Finance & Loans

Plan a strategy to get ahead of debt

According to the U.S. Census Bureau, more than 69 percent of Americans carry some sort of debt whether it is credit card debt or student loan debt. It is a vicious circle that requires some pre-planning on your part to get ahead of debt.

Make a monthly budget and stick to it: You should not spend more than you earn a month. Preparing a budget help you to understand where money is going and help you to cut corners to save and pay off burdensome debt.

Negotiate your credit card and revolving debt: Credit card companies are known to charge outrageous interest rates based on many factors. You can negotiate your interest rate with your credit card companies. If a new offer comes with a lower interest rate for balance transfer, use that to get a lower rate or negotiate with your current credit card company using the new offer. However, before accepting an offer for lower interest rate for balance transfer, consider other fees associated with the transfer.

Stop charging new purchases to your cards: This is where your monthly budget and sticking to it comes handy. When you pay off a card, do not cancel it without considering its impact on your FICO score.

The Housing and Economic Recovery Act of 2008

This article was written by Samuel Phineas Upham

In 2008, a series of poor financial decisions related to mortgages was suddenly coming to light in the worst possible ways. Many lenders had authorized so-called subprime mortgages, which helped buyers to get a home whether their income was sufficient enough to handle the payments or not. Within two years, the rate for subprime mortgages had risen to nearly 20%, well above the historical rate of 8%.

As a result, institutions like Freddie Mac and Fannie Mae started to show signs of collapse. This was not helped by the sudden surge in mortgage delinquencies either. Within a matter of years, the Fed was dealing with a series of poor loans that threatened to lower the US credit rating and destabilize the world financial market.

HERA, or the Housing Economic Recovery Act, was designed to try and restore some faith in these institutions. It guaranteed up to $300 billion in new mortgages at the 30-year fixed rate for subprime, or poor credit, borrowers. The condition was that the lender had to write down the principle loan balance to 90% of the current value. This meant a bit of extra capital, with some assurance that the loan would be paid back.

The act also increased the amount that the Fed could loan to a buyer, from 95% of the home’s value to up to 110%. It also stipulated that buyers would be responsible for a 3.5% down payment, and it barred sellers from financing down payments. The housing market is in recovery, but FHA is still relevant to first-time home buyers of today.

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About the Author: Samuel Phineas Upham is an investor at a family office/hedgefund, where he focuses on special situation illiquid investing. Before this position, Samuel Phineas Upham was working at Morgan Stanley in the Media & Technology group. You may contact Samuel Phineas Upham on his Samuel Phineas Upham website.

The History of Glass-Steagall

This article was written by Phineas Upham

The Glass-Steagall Act is actually comprised of four separate provisions of the Banking Act of 1933. The act is named after the two biggest supporters, Carter Glass of Virgnia, and Representative Henry B. Steagall. The act was the result of Carter Glass’s repeated attempts to pass legislation related to deposit insurance, and the separation of commercial and investment banks.  At one point, his bills were viewed as so controversial that President Roosevelt threatened a veto if they ever reached his desk. However, he did support several provisions designed to protect both banks and consumers.

Eventually, a hybrid form of the bill that supported both small and large banks was passed by Congress in 1933.

The crash of the stock market in 1929 wreaked havoc on the financial system. Roosevelt publicly declared that the financial system had stopped working, and an emergency response was clearly needed after the collapse of more than 9,000 banks in just a few years time.

FDR was working on what we would come to call “The New Deal,” so the act already had some momentum building before it passed. Through Glass-Steagall, the Fed was able to maintain a tighter regulation of the banks belonging to the Federal Reserve System. The act also prohibited the sale of securities by banks, and it created the FDIC insurance that is still in use today.

Unfortunately the act also created restrictions on what banks could underwrite. At the time, this was considered a non-issue, but by the time the stock market crashed in 1929, opinions had changed. The eventual repeal of Glass-Steagall dissolved the separation of commercial and investment banking.

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About the Author: Phineas Upham is an investor at a family office/hedgefund, where he focuses on special situation illiquid investing. Before this position, Phineas Upham was working at Morgan Stanley in the Media & Technology group. You may contact Phineas on his LinedIn page.

Is Chapter 7 bankruptcy right for you?

Chapter 7 of the Title 11 of the United States Code is the most common form of bankruptcy in the country. Many call it the bankruptcy code. It provides for a liquidation process for individuals, individual who own a business and property to file in Federal court for “straight bankruptcy” or liquidation of most types of unsecured debt. The US residents can file for relief in federal court under this provision.

In a Chapter 7 filing, individuals are allowed to keep certain properties such as exempt properties but a property with a lien such as a mortgage is not. Unsecured loans can be easily discharged by the court. However, child support, income taxes less than three years old, student loans, property taxes, and fines imposed by a court are not be discharged by a Chapter 7 filing. A Chapter 7 bankruptcy can stay for 10 years in a credit report (compare this to Chapter 11 bankruptcy that stays only for seven years). Those who want to significantly lower the debt payment may consider Chapter 13 filing instead of Chapter 7 bankruptcy for total debt wipeout. Chapter 13 can also help to bring the mortgage payments current if you are in a foreclosure and save your home.

Re-establishing your credit worthiness

Many face bad credit problems and get their credit messed up. This should not be a distraction to re-establish your credit worthiness again. It will require will power and development of good financial discipline. Keep in mind, there are no quick fixes and it takes time.

Open new accounts and pay them on time. Repaying proves that you are disciplined. Instead of one or two credit lines and carrying a balance more than 50 percent of the credit limit may not help. Multiple cards in smaller amounts could affect positively to re-establish credit worthiness. After a big financial fall, you may find it difficult to get credit again. One way to re-establish is to get help from a friend or relative to co-sign to get store and other credit. If you are unable to obtain credit on your own credit history, you may be able to qualify by securing credit. A bank may issue a credit card with secured savings account. Instead of using your cards heavily for day to day purchases, consider using it in moderation. Also keep the balance as low as possible to help you re-establish your credit worthiness and get a higher FICO score. Check your progress using free credit reports that are offered by many.

What to do if you discover an identity theft

Many of us do not check our credit reports regularly. But an identity theft can change this instantaneously. If you discover an identity theft by checking your credit report, here are few steps you need to take immediately.

• Immediately put a fraud alert with all credit reporting agencies of Equifax, Experian and Trans Union. Traditionally, a posting with one agency is picked up by the others. This step taken will not correct the fraud occurred but at least prevent it going further. This notification also a starting point to work with credit reporting agencies to unwind the fraud.
• In order to deal with credit reporting agencies and to file an affidavit, you need to gather relevant information. A copy of your Social Security card, a copy of your driver’s license or identification card, a copy of the police report and others will help.
• File a police report with your local law enforcement agency.
• Read as much as possible to understand what a theft is and what to do when a theft of your identity occur. The Internet is the best place to find information.
• May need assistance from a CPA and an attorney to investigate damage including fraudulent tax filing and use of your Social Security Number.

The impact of fraud alerts on your credit score

Article submitted by Racmaghreb.

The Internet is riddled with credit card fraud and fraud alerts. Alerts warn card holders as well as lenders that they are at higher risk and to be vigilant and closely monitor financial accounts including bank and credit card accounts. Traditionally, these alerts expire within 90 days says Experian, one of the credit reporting agencies.

Traditionally, fraud alerts do not impact your FICO scores. Many believe that fraud alerts do not go in to the FICO credit scoring system. However an actual fraud on your credit card could impact your credit. A fraudulent charge on your credit card could put you in a bind temporarily resulting late payment charges and lowering your FICO score. A theft could also result in redirecting your bills making you temporarily unable to receive your statements on time. Theft could also empty your bank account putting you in a financial jam for a period of time. Also, fraud alerts could cause denial of credit applications during the time a fraud alert is in effect.

During the period of fraud alert including initial 90 day effective period as well as subsequent fraud alert renewal periods, creditors could ask for additional information before approving a request for credit.

Which debt to pay first?

Experts say that to attack the debt with the highest interest rate first. But there are few factors that you need to consider before you prioritize which debt to pay off first.

Consider paying off the debt with highest interest rate as well as with no tax advantage first. Interest you pay on home mortgage in many cases is tax deductible. On the other hand consumer debt such as credit cards including store credit card interest is not tax deductible for many. If you are a small business owner and you use your credit cards to buy things to pay for your business expenses, your principal and interest may be considered as business expense and therefore, will be accommodated in Schedule C you file for your business.

Some prefer to pay off the lowest balance first regardless of the interest rate. This will have more of a psychological impact than a financial. If it makes you feel happier, pay it off with the knowledge that you still need to concentrate on higher interest rate debt.

If you get one of those low interest credit card offers in the mail, consider transferring some of your higher interest rate to a new lower interest rate card. Watch for any additional expenses.

Death and taxes

Benjamin Franklin once said “in this world nothing can be said to be certain, except death and taxes.” The Federal government’s estate tax exclusion now is at $5.25 million. Many estates are much less than the limit and therefore, many thinks that their beneficiaries can escape from paying estate tax when they die. It may be true for Federal tax purposes but not for state taxes. A total of 21 states and the District of Columbia levy an estate tax. Limits vary among states. The lowest exclusion comes from New Jersey at only $675,000. Many states levy estate tax for estates over $1 million including Massachusetts, Minnesota, New York, and Oregon. It is easy for someone with a sizable estate and a home could fall into the estate tax category. Be mindful that this is the tax on the estate itself that exceeds a certain threshold and it is different from inheritance tax that the person who inherits the estate will be subject to pay.

Many create bypass trusts to maximize each partner’s exclusion amount. Another strategy to use is to gift while you are living subject to annual gift limitations to reduce the size of the estate. Another will be to gift to a charitable organization.

Not all debt is bad

The average American household credit card debt in 2012 is estimated at $15,590. Most credit cards charge a hefty interest rate. Controlling your personal finance is the best way to get out of debt and manage your money wisely.

Not all debt is bad. Home mortgages and student loans are considered good debt. Home mortgage not only allow you to buy your own shelter while giving you a tax break on interest you pay on your mortgage. Additionally, many localities allow a tax break on property taxes you pay on your local and state income tax returns. Student loans on the other hand give you an opportunity to better yourself and interest you pay on your student loan may be tax deductible. Make sure to borrow only the amounts you can afford and shop around for better rates before borrowing. Then there is bad debt too. If you are charging your meals and your vacation to your credit card, this may be a bad habit as well as a bad debt. You should plan a monthly budget including your meals and stick to it without using your credit card to pay for your meals. Same goes with your vacation.

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