Adding up what you owe is the 1st step to managing debts

Collecting information for the annual income tax ritual may have raised your awareness about how much you owe others.

A study by the Federal Reserve Bank of New York late last year indicates we seriously underestimate what we owe. In fact, many of us owe 11/2 to two times more than we think we do.

While reviewing your financial situation, watch for red flags:

» Your total consumer debts add up to more than 20 percent of your take-home pay. That includes car payments, credit-card payments, personal loan payments and medical payment plans, but not mortgage payments.

Avoid applying for a new loan if the additional payment would make you exceed that 20 percent benchmark.

» Your home mortgage payment (including principal and interest plus homeowners insurance and property taxes) are more than one-quarter to one-third of your gross income.

» What you owe is more than your net worth (excluding the market value of your house and your first mortgage balance).

Credit-card debt mounts up easily. Many of us hold more than one credit card, and recent studies indicate about half of us don’t know the annual percentage rate charged for the card we use most often. Being aware of that can make you less likely to use it so lightly.

What else can you do to manage your debt from here?

» Stop adding to existing balances. If you pay off all of your monthly charges each billing cycle, enjoy the reward points or other benefits you may receive.

» Get a handle on living expenses. Identify a portion of your monthly budget for repaying credit cards and personal loans.

» Target a specific card or debt to repay quickly. Pay the minimum monthly payment on the remaining cards until this one is paid off.

» Keep it up. When you have paid off all of your consumer debt, begin working on your mortgage or begin a disciplined investment program.

For more debt-management strategies, see the Federal Trade Commission website at:

Walter L. Koon Jr

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Many want to find debt relief, rebuild their credit scores

Many want to find debt relief, rebuild their credit scoresMillions of consumers across the country are still dealing with large constraints such as significant amounts of credit card debt, but more now recognize some of their biggest problem areas when it comes to managing their money and financial lives correctly. More than half of consumers – 56 percent – say that they believe their biggest financial problem area, and the one in which they could use the most help, is knowing what it takes to improve their credit score, according to a report poll from the National Foundation for Credit Counseling. Problematically however, while many recognize that their credit scores can play a significant role in all aspects of their personal financial life, they don’t do enough on their own to make sure they’re in good standing. Most respondents said they hadn’t checked their credit report at any point in the last 12 months, but only 5 percent said they thought they needed help understanding the information contained in thedocument.
This type of disconnect indicates that consumers simply might not know that the information on their credit report is what’s used to comprise their score, NFCC spokesperson Gail Cunningham said. That’s why experts usually advise that it takes ordering a credit report to understand what’s wrong with a credit score.
But consumers weren’t only concerned about their credit standing, the report said. Another 23 percent of those polled said they think their biggest problem area is that they need to get their spending under control, and another 11 percent said they would like to have a better grasp on how to put more money into savings. Experts say that these two types of behavior combined can lead to serious financial problems because stretching budgets thin with overspending, and having nothing to fall back on in the event of an emergency, can lead to massive balances that can be difficult to get under control again.
Consumers who run into large amounts of credit card balances and other bills often find themselves in need of debt relief. Since the end of the recent recession, however, many consumers have been conscientious in their efforts to pay down their debt and make sure they don’t carry a balance from one month to the next.


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How Service Contracts Rob You of Your Rights (and What the CFPB Is Doing About It)

While you’ve been pretending to read the fine print on everything from your cell phone contract to your Starbucks card, companies have been slipping in legalese that robs you of your rights. A little-understood but rapidly expanding practice called “mandatory arbitration” is replacing your right to sue a company in court — a right many of us probably never even realized was vanishing.

On Tuesday, the Consumer Financial Protection Bureau announced an inquiry into arbitration clauses in contracts for financial products and services. These clauses have become ubiquitous and lurk in contracts and in the terms and conditions for all types of products and services, from credit cards to retirement account agreements to nursing home admission forms, and even show up in some employment contracts.

“Consumers may not realize that they have waived their right to a trial because of an arbitration clause,” the CFPB says in its release about the inquiry.

For the time being, however, even if people do realize that they’re being asked to sign away their right to a day in court, there’s little they can do about it. When you open a credit card, sign up for cell phone service or any other commercial activity, you don’t get to write the contract terms: the company does. In some cases, you don’t even have to sign a contract to give up your rights. The terms and conditions on the Starbucks website, for instance, says that customers are agreeing to arbitration automatically when they buy a gift card from the coffee giant.

So what is arbitration? It’s basically a substitute for a court case, but it’s skewed heavily in favor of the companies that mandate it. Instead of going in front of a judge, you present your side of the story to an arbitrator — one the company gets to pick. “Arbitration companies treat large corporations as their clients,” Public Citizen says. They don’t have to take legal precedent into account when deliberating, and their decisions aren’t made public. Public Citizen has calculated that 94% of all arbitration disputes get resolved in favor of the company. Unlike the court system, there’s no way to appeal a ruling.

The proliferation of these clauses stems from a Supreme Court ruling last year which said, essentially, that companies can legally prohibit customers from joining forces and filing class-action lawsuits against them. Instead, companies could mandate that customers have to submit to arbitration if that’s what the contract says. Not surprisingly, companies have been rewriting their contracts to include these clauses at breakneck speed, say consumer advocates.

“The net effect of all this is American consumers’ right to hold a company accountable in the courts is basically gone,” says Harvey Rosenfield, of counsel with nonprofit group Consumer Watchdog.

At this point, the CFPB says specifically that it’s not looking to rein in or prohibit the use of arbitration or arbitration clauses. But it wants to get a handle on how prevalent they are and how they affect consumers. It’s also just focusing on financial contracts, but its findings could be useful for extrapolating how widely used these clauses are in other industries.

Martha C. White

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Consumers Have Long Memories, Short Fuses With Credit Card Companies

Consumers have the memory of an elephant when they feel like they’ve been wronged by a credit card company. Much more so than other service providers like grocery stores or even health insurers.

Maybe that’s because of all the debt credit card customers are piling up – and are exhaustingly trying to pay down. According to the Federal Reserve’s March G.19 Report, U.S. consumer revolving debt (primarily credit card debt) dipped below the $800 billion level, to $798.6 billion, a 3.3% drop for the month of Feb. 2012. That’s the second-lowest debt level since Oct. 2004.

Both January and February saw declining credit card debt, as opposed to 2011, when revolving debt largely rose on a month-to-month basis, the Federal Reserve reports.

Altogether, U.S. consumer credit card debt has fallen from $957 billion in 2008 to $798.6 billion today. Yet a new study shows that credit card consumers are still seething about all that debt, and how they perceive to have been treated by card issuers (especially over issues like late payment fees, pullbacks on rewards programs and higher interest rates).

The study, from Temkin Group’s 2012 Forgiveness Ratings, says the credit card industry is the industry least likely to earn “forgiveness” from consumers.

The Forgiveness Ratings tracks consumer sentiment on 18 industries, and 206 specific companies, including retailers, parcel delivery services, airlines, banks and credit card companies.

What did the 2012 rankings find? Primarily, that industries like insurance carriers, investment firms, banks and fast food chains all ranked well ahead of credit card firms in terms of the all-important “forgiveness” factor.

As Temkin puts it, “Every company makes mistakes now and then, but how willing are customers to forgive the company when it happens? Forgiveness is a valuable asset that companies earn by consistently meeting customers’ needs.”

According to Temkin, that forgiveness factor is calculated in three ways:

  • Functional: How well do experiences meet customers’ needs?
  • Accessible: How easy is it for customers to do what they want to do?
  • Emotional: How do customers feel about the experiences?

Apparently, credit card companies failed on all fronts, as consumers reacted strongly against forgiving carriers for what they perceive to be toxic business practices.

Common gripes by consumers against card companies are shadowy and onerous rate changes, “gotcha” late payment fees and penalties, and the harsh reality that, every month, a credit card bill reminds the consumer of purchases long since passed but not yet paid.

Taken together, those issues tend to breed resentment among consumers toward card providers, and that’s exactly what the Temkin study seems to be saying.

For the record, grocery store chains, appliance makers and retailers topped the list of “forgivable” industries, according to Temkin. Joining credit card issuers at the bottom of the list were health insurers, cable and Internet providers and banks.

Brian O’Connell

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Free Balance Transfer Credit Cards in the Age of Runaway Spending

Each of the last four years, the number of consumers who’ve reported spending more than in the year before has steadily risen, according to the National Foundation for Credit Counseling’s 2012 Financial Literacy Survey. On the one hand, this trend reflects the continued economic recovery. However, it also speaks to the trouble people are having letting go of housing-boom spending as well as the record debt being racked up as a result. U.S. consumers incurred $48 billion in credit card debt during 2011 alone, according to a Card Hub study, which leads us to two obvious conclusions: 1) We need to pay down what we owe and 2) We must find a way to stay out of debt moving forward.

Paying Down Debt

As far as attaining debt freedom goes, consumers have a familiar ally: free balance transfer credit cards (i.e. 0% balance transfer credit cards that do not charge balance transfer fees). These cards actually disappeared following the CARD Act’s prohibition of the tactics that allowed credit card companies to revoke consumers’ 0% introductory rates as a result of any misstep, no matter how small. And while the reason for their return remains unclear, it doesn’t really matter.

Free balance transfer cards can save you hundreds in interest by allowing you to allocate the entirety of your monthly payment toward the principal for more than a year. For example, if you’re revolving around $7,000 in credit card debt and have a 12% interest rate – as the average consumer does, according to the Federal Reserve’s most recent G19 Report – then a free balance transfer would save you more than $800 over the next 12 months if you pay $100 each month.

The best free balance transfer offer currently on the market is the No Balance Transfer Fee Slate Card from Chase. It offers 0% on both purchases and balance transfers for 15 months and obviously does not charge a balance transfer fee.

Obviously, the savings you’ll garner via use of this card depend on your monthly payments as well as how much debt you have remaining after 15 months. That’s where a credit card calculator becomes handy, especially when you consider that all 0% cards have high regular interest rates. You can’t assume that you’ll be able to transfer your remaining balance to another balance transfer card because as many people learned during the Great Recession, they’re not always there when you need them.

Staying Out of Debt

Remaining debt free hinges on developing a budget and sticking to it. Start by rank ordering your monthly expenses and cutting those that are least important until your outlay is at the amount you’ve determined you can afford to spend. In doing so, be realistic and consider your current income, not the income you had prior to the financial downturn. While it might be tempting to assume everything will go back to “normal,” if your income was at all tied to the housing bubble, it’s not going to return to pre-recession levels. After establishing a budget, you can either ask your credit card company to lower your limit to this budgeted amount or set up balance alerts.

A helpful strategy for recognizing when you are spending beyond your means is to open a credit card specifically for everyday expenses. If ever finance charges make their way onto this card’s statement, you’ll know it’s time to cut back.

Ultimately, given the cost and stress associated with debt, taking the aforementioned steps to avoid it is a small price to pay.

Odysseas Papadimitriou

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Could your next Facebook Friend be a debt collector?

Be careful who you accept as a friend on Facebook.

More and more debt collectors are using social media to track you down. They set up a fake profile and be-friend you only to get your private information.

In debt? Tips to pay it off and still save

First of all, you can stop the harassing calls. When you receive your first collection letter, contact them within 30 and request they don’t contact you by phone, texts or emails. This won’t stop them from pursuing the debt collection but it will stop the calls. If you can’t repay it, negotiate and settle. You will take a hit on your credit score but it will stop the collection.

Ok now to how you should conduct yourself on Facebook:

1.    Turn on the privacy settings where your profile is visible only to your friends, not the public.

2.    Accept Friend requests only from those you know.

3.    Use common sense about what you post. There are NO secrets in the cyber space. Think about the treasurers that debt collector can find: your employment history, including your current employer, your email, cell phone and date of births.

Is this practice even legal? And what should you do if catch a debt collector trying to pose as your friend just to get your info?

The Fair Debt Collection Practices Actwas set up to protect consumers but with the emergence of the social media, it is trying to figure out how to deal with it. So it doesn’t explicitly forbid collectors from, posting on your Facebook wall as long as they don’t talk about your debt.

According to Craig Thor Kimmel, a consumer attorney, if a collector contacts you via a social media site, save those messages. Then report the sender as spam on Facebook and file a grievance with the Federal Trade Commission

Nancy Melear

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Stand Up Against Debt Collector Harassment

You don’t have to tolerate unscrupulous debt collectors, an attorney can help put a stop to harassment.

People dealing with debt issues may have a number of stressful issues they are trying to resolve. They shouldn’t have to deal with unscrupulous debt collectors too. Unfortunately, there are a number of agencies that will ignore the law while trying to collect. In fact, the Federal Trade Commission received 140,036 complaints regarding debt collectors in 2010, which accounted for 27 percent of all complaints the agency received across all industries.

Nevertheless, the Fair Debt Collection Practices Act (FDCPA) protects consumers and establishes a uniform code of conduct that debt collectors must follow. This article will highlight a few unauthorized practices that consumers should be aware of. If you are dealing with a debt collector who may be breaking the law, a fair debt collection attorney may be able to provide further assistance.

Annoying or threatening calls – Collectors may say a lot to get people to pay up, but they may not use profanity, threats of violence or abusive language to obtain payment. Additionally, debt collectors may not engage in harassment like calling repeatedly.

Constant calls or calls at odd hours – Creditors may only call between 8:00 a.m. and 9:00 p.m. Phone calls outside of those hours violate the FDCPA. Also, consumers besieged by phone calls can stop them by sending a letter asking creditors to cease all telephone communication. Federal law requires debt collectors to comply with written requests. Creditors may notify the consumer (in writing, of course) that there will be no further contact, or that they plan to file a lawsuit to collect the debt. Regardless, the phone calls should stop after written notification is sent.

Not verifying debt – Consumers should know how much they owe, and the law allows them to question whether a debt is valid. Upon request, a creditor is required to provide written verification of the debt; which may shed light on how the debt was accumulated, and whether the amount claimed is actually correct. A creditor that refuses to provide verification of the debt is breaking the law.

Talking with others about debt – Federal law also prohibits debt collectors from contacting family members, neighbors or colleagues to talk about a consumer’s debts. The only people authorized to talk about a debt besides the consumer are a consumer’s spouse or their attorney. A creditor who probes a person’s friends and family is violating the FDCPA.

While the preceding is not intended to be legal advice, you can stand up to threatening creditors. Contact an attorney if you believe a debt collector is violating the law, or if you would like to discuss solutions to resolving your debt problems.

by Ledford & Wu

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CFPB Checking Out The $31 Billion Banks Charged In Overdraft Fees

If banks had boots, mayhap they’d be quaking them right about now: the Consumer Financial Protection Bureau is on the case, reviewing nine U.S. banks over their practices to see if they’re on the up and up when it comes to charging overdraft fees.

Regulators gave Americans more power over managing overdraft protections for the checking accounts two years ago, notes Bloomberg, and the CFPB just wants to make sure if that crackdown on banks was good enough.

The CFPB will reportedly determine by the end of this year whether new rules are in order for banks including JPMorgan Chase, Wells Fargo and Bank of America Corp. The inquiry will look into how those institutions are pushing customer to enroll in overdraft programs, by checking out online and mailed marketing material and the scripts used by customer service representatives.

If any of that stuff is confusing to consumers, the CFPB probably isn’t going to like it. Consumers could benefit from stricter rules, but banks will likely groan over anything that will threaten another of their revenue streams. Banks charged customers $31.6 billion in overdraft fees last year, down from $33.1 billion in 2010.

The size of the overdraft fees will also be probed, to see if banks are justified in what they charge. Many large banks levy $35 per overdraft, while smaller banks and credit unions routinely charge $25. And since around 15 million of us overdraw our accounts 10 or more times a year, that’s a nice chunk of change for those financial institutions.

Mary Beth Quirk

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ACA International Offers Consumer Tips for National Financial Literacy Month

ACA International, the association of credit and collection professionals, today offers personal finance tips for consumers. Careful planning and active communication are important tools to effectively managing personal finances, particularly if a consumer is struggling to make payments on their current debt obligations or being contacted by a debt collector.

  • Plan and Budget:  Determine what you can reasonably afford, create a budget and plan, and stick to it.  Keep in mind that purchases on credit will need to be repaid at some point in the future.
  • Track your Spending: Keep tabs on how much you spend to help stay within budget guidelines.
  • Protect your Identity: Be careful about giving personal information including a credit or debit card number over the phone and online. Monitor your accounts and immediately report any suspicious or unauthorized purchases to your bank or credit card company.  Consumers should monitor their credit and are entitled to a free credit report each year at  If you believe your identity has been stolen, contact your local police department.
  • Communicate with Creditors: Having trouble making payments on an existing debt? Contact the creditor to discuss alternative payment arrangements. It won’t eliminate your debt but it can make things more manageable. Communication is particularly important if you are behind in payments to a creditor (e.g., credit card, loan, mortgage, medical) to avoid having the debt appear on credit reports.
  • Communicate with the Debt Collector:  If you hear from a debt collector, avoiding a letter or call won’t make the debt disappear. The reason for the contact cannot be resolved without the ability to communicate; whether it’s to pay an owed debt, verify an alleged debt or confirm that the debt collector has reached the wrong person.
  • Consumers have Rights: Consumers deserve to be treated respectfully and have rights under federal and state law.  For more information about consumer rights in debt collection or to ask questions, visit

ACA International is the comprehensive, knowledge–based resource for success in the credit and collection industry. Founded in 1939, ACA brings together more than 5,000 members, and their employees, in the United States and abroad including third–party collection agencies, asset buyers, attorneys, creditors and vendor affiliates. ACA International establishes ethical standards, produces a wide variety of products, services and publications, and articulates the value of the credit and collection industry to businesses, policymakers and consumers.    

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Debt Burden Lifting, Consumers Open Wallets a Crack

The bursting of the real estate bubble and the ensuing credit crisis forced American consumers to do something that they had little experience in trying: reduce their debt.

It has been a painful process both for borrowers, who have faced foreclosures and bankruptcies, and for lenders, whose have had to take losses vastly in excess of what they thought possible.

But the process is working far faster in the United States than in countries like Britain and Spain, which also faced plunging real estate prices. And now it appears to be contributing to an economic recovery that has gained a little momentum, despite facing headwinds from the European debt crisis. This week’s report that retail sales grew faster than expected in March was the latest sign that consumers — or at least a substantial number of them — are growing more optimistic.

One measure of the financial health of householders is the level of financial obligations, like required mortgage and credit card payments, to disposable income. By the fall of 2007, those obligations took up 14 percent of disposable income, more than at any time since the Federal Reserve began calculating the statistic in 1980.

But now the situation has turned around. The latest figures, for the final quarter of 2011, show that required debt service payments now make up just 10.9 percent of disposable income, the lowest proportion since 1994. A broader measure — which adds in such obligations as property tax and insurance premiums for homeowners, and rent for those who do not own their homes — has fallen to the lowest level since 1984.

There is little mystery in how that happened. First, debt levels have fallen. Over all, households owe about $13.2 trillion, nearly $600 billion less than in late 2008. Second, low interest rates mean that servicing that debt costs less. The Commerce Department says that mortgage interest payments, in dollars, are lower than at any time since 2005.

Getting those debt levels down was not a simple matter of making payments, of course. The McKinsey Global Institute estimates that about two-thirds of the reduction came from the cancellation of debt, through write-offs and foreclosures.

But the benefit is appearing. This week’s report of surprisingly strong retail sales in March may in part be because of warm weather. However, it also owes something to the fact that money that once went to mortgage payments may now be available for other things.

To get some idea of what needs to be done now — and what the result will be — the McKinsey institute points to two incidents in the early 1990s that got little attention at the time in the United States. Those were the bursting of real estate bubbles in Sweden and Finland. Details differ, but in each country there were two distinct phases of deleveraging.

“In the first,” the McKinsey institute said in an analysis published early this year, “households, corporations and financial institutions reduce debt significantly over several years, while economic growth is negative or minimal and government debt rises.” That is certainly what has happened in the United States.

The second phase is the good part, the institute said. “Growth rebounds and government debt is reduced gradually over several years.”

In this country, the deleveraging process has some way to go, with many foreclosures still pending, but it is at least possible that economic growth is beginning to accelerate. It is clear that the United States has made a lot more progress in cutting consumer debt than has been made in either Britain or Spain, two other countries that suffered from falling real estate prices.

To get the deleveraging process under way, it is important for lenders to face reality, admit losses and deal with them. For banks, and their regulators, there is a great temptation to obscure losses, hoping that the market will recover. That was a little harder to do in the recent cycle, thanks to new mark-to-market accounting rules. Those rules were weakened after they were denounced by banks, supported by their regulators, but they still had some effect.

Perhaps more significantly, many of the worst loans — and the ones that most needed to be dealt with — were generally not on bank balance sheets. The vast majority of home mortgage loans had been sold to investors in mortgage securitizations, many of them guaranteed by Fannie Mae and Freddie Mac and others privately issued. Securitizations must regularly report on how many loans are not performing. As a result, the losses could not be hidden — and the recovery process delayed — as happened in Japan during the decade after its bubble burst in 1990.

The McKinsey report identifies six markers of success that are useful in assessing a nation’s deleveraging process. A stable banking system must emerge. After the inevitable surge in government debt, there needs to be a credible plan for long-term fiscal sustainability. Structural reforms may be needed to make economies more competitive. Exports need to rise, as does private investment. Finally, the housing market needs to stabilize.

Susan Lund, the director of research for the McKinsey institute, says the two areas where the United States is weakest are in coming up with a credible fiscal plan and in stabilizing the real estate market. Home prices continue to fall in some of the hardest hit areas, where debts continue to be high relative to income. I’d add in private investment. Corporations are generating a lot more cash than they are willing to invest. To some extent, that may simply reflect the trauma of the crisis, when cash was king, and it may take time to solve it.

There are plenty of reasons to doubt that the current economic recovery will become self-sustaining, starting with Europe’s problems and including the threat that American fiscal policy will shut off growth by imposing too much austerity too soon.

Ms. Lund points out that from 2003 to 2007, American homeowners took out $2.2 trillion from home equity loans and mortgage refinancings, a source of economic stimulus that will not return anytime soon. “Compared to the much-debated government fiscal stimulus, this was more than twice the size,” she noted. She thinks the household deleveraging process will continue for two more years.

But who would have forecast that the burden of household debt — at least in much of the country — would by now have been reduced so far that consumers are again a source of growth? That fact is a reminder that the outlook is seldom as bleak as it seems in the immediate aftermath of a calamity.

Floyd Norris

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