Ask Liz Weston

Sick and tired of all that bad economic news that just keeps rolling in 24/7? You can now wear that sentiment on your sleeve — well — your wrist — with the eco-friendly  “I’m Tired of The Economy” bracelet. The bracelet is made from recycled tires and metal.  Cost: $10.

But the makers of the “I’m Tired of …” line, Santa Monica siblings Dan Hoffman and Carrie Pollare, will give you $5 back as your own little economic stimulus rebate. (And you didn’t have to wait for Congress!) They suggest consumers buy a cup of coffee or a sandwich with the money.

Typically, the company creates bracelets to “fight against the world’s issues that we are all tired of, like animal cruelty, world hunger, global warming, cancer, diabetes, and so many more,” according to their news release. Half of the sale ($5) from each bracelet is donated to charities whose cause the company supports. (The rest goes to handle their costs, such as shipping.)

“With all the talk about the economy, we couldn’t resist,” says Hoffman in the release. “The US economy stinks and it’s all we’re hearing about.”

How many of the “I’m Tired of the Economy” bracelets have they sold? “Not that many yet,” Hoffman wrote in an email. “Maybe a few hundred. It just launched, but we’re getting a good response.”

Hoffman said the company has even sent a bracelet to President Obama because they imagine he’s already pretty sick of the economy, too. Any response? So far, no.  “He’ll probably get back to us shortly,” Hoffman joked in his email.

For more info on the bracelets CLICK HERE.

I’ve heard from two readers in recent weeks who called Bank of America to ask for a lower rate on their credit cards–requests that seriously backfired.

The first knew his credit wasn’t great, but thought he’d see if BofA would lower his 25% rate anyway. Not only did the bank say no, it lowered his credit limit by $7,000.

The second asked BofA “what I could do in these difficult economic times to reduce my interest and/or payments” on a credit card and a line of credit, according to a post on the Your Money message board.  Instead of a concession, the reader recently received letters from the bank saying the accounts had been frozen. “I was very surprised and called Bank of America again regarding the letters,” wrote the reader, who wasn’t in financial distresss. “Their response was that since I called to ask them for help it showed I was in financial hardship and froze my accounts.” 

Bank of America spokeswoman Betty Reiss said it’s not the bank’s policy to freeze or shut down accounts simply because customers ask for an interest rate cut. But she sidestepped my question about whether such requests invite the bank to more closely scrutinize the accounts. Bank of America is more closely monitoring all its accounts these days, she said.

Here’s what you need to know about asking your issuer for a lower interest rate:

You have the best shot if your FICO scores are 720 or above. Credit card issuers are trying to shed high-risk customers but woo (and retain) low-risk ones.

Don’t cite “hard times” unless you’re facing them. If you have good scores, you want to argue from a position of strength–”I have great credit and can easily take my business elsewhere.” If you talk about economic distress, you’ll set off red flags and alarms.

If your scores aren’t great but you’re not in distress, consider other options. Rather than asking for concessions from your issuer, talk to your local credit union about a fixed-rate debt consolidation loan. Consider a 401(k) loan only if your job is rock-solid.

If you are facing distress, get help. Your issuer may offer you a modified repayment plan or temporary forbearance (read this excellent CreditCards.com story for details), but your accounts will almost certainly be frozen and perhaps shut down. Credit counseling is another option that will have the same result. Bankruptcy is a last-resort option that may be your only way out if your debt is truly unpayable; consult an experienced bankruptcy attorney fordetails.

Since my column runs in Stars & Stripes, I frequently hear from military folks–and they often have special financial-planning challenges not faced by the rest of the population.

Now they have a great new resource. Kiplinger’s and the Council of Better Business Military Line have just released a free, 20-page money guide that offers comprehensive advice on a dozen personal finance topics. Written by Kimberly Lankford, contributing editor of Kiplinger’s Personal Finance and herself a military spouse, the guide covers topics such as:

• • Deployment — how to financially prepare
    
  • Buying a home
  • Taxes
  • Insurance
  • Avoiding scams that target military families
    
  • Retirement planning

The booklet — Kiplinger’s-BBB Personal Finance Guide for Military Families –  is being distributed to more than 700,000 servicemen and women worldwide. The booklet also will be available at BBB offices throughout the United States and in each congressional office. You also can download it from Kiplinger’s Web site.

It comes out just in time for Military Saves Week (Feb. 22- March 1), a national campaign to help Americans save.

Dear Liz: In my younger days, I thought it was a smart practice to pay my bills late so I could keep my cash earning interest as long as possible. After having difficulty with a home purchase in the early 1990s because the late payments showed up on my credit report, I changed my perspective and built my credit score to 816 as of October 2008. At that time I had a home mortgage, an auto loan and three credit cards with limits totaling $35,000 and balances that were paid in full monthly.

Recently, I opened a new account to purchase a computer and I paid down my auto loan by $6,000. After these transactions, my credit score dropped 23 points to 793, even though my total debt has dropped and my credit limit has increased. It took 15 years to increase my score by 150 points and just days to drop it by 23 points. Where is the fairness in this system?

Answer: Let’s cut to the chase: If your FICO credit scores are over 760 or so, you really have nothing to worry about, since those scores will help you qualify for the best rates and terms.

But you do have some misconceptions about credit scores and how they work. For example, you don’t have one credit score, you have many, and they change all the time.

The FICO is the leading scoring formula used by most lenders. Each of the three major credit bureaus sells its version of the FICO to lenders. Experian has stopped selling FICO scores to consumers, but you can get your FICO scores for the other two bureaus at www.myfico.com.

Your FICO scores typically won’t drop if you pay down debt. In fact, they usually rise. What probably caused the drop in scores was an increase in the balance on one or more of your credit cards. Even though you pay your cards in full, the balance that’s used in calculating your credit score is typically the balance reported on your last credit card statement. If you ran up a big balance, you hurt your score.

As to your last question, FICO scores weren’t designed to be fair. They were designed to help lenders predict the risk that a borrower would default.

Dear Liz: I am wondering about withdrawing my 401(k) early to pay off debt. My husband is the primary breadwinner of our household and has just been laid off.

At the beginning of 2008 we had over $25,000 in debt, which we reduced to $19,000 over the last year. I fear that without his income we will be facing bankruptcy. We have considered refinancing our home, but our second mortgage has a prepayment penalty until September.

I realize that cashing out my retirement is possibly the worst option, but I am running out of ideas. If you have any advice I would appreciate it.

Answer: In most cases, you’ll want to conserve cash after a layoff. That means paying just the minimums on your debts while you look for ways to cut expenses and find cash (by selling stuff or taking part-time jobs, for example). Once you’ve got your expenses comfortably below your income you can begin to repay your debts out of that income.

Withdrawing money prematurely from a 401(k) is usually a bad idea, but that’s especially true if bankruptcy is a possibility, since retirement accounts are off-limits to creditors. In other words, you’d be taking money that would otherwise be protected and using it to pay debts that could be erased in a bankruptcy filing.

You would also be incurring unnecessary taxes and penalties that can eat up 25% to 50% of your withdrawal, and you’d lose all the future tax-deferred returns that money could have earned.

If your debt is primarily on credit cards, consider contacting a legitimate credit counselor affiliated with the National Foundation for Credit Counseling at www.nfcc.org to see whether you could benefit from a debt management plan. Also, make an appointment with an experienced bankruptcy attorney so you and your husband can explore other options.

Two of the banks that received the most bailout money, Citibank and Bank of America, have collectively slashed customers’ credit card limits by $45 billion, the Washington Post revealed today.

Mortgage originations also dropped sharply. Way to spread the wealth, guys.

I’m getting more questions from readers about lowered limits and frozen accounts than any other topic these days. Even if you don’t “need” the credit, you need to care, because lowered limits and closed accounts can hurt your FICO scores.

The good news: you can fight back,  as long as you have decent (720+) FICO scores. Read my MSN column “Thaw out your frozen credit” for techniques.

When you’re getting a pilot’s license, one of the first things you learn is how to avoid a stall. A stall is when the plane’s wings suddenly lose lift, which can lead to an uncontrollable plunge to the ground.

You’re taught that if the plane is flying at low speed and starts to shake, you push the nose down. Your instructor takes you up into the sky and puts the plane in a near-stall, over and over again, so you can practice this recovery maneuver until it’s reflexive. Shake, push down. Shake, push down.

Yet now comes information from last week’s terrible commuter plane crash that the pilot seems to have done exactly the opposite–that he pulled the nose up instead of down.

It’s still too early to draw conclusions, of course, but it wouldn’t be the first time a human being panicked and did exactly the wrong thing, with disastrous consequences.

To bring this home: being fearful about your investments is a perfectly human and rational response to the uncertainty in the market and the economy. But some people are letting fear flare into panic. They’ve become hysterical and irrational. They’re convinced the economy is about to collapse and their investments will become worthless. They’re making sudden, radical changes in their portfolios rather than taking a moment to breathe, get unconflicted advice and see the big picture.

When you’re a pilot, you may not have time to reflect. That’s why flight training is so important. As long-term investors, though, we don’t have to make split-second decisions. We can take the time to get it right.

Dear Liz: We have about $800 extra each month after paying bills, but we aren’t sure we’re doing the right thing with it. Should we pay down our adjustable-rate, maxed-out home equity line of credit? Or do we put it toward our savings, which has only $5,000 right now?
Answer: Before doing either, make sure you’re saving adequately for retirement. You may be tempted to cut back in this uncertain market, but the costs of retirement are so great that you need to start saving early and not stop if you want to have a sufficient nest egg. Your human resources department at work probably has tools to help you.
If you’re convinced you’re on track there and you don’t have any credit card debt, the next step normally would be paying down that home equity line. In today’s environment, however, you might find your lender lowering your limit as soon as you start to reduce your balance. Rather than freeing up credit that you could use again in an emergency, paying down your HELOC may actually reduce your overall financial flexibility.
This might not be an issue if you have tons of equity. If your current mortgage balance and your line of credit total less than 60% of your home’s current value, you may not need to worry about your lender reducing your credit limit.
If your loans total more than 60%, however, or if housing values are falling fast in your area, consider instead building up your savings.

Dear Liz: Like many in this economy, I overextended myself with credit card debt. Fortunately, most of the cards are now paid off, although some of my creditors have lowered my credit lines. (The card I use for my design business has had its limit lowered, for example.) You always tell consumers to keep cards open to protect their credit scores. Because I have so many cards, though, I would prefer to close the accounts that have the highest interest rates. I plan to use just my American Express cards because they must be paid in full every month.
Answer: Your best course is to wait until all your debt is paid off and your credit scores have recovered to decide about closing any accounts.
Because account closures can’t help your scores and may hurt them, you typically should put off closing cards until your FICO scores are above 750. Even then, you should avoid closing your oldest and highest-limit cards, because those help your scores the most.
In this economy, you also want to be wary about cutting yourself off from credit, particularly if you run a business. You may need to tap those funds in an emergency.
If you really can’t control your card use, of course, all these considerations are moot. Then closing accounts may be the only remedy. But the fact you’ve been able to pay off most of this debt indicates you have self control, so consider waiting before making any moves you may later regret.

Dear Liz: My daughter is trying to buy her first home with very little money available for a down payment, perhaps 3% of the total purchase price. What are your thoughts on the interest-free loan from the IRS for first-time home buyers? It seems too good to pass up. Is there a downside?

Answer: The IRS isn’t exactly handing out cash for down payments. What first-time home buyers can get after they buy a house is a tax credit worth up to $8,000. Before Congress passed the stimulus package, the tax credit was $7,500, and had to be back over time, which is why some referred to it as an “interest-free loan.” Besides being slightly larger, the new version of the credit won’t have to be paid back.

With 3% down, your daughter may qualify for a Federal Housing Administration loan. She might want to discuss her situation with a housing counselor approved by the U.S. Department of Housing and Urban Development. She can find one at www.hud.gov.

But she also might consider waiting to build up her down payment and her cash reserves in general. Homeownership is expensive, and she should be reasonably sure she can afford all the costs before she dives in.