week. This means you have two months a year that you get three pay checks in one month. That sounds great, but leading up to that third check, I was always short money. The dates that I was paid constantly changed, but the bills were always due at the same time.

I must also admit that I’m not very organized. I forgot to pay the mortgage bill one time and wondered why I had extra money. My mom went and bought me a wooden envelope holder that you can hang on the wall so that I would keep my bills in one place so that they wouldn’t get lost. That solved one problem, but I still had the problem of thinking I had extra money when the money really had to go to a bill that I hadn’t received yet.

Tracking Bills and General Spending

Since I like using Microsoft Excel, I finally started logging all of my projected expenses and then recording the exact amount and date that I paid them. This really helped me see how much extra spending money I really had. It also helps me keep track of when I pay my bills and what hasn’t been paid yet.

I never called it a budget, but now I realize that’s what it is. I was lacking one thing though. I didn’t have a handle on my credit card usage. Although I had the amount logged in my spreadsheet of the amount I had been paying, if I ended up spending too much money on Christmas, birthdays, or an emergency, then I would have an increase in the credit card payment that I hadn’t taken into account.

I ultimately want to get to the place where I can pay cash for anything I need or want. Credit card debt is way overused by Americans. Credit and credit cards are great to have when needed for special occassions, but our want for instant gratification means that we use them for impulse spending and things that we shouldn’t.

Credit Card Debt

If you can pay off your credit card every month, then it is not a bad thing to have one. I read the Federal Reserve Board Survey of Consumer Finances and according to their survey from 2004 (the most recent one published), only 46.2% of families carry a balance on their credit cards. I was shocked. I thought the figure would be more like 75% or higher. I guess once you get in that rut, you think everyone is in it with you.

I’ve had good credit and I’ve had bad credit. When you have good credit you get all the zero percent offers and can transfer balances from one card to another when the introductory period expires. I did it several times. The bad side to having good credit and using it, is the companies keep giving you more. It is easy to increase your credit debt. They let you do yourself in if you don’t use it wisely. At one point, if I had maxed out all my credit cards, I would have had over $100,000 in credit card debt. That is very scary.

I can understand why credit card companies don’t send zero percent interest rate offers to people with bad credit. But what I want to know is, how does it benefit the company if they jack up the interest rate to 24.99% for someone who has bad credit that is already struggling to pay their bills? If they make it harder for the person to pay their bills, aren’t they pushing them towards filing bankruptcy?

Paying Off Credit Cards

I read on one website that each $1,000 in credit card debt takes over nine years to pay off if only minimum payments are made. I’m not good at math, but I found another example. If you have a balance of $2,000 at 18% and you pay a minimum payment of $41 per month it will take over 7 years. So you definitely want to pay more than the minimum.

The best way to decrease your credit card debt is to choose one that you want to pay off first, whether it is because of a higher interest rate, or a higher balance, then pay extra towards that card every month. Focus on paying extra just on that one. When it is paid off, then you can pay even more towards the next one that you focus on paying off.

If you don’t have extra money to pay towards the balance, consider getting a second job and putting the total paycheck towards paying extra on the bill. You do not want to get another job and end up becoming use to having extra money, otherwise you will have to work two jobs for a very long time. Also look for ways to reduce your current spending. For more ideas on how to save money to put towards your credit card bills, read our article 10 Little Ways to Save Big.

The most important thing is to be self-disciplined. Don’t buy those impulse purchases. When you see something you want, do not buy it right then, even if it is on sale! Walk away and think it through. Is that item really going to move you closer to your life-long goals?

Looking to the Future

I’m excited that the owners of thecreditbeacon.com (I’m just a writer) will be releasing their first edition of the Money Tree Personal Budgeting Software soon. Maybe they should call it something other than “budgeting” since most people don’t like that word. But that’s what it really is.

If you want to be wise in handling your money, then you need to budget. Wouldn’t you like to have money when you retire that will allow you to enjoy retirement and do the things that you never had time to do while you were working? How about sleeping better at night right now, and having less arguments about money with your significant other?

Not only is the software going to be easy to use, it will include calculators that will help you know what you can afford and how long it will take to pay it off. Whether it is figuring out how long it will take to pay off those credit card bills, or how much you can afford to pay for a car, the budget software and calculators will help you make better choices.

Article featured in the The Carnival of Personal Finance Budget Category.

Since 1940, there have been three basic types of investment companies in the United States. They are open-ends, also known as mutual funds, unit investment trusts (UITs), and closed-end funds. Mutual Funds A mutual fund is a professionally managed firm of collective investments that collects money from investors and puts it in stocks, bonds, short-term money market instruments and other securities.

A mutual fund allows a group of investors to pool their money together for a predetermined investment objective. When you invest in a mutual fund, you become a shareholder of the mutual fund.

The majority of mutual funds invest in stocks and/or bonds. Bonds are money lent to the government or a company that pays back principle and interest over a set time period. Pooling the money together reduces trading costs and adds the advantage of diversification.

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Savings Accounts

The easier it is to access your money, the lower the rate of return from interest. A savings account in a bank pays less interest because you have easy access to your money. That means that you can withdraw your money at any time, which in turn means that the bank cannot invest it in a higher rate long-term investment. Some banks will offer interest rates on money in your checking account.

Saving Money in a Bank

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Teenagers need to be taught money management so that when they move out on their own they will be able to handle their money wisely. You don’t want them to fail and have to move back home just so that they can pay off their debt.

How to Get Started

If your child does not already have a savings account, help your child open one. A teenager should also be able to open a checking account. Anyone under the age of 18 will have to have a co-signer since minors cannot be held responsible for contracts.

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