If you want to see Government efficiency at work, look no further than the “cash for Clunkers” program put together by those brilliant politicians in Washington. This is a good example of why we DON’T want politicians making decisions for us, for our future, and especially for our healthcare.

According to the AP, they will be halting the program that began just barely a week ago at midnight on Thursday. If you were going to take advantage of that offer, I hope that you made it down to the midnight sale at your local car dealership.

This program was designed to help give auto sales a boost and get some of the old gas guzzling cars off of the road by offering incentives of $3,500 to $4,500.

Through this past Wednesday, 22,782 cars have been sold and $96 million of the $1 billion allotted for the program was spent. According to dealer surveys, dealers are concerned that they might have already gone over the limit of cars allotted for the program because of the severe backlog in getting cars approved on the Government level. Imagine that…the Government putting out a program that they were ill-prepared to administrate. Maybe those in charge should have read the details of the program first.

There might not even be funding left for the deals that have already gone through the system pending approval. Congress is acting fast. They want to approve more money for the program. Now there is a surprise – Congress wants to spend more money. They are so excited to see something that they have put together work so well. “Let’s spend billions more no trillions more…give free money to the people!!” Sorry, I got a little carried away.

Of course, now they have all of these cars to dispose of which should be a concern for the EPA. Is it pure speculation or is getting rid of 250,000 cars sort of a problem?

Close your eyes and imagine the politicians making decisions on your healthcare.

I received a notice about my change in terms and conditions from Chase today in the mail. Even I was shocked at how far they are going to fight back against credit card legislation. I thought I would write about some of the highlights.

(1) Change to variable rates – This was a no brainer and sure to happen. Credit card companies couldn’t continue to operate with fixed interest rates. So, they changed the fixed rate to a variable rate. The new variable rate is prime rate plus 8.99%. You can be assured that the prime rate will be going up in the future along with these credit card interest rates. If you want a cash advance, it is prime plus 15.99%! That would put a cash advance at 19.9% at today’s rate. It is pretty sad when a payday lender starts to look like a better deal.

(2) Change of balance transfer fee to 5% – Wow! That is pretty steep.

(3) Balance transfers can be declined – If I initiate a balance transfer with my available credit limit, they can decline it.

(4) The rewording of the Universal Default – Now this is sleazy. The biggest gripe about credit card companies is their ability to change the interest rates for any reason. Well, they redefined the universal default rate. Of course, they don’t dare call it that. The new universal default definition is the ability for Chase to charge me the default rate in the event that I am late with a payment or default on any account that I might have with Chase or its related companies. Of course, most consumers have numerous credit card accounts that are backed by Chase.

(5) They can stop a cash advance – They are notifying me that they can stop a cash advance if they choose.

(6) Communication – They go into detail about how they can communicate with me. They state that if there is a fee incurred while contacting me via e-mail, text, or phone, I am responsible for that fee although I didn’t initiate the communication. That is an interesting one.

(7) Closing of account – This is a dangerous one. If you close your account, the NEW fine print states that they “may require you (me) to pay the outstanding balance immediately or at any time after your (my) account is closed.” Of course, they give me the ability to close my account in the event that I don’t like their new terms and conditions.

The only difference between the old fine print and the new fine print is that they are just spelling out how many ways they are going to take advantage of me should I choose to keep a balance on my Chase card. With the new card agreement, how much of that will actually change when the new laws go into effect in February 2010? This should be interesting. Personally, I think that they are just laying the groundwork to get around the law. This is what this crooked industry has done for decades.

Tags: balance transfer fee, Bob Brooks, Chase, Credit Card Companies, credit card legislation, credit limit, Deceptive Money, fee, fixed interest rates, interest rates, payday lender, prime rate, Prudent Money, terms and conditions, Universal Default, variable rates

One of the big problems during the housing bubble occurred when buyers and sellers were getting inaccurate or inflated appraisals. In many cases, the relationships between lenders, realtors, and appraisers became a little too cozy causing fraud to occur. A lawsuit brought on by New York State Attorney General Andrew Cuomo against Washington Mutual put an end to those relationships through the creation of HVCC or Home Valuation Code of Conduct.

The HVCC forces lenders to use appraisal management companies to handle appraisals versus the local relationships where one party can help out another. These appraisal companies are comprised of independent appraisers from all over the country. Since the appraisers are not familiar with the area, they will use computer models that incorporate distressed sales into the appraisal. The problem with having someone from another part of the country conducting the appraisal is that they don’t know the intangibles that can increase the overall value of the home.

Can you imagine almost having a deal closed and the appraisal coming back much lower than you expected? That has been happening, adding even more challenges to the real estate markets. Leave it up to the regulators to allow corruption to occur over a number of years and then go too far on the regulatory end.

If you are going through the buying/selling process, make sure that you have a good handle on the appraisal value of the home. Surprises at the closing table are not fun.

Tags: Andrew Cuomo, appraisers, Bob Brooks, corruption, Deceptive Money, fraud, Home Valuation Code of Conduct, Housing bubble, HVCC, lenders, New York State Attorney General, Prudent Money, real estate markets, realtors, regulators, Washington Mutual

I cannot tell you how many times I come across this question. There is a lot to be dissatisfied with today when it comes to the investment process. You would think that it comes down to investment loss. However, in meeting with a great deal of dissatisfied people (which is why they end up in my office), I have found that the number one reason investors are not happy is because of a lack of communication.

When I say communication, I am referring to many different aspects. First, there is the ability to communicate with the advisor and be treated with respect. I often hear stories of how the client is talked down to or their concerns are quickly dismissed rather than addressed. Second, there is no written or verbal communication. Basically, the client has no idea what is happening with the investments.

Is the financial advisor really doing their job? You are not going to like the answer to this question one bit. Yes, in most cases, they are doing their job.

A month ago, I wrote a piece on the how the different types of advisors work. I received a great deal of feedback about that piece. So, I thought I would revisit the topic. It is important for investors to understand what truly to expect.

Registered Representative

Most financial advisors are registered representatives of a broker dealer. The majority work on a commission basis. It is important to understand what is required of registered representatives. The Financial Industry Regulatory Authority (FINRA) states that registered representatives are required to recommend that which is “suitable” for clients. However, FINRA doesn’t require that a registered representative do that which is in the best interest of the client. If it is not in the client’s best interest, whose best interest is it in?

They are not required to call you. They are not required to manage money. In fact, truth be told, broker dealers don’t want their registered reps trying to manage money.

Registered Investment Advisor

A Registered Investment Advisor (RIA) takes the roll of a fiduciary which is held to a higher standard. An RIA must act in the best interest of the client. The RIA must keep the client informed. RIA’s are fee based. If an RIA is doing their job, their clients should get a hands-on approach and a step up from being sold a set of investments.

For me, suitability is only one part of the initial investment process. As long as the investment portfolio is suitable, the Registered Representative has done their job. The role of a fiduciary never stops.

The Problem with Assumptions.
When a client meets with an advisor about investing, there are many assumptions made.

• The advisor is going to watch my investments and recommend changes along the way
• The advisor is going to stay in touch
• The advisor is taking care of everything so that I don’t have to

The Bottom Line of Working with an Advisor

The best advice I can give anyone who is in search of an advisor is to not assume and ask the tough questions. Know for a fact exactly what an advisor is going to do for you. Ask many different ways. If there is any hesitation, then continue looking. There are good and bad in both categories of advisors.

A good advisor can tell you how they manage money, about their systems, and how they handle all situations. Most importantly, they can set your expectations on communications. If an advisor’s example of an investment strategy is buying and holding, make sure that you are very comfortable with the advisor doing nothing.

Tags: Bob Brooks, broker dealer, Deceptive Money, financial advisor, FINRA, Investing, investment portfolio, investors, Prudent Money, Registered Investment Advisor, registered representatives

New Stock Market Alert – The Bear Market had to be over…Right?

New Debt Tip – Night Line Busts these Debt Settlement Scams

The news is constantly reminding us that the Government is running up enormous levels of debt. A client of mine sent me a link to the US Debt Clock. In his e-mail, he described the site as “very telling.” Actually, it is downright frightening. This site calculates to the second all of these disturbing numbers that will haunt us and future generations for the rest of our lives.

As I watched all of these numbers increase, I began thinking about the job of a President and the most powerful career politicians. They can run up the U.S. debt for their own agendas because there are no consequences for them or their future.

Presidents and the most powerful of politicians will never experience the consequences of their actions. For instance, do you think that any one of these politicians will ever be on a waiting list because of the up and coming government run health plan? Of course not – What it would be like to do whatever you want and never reap the consequences?

Anyway…here are some stats:

Total U.S. National Debt…………………………11.6 Trillion
Average per citizen……………………………….37,861 per citizen
Dollars in Bailouts……………………………….11.8 Trillion
Estimated Medicare Fraud year to date……….34 Billion
U.S. Private Debt………………………………….7.2 trillion
Credit Card Debt………………………………….983 Billion
U.S. Debt per citizen………………………………23,675
Number of Foreclosures thus far in 2009……..1,271,043
Number of Bankruptcies thus far in 2009………611,310

The Scariest Number of All – the total amount of future liabilities (expenses that will come due in the future with no money to pay for it)…$57 Trillion Dollars

Maybe we could take away some of the benefits that these politicians get to pay for some of these expenses.

Tags: bailouts, Bankruptcies, Bob Brooks, credit card debt, Debt, Deceptive Money, foreclosures, future liabilities, Government, health plan, national debt, politicians, President, Prudent Money, US Debt Clock

The credit card and debt collection industries are quickly losing their ability to collect using the legal system which is good news for the consumer. When you sign a credit card agreement, you grant the credit industry the ability to settle any debts against you through arbitration. The credit industry uses arbitration because it is almost impossible for a consumer to win.

The debt collector has 1 of 2 ways to collect a defaulted debt. First, they can go about it the traditional way of being persistent and going through the debt collection process. If the consumer still doesn’t pay, they either give up and give the debt back to the original creditor or sell it to another debt collector, or they take legal action.

They take legal action in order to get awarded a judgment against the consumer. Once they have the judgment, the debt collector or original creditor has other avenues of collection available to them. For the consumer, this is the one thing you want to avoid. They can go about getting a judgment through the filing of a lawsuit or through the arbitration process.

Arbitration is much a different process than going through a lawsuit. There are no official papers served to the consumer. A letter is sent to the consumer alerting them that the arbitration process has been started against them. They are asked to respond to the letter. The vast majority of time the consumer doesn’t even show up for the arbitration proceedings. The main reason for not showing up is that they are forced to travel to the state where the arbitration proceedings are held. In addition, arbitration is industry friendly and is a process that always stacks the cards against the consumer.

The consumer doesn’t show up, they lose the arbitration, and then the debt collector or creditor is awarded a judgment through a court of law. It is anti-consumer and another way the debt industry traps the consumer.

The two largest arbitration associations in the country are National Arbitration Forum (NAF) and the American Arbitration Association (AAA). The NAF had a lawsuit filed against them last week for their secret association with a large debt collection firm. Apparently, the arbitration association and the debt collector owned a hedge fund and they were filing arbitration proceedings against consumers right and left. Both parties were owned by the same company. There was no impartiality at all. It was a consumer scam.

As a result, the NAF stated they will no longer participate in consumer based arbitrations. Just this week, the second largest association dropped out of the debt collection arbitration business as well. This takes away the two of the biggest players available to debt collectors, which is a huge victory for consumers. Now, it is going to be tougher for debt collectors to collect through legal means unless they want to file lawsuits.

As a result, consumers might have a better chance of getting through the collection process without the potential of legal action taken against them. As I write in my book, the key to surviving the debt collection process is to stay out of legal problems. In the state of Texas, you have 4 years past the first missed payment (statute of limitation period) to have legal action successfully pursued against you. Now, it looks as if a victory has been scored for those who need it most.

Tags: American Arbitration Association, Arbitration, Bob Brooks, consumer scam, credit card, credit card agreement, credit industry, creditor, Debt, debt collection, debt collector, Deceptive Money, hedge fund, lawsuit, National Arbitration Forum, Prudent Money, statute of limitations

A recent study shows a change in the way that companies are approaching 401(k) plans. The typical 401(k) plan is set up to where employers will provide a $0.50 on the dollar or a dollar for dollar match to any contributions by the employee. Well, things have changed since the start of the credit crisis and recession. Similar to most recessions, employers will suspend the employer matching contributions program until the economy starts to rebound. This time 401(k) consultants say there is a different response.

Consultants are reporting that their clients are either stopping the matching program altogether or making the match available to employees only on the basis of profitability of the company. In other words, if the company makes money, then the employee gets the match. This credit crisis has really made employers rethink the matching contributions program.

Does it make sense to keep investing money into a 401(k) plan? If your 401(k) plan doesn’t have a match, I would argue that it makes no sense to continue investing into it. The employer match (or free money as I like to call it) is the biggest benefit of a 401(k) plan. Beyond that, there are more cons than pros to a 401(k) plan.

1) Lack of investment choice – Most 401(k) plans do not have enough choices for investment. I have looked at 401(k) plans with as little as 5 investment funds available for investment. That is clearly not enough diversity. Even if the plans have plenty of funds, they don’t have enough different types of funds. They might have 10 stock funds and 4 bond funds. As we saw last year, bonds and stocks can both lose money at the same time.

2) Lack of secure investments – Most 401(k) plans at least have a money market; however, some do not. Last year I looked at plenty of 401(k) plans that literally had no safe place for the participant to put their money.

3) High expenses – When it comes to expenses, you don’t have a choice. You are stuck with those high built-in 401(k) plan expenses. With 401(k) plans, there are a lot of people who are to be paid something. That is all built into the hidden expense ratio. There has been a lot of talk coming out of Congress to force better disclosure of these expenses.

What is the alternative? If possible, max out an IRA or a Roth IRA. Yes, the only other advantage to a 401(k) plan is the tax deduction and you will forgo the majority of the tax benefit if you are maxing out the 401(k) plan. However, with an IRA you can still get at least $5,000 (and depending on your age, up to $6,000) in tax deductions. Those limits will increase down the road as well. As a rule of thumb, I don’t recommend basing your investment decisions on tax savings. What if you were investing more than $5,000 or $6,000? You would then consider opening up an investment account and saving into that account with the additional money. Having money in a taxable investment account can be a very prudent way to save.

You have two other advantages with an IRA as your retirement vehicle of choice. First, you have at your disposal a selection of all of the categories of investments available on the market. You can also control expenses more effectively with an outside plan based on the investments that you choose.

Most importantly, you can have your IRA managed for risk and growth. That is a big deal. The best you can hope for with a 401(k) plan is a buy and hold strategy which has proven to be fatal for your account values.

Tags: 401(k), 401(k) Plan, Bob Brooks, bonds, Congress, credit crisis, Deceptive Money, expenses, investment choices, IRA, matching contributions program, money market, Prudent Money, Roth IRA, stocks, tax deductions

A recent study written about bear markets comes to some dangerous conclusions. The study looks at three different scenarios of recovery following a bear market and how investors should react. The conclusion is that even investors in their middle to late 50’s should stay invested in stocks at all costs. This article appears in Money Magazine which unfortunately is a magazine that too many people look to for financial advice.

Should someone so close to retirement just stay invested with the hope that everything will work out OK? When you read these financial articles, you always have to look at the assumptions that are being used. Just like most financial articles, they are assuming that the worst is behind us and that this is going to play out like any other bear market and recession. They don’t even consider that this could get much worse. If that is the case, being invested in stocks so close to retirement could result in disaster. To understand the best and worst case scenarios, you first have to consider the concept of long-term bull and long-term bear markets. If you go to this link, you can look at a more in-depth study.

A long-term bull market is a period which typically lasts 15 to 20 years, where the market goes up. It is a great time to be an investor.

Long-term bear markets are the exact opposite. They are horrible periods to be invested.

Two great examples to look at for the best case and the worst case scenarios are as follows. The best case scenario is the current long-term bear market which began in 2000 is like the 1966 to 1982 bear market. In 16 years and 7 months, the S&P 500 managed around a 15% return or an average of .87% a year. If we were 8 1/2 (amount of time we are in this bear market) years into that bear market, your investments would have returned around a 4% return for the balance of that bear market which would have lasted another 7 1/2 years. That wouldn’t have been disastrous.

However, let’s look at the worst case scenario of the 1929 bear market. That bear market lasted 13 years with much steeper loses. If this was the bear market of 1929 and you were invested in stocks, you would have lost another 28% over the next 4 years. Keep in mind these are approximations.

The Money Magazine article assumes that anyone in their middle or later 50’s should without question stay invested in stocks. Most people in that age bracket would read it and come to the conclusion that is doesn’t make sense to sell their stocks or reduce their exposure to stocks. What if we are in the worst case scenario? It could result in retirement disaster.

It makes more sense to approach it from the standpoint of managing risk rather than buy and hope that everything works out in the long-term. If you don’t have someone managing your money that has the philosophy of managing for both risk and growth, then base your investment decision making on risk levels of the market. If the risk level is too high in the market (I believe it is) then it makes sense to lower the percentage you have in stocks for now. Remember, you take risk (invest in stocks) when there is a high probability that you are going to be rewarded in the future for taking that risk. Remember, it is Prudent to always consider the worst case scenario in your decision making process.

Tags: bear market, Bob Brooks, Deceptive Money, long-term bear markets, long-term bull markets, Money Magazine, Prudent Money, retirement, risk, stocks

Much has been written lately about the credit card companies changing fixed interest rate cards to variable interest rates. The gripe is that they are doing this to get around the new regulations for the Credit CARD Act. I really wanted to jump on this bandwagon. I love writing about the loopholes in these laws. However, after thinking through it, there isn’t anything to the gripe.

I have gone through the Credit CARD Act or (aka The Credit Card Accountability, Responsibility and Disclosure Act) to look for the loopholes. When politicians write these pieces of legislation, they always leave loopholes to protect those who keep them in office.

The art of politics is the ability to protect the big businesses and special interest groups that keep the politicians in office while appearing to protect voters from these same big businesses. This is accomplished by writing legislation that offers great sound bites for the politicians, looks great on paper, and is filled with tons of loopholes making it for the most part a less effective piece of legislation. The Credit CARD Act is no different.

One press release noted:

“There is a tremendous loophole in this law and it is those credit cards with variable rates. Now that we are learning more about the details of the bill, surprises like this may start coming out. The law requires credit card companies give 45 days notice of a rate increase, but only if the card has a fixed rate. The law also requires rates to stay the same for one year after a new account is open, but only for fixed rates. Many credit card issuers and banks are rushing to switch their fixed rate cards to variable rates ahead of the new law.”

It is no surprise that credit card companies are making this change. This is actually good business for the credit card companies. The rate changes aren’t anything that can be manipulated because it is tied to a publically recognized index. In addition, credit card companies will need to protect their book of business once the Federal Reserve Board starts to raise rates, which may be well into the future. These variable rates are tied to very low rates currently. They have to rush to make these changes before the law changes

I never thought I would see the day where I actually wrote something that defended the credit card companies. Believe me, there is plenty to gripe about with this new Credit CARD Act. A credit card company raising their rates is not one of them.

For more information of how the credit card game is played and the step by step manual for getting out of debt, go check out my book Deceptive Money.

Tags: Bob Brooks, Credit CARD act, Credit Card Companies, Debt, Deceptive Money, Federal Reserve Board, fixed rates, legislation, loopholes, politicians, Prudent Money, rate changes, Responsibility and Disclosure Act, The Credit Card Accountability, variable rates

New stock market alert – Will the Government Bail-Out CIT?

New Debt Tip – Stay Away from the Loan Sharks at all Costs

Our blog was selected to be in the Festival of Stocks and the Bobo Carnival of Politics along with some other great blogs. Be sure to check them out!

One of the big complaints with the new credit card laws is that the vast majority of the law does not go into effect until February 2010. Of course, that gives credit card companies ample time to make changes to interest rates and terms of your credit card accounts. Well, if you can make it to August 20th, you will at least have options afforded by law with a change to your contract.

The Credit CARD Act required credit card companies to implement phase one of the new Credit CARD Act August 20th of 2009. The following is expected to go into effect:

(1) Creditors are now required to provide consumers with a 45 day notice prior to raising interest rates or changing terms and conditions on the credit card.

(2) Statements must be mailed 21 days in advanced to the due date (pretty sad that the lawmakers had to write this into a law).

(3) Credit card holders are given the right to opt out of any changes made by the credit card company prior to the changes going into effect.

The third rule can give consumers some relief. Some credit card companies will give the credit card holder the right to opt out of the changes. In other words, the credit card company would give the consumer the option to close the account and retain the current terms and conditions prior to the announcement of the change. Now, all card companies will have to give the customer that option. What happens if the consumer does not reject the changes before the 45 days? I haven’t seen anything that addresses the failure to contact the credit card company prior to the changes going into effect. Thus, it might be a good idea to make that call immediately.

Of course, the downside is that you can no longer use the account and the potential negative implications on your credit score. However, at least you maintain the original terms of the contract. One other note concerning the 45 day notice is that this does not apply to the reduction of credit limits. The credit card company can reduce the credit limit without providing notice.

Tags: Bob Brooks, Bobo carnival of politics, consumers, Credit CARD act, Credit Card Companies, credit card holders, credit card laws, credit limit, creditors, Deceptive Money, Festival of Stocks, interest rates, Prudent Money

Well it appears that Citigroup is having a tough time keeping their word to Congress. Over the past few years, Congress has done a lot of talking about credit card reform with one of the focuses of eliminating the universal default clause. This is the clause that every consumer signs off on, allowing the credit card company to change the terms and conditions, interest rates, etc just because they want to do so.

In 2007 as Congress was talking about credit card reform, Citigroup promised that they would not raise rates on any cardholder as long as they were in good standing.
Last November, Citigroup went back on its word and started raising fees on customers in good standing. The notice that they sent out said the following:

If the customer had not enjoyed a rate increase in two years, he or she could expect to enjoy one in January. No, I cannot make this stuff up!
So why would they go back on their word? Company spokesman told the New York Times that the business environment was tough and hurting bank profits. As a result, they were forced to raise rates.

This is an unfortunate trend that we are seeing all across the credit card industry. However, not all companies are utilizing the universal default clause. If this happens to you, take these action steps:

1) As a general rule of thumb, be paying very close attention to your statements. The credit card industry has at least until July 2010 to change anything it wants on your credit card account. Make sure that you stay aware. They don’t send out a lot of fan fair announcing these changes.

2) If your rates go up, check your credit score. If your credit score is in the 700’s, find some other company and transfer the balance to a lower rate.

3) If your credit score is not very good, call the credit card company and aggressively find out what has to be done to get interest rates lowered. When I say be aggressive, that means to be polite, persistent, and determined. If you don’t get a good answer, call back and or ask to talk to a supervisor. It is hit or miss and sometimes depends on the supervisor and/or the credit card company.

4) Don’t close the account. Sometimes you get the option to do so. Closing accounts has no benefit and can lower your credit score.

5) Don’t claim that you are being treated unfairly and just stop paying based on principle. This is the worst thing that you can do. By not paying, you will create a whole set of problems. Remember when you sign a credit card application, you just signed away the option to be treated fairly.

Tags: Bob Brooks, citigroup, Congress, credit card company, credit card reform, Credit Score, Deceptive Money, Prudent Money

A small number of Visa cardholders were surprised to find that recent purchases cost them a little more than expected – $23 quadrillion, plus change.

A man in New Hampshire used his card to purchase a pack of cigarettes only to find out later that he had been charged $23,148,855,308,184,500.

The same thing happened to a North Texas man who saw the same 17-figure bill on his credit card statement for a meal at a restaurant.

The first error was made with Visa through a Wachovia card. With a little work, the cardholder assured the bank that he hadn’t actually spent that much money.

The North Texas man had to spend two hours sorting out the problem with Bank of America and get the overdraft fee of $15 credited back. Visa stated that it was an obvious technical glitz in the system.

This story brings up some questions.

First, wouldn’t bells and whistles go off at a bank or credit card company in the event a 23 quadrillion dollar charge came through?

Second, how come it took two hours on the phone to sort this out with Bank of America? Wouldn’t this be an obvious mistake requiring a call to Visa and maybe a total of 10 minutes on the phone?

Third, how does a 23 quadrillion dollar transaction get approved in the first place?

Fourth, if you go 23 quadrillion dollars over your credit limit, is a $15 overdraft limit the only penalty? What would the new penalty interest rate be for going over the limit by a few quadrillion and how much would one day’s interest be on that type of money?

Finally, did either guy have trouble getting the overdraft fee credited back? After all, these are big money makers for credit card companies.

It really does make you wonder.

Tags: 23 quadrillion dollars, Bank of America, Bob Brooks, Cardholders, Credit Card Companies, Deceptive Money, overdraft fee, Prudent Money, Visa, Wachovia

38.9 billion dollars…This is the estimated revenue that the banking system will make this year in overdraft fees. Overdraft fees have become an enormous revenue producer for banks.

The Federal Deposit Insurance Corporation estimates that 81% of all banks now allow customers to exceed their account balances. Most banks in America will automatically sign you up for overdraft protection. Then, you are protected against embarrassment in the event you pull that debit card out to pay for a transaction and there is no money in the account.

What’s worse, Bank of America has a policy that they will approve up to 10 overdrafts PER DAY. Last year, their policy only allowed for 5 daily overdrafts.

In a USA Today article, a spokesperson for the American Bankers Association states that banks adopted this policy as a “convenience” for customers because they didn’t want transactions denied. A survey conducted by the Center for Responsible Lending showed the exact opposite. The CRL states “most people would prefer that the bank deny their withdrawal or purchase when they don’t have the money to pay for it.”

Investigations into bank practices also have found that banks are clearing checks and debits based on the size of the transaction rather than the order in which they arrive at the bank. A big transaction has a better chance of putting a customer into an overdraft situation then a smaller transaction. So, if that $100 transaction puts a customer into an overdraft situation, the next 2 to 3 transactions of $10 to $15 will rack up overdrafts fees ranging from $50 to $70 dollars depending on the bank’s fee schedule.

In 2004, the Check Clearing for the 21st Century act has increased the ability for banks to clear these checks and debits much more quickly as well as to practice “check and debit ordering.” Prior to the passing of this act, the process of clearing transactions took a very long time. This act speeds up the process. However, the act does not force banks to post deposits at a faster pace.

It is no wonder that since that act has passed overdraft fees have increased almost 4 times. Banks made $10 billion in overdrafts fees in 2004 compared to the estimated $38.9 billion that will be made this year.

Don’t fear because Congress is going to fix this problem. They are trying to pass new legislation to make banks stop with this abusive practice. They will spend tons of time in committees and in discussion crafting out new legislation. Basically, they will waste a lot of time while looking like they are doing something for the American voter.

To our politicians in Washington who continue to allow these abuses to occur:

Pass a new law that simply bans overdraft protection. It can be a one page act. If consumers don’t have the money, then banks shouldn’t allow the transaction. It really is that easy.

Tags: account balances, American Bankers Association, Bank of America, Banking System, banks, Bob Brooks, Center for Responsible Lending, checks, Congress, debit card, debits, Deceptive Money, Federal Deposit Insurance Corporation, legislation, money, overdraft fees, overdrafts, Prudent Money, transaction fees, USA Today

If you were to listen to the political sound bites, you would think that the politicians have done an amazing job protecting the American Consumer through the credit card legislation that was passed in May and goes into effect February 2010. Just like everything in Washington, the sound bites don’t reflect reality. Politicians have done it again. They have opted to protect those who contribute to their campaigns versus passing legislation that protects the American people.

As I have pointed out in past writings, there are a ton of loopholes in this legislation. One of the more disturbing aspects of this bill is the lack of protection for the small business owner. The bill excludes protection for any small business that has credit card debt. I have yet to see a statistic that shows the amount of credit card debt that applies to small business owners. However, I would suspect it is a large percentage.

The National Small Business Association’s latest survey (2008) states that credit cards are now the most common source of financing for America’s small-business owners. The survey showed that 44% of small-business owner identified credit cards as a source of financing that their company had used in the previous 12 months. This was more than any other source of financing.

Business credit was probably one of the easiest forms of credit to obtain prior to the debt bubble bursting. Opening up lines of credit through a credit card in the name of business was very easy. Although the business owner was personally responsible for it just like a personal credit card, the item never was reported to the credit reporting agencies and was never reflected as debt which could lower a credit score. It gave a small-business owner the ability to hide tons of debt within the business without it ever being reflected on their credit score. This enabled small-business owners to obtain large amounts of debt. Of course, the credit card companies aggressively went after small-business owners giving them ample lines of credit through credit cards.

For many credit card companies, this is a big percentage of their business. It is also a big percentage that falls outside the new laws that were designed to protect card holders. Unfortunately, a small-business owner is not considered worthy enough to be protected from the abuse of the credit card industry. Score one for the credit card companies and the politicians that protect them. I wonder what it would be like to actually own a politician?

Tags: American Consumer, bill, Bob Brooks, credit, Credit Card Companies, credit card debt, Debt, Deceptive Money, financing, legislation, National Small Business Association, politicians, Prudent Money, small business owner, Washington

New Stock Market Alert : Summer Time Blues

New Debt Tip : Prudent Mortgage Refinancing Isn’t About Getting a Lower Payment

I had the opportunity to go on vacation last week. My family and I went to Red River, New Mexico. I guess this was good for me. There was no internet where we were staying. The satellite went in and out not giving me much access to news. My iPhone would work only when we were in town. So, for the first time in as long as I can remember, I was literally out of touch with the crazy world of markets.

It gave me some time to think through what was happening in the economy and stock markets without the constant interruption of market news. There are so many various risks that you could consider right now. In thinking through it, there is one risk that should be followed by an explanation point. In fact, it is one risk that I think will ultimately be a real problem for the stock market.

Allow me to take you through my thought process. We invest money in order to make it grow so that we can use it for specific financial goals down the road. Unfortunately, things aren’t always rosy when it comes to the wonderful world of investing. There are periods of time when you can lose a lot of money. So, you have two choices. First, you can just buy and hold and HOPE that everything works out well in the end. I adamantly disagree with the financial services industry that you just hold tight and take the losses during those times. Second, you can be more proactive and reduce risk (reducing how much money is invested in any type of stocks or stock funds – for further explanation see below) and reduce the potential for losing money.

Today, it is tough to consider reducing risk in the investments. If you listen to politicians and Wall Street, the worst is behind us. Thus, it would be crazy to reduce your risk now. Then you start thinking of all of the craziness that is occurring. I think you would agree that it is risky out there but to what extent?

This is what every 401(k) participant and anyone invested in stock needs to know about risk. For me, there are many known and unknown situations today that create risk for investors. However, there is one that is easy to explain and one that I feel will ultimately spell a great deal of trouble for those who are not proactive. It comes down to what I would now refer to as the unemployment crisis.

Think through this cycle with me. For the stock market to be positive, we need a positive economic outlook. For a positive economy, we need consumers to spend money. For consumers to spend money, there needs to be plenty of jobs. Unfortunately, the unemployment situation gets bleaker as the months go by.

Before I write about it, let me make sure that I debunk a few counter-arguments. First, Wall Street will tell you that you are looking at the past when looking at the unemployment report and that things could already be getting better. Unfortunately, we look at unemployment numbers on a weekly basis and those are real time. Those look just as bad. Second, Wall Street will tell you that things always look bad before they get better. When there are no real solutions, unemployment can get much worse.

The latest unemployment report showed 467,000 jobs were lost. That was after the Government “estimated” 185,000 jobs were created (for an explanation of how these estimates work, read this report). If you didn’t count that “estimate”, we would look at a loss of 652,000 jobs for just last month. Since the beginning of the year, the Government has “estimated” over 500,000 jobs that were created out of thin air. Out of those 523,000 “estimated” jobs that were created, 56% of those jobs were “estimated” to be created in the…Leisure and Hospitality Sector. Of course, you could see where the Government would assume that sector is hot. After all, think of all of the money that Americans are spending in the Leisure and Hospitality Sector during the greatest recession since the Great Depression (please note the sarcasm).

The “stated” unemployment rate of 9.5% is the highest in 26 years. The Department of Labor has another employment rate that they follow, which adds back into the total, the workers who fall out of the system. That rate is 16.5%. Shadow Stats, which is a company that takes economic data and calculates the real numbers, shows an unemployment rate of close to 21%.

President Obama reassures everyone that this problem is getting fixed. He claims that many of these “infrastructure” projects are about to be started. In other words, he is about to create a handful of jobs to work on infrastructure projects. This is far from a fix for unemployment.

So this remains a major risk for the stock market and why I will continue to suggest that investors consider the risk that they are taking. Yes, the market could start to look better and could start making money for a period of time. However, any gains are going to be tough to sustain with this unemployment crisis hanging over our heads.

Note: You manage for risk two ways. First, you reduce your exposure to stocks and stock based funds. This is a very general strategy for reducing risk. Second, you can also have someone manage your money for risk.

Tags: 401(k), Bob Brooks, Deceptive Money, Department of Labor, economic data, economy, financial goals, financial services industry, Givernment, internew, Investing, jobs, news, politicians, President Obama, Prudent Money, risks, Shadow stats, stock funds, stock markets, stocks, unemployment crisis, unemployment report, vacation, Wall Street