Numerous stories are popping up around the personal finance blogosphere with regard to the fact that Chase is raising the minimum payment on its credit cards. Last month, I wrote a post about things are about to get ugly for consumers in terms of their credit card accounts. So it was no surprise when that post (although a month old) saw this recent comment from a reader, Lisa:

Yesterday (6-25-2009) I got a notice saying my “minimum” monthly payment was going from 2% to 5%. That means my payment of $345.00 will start to be $810.00 in August. I will not be able to afford that. Mind you, I always pay my bills, don’t get late payment charges and the last time I checked, my credit score was like 797. Yes! I’m having financial troubles and am just barely holding on. This will send me over the edge - especially if my other credit cards follow this one. … HELP!

This is probably a common refrain across the nation right now. And, sadly, this new rule is aimed exactly at folks like Lisa. Chase will keep your minimum payment at 2%, if you agree to allow the company to raise your interest rate. The most common recipients of this change to credit card terms are those with low introductory rates of between 2.9% and 5.9%. You can see where this is going. The higher interest rate means Chase gets more money, and allowing you to keep the lower minimum means that you make payments for longer — meaning Chase gets more money. The way I see it (and every situation is different), there are three options here:

Option #1: Suck it up and make the new minimum payment

If you don’t agree to the higher interest rate (and keeping the current minimum payment), you will have to make the new payment. Since you have about a month, now is the time to do some serious surgery on your personal finances. Look over your budget and see where you can make cuts. This may include cuts to entertainment, cell phones, eating out and other negotiable expenses. (Note: Your housing payment, especially if you have a mortgage, is not negotiable. Always make sure this is paid.) Figure out which expenses you can cut and get it so you can make the new minimum payment. It’s not pleasant, but in the long run, you will save money in interest and pay off your debt faster.

Unfortunately, many people do not have the option to cut back so dramatically. The current economic conditions mean that some folks, due to cutbacks or layoffs at work, do not have the ability absorb an increase of the magnitude proposed. In such cases, you might go with:

Option #2: New loan

In some cases, it might be wise to get a new loan to cover the amount of what you owe. Pay off the credit card, and move on. Of course, you still have a loan. You might try switching to a different credit card with an introductory rate of between 0% and 3.99%. You could also consider getting a debt consolidation loan from somewhere. If you have reasonably good credit, you might be able to get a personal loan with an interest rate of between 7% and 12% from your bank or credit union. (While this is higher than your intro rate, it is likely to be a lower rate than what the credit card will offer you in exchange for keeping the minimum low.)

Another possibility is to use P2P lending, such as Prosper or Lending Club to help you lower your payments. In any case, though, I would think twice (or thrice) about using a home equity loan to secure your credit card payment. Do that last.

Option #3: Debt settlement or bankruptcy

If nothing seems to be working at all, you can reach for the final tool of desperation in these cases: Debt settlement or bankruptcy. You can usually reach settlement for unsecured debt, allowing you to pay less than you currently owe on your credit card. As an extreme last resort, bankruptcy can help lower your payments to something affordable (even though in recent years bankruptcy laws rarely allow you to walk away). In both cases, your credit will be shot, so it is not a decision to be taken lightly.

What will you do if your credit card minimum is raised?

image source: daylife

Disclaimer: I am not a financial professional. Any information you get from this site is not intended as advice. It is likely to be incomplete, and it may not apply to your individual circumstance. Do your own research, consider your situation and/or consult a professional before making money decisions.

I’ve finally decided to joing the club: Weekly personal finance reading that I liked (in no particular order) especially this week. I hope it’s useful to you. Feel free to share your favorites in the comments.

• Tempted To Spend? Remove The Source of The Temptation at Bible Money Matters.
• On Spending Consciously at Cash Money Life.
• When Spending the Money is Worth the Cost at My Two Dollars.
• 10 Smart Student Credit Card Rules at Bargaineering.
• An Age-Based Plan For Teaching Kids About Money at Frugal Dad.
• Choosing a Withdrawal Rate for Your Retirement Assets at Good Financial Cents.
• How To Improve Your Productivity When Working From Home at Moolanomy.
• Confessions Of A Recovering Spendaholic at Free From Broke.
• How the Foot-In-The-Door Technique Costs You Money at The Simple Dollar.

We’ve all heard about the great deals being cut for a number of companies. They’ve enjoyed bailouts and preferential treatment on their financing. Now, consumers may be able to get a bit of a break — and the intiative is coming from the credit card companies.

Credit card debt settlemtent made easy

It has always been possible to employ debt settlement as a method of getting rid of unsecured debt. However, the process has long been fraught with complications and strenuous negotiations. Not so much anymore. CNBC offers an example of what happened when one customer asked to settle his credit card account:

Mr. McClelland’s credit card company was calling yet again, wondering when it could expect the next installment on his delinquent account. He proposed paying half of his $5,486 balance and calling the matter even.

It’s a deal, the account representative immediately said, not even bothering to check with a supervisor.

As they confront unprecedented numbers of troubled customers, credit card companies are increasingly doing something they have historically scorned: settling delinquent accounts for substantially less than the amount owed.

Clearly, the economy is forcing credit card companies to consider their options. With delinquencies and late payments on the rise, it is often easier to collect whatever the customer can offer than to try to collect on a debt that the consumer may not be able to pay. With unemployment and the threat of foreclosure forcing people to prioritize their obligations (your mortgage payment should come first), it is becoming a necessity to accept a debt settlement.

Even though you are getting a good deal with the debt settlement, it is worth noting that by the time you get to this point, you have likely paid more than you originally borrowed — and then some — due to the high rate of interest. Credit card companies may not get their entire interest earnings from you, but they’ve probably already made their profit. And, you should also realize that your credit score may be impacted.

Image source: Daylife

Today, the Federal Reserve released its quarterly report on household wealth. According to MarketWatch, the report contained this information on net worth:

Household net worth fell at a 9.9% annual rate in the first three months of the year to $50.4 trillion, the lowest in more than four years. Net worth — assets minus liabilities — peaked at $64.4 trillion in the spring of 2007, the Fed said in its quarterly flow of funds report.

This is the 7th consecutive quarter that saw a decline in household wealth. While there are some bright spots in the report (more disposable income, lower credit card debt), the fact remains that many people are seeing their overall net worth decline. Home values are declining and investment portfolios are experiencing losses. Since many people have a great deal of their assets tied up in their homes, it is little surprise that the bursting of the real estate bubble has hit net worth. Additionally, with the losses to the stock market, the assets many had in their retirement accounts are dwindling. As I see it, there are two things you can do to reduce the psychological burdens that come with these losses:

1. View your primary residence as a purchase: Instead of thinking of your home as an investment, think of it as a long-term purchase. Consider the intangibles that come with your home (a yard for your kids, your own space, etc.).
2. Remember the long-term value of the stock market: Even though your retirement account may be suffering now, over time stocks gain overall. If you keep investing now, there is a good chance that in 10, 15, 0r 20 years, you will see significant gains.

This still doesn’t change the fact that your net worth may have fallen. However, if you stick with the sound personal finance fundamentals of reducing debt, building your savings, engaging in prudent investing and making your mortgage payments, your net worth will recover — and eventually thrive.

How has your net worth been affected by the recession?

image source: Wikimedia Commons

Even with optimistic prognostications for economic recovery pouring in (thanks largely to yesterday’s payrolls report), don’t expect credit to be much easier to come by. The credit market has been heavily damaged, and financial institutions are not likely to forget that fact anytime soon. Indeed, credit has been tightening, and it is not likely to loosen for quite some time.

For those looking for a 0% balance transfer credit card, the news is pretty bad. You are unlikely to find a good deal on a credit card, and the debt management methods that usually follow such a course are likely to become less effective. Indeed, the tightening of credit card availability is likely to be further exacerbated by the recently passed Credit CARD Act of 2009. While the intentions are good, and many of the reforms are sorely needed, credit card issuers are likely to begin tightening their requirements, raising their fees and slashing rewards programs.

Getting a loan with the tighter credit requirements

You will still be able to get a loan, even with the tighter credit requirements. However, you may have to work a little harder for it. Whether you are trying to buy a car or purchase a home, here are some things to keep in mind:

• Down payment: The bigger your down payment, the better your rates — and your chances of getting approved in the first place. The larger your down payment, the smaller the amount being financed. And that is in your favor.
• Higher credit score: The credit score you need just to get approved for a loan has gone up. It is more difficult to get a bad credit loan, especially for a house. If you want approval, you need to work to improve your credit score. A higher score will also mean a lower interest rate.
• Income documentation: While it may not be terribly necessary for an auto purchase right now, income documentation is being emphasized more for a home mortgage loan. If you want to buy a house, the days of using unverified income are over. (At least for now. There’s a good chance that in 15 years or so things will be good enough that this whole messy cycle will repeat itself.)

This means that you need to prepare better if you are planning to make a large purchase on credit. Do what you can to improve your credit score, and save up money for a down payment. Those who are prepared are likely to still find credit at good rates. But the unprepared will either be rejected outright or will have to pay a premium to get approval.

A lot of space in the blogosphere has been given over to the recent passage of the Credit CARD Act of 2009. And for good reason. This is one of the most sweeping changes to The Way Things Are to come along for quite some time. But here are 3 surprising things in the Credit CARD Act. 3 things you might not have heard about.

1. Concealed weapons ban lifted for national parks. This is the biggest surprise in the Credit CARD Act because it has absolutely nothing to do with credit or credit cards. It was just sort of slipped in there. So, if you have a concealed weapon and permit, you are allowed to bring it into the national parks.
2. Gift card expiration date rule. It is terribly annoying to get gift cards, and find out that they have expired in 6 or 12 months. Congress now requires gift cards to last at least 5 years before they expire, and for expiration policies to be placed, in all caps and 10-point font, on the card.
3. Credit card payoff information. This is my favorite provision in the Credit CARD Act that no one seems to be talking about. Credit card issuers now have to print, on your statement, where you can see it, how long it will take you to pay off your credit card if you only pay the minimum balance. This is great. Many people simply look at the minimum and pay it without considering. Actually seeing how long it will take to pay off the credit card may spur some to take more immediate and drastic action.

Have you found anything else in the Credit CARD Act that isn’t being much talked of?

image source: Junglecat via Wikimedia Commons

It’s nice that the Senate has passed new credit card rules aimed at protecting consumers. Indeed, new rules on interest rates, over the limit practices notification of new card terms are all to be applauded. Going forward, these rules will better level the playing field and give us better information so that we can improve the way we use our credit cards. However, from the time these credit card reforms are passed (they haven’t been passed by the House, but are expected to be) until the new rules go into effect in 9 months, things are probably going to get ugly for us.

Will credit card issuers rush to take what they can get?

The recession has seen a number of changes to credit card accounts. Credit lines have been cut, fees and interest rates have been rising, and rewards have been slashed (and even discontinued). So it is nice that credit card companies will now have to notify you 45 days in advance if they plan to increase rates or change rewards programs. It gives you time to do what you need to do in order to cash in rewards. Additionally, the fact that credit card companies won’t be able to retroactively hike rates — unless you are 60 days delinquent — is a nice touch. But none of this takes effect for 9 months. Until then, we are naked before the storm.

Because credit card companies have never been overly nice about balances and interest rates, it is quite likely that you could see your interest rates rise. Your rewards values may be cut. I would be very surprised if credit card issuers don’t try to get whatever they can out of you before the new rules take effect. So be on the look out. And be aware that they don’t have to give you any notice. Consumer protections aren’t in place yet.

Do you think that credit card companies will go on a rampage over the next 9 months?

image source: larrybobsf via Flickr

The post on Bible Money Matters today got me thinking: In these tough economic times, it is no surprise that many people are starting to wonder about an emergency fund. It is a good idea to have an emergency fund, since it helps you prepare for the unexpected. Indeed, an emergency fund can help you avoid total financial chaos in the event that a large, unfortunate and expensive event happens in your life.

What an emergency fund isn’t

Many people make the mistake of thinking that credit cards are an emergency fund. I have a credit card that I take along with me for “just in case” moments while traveling, but I don’t think of it as an emergency fund. Credit cards are a loan. Trying to set them up as emergency funding is just asking for trouble, since you will have to pay interest on the money you use. Credit cards aren’t an emergency fund; they actually increase your chances of big financial problems.

What an emergency fund is

An emergency fund is a well of cash that you can dip into when an emergency comes up. It is money that you can use to tie you over if you lose your job, or that you can use to make unexpected car repairs. It’s also money that you can use to pay deductibles on insurance policies should the need arise. It’s a fund that is there, waiting to be called into action. Many experts agree that $1,000 is a good start for an emergency fund, and that you should keep adding to it regularly until you have around six months (or more) of expenses saved up. For best results, your emergency fund should be:

1. In an interest bearing account so that the money compounds as it sits there.
2. Fairly liquid so that you can access it when you need it (access within two or three days).
3. Not so liquid that you are tempted to use the money to buy big ticket items that you don’t really need.

I keep my emergency fund in a high-yield savings account. It requires a bit of transferring, and it takes two days to get my money. That keeps it out of my immediate reach, allowing me time to determine whether I really have an emergency on my hands, while still ensuring that the money is available to me in a timely fashion.

Do you have an emergency fund? Where do you keep it?

image source: sxc.hu

I don’t use credit cards much. And when I do, I try to pay off what I put on them immediately. But that doesn’t mean I’m not going to get a smack down from the credit card issuer. In fact, my responsible credit card use is more likely to get me a smack down, since credit card issuers aren’t making much off of me.

Anyway, I was a little surprised when one of my credit cards (issued by GE Money Bank) cut my credit line. Especially since I was nowhere near the limit and paying off my charges every month. This is my cash back card. But then I did some digging. See, when we bought our Prius a couple of months ago, we did our financing through the dealer for the special rates. Well, turns out the dealer blasted our information to a bunch of different lenders. (Yes, yes — stupid to get financing through the dealer. But that’s over and done.)

We got our good rate, but that’s not all we got. We got a bunch of inquiries on our credit report. And, even though we ended up with Chase financing, one of the banks that came back with a quote was GE Money Bank. Now, I can’t prove this, but I’m betting that our credit card line decrease came in part because GE Money Bank saw that we were taking out a loan for a car. The other part might have been the 15 point drop in the credit score that we had in the aftermath of car shopping, switching our satellite provider (credit check) and the fiasco with my Bank of America credit card. I fully expect that in 30 more days most of the credit score drop will be recovered.

I’ve tried to reason with the issuer, but to no avail. I was just told — more than once — that certain factors make me a bigger risk. Whatever. Of course, now this is going to ding my credit score even further, since now I have less available credit. Blegh. The other issue is that maybe my other credit cards will cut my credit line as well. Or raise my interest rate. Those new Fed credit card rules can’t come into effect fast enough.

image source: JudeanPeoplesFront via Flickr

It may seem counter-intuitive to say that you want a $0 tax return. But that is my goal. What a tax refund indicates is that you have paid more in taxes than you needed to. It means that you have given the government an interest-free loan. Tax refund money is money that you could have been investing. Or at the very least putting in a high yielding savings account. Tax refund money is capital that could have been used to earn a return. Instead, you are just getting back what was already yours — with no additional benefit.

I know that some folks like to use a tax refund as a sort of savings plan. It pays off debt and may added to the savings account after the fact. This actually does one a disservice. It promotes poor financial planning habits and prevents you from maximizing your income. While I suppose it’s better than having no savings plan, it doesn’t encourage a mind set that leads to truly yielding wealth.

• If you use your tax refund to pay off debt, it means that you have been paying high interest for a good portion of the year. Meanwhile, the money that was already yours was earning nothing for you in government coffers. You’re better off paying your credit card balances every month and avoiding a build-up of debt.
• If you want an automatic savings plan, have your money directly withdrawn from your checking account every month. Make sure you set up your personal finance software so that you don’t think that you have that savings plan money to spend.

You can adjust your withholdings to more accurately reflect what you owe in taxes. If you work for someone else, this is usually a matter of visiting the HR department and filling out a new W-4 form. If you pay estimated taxes quarterly, you get a new estimate every year.

I ended up with a tax refund this year

This year, unfortunately, I actually got a tax refund. We bought a home in late 2007, so 2008 was the first year that we had a whole year’s worth of mortgage interest for a deduction. However, the hope is that with my latest estimated quarterly taxes I will be back to paying a little extra in taxes.

The last few years, I’ve owed money. As my home writing business has grown, my estimated tax calculations have not been adequate. However, I have normally accounted for that and made sure that I set aside a little extra to cover the difference. It’s not much of a difference, but I just accept that I’ll be off by somewhere between $200 and $800 each year. And that’s not a bad thing; it means my business income is growing.

What about you? Do you like a tax return of $0?

image source: arborlaw.biz