ABDPBT Personal Finance » debt

Why The Backlash Against Debit Cards Confuses And Perplexes Me

anna — Wed, 04 Nov 2009 08:12:35 +0000

Photo by anachronist84 at deviantART

I don’t have to tell you that I’m not a typical personal finance blogger: I don’t recycle my toilet paper rolls, and I use dryer sheets exclusively in the manner in which God intended, viz. to scent and soften mine and my family’s clothing as it gently tumbles in my natural-gas-guzzling dryer. To add insult to injury, I gleefully wash my clothing with Tide in my full size laundry machine, and have never even once attempted to use coffee grounds to “stop the bleeding.” So, as you might imagine, it’s not strange for me to read something in a personal finance blog that confuses or perplexes me. This happens so often, in fact, that I have a folder in Google Reader devoted to “Personal Finance Blogs That Often Confuse Or Perplex Me.” Really. I do.

You thought I was just being hyperbolic, huh?

The thing is, neither Guzzo The Contrarian nor Frank Curmudgeon are in my “Personal Finance Blogs That Usually Confuse And/Or Perplex Me” folder in Google Reader. As a matter of fact, they are both in the Google Reader Folder called “Good Personal Finance Blogs,” and that is in spite of the fact that Guzzo uses a [praise Allah!] summary feed!

Summary feeds will be the death of me.

Yet both of them have featured posts about how they hate debit cards in recent memory, and this fact alone is causing me to question my whole life’s epistemology.

Guzzo says it’s because he assumes htis is a means of the bank making money of its customers, which, touche, but isn’t that what credit card companies do, too? I know that, in theory, if you use your credit card and pay off the balance in full each month, this will not happen (provided you don’t have an anuual fee), but you would only have to miss one deadline, or not have enough to pay one time, for this to not be true. The odds are, you’ll end up paying interest fees at some point if you use a credit card. That’s how they stay in business. There are people who haven’t yet, but I think the people who never have and never will are very few and far-between. Frank’s complaint is that there’s no good reason to use a debit card, because if you overdraft, the bank will just charge you a huge overdraft fee, rather than denying the charge, so it could potentially end up being a more costly endeavor than running up credit card debt. I will acknowledge that debit cards would be better all around if there were no such thing as these exorbitant overdraft practices that banks have developed, but that’s like saying you shouldn’t write checks because if they bounce, they will cost you money.

Guzzo cites a joint NYT/Frontline piece on how banks use debit cards as a means of getting you to pay overdraft charges. So you overspend on your debit card, and they cover the overdraft, and then charge you an exorbitant rate for the “service” of doing this. Banks are scumbags. That’s what they do. Besides, isn’t this a problem with the concept of overdraft protection and its associated charges or keeping accurate banking records, rather than a problem with debit cards in the abstract? If you are tracking your money carefully — and I have to assume that Guzzo is — then this kind of overdraft charge should not ever happen. It has never happened to me, and I’m not even very careful. I use cash for much of what I do, and I also keep a general idea of how much money is in my account so that this kind of thing doesn’t happen. People who are more organized than I am even write these kinds of things down — infact, isn’t that what people did back in the olden days when we wrote those things called checks? Do you have a problem with the concept of checks and overdraft protection, too?

Other than the overdraft charges — which I think consumers really have to accept responsibility for, anyway — I don’t see how we are paying money for debit cards, exactly? I don’t pay a fee for using a debit card. The only time I’ve seen a fee is when you go to some nickel and diming gas station like Arco, and they’ll charge you 40 cents for using your ATM card. And that’s pretty much cheaper than any finance fee you’re going to find at a credit card company, but they don’t let you use your credit card at Arco anyway. At least with a debit card, there is in theory a finite number attached to how much one can overspend. At some point, they’re going to stop taking your card. If I were to use a credit card, I could run a tab up into the high five digits before anyone cut me off, and this was true back when I was a *graduate student* in *English*, too. I’d much rather risk a few hundies in overdraft protection fees than five figures of debt at a high APR.

The thing is, Frank and Guzzo — god love ‘em — are two of those annoying people who don’t understand why debt is so bad for some of us, because they were born with an ability to treat money responsibly. For them, it is far more likely that they might make an error about how much cash (exactly) is in their account at any given moment than it is to run up their credit card bills unnecessarily. I envy them. But the reason that people are using debit cards more and more is because of that balance system that is in place — overdraft fees are outrageous, but they are still better than dealing with massive credit card balances. Some of us just cannot take the risk.

"Why The Backlash Against Debit Cards Confuses And Perplexes Me" was written by Anna Viele for ABDPBT Personal Finance and was originally posted on November 04, 2009. Copyright ®2009 Anna Viele for ABDPBT, Inc. and licensed for reuse under Creative Commons BY-NC-SA 3.0. All other rights reserved.

6 Purchases You Should Never Make On Credit Cards

anna — Mon, 10 Aug 2009 11:00:59 +0000

Photo by Ragasukmamendahaga at DeviantArt

Generally speaking, I’m of the mind that you should just not ever use credit cards. This is what works for me personally, but I know that other, more responsible people–people less prone to abusing anything they can get their hands on–are able to use credit responsibly. For those people, I provide you with this list of things you might want to think about putting on your credit card, based upon new research about how credit companies assess your purchases and assign you a credit score. That’s right–Big Brother is watching not just the dollar amount of your purchases, but also where they are made, based on a recent article in Marketplace, the highlights of which are below.

Traffic tickets. People seem to not like people who speed. Actually, let me amend that: we tend to look down on people who speed and get caught, so if you pay for your ticket or court fees related to your ticket with a credit card, this may apparently be construed as signifying you are a larger credit risk than somebody who doesn’t get tickets, or doesn’t pay for them with something that creates a paper trail. Why do we care? Well, it’s not unheard of for this kind of thing to be used to put you in a less-appealing pool of borrowers by your credit company, leading to higher rates and less perks. Not that they really need an excuse to do that. But if they’re looking for one, they might just use this.

$0.99 stores. American Express has been criticized recently for lowering customers’ credit limits based upon where they shop, and like it or not, it is apparently not illegal (yet) to discriminate based upon where you like to buy your laundry detergent. While buying at a bargain store could be an indication of financial responsibility just as easily as it could indicate financial distress, it doesn’t really matter: you don’t want it showing up on your statement. Credit card companies are skittish, illogical entities: if they think you’re about to lose your job, they will start messing around with your credit limits to protect against future losses, even when you’re just trying to get a better deal on housewares.

Lottery tickets. Lottery tickets should just not be purchased at all, in my opinion, but if you’re going to buy them, know that they are purchased overwhelmingly by people with no money. As a result, credit card companies see lottery ticket purchases–particularly if they are made on credit cards as a desperate act. In my mind, it’s just a dumb act, but perhaps that’s not something you want your credit card companies to know about you, either.

Cash advances. Here’s another one that just shouldn’t happen to begin with: cash advances are things that are going to keep you financially unstable and should be avoided at all costs. You should do whatever you can do to avoid taking a cash advance, because once you get started it’s easy to keep doing it, and pay 400% interest each time. But yeah, if you do plan to take one, I suppose you wouldn’t want to buy one on a credit card, because that’s like a cash advance on a cash advance, no? You’d be paying interest ten different ways, and trying to figure out why anyone would do this is starting to make my head hurt, because isn’t a credit card kind of like your own little portable cash advance place that you carry in your pocket? Anyway, don’t do it, because companies will (correctly) assume you don’t have the money to make your payments, and this is bad news for you.

Taxes. You can put your IRS bill on a credit card, but that doesn’t mean that you should. You don’t want anyone thinking you owe money to the IRS, because that’s bad news for everyone: the IRS is the entity that gets paid before everyone else, every time, so creditors want to see that you can pay them their due without using credit.

Alcohol & Porn. Alcoholic sex addicts are not always good at making their credit card payments. And everyone knows that anyone who buys alcohol or porn on a credit card is just a few drinks or spanks away from financial ruin. So try to keep your excesses on the DL, and the authorities won’t mess with your credit limit.

"6 Purchases You Should Never Make On Credit Cards" was written by Anna Viele for ABDPBT Personal Finance and was originally posted on August 10, 2009. Copyright ®2009 Anna Viele for ABDPBT, Inc. and licensed for reuse under Creative Commons BY-NC-SA 3.0. All other rights reserved.

10 12 Tips For Maximizing eBay Profits

anna — Fri, 10 Jul 2009 13:57:28 +0000

People, we’re on vacation this week at this quaint place that doesn’t have wireless internet. This makes it hard to do new blog posts, and also there are these things called “family time” and “relaxation” that keep getting in the way of blogging progress. So today we’re in reruns–I’m bringing back a classic post for the benefit of people who might have missed it the first time around. This post originally appeared on December 8, 2008. Enjoy. Again.

Now that you’ve been working on your debt snowball, you might be wondering how we can get this whole debt-repayment process moving a bit faster. One of the easiest ways to do this is to look around your house for things to sell. On Friday, I outlined some tips for selling books, DVDs and CDs on Amazon, and today I’m going to give you some tips on how to use eBay to your best advantage when trying to sell off household goods.

Always consider shipping costs when listing an item on eBay. Not only do you need to have a shipping cost listed with your item’s auction, you need to keep an eye on price and ease of shipment with all items you list for sale on eBay. Learn to appreciate the value of selling small, light items–it is on these items that you will make your highest profits. Maybe you have a valuable piece of furniture you’d like to sell, but eBay is probably not going to be the best place for this kind of sale. Even if you use the ‘local sales only’ feature on eBay, the fact is that the market shrinks considerably when you are dealing with large items that will require the buyer to pick up the item or pay exorbitant shipping costs. Consider Craigslist or local consignment stores for these types of sales.

Be careful with fragile items. Though there is a good market for pieces of art and other fragile items on eBay, you have to be careful with selling this type of stuff, just ask anyone who has had to deal with breakage! The best bet with these items is to insure heavily or, again, look to a local selling option to avoid the headache.

Use 7-day auctions. Different ebay sellers have different strategies, but my experience is that the longer the item is up, the more time you have to attract sellers and drive up the price. There are people who say that setting your auctions to end on a Sunday night is a good strategy as well, since more people seem to be online and looking to buy on those days.

Communication is key. Letting your buyer know what is going on is the easiest way to keep them happy. After a successful auction, email the buyer and let them know when they can expect their item to be shipped, and via what method, etc. Remember to always receive your payment before shipping anything.

Do your market research. Some things don’t sell well on eBay for some reason–an example, generally speaking, is fine jewelry. Similarly, some things sell very well for a certain time, and then the sales die off. We can only offer conjecture as to why this is–sometimes it has to do with availability on the regular retail marketplace, as is the case with the sales of Ugg boots and Wiis for inflated prices before Christmas. Other times, it has to do with buyer confidence–there are some things people want to see up close before they commit to buying (again, this may be the case with the jewelry example). You should always look up an item on eBay before you attempt to sell it–find out what it is going for (price point), how many are on the market already (the competition), what the interest in the item is (are there any bids?). All of these factors should be considered in listing–in some cases, these numbers will guide you in setting a price, and in others, they will tell you whether it’s worth it to list the item at all. Other things that market research can tell you include: 1) should you sell an item as a set, or individually; 2) will the item get more if sold in a lot with other like items?; and 3) what is the best category for an item that could be listed several places?

Use low start-off prices and avoid using reserves. This is a largely psychological issue, but for some reason buyers feel like they’re getting a better deal when items start low, even if the end price is the same. For the same reason, I would often list items with a start price of 9.99 instead of 10.00, even though it seems like a superficial difference–there is a reason people have done this in advertising for years. My rule of thumb was to start off a low priced item at $1.99 or $4.99, depending upon the basic idea of what I expected to get for it. A higher priced item might start off at $9.99. Only in a very extreme situation would I inflate the initial price–let the market do its work in driving up the price (if you’ve done the research, you should be more comfortable with this). Similarly, only in a very extreme situation would I use a reserve (like a very valuable piece of jewelry or something, which I probably wouldn’t be selling on eBay anyway), because it turns buyers off and costs more to list.

Provide clear, high-quality pictures of the exact item you are selling. People like to see what they are buying. Don’t make them wonder–take a good quality picture and put it in your ad. Do not take other people’s pictures, or pictures off the web.

Right or wrong, feedback is king. There are a bunch of crazy feedback mafia types out there these days, I’ve heard, who will withhold feedback and/or threaten bad feedback if you don’t bend to their will. I’ve never personally encountered such people, but if you’re communicating well with your buyers and providing good products as advertised, you should be OK on this front. Make sure to leave feedback and try to please your customers–your rating does affect people’s confidence in buying from you.

Do your best to estimate a fair and reasonable shipping cost. One trick for getting more money per item on eBay is to inflate the shipping cost, and people have been doing this since the beginning days of eBay. Now that shipping costs are listed right next to the item price, it’s much more difficult for sellers to take advantage this way. Do your best to estimate what a fair shipping price will be. You should include materials (if any) in the shipping cost, and let your buyers know that the price includes these incidentals.

Utilize free shipping supplies whenever possible. The post office has standard sized priority mail boxes that go for a flat rate regardless of weight. These can be used for free when using priority mail–but you can also get a supply of them to use for your own regular parcels–just cover up the priority mail stuff with a brown paper bag (shhh!) or a priority mail Tyvek envelope (also free) that you’ve cut open and wrapped around the box. If you are questioned by any postal employees, don’t say you got the idea from me, though.

Online shipping. Kerry was kind enough to add the folowing tips to the comments when this post originally appeared. I’ll add them here to make this post EVEN BETTER than the first time around:

You can order Priority Mail shipping materials (boxes, envelopes, etc.) for free through eBay, and have them delivered to your door. It’s also wise to print your postage online through eBay after the item sells (and is paid for), because it’s fast, and you don’t have to go out in the snow, and it automatically sends the buyer a tracking number. You also get free delivery confirmation (good for you AND the buyer), and a discount on the shipping price. I use the full-sheet labels for them (Avery makes them, but the Office Depot brand is cheaper and just as good). You cut them in half, put half on the box (because it has the address and postage and delivery confirmation barcode), and keep the other half (which is your proof of mailing, and also has the tracking number in case the buyer says they didn’t receive it).

eBay has also changed its pricing recently to encourage fixed-price listings instead of auctions (they’re trying to compete with Amazon, which I think is a bad plan, but whatever). Once you have a really good idea of what your price point should be for your stuff, they’re a good deal. If you’re less sure what something should sell for, though, an auction is still a better bet IMO.

Thanks, Kerry!

Schedule your mail pick up. Becky also added to the conversation by offering this advice on scheduling your post office pickups:

And I’m seconding Kerry’s info about using the online shipping. It is so, so much easier to automatically pay for and print the label in Paypal, and THEN schedule a carrier pickup for the mail person to come get the package. That way you never never have to go to the post office, which is a total pain with little kids. You gotta hand it to those ebay folks–they really have streamlined the whole process.

Happy eBaying!

"10 12 Tips For Maximizing eBay Profits" was written by Anna Viele for ABDPBT Personal Finance and was originally posted on July 10, 2009. Copyright ®2009 Anna Viele for ABDPBT, Inc. and licensed for reuse under Creative Commons BY-NC-SA 3.0. All other rights reserved.

3 Financial Quandries–What Do You Think?

anna — Mon, 13 Apr 2009 12:00:11 +0000

A few years ago, when I was aggressively paying off debt, I would listen to Dave Ramsey’s podcast in my car as I drove to and from work. As you might be aware, Los Angeles is not the most god-fearingly Christian of cities, and we tend to stick our noses up at both the thought of saving money and of taking advice on spending money from a Southerner. Maybe that’s just me, actually–but in any case, Dave wasn’t on the radio here, and I liked to listen to his show both to keep myself on track and also to get answers to those nitpicky questions about staying on a debt recovery plan. Not every scenario is covered by any one plan, which is why I think you ultimately have to come up with your own personal financial philosophy to meet your own needs. But still, when I read personal finance blogs, I do see these kinds of questions coming up again and again, so I thought I would address some of these here and see what you guys think.

Should you tithe while getting out of debt?
This is an easy one for me, because I don’t tithe. I don’t practice any form of organized religion, in fact, so tithing has never been an issue for me. However, I figure that for agnostics, the question might be, “Do you give to charities when trying to get out of debt?” My answer has been, “No,” in the past. However, I do wonder about this. A cornerstone of the Dave Ramsey program involves giving even when you are in debt–this is based on tithing in Christianity, but you might also think of it as a Law of Attraction kind of thing. The theory is that you get back more than what you put out. I don’t know, though. I tend to think that you should apply all that money to debt repayment.

Does your budget each month allow for annual payments?
Some people budget fifty dollars or whatever each month toward payments that are due annually, like life insurance and homeowners insurance premiums. This tends to create too many different things to keep track of for me, and I forget how much money I’ve put aside or where it is, unless I make up a new account for every single payment, which is just crazy. So what I have taken to doing is putting money in a “sinking fund” for that kind of stuff. I put money into the sinking fund as it is needed, and then write checks out of that when these kinds of payments are due.

Pay off student loans before putting 15% toward retirement?
Dave Ramsey is pretty adamant about being completely out of debt (other than the mortgage) before you start putting money toward retirement. Once you do start, though, it is supposed to be 15% of your income, which is higher than many people save. The thing is, if you have advanced degrees, and/or if you have anyone who went to a private school, your student loans probably total more than a house does in some parts of the country. In these cases, I tend to think you should save toward retirement while you’re paying off your student loan debt, so that you get the benefit of savings in the early years, even if your student loans are not paid off as aggressively.

Now it’s your turn. What are your financial quandries? How have you decided to handle them?

"3 Financial Quandries–What Do You Think?" was written by Anna Viele for ABDPBT Personal Finance and was originally posted on April 13, 2009. Copyright ®2009 Anna Viele for ABDPBT, Inc. and licensed for reuse under Creative Commons BY-NC-SA 3.0. All other rights reserved.

Buy A New Car, Write-Off Taxes On 2009 Return

anna — Tue, 31 Mar 2009 12:00:01 +0000

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So, news has come in confirming that the IRS is going to offer a tax rebate on new cars purchased between now and January 1, 2010. Here are the details:

You can deduct state and local sales and excise taxes on the purchase of a new car;
Limited to $49,500 of the purchase price for a new car, “light truck,” or motor home or motorcycle;
Your modified adjusted gross income must be below $125,000 for individual filers and $250,000 for joint filers; and
Deductions must be taken on 2009 return.

Via IRS

"Buy A New Car, Write-Off Taxes On 2009 Return" was written by Anna Viele for ABDPBT Personal Finance and was originally posted on March 31, 2009. Copyright ®2009 Anna Viele for ABDPBT, Inc. and licensed for reuse under Creative Commons BY-NC-SA 3.0. All other rights reserved.

Cash-Back Credit Cards: What Do You Think?

anna — Thu, 19 Mar 2009 12:00:23 +0000

As you probably already know, I’m not a big fan of credit cards. I hate them, in fact. I still have one account open, though every time they send me a new card I shred it immediately. I figure that whatever convenience or credit-maintenance benefits there may be to using the credit card, it’s just not worth it to get involved with those people ever again. I don’t like the fact that they have user agreements that allow them to practice usury as long as they give me enough (fine print) notice. I don’t like the fact that I’m less conscious of money being spent when I use them. And basically, I don’t ever want to pay another dime in interest to a credit card company ever again if I can avoid it. To me, avoiding this is most easily accomplished by not using them at all in the first place. Sure, it’s a little like the abstinence “method” of birth control, but it’s got a much better track record.

There are always people, though, that inisist that using a credit card is worthwhile, both for the convenience and for the rewards they can earn through the accumulation of points. Dave Ramsey is pretty clear and straightforward on this: his theory is that these types of programs are offered simply because the credit card makes money off them. So, yeah, maybe here and there there are some people who are beating the system with frequent flyer miles, etc., but overall, they are making way more than they are spending. I happen to know that credit card companies charge their merchants more for accepting rewards cards–oh yeah! they get you coming and going–probably because people are more likely to spend if they think they’ll get something for free. Overall, it just seems like bad news to me.

A recent article in the Consumerist got me thinking about this issue. The post discusses what the best cash-back reward card is, based on one person’s experimentation. I’m sorry, but you will have to go read the article to find out the answer to this, because in my mind it is like arguing what is the interrogation technique that is most enjoyable for the terrorist, but I did want to throw this out there for you guys to comment. Do you have a cash-back card? Have you made money on it?

"Cash-Back Credit Cards: What Do You Think?" was written by Anna Viele for ABDPBT Personal Finance and was originally posted on March 19, 2009. Copyright ®2009 Anna Viele for ABDPBT, Inc. and licensed for reuse under Creative Commons BY-NC-SA 3.0. All other rights reserved.

ABDPBT Personal Finance Debt Snowflaking Pageant: Week 5 1/2 Progress Report

anna — Thu, 26 Feb 2009 03:03:57 +0000

It’s been a slow week and a half here at the Right-Click household when it comes to debt snowflaking. After the astonishing success of the extra payments of 10 days ago, my little snowflakes seem so paltry and insignificant. But, isn’t it the spirit of the grand ABPDBT Personal Finance Debt Snowflaking Pageant that no amount is too small, no payment too paltry? YES! So in honor of the original thinking that spawned this pageant, let’s review our progress so far:

Week One: $24.28
Week Two: $12.50
Week Three: $0
Week Four: $1,337.28
TOTAL: $1,374.06

This week, a little snowflake fell into my lap in the form of an Amazon Marketplace sale. Total commission: $28.77. I’m throwing that on the mortgage with the rest this morning, which brings us up to a grand total of $1,402.83 in a little less than six weeks. Listen, that’s nothing to balk at. Have I got you motivated yet?

Want to join the ABDPBT Personal Finance Debt Snowflaking Pageant? Here’s what to do:

Start snowflaking and write up a summary on your blog.
Copy this code, and paste in the text of your post:
<a href=”http://www.abdpbt.com/?cat=148″ mce_href=”http://www.abdpbt.com/personalfinance/tag/debt-snowflake/”></a>
Either comment or email me at anna at abdpbt dot com to let me know you’re participating, and I’ll link you up below.

"ABDPBT Personal Finance Debt Snowflaking Pageant: Week 5 1/2 Progress Report" was written by Anna Viele for ABDPBT Personal Finance and was originally posted on February 25, 2009. Copyright ®2009 Anna Viele for ABDPBT, Inc. and licensed for reuse under Creative Commons BY-NC-SA 3.0. All other rights reserved.

ABDPBT Personal Finance Debt Snowflaking Pageant: Week Four

anna — Fri, 13 Feb 2009 12:00:14 +0000

The news this week is that, once again, I’ve flip flopped on where to throw my extra money snowflakes. I had originally thought mortgage, and then switched to student loan. But, maybe it’s all the scare tactic newsmongering, or maybe it’s that I’ve used my crockpot four times in the past two weeks (!!), but right now owning my home outright sounds like the most worthwhile goal for me and my family. So, yeah, I’m back to paying down our mortgage, bit by bit, and I’m going to make a commitment, here and now, to stick to that goal. I’ve decided that I like the idea of equity in my home more than anything else, particularly at this time in the economy, so I feel OK about this flip flopping if I’ve ultimately put the money where it is best spent. And after the successes of this week, I think we may own the equivalent of a few doors and windows in our home! Go us.

Though I haven’t been especially active in my snowflaking efforts for the past two weeks, I’ve run into a little dumb luck when it comes to making progress. For examaple, I got a $5.00 refund check from my car insurance company (don’t ask), so that will be thrown upon the pile with all of the other sundry refunds that filter their way in here for one reason or another. More significant to the goal, of course, was the $1,332.28 that I had stockpiled in an ING account for paying surplus property taxes that suddenly became available. You see, I knew the amount they were taking out in escrow would not be enough, so I was ready for an extra lump sump payment. Well, that wacky mortgage company did not charge us as a lump sum, and rather just increased our monthly escrow amount, so I took that extra money and threw it back at them, in the form of a check that said in large, bold-print letters, APPLY TO PRINCIPAL BALANCE ONLY. That’s right–with the $5, that’s $1,337.28 on principal, mortgage SUCKAHS. Kiss my grits, as Flo on Alice used to say.

What I really need, though, people, to get me going, is your help. I need you to be working on your snowflakes along with me. Even if it’s only a few dollars here or there, post here and let me know what you’re up to in your debt reduction efforts. Have fun, and I’ll see you next week!

Want to join the ABDPBT Personal Finance Debt Snowflaking Pageant? Here’s what to do:

Start snowflaking and write up a summary on your blog.
Copy this code, and paste in the text of your post:
<a href=”http://www.abdpbt.com/?cat=148″ mce_href=”http://www.abdpbt.com/personalfinance/tag/debt-snowflake/”></a>
Either comment or email me at anna at abdpbt dot com to let me know you’re participating, and I’ll link you up below.

"ABDPBT Personal Finance Debt Snowflaking Pageant: Week Four" was written by Anna Viele for ABDPBT Personal Finance and was originally posted on February 13, 2009. Copyright ®2009 Anna Viele for ABDPBT, Inc. and licensed for reuse under Creative Commons BY-NC-SA 3.0. All other rights reserved.

Refinancing v. Loan “Modification”: What is the Difference?

anna — Fri, 30 Jan 2009 12:00:49 +0000

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If you are looking to refinance your home in the near future (as we are), you will probably be deluged with a ton of offers from various sources offering you better interest rates and “lower payments” on your existing mortgage. These offers are often from Loan modification companies, which are part of an industry that has sort of sprung up out of nowhere in recent months to deal with the rising tides of mortgages-gone-bad and distressed homeowners. I have personally received about eight million of these “offers” myself, and the wording is somewhat confusing and misleading, so I thought–hey, free ABDPBT Personal Finance topic.

First of all, let’s define our terms. A loan refinance is where you go in and basically sell your loan again to another lender, or the same lender (maybe) but under different terms. You don’t have to get your current lender to agree to anything really because you’re just, essentially, paying your old mortgage off. Except, you’re paying it off with another bank’s money, so you still end up with debt, but it’s to somebody else (probably) and under different terms (probably). If you do a loan refinance, you have to pay fees and do escrow and all that crap that you had to do when you were buying the house. Except you don’t have to have people looking through your cabinets or host open houses or whatever. The biggest problem with refinancing in recent years has been that people have taken mortgages out for more than they originally owed, so when the market went down, they lost equity and/or ended up being “upside down” on their homes, aka owing more than the homes are worth.

A loan modification differs from a refinance in that it is where you deal with your current mortgage lender and attempt to get them to renegotiate your loan. Usually, this will be in the form of extending a teaser rate for a longer period, or agreeing to allow a loan percentage rate to be fixed for a certain amount of time. On occasion, they might talk about “forgiving” parts of loan in circumstances of financial distress, if they know the homeowner cannot make payments or something. It just depends. A loan modification does not cost anything in and of itself, but there are a bunch of companies that have sprouted up lately that are offering to negotiate for you and in exchange asking for an upfront fee. It’s not clear that loan modification necessarily has an effect on your credit score, but I would guess that it does, since you are kind of working out a default deal with your lender, and I’m guessing that they won’t just keep that to themselves out of the goodness of their hearts.

So the problem with this industry of loan modification companies is that they are charging they eighty five million people who are candidates for loan modification for something that is provided for free or for a small fee by a bunch of nonprofit organizations. These companies send misleading paperwork to a bunch of people, and not just candidates for foreclosures, by the way, since I’ve received eight pounds of them in my mailbox lately and we are all current on our mortgage. The notices have kind of tricky wording that suggests they are writing from your current lender, but actually they are not. Here’s an example from one I received:

RE: Current Right-Click Mortgage Holder
Your mortgage, originally funded by Current Right-Click Mortgage Holder, may be eligible to be modified to a 30 year fixed rate mortgage with a payment of only [super low number] per month!

If you look at the fine print, it says “information obtained from public record sources and not by Current Right-Click Mortgage Holder.” So basically they are blanketing areas with modification offers, regardless of what the terms are of the mortgage, and regardless of financial circumstances. Why? Because if they offer that ridiculously low payment offer, then people are going to go, “Hey, maybe I should do that,” and be willing to pay the $500 to $3,000 they charge for negotiating these “modifications”!

Bottom line is that you do not need to go out and hire somebody to modify your loan for you. Not only that, you only need to modify your loan if you are at risk for foreclosure and cannot refinance. While it is not illegal to charge for these services, and while the companies themselves argue that what they are doing is providing a service that is necessary because of overwhelming demand, you want to make sure to stay away from things that you do not need and which may hurt your credit. I think the notices they are sending out, personally, are designed to get you to sign up for something you do not need because the process is so confusing. If you are concerned about foreclosure or in the midst of a financial crisis that you worry will lead to foreclosure, the Department of Housing and Urban Development has resources to help you. For state and local housing counselors that are certified by HUD, visit this link.

"Refinancing v. Loan “Modification”: What is the Difference?" was written by Anna Viele for ABDPBT Personal Finance and was originally posted on January 30, 2009. Copyright ®2009 Anna Viele for ABDPBT, Inc. and licensed for reuse under Creative Commons BY-NC-SA 3.0. All other rights reserved.

ABDPBT Personal Finance Snowflaking Pageant: Week Two

anna — Tue, 27 Jan 2009 12:00:52 +0000

It’s now been two weeks since I threw down the gauntlet, and just as I reported last week, NOBODY HAS PICKED IT UP. What is so frightening about debt snowflaking, I wonder? Why won’t anyone join in? Is it the name, as reader AKD suggested? Too reminiscent of dandruff shampoos, perhaps? Listen, call it something else. Also, you don’t have to snowflake your debt–you can use the snowflake method to build up your emergency fund or other savings as well. It’s really just an exercise in adjusting mindset.

But whatevs. I continue my debt jousting with or without you errant knights. Both of Mini’s shoes sold, one pair for $7 and the other for $5.50, leaving us with a total of $12.50 in snowflaking funds for the week. These are being thrown at the $5,000 student loan balance.

We went into this week with $24.28 as the grand total for one week of debt snowflaking. Adding this week’s total, that brings us to up to $36.78 in total after two weeks of snowflakes. What is on tap this week? Well, we have yet another pair of shoes from Mr. Mini’s collection, as well as a picture frame. I think it’s going to be a big week in snowflake land, are you ready to join me yet?

"ABDPBT Personal Finance Snowflaking Pageant: Week Two" was written by Anna Viele for ABDPBT Personal Finance and was originally posted on January 27, 2009. Copyright ®2009 Anna Viele for ABDPBT, Inc. and licensed for reuse under Creative Commons BY-NC-SA 3.0. All other rights reserved.