Lower rates easing burden for some ARM borrowers

While Congress and the White House continue working on how to help homeowners with adjustable rate mortgage resets that have sent monthly payments through the roof, some relief is already on the way, thanks to lower interest rates.

ARM rates tend to follow movements in the short-term federal funds rate, which the Federal Reserve has lowered by 3.25 percentage points since last September. The index used for most hybrid and one-year ARMS, the one-year Treasury Constant Maturity, has dropped 2.3 percentage points in that time.

How much does that help? ARMs typically tack a margin of 2.75 percentage points onto the TCM index rate. Thus, a 3/1 ARM that had an initial rate of 5 percent when it originated in May 2005 would have reset to 7 percent this month if interest rates had stayed where they were before the Fed started cutting rates last year (assuming that annual adjustments are capped at 2 points, which is typical of many ARMs). Instead, the Fed cuts have brought the TCM index down to 1.93 percent, which results in a slight drop in rate—to 4.625—when the ARM resets. The drop cuts the monthly payment on a $300,000 mortgage to $1,547 from  $1,610.

The rate cuts are “absolutely” helping ARM borrowers, says Keith Gumbinger, vice president of HSH Associates, a mortgage-rate publisher in Pompton Lakes, N.J. “Even where they haven’t completely obliterated rate increases, they’ve ameliorated them.”

Lower interest rates only go so far, however, if the terms of the loans are stacked against the homeowner, as is the case with many subprime ARMs, according to data in a recent study (PDF download) by the Federal Reserve Bank of New York. For example, the 2/28 ARM, a subprime loan offered by New Century Financial, the second-biggest subprime originator in 2006, charged a “teaser” rate of 8.64 percent on average the first two years before resetting. Like many subprime mortgages, this one was tied to the 6-month London Interbank Offered Rate (LIBOR) index, with a whopping 6.22 points added as a margin.

So if last September’s 5.4 percent LIBOR rate remained in effect this month, this ARM would have reset to 10.13 percent. (A 1.49 point initial rate adjustment cap limits the hike somewhat.) Unfortunately, these loans reset every six months, so the rate would jump again to 11.62 percent in November (again assuming a 5.4 percent LIBOR). That would have added $6,610 to the mortgage’s annual cost.

With the recent rate drops, however, this ARM would reset to 8.9 percent (assuming the applicable LIBOR for a May reset remains where it stands now and for the rest of this year). That still increases the annual cost of the mortgage, but only by $770. “Subprime borrowers are not getting a lot of relief, but they’re no longer getting hammered,” Gumbinger says.

As if the New Century 2/28 was not anti-consumer enough, it also came with an interest rate floor equal to the teaser rate and a lifetime rate cap of 15.62 percentage points. Fortunately, 2/28 mortgages are now virtually defunct.—Jeff Blyskal

Proposed rules take aim at abusive credit card and bank practices

Federal banking regulators this week proposed new rules to end some of the most criticized practices consumers face when they use their credit cards or overdraw their bank accounts.

The proposal, adopted by the Federal Reserve Board, Office of Thrift Supervision, and National Credit Union Administration is headed for a 75-day public comment, after which it could be modified. You can read a 2-page summary or the 269-page full proposal online. (Start on page 153 to see the actual rule.)

Among the changes, the new rules would:

• Force card issuers to give consumers a reasonable time, such as 21 days (including mail time), to make a payment before imposing late charges and other penalties.
• Limit the practice of applying payments to the lowest-rate portion of a multi-rate balance, such as the 0 percent portion balance instead of a 21 percent cash advance portion.
• Prohibit issuers from raising rates on existing balances, unless there is a variable rate, a promotional rate that is lost or expires, or a cardholder's payment is delinquent for at least 30 days.
• Eliminate the two-cycle method of calculating interest rates, which can penalize cardholders who occasionally carry a balance.
• Stop issuers from charging credit card account fees or security deposits if those fees or deposits would use up the majority of the available credit limit. Fees that exceed 25 percent of the credit limit would have to be spread over a year instead of being charged as a lump sum at the account opening.
• Prevent issuers from charging over-limit fees when a retailer's hold is the only reason the consumer exceeded the limit. Gas stations, hotels, restaurants, car rental companies, among other retailers, often place a hold on a portion of the credit line in anticipation of how much consumers may charge after, for example, completing use of a rental car or a hotel stay. Those holds can take days to disappear, causing consumers to unwittingly exceed their credit limits.
• Prohibit banks from charging a fee after paying an overdraft unless they have first given customers a chance to opt-out of overdraft payments. The rule would apply to any transaction that causes the overdraft, including use of checks, debits card, ATM withdrawals, and recurring payments.

The proposal drew praise from consumer advocacy organizations, including Consumers Union, which has long been calling for credit card reform. However, the organization issued a statement that said the rules need to go further.--Anthony Giorgianni

Experian challenges LifeLock on fraud alerts

Experian, one of the three giant credit reporting bureaus, recently filed a lawsuit in U.S. District Court in California, designed to stop LifeLock from selling a service that, among other things, puts temporary fraud alerts on customers' credit reports and automatically renews them every 90 days. LifeLock charges $10 per month or $110 a year for this service.

Fraud alerts warn prospective lenders that a credit applicant might be an ID thief, and they should take steps to verify the identity of the borrower. Under the federal Fair Credit Reporting Act, consumers who make a good-faith assertion that they suspect they are, or are about to become, a victim of identity theft, have a right to file such alerts on their own—for free. That’s one reason we criticized LifeLock recently in the Consumer Reports Money Adviser.

That hasn't stopped LifeLock from selling the service—heavily advertised through TV, radio, and newspaper ads featuring LifeLock's CEO Todd Davis, who claims the company offers protection so ironclad that he reveals his actual Social Security number. LifeLock says it's now adding 120,000 new subscribers a month and is closing in on 900,000 total customers.

Experian’s central argument is that the Fair Credit Reporting Act “does not permit the placement of an initial fraud alert by corporations such as LifeLock.” But the law does allow a “consumer” to directly place a fraud alert or an “individual” representing a consumer to place fraud alerts; it does not specifically say "corporations."

Experian also argues that LifeLock violates the FCRA, which allows temporary fraud alerts lasting only 90 days, saying that it doesn't anticipate a series of 90-day alerts that are perpetually renewed. Consumers who have had their identities stolen can get a 7-year extended fraud alert if they file an ID theft report.

The Federal Trade Commission has made no policy statement on the matter, but offers advice to consumers on whether or not to buy services that claim to protect against identity theft.

Davis says Experian’s suit is “frivolous.” Experian’s retort: “This is not a frivolous thing we’ve done. We don’t file frivolous suits,” says Donald Girard, a spokesperson.

Protect yourself
As Davis himself admits, a fraud alert “isn’t 100 percent bulletproof” protection against identity theft. Consumers Union, our parent organization, recommends that you consider using a “security freeze” to completely block access to your credit reporting file by all prospective lenders. This would stop ID thieves from opening new accounts in your name. You can unfreeze your file with a personal identification number. As of last year, all three credit bureaus allow anyone to freeze and thaw their credit report as they wish for about $10, less in some states, and for free if you've been the victim of ID theft. Click here for more information.—Jeff Blyskal

Safeguarding your credit and debit numbers

With the Hannaford heist still in the news, here are further tips on how to protect your financial information, courtesy of “Money Mom,” who blogs on our parent organization’s Web site, ConsumersUnion.org.

When cyber crooks have your number

The latest data breach involving consumers’ credit- and debit-card numbers has hit the Hannaford Brothers supermarket chain, which operates primarily in New England, and the related Sweetbay supermarkets in Florida.

The company says cyber crooks made off with customers’ card numbers and expiration dates but not their names or addresses.  It offered this advice to anyone who might be affected.

For tips from Consumer Reports on preventing such thefts in the first place and dealing with one if it happens, click here.
 

30 years without a credit card, part 2

Last week I wrote a blog item that set off a surprisingly spirited discussion here and on Web sites such as The Consumerist.

In it I mentioned that I’ve gone three decades without a credit card—at least the kind that extends revolving credit. As I noted in the blog, I do have an American Express card, which has to be paid off in full each month.

Some of the readers who posted comments had favorable things to say; others thought I was splitting plastic hairs in saying the card I do carry isn’t technically a credit card. The words “smug” and “self-satisfied” even came up a time or two.

Quite a few commenters protested that anyone with the proper discipline could use a credit card without incurring onerous fees or paying outrageous interest.

I don’t disagree. I would point out, however, that lots of people do get in trouble with their credit cards, and there’s reason for concern that the situation is becoming worse. Here’s one recent study to that effect.

What may be most remarkable in all of this is how central credit cards have become to our lives. How did so many of us become so comfortable taking out a loan, in effect, every time we buy a burrito or a bottle of shampoo?

And whether or not we pay any interest on that loan, businesses are presumably adding something to the cost of their wares to cover the fees the card companies impose on them.

The genius of the credit-card companies is that they have managed to insert themselves into not just the big transactions where people might not have enough cash in their wallets but into the smallest, most everyday ones. This part is equally true for the card I carry, of course.

You’ve got to hand it to them, I suppose. But you don’t have to hand it to them with interest.

Comments, anyone?

—Greg Daugherty

Greg writes the “Retirement Guy” column in the Consumer Reports Money Adviser newsletter.

Sharper Image demonstrates perils of gift cards

Holders of Sharper Image gift cards have been getting a hard lesson in some of the downsides of gift cards.

Some three weeks after the specialty retailer filed Chapter 11 bankruptcy on Feb. 19, owners of gift cards and merchandise certificates are facing confusing options about what to do with those obligations, which the retailer initially said it wouldn't honor, at least for the time being.

On March 7, the U.S. Bankruptcy Court for the District of Delaware granted the retailer’s request to resume honoring its cards and certificates—but only for customers who make a purchase of at least twice the value of the card or certificate. So to use up a $50 gift card, a customer would have to buy at least $100 in merchandise.

Initially, the San Francisco-based retailer specifically told the court that it was not seeking interim authority to redeem its estimated $42.6 million in outstanding cards and certificates, including those cards it sold to Discover and American Express for use in those companies’ membership rewards programs. But that was before Feb. 27, when competing retailer Brookstone took advantage of the situation by offering to give anyone who surrenders a Sharper Image gift card, merchandise certificate, or similar obligation a 25 percent discount off their entire purchase at any of Brookstone’s 314 stores nationwide. (Brookstone’s offer does not apply to Web site purchases or to Sony, Celestron, Bose, Panasonic and Tempur-Pedic products.)

In its March 3 motion to the court, Sharper Image wrote:  “Brookstone is only one of undoubtedly many Sharper Image competitors that will attempt to capitalize on the fact that Sharper Image is currently prohibited from honoring its gift certificate and merchandise certificate programs by instituting promotional programs designed to draw customers away from the Sharper Image.”

The case is just one more reason why holders of gift cards, merchandise certificates, store credits and similar obligations should use them as quickly as possible and think twice about purchasing them in the first place. Last December, Consumer Reports Money Adviser reported on the problems with gift cards, including the risk of issuer bankruptcy. With growing problems in the economy, other retailers might also go under, leaving consumers with worthless obligations.

“It is not a surprise to us that people are having problems using these cards once [the store goes] into bankruptcy. The general advice is spend them quick. That advice is even better right now,” said Evan Johnson, administrator the Montgomery County, Md., Office of Consumer Protection. Johnson conducts an annual survey of gift cards to determine the fees and other conditions that card issuers impose.

The case could end up testing relatively recent state laws in California and Washington that prohibit retailers from using bankruptcy as a reason not to honor gift cards and certificates. In those states, the value of those obligations is deemed to be held in trust for consumers and not the property of the company. California last week tried unsuccessfully to get a state court to intervene. Attorneys general in both states say they are studying whether to raise the issue in the bankruptcy court.

YOUR CHOICES
If you have Sharper Image gift cards and merchandise certificates, what should you do? Here are your options:

• Redeem the card or certificate at Sharper Image. You can use it only if you spend twice its value. While that may seem unfair, especially if you received the card as a gift, it could be your easiest and least-costly option. The offer might not be valid at the 90 Sharper Image stores that the company plans to close as part of its reorganization plan, about half its outlets. Also, if Sharper Image fails, it won’t be there to honor its return policies or any other rights you may have if a products turns out to be defective.

• Redeem the card or certificate at Brookstone. In this case, you’d receive a 25 percent discount on your entire order if you surrender a Sharper Image gift card, rewards card, gift certificate, or merchandise credit. You won’t get the entire amount of the card or other obligation unless your purchase equals at least four times its value. For example, someone who has $50 on a Sharper Image Gift card would need to purchase $200 in Brookstone merchandise to receive the card’s full benefit. On the other hand, if your purchase exceeds $200, you would end up saving more than the value of your card. Brookstone spokesman Robert Padgett said a Brookstone store in Atlanta sold Sharper Image card holders three $4,500 massage chairs, giving a 25 percent discount on each.

• File a challenge. If the Sharper Image gift card or certificate was purchased recently using a credit card, the credit cardholder can try challenging the purchase with the credit card issuer. But this might not work. For one thing, you might already be past the time limit on such claims. Also, the credit card company might not agree with your claim.

• Wait out the bankruptcy. This is probably the least attractive option. For this to work for you, Sharper Image must reorganize successfully and resume honoring its gift cards and merchandise certificates without conditions. In its court filings, the company reported that as of Jan. 31, it had $251.5 million in assets and $199 million in debt. If Sharper Image goes out of business, card and certificate holders will have to line up behind the secured creditors for a piece of the liquidated assets. Typically, consumer creditors receive pennies on the dollar, if anything.

If you choose to roll the dice with this option, send a proof of claim form to Sharper Image Corp. Claims Processing, c/o Kurtzman Carson Consultants LLC, 2335 Alaska Ave., El Segundo, Ca 90245 (tel.# 866-381-9100). Be sure to designate yours as a priority claim. To do this, check the box next to “Up to $2,425 of deposits toward purchase, lease or rental of property,or services for personal, family, or household use,” and enter the entire amount on the line labeled  “Amount entitled to priority." This may place you ahead in the line of unsecured creditors.— Anthony Giorgianni

30 years without a credit card

With Americans’ credit card debt at record levels and growing at a rapid pace, one of our staffers shares his secret for staying out of credit card trouble. It's simple—he doesn’t have any credit cards.

I recently reached what I bet is a rare milestone: I have now gone 30 years, basically my entire working life so far, without a credit card.

This may make me seem like some kind of nut, or at least an anachronism. You know, the type of person who still isn’t convinced that indoor plumbing is worth the investment.

I do have what’s sometimes called a “travel and entertainment” (as opposed to credit) card, in my case American Express. I’m not here to plug Amex, but I believe a card like that, which has to be paid off in full each month, imposes a certain restraint that could keep many of us out of financial trouble.

It’s almost impossible to go through life without some sort of plastic, of course. Try renting a car or booking a hotel room, for example. If you have the discipline to carry a conventional credit card and pay it off in full each month, bully for you. But many of us clearly don’t have that discipline.

Debit cards are another option, but they have their own problems.

As a result of never having a credit card, I have never paid a cent of interest on one. Or a late fee. Or anything. Nor do I think that I have denied myself or my family much in the way of material stuff, vacations, or whatever.

None of this is to say that I am wiser or more moral than anybody else, including my friends with wallets full of credit cards and ample debt on them.

In fact, I applied for a card when I first joined the grown-up work force and would have happily accepted it. But I was rejected for lack of a sufficient credit history. Seemed like an insult at the time and had me steaming for a day or two. I never did reapply.

Looking back now, though, it may have been a lucky break—for me, if not the card companies.—Greg Daugherty

Greg writes the “Retirement Guy” column in the Consumer Reports Money Adviser newsletter.

Know your rights on debt collection

LTD Financial Services, a Texas debt-collection firm, recently paid more than $1.3 million to settle Federal Trade Commission charges that it misled, threatened, and harassed consumers in violation of federal law.

The Fair Debt Collection Practices Act bars debt collectors from a variety of practices, including contacting you at inconvenient times and places, such as before 8 a.m. or after 9 p.m.; contacting you at work if your employer disapproves; or contacting you directly if you’re represented by counsel or have requested in writing that all contact cease. If you believe a collector has violated the law, you have up to one year to sue to recover damages, attorney fees, court costs, and up to an additional $1,000. You also should file a complaint with your state consumer protection agency and the FTC. —Anthony Giorgianni

Q&A: Driving up your credit score

Q. I have heard that taking a new car for a test drive at a dealership, even if you don’t buy the car or apply for credit, can impact your credit rating. Is this true?

A. There is only a kernel of truth in what you’re hearing, says Craig Watts, public affairs manager for Fair Isaac, the inventor of the FICO credit score. While test driving a car should have no impact at all on your credit score, it is possible that an unscrupulous dealer could use the information on your driver’s license (some old licenses still show Social Security numbers) to order your credit score—without your permission—from one of the national credit-reporting agencies, Watts says. This kind of inquiry, if it happens, has a very small effect on your score and is not likely to affect your credit.

For more information on the types of things that can affect your credit score, click here.

Debit users say the PIN is mightier

Further evidence that consumers are pretty smart comes from a new survey by the research firm Gartner. It found that most debit-card users would rather punch in a PIN to make a supermarket purchase than sign a payment receipt. This is despite the push many banks have made to get consumers to sign (which rewards the bank with higher transaction fees).

But signing puts you at greater risk of identity theft and, under federal law, your liability for fraudulent charges on a debit card can be greater than for a credit card. This recent article from the Consumer Reports Money Adviser newsletter offers tips on how to avoid high overdraft fees and other bad stuff when using your debit card. 

Incidentally, the Gartner survey showed one payment method consumers preferred even over the debit/PIN combo. That was paying with cash.

Don’t trust a car dealer to pay off your loan

When trading in your old vehicle for a new one, you might be tempted to leave it to the dealer to pay off the existing loan, either by using part of the old car’s trade-in value or rolling any unpaid balance into your new-car loan. While that arrangement might sound convenient, it carries risks, as many Californians recently learned.

There’s a chance that the dealership may go out of business before paying off the note, leaving you on the hook for the remaining loan balance on your old car, along with the loan on the new car. The problem has become widespread in California, where hundreds of consumers have lost millions of dollars. The state is setting up a fund to reimburse victims.

Another danger is that the dealer might delay paying off the loan, causing your credit report to show missed monthly payments. That can damage your credit score, forcing you to pay more for future loans and insurance.

Consumers for Auto Reliability and Safety, a public-interest group in Sacramento, Calif., advises car buyers to pay off any outstanding loan on their old vehicle before trading it in for a new one. The group notes that doing so may be difficult, especially if the money you need to pay off the loan is tied up in the value of the trade-in. “It could be inconvenient, but how else are you going to know you’re protected?” asks Rosemary Shahan, the organization’s president. “How do you know the dealer is going to pay off the loan and not go out of business?”

If you can’t pay off the loan, you might want to wait until your payments are finished before shopping for a new car. That’s an especially good idea if you’re “upside down” on the loan and owe more money than the vehicle is worth. If you trade in a car under those circumstances, a dealership will typically add the balance of the outstanding loan to the new-car loan, leaving you essentially paying off two loans at the same time.

Similarly, whether you’re buying a used car from a dealership or an individual, make sure that any previous loan has been satisfied. If it hasn’t and the former owner falls behind, the lien holder might threaten to repossess the car. You can tell there’s been a loan if a lien holder’s name is on the front of the title certificate. If there is one, ask for proof that the lien has been paid. The lender should give you a lien release.  —Anthony Giorgianni

Review your credit reports regularly

We often advise consumers to obtain copies of their credit reports once a year to monitor them for accuracy and possible fraud. If you haven't done so in a while, now is a good time to get a look at what your creditors have been saying about you.

Credit reports contain information on your payment history with different creditors, inquiries made by various financial institutions, and public records such as foreclosures or bankruptcies. Consumer reporting companies collect and sell this information to lenders and other businesses that have a permissible interest in it. Your credit record can influence the rates you pay for borrowing and insurance, among other things.

Order your free credit reports online at www.annualcreditreport.com or by calling 877-322-8228. This is the official channel through which you can get your report from each of the three major consumer credit reporting bureaus—Equifax, Experian, and TransUnion. You can get all three all at once, or stagger your requests over the year to keep closer track on your records.

Other Web sites also promote free credit reports, but many of them tie those reports to fee-based services such as credit monitoring. A 2007 Consumer Reports WebWatch analysis of 24 such sites found that nine were owned or closely connected to TransUnion and eight were owned or otherwise closely connected to Experian. The report found that many of the alternative sites had names—like freecreditreport.com—that are similar enough to annualcreditreport.com to cause confusion.

Once you have your credit report, check it for accuracy:

• Make sure that your name, address, Social Security number, and all other personal information is correct.
• Make sure that there are no accounts, debts, bankruptcies, or court judgments on your report that don’t belong to you.
• Make sure that payment histories and balances are correct and that any errors you have reported have been fixed.

To help consumers take advantage of their rights to a free annual credit report, Consumers Union is offering a free online guide, Your Credit Matters, with advice on how to order a free credit report, review it for accuracy, and correct any mistakes. 

Q&A: Lower credit limit, lower credit score?

Q: I used to have a Citibank Visa with a $20,000 credit limit and a Visa from my bank with a $20,000 limit. I canceled the Citibank card and lowered the limit on the other card to $10,000. Will this affect my credit score?

A: It depends. Thirty percent of your FICO credit score is based on amounts owed, and that part of your score includes your credit-utilization rate, which is the amount charged on all your cards as a percentage of your total credit-card limits. So if you have only one card with a $10,000 limit and you’ve got a $2,000 balance, your credit-utilization rate would be 20 percent. With an $8,000 balance, your rate jumps to 80 percent. Credit issuers generally like to see a credit-utilization rate of 30 or 35 percent, or less.

"If a credit report shows no outstanding balances, then the credit utilization is zero," says Craig Watts, a spokesman for Fair Isaac, creator of the FICO score. "In this situation, closing one account and lowering the limit on the other probably had no effect at all."

If you had a balance on the remaining card, your score would have been affected by your actions. But Watts says your score would recover in a few months.

There are other factors that can affect your credit score. Consumer Reports Money Adviser offers more recommendations on how to stay on top of it.

Recession’s bright side? Bargains for brave consumers

Let’s say you have some cash on hand, your job (or other source of income) is secure, and you love a good bargain. What opportunities might a recession bring?

First a disclaimer: Nobody, including us, knows what’s ahead for this economy or, indeed, precisely what’s happening now. (Recessions are officially determined after the fact by the National Bureau of Economic Research.)

However, the battle-scarred veterans of our Money team have seen our share of recessions, and some of us even took notes. Based on our collective judgment, here are some of the possible buying opportunities that consumers with cash—and the guts to spend it—may find:

Homes. Home prices are already down in many parts of the U.S. Where they go from here is anybody’s guess, but few of us would expect them to rise at a steep pace anytime soon. So if you’re in the market for a home, now could be a good time to start looking and get a baseline feel for the market—even if you decide to hold off buying for a while.

Mortgages. Interest rates are already relatively low, averaging 5.42 percent for a 30-year fixed-rate mortgage as we write this. Credit standards have been tightening, though, so expect higher hurdles in getting the very best rates.

Stocks. Some are sure to become bargains, but unless you’re a stellar stock picker, consider a no-load stock index fund and hope to benefit from an overall rise in the market. Keep in mind that stock prices will often start upward well before a recession ends, as investors look ahead to better times.

Credit cards. Our resident credit expert thinks people with good credit scores should have a golden opportunity to negotiate for lower rates. Issuers will want to hold onto creditworthy customers more than ever.

Cars. If demand continues to drop (sales for 2007 were down compared to 2006), carmakers and dealers will have to do something to move their wares.

Appliances and electronics. Ditto.

Luxury goods. Sales are already slowing, we hear, so high-end goods may carry less-high prices.

EBay stuff. People eager to raise cash may be auctioning off knickknacks and whatnots in record numbers. So that Pee-wee Herman doll or first edition of Proust you’ve long wanted could be yours for the clicking.

Home remodeling. Lower demand should mean more room to bargain and, possibly, less wait to get the work started. If you need to finance your home improvement, you might also find favorable borrowing terms if your credit score is high.   

Travel. Our travel expert says to expect fare cuts from the airlines, but beware of the carrier going bankrupt before you can use your ticket. Hotels and rental cars should see cuts too.

Other services. If it’s something consumers can put off until the economic clouds clear (cosmetic dentistry vs. an aching tooth, for example), demand should drop and prices along with it. And it rarely hurts to haggle—even in the best of times.

Recession ahead? Already here? Neither?

Nobody knows the answer to those questions or will for a while. But the dreaded R word is certainly in the air and the news at the moment.

What might a recession mean to you—and what should you be doing now just in case?

We dipped back into the CR archives to see what we had to say during the memorable recession of 1990-‘91. Our advice today would be much the same:

1. Get a grip on your cash flow. When you have a spare moment, make a list of your typical household expenses. Divide it into two columns: items you don’t have much immediate control over (mortgage or rent, for example) and those where you have more discretion (groceries, eating out, clothes, vacation travel, etc.).If you need to slow your cash flow in the months ahead, plan to attack the discretionary items first. You may also discover cash leaks you can plug right away—and should anyhow, recession or no.
2. Stash more cash. If you don’t already have an emergency fund, now would be a good time to create one. The conventional advice is to keep three to six months of living expenses in a reasonably liquid account, such as a bank or money-market fund. If you have a lot of assets, few debts, or rich relatives, you may be able to get away with less, but this is a good starting point.
3. Reduce your debts. You’ll waste less money on interest payments and reduce your overall monthly expenses. As a general rule, we noted in 1991, it’s best to keep monthly debt payments (apart from your mortgage) at no more than 15 to 20 percent of your take-home pay.
4. Consider your job. How well you’ll fare in a recession will depend in large measure on whether you can keep your customary income coming in. So try to be realistic about your job security as well as your employer’s prospects. It might be time to revise the old resume, just in case.

Remember, too, that recessions aren’t forever. The 1990-‘91 one ran for eight months, economists later determined. In fact, it was already half over by the time most articles like this started appearing.

Consumer Reports Money Adviser offers some additional tips on recession-proofing your finances.

Time to plug in the shredder and tame the clutter

If your list of 2008 New Year’s resolutions includes a vow to tackle the mounds of financial paper you’ve been collecting, here’s some advice from Rosanne Grande, a financial planner with R.W. Rogé & Co., in Bohemia, N.Y., on what to keep and what to shred:

• Bank records. Keep deposit and withdrawal slips until you get your bank statement each month. Retain monthly statements for at least seven years, in case the IRS audits you. Ditch CD records after the accounts mature and you collect the interest you’re due. The same advice applies to loan documents after you’ve paid back all the money that you borrowed, with one exception. Don’t burn your mortgage after you’ve paid it off. Keep it as proof of how much you paid for your house so you can calculate the tax, if any, on your gain when you sell it.
• Investment account documents. Shred the statements you receive each month or quarter as new ones arrive, but keep annual statements for seven years. If you still hold stock in certificate form, ask your broker to hold them for you electronically. You can also convert U.S. Savings Bonds from paper to electronic using the U.S. Treasury’s SmartExchange program at TreasuryDirect.
• Retirement-plan records. Retain your annual 401(k), IRA, and Keogh statements. If you’ve made nondeductible IRA contributions, keep Form 8606, which you must file with your tax return. It proves that you’ve already paid taxes on money in those IRAs.
• Credit-card receipts and bills. After you pay your bills each month, staple receipts for credit-card purchases to your statements and keep them for one year. They’ll come in handy if you need to return defective goods that you bought with a credit card. After one year, shred the receipts. You can do the same with your credit-card bills unless you need them to support tax deductions. In that case, hold them for seven years.—Denise Topolnicki
  

R.I.P. for the check?

For all the talk over the years about a cashless society, it’s looking like a check-less one could happen first. According to a Federal Reserve study released this month, more than two-thirds of noncash payments are now done electronically, primarily by debit and credit cards, and less than a third are made by check. Just four years ago, in 2003, the split was roughly 50-50.

Since 2003, in fact, the use of checks has declined by about 6.4 percent a year, the Fed says.

Debit and credit cards certainly are more convenient as a payment method than writing a check. To make sure that convenience doesn’t cost you, follow our readers' advice on selecting a consumer-friendly credit card. Also, when using a debit card, monitor your checking account to make sure you don’t overdraw your account and incur penalty fees.

Class action suit spurs refunds of currency exchange fees

If you used your credit, ATM, or debit card for foreign transactions, you could be eligible for a refund of some of the currency exchange fees you paid, according to the proposed settlement of a class-action lawsuit brought against Visa, MasterCard, Diners Club, seven major banks, and affiliated companies. But you must file your request by May 30.

Under the proposal, payments would be available to anyone who used a Visa-, MasterCard- or Diners Club-branded credit, charge or debit/ATM to make foreign transactions while traveling abroad or over the Internet from Feb. 1, 1996 to Nov. 8, 2006. Covered transactions include purchases, cash advances, and cash withdrawals.

The refunds are expected to be at least $25, though they could be higher for individuals and corporations who actually can provide good estimates of their foreign transactions.

The proposal would settle charges that the card companies, their member banks, and affiliated firms conspired to set and conceal the markups and fees on currency exchange rates, typically 1 to 3 percent of foreign transactions. The class action suit also alleges that the companies failed to disclosure the fees adequately.

In agreeing to settle the case, the defendants denied wrongdoing, saying that the rates had been properly established and disclosed. They said they were agreeing to settle the case to “avoid the inconvenience, expense and uncertainty of litigation,” according to the notice posted on the settlement Web site.

The other defendants include Bank of America, Bank One/First USA, Chase, Citibank, HSBC/Household, MBNA and Washington Mutual/Providian, as well as certain affiliated and predecessor companies.

Under the proposal, the defendants would pay $336 million to pay claims, attorneys' fees and expenses. The proposal also would require them to make certain disclosures to cardholders about the rates used to calculate the U.S. dollar amount owed for a foreign transaction and any fees applied in connection with a foreign transaction. The proposal received preliminarily approval the U.S. District Court for the Southern District of New York on Nov. 8, 2006. A hearing on final approval has been set for March 31.

To participate, you must file a claim form by May 30. The claim form allows participants to opt for one of three types of refunds:
• Easy refund of $25. This option is recommended for those who traveled outside the U.S. for less than one week or had foreign transactions of less than $2,500 using the affected cards.
• A refund of up to 1 percent of estimated transactions. Based on typical spending during foreign travel and your answers to a few questions, this is recommended for those who traveled outside the U.S. for more than one week or had foreign transactions of more than $2,500.
• A refund of up to 1 to 3 percent of annual estimated foreign transactions. This option is recommended for those who had extensive foreign transactions and who can provide year-by-year information.

Any amounts, including the $25 easy refund, could be lower if participation exceeds expected levels.

Affected card holders also can object to or opt out of the proposed settlement by Feb. 14. Those who do not opt out would be covered automatically by the settlement terms, including giving up their right to pursue further claims against the companies.

For further information or to obtain a claim form visit the settlement Web site or call 1-800-945-9890.—Anthony Giorgianni

Use credit and debit cards wisely this holiday season

Have you started your holiday shopping yet? If you haven’t, you’re not alone. According to a recent Consumer Reports Holiday Shopping Poll, only 22 percent of consumers anticipate finishing holiday shopping right after Thanksgiving, compared to 30 percent in 2006. Forty-five percent of respondents said they do not anticipate finishing their shopping until the second week of December, and 20 percent said they would be pushing it right to December 24th. And approximately 6 percent of respondents are resigned not to complete their shopping until after the holidays.

Nearly one-quarter (23 percent) of our survey’s respondents said they expect to spend less this year than in 2006. If you want to control your spending, consider making a budget before you begin to shop. In our survey, among the 33 percent of consumers who made a budget for last year, 43 percent managed to stay on budget, with only 8 percent going way over budget.

Don't let finance charges and other fees push you over your budget. To keep from spending more than you have to, use the payment method that makes the most sense for you. If you pay off your credit card balance in full each month, charging your holiday gifts won’t cost you anything in finance costs and may even provide a bonus in the form of a cash-back or other type of reward. If you’d rather spend only what you have on hand but don’t wish to carry large amounts of cash, use a debit card. But be aware that if your bank account balance is inadequate to cover your purchase, you can be hit with large overdraft fees. Click here for more on how to decide the best method of payment.

Credit cards ranked for safety

Looking for a safe credit card? Bank of America’s Visa Platinum Card was rated tops in a recent study by Javelin Strategy & Research in California. The rating is based on the bank’s card-security services and technology, as well as its practices for secure handling of consumer information. The second-highest was American Express Blue, followed by Discover Platinum, First National Bank of Omaha’s Platinum Visa, Citi Platinum Select, and Navy Federal Credit Union’s Platinum MasterCard.

The Javelin study also found that some issuers lack security safeguards. Only 24 percent let cardholders either place limits on cash advances or not allow them altogether. And 56 percent require cardholders to provide their full Social Security number to interact with the company by phone, the Web, or mail.

For our advice on choosing and using credit cards wisely, click here. —Anthony Giorgianni

'Security' stymies overseas Americans who want credit reports

Americans who live abroad are likely to be mucho frustrated if they request the free credit reports they are entitled to by law. That's according to an investigation by Consumer Reports WebWatch.

WebWatch says the official Web site for requesting free reports, AnnualCreditReport.com, is denying access to anyone with a foreign Internet Service Provider, due to security concerns. Affected are Americans working or retired overseas, including military personnel. WebWatch's report provides more details, along with addresses for anyone wishing to request their reports by conventional mail.

Protect your child from ID theft?

FamilySecure, a new credit-monitoring and fraud-alert service introduced by the credit-reporting company Experian last week, purports to address a growing problem: identity theft involving kids younger than 18. For $19.95 a month, Experian says it can help.

Experian says many kids find after they turn 18 that someone has stolen their Social Security number and used it to run up bad debts. The resulting credit reports can make it difficult for the victims to get credit themselves.

Jay Foley, executive director of the Identity Theft Resource Center, based in San Diego, agrees that child ID theft is a real problem. He estimates that more than half of such cases involve adult family members who use children’s Social Security numbers to open accounts after ruining their own credit.

To put the risk in perspective, the Consumer Reports Money Adviser newsletter recently noted that just 19 percent of Americans who were told their personal information was compromised reported that the breaches led to credit-card charges, bank account losses, or other ID fraud.

What’s more, many of the protections that credit-monitoring services offer are things you can do yourself, at little or no cost.

FamilySecure does add a new twist to Experian’s traditional credit-monitoring and fraud alert services: a guarantee to pay up to $2 million in expenses related to cleaning up your or your children’s ID-theft mess, including stolen funds, legal expenses, loan application fees, and telephone costs. An Experian spokesperson tells us that a parent or guardian can enroll an unlimited number of children for the one $19.95 monthly fee.

While that may provide some peace of mind, it’s far from inexpensive. A parent enrolling a 1-year-old in FamilySecure would pay more than $4,000 for the service by the time the child turned 18, assuming the annual price never goes up. Parents may have other, perhaps better, uses for that money. —Tobie Stanger

Avoid debit card traps

There are two ways to use a debit card—entering a personal ID number or signing a sales slip like when using a credit card. Which way should you go?

Your bank likes when you sign. That’s because it charges merchants lots more to process signature-based transactions. But signing puts you at greater risk of identity theft and, under federal law, your liability for fraudulent charges on a debit card can be greater than for a credit card.

When you sign, the payment is processed through a credit-card network and the actual withdrawal from your account occurs later, usually within a couple of days. Some hotels, gas stations, and other retailers will put a hold on funds in your checking account during that time. The hold can be more than the amount of your purchase. If you’re running a low balance in your checking account, this can lead to multiple overdrafts—and penalty fees.

We suggest you forgo using a debit card all together for purchases such as rental cars and hotel bills and use a credit card instead. And if you pay off your credit card bill each month, consider using that card for most other purchases as well.  This way your cash will continue earning money in an interest-bearing account until the bill is due.

For more on how those convenient debit cards can hit you in your wallet, see “The Dark Secrets of Debit.” —Andrea Rock

Watch out for equity loan schemes that can imperil your home

Some shady companies have come up with all kinds of schemes that lure people into putting their most precious asset at risk. Making the rounds are dicey deals such as equity stripping, in which a lender encourages you to pad your income to qualify for a home-equity loan, even though both of you know that you can’t afford the monthly payment. As soon as you fall behind, you learn that the lender will foreclose on your house.

Just as seamy is the contractor who offers to arrange financing for a home-improvement project through a lender he knows. After the work has begun, you’re asked to sign a sheaf of papers to finalize things. If you ask to read the papers overnight, the contractor gets testy and threatens to leave the job unfinished. You give in and find out that you’ve agreed to a home-equity loan with a high interest rate and plenty of points and fees thrown in, and, no doubt, a cut to the contractor.

To avoid these and many other similarly underhanded scams, experts suggest the following precautions:

• Never take out a home-equity loan if you don’t earn enough to cover the monthly payments.
• Don’t sign any documents you haven’t read, any papers with blank spaces that will be filled in later by the lender, or applications with inaccurate information about your finances. 
• Reject a loan that includes useless but expensive add-ons like credit insurance or fees you didn’t agree to.
• Avoid doing business with unsolicited callers who offer to arrange a home-equity loan for you.
• Never sign over the deed to your house to a lender or a lender’s agent, such as a contractor.
• Shop around among several legitimate lenders to get the best terms.
• If you sign a contract for a home-equity loan and change your mind or realize you can’t afford it, know that if the home is your principal residence, federal law gives you three business days to get out of the loan if you ask to in writing.

For more advice about borrowing, see our article “Remodeling: Best Ways to Pay for It Now.”—Jeffrey Rothfeder

Big credit agency offers plan to freeze out ID thieves

On Oct. 15, TransUnion will become the first (and so far, only) of the Big Three credit reporting agencies to allow all consumers to put a security freeze on their credit files.  A freeze stops credit issuers from accessing your file and can thwart would-be identity thieves from opening accounts in your name.

TransUnion says it will charge $10 to place, temporarily lift, or remove a freeze. If you have been a victim of identity theft, the service is free.

Most states already have freeze laws that apply to all three reporting agencies. Before contacting TransUnion, be sure to check what your state provides.

In a statement, Consumers Union, nonprofit publisher of Consumer Reports magazine and this Web site, said TransUnion's move was a useful step that the other agencies should follow but added that it needs some improvement and doesn't eliminate the need for state freezes laws or a future federal one.