ConquerYourDebt.com

The LA Times reports on a growing, but highly risky, trend of using rising home values as an income source. As home values rise, homeowners are refinancing and pulling cash out of their homes.

As they happily watch their houses swell in value, Americans are changing their attitudes toward mortgage debt. Increasingly, a home is no longer a nest egg whose equity should never be touched, but a seemingly magical ATM enabling the owner to live it up or just live.

Homeowners took $59 billion in cash out of their houses in the second quarter, double the amount in the 2004 quarter and 16 times the average rate of the mid-1990s, according to data released this month by mortgage giant Freddie Mac.

People are cashing out so quickly that the term “homeowner” may soon be inaccurate. Fifty years ago, Americans owned, on average, three-quarters of their house and the lender owned the rest. These days, it’s approaching an even split.

My favorite part of the article though would have to be:

Such thriftiness has gone out of fashion. What was once considered undesirable — taking on large debt — is now seen as smart. And what used to be smart — becoming debt-free — is described as imprudent.

“If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years,” said David Lereah, chief economist of the National Association of Realtors and author of “Are You Missing the Real Estate Boom?” “It’s as if you had 500,000 dollar bills stuffed in your mattress.”

Subscribing to that link of thinking is only pushing the ‘montly payment’ life style. So why is this equity as income such a bad thing? One only needs to look to Friday’s statements by Alan Greenspan:

WALL STREET shuddered yesterday after Alan Greenspan, the United States’ central banker, warned American homebuyers that they risk a crash if they continue to drive property prices higher.

He said that the US house-price spiral had become an economic imbalance, threatening stability like the country’s trade gap or its budget deficit.

He said “history had not dealt kindly” with investors who kept ignoring risks.

Source: Times Online

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Ahh, the dreaded B-word.

Creating a budget really isn’t that hard, sticking to it is a different story.

The basics of the budget is to calculate your monthly take-home income. From that total, your first priorities are rent/mortgage payment, food, utilities and insurance. After those are satisfied, use the up the rest of your cash-inflow to assign to your debts, making sure every dollar is accounted for. If you need to give yourself a category for “spending money,” do so…everyone is human.

The key to making your budget work is sticking to it. Prior to every month, you should have this set up, and know where every dollar is going. If you can’t commit to sticking to a budget you set up, then you might want to analyze your spending habits. Keep a journal for the next month documenting every dollar you spend and find your money blackholes.

If you’ve created you budget, covering your necessities and the minimum payments for you debts and you find “too much month” and “not enough money,” you will need to start looking to trim the fat even further. The bad news is that you have a debt problem. The good news is that creating a budget gives you first the step to getting rid of that problem. I’ll explain more on dealing with this situation in coming entries.

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If you still haven’t caught on to the evil actions of credit card companies, perhaps this article from the Chicago Tribune will help clarify the situation.

Those disclosure notices you’ve been getting with your credit card bill, the ones written in tiny print, are warnings of changes that could cost you money.

Financial institutions have been bumping up interest rates in reaction to Federal Reserve Board hikes, but now they are tinkering with minimum payment amounts and grace periods.

“Like all of corporate America, they are trying to grow profits in any way they can,” said Greg McBride, senior financial analyst for Bankrate.com. “Not one of the changes works for the benefit of the cardholder. It all works for the benefit of the company.”

Read the full story

I’m not ashamed to admit that I used to be a slave to my cards, but for me it took a quick calculation one month of just how much we were paying each month just covering the minimum payment to realize what we could be doing with all of that money.

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Judging from the ways people are finding their way to this site from the search engines, it seems that there are quite a few people who are in the same boat I was and looking for help in paying off their credit cards.

While the plan we used to pay off our debt is not rocket science, it did take a monumental change in our approach to money to even begin to think about our end goal.

The plan we used was based upon the book The Total Money Makeover: A Proven Plan for Financial Fitness.

In a nutshell, the plan is broken down into a series of baby steps.
1. While making minimum payments, put together an emergency fund of $1000 (essentially to break the cycle of using credit cards for emergencies).
2. List your debts from smallest to largest, pay the miniums on the larger debts and throw every dollar you can scrape together at the smallest. As you pay one off, move to the next debt in the list. (a series of small wins will give you a sense of accomplishment and keep you motivated).
3. When all of your debt except your house is gone, fully fund your emergency fund with 3-6 months worth of expenses.

The book then covers remaining steps for investing for the retirement, saving for college, paying off the house, etc.

On a side note, he also has a popular radio show. You can listen online, or download the previous two weeks of shows, or download a 1-hour commercial free podcast from the previous day’s show at: DaveRamsey.com.

There is also a support site for his book: MyTotalMoneyMakeover.com.

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By this time next year, your minimum monthly payment for your credit card(s) will double. The federal government is requiring all banks to raise the minimum monthly credit card payment from 2% to 4%.

Consider a family with three credit cards all with interest rates of 16 percent, which is a standard rate.

Card #1 has a $2,500 balance. At two percent, the minimum monthly payment on is about $50 dollars–$33 goes toward interest; $17 to principle. At four percent, the minimum monthly payment doubles to $100, $33 still goes to interest; but $67 goes toward principle.

Card #2 has a $6,000 balance. At two percent, the minimum payment is $120 with $40 going to principle and $80 to interest; at four percent it’s $240 with $160 going to principle and the remainder to interest.

Card #3 has a $10,000 balance. At the new 4 percent minimum, the $400 payment would cover $267 in principle and $133 in interest.

While the family would be paying off their balances much faster, their monthly payments would double from $370 a month to $740, something that many would probably find difficult to afford.

Then consider that most families have 5 to 8 credit cards.

Read the full story.

While this might just be the kick in the pants some people need to pay off their credit cards balances faster, it could be a scary proposition to those who only make their minimum payments. Escpecially when you consider only one in six families pays more than the minimum due every month.

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It’s no joke. American consumers seem to be turning the corner on credit card debt and wisening up to the dangers of what has become “normal.”

But all is not tulips and nectar over at MBNA, the largest independent issuer of credit cards. Yesterday it reported a poor quarter and ratcheted down earnings expectations for the year. Its stock sank to a two-year low. Credit card giant Capital One Financial had a better quarter, but its stock has been slumping lately, too. Bad news for the credit card companies may be better news for us. There are signs at both companies that consumers may be responding to higher rates by doing something almost completely unexpected and practically un-American: paying down credit card debt.

If you are still in the dark as to what the credit card companies expect from their customers, the following should give you ample insight:

The credit card industry presumes, based on happy experience, that Americans will borrow more money each quarter to support their spending habits, regardless of the direction of interest rates, and that enough consumers will be happy simply to pay off just enough debt to allow them to borrow more.

Read the full story at Slate.

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A 302-126 vote by the House sent the legislation to President Bush, who is eager to sign it, the biggest rewrite of the bankruptcy code in a quarter-century. It marks the second major change in law to benefit business since Republicans increased their House and Senate majorities in last fall’s elections.

Debate in the House was acrimonious as Democratic opponents warned that the measure would hurt the economically vulnerable.

After eight years of strenuous efforts by congressional backers, banks and credit card companies, the legislation was catapulted toward enactment starting earlier this year. The legislation, which garnered some Democratic votes, cleared the Senate last month on a 74-25 vote.

The measure would require people with incomes above a certain level to pay credit-card charges, medical bills and other obligations under a court-ordered bankruptcy plan.

Opponents say the change would fall especially hard on low-income working people, single mothers, minorities and the elderly and would remove a safety net for those who have lost their jobs or face crushing medical bills.

While I don’t believe bankruptcy is needed in the vast majority of filings by individuals, I have issues with any bill that seeks to give protection to the credit card industry. The overly-aggresive marketing tactics of the credit card companies go too far with encouraging the practice of indebtedness.

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If you do not recognize information on your credit report, or believe an item may be inaccurate, you may request credit reporting agencies to investigate the data and correct any discrepancies. Only inaccurate information may be removed from your credit report; negative information that is accurate will stay on your credit report as long as governing laws allow.

Transunion:
Credit Report Dispute Process

Experian:
Disputes

Equifax:
How to Dispute

A note on Credit Repair Services:
If you are tempted to contact a credit repair company for help, use considerable caution. The FTC and a number of state attorneys general have sued credit repair companies for falsely promising to remove bad information from credit reports. Only inaccurate information may be removed from your credit report; negative information that is accurate (such as a bankruptcy filing or a defaulted loan) will stay on your credit report as long as governing laws allow.

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Soon you’ll be able to get your credit report for free. A recent amendment to the federal Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies to provide you with a free copy of your credit report, at your request, once every 12 months, from www.annualcreditreport.com. The Federal Trade Commission (FTC), the nation’s consumer protection agency, has prepared a brochure, Your Access to Free Credit Reports, explaining your rights and how to order a free annual credit report.

A credit report contains information on where you live, how you pay your bills, and whether you’ve been sued, arrested, or filed for bankruptcy. Nationwide consumer reporting companies sell the information in your report to creditors, insurers, employers, and other businesses that use it to evaluate your applications for credit, insurance, employment, or renting a home.

Consumers in Western states will first be able to order their credit reports under the federal law beginning December 1, 2004.

Free reports will be phased in during a nine-month period, rolling from the West Coast to the East beginning December 1, 2004. Beginning September 1, 2005, free reports will be accessible to all Americans, regardless of where they live.

Consumers in the Western states – Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming – can order their free reports beginning December 1, 2004.

Consumers in the Midwestern states – Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin – can order their free reports beginning March 1, 2005.

Consumers in the Southern states – Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, Oklahoma, South Carolina, Tennessee, and Texas – can order their free reports beginning June 1, 2005.

Consumers in the Eastern states – Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Vermont, Virginia, and West Virginia – the District of Columbia, Puerto Rico, and all U.S. territories can order their free reports beginning September 1, 2005.

How do I order my free report?

You can order your free annual credit report online at www.annualcreditreport.com, by calling 877-322-8228, or by completing the Annual Credit Report Request Form and mailing it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

When you order, you need to provide your name, address, Social Security number, and date of birth. To verify your identity, you may need to provide some information that only you would know, like the amount of your monthly mortgage payment.

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Fair Debt Collection

If you use credit cards, owe money on a personal loan, or are paying on a home mortgage, you are a “debtor.” If you fall behind in repaying your creditors, or an error is made on your accounts, you may be contacted by a “debt collector.”

You should know that in either situation, the Fair Debt Collection Practices Act requires that debt collectors treat you fairly and prohibits certain methods of debt collection. Of course, the law does not erase any legitimate debt you owe.

What debts are covered?
Personal, family, and household debts are covered under the Act. This includes money owed for the purchase of an automobile, for medical care, or for charge accounts.

Who is a debt collector?
A debt collector is any person who regularly collects debts owed to others. This includes attorneys who collect debts on a regular basis.

How may a debt collector contact you?
A collector may contact you in person, by mail, telephone, telegram, or fax. However, a debt collector may not contact you at inconvenient times or places, such as before 8 a.m. or after 9 p.m., unless you agree. A debt collector also may not contact you at work if the collector knows that your employer disapproves of such contacts.

Can you stop a debt collector from contacting you?
You can stop a debt collector from contacting you by writing a letter to the collector telling them to stop. Once the collector receives your letter, they may not contact you again except to say there will be no further contact or to notify you that the debt collector or the creditor intends to take some specific action. Please note, however, that sending such a letter to a collector does not make the debt go away if you actually owe it. You could still be sued by the debt collector or your original creditor.

May a debt collector contact anyone else about your debt?
If you have an attorney, the debt collector must contact the attorney, rather than you. If you do not have an attorney, a collector may contact other people, but only to find out where you live, what your phone number is, and where you work. Collectors usually are prohibited from contacting such third parties more than once. In most cases, the collector may not tell anyone other than you and your attorney that you owe money.

What must the debt collector tell you about the debt?
Within five days after you are first contacted, the collector must send you a written notice telling you the amount of money you owe; the name of the creditor to whom you owe the money; and what action to take if you believe you do not owe the money.

May a debt collector continue to contact you if you believe you do not owe money?
A collector may not contact you if, within 30 days after you receive the written notice, you send the collection agency a letter stating you do not owe money. However, a collector can renew collection activities if you are sent proof of the debt, such as a copy of a bill for the amount owed.

What types of debt collection practices are prohibited?
Harassment. Debt collectors may not harass, oppress, or abuse you or any third parties they contact.

For example, debt collectors may not:

• use threats of violence or harm
• publish a list of consumers who refuse to pay their debts (except to a credit bureau);
• use obscene or profane language; or
• repeatedly use the telephone to annoy someone.

False statements. Debt collectors may not use any false or misleading statements when collecting a debt. For example, debt collectors may not:

• falsely imply that they are attorneys or government representatives;
• falsely imply that you have committed a crime;
• falsely represent that they operate or work for a credit bureau;
• misrepresent the amount of your debt;
• indicate that papers being sent to you are legal forms when they are not; or
• indicate that papers being sent to you are not legal forms when they are.

Debt collectors also may not state that:

• you will be arrested if you do not pay your debt;
• they will seize, garnish, attach, or sell your property or wages, unless the collection agency or creditor intends to do so, and it is legal to do so; or
• actions, such as a lawsuit, will be taken against you, when such action legally may not be taken, or when they do not intend to take such action.

Debt collectors may not:

• give false credit information about you to anyone, including a credit bureau;
• send you anything that looks like an official document from a court or government agency when it is not; or
• use a false name.

Unfair practices. Debt collectors may not engage in unfair practices when they try to collect a debt. For example, collectors may not:

• collect any amount greater than your debt, unless your state law permits such a charge;
• deposit a post-dated check prematurely;
• use deception to make you accept collect calls or pay for telegrams;
• take or threaten to take your property unless this can be done legally; or
• contact you by postcard.

What control do you have over payment of debts?
If you owe more than one debt, any payment you make must be applied to the debt you indicate. A debt collector may not apply a payment to any debt you believe you do not owe.

What can you do if you believe a debt collector violated the law?
You have the right to sue a collector in a state or federal court within one year from the date the law was violated. If you win, you may recover money for the damages you suffered plus an additional amount up to $1,000. Court costs and attorney’s fees also can be recovered. A group of people also may sue a debt collector and recover money for damages up to $500,000, or one percent of the collector’s net worth, whichever is less.

Where can you report a debt collector for an alleged violation?
Report any problems you have with a debt collector to your state Attorney General’s office and the Federal Trade Commission. Many states have their own debt collection laws, and your Attorney General’s office can help you determine your rights.

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