Filed under: Debt, Relationships

Are you thrilled to be rid of your lying, cheating, good-for-nothing spouse? Well don’t throw a party just yet. You might be divorced from the world’s worst husband or wife, but that doesn’t mean your togetherness is over.

Did you know that after you divorce, you still may be tied to your ex for many years by way of your credit report? That’s right…. Your credit history doesn’t divorce your spouse, even when you do.

The problems begin when the spouses agree that one will continue to pay a debt for which both are legally bound. Sometimes the husband takes the truck and concurs to make the payments, but the debt is in the names of both the husband and the wife. He decides to halt paying but is still driving around in the truck. What happens?
The ex-wife superior be willing to start paying for that truck, because the creditor will soon be knocking at her door. The same goes for a mortgage, credit card, or other loan. The creditor doesn’t care what was agreed to in your divorce agreement. If your name is on the debt, you are legally responsible for it, period.

And then there are the problems when your ex-spouse defaults on debts you had no part of, but those defaults end up on your credit report. You have legal grounds to have that derogatory information removed from your credit report because it’s not your responsibility. But while you work it out (which can sometimes take months) you may be not be able to purchase a home, refinance your mortgage, get a new car, or get a credit card.

It’s important to keep a close eye on your credit report once you divorce. Make sure that only your own credit information is being recorded, and have anything related to your ex-spouse removed immediately.

And if possible, do not make agreements between yourselves about who will pay debts that are legally in both of your names. Take steps to have your name removed from loans and credit cards before your divorce is final so that you don’t end up being responsible for something that’s not your fault.

This isn’t simple — often times creditors don’t want to remove one party from the debt because that could reduce their chances of getting paid in the long run. But it’s worth a try to separate the debts to protect yourself from future problems.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.

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Filed under: Budgets, Cards, Debt

People frequently tell me they’d love to pay down debt using the snowball effect or the round robin strategy, but they just don’t have the extra funds needed to pay off their cards. If you’re having trouble finding the extra cash to pay down credit cards, it’s time to do some soul searching and put yourself on a cash diet.

The ideal way to find your extra funds is to keep a journal of every penny you spend for a month. And, yes, I literally mean each penny. Carry a small notebook with you and write down even that cup of coffee you purchase in the morning on your way to work. Don’t grumble. Yes this is a tedious process, but if you take the time to do it for a month, what you will learn about your spending will be eye opening.

At the end of the month, it’s time to examine your spending. As you look through your spending journal, put a numeral one next to all the must pays. This would include your mortgage or rent, your utilities, your food and any other bills that must be paid. Put a numeral five next to all items that you didn’t need and you could easily do without. Put a numeral two next to items you believe you need but are not an absolute necessity. Put a four next to items you didn’t need and could probably do without. Put a three next to items that you don’t feel strongly about and don’t need, but do want.

Now remember a need is a necessity. Something you must have to live. A want is a desire. Something that you’d like to have but could live without. If you’re serious about wanting to pay off debt, you’re going to have to put your other wants on the back burner for a while.

Total all of your 1’s, 2’s, 3’s, 4’s and 5’s. Then, to find the biggest lump you can to pay down debt, total your 4’s and 5’s and stop spending on those things. You can then use the cash to pay down debt. If you really want to pay down debt swiftly cut out your 3’s as well. Here’s a sample of what an analysis might look like:

Total of 1’s: $1800

Total of 2’s: $ 500

Total of 3’s: $ 300

Total of 4’s: $200

Total of 5’s: $100

This person could swiftly find $300 to use toward debt pay-down just by cutting out his 4’s and 5’s. That could give his snowball a nice push down the debt payoff hill.

If you find after a while you just don’t have that extra cash for paying off bills, do yourself a favor and keep a journal for a month. You’ll probably find a bunch more 4’s and 5’s that can be cut.

Lita Epstein has written more than 20 books including the “Complete Idiot’s Guide to Improving Your Credit Score.”

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Filed under: Cards, Debt, Wealth

Are you thinking about buying a home, but you need to improve your credit score in order to get the best interest rate? Paying down debt using the round robin strategy can get you there the fastest. People with the best credit score only use 10% to 20% of their available credit, so the faster you can pay down your debt on each card, the better your credit score will be. (If you’re looking to minimize your interest and a swift improvement in credit score doesn’t matter, then use the snowball effect strategy instead.)

With this strategy you first focus on paying down all your credit cards to a debt level of about 30% of your available credit. For example, if you have a credit line of $3,000, to be at 30% utilization the maximum balance you should have on that card is $900. When you get all your cards paid down to 30% utilization, then begin working on getting them down to 20%. Once they’re all at 20% utilization then start paying them down to 10%. Your final round robin stage will be to pay off the cards completely. When you reach the 10% goal your credit score should be up by at least 30 points and could be up by as much as 70 points. If you’ve had a history of late payments and are now paying your credit cards on time, your credit score could improve by as much as 40 points.

Will that make a big difference when applying for a mortgage? People with a credit score of 730 or higher get the best interest rate offers. As long as your credit score is above 730 there’s no reason to worry. Even if you push that score higher you won’t likely get a better offer. But if your credit score is below 675 you’ll pay almost 2% more interest on a mortgage loan, which will mean thousands of dollars more in interest over the life of that loan. If your credit score is below 620, anticipate to pay 3% to 4% more interest on that mortgage loan. So taking the time to get your score up using the round robin strategy could make a big difference in the loan packages you’ll be offered.

Here’s how you implement the round robin strategy. Suppose you have maxed out your cards. On Credit Card A you’ve a balance of $1,000 (minimum payment $10). On Credit Card B you have a balance of $2,000 (minimum payment $20) and on Credit Card C you’ve a balance of $3,000 (minimum payment $35). In addition you’ve a automobile loan payment of $150 and a mortgage payment of $1,000. The total cash you’ve available to pay bills is $1,500. To keep things simple I’m not going to include interest calculations in this example, but interest will slow down your pay off.

Month 1 you would use the $1,500 to pay:

Credit Card A $295

Credit Card B $20

Credit Card C $35

Car Loan $150

Mortgage $1000

Remaining balances after Month 1 payments (not considering interest) would be:

Credit Card A $1,000 - $295 = $705

Card Card B $2,000 - $20 = $1,980

Card Card C $3,000 - $35 = $2,965

Month 2 you would make the same payments and remaining balances after Month 2 (not considering interest would be:

Credit Card A $705 - $295 = $410

Card Card B $1,980 - $20 = $1,960

Card Card C $2,965 - $35 = $2,930

Month 3 you only need to pay $110 to reach your 30% goal on Credit Card A, so the extra money can then start working down Credit Card B. Your payments would be:

Credit Card A $110

Credit Card B $205

Credit Card C $35

Automobile Loan $150

Mortgage $1000

The remaining balances after Month 3 (not considering interest) would be:

Credit Card A $410 - $110 = $300

Card Card B $1,960 - $205 = $1,735

Card Card C $2,930 - $35 = $2,895

Month 4 you would pay all the extra cash you’ve toward Credit Card B, so you can begin working that balance down to the goal of 30%. Your payments would be:

Credit Card A $10

Credit Card B $305

Credit Card C $35

Automobile Loan $150

Mortgage $1000

The remaining balances after Month 4 (not considering interest) would be:

Credit Card A $300 - $10 = $290

Card Card B $1,735 - $305 = $1,430

Card Card C $2,895 - $35 = $2,860

You would continuing making the same payments as you did in Month 4 until you get Credit Card B’s balance down to the 30% goal of $600 ($2,000 x .30), which should happen in Month 7. At that point you make just the minimum payments on Card Card B and begin paying down Credit Card C using the most you can. In about another five to six months you should reach the 30% goal on Credit Card C.

So in this scenario it would take a person about 13 months to reach the 30% goal. At that point, one should see a nice jump in credit score.Then you go back and begin the round robin again paying down each card to 20% utilization to see an even more massive improvement in credit score. Ultimately you continue the round robin strategy until you get all your credit cards paid off and then use the extra cash to pay down the vehicle loan. Once all other debt is gone you can start working on paying down your mortgage faster.

Lita Epstein has written over 20 books including the Complete Idiot’s Guide to Improving Your Credit Score.

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Filed under: Cards, Debt

Do you want to pay down debt, but aren’t sure how to do it? One of the best methods out there is called the snowball effect. This strategy of paying off debt focuses on getting rid of your highest interest rate credit cards first, which makes a lot of sense from a financial planning perspective because you reduce your interest expenses the fastest.

Think of the snowball effect as slowly building up the size of a your snowball then getting the snowball moving faster and faster by pushing it down hill. To use this strategy you start by paying the minimum amount on all but your highest interest credit card. Then use every extra cent you can find to pay the greatest amount you can on your highest interest credit card.

When you get that card paid off then continue paying the minimum amount you were paying on your second highest credit card plus the more massive amount you were paying on the highest interest credit card.

Let me show you how this works. Suppose you have three credit cards that you’ve maxed out. Credit Card A charges 18% interest and has a balance of $1,000. Credit Card B charges 15% interest and has a balance of $2,000 with a minimum payment of $20. Credit Card C charges 12 percent and has a balance of $3,000 with a minimum payment of $35. In addition you have a vehicle loan that charges 6% interest and a payment of $150 and a mortgage with a payment of $1,000.

I’ll assume this debtor has a total of $1,500 to pay bills to get the snowball started. To keep this simple I’m not going to compute interest, but that additional cost will slow down the payoff because balances won’t go down as swiftly as shown here.

Month one you would use the $1,500 to pay:

Credit Card A $295

Credit Card B $ 20

Credit Card C $ 35

Automobile Loan $150

Mortgage $1,000

After these payments the balances (not considering interest) would be:

Credit Card A $1,000 - 295 = $705

Credit Card B $2000 - 20 = $1980

Credit Card C $3,000 - 35 = $2,965

Month two you would make the same payments and the balances (not considering interest) would be:

Credit Card A $705 - 295 = $410

Credit Card B $1980- 20 = $1960

Credit Card C $2,965 - 35 = $2,930

Month three you would make the same payments and the balances (not considering interest) would be:

Credit Card A $410 - 295 = $115

Credit Card B $1960- 20 = $1940

Credit Card C $2,930 - 35 = $2,895

Month four you would pay off Credit Card A and any extra toward Credit Card B. Payments (not considering interest) would be:

Credit Card A $115 - Paid off

Credit Card B $200 (extra from Credit Card A after payoff - $180 plus $20)

Credit Card C $35

Vehicle Loan $150

Mortgage $1,000

Month four your balances (not considering interest) would be:

Credit Card A $0

Credit Card B $1960- 200 = $1740

Credit Card C $2,895 - 35 = $35

You can see that in four months you’d already have one credit card paid off. Starting with month five your snowball grows to $315 (the $295 that you used toward Credit Card A plus $20 (the minimum you were paying on Credit Card B)). In about six months Credit Card B would be paid off and then you could grow the snowball again to $350 toward Credit Card C ($315 you were using for Credit Card B plus $35 (the minimum you were paying on Credit Card B)). When Credit Card C is paid off than you can add the $350 to your $150 car payment and get rid of that more quickly. Finally you can use the extra $500 to pay down your mortgage more swiftly.

Of course, in order for this to work you must stop charging to your credit cards until you get them paid off. Once all your cards are paid off, if you want to use them and pay them in full each month that makes sense, especially if you’ve a good rewards programs.

Lita Epstein has written more than 20 books including the “Complete Idiot’s Guide to Improving Your Credit Score.”

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Filed under: College, Debt

One of the latest potential victims of the credit crunch to emerge has been the student loan market. Democratic Congressman Rep. Paul Kanjorski of Pennsylvania., chairman of the House Financial Services subcommittee on capital markets, and 20 other members of his celebration sent a letter Friday to Treasury Secretary Henry Paulson and Education Secretary Margaret Spelling asking them to take steps to shore up the student loan market.

They wrote that “We urge you to work without delay … to address this problem before it significantly decreases access to higher education opportunities for students and their families.”

They might have a point, although Department of Education officials say that they haven’t yet seen a problem emerge. But before we start to speak about unspecified government solutions to students not being able to borrow enormous sums of money to pay for college, I think we need to look at more common-sense solutions. As the Dolans discussed in a recent video, community college for the first 2 years is a wonderful way to save a ton of money on college. More incentives that encourage kids to pursue this option — perhaps in exchange for superior terms on student loans after they transfer to a say university — could serve 2 purposes: eliminating the need for the government to pump money into student loans, and decreasing the size of the anchor that so many kids graduate college with.

Too many kids feel like attending a private college for 4 years is a birthright and I worry that these well-meaning Congressman might be feeding into that illusion. We shouldn’t be speaking about ways to make it easier for people to borrow money for college; we should be talking about ways to make borrowing large sums of money for education unnecessary.

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Filed under: Borrowing, College, Debt, Retire, Recession

I’m likely a few years off from grandparenthood, but I can’t stop fretting over the downturn’s lasting impact on college financing. One primary financing vehicle (piggybank, if you will) — home equity loans and lines of credit — ain’t what they were mere months ago, as falling home values and rising rates braid a tight, Gordian knot.

There’s more to it than money. For me, it’s about legacy, too: the mark we leave behind on those we love, those we know and even on the more massive world out there. You start to ponder legacy more when you leave work, and think about what’s next.

Grandparents are increasingly helping out with college financing. If tighter credit or other factors makes that harder to do, there may well be a perceived “legacy effect” — a feeling that if I’m less able to help, I’ve somehow failed those I’m leaving behind.

One way to fight this feeling is getting in front of it, and doing whatever you can despite forces out of your control. I like the idea of instilling good saving behavior in young children — whether that’s our children, or our grandkids. There are lifelong benefits that go far beyond education financing.

Financial guru Bambi Holzer wrote a great piece about this for grandparents.com. At around age five, she states, children start to understand how money works, making it a good time to begin teaching them about saving. They’ll begin to catch on when, for example, they see how one week’s allowance might not cover the cost of a coveted toy.

While it can be tough, not opening your wallet each time your grandchild states “I want that!” teaches a similar lesson. Let them discover, as you likely did growing up, that saving for what they want is not only fiscally responsible, but psychologically gratifying.

Holzer says that children who are aware of the high cost of college and who assume some responsibility for paying for it (if even the smallest portion), will assign more value to their education and get more out of it. Makes great sense to me.

Michael Burnham is CEO of My Next Phase, a consulting firm offering non-financial retirement planning products and services (www.mynextphase.com).

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Filed under: Banks, Budgets, Cards, Debt, Saving, The Dolans

Ken and Daria Dolan, America’s First Family of Personal Finance, answer your questions every Friday.

Ken and Daria,

I’m transferring my credit card debt to cards with a 0% introductory interest rate. There are a few fees involved, but I figure I’m saving more on the interest charges. Is this a smart idea?

Jeff

Great question, Jeff (and you might be surprised at our answer). The credit questions are really pouring in, so be sure to check back as we will be answering many more of them in coming weeks. Click on the video below for this week’s answer!

Ken and Daria Dolan offer expert advice on debt management and living credit smart at Dolans.com.

Click here to ask Ken and Daria your question.

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Filed under: Borrowing, Debt

Federal Reserve Chairman Ben Bernanke has suggested he’s entertaining the thought of more interest rate cuts. He states that cuts are possible this year to help the housing downturn and problems in the credit market.

What does that mean for you? Well “interest rate cuts” don’t directly affect consumers. When the Federal Reserve speaks about a cut, they’re speaking about the rate at which banks lend money to one another overnight. All day long the banks are cashing checks and taking in deposits, and at the end of the day they’ve to settle up between themselves. At night, some banks are short on cash and some have extra. The Federal Reserve determines the rate at which they will loan money to each other overnight. That’s what rate we’re speaking about.

But although the “interest rate cut” doesn’t affect consumers directly, it affects them indirectly…. and you can benefit! You will typically see consumer lending rates go down when “the rate” goes down. Most likely, those of you with a home equity line with a variable interest rate will see a drop in your rate. Those who are looking to refinance debt may likely see lower rates from banks and mortgage brokers. So if you’re a borrower, you should be happy to see that your rates could go down a bit this year.

Now if you’re a saver, a drop in the interest rate actually hurts you, because the rates on your savings account and money market will probably go down. Sorry. There are always winners and losers in the consumer finance game. Don’t let it stop you from saving though. You may need those funds for a rainy day.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Bookkeeping, and is the author of Essentials of Corporate Fraud.

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Filed under: Borrowing, Debt, Retire, Wealth

As someone who was born at the end of the Baby Boom and who’s been paying into the Social Security system since I got my first McJob as a teenager in 1982, I’m worried that when it comes time for me to get my cut, there’ll be nothing left. After all, according to USA Today, I’m one of 80 million Americans born between 1946 and 1964 who could qualify for Social Security and Medicare in the next 22 years.

The first wave of Boomers broke into the Social Security system this week, when 62-year-old Kathleen Casey-Kirschling — whose midnight birth on Jan. 1, 1946, makes her America’s first Boomer — signed on for benefits. This opened the floodgates for the 3.2 million citizens who hit the massive 6-2 next year, making them eligible for early retirement. According to the Center for Retirement Research at Boston College, the average age at which workers in this country start receiving Social Security is 63.

Those who’ve crunched all these numbers say that if this trend continues, Social Security rolls will increase by 34 million by 2030, and Medicare by 35 million. The Social Security trust fund will start paying out more benefits than it collects by 2017 and is projected to deplete its reserves by 2041.

While the good folks in Congress all seem to concur that something needs to be done to save Social Security, our elected officials are at loggerheads as to exactly what this something should be. It’s hard to say if this will change under our new president: Of the two parties’ front-runners, Obama, Clinton and Huckabee all favor keeping Social Security solvent, while McCain wants to develop a plan to would grant workers to invest a portion of their payroll tax in private accounts they’d manage themselves.

Given the dearth of solutions coming out of Washington, the Concord Coalition was inspired to organize a “Fiscal Wake-up Tour” to make voters more aware of the Social Security situation and ask us what compromises we’d be willing to make to ensure that future generations get their bennies. the coalition is also asking presidential candidates to explain how they plan to address the long-term fiscal challenges they’ll face if elected.

The tour has caught the attention of the White House. At a recent press briefing, Jim Nussle, director of the Office of Management and Budget, said, “This Fiscal Wake-Up Tour, I think, has been one that has been waking up members of Congress. And you see that in a bipartisan way.”

How Congress will answer this wake-up call remains to be seen.

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Filed under: Budgets, Debt

Oprah Winfrey is giving away digital duplicates of Suze Orman’s book, Women & Money, but the deal ends tonight at 7pm Central…. So hurry on over! The book is the real deal without any gimmicks. It is a PDF of the whole book, but the terms of the download state you’re not allowed to share, copy, or forward your copy of the book.

Women & Money: Owning the Power to Control Your Destiny includes a five month plan Suze has crafted to help “save yourself.” What Suze wants you to do, is to basically educate yourself on the most critical parts of being financially responsible, and she gives you action steps to move toward that. Suze states simplicity is the key, so the plan isn’t complicated.

The book has gotten great reviews, and its focus on women is necessary. Women approach money differently than men, so Suze thought it was the right time to address just women in educating them on money. If you don’t get to this offer in time for your free download, you can still pick it up on Amazon.com.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Record-keeping, and is the author of Essentials of Corporate Fraud.

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