When Should Seniors Consider CDs?

In the years since the financial crisis hit in 2007, seniors, especially retirees, have had to get used to some new investment strategies to produce returns. After a rough start, it seems like they’re beginning to get the hang of it. Retiree confidence in having a financially secure future increased to 28% this year from 18% in 2013, according to the 2014 Retirement Confidence Survey from the Employee Benefit Research Institute in Washington.

But some questions still remain, like when should a senior consider liquidating assets or putting money in certificates of deposit (CDs)? What proportion of assets should go into CDs? Here are some things to consider when pondering those questions:

Age

You may have heard that the stock market is a young person’s game. That’s because, as you get older, the time you have to recoup losses decreases. So if a 35-year-old takes a big hit in the stock market, she still has 25-plus working years to rebuild before reaching retirement, while someone already past 60 may not have that long.

Experts say that you should gradually reduce your stock holdings as you age ¾ from about 50% to 60% of assets in your 60s to about 20% to 30% in your 80s ¾ and replace them with safe investments like CDs or credit union share certificates. A good rule of thumb is to cut stock holdings by 1% a year, but you may increase your proceeds by selling up to 5% in years with good gains and none in a corresponding number of years with poor returns.

Inflation

When figuring out how to balance your investments, you’ll need to take inflation into consideration. If you’ve saved enough to carry you through retirement, the desire to preserve it is understandable. But if you put the full amount into risk-free savings or CDs, the interest you earn probably won’t keep up with inflation, reducing the value of those assets. The latest annual inflation rate was 2.1% in May, on a non-seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported on June 17. So if the interest rate you’re getting on a 1-year CD or savings account is anything less, you’re losing money.

Risk tolerance

When deciding whether to move your money to CDs and how much, it’s important to consider what level of risk you find acceptable and how much you can afford to expose to potential declines.

Your investments may generate enough income that you’ll never have to dip into your principal, or you might be worried that you may not have enough to last. Either way, you should keep some money in safe investments like CDs. Beyond that, you may consider taking on some riskier assets to grow your nest egg. Experts generally recommend that those already retired take fewer chances to prevent major losses, but in the end, the amount you put into riskier holdings ultimately depends on your comfort level.

Another thing to consider is how much of an emotional toll a loss would take on you at this stage in your life, regardless of whether you can afford it. To get an idea of where you stand, take this risk-tolerance quiz on the Rutgers University website.

How long can you go without drawing down your principal?

There are lots of options when it comes to term lengths of CDs. In general, though, the longer the term, the higher the interest rate you’ll earn, so it’s best to find the most financially productive structure for your circumstances.

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Banks Urged to Join Crackdown on Illegal Payday Lending

You may see many things in New York: iconic landmarks, the bright lights of Broadway and a teeming mass of humanity. What you won’t see is something found on nearly every corner in many other major cities – payday lenders. These “no credit check, get cash quick” short-term loan shops that charge more than 25% annual interest are strictly illegal in New York. And that includes “cash with a click” online operations.

New York state’s Department of Financial Services (DFS) began investigating these “predatory” lenders – some of whom charge more than 400% in annual interest ¬– over a year ago. The problem is, without a physical presence in such a lucrative market, payday lenders have gone online to circumvent the state’s usury law.

Four in five people who take out a payday loan extend it, or roll it over, at least once before paying it off, according to Richard Cordray, chief of the U.S. Consumer Financial Protection Bureau, which has been investigating the industry. Many borrowers – some 12 million Americans – get caught in “spider webs of debt’’ by using these products, Cordray has said. The agency is weighing the need for national rules to rein in lenders.

“Too many borrowers get caught up in the debt traps these products can become,’’ Cordray said at a payday loan hearing held in Nashville, Tenn., earlier this year. When borrowers roll over the debt, what was created in the 1980s as an emergency source of funds instead becomes a burden, he said, and “the consumer ends up being hurt rather than helped by this extremely high-cost loan product.’’

Most states specifically permit these short-term loans, often made through the lender’s acceptance of a deferred-deposit check in exchange for cash, but many of them have even lower interest-rate caps than New York’s, according to information compiled by the National Conference of State Legislatures. Among the 38 states with such laws, many also set limits on loan amounts and term lengths. Even those without specific payday lending statutes – including New York – have laws that effectively ban the practice.

To get around the state’s barriers, payday lenders have developed websites enticing New Yorkers to take out loans with rates as high as 1,095%, according to the DFS. Without face-to-face contact, the lenders have tried to collect these debts through electronic payment and debit networks. The DFS has urged banks to help stop such actions by identifying and preventing these online transactions. At least one financial institution – Bank of America – has already accepted the challenge.

The bank is the first to tap into New York’s database of companies that have been subject to action for illegal payday lending, defined as relatively small personal loans that are due in a short period of time and carry rates in excess of the state’s 25% legal maximum. Cross-referencing the data with its own information and “know your customer” procedures is expected to help the bank identify companies that may be illegally collecting payments electronically from New York consumers’ accounts.

In April, MasterCard and Visa joined the effort, agreeing to work with DFS to help halt illegal payday loan collections through their networks. The credit card companies promised to “take appropriate action” – including barring illegal transactions made by lenders, as well as alerting financial institutions that process the payments.

The enhanced enforcement is also targeting “lead generators” – businesses that use phone banks or the Internet to find prospective payday loan customers and sell their names and contact information such as phone numbers to lenders. The DFS says these boiler rooms may be engaging in deceptive and misleading marketing.

Debt collectors have also been warned about working with payday lenders in New York. The DFS notes that payday loans made in New York or to state residents are “not valid debts and cannot be lawfully collected.”

New York officials say the proactive strategy is working. Additional banks are expected to sign up for access to the database of illegal lenders, and the DFS says that since it has been providing the information to banks and payment networks, many payday lenders have been stopped.

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Credit Card Debt Consolidation Versus a Credit Card Balance Transfer: What’s the Difference?

If you’re in the dark about certain personal finance terms, don’t worry – you’re not alone! For instance, many people looking for solutions to their credit card debt woes are unclear about the difference between credit card debt consolidation and a credit card balance transfer. While these terms aren’t synonymous, there is a relationship between them.

Ready to learn more? Let’s dig in.

First, the vocabulary

Let’s go over the definitions of credit card balance transfer and credit card debt consolidation before explaining how the two are related:

Credit card balance transfer – This means moving a credit card balance from one card to another. Usually, people choose to transfer a balance because they’re carrying debt on a card that charges a high interest rate. If they’re able to qualify for a card with a lower rate (or in some cases a limited time, 0% promotional rate), the opportunity to save money on interest is huge.

Credit card debt consolidation – This means paying off several different credit cards with one single loan or credit card; you’re literally consolidating several debts into one. Most people consider debt consolidation if they’re carrying a few high-interest balances and can get a lower rate on a consolidation loan or card. This will save money on interest and also simplify the debt repayment process because they’ll be making one payment instead of many.

Both of these strategies are useful for saving money on high-interest credit card debt. But there’s an important difference to keep in mind: Credit card debt consolidation necessarily means that several debts are being rolled into one. But a balance transfer can be just one balance from one card being moved to another.

What’s the relationship between balance transfers and debt consolidation?

It’s clear that balance transfers and debt consolidation aren’t the same thing, but you’ve probably picked up on their relationship: Many people choose to consolidate their debt with a balance transfer credit card.

Shifting several high-interest balances onto one card that’s offering a promotional 0% balance transfer rate is a way to combine your multiple debts into one. Again, the benefit to this is that you won’t pay any interest during the introductory 0% period (usually 6-12 months) and only manage one payment instead of several.

Nerd note: Keep in mind that consolidating your credit card debt with a 0% card is just one option. You can also consolidate with other types of loans, like personal loans or home equity loans. We recommend weighing the pros and cons of every consolidation choice before moving forward.

When to consider these options – and pitfalls to avoid

Credit card balance transfers and credit card debt consolidation make sense if you’re in the red on your existing plastic and need a way to reduce your interest rate(s). Not only will you save money on finance charges, but you’ll be able to repay your debt faster. After all, interest has a way of eating into your payoff progress!

However, there are some pitfalls to watch out for with credit card debt consolidation and credit card balance transfers:

• Fees – Transferring a balance to a 0% card isn’t free. You’ll usually have to pay a fee of 3% of the balance transferred. Choosing other consolidation options can also result in fees; for instance, some personal loan issuers charge an origination fee. Be sure you know exactly how much it will cost you to reduce your interest rates!


• Late-payment repercussions – If you make even one late payment during your 0% balance transfer promotion, your deal might be canceled and your could have to start paying interest immediately. If your on-time payment record is spotty, other consolidation options might be worth looking into.


• Credit – In order to qualify for a 0% card or get the best rate on another type of consolidation loan, you’ll need very good credit. If this doesn’t sound like you, you’ll have to do the math to decide if consolidating is a good option at the rate you are able to get. Again, be sure to shop around – there are lots of personal loan options out there.


• Ending up back in the hole – Whether you transfer your balance onto a 0% card or consolidate your credit card debt with a loan or lower-rate card, you’ll end up with at least one paid-off card in your possession. Resist the urge to charge it back up, or you’ll end up with more debt than you started with.

The takeaway: A credit card balance transfer isn’t the same thing as credit card debt consolidation. However, transferring several balances onto a low-rate card is one way to approach debt consolidation. In either case, be sure to avoid the pitfalls discussed above to make the path to credit card debt freedom as smooth as possible!

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5 Common Credit Gripes – and How to Get Past Them

There’s no doubt about it: The credit scoring system we use in the United States is complicated. What’s more, there are plenty of critics who claim that it’s downright unfair.

While it’s true that our credit reporting procedures could probably use some reforms, there are ways to get past common credit gripes. Take a look at the 5 listed below, plus our tips for working within the system we’ve got.

1. You have to get into debt to build credit

People who prefer to pay cash often complain that there’s no way to build credit without getting into debt. This comes from a kernel of truth: You do have to use credit to create a credit history.

But this doesn’t necessarily mean you have to take on debt. For example, if you use a credit card regularly and pay your balance in full every month, you’re building credit, but not getting into debt. Consider this option as an alternative to taking out a loan that you don’t really want or need.

2. Every little mistake is used against me

If your lenders are reporting your payment information to the three major credit bureaus (which most do) you might feel like they’re tattling on you for every little mistake you make. It’s true that foul-ups like missed payments, taking on too much debt and submitting too many credit applications will get back to the credit bureaus and affect your score.

But it’s important to remember that many of these mistakes can be avoided. For example, setting up text and email alerts so that you know when your bills are due or if your credit card balance is getting too high will go a long way toward preventing a gaffe.

And even if something does go wrong, a money misstep won’t stay on your credit report forever. Most negative marks drop off after seven years; if you’re making smart credit moves in that time, your score will recover. In short, there are lots of opportunities to avoid most mistakes and bounce back from the ones you can’t.

3. My savings isn’t factored into my score

Many people are frustrated to learn that some of their good financial habits (like saving) aren’t incorporated into their credit scores. If you excel in this area, feeling a little slighted is normal.

Remember, though, that the purpose of the credit scoring system is to assess borrower risk. Lenders want to know how likely it is that you’ll repay money they’ve credited you, not how likely it is that you’ll save.

Look at working on your credit score as an opportunity to highlight another side of your financial responsibility. Again, pay special attention to paying your bills on time and staying out of credit card debt – these two habits alone will help your score sparkle.

4. Credit reports are full of errors

Although lenders and the three major credit bureaus make efforts to create an accurate report of your credit-related behaviors, mistakes do happen. In fact, a 2013 study by the Federal Trade Commission found that 1 in 5 Americans has an error on at least one of their three credit reports.

The best way to cope with this gripe is to review your credit reports carefully at least once per year and take steps to correct mistakes if you find them. And the good news is that getting an error fixed is expected to get easier soon, due to new rules set out by the Consumer Financial Protection Bureau.

5. It’s not clear how my score is determined

Historically, the credit reporting agencies were secretive about how your credit score was determined. While some information is still proprietary, we have a much clearer picture these days of what determines our credit scores:

• Payment history – 35%


• Amounts owed – 30%


• Length of credit history – 15%


• Mix of accounts – 10%


• New credit inquires – 10%

Again, the two most powerful things you can do for your credit score are paying your bills on time and staying out of credit card debt. But if you want to know more about your credit report and credit score, the Nerds have lots of great resources. Be sure to check them out!

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Sallie Mae Is Now Offering Free FICO Scores to Eligible Student Borrowers

It’s easy to get excited about heading off to college, but it’s not always so easy to get excited about taking out student loans. Let’s face it: Comparing interest rates and reading over loan disclosures will never be as much fun as pizza and parties!

However, one student lender recently announced that it will provide a helpful benefit to eligible borrowers: Sallie Mae will now provide customers with free quarterly access to their FICO scores. Ready to hear more? Take a look at the details below.

Free FICO scores from Sallie Mae: The details

If you’re a student borrower, you’re probably interested in the details behind this new free FICO score initiative. According to a press statement, students with a Sallie Mae Smart Option student loan disbursed in the 2014-2015 school year will automatically receive the following:

• A free quarterly FICO score


• Personalized factors that are influencing the score


• Online credit score education


• Information about what the FICO score is and how it’s calculated


• Frequently asked questions (and answers) about credit

To find out why Sallie Mae is now offering these benefits, the Nerds reached out to Abigail Harper, a spokesperson for the company. “By giving our customers access to their FICO Scores, they will be better informed and empowered to make responsible financial decisions,” Harper said.

Where else can you see your FICO score for free?

It’s definitely a step in the right direction for Sallie Mae to provide free FICO scores to student borrowers; after all, the more details consumers have about their finances, the better.

Sallie Mae is hardly the only source for a free FICO score. As of July 2014, the following credit card issuers also provide free FICO scores to their customers:

• Discover


• Barclaycard US


• First National Bank

You can also get your FICO score from Fair Isaac Corp. or from any of the three major credit bureaus, but access isn’t free. You’ll have to pay a fee to order a copy of your score.

Nerd note: These days, there are a number of sites that provide you with a free credit score, but this isn’t the same as a FICO score. These websites use their own proprietary credit scoring models, which serve as a decent barometer of how your credit is looking.

However, most lenders use your true-blue FICO score when they’re deciding whether or not to extend you credit. This is why being given a free FICO score by Sallie Mae and the credit card issuers listed above is so exciting – it’s the tool most widely used by banks to judge your creditworthiness.

Don’t miss this opportunity to take control of your score!

If you’re an eligible student borrower with Sallie Mae, be sure to take advantage of this opportunity to take control of your score. As a young adult, you’re in a great position to start building good credit – this will make it easier for you to get a credit card, a good rate on your car insurance and even a mortgage someday. Consider achieving and maintaining a high credit score just as important as achieving and maintaining a high GPA!

If you’re not sure where to get started, here are the Nerds’ top tips for building credit as a student:

• Pay your bills on time; this is the most important thing you can do to create a healthy score.


• Consider getting a credit card as soon as you can, but don’t charge more than you can afford to pay off in one month.


• Only take out loans that you actually need; applying for too much credit in a short time can hurt your score.


• Pay attention to your quarterly credit score updates; it’s especially helpful to track your score’s progress over time.


• If you see a dip in your score, look back at your recent financial behaviors for a possible cause (like spending too much on your credit card or paying a bill late).


• Pull your credit report at least once per year and check it for accuracy; this is good habit to get into when you’re young!

The takeaway: Sallie Mae is now offering free quarterly FICO scores to eligible student borrowers. If you’re one of them, be sure to use this opportunity to your advantage!

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What’s the Point of Prepaid Cards When Rewards Cards Abound?

For most credit card users, the selection process can be taxing, as we filter through all the various rewards that are available for customer loyalty. We are enticed by hotel rewards, airline rewards, cold hard cash-back and other delicious possibilities. For those of us trapped in the reward mindset, we may wonder why the heck anybody would use a prepaid debit card.

Who uses prepaid cards?

The largest user population of prepaid debit cards are the underbanked and unbanked – a demographic that is almost completely opposite the regular credit card user, according to the Federal Deposit Insurance Corporation. This customer is often considered to be “nonprime,” lacking credit history or having poor credit, and thus not generally able to obtain a credit card. However, they value having the Visa or MasterCard logo on a prepaid debit card, and so attach an emotional and psychological value to having a debit card.

The prepaid debit card is also popular with the underbanked and unbanked. A 2012 FDIC survey reported that 8.2% of U.S. households are unbanked, or some 17 million adults. Twenty percent are underbanked, 29.3% do not have a savings account and 10% lack a checking account.

This demographic distrusts banks or cannot afford the fees that banks attach to checking and savings accounts. The prepaid debit card industry has exploded in growth because of this demographic, and 17.8% of the unbanked used a prepaid debit card in 2011, the FDIC reported. Prepaid debit card usage is used disproportionately by Hispanics, according to a report in HispanicRetail360.com.

Prepaid cards seen as safe haven from debt

The Pew Charitable Trusts conducted a survey on prepaid debit cards users and found a few other trends. It found that, “most have previously struggled with credit card debt, overspending, and unpredictable fees. They have turned to prepaid cards as a safe haven to avoid the risk of overdraft fees and as a commitment device, or a tool to restrict their ability to overspend or to incur interest charges. For most customers, prepaid cards are a mechanism to avoid the temptations and problems of the past.” Indeed, the survey showed that 66% of prepaid card users had a credit card. Forty-five percent have one and used it in the past year, and 21% used it more than a year ago.

To this point, the survey also revealed the four primary reasons prepaid cards are used are to buy things online, avoid credit card debt, avoid spending more money than they have, and avoid overdraft fees. Sixty-three percent reported having paid overdraft fees, 34% reported that they closed a checking account themselves because of overdraft fees, and 21% had an account closed by their bank because of these fees.

Bottom line: It’s apparent that the prepaid debit card user is a much different user than a credit card user. Forty percent of users have used other alternative financial services like payday loans or pawnshops. There’s no need to use these services if you have a credit card, so to users of prepaid debit cards, the notion of a “reward” is not even on their radar.

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Your Official Credit Card Fraud Glossary, From “A” Through … “V”

It may seem silly to learn some of the most common forms of credit card fraud, but knowing the terms may come in handy. You may find yourself a victim and need to explain what happened to a credit card rep in order to dispute the charge. Using the right term can help them understand what may have happened. Terms may also help you understand a security breach at a third party, so you know how much risk you’re at.

Truthfully, the most important reason for knowing these terms is knowing what activity they imply. That gives you awareness if you sense something isn’t right. You’ll be able to identify fraud happening, possibly at the moment it occurs, if you are aware of all the different possibilities for fraud.

Most of all, we’re Nerds. We like telling you this stuff.

Presenting the official credit card fraud glossary

Account takeover — This occurs when a thief gets access to your account and changes your PIN and other important information, so he can access the account and you can’t.

Bust-out fraud — When the available credit is increased on a credit card.

Card-not-present — A common form of fraud that occurs when your card is somehow not present at the time the purchase occurs. This will occur most often with Internet transactions (though it’s not fraud if you’re doing the charging). Your card information may have been compromised by a third party security breach, skimming or cloning (see below).

Chargeback — Legitimate chargebacks exist, but fraudulent ones are when the card issuer reverses the amount charged by a merchant … back onto the merchant. This permits a thief to continue using a card while still retaining the purchased items. It creates a kind of bottomless well of credit because the credit limit never gets reached. The merchant often gets hit with big fees and is also out of the item sent.

Child identity theft — When a child’s information, especially Social Security number, is stolen and credit accounts are set up in their name. This is a great reason to pull your child’s credit report at least once a year.

Cloning – Using stolen credit card data, often from skimming (see below), to create a fake credit card. The data is often encoded onto a magnetic strip of the fake card.

Credit card fraud — A catch-all term for when your credit card is used without your authorization, or when it is used by yourself or others and neither pays the bill. That’s right – if you use the card and have no intention to pay the bill, you are committing fraud.

Dumpster diving — Sorting through someone’s garbage with the hope of finding personal information that can be used to commit fraud against that person.

EMV – A new security feature for credit cards which requires a microchip and PIN number on a card to make a charge.

Familiar fraud — This is essentially impersonation, when someone you know pretends to be you in order to get your personal information.

Fraud – This is the general term that encompasses any attempt, using some form of misrepresentation, to steal assets of another party. There are both federal and state definitions as what specifically constitutes fraud.

Fraud ring — A group of people who commit fraud.

Friendly fraud — When you charge something and deliberately engage a chargeback in order to keep the items you purchased without paying for them.

Identity theft — Using another person’s identify, especially a Social Security number, to obtain credit or steal assets.

Medical fraud — Stealing someone’s personal information to obtain medical care. It can sometimes be used to bill private insurance or Medicare and then get reimbursed for services that may or may not have been provided.

Pharming — To redirect people from a legitimate website to a fake website made to look like the real one.

Phishing — Usually done via an email that appears to come from a legitimate source, it’s actually an attempt to get you to provide personal information to a phony source. The thieves then use that information, often usernames and passwords, to commit fraud. These solicitations have many tell-tale signs, of which typos and poor grammar are the most common.

Shoulder surfing — When someone looks over your shoulder when you’re in the process of entering a PIN. This is just one reason why ATMs have wide-angle mirrors.

Skimming — A popular method of stealing credit card and other information. A skimmer is a small device that acts, and even looks like, a legitimate credit card scanner. It can be placed onto gas pumps or in ATM slots. It can be hidden behind counters at restaurants. You think you are engaging in a legitimate transaction, but the skimmer collects the data from your magnetic strip.

Smishing — The same as phishing, but the scam message comes via cellphone text message. You are asked to call a toll-free number, and led through an automated voice-response protocol, just like when you call your credit card company. You get asked to enter your credit card number, your CCV, and ZIP code.

Sniffing — Intercepting Internet traffic passing through a computer network. It’s a bit like eavesdropping on data passing through the network and grabbing up data that can be used for fraud.

Social Security fraud — When your Social Security Number is used so a thief can get your personal information. The key element in identity theft.

Synthetic fraud — Combining fake and real information about a person, in an attempt to create a whole new identity under which new credit accounts can be opened.

Vishing — Just like phishing, but a thief tries to steal personal information by installing software on your computer via video file.

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