We all realize that something needs to be done to help our economy, but I’m still not comfortable with what has been done. When the bill was first drafted, it was a wide open door for one man, Henry Paulson, to have unlimited power and control of all the bailout money. Limits have been added since then, but check the things out below that still remain in the bill.

As a reminder of how your government operates, the Senate cannot originate a spending Bill. Article 1, Section Seven of the Constitution says, “All bills for raising revenue shall originate in the House of Representatives; but the Senate may propose or concur with amendments as on other Bills.” So what the Senate did was pass amendments to the H.R. Bill 1424 that was passed by the House of Representatives. The bill starts out with an amendment to the Employee Retirement Income Security Act of 1974.

When I heard that the bill is 451 pages long, I wondered how they had time to read it since they have been in meetings most of the time. Actually the bailout part is from page 2 to 113, so it is only 111 pages. That is still a lot to read.

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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 In 1999, the Gramm-Leach-Bliley Act was passed which effectively repealed this separation for many large financial institutions.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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