Danger!

They sat in the window sill above my kitchen sink and stared at me every day – for weeks and months.  They whispered like the wind: “frodo baggins” – actually, more like “cash me, I love you!”.

If you think that credit card companies might be just a little sneaky or looking out only for themselves, you might be more than just a little bit right.

After being unemployed for almost a year, my savings built up during my prosperous time of work last year was consumed.  Unemployment ran out and I had to apply for emergency benefits.  Unemployment barely covers the mortgage and water payments.  And it takes considerably more to run a household full of kids and a stay-at-home/homeschooling mom.  What to do?

Ultimately you can go only so long without employment income if you are still in your working years like me.  We are in good company.  Being a consultant, I am accustomed to being disemployed.  As such, my first profession is to be a professional jobseeker.

Anyway, when the money runs out, your mortgage company, service providers, credit card holders, gas stations, and grocery stores still want theirs.  What you gonna do after selling all you can on eBay?

In my case, I finally landed a job at the last possible minute – the minute before I cashed those cash advance checks from one of the credit card companies I am trying to pay off.  But that is not to say that I was not tempted to take one or more of those checks and add some cushion to my reserves.

The marketing text about the offer says something enticing like “0% Interest for 9 months, or 1.99% for a year”.  Sounds nice at first, right?  But you must keep in mind that facts and truth are not necessarily in alignment – especially when dealing with financial institutions [as well as with politicians, and the mainstream media.]

Be sure to notice the little thing called a transaction fee.  It is 3% of the amount borrowed.  It used to be capped at $50 or $99.  So, in the past I did not mind taking advantage of an offer to move $20,000 from 10% to 5.99%.  But now there is no limit on the balance transfer fee.  So if you transfer/advance $10k to 5.99 for a year, and then do it again after 12 months, and again and again on these 1-year deals, your rate is really [at least] 8.99%.  Just know it is not really the 5.99% advertised.

In the same way, the 1.99% for 6 months is really 4.99% after you count the transfer fee.  Do it twice in a year, and your being charged almost 10% at a per-annum rate. 

The players include but are not limited to Citi, ATT Universal, Chase, Wells Fargo, Discover, American Express, and many more.

Read the Terms of Agreement Before You Do It!

But, what if you cannot pay off your debt at the end of the term and you cannot find another special offer?  Then your agreement might jack you up to 15% or 19% or even 28%.  Better think about that before you take the candy like Peter did from the White Witch in Narnia.  Remember, credit card companies don’t make money directly by offering great deals.  Instead, they make the money on the balance transfer fees and when the deal is over and the borrowers’ rates jump way up.  If that were not the case, they would have no reason to offer the enticements.

Not Always All Bad

My point is to never take credit card balance transfer and cash advance offers at face value, and to read the terms and know what it is you want to accomplish in both the long term and the short term and to understand the associated risks and rewards.  Personally, I believe the right thing for me is to pay off credit card debt once and for all and to never carry a balance again.  This is taking me years to do, and you can’t go forward if you are moving backwards; that is why I resisted so hard in taking them up on those balance transfer offers even during my emergency.

But that is not to say that there is never a reason.  There are several times that I had to do it in the past in order to pay the mortgage and make ends meet.  However, there are good ways to go about it, and bad ways.  As mentioned earlier, the bad ways include simply taking the checks and going for it without thinking about all the options and implications.

Be sure to ask these questions:

1. What is the interest rate? (is it better than my current rate?)
2. What is the term length? (what will happen when it is over?)
3. How much is the balance transfer fee? (what will my effective rate be including the fee?)
4. What is the balance transfer limit? (is it enough to make a significant difference? can I move enough of my debt to it to be worthwhile, or will it mainly add more burden to my busy life with another payment to have to try to keep up with and thereby be counter productive?).
5. Do I have to apply for another credit card to get the offer?  If so, do I want that type activity on my credit report?

In regards to question #4 above, I received a seemingly attractive offer from American Express.  So after reading their terms and submitting my application, I later received approval for up to $7,000.  But I wanted to “re-fi” $20k+.  Calling their customer service was unfruitful in obtaining the approval I wanted.  In the end I decided they were just another credit card company jerking my chain, hoping to divide and conquer and get me to miss a payment and be converted to their high profit-making rates.  So, I declined to transfer any debt to their card, and cancelled the account (actually they cancelled it after 6 months or so of inactivity, which suited me just fine so as to have one less vulnerability for identity theft).

And fact is that pretty much all of my $30,000 credit card debt is below 6% and has been for years.  It is because of taking advantage of low interest offers back in the days when the transfer fees were capped.  I am always open to moving the debt in order to achieve a lower lifetime interest rate until it is paid off.  But it must be a better deal in truth and not just manipulated facts stated in the marketing literature.

Always question the facts to get the truth

What you need to get out of credit card debt is to make your debt manageable and know your limits and only buy things on credit you know you can afford to pay off, a credit card is not a license to buy!

Stop Adding More Debt Onto Your Card(s) Right Now!

An obvious step you might say, but the temptation to use your card even though you already have a debt racked up might still be there and you need to understand you can’t give in to that temptation.

Use Cash Instead of Your Credit Card

When you pay for your purchases in cash you attach more value on what you spend, the temptation to make an impulsive purchase will strongly be reduced when you see how much cash you’re actually spending instead of swiping your card through the card machine or entering some digits into an online shopping form.

Pay Off Extra Debt Via The Money You Save On Cash Purchases

When you shop for the most part using your credit card you also pay additional interest, extra cash you can really use to get rid of your credit card debt.

Because you make more cash purchases you can allow yourself to save some extra cash, add some of this newly freed up cash to pay off your credit card debt.

Get a Lower Rate On Your Card

Instead of continuing paying off the card you’re currently using, why not transfer your balance to a different card with a lower interest rate, there are special balance transfer credit cards that make this process very easy for you.

Your advantage is that you pay less interest and in most cases these cards have special perks attached, remember the more you save the more money you free up to eliminate your credit card debt.

Obtain Professional Help!

If you have multiple cards and would like to obtain specialized help in eliminating your debt, consider using the services of a professional credit card consolidation company.

We offer a quick way to get in touch with these sort of companies and you’ll get different quotes in rates and learn more about how each company can assist you eliminating your credit card debt.

It just takes a few minutes of your time to get started, and the best time to get started is now!

But what exactly is a good credit score? – What is the magic number?

Rest assured there is no magical number, lenders and credit institutions have their own criteria when it comes to providing credit and even if your credit score isn’t as good according to the criteria by one credit institution, another credit institution will deem your credit score as good.

However, if there is a number you could use to grade your credit score as good, yet not to be used as an universal number, a credit score of around 660 could be regarded as a good credit score.

When you have a good credit score the probability you can negotiate lower interest rates is much higher then when you have a less then perfect credit score, that’s why it is so important to request your credit report and regularly give yourself a credit check and monitor your credit score and if necessary to take action and repair your credit score by removing questionable items from your credit report that could be calculated into your credit score.

The 3 leading credit bureaus, TransUnion, Equifax and Experion feeds their credit information to the Fair Isaac Corporation, (better known as FICO) and based on this information and FICO’s credit score rating formula, a credit score is assigned to each credit consumer.

Formula? What factors are exactly used to determine my credit score?

Your historical payment data, length of your credit history, total amount owned, new credit and what type of credit you have used are all factors how your credit score is being calculated.

Lets dive into this a little further:

Payments History

Your ability to pay off your monthly credit bills, your credit card bill, mortgage payments, etc is responsible for a big part how your credit score is calculated.

Having a few late payments doesn’t lower your credit score dramatically, especially over time the effect of these late payments will be less noticeable in your credit score, if the late payment involves a mortgage payment then that’s something that will not become less noticeable. (Consists of approx: 35% of your score)

Amount of Money You Owe and Amount of Credit Accounts

In order to determine your credit score another factor that plays a big part in your overall credit score calculation is the amount of credit lines you have and the amount of money you owe on these accounts.

Because you have different credit accounts it doesn’t automatically make you a high risk consumer to be given credit. It’s the increased likelihood someone with a lot of money owned on different credit accounts that can not make payments on time.

This likelihood is scored based on historical statistical consumer data collected by credit score agencies over time. (Consists of approx: 30%)

The Length Of Your Credit History

A longer history record where it shows you make your payments on time and are handling your credit responsibly reflects positively on your credit score.

When you don’t have an established credit history it doesn’t mean you can’t have a high credit score, because the overall appearance of your credit report contributes to your overall score. (Consists of approx: 15%)

New Credit Accounts

When a consumer opens different credit accounts in a short time frame it could mean there is a greater risk involved for the consumer.

Because this may indicate irresponsible behavior that leads to late payments or even defaulting on making payments. Making requests for new credit can affect your credit score as these requests can be reported to one of the 3 credit agencies, not every credit request could make it’s way into your credit report because it’s not required by law for companies to report a credit request to credit score agencies.

Shopping for mortgage quotes for example, simply inquiring about rates is a different matter, as FICO…the leading credit score agency can distinguish the difference between actually applying and merely inquiring about rates. (Consists of approx 10%)

What Types Of Credits Are In Use

The various types of credit accounts will also be taken into account for calculating your credit score. With that said it’s not necessary to open a credit account for every type of credit out there, your FICO score will simply take the various type of accounts into account and use it in their overall scoring formula. (approximately 10%)

In Conclusion

As your credit score is being used by companies/institutions to asses your credit trustworthiness and your FICO score is the most widely used, there is not a fixed magical number. However there are researches done how on average a certain FICO score can for example lower your monthly mortgage payments.

It’s advisable to know your FICO score and work on your FICO score by removing questionable items on your credit report, you can sign up for a Free trial in the MyFICO program and then cancel your subscription so you can obtain your FICO score for free.

Of course if you want to be on top of your FICO score it’s advisable to not cancel your subscription, as it’s very affordable and you have a better chain of support to ask questions about your FICO score as well as monitoring your FICO score and receive alerts when something goes wrong…so you’ll be there on time to catch any problems!

I have also learned to filter what I hear in the mainstream news – also known as the “driveby media”. When hearing reports about “subprime meltdown”, the real questions should be “what is the truth” and “is it really as bad as they would have us believe.”

To jump right on in with my opinion, I believe the answers are “the media conveys a few high-profile facts to us but largely excludes the truth in their reporting”, and “no, it’s not really as bad for everyone as they say – though for some of the constituents it is very bad”.

When it comes to subprime mortgages, yes they are a touchy subject for many. Let’s look at the constituents:

1:Originating lenders

2:Acquiring lenders (note buyers/holders)

3:Borrowers

4:End investors

5:The media

6:Everyone else

First, let me direct you to a good article that sheds a little light on the subject from perhaps a different viewpoint, and offers some behind the scenes insight.

With that in mind, I will try to be fairly brief here.

By the way, it was this [good] article titled “Q: How Big Is the Subprime Mortgage Market? A: Not Very Big at All” that inspired me to address this subject.

Now, about those constituents. The originating lenders are the ones who granted the loan in the first place. They are often the guys who ignored the poor credit information on the borrowers and made bad lending decisions for loans that were very likely to default. They pushed the interest-only loans as well as the low-interest-to-go-[outrageously]-variable-after-we-are-out-of-the-picture loans. They usually sell their loans as soon as they can, hoping to never see or hear about them again. In the business, they are called sellers.

Next are the acquiring lenders, also called buyers. Many mortgage companies both originate loans and sell (or keep) them, as well as purchase them from other originators. And, there are also buyers who do not originate loans themselves, but only buy them from others. One such company is EMC Mortgage Corporation, owned by Bear Stearns.

These buyers will usually securitize the loans as investments to be bought and sold in the investment marketplace; you have probably heard of “mortgage-backed securities”. Many times the buyers will require the sellers of the loan to warrant them against default by the borrower for a certain period of time.

The borrower is a key constituent, without whom there would be no need for a mortgage industry or any news pertaining to it. In the subprime market, the borrower usually has less-than-great – and even bad – credit. The borrower’s role is to get the loan, and in the case of the subprime failure scenario, to default on it. After default follows foreclosure.

When a securitized loan goes south, there is a lot of stuff that happens. One thing is that the security that people (end investors) have invested in when the loan is gets affected negatively. Also, the buyer of the loan will go after the seller to repurchase it if they can. Some companies like EMC are very judicious in their agreements with thier sellers as well as in the enforcement thereof. Many sellers (Option One is just one of dozens or hundreds in the past year or so) go out of business when faced with having to honor their representations and warrants that the loans they sold would be “good” for a certain period of time.

Now for a little of my own analysis. It is just a layman’s opinion; free, so take it for what it is worth… On slow news days the media is not too picky in finding something to write about. They would just as soon tweak a press release to look like news as actually pursue facts to report the truth.

Then there is you, me, and everyone else. In my opinion, whatever problems there are in the subprime mortgage industry are relatively limited and will take care of themselves in time. I believe that perhaps many large investment banks who deal in subprime mortgage securities might have been a little bit greedy and gotten lax in their business policies and are now starting to pay the price. Several big investment banks such as Lehman Brothers, Goldman Sachs, and Bear Stearns reported record earnings in 2006. Now following on, we are seeing negative reports about the[securitized] subprime mortgage industry. Maybe there is some correlation, and maybe for some more than others.

I also believe that a lot of the reports of subprime problems could also be used as an excuse by some companies to cover up other non-related mistakes and industry difficulties. For example, if the auto or airline industries start having problems, I would be very careful before believing that the problems were caused by the subprime mortgage industry. The same goes for housing starts and economic growth in general. The subprime mortgage market is reasonably finite, but is too often used as an excuse instead of a simple “we just don’t know”.

In concluding with my very brief blog post, I must agree with Ben Stein and Jerry Bowyer:

Regards,

Stephen Dunbar

“How could they do that?” you ask.

It can occur when your own insurance company drops you or you otherwise fail to get your own insurance. The terms are spelled out in the middle of the 30 page document you signed at closing when you purchased your property.

It happened to me one year. It was a very bad insurance year for me. I had 5 different insurance companies for various reasons (another story for another time). One of them was placed by my lender upon notification from the insurer that I was no longer covered. The cost was over $3,000 per year. That is 300% of the amount I am paying now – for the same house!

Placed insurance is not a good thing. Not only is it a higher cost, but the coverage is pitiful. It provides nothing for the benefit of the owner and pays the lender in the case of a fire or other severe loss or damage. Likely your lender will begin billing you separately after a few months; or you might start receiving a bill from the insurance company itself. Otherwise, if they start rolling the insurance into your mortgage balance for you to pay at the end, it could add years to the life of your loan as well as add tens of thousands of dollars to what you would have paid my maintaining your own insurance.

Avoid placed insurance by being proactive on your renewals or new policies, and by keeping your credit clean. Unfortunately, credit glitches and prior claims and rumors of claims are used against you.

Let me just say that despite the bombardment with offers from all sorts of banks and mortgage companies with offers to refinance – that I usually ignore – I would have to say that now is one of the best times in a long time to check it out. Even though I refinanced only 2 and a half years ago, my mortgage company keeps sending me offer notices. I have called them twice, only to find out that they cannot beat the deal I already have…

Be wary of simply getting a better base rate. That does not always mean a better deal. If you end up having to pay origination fees or closing costs, those end up getting financed as well. So, you might end up with a lower APR, but you could end up with a higher effective interest rate. One simple little trick I do is this… I add up all the payments I would have to make between now and my payoff date for my current loan, and compare it to the sum of every single dime I would have to pay between now and the would-be new payoff date. Then I ask, “which is less?”

Many sales people for loans (you might also call them loan officers, among other things), like to sort of trick the borrower by asking, “what do you want your monthly payments to be”, or “how long do you want your loan term to be”. Then they proceed to meet your single-specified criteria while at the same time putting together the highest cost loan package they can get away with in order to get the biggest commission they possibly can. Car salesmen are among the worst in this. Many times my blood was sent to boiling when the salesman ignored my clearly-stated criteria of “best rate with lowest absolute payout over the life of the loan”, and instead kept asking how much I wanted my monthly payments to be. Yes, he would love to jack up the interest rate and extend the loan term and get a financing bonus in addition to his sales commission.

All I am saying is, be informed. Be armed with information to protect yourself, and don’t worry about hurting a mortgage officer’s or a car salesman’s feelings by seeking to get the best deal for yourself. Take advantage of some of the free financial calculators here at LoanQuotes.com. And don’t be discouraged by my words of caution. There are lots of good and reputable lenders out there. In fact, we’d like to introduce you to some ourselves right here.

Happy financing!

Stephen Dunbar

If you are thinking about getting mortgage quotes for a home purchase or refinance – or any other type of loan quotes – now is a good time.

Don’t worry, the uncertainty in the economy is not over. With the pains that Britian’s Northern Rock Bank is feeling with withdrawal runs on it, there will be much more. The addage that misery loves company exists for a reason.

Talk about bank bailouts abounds. And there has been talk about bailing out lenders as well. Regardless of whether in the United States or in the UK, I would not hold my breath for either. As long as capitalism and free market economies are hoped to endure, bailouts should be kept off the table (or at least locked up in an air-tight vault). However, that is not to say that assistance might not be a viable solution.

In the case of individual lenders, lending institutions should make efforts to put procedures in place to review and revise [within reason] loan arrangements to make the borrower successful in paying back their loan. That by no means means forgiving the loan, but rather amending the terms in regards to lightening up the interest somewhat or forgiving late payment penalties.

Often I hear people say with great skepticism that the mortgage companies want their borrowers to fail in making their payments so they can foreclose on them and take their homes and then resell them for a profit. This however is not the case for any lender who wants to make money or stay in business. In fact, I have only ever heard of one company that tried it, and they got their butts sued off.

Instead, lenders are successful when their borrowers are successful. If you find yourself in a pinch in regards to making payments, then you will do well to pro-actively contact your mortgage company or bank and discuss matters with them. In working their long list of troubled loans, they would prefer to note your account as a “special plan”. That way they can sick their attorneys on the borrowers of the other loans who did not call in.

Not to worry, you are not alone. In fact I have been their myself in certain borrowing situations. And I can honestly say it is a phone call well spent.

Best Regards,

Stephen Dunbar

Meanwhile, another type of storm rages in the financial markets. Though I stand by my assertion that the subprime mortgage market is [way] overly blamed in general, that is not to say that the mortgage industry as a whole is not a factor in the turmoil – especially in light of Countrywide’s announcment that they borrowed $12 billion to finance their operational expenses. (As a side note, it sounds a little ironic that a megalender has to do so much borrowing. However, that is just part of the business).

The market is up one day, and down the next – perhaps with a range of 400 points on the DOW. That might be a lot in terms of absolute numbers. But when you consider it as a percentage, it’s really not any more extreme than times in the past with lower absolute numbers.

It is my belief that what does make the ride all the more wild these days is the fact that the media is reporting on it like crazy. And, with international markets tied together more than ever, there are more parties to react. More reporting, more reacting. More reacting, more reporting. People are “sense”-ational (as in affected by feelings), and the media thrives on sensationalism. The problem is that the situation lends itself to being self perpetuating. That’s what fear and paranoia do.

Don’t mistake my skepticism of the reported causes of the market problems for denial that there are problems. There are indeed problems, to be sure. And I would agree to a great extent that credit has a lot to do with it. There are lots of people now who cannot pay back loans – the highest mortgage default rate in 30 years! Among some of those borrowers I would imagine are plenty of home builders who borrowed on speculation. In fast growth areas in Texas, Nevada, and Arizona, home buyers would bypass pre-owned homes to buy new ones across the highway for the same price. This hurt the sellers of those existing homes, who in their own credit crunch, realized they needed to downsize but instead got caught in foreclosure. At the same time builders were encouraged to build away. Naturally, this is sustainable for only so long.

To me it is reminiscent of the Internet bubble of 2000 and the following years. Greed and investing excitement led to inflating values and increased investing activity. Now, like then, we are seeing the waiter bring the bill. And, this time, like last time, we will see the market correct itself. Most fans and players will emerge stronger. And, some will be injured severely or will be ejected from the game. Same story, different characters.

Oh, and by the way, you are hearing this from one of those “severely injured” in the Internet bubble.

Be of good cheer!