While I agree with some of the economic stimulus measures that President Barack Obama is trying to implement, I do not agree with all of them. More specifically, I am not happy with the continued focus on credit as the engine of our economy. I have written several posts about the disconnect between what’s good for the economy (consumer debt) and what’s good for our individual finances.

The policies adopted beginning in the years of Reagonomics, on up through Bush, Clinton, Bush II and now, Obama, are aimed at explosive economic growth that is unstable and unsustainable. Not to mention the “economic stimulus” designed to put off the natural down cycles, lest they happen during a specific president’s term. So it is no real surprise that I agree with a lot of what Peter Schiff said last night on The Daily Show. Do you?

With the passage yesterday of the Credit CARD Act of 2009, it is little surprise that the subject of credit is on my mind. And one of the most interesting and informative books on the subject of credit and credit scoring is Your Credit Score: Your Money & What’s At Stake by Liz Pulliam Weston. It’s an update of an earlier book, written in 2004. This newer version goes in depth into this important number, and offers the facts about what you can do to improve your credit — and includes information on the new FICO 08, as well as practical advice for getting through tough financial times.

Pulliam starts out by explaining why your credit score matters, and continues with a history lesson, describing how credit scoring came to be, and why it is so prevalent now in every aspect of our financial lives — from jobs to securing insurance to getting a home loan. She also takes some time to describe how the credit scoring system works, as well as addressing VantageScore, a new competitor to FICO.

The bulk of the book, however, is concerned with the practical application of techniques, financial habits and practices that can help you improve your credit score. Your Credit Score even devotes a section to building a credit score when you don’t have credit. Pulliam offers step-by-step information that can help you resolve a number of credit issues, from mistakes on your credit report to reporting identity theft. She also tackles common credit myth that are continually perpetuated. This is, without a doubt, one of the most useful personal finance handbooks I have read recently.

I like Pulliam’s levelheaded approach to credit. She points this out: “You don’t have to live in debt to get a decent score, but you do need to use credit.” I enjoy her middle of the road view of credit. Pulliam doesn’t represent extremes. She simply offers you solid information and the knowledge you require to make a plan to improve your credit score and then keep it healthy.

Have you read Your Credit Score? Did you like it?

A lot is being said about the impending release of bank stress test results. However, for most of us these stress tests are basically useless. The average consumer really doesn’t care a whole lot about whether or not 19 of the biggest banks have big enough capital cushions. Mainly because those 19 banks are most likely the institutions that the government would save anyway if they looked ready to fold. Wall Street investors care about capital cushions, but it’s really not the information you need to make every day personal finance decisions with regard to your bank (or credit union) — and whether your money is safe.

So far, rumors are that six of the 19 banks (remember that there are more than 8,500 banks in the U.S.) need more capitalization. Since Citi and Bank of America are appealing stress test results to the Federal Reserve, it is assumed that they represent two of those six. While it would be awesome if Citi went down and somehow in the process my student loan debt were wiped out, that’s not likely to happen. Instead of relying on bank stress tests, think local and consider these factors when assessing your banking:

1. Is your bank lending to ordinary folks with reasonably good credit?
2. Is your bank increasing fees at a rapid (and large) rate?
3. Is the credit department cutting lines of credit and slashing credit limits?

Chances are, these indications will be more likely to help you determine how safe your money is. If your bank is still lending, it is probably in reasonably good health. And, in fact, many local banks and credit unions are still issuing loans to people with reasonably good credit. Noticeably large increases in fees, however, could be a sign that your bank is looking to raise capital for protection. Cutting credit is a sign that the bank is trying to cut risk — and that the bank may be at risk itself.

If you are curious about your local financial institution, you can go to Bankrate.com and take advantage of the useful Safe & Sound feature. Just type in the name of your bank or credit union and check the rating. It’s far more helpful than relying on government stress tests.

Remember, too, that you can protect yourself if you have more than $250,000 that is insured by the FDIC through the end of the year: Just move your money around so that no account sports more than $250,000. It’s a problem I can only wish I had.

Do you think your money is safe at your local bank or credit union?

image source: Coolceasar via Wikipedia

I am looking for guest posters for Yielding Wealth. I am ramping up my efforts as part of the new launch of Bizzia, and I would like to give my readers a chance learn about other blogs and viewpoints. I, of course, am looking for topics related to personal finance, including investing, credit and debt, budgeting, taxes and any other PF related topic you can write about.

If you are interested in guest posting (I’ll be looking for 1-3 per month), contact me at mirandamarquit@gmail.com or leave a comment.

Thanks!

image credit: US Navy

In the current economic climate, it is becoming more difficult to get a loan. Personal loans and debt consolidation loans are harder to come by as lenders tighten their standards, even for those with good credit. This is why social lending — or P2P lending — is becoming so popular. It is possible to get loans from others, without the hassles of going through more traditional lending.

One company, Pertuity Direct, offers a rather interesting version of social lending. Recently, I spoke with Pertuity’s CEO Kim Muhota, as well as Charlie Schliebs, who is on the board for the associated National Retail Fund.The explained that Pertuity’s model is one of underwriting loans, and then packaging them into funds that investors can then earn a return with.

“With other person-to-person social lending, it can be tiring to go through all the profiles and decide who you should lend to,” Muhota says. “It puts the consumer in the place of a creditor. We actually take care of the lending part of things and the investor can choose to invest in a pool of loans.” He also touts the more secure nature of Pertuity’s system: “Your personal information is not made available to the investor. It is all taken care of with our backend loan writing and pricing structure.”

For those who are concerned about investing in funds comprised of pooled personal loans, Schliebs has this assurance: “Our loans are aimed at prime borrowers. There are two retail funds, one that has only borrowers with a credit score of above 720, and the other for a credit score of between 660 and 720. Additionally, these are regulated funds that work simply and transparently.”

Muhota says that the company is looking to expand its loan offerings — especially with regard to loan term length. For now, all loans to consumers are three year loans. “We also offer them at a fixed rate. For budget planning, especially from a debt management standpoint, this is very useful. You know that in three years you will be done, and you can budget the same amount for the entire term.” He also says that there are no prepayment penalties, so if you can pay off your loan sooner, you are not penalized.

Schliebs shares some of the fee structure for the retail funds — something that investors worry about. “Right now, total fees end up being a little under 2%. The funds are professionally managed by Gemini. However, as the funds grow, we expect the fees to decrease. There is also a loan servicing fee of about 1%.”

Finally, Muhota offers some insight into one of the more intersting aspects of this social lending structure. “You don’t have to look at profiles,” he says, “but you can if you want. We allow investors Pertuity bucks that they can “award” to borrowers whose stories they find compelling. These bucks translate into real money that the borrowers can use to lower the principal of their loans.”

At first glance, Pertuity Direct looks like it might be promising. I like the idea of being able to invest in funds with quality borrowers — as well as the fact that I don’t have to try and figure out who to give a loan to.

Also, this process takes away some of the guesswork from borrowers, who may be concerned that they don’t end up with full funding. With Pertuity, you are either approved for the loan, or you aren’t. Of course, the downside to that is that you won’t get even partial funding. And, of course, you have to have at least a FICO score of 660 to qualify.

With any investment — including (and maybe especially) social lending — it is important to recognize the risks. No matter how solid something may seem, you always run the risk of loss.

What do you think of the idea behind Pertuity Direct? Have you tried other social lending sites?

A couple months ago, I reported that the $700 billion bailout was likely to cost at least $2 trillion. So, with the costs that come with that large of a debt (notably interest costs), I wonder what sort of actual costs will result from a reported $1 trillion bailout plan. Because that’s where we seem to be headed.

Calls are mounting for a truly massive bailout. Honestly, though, I’m not sure why we’re even continuing the charade that there is a spending cap at all, and specific plans for the money. The government is trying its best to look as though it is putting limits on the money and practicing restraint, but that’s a lot like saying, “My credit card only has a $2,000 limit,” and then pulling out the second credit card with a $15,000 limit.

The bottom line is that continually throwing borrowed money at our problems won’t really make them go away. We can try to spend ourselves out of this recession, but, really, we should be considering that perhaps this recession is a chance for us to re-think our economy and how it works.

Rampant consumerism only breeds…rampant consumerism.

Unfortunately, rampant consumerism as an economic model is unsustainable in the long run because you need more and more of it (accompanied by more and more debt) and eventually you reach a point where borrowing more is simply impossible.While individuals have reached that point, our country hasn’t. We still have countries who are, for whatever reason, still willing to lend us money.

But at some point the party will really come to an end. Unless we start making changes now, this financial crisis will look like nothing.

Right now, it is of vital importance to prepare your personal finances for this economy. Preparation is key if you want to get through this relatively unscathed. Two of the main points of concern for many people right now are:

1. Employment
2. Debt

Is your job safe?

Today’s announcement that Citi is planning to cut more than 50,000 jobs in addition to the already-cut 22,000 jobs is not exactly instilling confidence in the economy — especially since unemployment is approaching recent highs. (Citi, though, plans to try and save executive bonuses, unlike Goldman Sachs, which has announced that execs will be foregoing bonuses this year.) To this end, it is no surprise that many people are becoming concerned about their jobs.

If you are worried about job loss, My Dollar Plan has some excellent suggestions for preparing for the possibility:

• Review your benefits and consider your health insurance options.
• Check your cash flow and start now to figure out where you can cut costs and how you can increase income from alternative sources.
• Be prepared to take action when it comes to a severance package, getting help, figuring out financing and making sure your credit is in order. Make any credit repair you may need.
• Prepare for the job market by updating your resume and dusting off networking contacts.

It’s never fun to contemplate losing your job, but it may become a reality, and preparing your finances for the blow is a good idea.

Debt and this economy

The other concern that many people have is related to debt. Our consumer culture has been on a debt-fueled spending spree for the last 20 years, and it’s catching up with a lot of us. It’s no surprise that people are looking at their crushing amounts of debt and starting to worry about what happens in an economy where they could lose their jobs.

As with preparing for possible job loss, trying to reduce debt is important. You need to start a debt reduction plan now, doing your best to get ready for what may be coming. This means that you need to cut back on unnecessary items, and do what you can to live within your means. And you need to apply leftover income to your debts. Debt has a way of magnifying other economic issues, and if you can get your debt to a minimum, it will leave more money free to take care of other problems.

And, of course, building an emergency fund will help you prepare for any personal finance storms that may come your way.

What are you doing to prepare your finances for this economy?

My husband and I know a guy that does tech support for a company that does payday loans. Recently, when the economy came up, he said something to this effect: “Payday loans are doing just fine. In fact, the company I do work for is seeing an increase.”

This information, though somewhat disheartening, is not all that surprising. As credit card companies and other lenders tighten their credit requirements and boost their interest rates, many people (and businesses) are turning to fast cash.  Cash that doesn’t require an extensive credit check to get.

While payday loans can provide you with a short-term easing of your cash flow situation, it is important to be wary. Be very wary. If you roll over the loan, the interest rate is extremely high, and you can soon owe more than you originally borrowed. In this way, payday loans can actually be worse than credit cards.

Another thing to take into consideration is the fact that payday loans are considered “lesser” debt. They look worse on your credit report and count more against you for your credit score than many other types of loans.

Pawnshops seeing more business

Payday loans aren’t the only offerings in the area of “quick cash” that are seeing an increase. MSNBC reports that pawnshops are doing brisk business. These are another form of “short-term” loan. You bring in an item for cash, and you are charged an interest rate. If you come in and pay back your loan, you get the item back. If not, the shop keeps the item and sells. Some people are just selling their items to get money, and not worrying about the loan part.

If the economy continues down this path, with increasing job losses and other issues, we’ll probably be seeing more of this kind of lending.

image source: sxc.hu

Today, the Federal Reserve is widely expected to cut the Fed Funds rate. Because the economy seems to be heading toward recession, the overriding goal is to stimulate the economy. And this means — as far as the Fed is concerned — making it cheaper for everyone to borrow money.

Because our economy runs on consumption fueled by debt, a Fed rate cut is expected to help stimulate the economy be stimulating more borrowing. Here’s one example of how it’s supposed to work for you and the economy:

1. The Fed cuts its rate, which influences consumer loans (including credit cards). This happens because the prime rate, in most cases, is the Fed Funds rate plus 3. So, the prime rate drops from 4.5% to 4% — assuming 50 basis point cut to 1%.
2. Your credit card interest rate drops. Credit card rates are prime plus whatever (I have one that is prime +7 and one that is prime +11), so theoretically, those drop as well.
3. With a lower interest rate, your monthly credit card payments drop. If you keep paying the same amount, more money goes to the principal, giving you more room on your credit card. If you just go with the minimum, you pay less money overall and have that money in your pocket. Either way, the hope is that this newfound “disposable” income finds its way into the economy when you buy stuff.
4. The economy is stimulated as people have more spending power and use it.

Also, the lower interest rates are meant to lure people into buying things with debt, since the rates are lower. Auto loan interest rates will drop, and that could make buying a car more desirable. Which would help a segment of the economy that is suffering rather badly.
Will the Fed rate cut work this way?

The big question now is whether or not today’s likely Fed rate cut will work this way. With credit card companies worried about increasing defaults, they are starting to tighten their requirements. Credit lines are being reduced (that’s right; check your statement — your $5,000 limit may only be $4,700), so even with lower rates, it may not mean more available for spending on the credit card.

Read more

While this video doesn’t fully explain the credit market crisis and the global financial crisis, it does provide a good educational look at finance, and one of the root causes of why we are where we are.

Plus, I like the smiley faces.

Happy Friday!