Six Ways to Improve Your Chances of Getting a Mortgage

From AOL

Mar 25th 2011
Ann Brenoff

New homes for sale

Remember how Spring was always the home-buying season? Don’t count on that happening this year and you can point the finger, at least in part, at the new lending hoops buyers must jump through. One out of three home buyers will fail to get a mortgage this spring.

Understanding the mortgage process and meeting lenders’ more stringent qualification requirements have become big obstacles for applicants, according to a survey the site conducted. Most recent home buyers — 70% — described the mortgaging process as more difficult than they expected. And those who bought homes during the bubble years, when mortgage loans were given out like candy at Halloween, are especially shell-shocked by the new lending standards.

One of the biggest problems home buyers run into today concern their credit scores and how, in general, they don’t work to improve them before applying for a loan. In the same vein, a recent Fannie Mae survey found that poor credit was the top reason that renters gave for not buying a home.

(Following closely behind poor credit was the self-awareness that they couldn’t actually afford to buy or keep up a home and the perception that now is not really a good time to buy. Hooray for enlightenment on the first point, but with home prices back to 2002 levels and interest rates among the lowest ever seen, how isn’t this a good time to buy?)

Back to the study: A full 35% of successful buyers said they didn’t even know their credit scores when they started to look for houses to buy. Somewhere, a Realtor is clenching his or her teeth just reading that. These buyers decide they want to buy a house but don’t know their credit scores? Home-buying is a process that starts with getting your financial house in order and then hitting the brick and mortar ones.

See photos of homes for sale in your area and across the country on AOL Real Estate

Sue Stewart, senior vice president for Move, Inc. said, “Buyers who prepare themselves financially early before they start looking for a home will have a better chance of succeeding. If you want to be in a position to land the best mortgage … get your documentation together and find a lender you trust.”

Some tips before you apply for a mortgage to help you beat the odds:

  1. Pay down your debt. Reduce your total debt — your monthly payments on cars, student loans, credit cards — before you start the mortgage application. The goal is to reduce your overall debt-to-income ratio and improve your credit score. The somewhat unrealistic guideline that lenders want everyone to toe is that your total housing expenses not exceed 28% of your monthly gross income. For decades, people have exceeded that quite happily but now the lenders believe they know best and they control the money.
  2. Clean up your credit. Start with figuring out what your reported scores are. Obtain your free credit report from each of the three credit bureaus (Equifax, Experian and TransUnion) and carefully review them, noting all negative items. Correct inaccurate or outdated items. Your credit score needs to be a minimum of 680 — preferably 720 or higher — to qualify for a lower interest rate on a mortgage.
  3. Delay any large purchases, don’t apply for any new credit until you close on your house. Lenders check credit reports at the time you apply and then again right before closing. A last-minute spending spree is going to be flagged. Once you clear the mortgage hurdle, feel free to move about the cabin and decorate your new house to your heart’s content. (That’s said in jest; charge wisely.)
  4. Increase your down payment. This reduces the loan-to-value ratio and improves your chances of getting a loan. How do you do this? You save up for it or call up your rich relatives. There are also a lot of community programs to help first-time buyers, so check around.
  5. Get your paperwork together. Your lender will want to see pay stubs, bank statements, assets, credit documents, income tax returns, all financial statements and possibly your fourth grade report card. OK, I made that last one up, but you get the idea. This is paperwork central. And you better make copies of everything you send them in case they ask you for it a third time.

IRS debt guidance really hits home

From the Boston Herald

By Kenneth R. Harney
Sunday, March 13, 2011

WASHINGTON — The IRS has issued fresh guidance on how to handle canceled mortgage debt in the upcoming tax season — just as hundreds of thousands of homeowners have negotiated loan modifications or short sales or have been foreclosed upon during the past year.

It’s a huge issue, widely misunderstood by consumers, and involves potentially billions of dollars of tax liability.

When most debts are canceled by a creditor, such as unpaid balances on student loans or credit cards, the forgiven amounts are treated as ordinary, taxable income by the Internal Revenue Code. But under a special exemption adopted by Congress covering distressed home mortgages, many owners can escape the ultimate double-whammy: getting hit with extra taxes because your mortgage went seriously delinquent or you lost your house.

In its latest guidance, the IRS focuses on several key points that owners — and former owners — need to know. Tops on the list: Just because a lender wrote off a portion of your mortgage debt, this doesn’t mean you automatically qualify for special tax treatment. To the contrary, there are essential tests you need to pass to qualify: The debt your lender canceled must have been used by you “to buy, build or substantially improve your principal residence.”

There’s a lot packed into these words, so it’s important to parse them carefully. Start with the house itself. It can’t be your second home; it can only be your main residence, and fully documentable as such.

Next, the unpaid mortgage balance your lender canceled as part of a modification, short sale or foreclosure cannot have been used for non-qualifying purposes, like for something other than acquiring or constructing the house or making capital improvements to it. Refinanced mortgage debt used for kids’ tuitions, vacations, buying cars or paying off credit card bills won’t make the grade.

The IRS offers a hypothetical example of how borrowers can mess up their chances for tax relief. A taxpayer took out a first mortgage of $800,000 when he purchased his home years ago. Thanks to strong appreciation in property values, the house was soon worth $1 million and the owner refinanced the mortgage to $850,000. The loan balance at the time of the refinance was down to $740,000, and the owner used the $110,000 in cash-out proceeds to buy a new car and pay off credit card debts.

Bad move. A year or two later — presumably well into the recession and housing bust — the home value had plunged to between $700,000 and $750,000. The owner then convinced his bank to allow a short sale for $735,000 and to cancel the remaining $115,000 of unpaid debt.

Does the owner get tax relief on the full $115,000 under Congress’ special exemption? No way, according to the IRS. He only escapes income taxes on just $5,000 of the $115,000 because he spent the other $110,000 on a car and credit card balances — neither of which counts as “qualified principal residence” debt.

Greg A. Rosica, a tax partner with accounting giant Ernst & Young, says misunderstandings of the rules about mortgage debt forgiveness are “commonplace.” People often don’t know that the money they used for vacations and other purposes “just will not qualify” under IRS rules. Taxpayers who walk away from their houses may be liable for taxes, said Rosica, if at some point the property “no longer was their primary residence” — say it was converted into a rental property.

The IRS highlighted some other key points in its guidance:

• Mortgage cancellation relief is capped at $2 million for singles and married taxpayers, $1 million for married owners filing separately.

• Anyone who’s had mortgage debt cancellation as part of a loan modification or foreclosure should go to and download Form 982 and IRS Publication 4681 for additional filing details. Alternatively they can call 800-TAX-FORM to request copies. Lenders who write off unpaid mortgage balances typically provide borrowers with a year-end IRS form 1099-C cancellation of debt statement, including the amount of the loan forgiven and the fair market value of the property.

If you’ve had mortgage debt canceled but have never received a 1099-C from your lender, get in touch and request it if you want to avoid federal tax hassles.

5 ways to be stupid about credit

1/26/2011 12:05 PM ET

|By Liz Weston, MSN Money

What you think you know about you credit scores is probably wrong — and that can cost you. Arm yourself against 5 common misconceptions.

The world of credit can be confusing, counterintuitive and strange. Trying to get a handle on how it all works isn’t easy — which may be why so many myths and misstatements about credit get passed along as fact.

The good news is that people who want to educate themselves about credit can do so by visiting sites like this one and many others, including Creditbloggers, myFICO and the Federal Trade Commission’s site.

In the meantime, if you want to sound smart about credit, here are things you don’t want to say.

Misstatement No. 1: “My credit score is 740.”

You don’t have one credit score — you have many, and they change all the time based on the constantly shifting information in your credit reports.

The credit scores most lenders use are called FICO scores, which range from a low of 300 to a high of 850, and you have three of them at any given time — one from each of the three major credit bureaus. Credit bureaus use the same basic FICO formulas to generate the scores they sell to lenders, although the FICO scores themselves can go by different names:

  • At Equifax, they’re called Beacon Scores.
  • At Experian, they’re known as the Experian/Fair Isaac Risk Model.
  • At TransUnion, they’re called Empirica.

If the credit score you get isn’t called a FICO or one of the above names, it’s not a FICO. You may be looking at a VantageScore, a competitor to the FICO, or at one of a credit bureau’s in-house “consumer education scores” that aren’t widely used by lenders and that may not be in the same ballpark as your FICOs.

You can buy two of your three FICOs from myFICO for $19.95. Experian, however, no longer sells FICO scores to consumers, although it still sells them to lenders. So the most accurate thing you can say is something like: “Last time I checked, my Equifax FICO was 740, and my TransUnion FICO was 735. And it’s about time Experian started selling FICOs to consumers again!”

Misstatement No. 2: “Credit scores are debt lovers’ scores.”

If you don’t understand much about how credit scores work, it may seem logical that they would reward people who pile on debt. But that’s not necessarily the case.

You can get and keep good credit scores without ever paying a dime in interest or carrying debt. You simply need to have, and lightly use, two or three credit cards, paying the balances in full every month.

It’s true that it’s easier to achieve good scores if you have a mix of credit: revolving accounts (credit cards) and installment loans (a mortgage, auto loan or student loans, for example). But people who use credit accounts to dig themselves deeply into debt are unlikely to have good credit scores for long.

That’s because credit-scoring formulas are extremely sensitive to how much of your available credit you’re using at any time, particularly on revolving accounts. So if you max out your credit cards or even come close, you’re likely to hurt your scores. (This is true, by the way, whether or not you pay your balance in full. The balance reported to the credit bureaus, and used in credit score calculations, is typically the balance from your most-recent statement, before you sent in your payment.)

Plus, anyone who takes on too much debt is likely to start missing payments. A single skipped payment can knock as much as 110 points off your FICO scores.

The key to having good credit scores is to have, and responsibly use, credit. Piling up debt isn’t responsible, necessary or smart.

Misstatement No. 3: “Credit scores don’t benefit consumers. They just help lenders squeeze more profits out of us.”

There’s a kernel of truth here. Credit scores were designed, wholly and entirely, to benefit lenders by helping them gauge the risk that you would default on a loan. Originally, you weren’t even supposed to know that credit scores existed. Once upon a time, lenders were contractually obligated to keep them a secret.

But that doesn’t mean the system has no benefit for individuals. Credit scores gave lenders the confidence to make credit more available — and make it cheaper for those with good scores. That means if you’re responsible with credit, you’ll pay less for a loan than someone who has been less responsible. You won’t have to cover the risk that the other guy will default.

Credit scoring is also pretty much colorblind. In the not-so-distant past, it was harder for women and people of color to get a loan. Discrimination hasn’t entirely disappeared, but credit scores have gone a long way toward convincing bankers that it’s unprofitable.

Misstatement No. 4: “I paid my old debts, but they’re still showing on my credit reports.”

Paying your debts doesn’t erase them from your credit history. The credit bureaus can continue to report negative information for up to seven years and 180 days after an account first went delinquent. (Bankruptcies can be reported for up to 10 years.)

You may be able to persuade a collection agency to delete a collection account from your credit reports in exchange for payment. But you typically won’t be able to erase what the original creditor reports about you, which means that the information that’s most damaging to your credit scores — the skipped payments and charge-off that occurred before the account was turned over to collections — will remain on your reports for the full seven and a half years.

By the way, you shouldn’t fall for a credit repair firm’s pitch that it can erase true, negative information from your credit files. These outfits often flood the bureaus with disputes, but the vast majority of those disputes go nowhere, and the negative information remains on your files.

Misstatement No. 5: “If you don’t pay your debts, you’re stealing.”

Theft is a crime. Owing money generally isn’t.

There are exceptions, of course. If you rack up debt knowing full well you can’t pay the bill, you’re committing fraud. Refusing to pay the Internal Revenue Service (like actor Wesley Snipes) or court-ordered child support (like former NBA star Vernon Maxwell or hotel magnate Patrick Quinn) also can land you in jail.

But most people who owe debts they can’t pay didn’t start out intending to stiff their creditors. In fact, many people who struggle with debt wind up draining assets that would otherwise be protected from creditors, such as retirement accounts or home equity.

Most of us believe that skipping out on a debt you can afford to pay is morally wrong. Throwing in the towel on debts you can’t pay, however, is sometimes the best of bad options.

Liz Weston is the Web’s most-read personal-finance writer. She is the author of several books, most recently “The 10 Commandments of Money: Survive and Thrive in the New Economy.” Weston’s award-winning columns appear every Monday and Thursday, exclusively on MSN Money.

10 Things Credit Card Issuers Don’t Say

From MSN SmartMoney

Some of the card companies’ little-known rules are costing you money — and putting your credit, your identity and your family at risk.

1. “We’re waiting for you to screw up.”

Despite new credit card rules, there are still many factors that can cause a credit-card issuer to raise your interest rate. Among them is when a lender reviews your credit history and decides to change the terms of your credit card after it’s informed that you missed a payment with another credit issuer.

The Credit Card Accountability Responsibility and Disclosure Act does offer consumers some protection here, though. Should your credit-card issuer change the terms on your credit card, in most cases it can do so only for purchases going forward, not the balance you’re already carrying.

The credit-card industry claims that what it’s doing is managing risk. “Prior to these reforms, most of the larger issuers would review risk profiles on average every 90 days,” says Peter Garuccio, a spokesman for the American Bankers Association, a trade group. He says many of them build their own risk models, basing them on reports from the credit bureaus. He anticipates that this practice will continue. “It’s a matter of sound underwriting,” Garuccio says.

2. “We’ll give you advance notice — but your options are limited.”

With the Credit CARD Act, issuers need to give you at least 45 days’ advance notice before making a significant change to your account.

“The key is the flexibility with which they can apply any change to a customer’s profile,” says Garuccio, explaining that the customer has the right now to reject any new terms a credit card issuer plans to impose. If a customer rejects the changes, the issuer can either maintain the account under the existing terms until its expiration date or close the account. Either way, the customer is responsible for paying off any balance under the original terms.

The options for consumers are limited. Shutting down a credit card will lower a credit score, while the alternative often means having a card with a higher interest rate.

3. “When it comes to identity theft, you’re at risk.”

Credit cards are a common gateway for identity theft, and it’s almost impossible for consumers to be certain that their identifying information won’t be compromised, says Murray Jennex, an associate professor of information security and information systems at San Diego State University. But there are some basic steps you can take to minimize the chances.

Before you give your credit card information to a Web site, make sure it’s secure; look for a URL beginning with “https://” and for the image of a padlock by the Web address. Don’t store personal information online, and update your computer’s antivirus software each year.

Also, don’t respond to e-mails requesting your personal information and don’t click on links included in them. “Your bank won’t contact you in an e-mail asking for this,” says Margot Mohsberg, an ABA spokeswoman. And if there’s a link in the e-mail, “just by clicking on it, fraudsters can download ‘malware’ that would allow them to coast with you when you go into your bank account.” If you’re unsure whether the source is actually your lender, call and ask.

Consumers who fear their credit card information has been compromised should immediately notify the issuer and, if possible, file a police report. In most cases, credit card issuers will work with you; while you will likely be liable for the first $50 of unauthorized charges, the issuer typically covers the rest of the losses. Mohsberg says that credit card issuers are increasingly waiving the $50 payment. They’ve “found it’s not worth it to charge customers that amount of money; it’s much better for the company to completely reimburse that fee and to ensure consumer trust.”

4. “We haven’t forgotten about your kids.”

Many of the new credit card rules are geared toward protecting those under 21 years old. But don’t think the rules will keep credit card issuers at a distance.

For example, issuers no longer can give free stuff to college students in exchange for filling out credit card applications on college campuses or at college-sponsored events. But issuers can still give out those freebies as long as they don’t require students to sign up for a credit card to get them. Representatives of Citigroup and Bank of America say their banks aren’t doing this.

5. “Our rewards can throw you off track.”

In the credit card marketplace, rewards are a way for issuers to target niche audiences — frequent fliers, for instance. Before signing up, figure out how much you’d have to spend to earn the incentives from a given card and if the card is geared toward your spending habits. And check to see if rewards on specific purchases are offered throughout the year; some credit cards rotate their rewards every few months, says Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling. With rewards cards that offer cash back, find out if the amount you can earn has a ceiling. And for cards with travel rewards, inquire about blackout dates and other limits.

Consumers who are approved for these credit cards should also avoid carrying balances, because interest payments can eat into savings, cancelling out the value of the reward. “What people tend to do with rewards cards is charge everything,” Cunningham says. “But if you’re a person who carries a balance month to month, don’t consider (such a card), because you’ll be paying interest on it and probably not gaining the rewards you should.”

6. “Deferred-interest plans can leave you worse off than when you started.”

Stores often promote deferred-interest credit card plans with the sale of big ticket items like furniture, electronics and watches. But often these plans really are too good to be true.

Typically, such plans — financed by a lender — allow a consumer to purchase an item without paying interest during a promotional period, such as six or 12 months. But if the promotional period ends and the consumer hasn’t paid off the balance in full, interest kicks in and the shopper is retroactively charged interest on the balance for the entire promotional period, says Chi Chi Wu, a staff attorney at the National Consumer Law Center.

Also, if a consumer is more than 60 days late with a required payment during the promotional period, the 0% interest could be replaced with retroactive interest charges. “Even if consumers understand the pitfalls, such a tactic relies on consumer optimism or failure to think of the worst,” like losing a job or getting sick and being unable to make payments, says Wu.

7. “Double-cycle billing isn’t entirely a thing of the past.”

A big change in the Credit CARD Act is the elimination of double-cycle billing. This is a formula that computes interest charges based on the two previous billing cycles — effectively penalizing consumers who go from paying off their balance in the first month to carrying a balance in the second.

However, if your card doesn’t have a grace period — the period in which an issuer allows a cardholder to avoid paying interest on charges by paying off the balance in full — you still could be exposed. “The provisions against double-cycle billing apply when a credit card has a grace period, so if a credit card doesn’t have (one), the rules don’t apply,” says Wu. For cards without a grace period, some credit card companies refund the interest if a consumer pays the balance off in full each month.

8. “We’re accepted around the globe, but beware of our rates.”

By now, plastic has all but replaced the traveler’s check as the preferred way to make purchases abroad. But beware of the charges that accompany these transactions.

At issue is the foreign transaction fee, a charge for converting a currency into U.S. dollars. Currently, Visa and MasterCard charge a foreign transaction fee of 1% for any purchases, and most banks that issue these cards add a second fee. For example, Bank of America charges 2%; when combined with the Visa or MasterCard fee, card users end up with a fee of 3%. Foreign transaction fees are often this high, says Gerri Detweiler, a personal finance advisor at and author of “The Ultimate Credit Handbook.”

Consumers who purchase items from an online vendor based abroad are also typically charged a foreign transaction fees.

9. “Late fees are still with us.”

With the Credit CARD Act, consumers should be aware of the new changes to the time their payments are due. Prior to the new rules, many banks were setting deadlines as early as 9 a.m. or as late as 2 p.m. on the payment due date. Payments are now considered on time when received by 5 p.m. on the due date. And if the due date is on a weekend or federal holiday (when payments aren’t processed), the credit card issuer must consider your payment on time if it arrives on the next business day.

“This change gives you a better shot at getting your payments in on time,” says Detweiler. For consumers who are late with their payments, though, issuers can still charge a late fee, which they aren’t as quick to refund anymore, she says. Such fees run as high as $39 and they’re not proportional to the amount owed. So a consumer who is late making a $20 payment can incur a late fee nearly twice that, she says. The Federal Reserve has a announced a proposal that includes changing the way late fees are assessed, but it remains under consideration.

10. “Go ahead and exceed your credit limit — we like that.”

With the new credit card rules, consumers have two options: Consent to be charged an over-the-limit fee or refuse to opt in and risk being denied if they try to exceed a card’s limit.

You can be charged a fee of around $30 to $35 each month you’re over the limit (or more if you exceed the limit with another transaction in a subsequent month), says Wu. The Fed has proposed rules to limit the amount of the “opt in” fee.

Wu says consumers have reported that credit card issuers are trying to persuade people to opt in by offering the incentive of a lower fee and implying that by opting in they’ll have extra protection in case they need to use their credit card. “It’s a way for credit card companies to make more money off fees, and we recommend not opting in because it will more likely hurt you,” she says.

Garuccio of the ABA says he hasn’t heard of credit card issuers doing this.

This article was updated and adapted from the book “1,001 Things They Won’t Tell You: An Insider’s Guide to Spending, Saving, and Living Wisely,” by Jonathan Dahl and the editors of SmartMoney with additional reporting by Nancy Nall Deminger.

Health Costs Fuel Rise in Bankruptcy Among Elderly Published November 08, 2010 | Reuters

From FoxBusiness

A good friend plans to throw herself a Medicare party when she turns 65 a few years from now. She lost her employer-sponsored health coverage a few years ago, and has struggled ever since with limited insurance and high out-of-pocket costs; she thinks Medicare will solve all her health insurance problems.

Medicare is fairly comprehensive, but it doesn’t cover everything — and the basic coverage doesn’t cap out-of-pocket expense if you become seriously ill or need nursing care. In fact, healthcare expenses can wreck retirement.

security – a fact underscored by a recent study that found medical expenses are a major contributor to bankruptcy among older Americans.

The study was conducted by Professor John Pottow, an expert on bankruptcy at the University of Michigan Law School. He found that even though the elderly account for a relatively small share of overall bankruptcy filings, the growth rate in their filings has been dramatic.

For example, from 1991 to 2007, the percentage of bankruptcy petitioners age 65 to 74 rose 178 percent. Those figures reflect trends before the recession began in 2008, so it’s fair to assume the situation has worsened in the past few years due to job losses, diminished retirement portfolios and housing equity.

Healthcare is a major area of expense in retirement , and costs are rising more quickly than overall inflation.

The Center for Retirement Research at Boston College (CRR: 88.31 ,+1.24 ,+1.42%) reports that the typical married couple at age 65 can expect to spend $197,000 in lifetime uninsured health costs, including insurance premiums, out-of-pocket and home healthcare. That figure excludes any long-term care need. When nursing care is factored in, the typical cost rises to $260,000, with a 5% chance of hitting $570,000.

Research by Fidelity Investments shows that retiree healthcare expenses this year are 4.2% higher than in 2009, and have jumped 56% since 2002. By contrast, overall consumer prices are up just 1.1% so far this year. Fidelity also found that monthly healthcare costs average $535 this year, second only to the cost of food.

Melissa Jacoby – George R. Ward Professor of Law, University of North Carolina at Chapel HillMedical bankruptcy filings usually result from high out-of-pocket expense, along with the cost of financing those expenses, according to Melissa Jacoby (pictured right), a law professor at the University of North Carolina at Chapel Hill who specializes in bankruptcy issues.

“Chronic conditions, drug costs and nursing home costs are a big area of concern,” she says.

“And when people put those expenses on a high-interest rate credit card, the financial burden of those costs escalate.” Jacoby’s research shows that one-third of people filing bankruptcy petitions for a medical reason report that they used a credit card to finance those expenses.

Another key factor, she says, can be a loss of income due to unemployment, since many older Americans are working longer.

The new healthcare reform law aims to provide some relief to the elderly. For example, the notorious doughnut hole — that’s the gap in Medicare D prescription drug coverage for beneficiaries with high expenses — will be closed between now and 2020.

The Affordable Care Act (ACA) also improves the Extra Help prescription drug subsidy for low-income seniors, which pays 100 percent of premiums for enrollees with annual income of $16,245 a year (single) or $21,855 (married couples).

ACA also adds free preventive care visits to Medicare starting next year, which should help head off catastrophic cost for some patients through early intervention.

Here are some key ways to plan for health expenses in retirement — and protect yourself from the worst-case risks:

Plug the gaps with insurance. Medicare’s hospital coverage (Part A) covers all costs for the first days, and has escalating co-pays up to 150 days. But if you face a catastrophic illness that requires a long hospitalization or skilled nursing care, you’re on your own after that.

Many seniors purchase Medigap policies, which cap out-of-pocket expenses and for protection against that type of catastrophic expense. Buy these policies during your open enrollment period, which lasts six months and starts on the first day of the month when you turn 65 and have already enrolled for Medicare Part B (medical services). If you sign up during open enrollment, insurance companies can’t turn you down or charge higher premiums due to pre-existing conditions,
Also give careful consideration to buying long-term care insurance (LTC: 28.50 ,+0.02 ,+0.07%) , which protects against the risk of nursing home expense. About one-third of individuals turning 65 this year will need at least three months of nursing home care sometime in their lives, according to the CRR; 24 percent will need care for more than a year.

It’s best to buy LTC coverage in your late fifties or early 60s in order to get a reasonable annual premium and minimize risk that you’ll be rejected for health reasons.

Focus on out-of-pocket expense. “When you are choosing insurance plans, really focus on understanding what the benefits are,” says Sunit Patel, a Fidelity senior vice president who specializes in healthcare matters. “The key question is, ‘What is my maximum out-of-pocket expense in any given year?”

Save for it. Good retirement plans include specific saving and investing goals for healthcare, Patel says. “Just as you would save to finance college education or a general retirement goal, is there a percentage or a specific account earmarked for healthcare? And, how will you recreate a stream of income that covers the essential expenses, taking into account that healthcare inflation is larger than overall inflation rates?”

Don’t bank on good health. Research by CRR actually shows lifetime health care costs are higher for people who think they won’t need Medigap or LTC coverage – and pay higher premiums as a result of waiting too long.

Don’t Look Now, But Here Come the New, New Bank Fees

From The Wall Street Journal


Less than a year after the passage of new laws limiting banks’ ability to impose certain fees on credit and debit cards, Bank of America Corp., Discover Financial Services, J.P. Morgan Chase & Co. and other lenders are using different tactics to boost their fee income.

Some are raising minimum payments on certain customers’ accounts in order to increase late penalties. Others are ramping up credit-protection insurance programs and charging customers for coverage without permission. Still others are pushing aggressively into high-fee prepaid cards, which are exempt from most of the new rules.

Banks already have rolled out a slew of new fees since the passage of the Credit Card Accountability Responsibility and Disclosure Act of 2009. Among other things, they have revived annual fees; shortened billing cycles; levied new charges on cards with low credit limits; increased balance-transfer, cash-advance and foreign-exchange fees; and begun aggressively marketing “professional cards” not subject to the restrictions of the Card Act. (For more on these, see “The New Credit Card Tricks,” July 31.)

The Federal Reserve responded on Oct. 19 by announcing proposals that would ban hefty activation fees and prevent issuers from raising interest rates on promotional card offers until a borrower is more than 60 days late.

The Card Act is expected to weigh heavily on bank profits. Lenders could lose an estimated $11 billion in fee income next year alone, according to Robert Hammer, CEO of R.K. Hammer Investment Bankers, an adviser to card issuers.

Profits from debit cards also are in jeopardy. Earlier this year, the Senate passed a law ordering the Federal Reserve to limit “interchange fees,” the levies banks charge to merchants each time a card is swiped. Last year, banks collected $22.8 billion in such fees on debit-card transactions, according to, a consumer information site.

The Fed hasn’t yet announced how much it will reduce the fees. Analysts say even a moderate reduction could hurt lenders.

J.P. Morgan Chase announced this week that it is moving away from debit cards. Starting in February, the lender won’t issue debit reward cards to any of its new customers, according to Charlie Scharf, head of retail financial services at the bank.

The recent foreclosure mess could further damage bank profits as a legal storm gathers over allegations that some employees signed foreclosure-related documents without having reviewed them. Bank of America and J.P. Morgan declared a moratorium on foreclosures earlier this month while checking documents for accuracy, though both have since restarted their foreclosure proceedings.

“In this environment fee income is ever more important,” says Gail Hillebrand, a senior attorney with Consumers Union.

Customers, therefore, should be on guard from the outset, say consumer advocates. Before signing up for a new card offer, borrowers should find out whether services like payment protection are automatically included. And once borrowers start using a card, they should pore over their statements each month in search of billing changes. If they notice a higher minimum payment or a new fee, they should contact the card issuer immediately, say consumer advocates.

Minimum Payments

Some lenders, including J.P. Morgan Chase and Bank of America, have upped minimum payments for some borrowers, according to, a card-comparison site. The goal, say analysts: to maximize late-fee income.

Under the Card Act, late penalties are restricted to $25 or the minimum payment amount, whichever is lower. By raising minimum payments, card companies also can increase their late fees.

Sudden jumps in the minimum payment can increase the likelihood that borrowers will be late on payments. “Rising minimum payments can cause borrowers to default and help generate greater fee income for issuers,” says Victor Stango, an associate economist with the Federal Reserve Bank of Chicago and a professor at the University of California, Davis, who has studied the impact of the Card Act on lenders’ practices.

David Highland, who lives in Telluride, Colo., and runs a small lodging company, says he saw firsthand how banks are raising minimum payments. Last summer, he says, Bank of America increased his required monthly payments to 2% of his total balance from 1% despite the fact that he hadn’t missed a payment.

“It’s a squeeze,” Mr. Highland says. “It looks to me like they are trying to tip over vulnerable borrowers.” He has since paid off the balance.

A Bank of America spokeswoman says it doesn’t comment on individual borrowers. She adds that the bank hasn’t raised minimum payments on its consumer cards in the past year, and that the payments are based on balances, late fees and finance charges.

Tom Nedelsky, who owns a Santa Cruz, Calif.-based construction company, says his minimum payments on two Chase credit cards went to 5% from 2% in August 2009—boosting his payments to $1,185 from $493.00.

“We never paid late and we were never given an explanation,” Mr. Nedelsky says.

Chase doesn’t comment on individual borrowers, but spokesman Paul Hartwick says that “for the overwhelming majority of customers, our current minimum-payment calculation is the greater of $10 (or the total amount if the balance is less than $10), or 2% of the balance, or the total of 1% of the balance plus interest and late fees.”

Credit Protection

Lenders also are ramping up their payment-protection-insurance programs. The promise: For a monthly fee, a credit-card issuer will suspend finance charges and minimum payments if a borrower loses a job or gets sick. Costs for the protection vary by card issuer, but are routinely about 80 cents to 90 cents per $100 of credit card debt.

There aren’t hard numbers tracking payment-protection offers, but bank analysts say lenders are pushing the product more aggressively. “There is a growing movement on the part of the banks to enroll more people in payment-protection programs,” says Dennis Moroney, research director at advisory firm Tower Group.

“Major credit-card companies are ramping up offers for credit protection,” adds Ben Woolsey, director of marketing and consumer research at

Some lenders may be imposing the fees without borrowers’ permission. Raymond Christopher, a 36-year-old owner of a car-repair business, says he was surprised to find a fee for credit protection when he checked his Discover card statement in August. He says that on further investigation, he learned that he had been charged $1,200 in protection fees since January.

The higher a cardholder’s balance, the more he must pay for payment insurance. Discover charges 89 cents per $100 in balance—so a person with a $15,000 balance would pay $133.50 a month for payment protection.

Mr. Christopher, who lives in Fredonia, N.Y., says he called Discover to protest the fee because he never signed up for the insurance in the first place.

“I was told that I signed up on my wife’s birthday, which would have been impossible since I was strictly forbidden from even talking on the phone that day,” Mr. Christopher says. “There’s no way I signed up.”

David Paris, a New York based attorney, in July sued Discover in California federal court on behalf of cardholders enrolled in Discover’s payment-protection plan without their consent.

“Thousands of people have been pushed into this program,” Mr. Paris says.

Discover doesn’t comment on individual borrowers, but spokeswoman Laura Ginigiss says, “It’s not in Discover’s interest to sell a product that doesn’t enhance our relationship with our card members.”

Some lenders are tightening the eligibility requirements for credit protection as well. In February, James W. McKinney of Benton, Ill., signed up for payment protection through HSBC Holdings PLC after being solicited by phone. The problem: Mr. McKinney, a disabled war veteran, was unemployed and therefore ineligible for HSBC’s payment-protection insurance.

In October, Mr. McKinney joined other borrowers in a class-action suit against HSBC in Illinois federal court.

HSBC declined to comment.

Prepaid Cards

Some major lenders, including Capital One Financial Corp., the sixth-largest credit-card issuer, are turning toward “prepaid” cards. Pitched as no-hassle, bill-free alternatives to debit and credit cards, prepaid cards are especially attractive to college students—and their parents.

Issuers like them for another reason: Not only are prepaid cards not subject to most Card Act restrictions—they also are exempt from interchange-fee restrictions.

Capital One launched its prepaid card last October, five months after the signing of the Card Act. “Prepaid debit cards are a natural extension of our diversified financial-services business,” says Pam Girardo, a spokeswoman for the lender. “Our prepaid card is a transparent product that offers good values for consumers.”

Other big lenders are likely to follow. “We are absolutely going to see banks expand their prepaid card offerings,” says Odysseus Papadimitriou, CEO of

Investors are betting that prepaid cards will be a hot market. NetSpend Holdings Inc., a large issuer of prepaid cards, went public on Oct. 19 at $11.20 a share and has risen to $15.98. Rival Green Dot Corp. went public in July at $36 and now trades at $52.98.

But consumers might not benefit from a push toward prepaid cards. Consumers Union, an advocacy group, examined prepaid cards in September. It found that more than half came with activation fees as high as $39.95.

Many prepaid cards also charge borrowers a fee to load money on the card, and then another fee to check balance information or use the card at an ATM. And if borrowers want to escape the steady stream of fees, they usually have to fork over another fee. Western Union Co.’s prepaid card charges $10 to close out an account with a check.

Inactivity fees, banned from credit cards under the Card Act, range from zero to $9.95 for prepaid cards dormant for 60 days.

While banks must get debit cardholders’ permission before they can ding them with overdraft fees, prepaid cards carry no such restriction. Overdraft fees, called “shortage fees” on prepaid cards, are charged when a cardholder’s purchases exceed the available cash on the card. NetSpend mentions this fee in the fine print of its terms and conditions.

A Capital One spokeswoman says its prepaid card doesn’t charge activation, inactivity or insufficient-funds fees, or for balance inquiries. It charges a monthly maintenance fee of $4.95 for customers who don’t load at least $500 onto their cards each month.

“While these cards may look like other plastic, they are far different and more dangerous to cardholders—especially college students,” says Ms. Hillebrand of Consumers Union. “These cards are so larded with fees that almost all the available credit can evaporate before a cardholder even uses it.”

—Aparajita Saha-Bubna contributed to this article.

Have Tax Problems? A Tax-Relief Firm May Only Add to Them

From AOL

By SHERYL NANCE-NASH Posted 9:00 AM 11/01/10

It sure can be intimidating to have to deal with Uncle Sam if you have significant tax debts. Few people feel equipped to take on the IRS alone. But be careful who you ask for help. You might just make your situation worse. Tax-resolution scams are on the rise as unethical companies peddling tax-relief services prey on people who owe back taxes.

“With tax-relief firms getting sued by state authorities and making headlines for cheating distressed taxpayers out of thousands of dollars in up-front retainer fees, it’s more important than ever for people to know how to protect themselves from firms who misrepresent their ability to solve IRS problems,” says Michael Rozbruch, a certified public accountant, certified tax-resolution specialist and founder of Tax Resolution Services.

At the request of the Federal Trade Commission, a federal judge recently halted a national operation, American Tax Relief, that allegedly bilked consumers out of $60 million by falsely claiming it can reduce a person’s tax debt. The company’s California business license was suspended last year because the firm didn’t pay its own taxes, the FTC alleges. The FTC wants the company to pay restitution to victims.

A 99% Success Rate — or 90% Failure Rate?

American Tax Relief charges up-front fees of $3,200 to $25,000 for its services. The company’s ads on TV, radio and the Internet include a toll-free number to call for a “free consultation.” After speaking briefly with a commission-based salesperson, who is supposedly a “tax consultant,” virtually all consumers are told that they qualify for a tax-relief program and that American Tax Relief can help them significantly reduce their tax debts, the FTC complaint alleges. Meanwhile, the company’s owners were living large with goodies like a Ferrari and $3.4 million house.

Earlier this year the California attorney general sued “tax lady” Roni Deutch for more than $34 million, alleging that her law firm regularly violates state law by making false promises that it will help people resolve disputes with the IRS. She advertises a success rate of up to 99%, yet successfully reduces the amount of money her clients owe in just 10% of cases, the lawsuit says.The Texas attorney general charged Houston-based TaxMasters and its CEO Patrick Cox with multiple violations of the Texas Deceptive Trade Practices Act and Texas Debt Collection Act. Allegedly, TaxMasters unlawfully misled customers about its service contract terms, failed to disclose its no-refunds policy and falsely claimed that the firm’s employees would immediately begin work on a case, despite the fact that TaxMasters didn’t start work until customers paid in full for services, even if that delayed response meant taxpayers missed significant IRS deadlines, according to the state’s enforcement action.

Such practices matter when one out of six Americans has a tax problem. “More than 26 million people need to know how to get legitimate help with their tax debt,” says Rozbruch.

What You Need to Know Ahead of Time

“If something sounds to good to be true, it probably is. Many tax-relief agencies make claims similar to what drew the FTC’s attention to the debt settlement industry — settling debt for ‘pennies on the dollar,'” says Christopher Viale, president and CEO of the nonprofit Cambridge Credit Counseling. One way to protect yourself from an unethical tax-resolution firm is to be leery of any company that’s likely overstating its success rate or misrepresenting their staff’s professional skills. Look for a Certified Tax Resolution Specialist firm that puts potential clients through a rigorous, in-depth interview process to find out if they qualify for an IRS tax settlement, advises Rozbruch.

Second, beware of firms that guarantee results without even seeing your information. A hallmark of a tax-resolution scam is someone who promises you a specific outcome without an in-depth review of your specific tax matter.

Know exactly what you’re signing before releasing your money. Never give a credit card number over the phone. Have the tax-relief company send you the documentation and the forms it wants you to sign, prior to putting up your cash. “This gives you a chance to stop and think about additional questions you may have, and certainly you need to read what you are signing,” advises Karla Dennis, CEO of Cohesive, a tax-preparation, consulting and representation firm.

Questions to Ask

Determine who you’re dealing with. Jeff Staley, managing partner of Freedom Tax Relief, highlights a few questions you should ask. How long has the company been in business? How many customers has it served? Find out if the company and its own employees are those who’ll actually provide service through the life of the program, or will they contract out to others once you’re enrolled. Will they let you speak to the tax professional who’ll be handling your matter?

What’s the background of the company’s management team? Do a Web search of the company, check with the Better Business Bureau and do a little digging on the Ripoff Report and to see if the firm you’re considering has a less-than-stellar past.

Ask about fees, which should never be a percentage of savings. “A fee should be a reasonable flat or hourly rate based on the work that needs to be done,” says Dennis. Those fees should be clear and in writing. You should not have to pay the entire tab up-front.

Pay the IRS a Visit

It’s important that you get it right with Uncle Sam. “Unpaid taxes can lead to wage garnishment, incarceration, civil penalties and a host of other unpleasant outcomes. If you don’t think you can be your own best advocate, stick with professionals like tax attorneys, enrolled agents and CPAs when trying to figure out the best way to repay taxes,” says Viale.

If you don’t want to hire someone, you can speak with the Taxpayer Advocate Service (TAS), an independent organization within the IRS that will work with you for free to resolve your issue. They stay with you until the problem is resolved.

It’s important to call and visit the local IRS office to discuss tax issues. There, the IRS may ask you to complete a financial statement, and based upon their review of it, may grant some form of relief. That can be an “Offer in Compromise” to establish a reasonable payment agreement with you, says Steven Hoffman, an enrolled agent, who worked for the IRS for 15 years.

An installment agreement is generally available to people who owe less than $10,000 and can’t pay their tax debt in full at one time. You pay an agreed-upon monthly amount until you polish off the debt. An Offer in Compromise (OIC) lets you permanently settle your tax debt for less than the amount you owe. However, you’re eligible for this only after other payment options have been exhausted and your ability to pay has been reviewed by the IRS. This process can take six to 10 months.

It’s Best to Be Nice

On occasion, the IRS may offer a penalty abatement to people who haven’t paid their taxes because of a special hardship. If you meet very narrow criteria, the IRS may agree to forgive the penalties. An interest abatement is even more limited and is rarely provided.

Sponsored Links

What you don’t want to do is misrepresent your situation in any way. The IRS has the power, and the means, to investigate your finances and could certainly choose to do that, says Viale. Don’t get angry at your least favorite offspring of Uncle Sam. “Be as polite and cooperative as you can in any request for a reduced payment. Being nice can go a long way,” says Viale. If your only reason for going it alone is to save a few dollars, don’t cheat yourself by being cheap. “Invest in advice from the right person to get you to the right result,” says Viale.

Adds Viale: “While we don’t want to say that no tax-relief firms are legitimate, tax attorneys, a certified public accountant or an enrolled agent should help you seek settlement with the IRS.” Still, for his “best advice,” Viale says bluntly: “Don’t engage with a tax-settlement company.”

Are you trying to compare credit card offers? Good luck with the legalese

From the Boston Globe and the Associated Press

By Eileen AJ Connelly Associated Press / October 26, 2010

It’s becoming a bit easier for credit card holders to understand the interest rates and penalty charges they face.

That’s because regulations that took effect earlier this year are having an impact. But a study released yesterday said credit card offers are still far more complicated than they were a decade ago, which makes it harder for consumers to comparison shop.

The greater complexity did not arise from a requirement that banks disclose more information to consumers, said Josh Frank, a researcher at the Center for Responsible Lending who authored the study.

“It was mainly due to more complexity in terms, more fees, more complex fee structures,’’ he said.

As a result, card offers now regularly include separate listings for balance transfer fees, minimum interest charges, cash advance interest rates, penalty rates, and a number of other lines that were added to the disclosures in recent years.

Those fees existed on some cards for years, but they have proliferated so that they’re now nearly universal, said Ben Woolsey, director of marketing and consumer research for, a consumer website not involved in the study. As more banks adopted these charges, they were added to more disclosures.

The study looked at the disclosure boxes on mailed credit card offers from the top 25 issuers since 1999. The average box included 13 numbers related to specific terms or dates in 1999 and peaked at 33 numbers a decade later.

Since February, when card regulations kicked in, the average has declined to 26 numbers. That’s better, but still far more than an individual can process, particularly if trying to compare terms between cards to pick the best one, the study said.

And that’s without counting the terms of rewards programs, which are generally not included in disclosure boxes.

Consumers who are trying to compare offers can quickly reach information overload if they go point-by-point through different offers, the study said. It noted that some banks and credit unions are able to keep their offers simple by keeping their card terms simple.

The American Bankers Association said the study came across “as a less than subtle attempt’’ to get the government to require banks to issue “plain vanilla products,’’ or cards that carry the simplest terms. That would deny consumers “the benefits of innovation and choice,’’ the trade group said in an e-mail.

Woolsey, of, said the language used in credit card offers is not designed for the people using the cards. The disclosures are “ultimately not for the purpose of consumer understanding, they’re really more for legal protection,’’ he said. “It becomes legalese, and it’s not highly explanatory.’’

Eileen AJ Connelly writes for the Associated Press.

Fed Aims to Tighten New Rules for Credit

From the Wall Street Journal


The Federal Reserve on Tuesday announced plans to amend several credit-card regulations and block some practices that issuers have used to circumvent new credit-card laws.

The proposed rules would restrict offers designed to get around regulations governing interest-rate increases. They would also hit “fee harvester” cards that use high up-front charges to skirt fee limits.

“The proposal is intended to enhance protections for consumers and to resolve areas of uncertainty so that card issuers fully understand their compliance obligations,” the Fed said. The new rules would take effect next October at the earliest.

Congress and the White House revamped credit-card laws in May 2009 as the first big regulatory response to the financial crisis. Key provisions that took effect in February put sweeping restrictions on fees and rate increases. The law banned card issuers from raising rates on existing account balances unless customers were overdue more than 60 days. It also required at least 45 days’ notice before changing any significant contract terms.

The resulting hit to profits led banks to consider new offers and programs. For instance, Citibank, a unit of Citigroup Inc., raised some customers’ interest rates as high as 29.9%, then offered a rebate on up to 70% of finance charges if they paid on time. That, at times, was enough to bring a borrower’s interest costs near their level prior to the rate increase.

But the bank also told customers it could revoke the rebates at any time. Characterizing this as raising the rates in advance of the rebate offer allowed it to circumvent the rules on raising rates on existing balances and the 45-day notice for changing terms.

That practice would be largely prohibited under the Fed’s newly proposed rules.”Promotional programs that waive interest charges for a specified period of time are subject to the same protections as promotional programs that apply a reduced rate for a specified period,” the Fed said.

A Citi spokeswoman on Tuesday said “we will review the proposal from the Federal Reserve and of course comply with any regulatory guidance on the interpretation” of the credit-card act.

The proposed rules also address fees frequently tacked onto cards marketed to people with weaker credit histories. The credit-card law, targeting confusing offers that often drew lower-income customers to sign up for costly credit, limited fees to no more than 25% of a card’s credit line in the first year.

First Premier Bank has since offered a card with a $300 credit limit and $75 annual fee, plus a $95 processing fee that must be paid before the card is used. The bank, which didn’t respond to requests for comment, told The Wall Street Journal earlier this year that the 25% limit only applied to fees charged after an account was opened.

The proposed Fed rules would more clearly block that offer.

“Application and similar fees that a consumer is required to pay before a credit card account is opened are covered by the same limitations as fees charged during the first year after the account is opened,” the central bank said.

The Fed’s proposed rules Tuesday also would require card issuers to consider a consumer’s independent income, rather than household income, in evaluating a consumer’s ability to pay.

Separately, the Fed issued final regulations Tuesday allowing stores that sell gift cards, prepaid cards and gift certificates — whose rules were overhauled in the credit-card law — to sell their previously printed stock of cards through January, as long as they provide in-store disclosures. The move allows stores with older cards to keep them on shelves in their current form through the holidays. All cards, however, would still be subject to limits on fees and expiration dates.

Bank of America, GMAC say they’re ready to resume foreclosures

Boston Globe / New York Times

By Nelson D. Schwartz and Andrew Martin

Bank of America Corp. said yesterday that it would resume home foreclosures in nearly two dozen states, despite the ongoing controversy over how banks handled tens of thousands of cases of homeowners facing eviction.

Bank of America, the nation’s largest bank and the servicer of roughly 1 in 5 US mortgages, said it had not found a single example where a foreclosure proceeding was brought in error.

The move is likely to encourage other giant lenders to resume the foreclosure process that threatens 2 million homeowners.

Meanwhile, GMAC Mortgage, whose procedures helped prompt the controversy when one of its executives testified that he had signed 10,000 documents in a month, is also moving forward with foreclosures.

“We announced a temporary suspension of evictions and foreclosure sales in the 23 judicial states several weeks ago so we could commence the appropriate review,’’ said Gina Proia, a spokeswoman for GMAC. “As cases are being reviewed and, when needed, remediated, the foreclosure process moves forward as appropriate.’’

Guy Cecala of Inside Mortgage Finance, an industry publication, said: “This draws a line in the sand that the banks expect this problem will be over in relatively short order and it will be back to business as usual.’’

Bank of America plans to begin filing new paperwork for 102,000 foreclosures by Monday.

Consumer advocates and lawyers for homeowners expressed skepticism that Bank of America could complete a review of the paperwork so quickly. But the banking industry has come under increasing pressure from investors to resolve the problem.

Investors have fled bank stocks, worrying that the foreclosure halt would cost banks billions of dollars and further harm on the housing market.

Bank of America said it would resume foreclosures in the 23 states where judicial approval was required after an internal review turned up no evidence that cases were filed in error.

However, the company’s suspension of the process will remain in effect in the 27 other states, including Massachusetts, that do not require a judge’s approval to foreclose, as the bank’s paperwork review proceeds state by state. It was the only bank to initiate a nationwide freeze.

“We did a thorough review of the process, and we found the facts underlying the decision to foreclose have been accurate,’’ said Barbara J. Desoer, president of Bank of America Home Loans.

In the other 27 states, Desoer said, she expects foreclosures to resume within weeks.

Bank of America noted that the major holders of mortgages — and Freddie Mac — as well as private investors had signed off on its decision.