SPENDonLIFE

Friday Grab Bag: Long Arm of the Law Edition

Carrie Davis — Fri, 20 Nov 2009 12:57:26 -0500

It's Friday again, and that means it's time for the weekly SpendOnLife grab bag! This week we focus on Congress' Go-Go-Gadget arm that is reaching out further and further to protect consumers from the big bad financial industry. It started with the CARD Act, but now extends to regulating debit card fees, creating a new financial protection agency, and requiring full disclosure when data breaches happen.

I'm all for keeping credit card companies in check, but at what point do we say enough government involvement is enough? At what point must consumers be expected to fend for ourselves? After all, we don't want to use the money we save on credit card fees to simply be transferred into Uncle Sam's pockets come tax time.

Here are a few major initiatives headed through Congress now:

Federal Reserve to ban overdraft fees

The Fed will prohibit banks from charging overdraft fees on ATM and debit cards, beginning in July of next year. Unless a customer has explicitly agreed to pay extra for the privilege of exceeding an account balance, the bank will no longer be able to charge one. As Fed Chairman Ben Bernanke says, "The final overdraft rules represent an important step forward in consumer protection." In addition to this edict from the Fed, two separate bills are working their way through Congress to restrict bank overdraft fees. You can view those bills here and here.

The Consumer Financial Protection Agency of 2009

This newly created agency would continue work where the CARD Act left off. The creation of a financial watchdog agency was originally conceived by Elizabeth Warren back in 2007, when the sub-prime mortgages started to fall like dominoes. The proposed bill for a Consumer Financial Protection Agency (or CFPA) was introduced to Congress this past July. This agency would protect consumers from deceptive practices from the mortgage, credit, and banking industry. Those against the bill say that there are already plenty of laws in place to protect consumers; do we really need to create a new group that may actually bring about more foul play from the financial industry (as the CARD Act has)?

Comes down to party lines

We all know that credit card companies have been implementing blatant interest rate hikes in anticipation of having their hands tied by the CARD Act next year. So Senator Chris Dodd (D-Conn) proposed freezing interest rate and fee hikes now, until the full protection of the CARD Act kicks in. When it came time for a vote, Senator Thad Cochran (R-Miss) stood up to say, "On behalf of several senators on this side of the aisle, I object." And that was that.

National Data-Breach Notification Bill in the works

This newly proposed bill would require any business engaged in interstate commerce (including government agencies) whose sensitive data has been breached to notify all persons affected, as soon as possible. Data breaches occur when hackers get a hold of a company's sensitive and personal data they store from their customers, like what happened to Heartland. Once these hackers have millions of credit card number, names, and other personal information, they can sell them on the black market to other identity thieves. Those whose data was stolen run the high risk of a wrecked credit rating or fraudulent credit card charges. This bill requires companies to notify you immediately if your sensitive data is no longer safe so you can have time to do something about it, such as enroll in a credit monitoring service or be more vigilant for fraudulent activity on your bank statements.

Drama over Federal Reserve regional bank presidents

Should Congress get involved in choosing Federal Reserve bank presidents? Currently, private-sector banks choose two-thirds of presidents, and the Fed’s Washington-based governors choose one-third. Says a former Fed official: "The way the board members of the regional banks are chosen is really an anachronism" dating back to 1913 when the law that created the Federal Reserve was passed. "I don’t see any great danger in modernizing it." Many predict that this issue will become an intensely heated battle over the next few months.

Ron Paul's "Audit the Fed" Bill making progress

Congressman Paul's bill would give the Government Accountability Office the power to conduct a thorough audit of the Fed's entire $2 trillion balance sheet to see exactly what it’s doing with taxpayer money. The Federal Reserve Transparency Act of 2009 (H.R. 1207) will go to vote shortly after the Thanksgiving holiday.

72% of U.S. Adults Fear Online Identity Theft

Carrie Davis — Thu, 19 Nov 2009 10:38:07 -0500

A recent ABC News / Washington Post poll found that seven in 10 adults are worried about falling victim to online identity theft.

While technology and the internet provide convenience, most people feel that convenience comes with a price - namely, privacy and security. Here are some of the poll's findings:

57% of American adults feel that the internet greatly diminishes personal privacy (up from 42% in 2005 and 38% in 2000).

72% worry that their personal information could be stolen online.

84% think businesses should do more to protect customers' private information.

As consumers hear more and more reports about data breaches in which fraudsters gain unauthorized access to their information, privacy fears swell. Many polled expressed concern about the transfer of their private data due to recent bank mergers.

Interestingly, identity theft numbers are down this year, indicating the increased fear is unwarranted. 22% polled said they had had their credit card stolen or used to make unauthorized transactions - the exact same percentage from 2005. Granted, 22% is a huge number of ID theft victims, but at least it hasn't grown in the past 4 years.

For more facts and figures, visit our Official Identity Theft Statistics page.

Denied for a Home Loan Mod...Is Foreclosure Next?!

LaToya Irby — Mon, 16 Nov 2009 12:13:46 -0500

We recently received a question from a reader that we researched and wanted to share our answer on the blog. We think it’s good information for anyone who has been turned down for a home loan modification.

Q: If I'm turned down for a home modification, can the bank take my home (because my credit score is now lower and my debt is higher than when I bought my home) even if I'm making my payments?

A: As long as you’re current on your mortgage payments, the lender can’t foreclose on your home, even if your credit score has dropped and your loan is "upside down." (An upside down loan means that your mortgage loan is higher than the value of your property.)

Why modifications are denied

There’s a high re-default rate on loan modifications and your modification might be denied if you make too much money, your mortgage has not defaulted enough, or if you’re currently out of work. The government now requires banks to tell you why your loan modification was not approved.

When a bank can foreclose on a property

Whether (and when) your lender can foreclose on your home depends on your state’s laws and whether you’re behind on your payments. In some states, foreclosure proceedings can begin after the first late payment. But, it’s more common that the process starts after three months of missed payments.

Foreclosure won’t take you by surprise. Before your home is foreclosed, you’ll receive a Notice of Default from your bank. After you get this notice, you generally have about three months to bring your loan current before your lender sends the Notice of Sale. After this notice, your home is auctioned off and the deed is given to the higher bidder.

If you’re already behind on your payments and the loan modification falls through, you have some other options:

Repayment plans

The lender may put you on a repayment plan that allows you to catch up on your defaulted payments. For this to work, you need to be able to pay your regular mortgage payment and the catch-up amount. For example, if you’re behind $2,400, your lender may let you add $200 to your mortgage payment for 12 months to catch up.

Refinancing

Refinancing is an option. When you refinance your loan, your missed payments are added back into the loan and your payments are recalculated. Unfortunately, you may have a hard time convincing your lender to refinance your loan if your credit score has dropped.

Declaring bankruptcy to avoid foreclosure

Finally, you may be able to use Chapter 13 bankruptcy to keep your home. Filing bankruptcy would stop the foreclosure process and require the lender to work out a five-year repayment plan that would allow you to catch up on your defaulted payments. You would still responsible for making your normal mortgage payments.

Of course no one wants to lose their home, but you may have to walk away from it if the situation gets worse. You can sell your home and use the proceeds to pay off your mortgage. Your lender might allow temporarily stop or reduce your payments while your home is on the market. Since your mortgage is higher than your home’s value, you might have to do a short sale in which the lender agrees to forgive the debt and accept the lower payment.

Dealing with and avoiding foreclosure can be difficult. It’s good to be proactive and do things like apply for a loan modification to avoid the foreclosure process.

Identity Theft Protection Guide

LaToya Irby — Fri, 13 Nov 2009 12:27:19 -0500

Identity theft is a crime that is often difficult to detect and even more difficult to recover from. For several years, identity theft remained the fastest growing crime in America. Only recently has its growth slowed slightly, but it’s still estimated that millions of people are identity theft victims every year.

Thieves continue to find increasingly clever ways to steal your personal information. They steal your mail, go through your trash, and even snatch your wallet when you’re not looking. Some thieves use electronic devices to steal your credit card information in legitimate transactions. Other thieves hack into the computer systems of companies you’ve done business with and take your personal information.

There are some things you can do on your own to detect and prevent identity theft. For example, checking your credit reports at least once a year will give you a heads-up on any suspicious accounts that have been created in your name. The federal government has worked with the credit bureaus (Equifax, Experian, and TransUnion) to create www.annualcreditreport.com, a central site you can use to receive a free, government-granted credit report each year.

You may decide to go beyond checking your free credit reports to protect your identity. Here is a list of identity theft services you can use to help prevent identity theft and to clear your name in the unfortunate event that you become a victim.

Credit freeze products

A credit report security freeze offers the most identity theft protection of any solution out there. With a credit freeze, businesses cannot check your credit report because it’s locked. Therefore, would-be thieves couldn’t open new accounts in your name because the banks can’t review your credit to approve the application. When you need to make applications for credit, you can temporarily unlock your credit report by giving a password or PIN to the credit bureaus.

You can set up a credit report freeze directly with the credit bureaus. Because the process can be cumbersome, there are some companies that provide credit freezing services for you.

If you hire a company to freeze your credit report, make sure you understand the cost of the service, any additional services the company provides, and how you can cancel the service. Ask how you will be able to confirm that the credit freeze was successful.

Understand whether the company offers insurance in the event that your identity is stolen even though your credit was frozen.

Credit freezes aren’t 100% foolproof because, in rare cases, credit card accounts are given without a credit check.

Credit monitoring services

Credit monitoring services continuously check your credit report and alert you when there is suspicious activity on your credit report. For example, you may be notified if a new inquiry is placed on your credit report, if a new account is opened in your name, or if an account balance increases by a certain amount. These are all signs that your identity has been compromised.

You can monitor your credit at a single credit bureau or at all three credit bureaus. For complete protection, your credit monitoring service should check all three of your credit reports. This is important since some businesses only report to one of the credit bureaus and the bureaus don’t share information.

When you’re choosing a credit monitoring service, you should check all the benefits offered and compare them among other services.

Credit monitoring services don’t always alert you as soon as identity theft happens, since it takes a few days to a few weeks for information to show up on your credit report. Be advised that credit monitoring only allows you to react to identity theft that has already occurred. It doesn’t necessarily allow you to keep identity theft from happening. But by cluing you into account-opening identity theft as early as possible, you can then take the necessary steps to stop it before too much damage is done.

Data sweep services

If your personal information makes it onto the internet, your risk of identity theft is greatly increased. Data sweep companies comb the internet, checking to see if your personal information has been published and potentially traded on black market “carding” sites. You’ll receive an alert letting you know if your social security number or financial records have been put on the internet. The sooner you know about this information has been published, the sooner you can begin taking steps to have it taken down.

Identity monitoring

Identity monitoring provides all the features of credit monitoring plus additional services that help you prevent identity theft. For example, identity monitoring might offer additional notifications for things like address changes, account information posted on the internet, and other symptoms of identity theft.

When you’re choosing an identity monitoring service, you want to be notified of as many signs of theft as possible and as quickly as possible.

Identity theft insurance

Identity theft insurance can be purchased as part of identity monitoring services, as a stand-alone policy, or as an addition to another type of policy, like a homeowner’s insurance policy. Depending on the agency, identity theft insurance covers different things. The insurance might cover:

Lost wages due to time you take off to handle the theft,
Legal fees you pay to recover your name,
Other out-of-pocket expenses you pay to help restore your identity.

When you’re shopping for identity theft insurance, make sure you know what’s covered, the coverage limits, and the costs. Ask for the amount of the monthly premium and the deductible. Avoid policies with high deductibles because the cost might exceed what you’d spend on identity theft expenses. A 2007 survey by PrivacyRights.org, reveals that the average identity theft victim spends just more than $740 to clear their name. Keep that figure in mind as you compare deductibles and coverage limits for identity theft insurance.

Secure payment agents

It’s becoming more common to do business over the internet. Most internet transactions require sensitive personal and financial information that would allow scammers to steal your identity.

A secure payment agent (SPA) is a type of service that cloaks your personal information when you’re doing business over the internet. For example, when you use a credit card for payment, the service uses a temporary credit card number that expires after you’ve used it. Login name and email address are also temporary and discarded after use. Would-be thieves would’t be able to trace this stolen information back to you.

When you’re shopping for a secure payment agent, one of the primary things you should consider is the cost. You should also ask these questions:

How many secure transactions can you make each month?
How can you be sure the transaction was successful?
Is there a limit on transaction amounts?
Does the SPA store your personal information? If so, what measures does it take to keep your information safe?
Can you manage usernames and passwords via the SPA?
Can you access your account online?
How can you cancel the service?
Can you make payments using your credit card, debit card, and/or checking account?
Do you need to download additional software to your computer for the SPA to work?

Victim resolution

Part of the identity theft recovery process includes clearing your name from fraudulent accounts that were created without your permission.

Victim resolution services are typically add-ons to other identity theft services. These services help identity theft victims clear their name from fraudulent accounts that have been created. They can tell you what documents you need to help prove these accounts don’t belong to you.

Check around before you hire a victim resolution service because there may be a local non-profit agency that will help you with the resolution process at no charge.

If you decide to hire a company to help you through the resolution process, consider these things:

The cost of the service
The services provided
The types of identity theft covered
Whether the service covers accounts created before the contract was created
How you can cancel the policy
Whether you can receive a refund if you are unsatisfied with the results
How will the company restore your name

Protecting your personal data

Whether you decide to pay for an identity theft protection service, there are still some steps you can take on your own to help prevent identity theft.

Keep your personal identifying and financial information safe. This includes your social security number, credit card number, PIN, and checking account number.
Shred your billing statements and unused credit cards rather than tossing them directly into the trash.
Check your billing statement each month. Contact your bank or credit card company immediately if you notice any suspicious and unexplained credit card charges.
Get your credit report at least once a year. Three times a year is better. You can order one of your free credit reports every four months to watch your credit throughout the year.

For more information, download the free SpendOnLife Identity Theft Recovery Kit.

What Can a Credit Counselor Really Do?

Carrie Davis — Wed, 11 Nov 2009 12:32:25 -0500

This guest post comes from Thomas J. Fox. Thomas is the Community Outreach Director at Cambridge Credit Counseling Corp. He is an AFCPE-accredited credit counselor and IFL Certified Educator in Personal Finance who, over the last decade, has created a number of guidebooks, DVDs and educational curricula designed to educate young people and low-income individuals about personal finance. Mr. Fox also co-hosts Money America, a weekly radio program that airs on WAIC 91.9 FM.

If you’re like most Americans, there are probably a lot of things you wish you knew before our current recession hit. Perhaps you had too much debt, or not enough savings, and as a result found the economic downturn especially difficult to navigate. Don't worry - you're not alone. Most Americans are guilty on both counts. Before the recession hit, our country held almost $1 trillion in credit card debt, and our personal savings rate had hit an all-time low of negative 2.7%. While we all wait for a time machine to be invented, we should use this latest crisis as an opportunity to learn how to make better financial decisions.

Financial education

Everyone agrees that a well-rounded education is the foundation of success, so it’s more than a little surprising that only seven states require courses in personal finance. Many experts have cited this oversight as a contributor to the economic crisis. Why? Because many people were simply unprepared to deal with the choices they faced. Should I rent or purchase a home? If I buy, what kind of mortgage should I get? What’s the best way to save for my child’s college tuition? Should I settle my debts, or pay them down responsibly? How much will I need for retirement? The good news is there are organizations out there that can provide you with the financial knowledge you need to answer these and a host of other tough questions, and they’re only a phone call away.

Credit counseling

Many people mistakenly think that credit counseling agencies simply provide debt management plans, but, in fact, the more established organizations generally offer a variety of other programs, including housing counseling – a service that a lot of displaced homeowners wish they had used before they signed up for an exotic mortgage they couldn’t really afford. The most reputable agencies are staffed by certified credit counselors who offer free financial assessments and create personal action plans based on your unique circumstances. A counselor can show you how to create a workable budget, deal responsibly with decreases or increases in your monthly income, communicate effectively with bill collectors and, if need be, whether you should investigate filing for bankruptcy. Most of all, counselors provide people with the tools they need to make more informed decisions.

At the risk of sounding like a commercial, let me use my agency, Cambridge Credit Counseling, as an example. The people who call us, roughly 32,000 per year, are each offered a free examination of their finances, a personalized plan based on the outcome of their counseling sessions, a copy of our Learn Now or Pay Later financial guide, and a copy of our DVD, Budgeting with the Connors. Other reputable credit counseling agencies offer similar products at no cost to consumers - they do so because their mission is to help.

Can’t go it alone? No problem

Millions of Americans find it difficult to develop a workable financial plan. That’s not a put-down in any way - it’s just not within their expertise. And for those who’ve seen their income significantly reduced and been hit by increases in their minimum monthly credit card payments – a terrible double whammy, there’s a lot to lose by waiting for things to turn around. The good news is that credit counseling agencies can usually help in these situations, too. Depending on your creditors’ policies, you may be eligible for participation in a debt management program, which typically includes a reduction in interest rates and fees, allowing you to afford your monthly payments and pay down your accounts over time, generally 3-5 years. In addition, you’ll be provided with ongoing educational counseling and support throughout your enrollment, helping you manage your finances more effectively once the debt management program is complete.

Whether you’re trying to understand a particular aspect of your personal finances or attempting to deal with unmanageable levels of indebtedness, credit counselors can help. Best of all, non-profit credit counseling agencies provide their services free to the public. Before seeking costly remedies for your financial problems or taking steps that may significantly damage your credit, take the time to speak with a professional who has your best interests in mind.

Boom and Bust, Spend and Save

Carrie Davis — Mon, 09 Nov 2009 15:55:41 -0500

We asked our friends over at BillShrink to share their perspective on American credit card spending habits. Because they help people save money, in part by suggesting credit cards with lower interest rates, they have access to all kinds of data such as average credit card balances and interest rates. We thought what they have to say on Americans' spending and saving habits (coupled with their top credit card pics) is pretty interesting, and think you will too.

In the dot-com heyday of the 1990s, when credit flowed freer than the Cristal at a P. Diddy party, the personal savings rate in America sank, hitting a historic 0.9% low in October 2001.

Eight years later, our economic situation has drastically reversed, and our spending and savings habits have undergone a corresponding shift. As foreclosures mount, jobs are eliminated, and credit tightens, we Americans are spending less and saving more.

Over here at BillShrink, we've definitely noted an increase in financially sound behavior. Over the past nine months, the credit card debt carried by the average BillShrink user has fallen 8%, from $7,427 to $6,812. The number of BillShrink users who pay off their credit cards each month has also increased over time by about 10%, from 46.7% to 55.3%.

Give your big balance a break

Still, if you’re like me, you have a hefty outstanding card balance and the interest paid on that amount irks me every month. Put your card to the test and see if there are better credit card offers out there. Forget about loyalty: switch to a credit card with a better interest rate so you can focus on paying down the balance.

Two of my favorite cards right now are from Bank of America:

Bank of America’s Total Merrill Cash Back, which has a 1.9% introductory APR on balance transfers for 12 months, 9.99% interest on purchases and has no annual fee. (This card will save me $2300 in interest over the next year if I continue to only pay down a few hundred dollars a month).
Another one to lighten your load is B of A’s Accelerated Cash Rewards with a 0% introductory APR for 10 months, a 12.99% variable rate on purchases and no annual fee.

Join the trend to cut down your spending, but start by making sure you’re not paying unnecessary interest. Save your allegiance for where it really counts and maybe soon you can join that group of Americans who pay down their credit card each month!

SmartyPig Review: My Two Cents

Carrie Davis — Thu, 05 Nov 2009 13:02:50 -0500

I learned about SmartyPig at the Finovate conference, and wanted to try the online savings account for myself. I currently have an ING savings account and think I do a pretty good job socking some funds away each month for a rainy day, but you can always save more, right?

Based on the demonstration at the conference, SmartyPig seemed like a fun way to save cash for specific goals. Here's how it works, and why it's different from other online saving tools.

The sign-up process

When you sign-up with SmartyPig, you are also really signing up for a new savings account through their banking partner, West Bank. This West Bank savings account is currently yielding a 2.01% interest rate (better than the 1.30% ING is currently offering)!

Once you have a SmartyPig account, you'll need to link it to an existing checking account. SmartyPig requires that you transfer a minimum of $25 from your checking account to your new savings account right away, so you have at least a small balance to start.

You can modify your security and account settings, including choosing an avatar for yourself. SmartyPig has plenty of piggy personalities to select from, or you can upload your own.

Setting goals

At SmartyPig, you list out your savings goals and it tells you how much you need to put aside each month to reach those goals. Sure, anyone who passed a high school math class can calculate the same thing, but can they give you the cute piggy graphics and visual motivation you need to actually follow through? And more importantly, will they autodraft that necessary amount from your checking account each month?

I decided my first goal on SmartyPig would be to save up for a Vegas trip I'm taking next June (safely assuming my winnings from the blackjack table won't cover the costs of the weekend). I figure to really go in style I'll need two grand. Smarty Pig reminded me that a $2000 trip means saving $245 each month. Yikes! Somehow, $245 drafted from my checking account for the next eight months seems like a heck of a lot more than just putting $2000 on my credit card and worrying about it later. This might be Smarty Pig's biggest strength: it forced me to re-evaluate how much something is really worth to me. If I'm not willing to part with the funds each month ahead of time, maybe I should reconsider my purchasing decisions.

I decided to lower my Vegas goal to $1000, and chose the day of the month I want the $125 autodrafted from my checking account each month. I'll also start looking for ways to cut my trip's costs (cheaper airfare and luck at the slots will certainly help).

Going public

Perhaps the most unique thing about SmartyPig is that it can interact with your Facebook and Twitter account, if you want it to. The SmartyPig Share tool alerts your friends and family to your savings progress and even solicits funds from them. You can create a widget to place on 28 various social networks of your choosing. This widget can either ask for friends and family to donate money to your savings goals or (if you think that's kind of tacky) simply show them your progress. Sharing your goals with others is a great way to help you stay motivated enough to reach them.

The payout

Once you've reached your goals, SmartyPig has a few options for sending your savings back to you. You can opt for a MasterCard with your savings on it, choose a gift card from a list of retailers (this option will add 6% to your amount), or simply transfer your savings back into your checking account.

Site security

Don't let the cuteness and simplicity of the website's design fool you: it has thorough, no-nonsense security in place to keep your account secure. SmartyPig will ask for a strong password, answers to five security questions, and other personal information like your Social Security number when you sign up. In truth, the security seems almost like overkill. Each time I visit the site it wants me to answer security questions, and my sessions time out faster than other online accounts I have with ING, BofA, and Chase. I actually locked myself out of my SmartyPig account by entering the wrong password too many times. Luckily, the customer service was efficient and friendly, and I was back in my account in no time.

Other features

I haven't explored everything yet in SmartyPig, but I did notice the ability to connect your SmartyPig account with other online personal finance managers like Mint and Wesabe. You can also purchase SmartyPig gift cards for friends to get them started on the savings site, too.

Overall, SmartyPig is perfect for those looking for some fun motivation to save towards goals. It is especially great for people who enjoy social networking, but can also just be used as a basic savings account that autodrafts monthly from your checking account. Plus, you can edit or cancel your savings goals at any time, so it really is as flexible as you want it to be. A worthwhile site to check out for long-time penny pinchers and savings newbies alike!

Credit Unions vs. Banks

Carrie Davis — Tue, 03 Nov 2009 11:18:31 -0500

We've gotten a few questions from readers asking about credit unions and how they compare to traditional banks. I personally don't have any accounts with a credit union, probably because I've been so marketed to by major banks that I never thought to approach one. I've heard some credit union customers say the interest rates they get from their credit unions are lower than other places, and some say they are comparable or even higher. Nonetheless, it seems like credit unions deserve a closer look. I asked Paul Brucker from Alliant Credit Union to share his expertise on the subject. Here's what Paul had to say:

"A bank is a for-profit business owned by shareholder investors. A measure of a bank’s success is how much profit it makes from its customers and distributes to its shareholders. To maximize profits, banks pay lower rates on deposits, charge higher rates on loans, and assess more and higher fees. Credit unions operate on a totally different principle.

For one thing, when you join a credit union, you’re not a customer – you’re a member and an owner. Credit unions are not-for-profit organizations owned and operated for the benefit of their members. In a credit union, all income after expenses and capital reserves is distributed to its members. In fact, a credit union’s mission is to maximize the returns to its members through high savings dividends, low loan rates and low fees.

In short, while banks take money from their customers, credit unions, like Alliant, make money for their members."

Sounds good to me. What do you think? Do you prefer a credit union over a bank?

About Alliant Credit Union: Alliant was founded in 1935, shortly after Franklin D. Roosevelt signed the Federal Credit Union Act into law. It serves more than 250,000 members and manages over $6.7 bilion in assets, making it the seventh largest credit union in the nation based on asset size. To learn more about Alliant, their rates, or to apply for membership, visit www.alliantcreditunion.org.

Guide to Secured vs. Unsecured Debt

LaToya Irby — Mon, 02 Nov 2009 12:01:15 -0500

Many people don’t realize it, but not all debts are the same. There are two basic types of debt – secured debt and unsecured debt. At the most basic level, the difference between the two is that one type of debt is tied to a piece of property while the other type is not.

Secured debt

Secured debt is debt that is "secured" by an asset. The asset is used as collateral for the debt and can be seized by the lender if you default on the terms. Common types of secured debt are mortgage loans, which are secured by houses, and auto loans, which are secured by cars. If you fall behind on your mortgage or auto loan payments, your lender can foreclose on your home or repossess your car.

Unsecured debt

Unsecured debt is the opposite of secured debt. It’s debt that isn’t secured by an asset. With an unsecured loan, the lender’s only guarantee of loan repayment is your signature on the loan agreement. Most credit cards are a type of unsecured debt.

If you fall behind on unsecured loan payments, the lender has fewer choices for recourse. It can report your delinquent payments to the credit bureaus, thereby damaging your credit record. It can also turn your debt over to a debt collector or sue you for the amount owed. But there is no collateral that can be automatically seized to cover any of the loan losses.

Is one better than the other?

Secured and unsecured debts have different purposes, so it’s nearly impossible to say that one is better than the other. Because there is no collateral associated with unsecured debt, lenders rely on your credit history to approve you for an unsecured loan. If you have a poor credit history, you’ll have a hard time qualifying for an unsecured loan. If you are approved, you’ll likely have a higher interest rate than a secured loan for the same amount. Not only that, unsecured loan amounts are typically limited. Many lenders will lend up to $25,000 on an unsecured loan.

In some ways, an unsecured loan is more attractive since the lender can’t (easily) take your property if you fall behind on your loan payments. On the other hand, when you default on a secured loan, you’ll lose the property, get a bad credit rating, and could even end up owing the lender a deficiency judgment. A deficiency judgment is the difference between the amount you owed on your loan and the amount your lender recovered from your repossessed asset.

Secured and unsecured credit cards

When it comes to credit cards, there are secured and unsecured versions. Unsecured credit cards are more prevalent. In fact, many people don’t know there’s such a thing as a secured credit card. Secured credit cards, which require a security deposit to be made against the card’s credit limit, are less common.

A secured credit card is a good option for people who don’t qualify for unsecured credit cards either because they don’t have sufficient credit history or they have a bad credit history. Having a secured credit card can help build a credit and even rebuild a bad credit history because it offers a chance to gain positive credit history. That’s if the secured credit card issuer reports your account to at least one of the three major credit bureaus. So, if you want to use a secured credit card to help rebuild your credit, make sure you get one that will be included on your credit report. Make sure to not carry a balance from month to month on a secured credit card, though, because the interest rates tend to be higher than on an unsecured card.

The Haunting of Credit Mistakes Past

Carrie Davis — Fri, 30 Oct 2009 08:45:16 -0500

Oh the horrors! Credit card balances that make you want to run screaming, debt collectors that call late into the night when you're home alone, identity thieves that are able to suck the very soul right out of you...It's Halloween folks, and at SpendOnLife, that means sharing some classic (and financially horrifying) ghost stories.

The Lady of the Lake...who couldn't stop shopping

It's true, she exists. You may see her walking that desolate stretch of road along the lake late at night, weighed down with shopping bags so heavy they could sink her to the bottom of the water. She's on foot because her car was repossessed (she spent all her money on clothes instead of car payments). But did she have a choice? No! Not when Nordstrom was having THE sale of the year, and deals abounded in every corner of the store. She may be walking in a torn chiffon wedding dress now, but just wait until she changes into the Therapy outfits she bought! Of course, she has nowhere to change into them...her house was foreclosed on long ago. And so she walks from the mall to the lake each night, purchases as heavy as iron-forged chains hanging from her ghostly arms.

The Tell-Tale Debt

He thought ignoring the bills would make them go away. The past due notices piled up, and yet he did not pay. No, instead he cleverly peeled back the floorboards and placed the bills inside, where no one could ever find them. The debt collectors came to the door. He thought he could tell a convincing enough tale to make them disappear. But the planks of the floor kept creaking, something tapping at them from below. He could stand it no more! Like a desperate man, he began ripping at the wooden boards, until he revealed the past-due debts that weighed so heavy on his heart and would not simply disappear. They continue to haunt his credit report to this day.

The Possessed Identity

Something beyond comprehension is happening to Regan. She's not feeling quite like herself lately. She's receiving notices of past-due payments on loans and credit cards of which she has no recollection of applying. A Bowflex listed on her credit card statement? She has no need for one of those, especially considering the newfound flexibility in her neck and levitation abilities. It's as though demons have invaded her identity and are using her good credit for their own devices. How can she exorcise these evil spirits once they've gotten a hold of her Social Security number, date of birth, and mother's maiden name?! If you listen close enough, you can still hear her cries: "Be gone, identity thieves! I command you!"

For more Halloween money stories (treats only, no tricks, we promise!) check out PT Money's comprehensive list. Have a Happy Hallow's Eve from all of us at SpendOnLife!!