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.

The government aims to help those with a great deal of student loan debt. In addition to arranging plans with your lenders, or applying for forbearance, the government will begin — on July 1 — a new program that helps you refinance your student loans, depending on your income. It is called the Income Based Repayment Plan.

Who qualifies for the new student loan debt program?

Those with lower incomes qualify for this student loan debt program, which allows you to make payments that are around 10% of your monthly gross income. In order to qualify, you have to have student loan debt of at least 1.5 times your your gross income. (This means I don’t qualify.) The loans included in the plan can be undergrad or grad. Professional job training certifications are also included.Your Stafford, Grad PLUS or consolidation loan of these programs are eligible. A parent PLUS Loan is not eligible. You can include old loans in this program.

For those who are having a hard time finding a job, or for those with a lot of debt relative to their income, this might be an elegant solution, one that works better than forbearance or deferment. One of the bonuses is that if you go into public service, what is left after 10 years is forgiven. If you choose the Income Based Repayment Plan, and you still owe after 25 years, that remainder is forgiven as well.

Here is an example chart of what you might pay, depending on your income and the size of your family (source: studentaid.ed.gov):

Drawbacks to the Income Based Repayment Plan

As you might guess, there are some downsides to this plan. While it can make meeting your obligations a little bit easier, there is a price to pay — in the form of increased interest paid over the life of your student loan debt. With a reduced payment, you are spreading your obligation out over a longer period of time. This means that you will probably pay more interest over the long haul. Most student loans are repaid over a period of 10 years, so that means extending out 25 years could mean a great deal of difference, even if you get the remainder forgiven.

You should also realize that you will have to submit annual documentation. This means that you have to maintain a low income in order to renew at your low income payments. If you fail to provide documentation, your payments will return to a standard repayment amount. Most lenders will probably send you reminders about renewing your documentation.

For those having difficulties due to the economy, this might be just the thing. However, it is a good idea to pay more when you are able to. Extra payments toward the principal should begin as soon as you can manage. In the end, the student loan industry is making money off of you, and the interest is money you could be using for yourself.

What do you think of the Income Based Repayment Plan for student loan debt?

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

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.

For years, personal finance gurus have said that the most important thing you can do is pay down your high interest credit card debt. In fact, most personal finance conventional wisdom has revolved around the idea of putting together a small emergency fund ($1,000 or so) and then tackling credit card debt aggressively. But now the personal finance world is abuzz with the advice Suze Orman gave on Oprah: Save up money before you pay off your credit cards — especially if you think you will lose your job.

Wait to pay off your credit cards

This is a major departure from the regular advice given. It’s a reaction to the recession and the spiraling unemployment rate. Suze Orman points out that if you are concerned about your job, your first priority is to build up your savings so that you have something to fall back on. The other reason to wait on your credit cards? To avoid having credit card companies close your accounts.

Dave over at My Two Dollars delves into the credit score aspect of Orman’s advice in great detail. He pointed out that many companies are closing credit card accounts that have reached a balance of $0 and that are inactive. This means that you can have your credit score dinged by having less available credit. And it also means something else: Folks who thought that their credit cards could serve as a supplemental emergency fund during the recession are in for a rude awakening if their credit accounts are closed by companies who aren’t interested in how responsible they are.

It’s an intriguing thought. And it makes some sense during the recession. In uncertain economic times, the general move is toward safety. And safety means building up your emergency fund and preparing yourself for the worst. Of course, personal finance is still personal, so there are allowances for differences in situation. If you have steady and reliable cash flow that isn’t in immediate danger, three to six months is probably still sufficient, you should be paying off those credit cards. But if your cash flow is on shaky footing, it’s time to prioritize your bills into something that probably looks similar to this, before things get really bad:

1. Housing (especially if you have a mortgage).
2. Food
3. Utilities
4. Emergency fund: building up to six to eight months of expenses.
5. Credit cards/other debt reduction.
6. Wants.

What do you think? Does this recession call for a suspension of the commonly accepted rules for paying off credit cards?

image source: U.S. government via Wikipedia

I’ve had several things brought to my attention in the last week or so. Many of them are interesting financial resources online. I thought I’d share them, and I invite you to share any of the interesting financial resources you’ve come across online in the comments section.

• Gnutrade.com offers a very interesting game. You can use play money to set up a practice account for investing — and you can also set up an account with real money and invest for real. It’s all set up like a game, though, which some might find helpful in learning how to invest.
• FinancialFate.com is concerned with helping you create a long-term financial plan — including estate planning, income forecasts, investments, and tax planning. You can also make adjustments to get an idea of how what you’re doing now (or might do later) will affect your ultimate outcome.
• CrashCourse is a video resource that includes episodes with financial and economic information, providing a base for better financial education.
• GoCollege.com offers insight into personal finance for college students — and tips for helping them get through college with as little debt as possible.

Also, a contest from DebtGoal.com (a free tool that can help you creat a debt reduction plan) is being run over on Facebook. You can win $250 for sharing a thrifty secret.

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?

This is a guest post from Trish Wagner. I really like her take on figuring our your money mentality in order to help you change your financial behaviors.

How do you feel about money?  Most people see money in terms of black and white, either you have enough of it or you don’t.  Of course there are many levels of “have it” or “don’t” but let’s assume you fall into one of those categories. How does your attitude or feeling about money affect the rest of your life?  Can changing your attitude change your financial status?

What is your money mentality?

Your attitude toward money is formed over a lifetime of financial experiences.  It starts when you are young and can be greatly influenced by your upbringing.  Children learn from example; if your parents had a negative attitude about money or wealth you might be more inclined to mimic those feelings. Have you ever heard or perhaps spoken the following phrases in regards to money?

• This is the way it has always been
• The rich get richer while the poor get poorer
• We can’t afford that
• There is never enough to go around
• Our family has always been poor

While money may not buy happiness, it does pay for housing, clothing, food and other necessities that many people struggle daily to maintain.  For some individuals financial security is still viewed as a dream that can never be achieved.

Change your attitude to change your life

If you feel you are “destined” to be poor or that you will never have enough money to live comfortably you could likely fulfill that prophecy.  A common factor that contributes to generations of families living hand to mouth is the belief that you have to have money to create wealth.  While in theory this is somewhat true, it does not mean that you have to start out with money in order to be successful financially.  What you do have to have is a positive attitude, short and long term goals and a plan to reach those goals.  There are endless rags-to-riches stories about individuals who overcame growing up in poverty who turned their lives around. You can, too, by doing the following things:

• Believe in yourself and your ability to find success.  Nothing in life comes easily and changing a lifetime of negative financial experiences will prove to be hard work.  You must truly be ready for change and committed to the hard work required to achieve success.
• Debt is a four letter word that makes it almost impossible to achieve your financial goals.  There are several methods to get out of debt and you will have to examine your own situation to determine what method is right for you.  Whatever route you take reducing or eliminating your debt is imperative to your financial success.
• Set short and long term financial goals.  Once you eliminate your debt you can begin to focus on establishing financial goals.  To break the cycle of debt you must have money set aside in savings for unexpected expenses.  Learn about the importance of emergency funds, saving for retirement and investing.
• Do not set yourself up for failure by expecting overnight results.  Unless you win the lottery or find yourself the recipient of some other windfall, changing your financial status will require hard work, sacrifice, determination and a strong desire to improve your situation.

Keep in mind you are limited only by yourself.  Regardless of how you ended up in your current situation, you are the only person who can change the path your life takes from this point forward.  Remember: Finding real wealth is not just about financial success, but also maintaining healthy relationships, improving yourself as an individual and helping others to do the same.  If you can achieve these goals you will truly experience a life of wealth.

Trisha Wagner is a freelance writer for DestroyDebt.com, a debt community featuring debt forums. Trisha writes regularly on the topics of getting out of debt and personal finance.

This week, Dollar Frugal is hosting the Carnival of Personal Finance. The theme is The Wizard of Oz. Confession: I’ve never actually watched The Wizard of Oz. The picture of the dog as Dorothy is priceless! Anyway, my post about buying a car is included.

SO, car update: We’ve been enjoying the Prius we ended up buying. I’m still working through my issues with buying a car and adding a new monthly payment, but that’s my m.o. (I always have buyer’s remorse on anything that costs more than $100; Josh never does because he only buys things he really thinks he wants/needs.) Eventually, when Josh starts taking it to work and I get more of MY work done (since I won’t be carting him around), I’ll feel better and less stressed, I think.

There are few things in life that I find as unpleasant as car shopping. Unfortunately, we are seriously car shopping right now. We started the process last Saturday. Also unfortunately, my husband (I love him) has the habit of upping the budget — on any major purchase (including the house) — once reality sets in and he realizes that he can’t get what he wants for the price he wants. We don’t buy things we can’t afford, but we usually end up spending a little more than I would like.

And it looks like the case with the car.

First of all: Why we are buying a car

As a PF blogger, I feel I have to justify myself in buying a car — considering in most cases it is such a miserable waste of money. Having only one vehicle (as we have had for the seven-year duration of our marriage) is no longer really manageable. We’ve been trying to supplement with public transportation, but it’s just not working. The local bus service doesn’t have enough routes — or even come within a mile of our home. Josh is going to have more responsibility soon, and he needs to be able to efficiently go from one place to the next.

Our budget for buying a car

At first we thought we’d get a Corolla. Fuel-efficient, reliable and in our price range ($10,000 to $12,500). But then Josh saw the Prius. We had already decided that a Prius was out of the budget, but the one we saw is “just” $15,995. And the dealer said he’d drop it to $14,995. We’ve found five other Prius cars between $12,500 and $18,000. We are now buying a Prius. We can afford it — without a longer payment term than we originally agreed on — but it’s more than I wanted to spend. But you pick your battles: I blatantly refuse to get something more expensive $15,000. And I’m sticking to my guns on that. (At the outset, I figured we wouldn’t really stay within the original budget. That’s not DH’s m.o.)

Mistakes we don’t want to make while buying a car

Anyway, we’re getting to the haggling stage, where we play the dealers off of each other. This is convenient right now, since the recession is making the dealers anxious to earn our business. And, since we’re buying used, the tax credit for new car buying that the Senate is including in the (ever costlier) economic stimulus bill won’t apply, so the used car dealers are really trying to get us from going for new. And no one is looking at the Prius right now because as soon as gas prices dropped, people around here started demanding SUVs again. So chances are that we can get a screaming deal — as long as we don’t make major mistakes.

I’m using a post by Jeremy at Generation X Finance to make sure that I’m not making one of the 5 cardinal mistakes of buying a car:

1. Overestimating how much car you can afford: We haven’t done this. Technically we can afford something in the $20,000 range. But I’m not making that payment. Besides, something in that range would render our down payment practically useless. Unfortunately, one of the points Jeremy stresses is the importance of sticking to a budget. We haven’t done that, but we’re not getting in over our heads, either. (Can you hear the justifying tone of voice?)
2. Buying New Instead of Used Just for the Sake of a Warranty: Definitely not doing that. Besides, we’ll buy something new enough that it still has some years left on the warranty. And one of the dealers offers a lifetime guarantee on the engine and transmission.
3. Choosing a Longer Term Loan to Make Monthly Payments Affordable: We’re keeping to our original term loan. The only way we might bend is if we go through one dealer who is offering a special 4.99% rate only on 60 month loans (no prepayment penalty). If we do get that Prius, we will pay off the loan early — within our original loan term of 36 months.
4. Putting little or no money down: Because our budget for the car has grown, unfortunately our down payment isn’t going to be as effective. But it’s still there.
5. Not factoring in Total Ownership Costs: We’ve already talked to our insurance agent, and with a Prius, the gas isn’t going to be much more expensive than what we are already paying. In fact, it might end up being less, since I won’t be driving Josh all over town. And we’ll save big time (money and the environment) when we drive the Prius up to Idaho to visit my parents.

So, I’m reasonably comfortable with the purchase. And we do need a reliable second car as our current car ages, and, even though it’s more than I want to pay, I keep telling myself that — in the long run — I’ll be happier with the Prius.

What do you think? Are we doing the right thing?

image credit: Michael Pereckas, via WikiMedia Commons. Creative Commons license.