They said he is an account representative for Rent-A-Center and went to the 21-year-old woman's home Oct. 22 to discuss a delinquent account. During the discussion, he turned the conversation into a sexual nature, offering to make her bill go away in exchange for a sex act, police said.

Herron then exposed himself to her while taking her hand and placing on himself. The woman pulled away and Herron completed the sex act upon himself before leaving her home, police said.

In what universe is this a good idea? If the accusations are true, had he tried this same scheme on other women who simply didn't report it to police?

Bill collector accused of demanding sex for debt relief [Detroit Free Press] (Thanks, Adam!)

(Photo: striatic)

What you're doing is actually settling the debt for less than you owe. As such, the lender will probably report the debt as "settled" rather than paid. Often it's more important to get the debt off your back than to maintain a pristine credit score, but you should just be aware you might incur a ding. But don't let that stop you from getting debt-free if that's what it takes!

Negotiating reduced payments can hurt credit scores [Ask Max] (Photo: Colin Tobin)

"8 Signs You Should Not Buy a House" may be a tough list to absorb if you've been turning a blind eye to immediate financial issues like credit card debt and savings accounts, but following this advice will put you in a much safer position for a new home. Once you've made sure it's the right time to buy, "8 Home Buying Blunders" has some tips that should help protect you from unanticipated problems at closing or after you've moved in.

"8 Signs You Should Not Buy a House" [Morningstar]
"8 Home Buying Blunders" [Morningstar]
(Photo: Smath.)

Why are so many states going after debt relief companies? Because they insert themselves between consumers and creditors and suck up the money earmarked for creditors by promising that they're going to renegotiate payments—and then they don't keep that promise.

According to a lawsuit by the Illinois Attorney General, Credit Solutions of America does just that; it "continually fails to negotiate with consumers' creditors even though consumers cease to pay their creditors directly and, instead, make months of upfront payments to CSA."

So now the AGs are asking the FTC to tighten telemarketing rules, like prohibiting them from collecting fees before rendering services.

"In an ever-building wave of ploys and scams on consumers, debt settlement and debt negotiation companies promise to help consumers eliminate or reduce their debts, but often fail to deliver on these promises," said Ohio Attorney General Richard Cordray. "Tougher regulations will help to rein in some of the most deceptive and unfair practices in this industry."

"States Want Coordinated Crackdown On Debt Relief Firms" [Consumer Affairs]

He writes:

I will be getting married in a few weeks and I'm expecting trouble with my fiancee's old bills. She went through a rough time and has had some stuff sent to collections. She has been paying on the bills so they should be happy for now.

We have had some long talks about bills and stuff so we don't expect any new bills sent to collections but you never can tell with them.

What I am worried about is that once we are married i figure that they might decide to come after me for her old bills. I know that's wrong but I'm at a loss about what to do or say if they decide to start bugging me for her old bills.

The answer is that it's a little complicated, because there may be state laws that will impact the issue, but in general you are not responsible for the debt your spouse acquires before marriage. Having said that, if the bad debt has gotten so bad that there's a lawsuit involved, talk to a lawyer to avoid any weird surprises from default judgments.

Some debt collectors will break the rules and pretend you're responsible for the debt too, and that means they may start harassing you about it. They can't do this, and if they try it you can demand that they stop. We've found the website Credit Info Center is a great resource for crafting a strategy to deal with abusive collectors—it's got example letters to you can send, and specific laws you can cite to make it clear you mean business.

In fact, if you visit the site you'll see that you may want to be proactive with this old debt and negotiate new repayment plans with the collectors. Collection agencies buy debt for pennies on the dollar, and in most cases will gladly settle for a lower amount if you can pay it up front. There's a hidden cost to that route, because you'll have to pay taxes on the amount that's forgiven, but it will get it of your lives much faster.

(Photo: Oh mon héros [Aka Suleiman Poher])

Revolving credit debt, mostly through credit cards with balances that are not paid off immediately, dropped by an annual rate of 13.1 percent in August to $899.4 billion, the Federal Reserve reported.

[...]

Indeed, the personal savings rate climbed to 4.2 percent in July, according to government data, up from the near-zero levels of just a few years ago.

"Consumers Keep Paying Off Credit Cards, Building Up Savings" [Washington Post]
(Photo: leafy)

Like any good potluck, you never know what you're going to find in a Carnival, but there are always at least a few useful, thoughtful, or just entertaining posts you probably wouldn't have heard about otherwise. The curatorial duties are passed around to a different blogger each week, which helps mix things up.

This week, Emily Starbuck Gerson at CreditCards.com assembled the collection, and you can see from the list below the wide variety of topics you'll frequently find:

• "What it Costs to Own a Home" [The Money Mythos]
• "How Margin Trading Works" [Narrow Bridge]
• "Four Fifteen-Minute Financial Fixes" [Good Financial Cents]
• "Another fantastic unintentionally low-cost weekend" [Beyond Paycheck to Paycheck]

Carnival of Personal Finance
(Photo: kevindooley)

"23 Powerful Tips and Tools to Eliminate Debt" [Dough Roller] (Photo: mskogly)

Naturally, they suggest you closely track where your money goes, which is an easy thing to do in this era of free personal finance websites like Mint and Wesabe. But they also address the issue of understanding why you spend (or don't spend) money, so that you don't end up being a slave to your emotions or habits:

• Know yourself. Nathan Dungan literally wrote the textbook on personal finance and speaks at colleges nationwide. What does he think is most important for students to understand? Themselves. "Know your money temperament ... the lens through which you view and do money," he said. If having money makes you want to spend it, it's best to know that and figure out a way that works for you to keep that natural tendency in check.
  
  
• Keep money out of reach to stay out of trouble. Each year, Solheim asks students about a bad financial experience. "I have quite a few that will say ... 'The first time I got my financial aid I just had a good time ... and then was stretched at the end to make ends meet,'" she said. If you're a student receiving a lump sum from the Bank of Mom and Dad or the financial aid office, figure out how much you'll need each month and put the rest in savings. That way you won't feel artificially flush when you see that big bank balance.

"Experts offer advice for college and beyond" [San Jose Mercury News]

The move isn't due to compassion, but rather fear of getting bilked out of money. If you're able to negotiate a sweeter deal with your credit card bank, thank the kind folks who decided not to pay their bills.

From the story:

"Issuers are looking to get something as opposed to nothing," said David Robertson, publisher of the Nilson Report, which monitors the industry.

Most card issuers are unwilling to talk about the practice for fear that they will be swamped with requests from people who do have the funds to pay their bills. But industry executives confirmed that the practice is becoming more common as card issuers face a record percentage of charge-offs, giving up on collecting debts that consumers never repay. The charge-off rate on U.S. cards for July was 10.52 percent of balances, according to Moody's, which expects it to reach at least 12 percent in the middle of next year.

This is one instance in which the proverbial ants have the grasshoppers to thank for buying stuff they can't afford.

Banks Ease Burden Of Credit Card Debt [Washington Post]

The report spotlights a consumer determined to sock away cash and pay down debt following the stock market and real estate crashes. Households have saved about 5% of their income in recent months, vs. less than 1% before the downturn.

Long-term, the trend "puts (consumers) in a healthier financial position" by trimming interest costs and encouraging investments for "future needs like college education and retirement," says John Ryding, chief economist of RDQ Economics.

In the short run, though, "This does not bode well for a significant, sustained rebound in real consumer spending," Steven Wood, chief economist for Insight Economics, said in a report.

In other words, what's good for us as individuals is bad for financial institutions. And for the overall economy, which counts on Americans to spend, spend, spend.

But don't let that stop you from being, you know, responsible and sensible with your finances.

Consumers cut outstanding credit by record $21.5 billion [USA Today] (Thanks, snarkysnake!)

(Photo: Arria Belli)

What happened to AP reporter Holly Ramer is sort of the legalized equivalent to identity theft. There's no criminal mastermind behind it, just government neglect and a bunch of passing the buck.

The problem involves three Pacific island nations, each of which has its own, independent Social Security Administration. The three — the Federated States of Micronesia, the Republic of the Marshall Islands and the Republic of Palau — grant defense rights in the region to the U.S., and in exchange receive aid, including grants and loans after disasters.

[...]

Some federal agencies collect locally-issued Social Security numbers from grant and loan applicants and report them to credit bureaus as if they were U.S. numbers, regardless of whether the numbers already are in use.

[...]

The U.S. Department of Agriculture has known for years that it creates "overlapping" Social Security numbers when granting loans in the three island nations, said Donald Etes of the agency's rural development office in Hawaii. The office that processes loans is working on a fix, but there have been no software or policy changes yet, he said.

One of the problems is that two of the three Pacific Island nations use 8-digit Social Security codes, but U.S. computer systems add a zero to the front of them—which then makes them identical to SSNs that have already been assigned to residents in New Hampshire and Maine.

Bottom line: If your U.S. number starts with 002-6, 003-9, 005-7 or 007-8, it could match a number in Micronesia. Numbers that start 006-4 could match numbers in Palau. Those that start with 004 could match numbers in the Marshall Islands.

In all, Ramer estimates about 135,000 numbers are in co-existence, but none of the major credit reporting agencies has any way of filtering for the problem. And since it's an error and not theft, the FTC won't get involved.

Ramer was unlucky enough to share a SSN and a bad loan from your Pacific Island doppelganger, something that she estimates has probably happened to about 200 other Americans.

"Some Social Security Numbers Duplicated" [Fox News] (Thanks to Marisa!)

US News says that most people are better off paying down the debt before they retire, but that the answer is not clear cut. As such, they recommend the following should be considered when making your final decision:

Compare returns. Some retirees keep their mortgages in hopes of achieving a higher rate of return elsewhere.

Weigh the tax breaks. The interest you pay on your home mortgage is tax deductible. But you only benefit from this tax perk if all of your itemized tax deductions add up to more than the standard deduction that most taxpayers receive automatically.

Preserve your retirement accounts. It can be tempting to dip into your retirement stash to pay off your mortgage. However, your tax bite could jump if you withdrew a large sum from your tax-deferred retirement accounts in a single year.

Consider refinancing. Refinancing from a variable-rate loan to a fixed-rate mortgage can help minimize mortgage payments in retirement.

Keep some savings. Although eliminating your mortgage is a worthy goal, high-interest debt such as credit cards and car loans should be paid off before a mortgage.

Like much of personal finance, the best decision on this subject will vary from person to person based on circumstances, goals, preferences, and so on. But in general, we're of the opinion that a retiree should be mortgage-free before he leaves the work world.

What's your take on the issue?

Should You Carry a Mortgage into Retirement? [US News]

— FREE MONEY FINANCE (Photo: Great Beyond)

And unlike vampires, debt collectors aren't allowed to lie to you. Examiner , well, examines the particulars of what debt collectors can and cannot do. One of the can nots, under the Fair Debt Collection Practices Act, is fib:

Debt collectors may not lie when they are trying to collect a debt. Among other false statements that are prohibited, they cannot falsely claim that they are attorneys or government representatives; that you have committed a crime; or represent that they operate or work for a credit reporting company.

That also are prohibited from saying that you will be arrested if you don't pay your debt and saying they'll seize, garnish, attach, or sell your property or wages unless they are permitted by law to take the action and intend to do so.

The article also says debt collectors can't charge you interest or harass you, and advises that sending a certified letter to a debt collector makes it so he can no longer contact you once he's received it other than to confirm receipt.

Either that or stock up on holy water.

Consumer 101: How to push back when the debt collector calls [Examiner]
(Photo: hagner_james)

Some credit unions participate in the federal loan program and, in the last six months, a growing number also have started offering private loans because of member interest. In some instances, the credit unions are working in groups or with states to make the loans available, often with better rates than other private lenders.

For example, more than 80 credit unions nationwide are participating in the Credit Union Student Choice, which provides undergraduate loans. The average rate for a variable loan was 5.8%. None had origination fees, which typically range from zero to 6%. A borrower needs to belong to a credit union to apply for a loan. Unlike many big banks, credit unions often keep the loans on their own books.

Don't even consider private loans until you've exhausted all other options. Federally backed loans are always the gold standard, in the following order: subsidized loans, unsubsidized loans, and then PLUS loans. If you need to take out a private loan, go over the terms with a fine-toothed comb and pay special attention to the sections dealing with interest rates and repayment options.

More Credit Unions Offer Student Loans [The Wallet]
(Photo: debaird™)

This is a shame. Although many creditors' claims are bogus, the courts may never test them.

No judge sees most creditors' claims

One of the main reasons creditors were so successful in their NAF claims was that few consumers defended themselves. NAF may have been in bed with the creditors, but in cases where the consumer did not answer, arbitrators did not have to stretch themselves to make consumers lose.

Most courts have even less oversight when it comes to defaults, because judges never see the cases. The creditor simply submits an affidavit saying the consumer was served and did not answer. The clerk then enters a default judgment. No judge ever even glances at the file, and the evidence the creditor has to support its claims is largely irrelevant.

This may not be true in all states, but it is still the typical procedure in most.

Consumers may not know their rights or the true cost of litigation

Consumers rarely answer for several reasons. Some are expecting to have their "day in court." Unfortunately, most civil litigation (other than small claims court) happens on paper, and a court date—if any—comes only after the consumer has filed an answer and one of the parties makes a motion.

Further, consumers may think they cannot afford court—and they may be right. Other than small claims court, litigation can be expensive. But consumers who do not defend themselves may end up owing the debt as well as the creditors' litigation costs. If they defend themselves and win, they may be able to recover their costs from the creditor, instead.

Other consumers have simply given up. They may not realize they could win their case if they defended it.

All of this means that creditors' claims will rarely be tested, even though many creditors have no competent, admissible evidence to prove they actually own the debt, much less that the consumer owes it.

Courts should take measures to safeguard due process

Courts should take a lesson from the NAF case, and institute safeguards to ensure consumers do get their day in court, and that creditors are forced to come up with competent, admissible evidence to support their claims. Otherwise, I do not think consumers are getting meaningful notice of their opportunity to be heard, regardless of what the procedural rules may say.

Until state courts step up, consumers will be no better off than they would have been in NAF. But at least in court, the creditors are not paying the judges.

Sam Glover is a consumer rights lawyer, enemy of shady debt collectors, previous Consumerist contributor, and writes the Caveat Emptor blog. His column appears monthly on Consumerist.

(photo: &y)

1. Pay Yourself First: No, not with an Xbox, but by saving religiously. Finance your emergency fund, retirement accounts, and general savings account before buying toys.

2. Harness The Power Of Compounding: J.D. over at Get Rich Slowly writes, "I wish somebody had shown me a chart demonstrating the difference between paying a credit card company 18.9% a month on $10,000 versus a bank paying me 3% interest on the same amount."

3. Avoid Lifestyle Inflation: More money should mean more saving, not more spending. When you get a raise, resist the urge to live a better life, because once you start, it's impossible to go back.

4. Avoid The Chains Of Debt: Again, J.D. says it best: "Debt is slavery." For young people, there is no such thing as "good" debt. Unless you're buying a house or earning a career-making degree, you should not be in debt, period.

5. Save On Things Big And Small: Scrutinize the big buys, yes, but also the little ones. They add up faster than you would expect. Consider your grocery list—you do shop with a list, right?—it's not a series of huge line items, but lots of little missed chances to save.

What We Wish We Knew When We Were Younger [Get Rich Slowly]
(Photo: Material Boy)

Is a true that after 7 years your bad credits go away?

By credit you mean debts, and, for the most part, the answer is yes. However, it depends. Some negative information can stay on your report for up to 15 years. Here's a breakdown of how long each of 10 different kinds of negative items stay on your report, aka, drag down your credit score:

Delinquencies (30 – 180 days): Up to 7 years after the first missed payment, the original delinquency date, after which point you never caught up on your payments again. A 30 days late stops mattering after about a year or two, but 60+ days can last for a long time, notes commenter FDCPA Guy.

Bankruptcy: Ten years from date of discharge for chapter 7, 11, and 12. Seven years for chapter 13. Any accounts involved in the bankruptcy stay on for seven years.

Collection accounts: 7 years from the original delinquency date (ODD).

Charged-off accounts (when the original lender figures they're never going to get money from you and writes it off as a loss and sells it to a collector): 7 years from the ODD, even if payments are late made (this is important to remember because some collectors try to say that by making a payment with them you've reset the debt clock. We covered this more in this post).

Closed accounts: 7 years from date of reported closing if they have delinquiencies, 10 years if there's a positive balance.

Lost credit card: 2 years, if there's no delinquienceies. If there are, then 7 years from ODD.

Child support judgments: 7 years from date judgement is filed.

Small claims and civil judgments: 7 years from date judgement is filed.

Liens: 15 years for unpaid tax liens. 7 years for paid liens.

Hard credit inquiries: 2 years.

Paid positive accounts: 10 years.

Positive open credit information: forever.

That many years sounds like a long time for a lot of these items. How will I ever get credit? Don't worry so much, says commenter Stephmo. They note that a lot of credit-scoring models just look at the last 24 months, "meaning that if you keep your pills paid for 24 months and your score improves and you manage to rebuild credit for 24 solid months - this stuff starts to not matter as much. If you have 24 months of similar high re-established credit, most creditors will consider you "rehabilitated." In many cases, you can even get auto-approved unless they're really targeting specific delinquency types."

[via Experian] (Photo: -heureux-)

"Dear Chase,

Sincerely,
David

That was sent on 7/13 3:53pm, I got a call that at the time I couldnt answer at 4:22pm.

I called back the next morning at 9:44am and reached Lisa who told me she was able to return my rate to the previous level, 12.24% and credit me the difference of $251.71 for the six months of finance charges at the 29.99% rate. While I havent gotten the confirmation email she said I would get, the next day I logged onto my Chase account and can see the $251.71 has been credited to my account.

I'd say this is a happy ending. And now I can pay down my card faster and graduate school with only my student loans.

Oh and just because I'm a math major doesn't means I'm good with money. Money is a whole different kind of beast.""

Mirosiichenko said his company would not employ debt collectors to get its money back if people refused to repay, and promised no physical violence. Signatories only have to give their first name and do not show any documents. "If they don't give it back, what can you do? They won't have a soul, that's all."

"Would you pledge your soul as loan collateral?" [Reuters] (Photo: goldberg)

Chase Bank sent me a notice they are hiking minimum payment fees from present level of 2% to 5%!! This means on my account, where I took their balance transfer offer for over $25K several years ago at a fixed 5.9% rate, that my monthly payment is now going to go up $558 to $930 !!!

This is insane. More people will claim inability to pay or declare bankruptcy with this "strategy." My wife and I are trying to make ends meet with both our salaries reduced by our companies, costs for everything increasing as usual. This news from Chase causes us immediate financial stress, as it will others.

Isn't this behavior the exact kind Congress is trying to prevent???

Greg doesn't specify, but some customers who are subject to this hike aren't given the option to close their accounts at the previous terms. They're just stuck with the new supersized payment.

If you're a Chase customer carrying a large balance who has been hit with this minimum payment increase and you simply can't afford it, consider starting some sort of debt management program. The credit counseling website Vision Credit says that Chase in particular has become very responsive to requests for payment reductions for customers who are in debt management programs—in fact, Chase now gives some credit counselors the ability to lower monthly payments automatically.

Entering a debt management or credit counseling program may seem like a serious change in your financial situation, but it sounds like Chase has already put you there. It's also a lot less nuclear than declaring bankruptcy, and a lot less damaging than letting a balance that large go into default.

Take action now, though—don't struggle to meet the new payment requirements for the next month or so if it's just putting off the inevitable.

"Chase Improves Credit Counseling Benefits" [Vision Credit]
(Photo: Logan Antill)

We found that credit unions are less likely to charge the fees and penalties that the new act hopes to eliminate - and when they do, they charge less than other issuers.

While virtually all banks and other for-profit issuers increase the interest rate if the borrower fails to make a minimum payment on time, most credit unions do not. Similarly, credit union fees for exceeding the credit limit are on average just half those of other issuers. But contrary to industry assertions, more responsible card users don't pay the price. Credit union cards actually offer lower annual fees and longer grace periods than regular cards.

The question is, can credit unions and banks use the same model? "Absolutely," they write:

Banks and credit unions compete for customers in the same market. The primary distinguishing characteristic of credit unions is that they answer to a different group of owners: profits that are not reinvested are paid to the union's shareholder-customers as a dividend, much as investor-owned banks reinvest or pay dividends to their shareholder-investors.

There's one area that will be affected, however: reward programs. But as the authors point out, reward programs are subsidized by lower-tier customers who are poor and/or carry high debt loads, so getting rid of that sort of model may be part of the cost of creating a fairer system overall.

"A Fairer Credit Card? Priceless" [New York Times]
(Photo: frankieleon)

But back to his collection agency side business. According to the Associated Press,

During one call recorded by a debtor, a man who vaguely identified himself as an investigator from "the warrant division" said one victim was about to be "picked up."

"Make sure you have somewhere for your kids to go. Lock up your house. Get some clean clothes, because you're not coming home anytime soon," the caller said.

In reality, authorities said, the business was run not by lawmen, but convicted felons. Its owner was former drug dealer who goes by the nickname "Bags of Money" and served 13 years for attempted robbery.

According to the Buffalo newspaper Business First, Boyland's debt collection agencies included:

Central Resource Management, Final Claims Asset Locators, Final Control Asset Locators, Interchange Payment Solutions, Next Step Services, Portfolio Asset Assurance, Silverbay Services, and Teleport.

"NY shuts down debt collection company run by felon" [Associated Press]
"AG shuts door on collection operation" [Business First of Buffalo]

RELATED
WhoCallsMe thread on Boyland [whocallsme.com]

[Experts] say many credit card issuers have revised internal guidelines to give front-line employees the power to cut deals with consumers. The workers do not even have to wait for customers to call and ask for a break.

"Now it's the card company calling you and saying, ‘Let's talk turkey,' " said David Robertson, publisher of the credit industry journal The Nilson Report.

One thing to be aware of is after six months of non-payment, "regulations require the card company to reduce the value of the debt on its books to zero." In addition, collection companies are buying old debt at about a third of what they were paying before the recession. As that six month deadline approaches, banks are far more willing to negotiate a lower amount, which is good for you (assuming you can't pay the full amount) and better for the bank than selling the debt for 5 cents on the dollar.

Just remember the costs of going this route: a massive hit on your credit score, and the amount of the debt that's forgiven will come back to haunt you as taxable income.

"Credit Bailout: Issuers Slashing Card Balances" [New York Times] (Thanks to Megan!)

RELATED
"Got Debt So Bad It's Defaulted? 3 Ways To Deal"
(Photo: Zanastardust)

Given the state of the economy today, is it better for me to reduce my 401k to a minimum and use the extra funds to pay off my credit card debt? This is a good time to put money into the markets, based on my admittedly limited understanding, but with interest rates going through the roof (my personal Chase card went from 12.99 to 23.99), I would like to kick down my cc debt (now at around $6,000) faster. I'm currently only putting 6% in my 401k, and I'm fairly young (35). Have you advice for me?

Does your employer do any sort of matching? If so, keep at least enough of your salary directed to your 401k to earn that free investment money. Beyond that, however, we think it comes down largely to whether or not you're disciplined enough to see this strategy through to the the end as quickly as possible; it's probably not going to be worth it if you end up amassing revolving debt again.

If you can stick to the plan, and then re-route everything you were paying on the Chase card into your 401k as soon as you pay off the card, it could work out in your favor. We say this after running some sample numbers through Bankrate's calculators. We got the idea from former financial planner Gary Foreman at stretcher.com, who suggests using these Bankrate tools to estimate your net worth after n years.

What will it take to pay off my credit card? [Bankrate.com]
401(k) Savings Calculator [Bankrate.com]

Here's what we did. To keep it simple, we assumed no raises over the next 4 years, as well as no employer matching contribution, and we started the 401k balance at $0. Instead of true net worth, we're only looking at the total net worth of the 401k after 4 years after you subtract the cost of paying off the credit card.

Annual Salary: $40,000
Currently paying 6% into 401k, or $2400/yr, $200/mo
Debt: $6,000 @ 23.99% APR

Let's say your current Chase payment is $200/mo. At that rate, it would take 47 months to pay off, and cost a total of $9,400.

Let's say you cut your 401k contribution in half from 6% to 3% of the 40k salary—in other words down to $100 a month. You added the other $100 to the $200 you were already paying Chase. Under this new $300/mo payment, it would take 26 months to pay off, and cost a total of $7,800.

Now let's look at how much your 401k would be worth under both scenarios, assuming an annual rate of return of 8%.

If you leave things as they are and contribute 6% a month over four years, your 401k would be worth $11,278.

However, if you dropped your contribution to 3% for two years, but then bumped it up to 12% for the remaining two years, it would be worth $13,448. We say bump it to 12% because we're imagining that after you paid off the Chase card, you'd have that extra $300 a month that you could re-allocate to your 401k, meaning you could put $400 a month total into it for the remaining two years of this plan.

Scenario 1 (leave things as is):
Value of 401k after four years: $11,278
Total cost of Chase debt: $9,400
Total net worth: $1878

Scenario 2 (temporarily reallocate funds):
Value of 401k after four years: $13,448
Total cost of Chase debt: $7,800
Total net worth: $5648

We fudged a lot on this estimate. For example, we rounded up by 1 month on the first scenario and down by 2 months on the second in order to use the Bankrate tools, which slightly exaggerates the difference between the two final numbers. We also didn't take taxes into account, since you'll be paying more if you reduce the amount going into your 401k, and that should slightly work in favor of Scenario 2.

But even going by such rough estimates, you can see that the second scenario is better—IF you can follow a couple of rules to the letter:

• As soon as you pay off the debt, reallocate that monthly payment to your 401k to make up for the lean times.
• Don't rack up any more revolving debt.

Having said all this, you should really run the real numbers and try to be more precise if you want a more certain answer. Or go see a financial planner.

(Photo: dana.ocker)

I run first thing in the morning. I get it done early so that I can spend the rest of my day on other things without the need to run hanging over my head. And having done this, I feel great. When I'm done with a 12-mile run on Saturday morning, I feel like the king of the world. I'm filled with confidence. In the same way, I felt empowered when I learned to pay myself first, to save and invest for my future before I paid my bills.

Other comparisons include forgiving yourself and getting back on track if you skip a day, and removing passive barriers (JD goes to bed with his running clothes on to make it easier for him to get into the mode of starting his run the next day). Even if you're not a runner, there's sure to be some debt-reducing concepts in his post that can help you out.

The Loneliness of the Long-Distance Debtor [Get Rich Slowly] (Photo: Paul Keleher)

A visual history of the credit card. [The Big Money]

(A "deadbeat" is industry slang for a customer who doesn't bring in much revenue—typically someone who never carries a revolving debt.)

Of course, one of the ways to make deadbeats profitable is to re-introduce annual fees, which is something the industry threatened anyway in the weeks before Congress passed the CARD act. It also helps to find customers who are deadbeats but who still spend a lot every month—which means rewards programs will likely be emphasized.

AdAge writes,

Charge-off-weary credit-card issuers, who still collect the 2% to 3% fee paid by merchants whenever a sale is made, will seek out customers who charge thousands of dollars a month and always pay off their balances.

"The industry has become so risk-averse that even any kind of balance makes them nervous," said Curtis Arnold, founder of CardRatings.com. "That higher end of the market — folks with above average spending and above average credit — will be sought-after."

"I do think annual fees will come back, but I also think there will be rewards for everyone in every possible way — anything you want," Mr. Robertson said. "There will be much more reliance on loyalty programs and making them as robust as possible ... to retain existing customers."

Is this the silver lining to the credit crunch—financially responsible customers will be treated like worthwhile customers again?

"Credit-Card Issuers to Market to 'Deadbeats'" [AdAge] (Thanks to pdp!)
(Photo: Stewart)

Consider the residents of Miami, Fla. The metropolis has fully felt the effects of the real estate crash, including a 12% decrease in hotel occupancy for the first quarter of 2009, an increase in unemployment to 8.5% in March 2009 and a 9% year-over-year increase in foreclosures for April 2009. Yet, on average, Miamians owe more of their personal income to credit card companies than those in any other area of the U.S.

While the median household income is a moderate $43,333—the national average is $50,233—average credit card debt in each home is $9,797.38. That means to pay off outstanding credit card bills, debtors would have to forgo 22.61% of their incomes.

Other areas where Americans continue to spend far more than they earn include Tampa, Fla., where the average household owes 17.1% of its total income; Los Angeles, where it's 16.81%; Jacksonville, Fla., which owes 16.38% on average; and Orlando, Fla., indebted by 16.37%.

Other cities with higher than average debt ratios are Austin, Indianapolis, Charlotte, and Cleveland.

"Worst Cities For Credit Card Debt" [Forbes]
(Photo: Birdies100)

So what was the argument about? Davidson takes issue with Warren's "point of view," and wants her to "put aside [her] pet issues" until the financial crisis is over. When she's not keeping an eye on the bailout, Warren is a Harvard law professor who teaches contract law, bankruptcy, and commercial law. She's extremely interested in debt and its affect on the American family — a topic about which she has co-authored several books.

This concerns Davidson because he is worried that Warren, who he introduces as someone who is on Fresh Air a lot for her work on "credit and bankruptcy and financial stuff," is in "opposition to the banks." Davidson maintains that TARP has "one problem to solve" which is not to "look at 30 years of inequity to the American family or the other issues that she happens to care passionately about."

Warren defends herself, claiming that the debt crisis and the banking crisis are the same thing, and that you can't have a healthy banking system without considering the American consumer.

The Colombia Journalism Review has a partial transcript of the interview, or you can listen to the entire thing here:

ADAM DAVIDSON: What it feels to me is what you are missing is that - I think we put aside your pet issues. We put them aside. We put them aside until this crisis is over.

ELIZABETH WARREN: The cr- What you're saying makes no sense. Now come on. [interpolate Davidson sputtering and attempting to interrupt throughout.] It makes no sense. On an emergency basis, on one day, one week, one month, there's no doubt in my mind we've got to step in, we've got to make sure we have a functioning banking system. I think I've said that like nine times now. Of course we've got to have a functioning banking system.

DAVIDSON: Wait a minute. I want to make you go further. I want to make you madder before I -

ELIZABETH WARREN: No no no. [Davidson snickers] We're now at what - we're now seven, eight months into this. And it's the second part of what you said. We can't do anything about the American family until this crisis is over? This crisis will not be over until the American family begins to recover. [More Davidson sputtering.] This crisis does not exist independently -

DAVIDSON: That's your crisis.

ELIZABETH WARREN: No it is not my crisis! That is America's crisis! If people cannot pay their credit card bills [Davidson tries to interrupt] if they cannot pay their mortgages -

DAVIDSON: But you are not in the mainstream of views on this issue. You are not -

ELIZABETH WARREN: What, if they can't pay their credit card bills the banks are gonna do fine? Who are you looking at?

ELIZABETH WARREN: Who says a bank, a bank is going to survive - Who is not worried about the fact that the Bank of America's default rate has now bumped over 10%? That's at least the latest data I saw. So the idea that we're going to somehow fix the banks and then next year or next decade we're going to start worrying about the American family just doesn't [Davidson talking over] make any sense.

...

DAVIDSON: The American families are not - These issues of crucial, the essential need for credit intermediation are as close to accepted principles among every serious thinker on this topic. The view that the American family, that you hold very powerfully, is fully under assault and that there is - and we can get into that - that is not accepted broad wisdom. I talk to a lot a lot a lot of left, right, center, neutral economists [and] you are the only person I've talked to in a year of covering this crisis who has a view that we have two equally acute crises: a financial crisis and a household debt crisis that is equally acute in the same kind of way. I literally don't know who else I can talk to support that view. I literally don't know anyone other than you who has that view, and you are the person [snicker] who went to Congress to oversee it and you are presenting a very, very narrow view to the American people.

ELIZABETH WARREN: I'm sorry. That is not a narrow view. What you are saying is that it is the broad view to think only about trying to save the banks [Davidson sputters] and say "Hey! the American economy will recover at some point and we'll worry about the families [Davidson talking over]." I think that is the narrow view and I think I have the broad view. The broad view is that these two things are connected to each other. And the notion that you can save the banking system while the American economy goes down the tubes is just foolish.

You can listen to NPR's reaction to the backlash here. The conclusion was that NPR should have treated Ms. Warren with the same level of respect that they gave to another recent interviewee — Tim Geithner.

So, bad manners aside, who is right?

So That's Why the Press Won't Cover Elizabeth Warren! [CJR]
Hear: Elizabeth Warren Checks In [NPR Planet Money]
Hear: Follow Suit [NPR Planet Money]

There are piles of evidence that people are bad decision makers when it comes to how they use credit cards. Even when presented with full and fair information, they often make decisions that are not in their own economic best interest.

Here are three examples from the article:

• We're not always good at picking the best teaser rate offer, because we fail to take into consideration the length of time of the special rate and the true likelihood that we'll pay off the balance during that time.
• We don't give penalty and other fees enough weight when choosing a card, again because we don't seriously consider the possibility of paying late or going over the credit limit.
• We're frequently willing to pay more if we pay by credit card. Kiviat writes, "In one experiment, Drazen Prelec and Duncan Simester of the Massachusetts Institute of Technology found that people were willing to pay twice as much for basketball tickets when they were using a credit card as opposed to paying cash."

The bill before the Senate does try to address some of these psychological stumbling blocks, by requiring credit card providers to show customers how long it will take to pay off a debt, and how much interest it will cost, if they only pay the minimum amount.

Regardless of what happens on the provider side of the issue, the next time you're shopping around for a credit card, it's probably a good idea to be more pessimistic about your future than you normally would be, so that you don't dismiss things like hidden fees, skyrocketing rates, and the possibility that some emergency will leave you carrying an unexpected balance.

"The Real Problem with Credit Cards: The Cardholders" [Yahoo] (Thanks to PewPew!)
(Photo: richardmasoner)

1. IGNORE THEM

Ignoring your debts is not really a good option, but it is the option many people take, hoping their creditors will forget. But creditors have long memories, and they like to exploit lengthy statutes of limitation. The longer you go without doing something, the bigger your debts will get.

Credit card companies, for example, often hang onto your debt for as long as they can, racking up late and over-limit fees and 29% interest (or more) before they must write off the debt. Then they let it sit—or sell it—while it accumulates interest at that high rate for as long as possible. When they sue you a few months before the statute of limitation expires, the debt is twice what it was, or more.

Ignoring your defaulted debts means serious damage to your credit reports, frustrating phone calls from debt collectors, and possibly a lawsuit down the road. If you are lucky, your debt will be sold a few times and end up with someone who cannot prove they own it. Even if you beat the debt in court, you will have expended many hours and dollars for a Pyrrhic victory, since you may still wind up with negative information on your credit report, plus an attorney's fee.

So option one really isn't an option. Let's look at the other two.

2. NEGOTIATE A SETTLEMENT

You could just pay up, but it never hurts to ask for a discount, especially when a lot of what you "owe" probably consists of ridiculous fees and interest. Always ask to settle the debt for less, and suggest a compromise of your own in return.

A few suggestions:

1. Just like used cars, negotiate for a total price, not for a monthly payment;
2. Negotiate an "installment plan" only after arriving at the total price;
3. Record the phone call, asking for permission if your state requires it—just explain that you want to make sure you have a record of the settlement; and
4. Demand a confirmation of the agreement in writing.

Before you agree to anything, you should also look into the tax consequences of settling. If you admit you owe the debt, any amount the creditor "forgives" may be considered income for tax purposes. Depending on the size of the debt, this could be a lot of money, so it makes sense to talk to an accountant or at least do some research on your own.

3. FILE FOR BANKRUPTCY PROTECTION

Creditors, whether banks, doctors, or debt buyers, want you to think "bankruptcy" is a dirty, dirty act, done only by deadbeats and ne'er-do-wells. It's not. It's a perfectly legitimate tool for conducting business. Witness the number of companies making use of it these days.

Bankruptcy is sometimes called a financial weapon of mass destruction, but I prefer to think of it as a Project Genesis for your finances. Bankruptcy can give you a clean start, hopefully so you can avoid getting into the same problem with credit all over again.

When should you consider bankruptcy? Take a good, hard look at your finances. Can you see a way out of your debt? If not, it is probably time to talk to a bankruptcy lawyer.

Sam Glover is a consumer rights lawyer, enemy of shady debt collectors, previous Consumerist contributor, and writes the Caveat Emptor blog. His column appears the first Monday of every month on Consumerist.

(Photo: walknboston)

1. Savings Matter: Learning to sock away funds not only teaches you to do more with less, a lesson you will carry with you for life, but it gives you the financial cushion to sustain a job loss or emergency without falling into debt.

2. Find And Read The Fine Print: Don't let page-long consent agreements stare you down. Instead of blindly signing on the dotted, take five minutes and read your contracts.

To avoid that headache, look at agreements and contracts as though you were on a scavenger hunt for key facts: How can you end this agreement? How can the other side terminate the deal? What exactly will you be paying and when? And what happens if a payment is late or missed? Knowing the significant details will help you make better decisions and avoid much grief later on.

3. Focus On The Total Cost: Resist the urge to draw out your loan's lifespan in exchange for smaller monthly payments. Remember, companies don't make suggestions out of the goodness of their hearts. They don't even have hearts! Always consider for the full, long-term implications of any financial decision.

4. Debt Is The Great Divide: Debt is a shackle that binds itself to the borrower. Debt can be a powerful tool for financing a home or education, but it drastically limits your financial freedom. Treat it warily, especially with credit cards.

5. There Is A Permanent Record: It's called your credit score, and it will follow you for life. Your credit score serves as an objective measure of your fiscal responsibility. The lower your score, the more expensive credit will be. Higher scores open doors and lower costs, allowing you to finance your future for less.

Five Money Lessons for New College Grads [The Wall Street Journal]
(Photo: CarbonNYC)

From the study:

• Students have an average of 4.6 credit cards!
• 84% of students have at least one credit card.
• The average (mean) balance is $3,173, the highest ever recorded in the study's history.
• The median balance was $1,645 with 21% of students having between $3,000 and $7,000 in debt.
• 39% of students already have a credit card before they arrive on campus.
• Median debt of those students was $939, up from $373 in 2004, with only 15% having a $0 balance.
• Students graduate with an average of $4,100 in credit card debt with almost 20% having more than $7,000 owed on credit cards.
• A third of students rarely or never discussed credit card use with parents.
• 60% were surprised how high their balances were, and 40% charged items knowing that they couldn't pay for them.

How undergraduate students use credit cards: Sallie Mae's national study of usage rates and trends, 2009 [Sallie Mae]
How Students Use Credit Cards [Bargaineering]
(Photo: me and the sysop)

That's probably because fewer respondents are receiving refunds this year. In 2008, 20.0% said they did not receive a refund, while this year 33.9% said they didn't. It's also probably because 56.74% agreed with the statement, "I have made a concerted effort to cut back in the past few months because of the weakening U.S. economy," compared to doing nothing or saying that they save money regardless.

PriceGrabber also asked those who are spending their refunds just what they plan to spend them on. Here were the responses:

Note: Whenever we post survey stuff like this, a lot of you ask for details about how the survey was constructed. We're one step ahead of you this time—we asked for the same info, and here it is.

2009 Tax Rebate Survey Methodology

For the 2009 PriceGrabber.com Tax Rebate Survey conducted between April 7, 2009 and April 22, 2009, PriceGrabber.com designed and fielded a Web survey to reach each consumer who recently made an online purchase from one of our 13,000 retailers and sellers. After completing an online purchase, each online consumer received an email confirmation, which included the URL to the Web-based survey. Of a total of 359,233 US online consumers invited to take the survey between April 7, 2009 and April 22, 2009, up to 1,574 adequately completed the survey. The online survey was comprised of 7 close-ended questions. Respondents were asked about their plans for their tax refund money, their situation in the current state of the economy, and additional demographic data.

The sample set reflects the online consumer population by age, gender, neighborhood type and total income level over the 15 days the survey was administered. Of the total respondents that opened the survey, 86.5% completed the survey and 13.5% partially completed the survey. The final 1,574 respondents used in this study were controlled for quality. Respondents that incorrectly answered a trick question and/or completed the survey considerably faster than the average respondent speed were removed from the sample set. The maximum sampling error for the survey data based on the sample of 1,574 respondents is +/- 3 percentage points at the 95% confidence level.

(Photo: NickStarr)

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The Word - Have Your Cake And Eat It, Too
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"April 14, 2009: The Word - Have Your Cake And Eat It, Too" [Colbert Nation]

From Vanity Fair:

Just after October 6, 2008, when Iceland effectively went bust, I spoke to a man at the International Monetary Fund who had been flown in to Reykjavík to determine if money might responsibly be lent to such a spectacularly bankrupt nation. He'd never been to Iceland, knew nothing about the place, and said he needed a map to find it. He has spent his life dealing with famously distressed countries, usually in Africa, perpetually in one kind of financial trouble or another. Iceland was entirely new to his experience: a nation of extremely well-to-do (No. 1 in the United Nations' 2008 Human Development Index), well-educated, historically rational human beings who had organized themselves to commit one of the single greatest acts of madness in financial history. "You have to understand," he told me, "Iceland is no longer a country. It is a hedge fund."

Wealth tripled, the stock market multiplied nine times, and a country the size of Kentucky with as many residents as Peoria, IL found itself at the forefront of investment banking. Trouble is, they didn't really have any idea what they were doing.

Marketplace Money took a look at how Iceland is coping with their bankrupt nation — (their debt is 850% of their GDP). Apparently, they're eating porridge and slowter, a kind of haggis.

Teitur Thorkellsson: It's made from intestines and blood and fat of the sheep, meaning everything but the meat.

Teitur Thorkellsson says that during the boom no one bothered with slowter. Now, it's become almost chic.

Thorkellsson: Right after the economic crash, then this became the most fashionable thing ever. You know, families were getting together and friends were invited to stand with their hands bloody in the kitchen making this slowter food, because it's extremely cheap.

And if you thought our mortgage situation was bad, check out what Iceland was doing. They were using something called a foreign currency mortgage:

Vanity Fair:

For the past few years, some large number of Icelanders engaged in the same disastrous speculation. With local interest rates at 15.5 percent and the krona rising, they decided the smart thing to do, when they wanted to buy something they couldn't afford, was to borrow not kronur but yen and Swiss francs. They paid 3 percent interest on the yen and in the bargain made a bundle on the currency trade, as the krona kept rising.
...
It must have seemed like a no-brainer: buy these ever more valuable houses and cars with money you are, in effect, paid to borrow. But, in October, after the krona collapsed, the yen and Swiss francs they must repay are many times more expensive. Now many Icelanders-especially young Icelanders-own $500,000 houses with $1.5 million mortgages, and $35,000 Range Rovers with $100,000 in loans against them.

Whoops.

Marketplace Money talked to a woman with a foreign currency mortgage who is about to lose her home:

Hognadottir: It has been good for Iceland.

Beard: The collapse?

Hognadottir: Yes, in a way. Because the greed of the people. There was so much greed. But now people are more caring. We're becoming more human again. And that's what I like. And if I lose my house for that, that's a good cause.

Wall Street on the Tundra [Vanity Fair]
Iceland Warms Up to Frugality [Marketplace Money]
(Photo:Kristin Sig)

(Photo: qnr)

10. "OMG emergency!"
9. "What a deal!"
8 "It's only a widdle bit of money."
7. "I'll only be paying a widdle bit on it each month."
6. "The reward points I'm getting make up for it."
5. "It's for my business. "
4. "I can claim it as a business expense on my taxes."
3. "I deserve a treat."
2. "0% APR means it's free money!"
1. "I'll make a bunch of money after college and pay it off then."

What's your favorite debt-inducing lie? Sound off in the comments. [via monycentral] (Photo: * Photography by Chris *)