I am pissed.  And you will be too when you hear this.  Instead of just lowering your credit score when you are late, they are lowering your score when you shop at places (with fine credit, mind you) at places where others shop that may have bad credit.  So you will be standing in line with your credit card, getting ready to pay for a usual item, and the person behind is ready to do the same and simply because their score is lower, yours is lowered as well.

Is that fair?  Can they really do that?  What?  WTF?  Really?  Whats going to happen now?  Are stores going to advterise that they only accept business with a certain credit score?  They might have to if you value your credit score.
Ok, maybe thats stretching a bit too far, but honestly, it just seems a bit extreme to judge a person’s ability to payback simply based on anothers ability.  Another person that you don’t even know.  Man, I cannot wait to see what Congress has to say about this…

The credit card companies say that this “behavioral analysis” is simply a new tool to limit their exposure to credit fraud.  

Tool indeed.

I guess the rules really are changing over all.  Data mining is easier then ever, and every purchase we make might set off another slew of aggressive and unfair analytics.  But they changed the rules without telling anyone.  In this turbulent time of economic strife, where there is zero consumer confidence, they put a knife in our back.  Nice.

Happily, there is a little something being done about it.  In 2008, regulators and lawmakers filed a suit against Compucredit for not disclosing this new practice.  It was settled last December to the tune of $114 million where the money went back to the credits of consumers.  American Express who has been shown to have also participated this as well, had the following to say:

Our intent is to strike the right balance between accommodating our card members’ spending needs and, at the same time, prudently managing credit risk.  While we may use additional data points, the driving factor for any credit limit reduction is the customer’s debt level.”

Its not enough they charge incredible interest rates, but to alter the rules, and then not have any transparency about it…pisses me off.  $

For a copy of our letter sent to the Federal banking regulators, click here.  Or click on the image to the left.

Overall, we feel that the proposed rules are long overdue and in general are legitimate in their intentions. While we generally feel the proposals do not go far enough, we applaud the Agencies for taking the first and necessary steps to curb these abusive practices related specifically to credit cards.  MYM proposed amendments to the proposals in the following areas: Allocation of Payments, Applying Rate Increases to Existing Balances, and Firm Offers of Credit.

In addition to the suggested amendments, MYM also suggested that reform be addressed in the following areas that are not currently incorporated into the Fed’s proposal:

• The number of overlimit fees that may be applied in a single billing cycle should be fairly determined to properly put responsibility on the account holder to stay within their limit, but not overly punish them into unaffordable debt.

• Finance charges are often applied at the transaction date and not at the posting date when the money is actually financed. Finance charges should not be charged before the money is actually lent to the consumer.

• Fees charged to a consumers account for non-use of a card should be banned. Credit is something consumers earn and being charged for not using available credit is cruel and irresponsible.

• Penalty interest rates should be capped at a reasonable rate to both interested parties.

• A disclosure should be added to each monthly bill that clearly states the amount of time it will take and the cost to the consumer to completely pay off an account when only making the required minimum monthly payments. $

Both Freddie Mac and Fannie Mae have gotten quite a bit of media attention on their recent bailout, a la Bear Stearns.  While the consequences for this hasn’t been felt yet (and I am pretty sure that we as tax payers are going to be integral in footing the bill) the ramifications of them going under would have been drastic. They still have something to offer, read on to find out what…

Having said that, I think its important to still take a look at what these mortgage companies have to offer.  I am in the long process of doing research on becoming a home owner: looking at the comps in every feasible neighborhood, seeing what it would cost to heat or cool different amounts of square footages, as well as the very process that you need to go through in order to secure the right loan and deal with a real estate agent.  I would like to pass some of this on to you, dear reader.

To begin, we need to look at credit.  Starting about a year ago, I was told by a mortgage broker that my credit needed to be shaped up if I was ever to even think about approaching a lender.  In order to hand over a large chunk of money, a bank needs to know that not only will you be able to pay them back, but that you will be able to pay the interest that invariably comes along with it.  The better the credit score you have, the lower the interest you have to pay due to the fact that you are less of a risk.  Vice-versa, if you have bad credit, you are more of a risk and therefore will need to pay a higher interest rate since to offset the whole risk reward equation.  Credit really bad?  You might not get a loan at all.

TIP:  Be prepared to pay about 30% of your net monthly income on a mortgage payment.  Some might say a different percentage, but either way, err on the side of caution.  Leave room for living.

So I began by paying down credit debt (with first attempting to reach 49% paid off), not being late on a single bill, socking money away, and keeping my checking account in the black.  Mortgage companies look at everything and I mean everything.  They might question why you make X amount and still managed to overdraw your account even for a day.  Now that the economic woes of this country are at full tilt, its getting harder and harder to secure money and lenders are scrutinizing your finances more and more.  Be ready with bank statements sent from your bank, not just printouts off your online access.

There are more little ins-and-outs with respect to just getting the money in the first place, and hopefully we will be able to cover them soon.  Another detail is simply finding the right home in the first place.  Find out what the final amount might be and extrapolate to see what your monthly payment might be.  ZipRealty.com does a great job of integrating a calculator into the bottom of each house listing to show what payments can look like

TIP:  Be cautious of going talking to a real estate agent before you are ready.  Some are very “tenacious” and might not understand if you are just shopping.  ZipRealty will email you quite a bit, but these are automated and are just fishing for customers.  If one gets through, simply tell them you are under contract with another agent and that you are getting comps.

Once you start looking at homes, the best advice I can give is to stay organized.  With the power of the interwebz, it is very easy to accumulate more houses you like than you can deal with.  Create a spreadsheet, and keep files on all the houses you go through.  Even if they are just printouts of home listings, it can come in handy down the road.  Don’t be afraid to include houses that you are not fond of, its just as important to keep track and note what you don’t like about a house as much as you what you do like.  This is a big decision and you need to be as informed and self educated as possible.

One of Freddie Macs tools is a worksheet that does a great job of allowing a buyer to keep track of comparable features of all the homes he or she might come across.  Print this out and use it. We are also going to include it in our list of tools on the right.  Their other tools can be found here.  For both buyers and sellers, ZipRealty.com’s blog might also be worth a look through.

Getting your savings in order is a tricky thing…It’s just enough ‘out of sight, out of mind’ that you can easily dismiss it throughout the day and go to sleep at night thinking, “I need to start tomorrow.”  Then tomorrow comes and its the whole cycle over again.  Over and over again.  One of the things that causes me anxiety is the idea that I will wake up one day, and it will be time to stop working for a paycheck and I will have nothing.  Maybe not nothing, but not enough to fully enjoy the remaining years of my life.  Its a scary thing, but setting up more and more financial vehicles now while there is still time gives me hope.  The hardest part is getting started.  Here are a few ideas:

Set goals. Duh.  This is an easy one.  But to elaborate a little bit, don’t just set goals, keep them.  Make a list and order it from small to grand.  The smaller goals can be anything really, like telling yourself that you will pack a lunch instead of heading out to your favorite hot sandwich spot and record how much you would have spent as well as what you have saved. Give yourself one week to do this and see what happens.  The achievement will be a great boost towards your next goal.  Your larger goals might be something more long term like some sort of time frame to have your mortgage paid off.  This will need its own set of goals of course, so set up another list for that.  Start small so these objectives are attainable and keep moving forward.

The other important thing is to talk to your spouse about what you both want and build the list together.  Its sounds dorky but my girlfriend and I do this almost weekly.  We used to have long drawn out conversations about it as we have a great deal to map out but now that we are clear with each other, these conversations are much more brief and specifically to the point.

Create a cushion. Here is where the saving begins.  Imagine a layoff or some sort of large emergency.  I recently had one and if my buddy hadn’t happened to have a travel voucher on hand I would be out $1300 for a next available flight.  I am grateful to both him and Southwest.  But it made me think:  Thats not going to happen every time.  I need to be ready for anything and be able to take care of myself.  To get this done, set up a recurring money transfer to a savings account that is devoted to be used only when absolutely necessary.  You will have to make a few sacrifices but not much.  And it will be much more worth it in the long run.  Set this goal to be at least 3 months of salary and try to achieve s good chunk of change equally 6 months worth.  I recommend ING Direct, their rates are competitive and when the economy starts to turn for the better (next year? year after?) their rates should be the first to go up.

Pay your bills automatically. We have talked about online bill pay before and while its not the most monumental idea in finance, its still pretty powerful.  Usually what happens is that you think about paying your bills and something comes up and you put it off.  You have the money for it and everything but sometimes it takes a late fee to smack you upside the head to square it away.  Just set up bill pay and save money by not getting a late fee.  Your credit score will thank you for it.

Whats your 401(k) doing? This may seem dry to some but read it anyway…its quick and easy and you really only need to do it once.  If your company has a 401(k) (or a 403(b)) talk to whoever sets it up and takes your order to set it as index funds.  Three to be exact.  One domestic, one foreign and one bond.  This doesn’t have to stay this way and I am sure there are thousands of suggestions as to what it should be but until you are ready to analyze and make informed decisions, this is probably the safest way to go for now.   Take a look at all of what Vanguard has to offer while you are at it.   Feel free to comment about other ideas though!

Automate again. See a pattern?  What you did for your emergency savings as well as your work fund, do this with a Roth IRA and a 529, if you have kids.  Or maybe even if you don’t have kids but you might someday.  These don’t have to be extreme values that cause you to live like a monk but it should be something significant.  Don’t Dump so much money that you can’t live, but then again, $5 a month is not going to work very well for you either.  Moderation.  There is a good quote about moderation that I can’t remember now…

Paper (money) or plastic (card)? Whittle your credit card debt down to one card.  Don’t cancel the rest as your credit score might take a hit but get them to zero.  You now have one bill to look at and keep track of.  Use the card with the lowest rate the most and try to lower all of them by calling.

Challenge yourself to try these.  See what you can achieve.  And then don’t worry so much about it.  Remember that if you slip up, gather yourself up and keep moving forward.  There is nothing gained by worrying about the past.

In light of the fact that this site is predicting its imminent demise (due to factors not yet discussed), we found a Yahoo-er who has some interesting things to say, complete with spelling errors and all. (Read original here.)

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I have been a lender on Prosper.com since March 2007, with about $2,400 invested. Although my projected ROI is currently about 10%, I stopped lending in October for a variety of reasons all linked to Prosper’s management. Basically, the best way to summarize Prosper is that it is a wonderful concept, executed horribly due to the incompetence and arrogance of management.

There are too many serious problems with Prosper to list here, but brief review of www.prospers.org, which is the largest Prosper forums, will provide anyone interested with a long list. Here are a few:

1) The default rate on Prosper is MUCH higher than advertised. Chris Larsen, Prosper’s CEO has been quoted in news articles saying the default rate is 2.7%. While perhaps technically accurate using Prosper’s narrow definition of “default,” this is utter balderdash from any real perspective. Prosper only counts a loan as defaulted when it sells it to a junk debt buyer for pennies on the dollar. However, Prosper currently has such sales only quarterly, so it is not uncommon for there to be many loans that are 5, 6, 7, or more months late. Historically, loans almost never come back from being even 3 months late, so all of these loans are defaults in everything but name. Moreover, Prosper calculates its official default rate as the number of defaults divided by the number of loans, but because many loans are too new to have defaulted even if the borrower never made even the first payment (which happens far more often than you might think), this also tends to understate the default rate. So far as can be seen, the real default rate appears likely to be about 20% (or more).

2) Another problem with Prosper’s handling of defaulted loans, is that the process completely lacks transparency. Prosper flatly refuses to disclose the identity of any of the junk debt buyers that have purchased defaulted Prosper loans, the identity of (or even the number of) any junk debt buyers that have sought or been solicited to participate in the junk debt sales, the process Prosper uses to advertise the junk debt sales to possible buyers, or the method used to calculate the sale prices of the various defaulted loans. Prosper lenders – who, after all, actually OWN the defaulted loans being sold by Prosper for pennies on the dollar – have no idea whether Prosper diligently and/or successfully obtains as high a price as possible for the defaulted loans, or simply sells them off to the first buyer it can find, regardless of price. For that matter, without transparency there is no way to be sure that Prosper doesn’t simply sell the defaulted loans at a favorable price to a company controlled by a Prosper insider. Given Prosper’s many other shortcomings, there is no good reason to believe that Prosper handles the junk debt sales in an appropriate and competent manner. Moreover, there is at least one piece of evidence that it doesn’t. Long before the last junk debt sale, a lender and forum member made a firm offer to purchase a particular loan that was headed to default. He made this offer by sending it certified mail, return receipt requested, to Prosper’s VP of collections and to its General Counsel. Prosper completely ignored this offer for almost two months, and then sent a rejection letter at the same time it sold the loan (along with others) to a junk debt buyer for considerably less than what had been offered to Prosper. This unjustified rejection by Prosper collectively cost the almost three-dozen lenders on that loan $500, which was the difference between the rejected offer and the actual sales price to the junk debt buyer Prosper chose to sell the loan to instead.

3) One of the contributing factors to issue #1, is that Prosper’s collections are anemic. When a loan turns 1 month late it is turned over to Prosper’s collection agency, but historically, only around 15% of loans in collections are brought current. There have been many anecdotal stories by late or defaulted borrowers on Prosper’s old forums that they either were never contacted by the collection agency, or the contact consisted of an email or 2 and maybe a phone call or two. Prosper’s own newly-hired VP of Collections admitted that the call logs from the collection agency showed that they were repeatedly trying to contact borrowers at the same time of day, such as between 3-5 pm, so if the borrower worked during the day, no contact was made.

4) Very little information about the borrowers is verified by Prosper. Prosper selects a subset of fully-funded listings to verify employment and income, but many listings become loans without such verification. Prosper has already had to repurchase about $400,000 of loans under its ID-theft guarantee, meaning that Prosper let many fraudulent loans through its systems. Indeed, there is one case (identified by a diligent forum member) where one person obtained a dozen loans from Prosper under different identities. After the forum member outed this on the old forum, Prosper repurchased the loans and sued the borrower in Los Angeles Superior Court to get its own money back. However, there is substantial doubt among the lending community that Prosper tries very hard to identify ID-theft loans, because when it does, it has to repurchase them from lenders.

5) Although Prosper has funded a number of fraudulent loans, it has also cancelled a number of legitimate loans, apparently through incompetence. One such loan involved the brother of a well-respected Prosper lender and very active forum participant. After claiming that faxed documents were illegible and then that Prosper couldn’t open a .pdf file, it cancelled the fully-funded listing with no opportunity for the borrower to resubmit the documents. There have been many other Keystone Kops situations involving Prosper’s verification.

6) Related to issue #5, Prosper’s customer service is terrible. Often, they let the phone just ring and ring without answering it. When you send an email, the response is often irrelevant boilerplate. Lenders used to provide a lot of Prosper’s customer service for free on their old forums.

7) Prosper’s advertising is highly misleading in many ways, if not downright fraudulent. They overstate interest rates in ads directed to lenders, and understate them in ads directed to borrowers. Prosper was caught once apparently having photoshopped a screen shot of an actual listing in an advertisement about the rate (changing the actual rate to something more beneficial). Also, Prosper has repeatedly sent out mass email ads featuring borrower and lender testimonials that were quickly proven to be false. After the first time, Prosper admitted that it hadn’t verified the facts claimed by the person, and said it would do so in the future. But whoops, they promptly did it again (in a different testimonial) in the next ad.

8 ) Prosper used to have a vibrant community on its official forums, with about 400,000 posts. These forums were an amazing learning experience for lenders, so that new lenders could avoid the mistakes of their predecessors. Prosper banned me from the forums and from lending (although I had already publicly announced that I had stopped lending due to Prosper’s mismanagement) because I sent a bunch of PM’s to new lenders alerting them to the existence of Prosper’s own official forums. Then, the day before Thanksgiving, Prosper deleted its entire forum with no notice, in an effort to hide the truth from new lenders. It then replaced the old forums with a super-moderated version that is completely useless (every post must be approved before being posted, which often takes days even when the moderator lets it through).

9) When another forum member made an archive of the old forums available on www.prosperreport.com, Prosper had its lawyers send a threatening letter seeking to take the domain away on baseless trademark, unfair competition and cybersquatting grounds. Undoubtedly, Prosper figured this person would cave in and take down the site. Instead, he retained a lawyer from Public Citizen, who responded to Prosper’s letter by explaining how Prosper’s claims are entirely without merit. Both letters are posted on the site. Prosper has yet to respond.

(10) Prosper also misappropriated thousands of dollars of lenders’ money by charging its servicing fee on loans that were more than a month late, contrary to Prosper’s own legal agreements. This too was discovered by yet another forum member. Prosper admitted that its action was “in error,” but only recently returned this money to lenders despite having promised to do so months ago.

(11) Another significant issue is whether Prosper will even survive as a company for the three-year term of its loans. As can be seen on www.Lendingstats.com, loan originations have been essentially flat for the last nine months, and Prosper’s CEO has admitted that loan originations need to increase 400%-500% in order for Prosper to turn a profit. Given that, clearly the outlook is troubling. Although the Prosper Lending Agreement specifies that if Prosper goes out of business the loan servicing will be taken over by another servicing company, there is no guarantee that any such company can and will be found, or that the transition will go smoothly, or that the new company won’t require higher fees in order to do the servicing.

(12) Recently, a new potential legal problem has emerged — there is a question as to whether Prosper has been illegally selling lenders unregistered securities. This issue recently caused Lending Club (a newer Prosper competitor) to stop signing up new lenders and to stop selling loans to lenders while it obtains regulatory clearance. This issue has also resulted in Canadian P2P loan operations being shuttered. While Prosper has stated that it believes it is in compliance.

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Lend and borrow at your own risk!

Credit card companies are coming under fire lately, and in our opinion, deservedly so. Credit cards of all kinds are now taking advantage of the 10 pages of fine print you agree to when signing up for a new card, which gives them the rights to basically do whatever they wish to your interest rate. It is not uncommon now for good customers, those that pay their card in full every month on time, to have their rates raised. Sound unfair, well it is. Because of the problems associated with the mortgage mess and even hedge funds, banks are now looking for other ways to balance their books, and they are turning to the average consumer.Congress is now in tune to the problem and has held various oversight hearings. However, we feel it is unlikely that any major reforms in the industry are likely during the election year, but attention to the issue will only heat up. Half of Americans carrying total credit card debt average around $10,000 each (according to the U.S. PIRG). Because of the enormous amount of debt people are facing in other areas of their life with student loans, ARM mortgages etc., it’s hard for anyone to afford jacked interest rates on their credit cards.

Common Practices Credit Cards are Using to Get More From You

Double-cycle billing: This is a practice, which is confusing when explained in plain English, let alone when sifting through the fine print. Here, banks issuing credit cards will charge you interest on the entire amount you charged during a billing cycle, regardless of the amount you actually pay off. For example, if you charge $2,000 one month and pay off $1,900 leaving a balance of $100, the bank will make you pay interest on the full $2,000 in the next month and beyond, until the remaining $100 is paid off.

Universal Default Pricing: This is a practice where banks are taking advantage of good responsible customers. Regardless if you have never missed or had a late payment on your current credit card, companies may now raise the current interest rate on your card if you are late on a completely different bill with a completely different company. In addition, they can raise your current rate if your credit score falls.

Zero-Tolerance Late Payment Policies: Little leeway now is given to customers from certain financial institutions. You can now be charged the same late fee for being an hour or a day late as those customers who are months late on their payments. Keep in mind that due to the magical fine print you agreed to, any late fees may also result in a penalty rate imposed on your account, which according to CNN can top 30%, which can be applied to not only purchases you are going to make in the future, but also the ones you made last week!

Suggestions
Milk Your Money is troubled by these practices, which are becoming more common, and has a few recommendations you should take as a cardholder to ensure you are not a victim of these rate hikes.

1) Read your statement each month. Look to make sure that the interest rate remained the same from the previous month. Look to see if any fees or penalties were charged to your account. If any of these appear on your statement, call you company and get explanations, you many see these charges dropped, just for asking.

2) Stop using multiple credit cards. The more credit cards you are using, the more likely you are going to “break the rules,” with one of the companies. For example, you might go over your credit limit or forget a payment. Focus on using one card and really understand the terms of the card to ensure you use the card only to your advantage.

3) Forget about rewards programs if you are paying interest month to month. Rewards from credit cards should only be taken into consideration for those that are truly responsible with their spending. Rewards average around 1% of your total purchases. This is a number, which is wiped out with one late fee assessed to your account or a month-to-month interest payment. Companies love that people are obsessed with earning frequent flyer miles or any other reward when using a card, many of these people don’t look at their credit card statement, but do look at how many miles they have earned. Money is money, so treat it that way.

4) Call your card issuer and ask for a lower rate. We have stressed this before in an earlier post. Nearly half of the people who call into their company asking for a reduced rate are successful. This is an amazing number! Credit card companies spend so much money marketing their cards and gaining new customers, that once they have you, they don’t want to lose you. Take advantage of this and ask for a lower rate today! $

Participating in your employers 401(k) match program allows for a great way to accelerate your retirement savings, but have you ever considered using your credit card rewards program as a means to save?  Although rewards programs are all over the map in their offerings, certain programs present a great way to add to your future nest egg.  Despite the great opportunity for additional savings, nobody paying interest on their current card should spend with the rewards in mind – no program will out accrue your current cards interest rate.

What I Do
My wife and I use a credit card for nearly 100 percent of our purchase and about 50 percent of our monthly bills.  Because charging as much as we do can lend itself to overspending, it is only recommended for disciplined spenders that stick to a budget and spend only what you can afford.  If cards are used like this, they actually offer you a no interest loan during the grace period in additional to the cash back award.  Hey, it’s free money – if you have the discipline, take it.      

I now have a personal IRA account with Sharebuilder, which offers a Visa card with a 1 percent cash back on all purchases.  This program in my opinion is extremely valuable, because the cash back is automatically deposited into your Roth IRA, instantly earning additional monies in a money market fund.  Also, because Roth IRA’s grow tax-free, the free money you earn is truly all yours. 

One percent may not sound like much, but considering how much you spend in a year, coupled with compound interest, has the  potential to add up to a significant amount.  Like I said above, we use our card for nearly all our purchases and about 50 percent of our bills.  Last year alone, we put about 36k on our card (remember, we are constantly paying it off, with multiple payments throughout the month). As you can tell from the figures below, using your card the right way can really boost your savings.

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Estimated Earnings Potential -

Average yearly amount spent on card = $36,000
Average yearly cash back amount received = $360
40-year earnings based on an 8 percent return = $ 104,730.23
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Remember if you decide to use your card as a savings vehicle, keep your debt to credit level around 35 percent as to not negatively affect your credit score, learn more about what I mean here.  Also important to keep in mind is that most rewards programs have limits as to the actual amount of money you can receive in a year while participating in their programs.  Do you currently participate in a rewards program worth sharing? $  

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Improving and maintaining your credit score is one of the best ways to qualify for lower interest rates, acquire credit, and reduced insurance premiums. However, the majority of us don’t keep a close enough eye on our credit scores and frankly probably don’t understand them. How your credit score is actually determined is a topic for another post, but today we feel it’s important to give everyone a few methods to improve your current score and if you’re lucky, maintain a high one.

Pay Your Bills on Time
A significant portion of your credit score is determined by your history of making on time payments. Missing just a couple payments can knock your score down and which only time can heal. Do your best to get into a routine when it comes to paying bills, or better yet, organize your bills with online bill pay.

Keep Credit Balances Low
It’s good to use your credit, but not all of it. You will hear different percentages of how much of your credit you should actually spend, we think around 35 percent is a good number to try to stay under. In other words, if your credit card balance is $5,000 try not to charge more than $1750 on it. This shows that you have credit, but also restraint from blowing it all.

Don’t Cancel Your Oldest Cards
Another factor weighed into your credit score is your credit history. Because of this, you should try to keep your oldest accounts open to show that you are a good long-term customer. Even if you are not using your oldest cards, you will benefit by not closing the accounts.

Try to Avoid Pulling Your Credit
Each time you apply for a credit card or get a quote on a loan, your credit is pulled to help determine the amount of money a lender should give you as well as what interest rates. If you have an excessive amount of inquiries, it will negatively affect your score. It’s good to remember that shopping for loans is not a bad thing and is actually encourages, but try to keep your inquires within a 30 day window.

[Ben's Note: Don't forget that you are entitled to 1 free credit report a year and that there are 3 credit scoring bureaus; TransUnion, Experian, and Equifax. One more thing... MyFICO has a great deal of information in addition to a nice little widget on their front page that shows what your payments might be based on the loan amount and where you live against a spectrum of potential FICO scores, it really shows the difference in payments with a shift in your score! Read all about it.]

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We hear from a good number of people that they would like to have more money. Not just have more, but make more. They talk about the need to get a better paying job, how they can barely afford to pay the bills and if only they made more money every month, then all their problems would be solved. However, having more money, can in many situations, make things worse. Its just about a proven fact that a huge majority of lottery winners end up in ruin not because they have too much money, but they use that money to dig themselves a hole of debt. It takes a considerable amount of discipline to manage huge sums of money and the truly wealthy are good at it, simply because they have had the practice. Who is going to be a better golfer: Tiger Woods with the run of the mill clubs, or you, who has the bleeding edge of club technology? There’s an analogy in there somewhere, but I digress…

»What we need are not only a few simple steps to get us on the right track but also the ability to stay on that track. Before you think to yourself, I need more money, think about making the most of what you already have.«

1. Stop the Bleeding – Get a detailed printout of your current monthly purchases and give it a hard look. What are the most common things you buy? For my girlfriend it was Starbucks. Every morning she would order a half-caff, triple latte, super espresso quad-shot coffee that would have given your whole family a permanent orange afro after it peeled the paint off your house. You can imagine how expensive this was, especially on a daily basis. It adds up and now that she brews it herself, we save, literally, about $130 a month. Apply these thoughts to your own image of spending. What are buying constantly that might be considered “extra.” It’s ok to cut out a little at a time; the goal is to not alter your lifestyle, but to reduce the expenditures that come along with it.

2. Budget – Get into the habit of monitoring your finances on a weekly basis. Set aside a solid 20-30 minutes a week to assess your money. Examine what you spent money on and what you saved and keep track of it. Even if you don’t necessarily have a perfect day, the notes and trends you see will help you in the long run. Wealthy people seem to never worry about their money, but they have a very accurate pulse on their financial situation. There are several ways to do this; Quicken, Microsoft Money, Mint, Wesabe, Geezeo and Lazy Man’s personal fave: simple spreadsheet. Here’s ours.

3. Bills – One way to manage bills is to set up automatic payments, once you are caught up of course. It is far better to scrape by until you adjust than to miss a payment here and/or there and have your credit report take a hit from late or non-payment. You will also be able to judge for your budget how much you have left over and set that money aside preemptively. Then you don’t have to worry about it, its being paid. Important note: Keep very specific notes on all bills you set up for auto bill pay. You are going to consult this whenever it comes time to buy other items, like groceries for example. Keep close track until you are in the habit of recognizing how much you have every month.

4. Saving Methods – We are big advocates of investing, but then again that’s the industry where both Frank and I work. However, there are few drier things then learning about stocks, bonds, interest rates, capital gains, tax exemptions, deductions, liquid returns, and P/E ratios for most of us to entertain for any length of time. Lately, we have been talking about some of the most sure fire ways to save without thinking about it. Both Wachovia and Bank of America have saving programs that set aside small sums frequently over the course of your spending, and employers will set any amount aside for you into any account you choose. ING Direct has some nice rates for long term savings, as well as checking. Keep in mind that rates are not good right now due to the Fed dropping them so low. Watch this, history has shown that when they get very low, it comes time to crank them up and when they do, especially when the economy is in this sort of situation, you can almost bet that it will be fast. But that’s a whole other article.

5. Maintaining Financial Discipline – After all this is said and done and you feel as though you have reigned in the wild spending of your spouse, or yourself, you are going to need to be diligent about keeping up with it. Educate yourself. Yea, its hard work and is sometimes a little boring. But then again 1) if it were easy, you would already be doing it and would not be reading this 2) eventually, it will be a habit and over time it will really pay off. No pun intended. (Well, maybe a little intended.)

6. Temptations – What about when we get into having a few extra dollars coming our way? These sorts of things happen from time to time and the best policy is to really just grab onto every penny and not let go. Populate an emergency fund in a high interest money market, or at least in a savings account with your current bank. Then forget about it. Its hard to convey this but you will absolutely be glad you did when the time comes. If you have already done that, then jumpstart your 401(k)/403(b). If you are already maxing that out, then drop it into an index fund. Anything, but park it into your checking account and having access to it through your debit card. The same applies with any windfall or raise. Be disciplined and simply try it. You will be amazed at the results.

These are but a few most basic principles to consider but powerful none the less. Take advantage of what you are already making and be diligent and you might find a few financial surprises right under your nose. $

MilkYourMoney.com has received an increasing amount of traffic directed to an earlier post titled, “How Do the Federal Interest Rate Cuts Affect My Student Loans,” in recent days and with good reason.  The Federal Funds Rate has been dramatically reduced in the last couple of months, which has adjusted borrower’s monthly payments for nearly every loan borrowed at a variable rate, including credit card rates.  However, depending on the benchmark for which your loan rate is based, your loan could actually be moving in the opposite direction of the rate cuts – which is the case for my private student loans. 

This weekend, my wife and I received a letter from Iowa Student Loan’s (my borrower) offering, what I consider, a rare opportunity.  Because my private loan interest rates are based off the Cost of Funds Index (COFI), my interest rates have actually spiked from 8% three months ago to around 13% as of April 1, 2008.  Because of this unaffordable rise in interest rates for many private loan borrowers, Iowa Student Loans  has offered us the opportunity to amend our original loan contract and adjust the benchmark our loans follow in order to determine our rates to the London Interbank Offered Rate (LIBOR) benchmark.  If I choose to amend my original loan contract to use the COFI benchmark, my rates would drop from the current 13% to around 6.5%. 

I can’t help but to think the current strains our economy is facing due to the mortgage crisis is the primary reason for our lenders recent offer.  Most lenders are finding themselves in a position where higher interest rates, which ultimately give them higher profits, are not benefiting them because the higher rates are actually pushing some borrowers into default.  Job losses, the declining dollar, rise in commodities are all, in my opinion, forcing banks to become more consumer friendly.  (An interesting fact, student loan debt is the only debt that dies with you, no survivors have to make payments on your behalf.)      

I have until April 30th to decide if my wife and I should make the move to the new benchmark.  At the surface, the decision sounds like an obvious one, which is exactly what makes me hesitant.  I need to do some research to determine over a 20-year period which benchmark, the COFI or the LIBOR would offer me the most consistent lower rate, thus, saving me the most money in interest payments.  It’s also important for me to consider how these benchmarks are set and if they move independently of the Federal Funds Rate. 

Below I have included more information on the two benchmarks – what should I do? 

Cost of Funds Index (COFI)
Currently, my private variable student loan rates are based off the COFI.  The COFI is a regional average of interest expenses incurred by financial institutions that is used to calculate variable rate loans.  To our knowledge, the COFI rate is a private calculation between banks and is not available to the public.  Most lenders readjust your rate quarterly (every three months) based off this average.  Most importantly, the COFI is not directly linked to the federal funds rate, which means the index does not move in the same direction as the recent rate cuts.  In fact, since January 1, my student loan rates have actually increased.  You can easily find out how your student loan rates are set by calling your lender and asking, it worked for me.

London Interbank Offered Rate (LIBOR)
Many lenders will use this rate if you decide to consolidate your private student loans with a variable rate product.  The LIBOR rate is the interest rate the most credit-worthy banks around the world charge each other for loans.  The rate fluctuates throughout the day based on the market, similar to stocks.  Most Student loan lenders that set their rates using LIBOR will readjust their rates quarterly, based on the LIBOR rate + an additional percentage depending on factors like if you have a co-signer, how big of a origination fee you choose etc.  For example, if I were to consolidate my student loans now my rate would be based of the LIBOR Rate from the start of the new quarter (January 1) which was at 5.12% + 3.14%(call your lender to ask what this additional amount will be) for an interest rate of 8.26%.  It is important to remember that the LIBOR rate moves independently of the federal funds rate. $

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It’s strange how the conveniences in our lives continually improve but we seem to constantly be on the run with more things to do. We no longer have to go to the store to rent movies, we can now have our groceries delivered to our door, and we can even hire life coaches to take care of the odds and ends we don’t have time for. Then there is the whole outsourcing concept. In all of our hustle and bustle, it’s important we take advantage of online bill pay, another added convince, which not only saves us time, but also saves our credit scores.

Credit Scores and Monthly Bills
A significant part of your credit score is your ability and history of making on-time monthly bill payments. Falling behind on a few monthly bills – which would ultimately be reported to a collection agency – will significantly affect your credit score. There is a perception that our credit history relies mainly on our current and future debt, and the importance of our monthly bills is downplayed. Although determined in a complex way, our credit scores can be maintained and improved mainly by being responsible consumers.

Online Bill Pay
Nearly all major banks now offer some kind of online bill payment system. If you are not familiar with these, they allow us to consolidate all of our monthly bills into one online source that makes paying our bills a breeze. I use Wachovia, which in my opinion has an excellent bill payment system. I use Wachovia to pay all of my bills, which saves me a lot of time and headaches. It literally takes about 5 minutes to pay my bills for the entire month. Below is what I consider the top 10 reasons to use online bill pay:

Top Ten Reasons to Use Online Bill Pay
1. No Postage Necessary. We no longer have to mail in personal checks – I can’t even remember the last time I bought more than one stamp.

2. Bill Reminders. Have reminders automatically emailed to you so you never miss a payment again.

3. Records. Every time you pay a bill using an online source, a copy is saved in their network, which makes record keeping a breeze.

4. Time is Valuable. Have you ever realized a bill is due tomorrow? Now it doesn’t matter, most bills will reach their destination either automatically or the following morning.

5. Credit Score. As I mentioned above, a missed bill payment can shave valuable points off your credit score.

6. Eliminate Paper Bills. Do you no longer eat at your kitchen table because it’s full of mail – this is the case with me. You can have your bills automatically sent to your bank account to eliminate the mailing of paper bills. Go green.

7. Organization. Within seconds you can see your list of bills, whether they have been paid or not and their due dates, all of which can easily be lost or forgotten otherwise.

8. Flexibility. Let’s say a bill is due in two-weeks but you will not have the money until a day before the due date. With online bill pay, you can easily set your account to pay the bill whenever is convenient for you.

9. Automatic Reoccurring Payments. Most people have a few bills where the amount never changes. With these, it’s easy to setup an automatic payment, which will pay the bill at the same time every month without us doing anything.

10. Because its 2008!

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