Your Money Book

One of the most convenient, but so financially deadly, traps is to have overdraft protection on your chequing account. It allows you to go below zero without fees, or the chance of bouncing a cheque, but comes at a very high price – in a number of ways.

Firstly, an overdraft will almost certainly become a permanent debt, because it now pretends you can go to minus $500 or minus $1,000 – forever. But it’s not something most people really consider “debt.” And it also gets used almost every month, because we never seem to get out of it, kind of like quicksand.

The convenience comes at a high price of around 20% interest. That is one of the biggest reasons banks aggressively sell it. Yes, it does protect you from an NSF charge, but can’t you simply learn that zero in your account is the end of spending, instead of going in the hole over and over again?

About six months ago, I started working with someone, OK, more like bugging him, to get his $1,000 overdraft cut off. But it was, and will be for you, very hard to get yourself out of that hole. A great plan, if you finally want away from this almost permanent debt, is to do it in stages. The plan was to get it down to below $500 and then go to the bank and cut the limit of the overdraft to $500 as well.

That was a great way to assure the overdraft was being reduced and not going up again. Yes, the teller will claim they cannot do that, you have to see a loans officer, etc. That’s nonsense. It’s one press of the button to reduce it. The reason they want you to see a loans officer is because they want to SELL you on keeping it way up there. That’s how they make money! Their job is not to help you, but to help their financial statement. If you get that push back, tell them: Fine – just close the account then. At that point, they’ll blink and cut the overdraft down. It’s YOUR money and you are the customer. It’s what YOU want and not what the bank wants!

US household debt to disposable income is still at 122% as of April. In normal times of the economy and employment levels, anything past 100% isn’t sustainable over an extended period of time. That is, you cannot continuously spend more than you earn. It is a recipe for financial trouble in the long term, and obviously means we can’t save. In Canada, even through the recession, we Canadians kept spending. Our household debt is now 146% of disposable income. We may be more conservative than Americans, we may have lower total debt levels but we’re spending a lot more, over and above what we earn, than our American friends.

On that same issue, the Bank of Canada says that, by 2012, one in 10 households will be spending 40% or more of their household income just paying debt. What does that leave to live on? Already 32% of households have no savings. So it stands to reason that, the more we pay towards our debts, the less money we have to live on, or save.

The National Foundation of Credit Counseling just released a study that, last year, the average person had over $2,000 in unexpected expenses! I keep talking about how critical it is that all of us have a basic emergency fund with two weeks of pay set aside – that’s another reason why. We all know there WILL be an emergency. We just don’t know when, what, or how big it’ll be. What an emergency fund does is to turn a panic and crisis into a minor inconvenience, because we have the money! If not, here we go again…using credit, and thinking that’s a solution, and going further in debt once again. Find a way to have two weeks worth of your pay in an emergency account that you don’t touch for anything else.

According to a company called RealtyTrac, foreclosures in the US, in the first quarter of 2010, are UP 35% over the same time period of 2009. And the credit bureau, Trans Union, found that mortgage arrears are rising, and not falling. In Nevada, 16% of homeowners are in arrears, it’s 15% in Florida, and 11% in Arizona and California.

In Canada, according to a report by the Canadian Association of Accredited Mortgage Professionals, there are about 375,000 people with mortgages who are challenged by their current payments. I don’t know what their definition of challenged means, but it sounds like a problem. If rates increase by just one percent, they expect another half million people could be in trouble. That goes back to what we talked about in the security of a fixed rate, instead of a variable rate mortgage.

On the flight back home yesterday, I read another sick, sad and totally unnecessary story of a family losing their home. But this one is different. A young family had a mortgage on their home and had mortgage life insurance. When the husband died during a traffic accident, financially, the wife and her son should have been OK. But that was not the case, simply because there’s mortgage life insurance in place.

Yes, there is a difference in insurance coverage for our debts. But it’s something most of us would rather not think about. When we do have to deal with it, in the event of a death or serious illness, it will always, always be too late.

One of the big debts most of us choose to insure is our mortgage. But it should never ever be mortgage life insurance.

That type of coverage is convenient, because we just sign up at our mortgage lender, but that coverage only pays off the balance of your mortgage. Essentially, it protects the lender so they get paid, it does not protect the family by giving them any financial freedom, or breathing room with other bills. It’ll give your family a free and clear home, but what good does that do when they have to sell the house right away to raise money for other bills, debts or financial needs?

A much less expensive, and way more flexible policy, is to get an equal amount of term insurance. It’s also for a fixed period of time but now lets your family decide what to do with the money and not the lender. The money is paid to your family. Sure they might pay off the mortgage, but that should be their choice not that of the lender.

What happened to this family in Illinois is that their home was paid off, but they were now forced to sell it to have any money at all to live on. You can bet that was not what the plan was when they paid the overpriced premiums for all those years, thinking they were protected.

Another common insurance for loans is optional accident and sickness insurance. Yes, it’s ALWAYS optional. If you were told different, you were lied to – simple as that.

Most of these policies have a 90-day elimination period. Elimination means it starts on day 91 – long after most short-term accidents or illnesses are over. This puts you three months behind on your payments and will not pay out a dime. But they are the least expensive, since they don’t cover the first three months at all.

Something called a retro policy means the coverage is retroactive to the first day you were off work. There is a big difference. The time to discover it is NOT when you have no income and no chance of making a claim.

As with anything else, ask the questions, get informed, and get the “what if” answered before signing on the bottom line.

J.D. Power Fall 2009 Credit Card Satisfaction Survey

Each fall J.D. Powers conducts a very comprehensive credit card survey. It rates overall satisfaction, along with how happy cardholders are with their rewards, payment processing, problem resolution, customer service, and fees.

This year, American Express rated five stars, head and shoulders above other national card issuers in all categories. At the bottom of the bottom, with the worst score on customer’s satisfaction with their credit cards were Capital One, along with GE Money. GE is a surprise, as they handle the Wal Mart cards, and Wal Mart prides itself on great customer service! As to Capital One – what’s in your wallet? I hope it’s not one of their cards!

But the scary response to the survey was that 53% of us did not know the interest rate on their card, even though it is printed on every statement. Not knowing that we are paying around 20% on our credit cards is not good news!

Scotiabank can’t be happy with a bunch of national press recently. But there’s a great lesson for anyone over age 59 to learn! All banks offer seniors a no charge service banking packages, or greatly reduced service charges at various ages, but for most it’s at age 59. Barry Ashpole, a 66-year old college teacher, had the TD and Royal automatically lower his fees, because all the banks have your birth date on file. But Scotia kept charging him the full service charges for seven more years! When he discovered the huge overcharges, he hit a wall of no help to get this reversed, and fought it all the way to their Ombudsman’s office. At that point, he received a six month refund of $71. They wouldn’t refund the other six and a half years! You need to make sure you know when you are entitled to a break of the huge service charges, or you’ll get taken, as Barry Ashpole found out the VERY expensive way.

And a final update on your credit cards: Time and time again, I point out how critical it is to check your credit card statement line by line. Stuff shows up that’s not yours, merchants who accidentally, or because of a kinky staff member, charge things twice, and all kinds of errors can and do happen. But less than 10% of us look at our statement items – and that number is way lower if you get your statement on-line!

There is a phrase you need to know. It’s called post transactional marketing. You buy something from a retailer on-line, or join a web site. Often you’ll get a pop-up asking you to join a loyalty program for deals, alerts, or whatever. Be careful, because in many instances, these pages look like they come from the retailer, but they’re third parties, and deeply buried in the fine print is a note that you’re actually going to have a monthly fee charged to your credit card! And it’s not small business, but the 1-800 Flowers, Barnes & Noble, airlines, Priceline and buy.com sites!

Be careful, as these marketers have scammed people out of over $1.5 billion so far, Facebook has now been hit with a class action lawsuit, alleging that they allow, promote, or profit from these post transactional marketing, and the U.S. Congress is holding hearings on the issue.

Today, here are two moral dilemma stories. What do you think? Are either, or both of these, right, or wrong?

A number of years ago, in Michigan, some dealers experimented with a system that had a computer chip installed in vehicles which were financed. If the payments were past due, the owner would get a warning from this electronic signal in the car. It warned that the vehicle would become inoperable if the payment was not made within three days. Another warning came through the car the following day. Then, on day three, the car’s electronic system was automatically shut down, and wouldn’t start. Talk about a way to get someone’s attention to make their payment!

The dealerships were able to finance the vehicles with this software for a lower interest rate, because the risk of arrears was much lower on these loans. It resulted in a lot less repossessions, but the backlash was so huge, the technology didn’t take off to any large degree. Very bad idea, or would you buy it with the mindset that it’s reasonable not to drive something you can’t afford to pay?

Last year, in the U.S., between 700,000 and one million people walked away from their homes – but not in a typical foreclosure.

Strategic defaults are foreclosures of homes were the mortgage holder HAS the money, and HAS the ability to pay, but chooses not to. These people owe more on their home than the value, and make a conscious decision to stop making the payments. It will give them six months or so free housing until the bank comes to foreclose. At that point they walk away, reasoning, they’re saving themselves tens or hundreds of thousands of dollars paying a debt that is way more than their home is worth. They literally trash their credit, but reason that they are still way ahead, financially, by now being able to walk away from their home. In many interviews, on various programs, a lot of these homeowners were asked if they didn’t feel guilty, or some moral obligation to pay the mortgage that they CAN pay and voluntarily signed. The answer has always been no.

If you have the financial ability to pay, would you walk away if you owed $10,000 more than your home was worth? What about $50,000? What about when the value of your home has dropped by 50% or more such as many places in Arizona, Florida, or California have experienced?

Before you answer that, you should know something else. The biggest apartment complex in the world is Stuyvesant Village in New York. We’re talking 11,000 apartments and 18 highrises. In January, they defaulted on a $4.4 billion mortgage and voluntarily walked away. And who was one of the big five investors? The Church of England.