Compulsive Spending Disorder

Do you like to shop till you drop? Do you run up your credit cards on shopping sprees? Do you go to the store every day? Do you spend a lot of time at on-line shopping sites? Do you feel 'good' when shopping, and then guilty after? Do you shop for a 'pick me up' when you're feeling down? Are you suffocating in debt? Do you know deep down that you have a spending problem?

These are all signs of a habitual spender. This is as much an addiction as is alcoholism and can be just as damaging. Not only can this addiction ruin your relationships, it can drive you into financial ruins and cause physical problems too.

What can you do? First, recognize and admit that there is a problem. Then determine the cause of your compulsion. Are you lonely, tired, angry, or depressed? Are you bored? Admitting that there is a problem and discovering the reasons why you spend is the first step in taking control of the situation.

This is a very serious problem for many people. If you feel (or know) that you have a problem, seek professional help.

Here are a few starting points:

• Crown Financial Ministries
• Indiana University
• Debtors Anonymous
• Recovery Connection
• North American Mission Board

Congratulations on taking your first step. You are on your way to recovering from this problem. You are in the drivers seat!

New York Creates Program for Strapped Mortgage Borrowers

ALBANY, N.Y. (AP) — New York has created a $100 million program to help borrowers facing foreclosure or other financial strain because of risky adjustable rate and interest-only home loans.

Gov. Eliot Spitzer said the "Keep the Dream" fund will give eligible low- and middle-income borrowers a way to refinance mortgages they can no longer afford because of recent or pending hikes in interest rates.

The loans for 100 percent of a property's value up to $417,000 will be at competitive rates through a partnership of federal lender Fannie Mae, other mortgage lenders and mortgage insurance companies, the governor said in a press release. The program operated by the State of New York Mortgage Authority will offer 30- and 40-year fixed rate loans financed through Fannie Mae.

The program also creates a counseling and education program that will be run through eight nonprofit agencies around the state to help borrowers avoid predatory loans and, in the case of delinquency, foreclosure.

To be eligible, a borrower must prove mortgage payment hardship and have income below a certain percentage of their area's median income, which varies around the state. In the examples released by the state, the income ceiling is $58,120 in Allegany County, $82,870 in Albany County, $93,720 in New York City and $158,560 in Rockland County.

Information is available by calling SONYMA at 1-800-382-4663.

Hey, everybody just...

Hey, everybody just wanna let you know that we're put in together some topics for 2008, little planning ahead so this entry is a short one today. Hopefully we'll have some really good content coming for you real soon. Thanks for checking in and we'll talk to you again tomorrow. listen

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Happy Holidays, here's the bill!

Yes, this is the season for giving and your credit card companies won't forget you! "Did you enjoy your shopping? Did you find everything that you were looking for? Good! Thank you for your business and HERES YOUR BILL!"

The credit card statements are starting to find their way into our mailboxes. Wasn't it nice to get Christmas cards instead?

But for some unexpected emergencies this summer, we had planned on paying cash for Christmas this year. Our budget includes a monthly allotment for the holidays and birthdays, but we had to dip into it for some 'site work' around the house along with an updated heating system.

The new plan is to use the income tax refund to supplement the pay down of the credit card debt. We'll carry a balance on the card until the promotional interest rate expires, then we'll pay if off (or at least down) with the money that's left over in the holiday account along with the income tax refund.

DANGER: Miscellaneous Catagory

If you're like me, you have a category in your financial software labeled 'miscellaneous'. I've found this to be a very dangerous and expensive category. If you're not careful, you can mask dangerous spending habits that could be costing you a lot of money.

Consider this article by M. P. Dunleavey appearing in today's New York Times. She talks about how quickly $27 per day on miscellaneous things can add up.

What are some things that you can do to curb miscellaneous spending?

1. Don't take plastic cards with you: they encourage miscellaneous spending

2. Give yourself a daily cash allowance and only carry this much with you

3. Purchase only items that you need

4. Keep records of every dollar that you spend from your daily allowance

In 2008, I vow to remove the miscellaneous category from my expense list and to take a very critical look at where this money really goes.

Make Money by Shopping for Car Insurance

I was going along, minding my own business when out of nowhere my car insurance bill shows up. No problem, I set aside money each month so that when the bill comes, I can pay it and be good for another year (yes, this company has annual premiums instead of semi-annual).

Anyway, I open the bill and was floored at the price. Now, I'm not a young man, but I suppose that is relative.. I am married with two children and am closer to 45 years old than I am to 39 years old. My driving record over the past 20 years is remarkably impeccable (before then, well that another story...).

I dug up the old bills from a few years ago when I got on-board with this company. Wouldn't you know it? The annual premium, slowly, like the hour hand on a clock, kept moving up. Over three years, the premium increased by almost $400.00!

So I asked my agent to shop my policy around for a better price. In the mean time, I was doing some shopping around on my own. The verdict? $400 in my pocket!

I'm not an insurance agent, so I don't know anything about how an insurance agent is paid for selling insurance or how their pay impacts the premium price, or even if it does. What I do know is that insurance carriers will slowly increase your premiums. The small increases add up and are pure profit for them, and pure undo expense to you!

So, how can you make money shopping for insurance? By reducing your premium like I did! There are two sure fire ways to do this: (1) Negotiate with your current carrier (2) Switch to another carrier.

Keep in mind, whether you negotiate a better deal or just switch to another carrier, make sure that you're not sacrificing coverage for a lower premium. Depending on whether or not a lender has an interest in your car, and how old the car is, you probably want comprehensive and collision coverage with a deducible of no more than $1000 ($500 is better, but the premium will be higher). Make sure that you have a good limit of liability too! Especially if you have other assets that you need to protect if in the unfortunate event you run somebody over and get sued!

For more information on shopping for car insurance, click here.

Do you have money left over in your FSA?

If you have money left over in your Flexible Spending Account (like I did!), then you have to read this post over at
Blueprint For Financial Prosperity. Some fantastic ideas on how to get some benefit out of these left over funds.

Remember, if you don't use 'em, you lose 'em!

New FICO Math will effect your credit score

Fair Isaacs Corporation, the people that create the credit score models, have a new formula that can impact your credit score in the future.

This new math or formula is expected to do a better job of predicting whether or not you will default on a loan. The formula, called FICO 08, is also expected to be more forgiving for the occasional late payment, and more critical for those that are habitual late payers or non-payers.

Building ones credit history by 'piggybacking' will be difficult, if not impossible with this new formula. Credit 'piggybacking' is when someone adds another as an authorized user to their account. The repayment history is reflected on both users, however the primary account holder is obligated for the repayment where the 'piggybacking' party is not. This was a method used by many sub-prime borrower to artificially boost their credit scores.

Is this Deceptive Advertising?

I received "A Special Offer for a Valued Chase Visa Customer" in the mail today.  A promotional fixed rate of 6.99% Fixed APR until the Balance is Paid Off!  What a deal, save for the 3% balance transfer fee.

 

Here is the rub.  The second sentence of this offer certainly puts quite spin on the balance transfer fee.  It reads;

 

"This offer includes a fee of 3% of the amount of each transation.  This transaction fee has a $5 minimum and no maximum."

 

No, I didn't add the emphasis by underlining the no maximum part; that's exactly how it appears on the offer that I received.

 

I'm sure that this simply is saying that there is no maximum fee, that it can be as high as anything!  However, at first glance, it appears to be offering some sort of benefit.

 

Am I out in left field or does it look that way to you too?

Should you pay an old collection account appearing on your credit report?

Alright, so they probably did something that made you mad. I can relate! Once I was a cellular customer with the same company for over 6 years. Each year, my contract would 'automatically' renew. Anyway, when I ultimately switched carriers (yes it was before the anniversary date of my contract) I was charge a $175 cancellation fee.

To say that I was upset is an understatement! The way that I see it, the early termination fee applied if I were to cancel during the first 24 months, not the first 60 months!

Anyway, I didn't pay it. As a matter of fact, they referred the account to collections, and ultimately it wound up on my credit report for seven years.

I didn't feel it was right of them to charge me this fee. Because I wasn't willing to see the forest through the trees, I wound up paying more in higher interest rates than I would have had I just swallowed my convictions and paid the fee.

So, that is my story. Do you have collections on your credit report that for one reason or other you don't feel you should pay? Is this really helping you or hurting you?

Is it hurting your credit score? Yes, absolutely. The more recent the collection item is, the bigger the impact it has on your score. But, just as importantly, a collection item might mean that your receiving calls from a collection agency. This can make you feel like your finances are in trouble (maybe they are) and this can take an emotional toll on you.

Do you need a loan? All lenders are different, but many will want to see that your paying or have paid the collection accounts before lending you any money. Paying these collections could improve your creditworthiness. Are these collection items on your credit report keeping you from earning a preferred interest rate from the lender? Is your credit costing you more just because of these accounts that you've overlooked ?

Here are some free educational booklets from MyFICO that help you understand how collections play a role in your credit score.

The verdict? Well, that is for you to decide. My thoughts are that if it is a debt justly owed, then pay it. If you feel that it is unjust, then pursue getting it amicably resolved. Any account on your credit report is disputable. So if it isn't right, you can contact the credit reporting agencies and file a dispute. If the party reporting the account fails to respond to the investigation (many of them do not respond) then the account will automatically be removed from your credit file.

In the end, like so many things in life, it's up to you!

Good Debt Reduction Strategies

There a lots of debt reduction strategies out there, and they all share one common thing; you have to work the plan in order for the strategy to work!

 

This post on Smart Easy Money has some very good ideas.  One in particular that I like is to stop carrying your credit card(s) around with you.  This one strategy in itself can make a huge difference in staying on course with your plan.

 

The other strategy is one that we've all heard over and over and over; make and stay on a budget.  The reason that we hear this so many times is because it is the first and foremost requirement when developing a Debt Reduction Strategy.

 

Visit the links that I've provided on the right hand panel of this page under "Educational Websites" for some sites that can help you develop your strategy.

 

Do you have a strategy that has worked for you?  Please share your comments and experiences with us!

 

 

Bankruptcy on the Rise

According to the American Bankruptcy Institute, non-business bankruptcy filings in the Northern District of New York through the third quarter of 2007 are up by 47% over last year. In 2006 through the third quarter, there were a total of 5,269 non business filings in the district. Through the third quarter of 2007, there were 7,761.

This sign of the times is alarming. In 2005, the Bankruptcy laws were changed to make filing for bankruptcy more of process to complete, for example, the law requires a certificate from an approved debt counselor before a discharge can be issued.

Recently a bill introduced by Barney Frank (D-MA) and passed by the House requires the licensing of mortgage loan officers and virtualy anyone involved in the mortgage loan process. Like attorneys and realtors, this licensing could incorporate educational requirements for the loan originator.

For years and years, mortgage loan officers and the like have been helping people with home ownership. Sure, they were making money, and in many cases a lot, but is there anything wrong with that? Afterall, everyone that I know who works for a living gets paid, some more than others, some not as much.

Anyway, isn't it curious that there aren't any regulations requiring consumer financial education and certification BEFORE getting into financial trouble? No, our laws say that only AFTER finding yourself in financial ruins are you required to receive financial counseling. What is there to learn?

Exuse me while a rant for a minute. Here's what there is to learn. Go out and be entirely fiscally irresponsible. It's okay to open a new credit card every chance you get! Sure, go ahead and charge all of your groceries, your cable Tv, your electic bill; hey, might as well put the neighbors bill on it to because once it gets to be too much, you can just NOT PAY! And, if the heat gets too hot, you can file bankruptcy just as long as you get the requisit finacial counseling!

Sure, get one of those payment option arms. Don't know what that is? That's okay because WHO CARES ANYWAY! You mean to tell me that instead of paying rent of $800 per month, I could be living in a $500,000 house for the same money? What? I don't need any money down either? Well, where the heck do I sign!

Alright, now that I've got that out of my system, the new bankruptcy laws are intended to curb the abuse. In many cases, secured lenders are in much better shape now than before the law was changed. But, the consequenses of bankruptcy remain so insignificant that nothing is a deterent other than ones own ethics. Remember those?

The Holidays and Credit Cards

It's that time of year again, and our credit cards are bulging! Do we have a plan to pay these off before next season?

Here is some interesting information found at the Motley Fool's Credit Center

-Total consumer credit: $1.7 trillion.
-Credit card debt carried by the average American: $8,562.
-Total finance charges Americans paid in 2001: $50 billion.
-Percent of U.S. households deemed credit worthy by the lending industry: 78%.
-Number of credit card holders who declared bankruptcy last year: 1.3 million.

According to another article, paying off your credit card could actually cost you more!!

From a credit score perspective, having a low (or no) balance on a credit card will lift your credit score. As a matter of fact, 30% of your credit score is based on the balances that you owe.

Having credit accounts and owing money on
them does not necessarily mean you are a highrisk
borrower with a low FICO® score. However,
when a high percentage of a person’s available
credit has already been used, this can indicate
that a person is overextended, and is more likely
to make some payments late or not at all.

Keeping a balance isn't always a bad thing. For example, I have a credit card that is charging 1.9%. My savings account is paying 4 something. By not paying the account in full, I still get to earn a couple of points on my money. If you DO keep a balance, don't keep the card maxed out. This will kill your credit score.

Like anything else, credit cards are a good thing if used in moderation!

Time to Pay the Piper

Here is an article that recently appeared in Kiplinger about the authors plan on paying off credit card debt. Some good advice! Read the article here!

Win $2500!

Over at Ashwin’s blog, you will find one crazy blog owner!! You can win $2500!! To enter just copy this text and paste it in your blog!! But hurry, this competition will not last long! So get posting!

Free Advice from NAFPA August 17 and August 30

You might want to know about Kiplinger's Jump-Start Your Retirement Plan Days, two days of free financial advice by phone or e-mail on Friday, August 17, and Thursday, August 30 (9 a.m. to 6 p.m. eastern time on both days) from planners who are members of the National Association of Personal Financial Advisors (NAPFA).

Normally, these fee-only planners, who are well versed in investments, taxes, insurance, estate planning and saving for college and retirement, charge clients $100 to $250 an hour. But on Jump-Start Days, you don't pay a cent -- not even for the phone call. Just dial 888-919-2345 and a NAPFA adviser will respond to your question. Or, if you prefer, you can e-mail your question in advance starting August 1 to jumpstart@kiplinger.com and a NAPFA adviser will reply on one of the Jump-Start dates.

Why PMI?

Private Mortgage Insurance aka PMI is extra insurance that lenders require from most home buyers who obtain loans that are more than 80 percent of their new home's value. PMI enables borrowers with less cash to have greater access to home ownership. PMI can add a significant amount of money to your mortgage payment every month. Is it really worth it? There is a better way!

Enter 80/15/5 financing. Or, if you prefer, 80/10/10 financing. Avoid PMI with as little as 5% down. How? By financing your 15% down payment with a piggyback home equity loan.

This is how it works. You receive a first lien loan from the primary lender for 80% of the purchase price. This loan is a secondary market or conventional loan, basically meaning that it's salable on the open market. Then, you receive a second mortgage, probably from the same lender for 15% of the purchase price. The difference here is that this second loan is normally held by the lender in their portfolio. The terms might be different than those of the first loan, but you'll only have to pony up 5% down payment plus closing cost.

By financing only 80% on the first mortgage, you avoid the PMI. Each payment that you make on the first and second mortgage is reducing the amount that you owe thereby building equity in your home. With PMI, you'd be paying a monthly insurance premium instead of building equity. Moreover, PMI is not tax deductible whereas the interest that you pay on the second mortgage in most cases IS tax deductible.

What if I have PMI now? Can I get rid of it?

The answer is "maybe". By law, a lender has to drop PMI once the loan to value reaches 78%. This calculation is based upon the current loan balance divided by the original value of the home.
But what if the balance hasn't dropped below 78%, but your property value has increased due to rising market values? If you can prove this to the lender, then they may drop the PMI. How do you prove it? You should first contact the lender or whoever is servicing your mortgage. Tell them that you believe the loan to value is below 80% and that you'd like to have them drop the PMI from the loan. Ask them what they will require of you. In most cases, you'll need to provide a property appraisal report at your expense. In our market, this would cost somewhere in the neighborhood of $375.00. In most cases, the lender will order the appraisal for you from a list of their independent appraisers.

Enter Drawing to win a Flat Panel HDTV!

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This is an awesome opportunity for someone to win a TV valued at $799.00! Be sure to enter!

Stop Foreclosure

This question was recently posted on a debt management forum that I subscribe to. The writer has fallen behind on her mortgage loan payments after entering into a payment plan (forbearance). When she called the lender, they told her that she was "in foreclosure", and that she could "cure" the loan if she were to pay the past due payments and legal fees accrued thus far. Here are her questions;

For those of you who have been through this, what kinds of "fees" are we talking about? How much? Will the attorney's and "other fees" be several thousand dollars on top of the amount we'll have to pay to bring the mortgage current? My other question: will I have time to get the loan from my retirement plan to do this?? Will they give us a payment plan again, or did we blow it?? I'm really frightened about this and am not sure what the typical scenario is.

First, the good news. In most states, foreclosure is a very long process. It could take 6 month to a year and a half to complete. So, you have some time to get yourself back on the right track. Don't fall any further behind. Make regular payments to the lender. If they won't accept anything other than a lump sum, just keep saving the money. In most states you have a right to cure, which means that you can bring the account current and pay any fees incurred by the lender to collect the amount owed. By curring the account, you will stop the foreclosure. Because one can cure the loan, and because it takes such a long time to foreclose (usually), one should have plenty of time to borrower from a retirement plan or otherwise.

More good news; the forbearance agreement might not have an effect on the terms or the original note and mortgage. This means that a default is a default, regardless of whether or not there is a forbearance agreement. The lender isn't entitled to any special treatment and cannot speed up the process just because you've defaulted on the forbearance agreement.

Now, some bad news. If, when you signed the forbearance agreement, the foreclosure process was nearly complete, then the time that you have to cure might be less than what it would be if the process just started. In most cases you have right up until before the property is auctioned at the courthouse to cure. The costs that the lender incurs to foreclose can be high. Attorneys fees could run anywhere from $2000 and more. Court costs could run as much as $1000. These fees along with the late payments, fees and penalties can amount to a lot of money.

Did the writer "blow it"? I don't know. What I do know it that we as lenders are not at all interested in foreclosing, and would prefer to do just about anything but foreclose. I think that as long as the writer can get back on track with this, then she will probably be okay.

If a lender has to foreclose, then he must report the loan as 'non-performing' and reserve for the possible loss. To reserve means to set aside some money out of profits for potential loss(es). This reserve account is established from when the loan first goes 60 days late until the time that the property becomes OREO. No, the lender isn't making cookies! OREO means "other real estate owned".

In summary, the answers to the writers questions, at least in my opinion are:

1. The fees could run into the thousands of dollars and will need to be remitted along with the past due payments.
2. You should have plenty of time to bring the loan current and get it out of foreclosure.

Technorati Tags: money, credit, banking, borrower, mortgage, foreclosure, debt, obligation, credit history, repayment, debt, default, income, assets,

Co-Signer or Co-Borrower: What's the difference

Occasionally, we bankers find ourselves looking at loan applications where the borrower isn't quite qualified on their own to borrower money. In most cases, this is because of a limited credit history or a slightly blemished credit record. When this happens, we might ask for a co-signer to help support the loan request.

The co-signer on a loan agrees to be legally obligated for the repayment of the debt. The co-signer must have an established and very good credit history. And because they will be legally obligated to repay the debt in the event that the borrower defaults, the co-signer must be able to qualify for the loans on their own merits.

This is in contrast to a co-borrower. A co-borrower credit history, income and assets are considered together with a primary borrower to qualify for a loan. Instead of qualifying individually, the primary and co-borrower are able to combine their income and assets into one in order to meet the lenders borrowing criteria.

To summarize, a co-signer is someone who is willing to take over the repayment of the loan should the borrower default. A co-borrower is someone who is borrowing money together with someone else. The co-borrower receives the proceeds of the loan while a co-signer does not.




Technorati Tags: money, credit, banking, borrower, cosigner, coborrower, debt, obligation, credit history, repayment, debt, default, income, assets,

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Patton on Iran and Iraq

This video from Youtube.com was mentioned on foxnews.com today. If you haven't seen it already, watch it now. Turn down the volume, some of the language might not be appropriate for all the ears that might be around you. Funny at times, but truly provoking. Let me know what you think.

Why a Good Credit Rating Can Hurt You

Did you know that having a good credit score or credit rating can hurt you if you're not careful? Like anything else, if not used in moderation, good credit can hurt you. Those who have really good credit need to be extra vigilante at protecting their credit rating. An article this morning in the One-Day Wonder section on SmartMoney.com suggest that even those with Prime credit are beginning to show signs of having trouble repaying their obligations.

How can this happen? Why would someone with really good credit all of the sudden find themselves not being able to make their payments on time? Is it the economy? Did they have a change of heart? Maybe they fell ill or perhaps they lost their job? More than likely though, they overextended themselves by taking advantage of sweet offers of credit and now are beginning to struggle.

The folks that have the really good credit ratings are able to get credit just about anywhere, and from nearly anyone. It isn't uncommon for these folks to receive numerous promo credit card offers and home equity loan and credit line offers every day! Talk about temptation!

Because the rate offers are so good, 1.9% for 90 days, 0% for 12 months, how can one resist? Especially if you have a free balance transfer at 1.9% for 120 days, and are paying another card 12.9%? It only makes sense to open the new account and transfer the balance to the lower rate card.

We can be lured over time into taking these offers and before we know it, the honeymoon period is over and because we taken so many offers, have so many balances from so many different places, the bills become unmanageable. To make things even worse, the payments will double, even triple when the rate adjusts from the discounted rate of 0% to the Prime rate plus 7.99%. And, because the credit report shows a number of accounts recently opened, even the friendly local banker might not feel quite up to granting more credit, making it very difficult to consolidate if it should come to that.

So, a good credit rating or score can hurt you if you're not careful. Don't be tempted into opening an account just because it's offering a low initial interest rate. Use credit sparingly, especially revolving credit. Don't let your good credit rating get you in over your head. Everything in moderation, which includes borrowing money.




Technorati Tags: borrowing, debt, credit, credit rating, prime rate, money, cash

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What you can do today with $1000

So, you have a grand and are wondering what is the best way to use it? I read a great thought inspiring article on Kiplinger titled What $1000 Can Do. Here are a couple thoughts...

• Earn over 12% on your investment. How? By paying off or paying down a credit card balance where the interest rate is more than 12%. By not paying it, your kind of earning it.
• If you don't have a credit card to pay down, invest it for the future in a retirement or college savings account.
• Set the cash aside to begin funding your emergency account in an interest earning account.
• If you're on your financial feet, there are kids who don't have enough to eat and who can't afford shoes. Think about helping them. This relatively small amount of money could go along way for them.

Just a few thoughts. What ways can you think of to use $1000?

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Day Five The Frugal Parent

The Frugal Parent, this could be the toughest to become in our quest to live frugality defined. From clothing to toys, from ice cream and friends, and from sports to needing a car, our kids put a lot of pressure on us and our purse strings.

One way to make it easier on both you and your kids is to begin setting an example of frugality while they're young. Doing so will help your kids get away from the materialistic mentallity. While young, kids are prompted into materialism by television adds and the examples that they see around them. It should be part of the parents job to protect their kids from suffering from the dreaded and expensive "I want it and need it now" syndrome. This is a learned behavior, however it can be inherited.

Here are a couple of ideas that might help you on your path of living frugal defined while parenting.

-Shop for kids clothes at the second hand store. Start doing this early in your childs life. You might be able to get away with not having to purchase new, name brand until the kid hits 10 or 12 years old. The money that you save by shopping at the second hand store while they're young will help subsidize the financing of the name brand clothes when their older!

-Put a little money away every payday for college. It doesn't have to be a lot, just so long as you set aside something. $15 per week, every week will amount to nearly $18,000 (depending on interest earned, the type of account, etc.) by the time they turn 18 years old. Certainly a good start!

-Buy pre-owned electronics like the gameboy, ps2, etc., whenever you possibly can! Sure, the kids will want the latest and greatest, but let their friends parents buy it, and let the kid visit the friends house! I know its not quite the same as having your own, but the idea is to live within our means, not to keep up with the neighbors. If it is a MUST HAVE item, let the kid(s) work, save and EARN it.

-Minimize TV time. This does a couple of things. First, it keeps the advertisers away from your children. Second, it reduces your electric bill. Third, you won't need to subscribe to an expensive cable package. Fourth, and most importantly, it give you and your kids some time to really be together. Whether your doing household chores or just sitting next to each other while each of you read a book, having this time to interact is very important and missing in a lot of kids routines.

-Go on family outings that don't cost anything! A trip to the amusement park sure is fun, but it is expensive too! Instead, for the cost of a few gallons of gas, take a ride into the country and go on a hike. Find a pond or stream someplace and look for frogs or salamanders. Pack a lunch, food always taste better when you eat outside. Kids love to do this, especially looking for frogs and things around ponds and streams! Very low on the cost scale, and very high on the doing something special scale!

-Read and apply what you've learned from the Series Frugal posted this week on Money and Credit:

The Frugal Shopper The Frugal Home Owner Frugal Banking Frugal Motorist

-Regularly Visit the following blogs to learn more about frugal living;

Frugal For Life Frugal Living Frugal Simplicity Frugal Village Mighty Bargain Hunter

The Frugal Law Student The Secret to Saving Money Money and Credit

Thanks for reading and please comment if you found something that helped you

Day Four Frugal Motorist

Becoming a frugal motorist can be difficult if your not one already. Just jumpin' in the car and driving around for something to do will be a hard habit to break! You'll need to find a replacement habit that is frugal, like reading used books, or walking around!

Tire pressure is one of the things a frugal motorist is going to monitor. Proper tire pressure will not only will it increase the life of your tires, it will dramatically improve your gas mileage.

Frugal motorists plan their trips, they don't just drive to the store, then back home, and then run out to hot dog joint, then back home to pick up the kid to bring to a friends house. Planning your trips, even the short ones, will save time, money and wear and tear on your vehicle.

And, speaking of wheels, specialty shops are where you should shop for wheels. If there is a place in your area that does nothing but sell, mount and balance tires, you'll get a better deal on the cost of the tires than you would if you went to your favorite general service center.

The same is true for oil changes and mufflers. It's less expensive to go to the quick lube place, or the muffler guy. Think of it like this. You wouldn't see a corporate lawyer if you needed to have a deed drawn up, nor would you see a dentist if your foot was bothering you. So, why go to a generalist when your tires need to be replaced?

Drive a steady speed whenever possible. Use cruise control if you have it (and when its safe, don't use it driving through the middle of town!). Doing so will help conserve gasoline.

Shop around for the best priced gasoline, and fill up your gas tank. Don't wait until you're on empty to get gas, because if you HAVE to buy gas because you're on 'E', you won't have the luxury of shopping for the best price in town. The best price around where I live is almost 14 miles away! Some would say that whatever I'm saving in the cost of gas, I'm spending on wear, tear and the drive to buy the gas. I disagree because I lump all of my trips into one, and besides, the drive to get the gas is into another state that doesn't charge a gas tax of .15 cents per gallon. It's like getting a gallon of gas for free!

Car pool if you can, and use public transportation if you can, especially for getting back and forth to work. If you could reduce your cost (gas, maintenance, tires, wear and tear) to get to and from work, it would be almost like getting a raise wouldn't it? If it costs $5 per day in total expense to get to and from work if you drive your car vs. a buck a day to car pool, that's like an $80 dollar per month raise (use this to pay down high rate credit cards, or add it to your retirement savings).

Tomorrow- The Frugal Parent

Day Three Frugal Banking

Before we discuss Frugal Banking, let's take another look at the definition of Frugal;

1. economical in use or expenditure; prudently saving or sparing; not wasteful: a frugal manager.
2. entailing little expense; requiring few resources; meager; scanty: a frugal meal.

With this definition of frugal in mind, let's go on!

Frugal banking is the art of managing you checking and savings accounts so that you entail little expense, require few resources and aren't wasteful. Some of the ways that you can be a frugal with your banking:

Open a free checking account, but beware of the fees (see Fee Schedules below)! If you can keep a small minimum balance and don't write a lot of checks, a free checking account could be your best choice. Do some homework to find out what other checking account options are available. Remember to read the fine print because free isn't always free!

Friendly ATM's are the ones that don't charge you for using them. Banks call these 'foreign transaction fees' and make muchos dinero from them! The least expensive ATM is the one owned by your bank or credit union; they won't charge you a fee for using their ATM's. If you know that you're going to need cash, and you must use an ATM that isn't in your bank or credit union's network, then make sure that you withdraw enough cash to get you by until you can visit your own institution.

Online Bill Payer is one of the most frugal banking steps that you can take! Not only are you saving the cost of postage and checks (remember free isn't always free, see free checking above) you can save your valuable time by setting up bill payer to pay your regular and routine bills on a schedule! But again, watch out for fees! Most bill payer services these days are free, but some banks and credit unions will impose a non-usage charge if you've signed up for bill payer but don't use it.

Dormant account fees are charged when an account, no matter what the balance on deposit might be, hasn't had any recent withdrawal or deposit activity. Why do banks charge a fee like this? Good question. I think the best answer (not necessarily the right answer) is because they can! Does your bank or credit union charge you for leaving money with them? If so, take your money out and run! Or, if you'd prefer to leave your money in the account, stop by and deposit a penny every couple of months!

Account maintenance fees what your friendly bankers might charge you for doing business with them. Here is a nice chart from Bankrate.com that covers many of the fees that you could be charged, and what the fees are for.

Make sure that you have enough money in your checking account to cover the checks you write! This may seem obvious, but surprisingly, many people continue to rely on the float that really doesn't exist anymore. Instead, banks and credit unions have come up with a product called Overdraft Protection or Courtesy Pay. These products will cover your otherwise bad check and charge you a fee for doing so. These fees can be OUTRAGEOUSLY HIGH, but are probably still better than writing bad checks. The lesson here is don't try to float a check, make sure that you have the money in the account before writing the check!

You can avoid bank fees by being aware of what they are! Frugal Banking means not being wasteful. By knowing the rules, you can avoid the fouls! Read you account agreement and fee schedule, doing so could actually make you money! How? If you learned something by reading the agreement and schedule that helped you avoid paying a fee, then you kind of made money by not being wasteful with it! Your account agreement is the rule book; it sets out under what circumstances the financial institution will charge you a fee. Being Frugal is being smart. To be smart, you need to know! Read the account agreement so you can know!

Go where the money is! Even modest balance savings and checking accounts can earn really good interest rates if you shop around! The best places to earn interest income on modest balance checking and savings balances are online banking accounts. Recently, ING Direct paid 4% for a checking account with no minimum balance, FNBO Direct is paying 6% for a savings account with no minimum balance, and Capital One Direct was paying almost 5% for a no minimum balance money market account! Don't leave money in the banks and credit unions so that they can fee you for it! Move it to a place that appreciates your business and rewards you for it!

Tomorrow- Frugal Motorist.

Day Two- The Frugal Homeowner

It's easy to be a Frugal Homeowner. There is just so much that you can do to live less expensively, so here we go!

Don't buy too much home-

The first thing that you'll want to do is to make sure that the home that you're buying, or if you own a home now, is within your means. Your housing payment, including taxes and insurance, shouldn't exceed 28-30% of your gross monthly income. If buying a home, the price shouldn't be more than 2-2.5 times your gross annual income.

Properly Insulate

Whether you're in a warm or cold climate, insulation is a money saver! In a warm climate, it keeps the air cool are when it's hot out, and in the cold climate, it keeps it warm when it's cold! Insulation can be expensive, but PAYS BIG in the long run! You can save hundreds every year in heating and cooling expense!

Check the Temperature

I'm pretty frugal when it comes to heating in the winter. Me and my bank account are pretty comfortable at 68 degrees fahrenheit. Yes, this is cool for many when to them 72 degrees fahrenheit is right on the edge of freezing! Wear a sweater (see yesterdays post in this series about getting a generic brand sweater!)

Turn of the lights, please

It's a colossal waste of money and energy when lighting an unoccupied room. Turn off the lights, please!

Speaking of lights..

Fluorescent bulbs are where its at! No, you won't find these at the dollar stores so shop around for the best price. While more expensive than regular incandescent light bulbs, they last much, much longer and use far less electricity.

Use renewable energy

You've seen the outdoor furnaces? Did you know that they can replace a oil fired heating system, and do so with a renewable energy source? These furnaces will heat your home with wood or corn. Both renewable, but far less expensive the petroleum products. And, burning corn is good for the farmers!

Whatever system you use, have it checked

Whether you're using oil, wood or corn to heat with, have your system checked at least annually. Doing so will keep it in good running order and help prevent expensive surprises! The same applies for those readers that don't heat, but instead cool; have your cooling system checked for the same reason.

Cable Television

Expensive and not necessary. Some argue that TV is a must, especially as a tool to stay on top of what is happening locally, nationally, and world-wide. If you're reading this, then you have access to the Internet and can keep on top of it pretty well by checking the news websites. Television is not good to those who want to live Frugal Defined. The cable bill is expensive, and the ongoing bombardment of advertising does nothing for anyone other than the advertisers. Unplug and disconnect from the cable or, at the very least, unsubscribe from the premium package that charges you for an impossible number of channels that you never seem to watch anyway!

What ways are you defining frugal in your home? Your comments are welcomed and appreciated!

Tomorrow, Frugal Banking.

More Frugality- An Excellent post on Grad Money Matters!

Excellent post on Grad Money Matters by ISPF. Here are the 10 Commandments of Frugality!

Commandment 1: Thou shalt cook at home instead of eating out.

Commandment 2: Thou shalt not buy a new vehicle if you can make do with an old one.

Commandment 3: Thou shalt switch off the lights, fan, TV etc when you exit the room.

Commandment 4: Thou shalt not pay for services that you are fit and healthy to do on your own.

Commandment 5: Thou shalt not pay full price for any item that will eventually be available on sale. Thou shalt not pay anything at all for what can be had for free through nature or public offerings.

Commandment 6: Thou shalt not covet thy neighbor Joneses belongings.

Commandment 7: Thou shalt not waste – be it money, leftovers or time.

Commandment 8: Thou shalt entertain yourself through inexpensive means.

Commandment 9: Thou shalt live by the 3 R’s – Reduce, Reuse or Recycle.

Commandment 10: Thou shalt not confuse frugality with cheapness.

Day One- The Series Frugal

Join me for the next five days while I write "Series Frugal". Each day I'll write thoughts and tips on how to live the definition of Frugal. Here we go!

Day One- The Frugal Shopper

We are constantly bombarded with advertising in newspaper and on tv which constantly encourages us to buy name-brand merchandise. Name-brand buying can be big money spending, not very frugal. Here a couple of thoughts to consider:

• Purchase generic off-brand medicine- for example, Walmart's store brand Ibuprofen is a whole lot less expensive than name-brand Advil.
• Instead of paying top dollar for name-brand food items (bread, peanut butter, etc.) buy the store brand. Even after manufacturers coupons, the store brand in many cases is less expensive. Unless you shop where they double or even triple coupons, stick to the store brand.
• Off brand clothing can be a much better buy than branded. Example: Hanes athletic socks vs. the off brand competition. Who cares about the name brand of socks anyway? OK, maybe the name brand lasts longer, but by how much? Save buying name brand clothing to when you're shopping at the second hand store. Otherwise, buy off brand.
• Shop the dollar stores for your non-food groceries like shampoo, razors, paper products, etc.

Tomorrow's Series Frugal- The Frugal Homeowner

Frugal- What Is?

fru·gal [froo-guhl]
–adjective
1. economical in use or expenditure; prudently saving or sparing; not wasteful: a frugal manager.

2. entailing little expense; requiring few resources; meager; scanty: a frugal meal.

Webster's Dictionary Frugal defined. That's what we'll strive for when it comes to money and credit. Expending money economically, making sure that we're getting the most bang for the buck!

Prudently saving so that we're not doing more than what we can afford while working towards our savings goals.

Not wasteful or expending money needlessly or wastefully.

A frugal manager knows how not to be wasteful, how to get the most bang for the buck, and how to pursue savings goals without impeding cash flow.

It doesn't make cents, but there are some who save more than what they should. How could this be? They put money aside while paying minimum credit card payments. The build up of the savings accounts sure looks good, but it is costing more than what it is saving. Its not a frugal manager who puts money away in savings earning 4 or 5 percent interest while paying 15-20 percent interest on credit card balances. The frugal manager would forgo the savings until the high rate credit cards where paid, perhaps making a minimum payment into their savings and a maximum payment on the credit card.

I especially like Websters definition #2. By 'being' this definition, you can become definition #1. It becomes almost easy
to be a frugal manager if you entail little expense and require few resources. With little expense and little resource requirement, your savings goals will be easily realized and obtained.

If you've read "The Millionaire Next Door", then you know that living below your means is really the answer and ultimate definition of Frugal.

This Weeks Top 5 on Money and Credit

Over the past few days we've read about ways to cut spending and to protect ourselves from getting scammed. Here are a five posts that I particularly enjoyed this week.

JLP on AllFinancialMatterrs tells us to watch out for financial planners and their fees in a post titled Planners and Fees .

Kyle posted a link to a cool video called How to Avoid Getting Ripped Off By A Mechanic that talks about the 5 things that you need to know.

A post on The Mad Money Analyst tells us to be wary of store branded credit cards, that these types of cards can get people in trouble if their not careful.

Have you been getting a lot of e-cards lately? Hope that you haven't been reading them all! Vinoo Thomas tells us more about the dangers of reading these over at McAfee Avert Labs Blog.

Don't waste your money on ID Theft Insurance! Read this excellent post at My Money Blog about ways that you can self insure against ID Theft.

More Car Expenses? Money saving tips!

Car expenses. A necessary evil? A car can be a huge drain on your budget when its not properly maintained. And sometimes, even with proper maintenance, it can catch you by surprise.

Here are a couple of ways to ease the money pain when it comes to owning and operating your wheels.

• If you can car pool, or if there is public transportation, leave the car in the garage. Don't drive the kids to school if they can ride the bus. You'll save money on gas and reduce wear and tear.
• Combine your trips. Instead of running to the store to get ice cream, and then later dropping the kid off at their friends house, make one trip instead of two. Takes a little planning, but you can do it! Arrange car pools with other parents to run the kids from place to place.
• Find the lowest gas price in town (or even outside of town if that's what it takes) and fill up your gas tank. In the long run, it can be less expensive if you keep your gas tank full instead of hovering around empty because if you're close to empty, you're going to need to buy the gas no matter how much it costs!
• Have your ride services regularly. Check you tire pressure, oil and other fluid levels weekly. Follow the manufacturers suggest maintenance schedule (see your owners manual).
• Shop around for insurance! It can be a pain to check every year, but it can save you a lot of money. Insurance premiums can creep up on you if you don't pay attention.
• You can save a bunch of money if you can learn to do your own maintenance like oil changes, filters, spark plugs, etc.
• If you think that your car is acting strange, get it looked at before it gets real strange and expensive! Don't procrastinate! Minor issues can result in major repairs if not addressed sooner than later.
• Check around for a lower car loan rate. Yes, you can refinance a car loan. No, you're not stuck with the high rate that the dealer gave you! Another lender would be happy to give you a better deal. Check around!
• Don't take the car to the dealer for things like brakes, oil changes and mufflers. Specialty shops are no where near as expensive as the dealership. Shop around for price. You'll be surprised....
• Know your mechanic. Ask people that you work with or who are in your circle (like church or other community groups) who they recommend for a mechanic. Why? You don't want someone who is going to recommend unnecessary repairs or who's work is shoddy...

Dealer Financing, Good or Bad?

The convenience of letting the car dealer handle your financing can be very expensive. In our world of immediate gratification, this price might be something you're willing to pay. But, you should consider the alternatives and the cost.

The ability for the average consumer to get invoice pricing information and wholesale used car values has put a huge dent in the dealers ability to make a profit on the car. Now dealers use other channels to create profit. One of the the biggest profit centers in the dealership is the Finance and Insurance Department (F & I Dept.).

Making a big profit on the financing is easy for the dealer if you're an uninformed buyer. But, because you're reading this, you can count yourself as one of the lucky few. Now you're going to be in the know, and you will be an informed buyer. Knowledge is power!

So, how does the dealer make a profit in the Finance and Insurance Department? They start off by making a deal with an indirect lender. This lender could be your local bank, or one of any number of national lenders. It's likely that the car dealer has a couple of lenders that they have this deal with, and the deal is mutually rewarding. The lender doesn't have to market directly to you nor do they need to employ a loan officer to talk with you about your financing, thereby cutting way down on their costs. Instead, the Finance and Insurance Manger who is an employee of the dealership (and who incidentally is paid on commission!) is working for the lender, filling the marketing role by promoting the bank to you, and fulfilling the loan officer role by helping to complete a loan application and forwarding it to an underwriter. Sweet deal for the lender.

So far, we've talked about how this deal rewards the lender. How does it reward the dealer? Makes them tons of money, that's how! You see, part of the deal with the bank is that the dealer gets a special interest rate known as the 'buy rate', which they are allowed to increase or 'mark up' by 300 basis points or more. This means that if the dealer 'buy rate' is 5%, they can (and will!) charge you (the 'street rate') 8% or more for the loan! When they do this, they get to keep the difference in finance profit. This can be a lot of money when you're talking about a big loan. Let's look at some numbers:

$28,000 Loan amount @ 3% interest rate (the difference between the 'buy rate' and 'street rate') over 60 mos = $2187.00 dealer finance profit. Not bad for an hours work in the F & I Department, eh?

Let's look at the difference between a 5% (the buy rate) and an 8% (street rate) payment for a $28,000 loan over 60 months. The 5% rate has a monthly payment that is $39 less than the 8% rate. Look at it this way; you can make $39 per month for the next five years simply by spending an hour today shopping for a good car loan rate before taking the dealer financing!

Shop around for a car loan BEFORE you go to the dealer! Get a low rate loan commitment from your bank or credit union before you go car shopping. Then, after you've found your car, let the F & I Department make a firm rate offer to you. If it's more than what your bank or credit union has offered, you have a couple of choices. Negotiate a better rate. Will they give you a lower rate if you have shopped? Almost guaranteed! Even if they can't mark up the rate even a whisker, they will still get the 'retention' pay. This is a flat fee paid to the dealer, normally around $150, just for taking the application and handling the paperwork. Of course, you can forgo the negotiation and just get your loan from the bank or your credit union.


Be sure to vist The Mint Blog to read more awesome articles like this one in the upcoming 108th Carnival of Personal Finance!

2.3 Million Identities stolen from Certegy Check Service

A seven year employee of Fidelity's Certegy Check Services Inc. unit has been charged by the US Secret Service with compromising the identities of over 2.3 million people. Although large, this breach does not even come close to matching the size of the TJ Maxx fiasco.

This breach occurred at Fidelity National who provides payment processing services for the retail, mortgage, and other like businesses.

According to an article on CNN Money, the former employee stole bank and credit card records and sold them to a data broker.

What You Should Do If You Think Your Identity Has Been Stolen

1. Put a freeze on your credit files
2. If you use a debit card, carefully monitor your checking and savings accounts for unauthorized activity.
3. Consider closing your checking and savings accounts and transferring them to another account number.
4. Periodically check your credit report at http://www.annualcreditreport.com/
5. Visit the Federal Trade Commissions Identity Theft Site
6. Regularly monitor all of your financial accounts

The 107th Carnival of Personal Finance

Want to learn a whole lot about personal finance? Then you need to read these posts in The 107th Carnival of Personal Finance, hosted by Blogging Away Debt.

Some notable posts...

Family is Key to Personal Finance Success

Are you addicted to borrowing money?

The way banks look at you Part 3

And my personal favorite... The B Word

Thanks to Tricia at Blogging Away Debt for hosting this carnival!

This Weeks Top 5 on Money and Credit

This week I've been looking into a number of online savings and banking programs, and general information about saving money. A lot of my research included reading recent blog posts about online bank accounts and saving money in general. So, this week I give you the 5 posts that I enjoyed the most about Savings.

Read about "How to Start a Roth IRA (And where to do it )" at Get Rich Slowly. Easy to understand answers for many questions.

Here is a good post at Free Money Finance about 'Saving Money By Taking Your Lunch To Work' . Makes a good point about saving time, money and eating healthy!

Trent at The Simple Dollar has a great plan to save money. Read this post titled Treat it as a bill; How I made a commitment to savings work for me .

Here are 5 Ways To Save Money Without Noticing from Blueprint For Financial Prosperity. Some good ideas about taking a look at what your spending and deciding whether or not its really worth it.

Over at Money Matters and More Musings, golbguru shares 25 Things We Do To Save Money. I especially like the 4 year old jeans and not carrying credit card balances.

This Weeks Top 5 on Money and Credit

Jeremy at Generation X Finance has found a free online finance course and tells us about it in his post "Take a free personal finance course at the University of California Irvine online"

 

At Money $mart Life, read a post on "Everything you ever wanted to know about Quickbooks"

 

Read about 5 ways to get financial advice with social media on My New Choice

 

The Simple Dollar has a good post on Six Steps to Eliminate Non Credit Card Consumer Debt

 

Read up on "Credit Card Universal Default- Like Vultures on Fresh Roadkill" over at My Credit Group

 

Happy Reading!

Financial Dieting

In yesterdays post, "The B Word", I mentioned that there are lots of software programs to help you with a financial diet, more commonly known as budgeting.  Although Quickbooks and MS Money are good programs they can take a lot of time to set up.  Here are a couple of others that you might consider. (note: this is not a paid endorsement nor have these products been tested by the Colonel.)

 

Mvelopes

Mvelopes is based on the traditional envelope method of budgeting and includes automatic transaction retrieval (from credit cards accounts, etc.), online bill pay, net worth tracking, and anytime access.  Seems like a pretty cool program and it comes with a free trail period.  Subscription is spendy, $129.60 billed annually.

 

Moneydance

Offering traditional financial management, Moneydance also offers budget tracking, online bill payment, and investment tracking.  Free trial, purchase for $29.99 

 

PersonalBudgeting.com

This program is touted as simple and easy to use.  Track you checking, credit card and loan balances along with your monthly expenses.  Compare actual to budgeted expenses to see how well your sticking to your financial 'diet'.  Free to try, purchase online for $14.95.

 

PearBudget.com

Pear Budget is a FREE budgeting program written in MS Excel.  It can be used in almost any spreadsheet program like Excel, OpenOffice, etc.  Good program if you are interested only in budgeting.

 

YouNeedABudget.com

YNAB (you need a budget) used four simple rules of cash flow management.  Tracks budgeted spending in a MS Window environment.  Two versions, YNAB $19.95, YNAB Pro $39.95

 

My Budget Planner

A simple and straight forward budgeting spreadsheet for $19.00

 

Visit these sites if you're looking for help making and monitoring your budget.  If money is tight, or if you're really frugal, you don't NEED software to make and monitor a budget.  You can use the old standbys; paper, pencil and calculator.

The B Word

Many of us think of the 'B' word (Budget, what were you thinking?) much the same way that we do about dieting. We know that it would be good for us, but it's a pain to get started. Then, when we finally do get started, we don't stick with it very long.

A good diet will help you stay healthy. A good budget will help you stay financially healthy. In order to succeed, you need a success plan. This is what a budget can be for you; a financial success plan.

So, you think you're ready for a financial diet? If so, here's what you need to do to get started.

First you need to figure out how much money is coming in the door every month by adding up all of your take home pay. This is your income after taxes and any other deductions that are taken out of your paycheck by your employer. This amount is also known as your 'net pay'.

If you are paid weekly, multiply your take home pay by 52 and then divide by 12 to get your monthly income amount. If you're paid every other week, then multiply your take home pay by 26 and divide by 12.

Do not include any bonuses, gifts, occasional overtime, or any other infrequent source of income. Right now, you're interested in what regularly comes in the door every month.

Next, you need to determine your regular monthly expenses. For those expenses that you might pay only once or twice a year, break them down into monthly installments. For example, you might pay $400 twice a year for your car insurance. Take $800 and divide it by 12. Use $66 as your monthly car insurance expense.

For your housing expense, be sure to include your entire mortgage payment (principal, interest, tax and insurance).

Set aside an additional amount for your home maintenance allowance (assuming of course that you're not renting). This amount should equal about 1% of the purchase price of your home. If you paid $100,000 for your home, then you might consider setting aside $1000 per year, or $84.00 per month for this expense item.

You should also think about establishing an emergency fund. Advisers recommend saving 5% of your take home pay. So if you take home $3000 per month, you may want to set aside $150 per month in your emergency fund. Remember, don't touch your emergency fund unless it really is an emergency!

Now, compare your results. If your expenses are more than your take home pay, there's a problem. It's best to address this problem immediately and head on now; it's probably not going to go away on its own. What can you do about it?

Look where you can cut back Some of your expenses are fixed meaning that the amount doesn't change every week or month. Other expenses are discretionary, meaning that you are in control of how much is spent in these areas. Look hard at your discretionary spending first.

Then, invest some time thinking about your wants and needs. The discretionary items that you simply cannot go without are your needs. What's left are your wants. For example; do you need the 1000 channel cable package, or is this something that you just want because its nice to have? This wants list is where you'll start looking to make cuts in your discretionary spending.

There are many budgeting software packages available on the market. In a coming post, I'll name a few that you might be interested in looking at.

In summary, you need to first get a handle on where you are before you can decide on how to get where you want to go. These steps will help you identify your cash flow situation and where you are today financially.

Be sure to visit Blogging Away Debt who is hosting the first Carnival of Personal Finance in July for more posts like these!

Unbanked

Millions of people in the United States of America are 'unbanked'. Unbanked means that they do not use the traditional banking system in America. Instead, they use payday loan and check cashing companies. Why? Another case of financial illiteracy?

Some of the reasons why these 20 million people don't use traditional banking are mistrust, cultural and language barriers, and many misconceptions about the banking industry.

A vast majority of those that are unbanked are immigrants to this county who according to some estimates earn in the hundreds of billions of dollars annually. Many of these people come from countries where the banking systems are corrupt and depositors regularly lose their life savings.

Unfortunately for these people, the cost of using non-traditional banking in the United States is very high. Check cashing companies will charge between 2% and 5% of the face amount of the check, and payday lenders charge fees representative of interest rates of 100% or more.

U.S. banks recognize this market but so far haven't been able to change to accomodate it. For example, many banks require a hold of three to five days on checks presented for deposit. Many of these unbanked are living from paycheck to paycheck, and need the money now. They can't wait for the hold on the check to expire, so they're forced to use a check cashing company.

An estimated 10 million American households are "unbanked" or "underbanked" -- they do not have accounts at banks and other mainstream financial institutions. Unfortunately, as a result, these cash consumers pay excessive fees for basic financial services, are susceptible to high-cost predatory lenders, or have difficulties buying a home or otherwise acquiring assets.

So what is the answer? Both the NCUA and FDIC (federal credit union and bank regulators) actively promote reaching this market, but real progress is yet to come. If the root of this problem is a lack of trust in the banking system, is there anything that can be done to rebuild confidence?

Some companies are thinking outside the box, and are doing things to introduce the unbanked to more traditional banking. Watch this video about the "Revel Card".

This Weeks Top Five on Money and Credit

Here are this weeks Top Five on Money and Credit, in no particular order...

1. The true cost of a bad credit score by My New Choice
2. No Credit Needed writes about "Managing My finances Firefox, ING Direct, online billpay, and you need a budget"
3. 73 Debt Elimination Tips from Zen Habits
4. Some good posts from bloggers on The Mint Blog "What's a sound financial lifestyle"
5. The Frugalist offers The Frugality Cheat Sheet (note the finance tips starting at #48)

What Debt Settlement Companies Won't Tell You

An excellent article appeared today on smartmoney.com about the downside of using a debt settlement company. Personally, in my years of banking, we have worked with very few of these companies. Why? Because as a creditor, we could offer the debtor a much better deal by working directly with them instead of through the debt settlement company. By working directly with the debtor, we're able to negotiate a settlement plan directly, eliminating any 'fair share fees' or other costs that detract from repaying the debt.

What debt-settlement companies won't tell you

1. Debt settlement may not be right for you Debt settlement is a niche solution that's right only for a small segment of the population, says Charles Phelan, founder of ZipDebt.com, who coaches consumers on do-it-yourself debt settlement. But don't expect to hear that from a debt-settlement company. "People working the desks at the debt-settlement companies are working on commission and have the incentive of bringing as many people as possible," he says. You could be a good candidate for debt settlement if you're heading toward bankruptcy, but don't qualify for filing Chapter 7, Phelan explains. (Under Chapter 7, most of your unsecured debts are written off, but you'll most likely have to sell some property including your home). "Most people who can qualify for Chapter 7 in all likelihood lack the cash flow to make debt settlement work for them," he says. Debt settlement, in other words, might be a viable alternative to Chapter 13, which sets up a three- to five-year schedule with your creditors to repay your debts. (For more details on qualifying for Chapter 7 or Chapter 13, read our story.) Likewise, if you can scrape up the cash to pay off your debts in a debt-management program, where you work with a debt-management company to pay off your balances in full but with lower interest rates, then debt settlement isn't the best solution. 2. Your credit will suffer Creditors don't settle unless you're severely behind on your payments. That means one thing: Debt settlement is damaging to your credit. Just how damaging it is depends on your track record. If you're already behind on payments, your credit will suffer less than if you've managed to avoid delinquencies and credit charge-offs. 3. You could get sued With bankruptcy, creditors have to stop collections efforts as soon as you file. That's not the case with debt settlement. Even if you inform your creditors of your efforts to settle, they won't stop trying to collect, Phelan says. Worst-case scenario, they could sue you for the amounts you owe. Should that occur the only way to avoid a black mark on your credit record would be to pay off the debt in full. 4. There are tax consequences Debt settlement is a taxable event. Any forgiven balance that exceeds $600 is taxable income, says Linfield. "Sometimes that tax event can put people in worse shape than they were in to begin with," she says. Consider this: If your tax rate is 15%, $5,000 of forgiven debt will carry a $750 tax liability. That's a debt that the IRS won't forgive. (Read our story for advice on what to do when you can't pay your taxes.) One exception: If you're insolvent — namely your assets are less than your liabilities — you can petition the IRS to waive that tax liability by filing form 982. 5. Our services might be illegal While the laws regulating debt-settlement companies vary greatly by state, it's worth noting that 12 states currently prohibit for-profit debt management. Since debt-settlement companies are for-profit entities, they're not allowed to practice there. Those states are Arizona, Georgia, Hawaii, Louisiana, Maine, Mississippi, New Jersey, New Mexico, New York, North Dakota, West Virginia and Wyoming. If you live in one of those states, remember: It is illegal for for-profit debt-settlement companies to contact you and work with you, even if they're based in another state. "Many companies do it anyway," Linfield says. "And that's a big red flag."