Ask Liz Weston

photo credit: allancaplan

Back-to-school sales are already in full swing, although the National Retail Federation says the typically K-12 family will spend 7.7% less this year, or an average of $548.72.

That’s still a significant chunk of change, particularly for families coping with financial setbacks such as a job loss or cut in hours.

There are plenty of smart ways to cut the tab. Among them:

Sort through what you have. Go through closets, drawers and shoe bins to see what’s still wearable and what basics you might need to add. The same is true for school supplies–you may have enough pens, notebooks and other items squirreled away to avoid another materials run. Even if you don’t, inventorying what you have will prevent you from buying duplicates.

Solicit donations. I’m not talking about panhandling strangers. I’m saying let your network of friends, neighbors and relatives know that you’re interested in gently-used hand-me-downs. You might even organize a swap party so your circle can get together, socialize and trade no-longer-needed clothes for stuff they can use. Or check out clothes-swap sites or Freecycle.org.

Set a budget–and let your kids help make choices. After all, making choices is at the core of smart money management. If you start this dicussion far enough in advance, your kids may even have time to supplement what you can spend with money they earn and save on their own.

Widen your search. Yard sales, consignment shops and thrift stores abound in most areas and can be a great source of clothes, accessories and supplies. So can eBay, Craigslist and deal-hunting sites like DealNews. Dollar stores and teacher supply catalogs are other places to check.

Shop early and late, but not the weekend before school starts. Yes, retailers will be slashing prices then and some states waive sales taxes for those days, but any savings may be offset by the hassles of dealing with big crowds and the temptation to buy more “because it’s on sale!” Delaying at least some purchases until a few weeks into school also has its advantages: your kids will be able to see what’s really in style (and yes, that’s important to all the but the youngest and least socially-conscious children) and you’ll find out how much of that long school supply list is really necessary.

photo credit: sterno74

We’re right in the thick of summertime driving, especially for teens, who spend 44 percent more hours driving each week now than during the school year.

If you haven’t looked at the financial and safety implications of adding a young driver to your household, here are some tips to consider from the Insurance Information Institute, a nonprofit group sponsored by the insurance industry:

Talk to your teen about costs. Explain how a driving infraction or accident can drive up insurance costs.

Insure your son or daughter on your own policy. It is generally cheaper to add your teens to your own policy than it is for them to purchase their own. If they are going to be driving their own car, insure it with your company so you can get a multi-vehicle discount.

Find out how your insurer assigns drivers to cars. Some insurers assign the driver who is the most expensive to insure (typically the teen) to the car that is the most expensive to insure. If you can, try to have your teen assigned to the least valuable car. Some insurers will allow policyholders to do this if the number of autos equals or exceeds the number of insured drivers on a policy. However, with this kind of deal, your teen can only use the car he or she has been assigned – even in an emergency.  You face penalties and your premiums might rise if your teen is involved in an accident in a car he/she was not assigned to drive.

Increase your liability insurance. State minimums for liability insurance will not be enough to fully protect you from lawsuits if your teen gets into an accident. If your teen is found negligent in an accident and the damages exceed your insurance limits, you will be held financially responsible and could be sued for those amounts not covered by your insurance. Consider an umbrella liability policy, which kicks in when you reach the limit on the underlying liability coverage in a homeowners, renters, condo or auto policy. For about $150 to $300 per year, you can buy a $1 million personal umbrella policy.

Let your insurer know when you teen is at school. You may be eligible for lower premiums once your teen is at college, providing he or she leaves the car behind.

Tell ‘em to get good grades. Most companies will give discounts for getting at least a “B” average in school and for taking a recognized driver training course.

Here’s a tip that the III didn’t offer, but I will: don’t let your teen drive an SUV or a sports car, which are tricky for inexperienced drivers to handle.

Above all – make sure you talk to your teen and get them into a good driving program. And set a good example. Their lives are at stake.

Need more information on insurance? Check out my columns for more advice:

• Cut the cost of insuring your teen driver
• What a car wreck could cost you
• Cut your auto insurance bills in half

photo credit: Andres Rueda

I’m a fan of having access to plenty of low-cost credit—as a proxy for an emergency fund while you’re building one, and to supplement your cash once you’ve got several months’ worth of expenses set aside. The future is uncertain, after all, and you can never tell when a cascade of events will wipe out your reserve.

What’s worrisome is that so many people never get beyond relying on their plastic as their only source of funds for unexpected emergencies—or even relatively predictable events like car and home repairs.

The national research center Demos recently published its second survey examining credit card debt among low- and middle-income households, which it defined as households whose incomes fell between 50% and 120% of the local median income.

“The Plastic Safety Net: How Households are Coping in a Fragile Economy” blows it in one sense by citing an “average” debt of $9,827 for these households. If you’ve been reading me awhile, you know how deceptive these “averages” are, since they’re skewed by big balances owed by a relatively small number of households.

A better measure of household debt uses medians, which describe the halfway point—half of the surveyed population owes less, half more.

The latest figures available from the Federal Reserve show that only 25.7% of the lowest-income households, 39.4% of lower middle income and 54.9% of middle income households have any credit card debt. Of those who have credit card debt, the median balances are $1,000, $1,800 and $2,400, respectively.

The other data Demos cited, though, was revealing. Particularly:

•    3 out of 4 low- and middle-income households reported using their credit cards as a safety net–relying on credit to pay for car repairs, house repairs, layoff or job loss, money given or loaned to relatives, college expenses or starting or running a business.

•    More than 1 out of 3 households reported using credit cards to cover basic living expenses, on average for 5 out of the last 12 months.

•    The most important predictor of higher “debt-stress” levels was whether a household relied on credit cards to cover basic living expenses such as rent, mortgage payment, groceries, utilities or insurance.

•    For 1 in 2 households out-of-pocket medical expenses contributed to a families’ credit card debt, with an average of $2,194 dollars related to out-of-pocket medical expenses.

•    The average interest rate paid on a families’ card with the highest balance was 14.8% with close to 1 in 4 indebted households paying more than 20% interest on their card.

•    In the past five years credit card indebted homeowners used an average of $14,344 in home equity to pay down credit card debt.

•    The majority of credit card indebted households used tax refunds toward debt reduction and nearly half of respondents worked extra hours or took on an extra job in order to get out of debt.

That last finding shows most households realize they have a serious problem and are trying to do something about it.

Demos’ recommendations to reduce dependence on high cost debt include:
1.    Promote increased savings, not increased debt, to help families meet unexpected financial emergencies.
2.    Modernize the unemployment insurance system and expand coverage and benefit levels.
3.    Strengthen the position of low-wage workers in the labor market.
4.    Address rising health care costs and the growing number of uninsured.
5.    Establish a new agency focused on consumer financial protection.

I think numbers 2 and 3 are longshots, particularly in this economy, but 4 and 5 are in process and the first suggestion–promoting savings rather than plastic–has always been a good idea.

If you want to break your own dependence on plastic, read the following:

• How to plan your ‘emergencies’
• How much should you spend on…
• Why you need budget buckets
• The $0 emergency fund
• Want to sleep better? Save $500

photo credit: barsen

Expect fees to proliferate as credit card companies cope with coming federal regulation that limits how much they can hike rates. Here are some to watch out for:

Annual fees
You’ll usually find these attached to reward cards or secured cards, although they’re likely to start popping up on all kinds of cards soon.
How to avoid it: If it’s a frequent flier card, you’re probably stuck with the fee, although it may be waived for the first year. Otherwise, ask the card issuer to waive the fee or if it offers an alternative card with no fee. Or, simply look for a card that does not charge you an annual fee – ever. If you have good credit, you should have plenty of options.

Application fees
Some secured cards charge for an application fee, but you shouldn’t pay one.
How to avoid it: Once again, ask the issuer to waive the fee. If it won’t, take your business elsewhere and shop for a card that doesn’t charge for the application.

Balance-transfer fees

Once upon a time, credit card companies either waived balance transfer fees or capped them at $100 or less. These days, expect to pay 3% or 4% of the amount you’re transferring. If you’re looking for a balance transfer offer to lower your interest rate, you really need to do the math to see how much of those savings will be offset by the fee.
How to avoid it: Look for deals that cap fees (there are still a few out there; check CardRatings.com and CreditCards.com for offers). Check with your current issuers to see if they’re offering any special deals or capping or waiving fees.

Cash advance fees

You’ll pay a fee of 1% to 3% if you use your card to get cash, plus a high interest rate that kicks in the moment you get the cash (no grace period).

How to avoid it: Avoid using your card for cash advances, if at all possible (although a credit card is typically a better option than a super-expensive payday loan).

Foreign transaction fee

It used to be that using your credit card was the best way to pay in foreign lands, since your plastic gave you access to the best institutional exchange rates. Card issuers have offset that advantage by piling on a 3% fee for the privilege of using your card abroad (or even for purchasing items from a foreign vendor while you’re at home).

How to avoid it: Capital One is the only major issuer that doesn’t charge the fee. Discover charges 2%, but acceptance of the card is somewhat limited outside the U.S.

Insufficient funds (NFS) or bounced-check fees
This can be a real pain in the you-know-what to clear up, so don’t bounce a check in the first place. The credit card issuer’s fee is $30 to $40 and most banks will charge an additional NSF fee of $25 to $30 per invalid check or transfer.
How to avoid it: Make sure you have true overdraft protection that links your checking account with a savings account, credit card or line of credit so that transactions don’t bounce. Check your balance frequently to make sure you have enough funds to cover your transactions. Also, find out how long a “hold” your bank puts on large deposits–a bank can often take days before it will let you draw against an unusually large deposit.

Late fees
Credit card issuers make a mint from these fees, and have been accused of changing due dates and times just to wrack up additional revenue. The new legislation will put an end to those games, but you still have to beware, since the typical fees is now over $30 and many cards will jack up your interest rate if you’re late.
How to avoid it: Set up automatic debits with the card issuer so that at least the minimum payment is taken out of your checking account each month. If you don’t like automatic debits, you can use your bank’s online bill payment system to set up recurring payments so that a set amount is sent to your issuer or simply send the payment in as soon as you get the statement. Don’t mail checks if you can avoid it, since those can be delayed in the mail and don’t leave an electronic trail behind them that allows you to prove the payment was sent on time.

Overlimit fees

This is a fee for making a purchase that puts you over your card’s limit. Nope – no one will tell you at the cash register that your card is over-the-limit. You’ll just get that bill.  And – here’s a twist: Recently, some card issuers have lowered credit limits, sometimes lowering account limits before an existing balance. Tricky, eh? So some borrowers who thought they were above their credit limit, suddenly find themselves exceeding it.
How to avoid it: Keep your balances significantly lower than the credit limit. It’s a good idea to use 30% or less of your credit limit and to sign up for email reminders from your issuer that notify you when your balance exceeds the limits you’ve set. And remember – under new rules signed into law this spring, borrowers must opt in for over-limit access.

For more credit tips, check out my latest columns:

• 7 fast fixes for your credit score
• Low rate balance transfers can hurt credit
• People with $100,000 credit card bills
• Fewer credit card offers, higher fees

Dear Liz: My fiance and I are trying to secure financing for our first home, but his credit scores are just below the mark. I was thinking of adding his name to my credit card account so that my available credit line shows up on his report. Would this boost his scores at all? Is there any danger of it lowering his scores?

Answer: If you have a good history with this account — you always pay on time and you’re not carrying a large balance — adding him as an authorized user may help his scores.

The key is whether the credit card issuer will “export” this data from your credit file to his. Some issuers automatically do this export for any authorized user; others do so only for spouses. The only way to know for sure is to ask your credit card company.

If the data is exported to his file, it will be used to calculate his FICO scores, which are the scores most lenders use. The company that creates the FICO briefly toyed with the idea of excluding authorized user data in its latest formula, FICO 08, but ultimately decided to continue using it.

If you add him as an authorized user, you don’t need to give him a card or access to your account. What you should do, however, is take some time to go over his credit reports and discuss what steps he’s taking on his own to clean up his financial act.

A temporary boost in his scores might land you a mortgage, but you could wind up much worse off financially if he continues to mishandle his credit.

Dear Liz: I just received rate increases on two of my credit cards that are together going to send me into bankruptcy. I didn’t think it could happen to someone who has perfect credit, has not maxed out the card and has been steadily reducing the balance and not charging anything, but obviously it can. I had every intention of repaying my debt, but these arbitrary increases — which will add $600 a month to my payments — have made it impossible.

I feel foolish for having this debt at all, but I lost my mortgage business and my husband is in construction. We have had a really bad four years. If they had just allowed me to continue making the payments per our original agreement, I would have been able to continue reducing the balance and they would get their money. This way, they won’t receive any money at all. How does this make sense?

Answer: Credit card issuers know full well that their latest rate increases will send some of their borrowers to Bankruptcy Court. What they’re hoping is that they’ll get enough interest from those who can still pay to offset the losses from those that can’t.

All may not be lost. Many issuers who have instituted these rate hikes offer an “opt out” provision that would allow you to keep your original rate if you agree to close the account. You should contact your issuers to see if this option is available. Closing accounts can ding your credit scores but will cause far less damage than a bankruptcy.

Be realistic about your financial situation, however. The amount of the proposed payment increase indicates you’re carrying substantial debt on those cards. Unless your financial situation improves dramatically, it’s probably only a matter of time until a misstep or another change in terms causes you to fall behind.

If that’s the case, bankruptcy may be a better option than continuing to struggle with debt you’ll never repay.

photo credit: Mike Licht, NotionsCapital.com

Medical spending on obesity-related health conditions has doubled in the past 10 years and now accounts for 9.1% of all money spent on health care, according to a new study published today by Health Affairs.

That’s up from 6.5% in 1998. The obesity rate–the percentage of Americans with a body mass index over 30–is now more than 25% of adults in America, up from 18.3% a decade ago. (You can calculate your BMI here.)

The study reports that per-person medical spending for obese people was 42% higher than for someone of normal weight, which means an extra expense of $1,429 per obese person per year. Obesity-related medical spending accounted for 8.5% of Medicare (the program for people over 65) and 11.8% of Medicaid (the health program for the poor).

And the money typically isn’t going for high-cost treatments like bariatric (stomach-stapling) surgery. Almost all of the obesity-related spending in both public and private sectors is tied to costs generated from obesity-related diseases, like diabetes, high blood pressure and high cholesterol.

The study’s authors say that lawmakers need to focus on ways to reduce obesity if they’re serious about containing health care costs.

As individuals, we need to get serious about our weight as well if we want to live longer, healthier, happier and more prosperous lives. Make today the day you start. Weight Watchers can cost you less than $10 a week, while 12-step-based programs like Overeaters Anonymous are free.

For more MSN articles on the connection between body weight and money, read:

• What if nobody were fat?
• What does it cost to drop 30 pounds?
• Will the recession make you fat?

Despite concerns that credit card limit cuts would devastate consumers’ credit, scores nationwide seem to be holding steady, according to Credit Karma, a score-tracking site.

Credit Karma’s latest survey found 34% of consumers saw their credit score stay the same in June compared to 32% in May. Nationally, 28% of consumers saw their credit score decline in June, which is slightly lower than May. And 38% of credit scores increased.

Now, while Credit Karma doesn’t use the FICO scoring formula that most lenders use, the trend is interesting because it seems to confirm what FICO has said: Limit cuts are not hurting consumers as much as some have expected, because consumers are reining in their spending, reducing their balance and new purchases.
Some of Karma’s other findings:

• The South as a region had the highest percentage of increasing credit scores, ending the Midwest’s four-month run at the top. In June, 39% of consumers in the South saw their credit scores increase; 28% of credit scores decreased; and 33% of credit scores stayed the same.
• Michigan had the highest percentage of increasing credit scores during June at 41%; 27% of credit scores declined; and 32% stayed the same.
• Texas saw the highest percentage of decreasing credit scores with 29%; 39% of Texas consumers credit scores increased; and 32% stayed the same.

Want to learn more about boosting your credit score? Check out my latest columns:

• 7 fast fixes for your credit score
• Raise your credit score to 740
• New threats to your credit score

photo credit: butler.corey

In a disaster, nothing is easy. If you have a mortgage and your home has been severely damaged or destroyed, some or all of the payment checks from your insurance company will be made payable jointly to you and your mortgage company.

But until your mortgage company releases its claim on the funds, that money will sit in your mortgage company’s account. And you need that money for your repairs! So you must understand how to negotiate your way through the claims process.

Here are a few tips from United Policyholders – a non-profit tax-exempt organization that helps to educate consumers about insurance:

• Read your documents and get in touch with your mortgage company by phone and mail.
• Be persistent and patient. Be polite but firm.
• When talking to your mortgage company, emphasize that without the money, you cannot get their collateral rebuilt.
• Ask the mortgage company to document what happens to the money while they have it (does it generate interest, and if not, is it invested?). The answer could be uncomfortable for them — and if so — that’s good for you.

To read an FAQ from United Policyholders and more details about how to get your money, CLICK HERE.

And to learn more about disaster/home insurance, check out some of my previous columns:

• Do you need disaster insurance?
• 10 things your insurance may not cover
• Is your home underinsured? 8 key points

photo credit: nicely85

The September issue of ShopSmart recommends sites and software that can make tracking your budget easier. (ShopSmart is published by the same folks who bring us Consumer Reports, and manages to combine CR’s great research with a Real Simple-style clean design.)

Here are ShopSmart’s picks, with my comments in italics:

For people who “just need a quick look at my spending,” ShopSmart likes:

Mint, saying “You’ll get an easy-to-read snapshot of what’s in your bank account and what you’ve spent so far on your credit card. Mint also searches the Web for appealing deposit accounts, loans, and other deals.” My take: Mint’s the leader so far in this space, and has an active community of users.

Quicken Online, saying “Quicken Online lets you input checks that haven’t cleared, so you know how much cash is left. It can also project what you’ll have in your bank account in the next several weeks, based on info you provide on regular expenditures.” Quicken’s been at this transaction-tracking game the longest and has a solid reputation for support and security. Being able to add transactions that haven’t cleared is a great way to avoid bounced check fees, but either of these sites would be helpful to get a grip on your money.

For people who “want something more comprehensive,” ShopSmart recommends:

Microsoft Money plus Deluxe. Oops. Clearly, the magazine went to press before Microsoft announced it was pulling the plug on its downloadable personal finance software. You can no longer purchase Money and support will be going away as well. So the better choices would be:

Quicken Deluxe 2009. ShopSmart says, “Quicken might intimidate novices with its spreadsheet-like graphics and overwhelming options, but the program has endless ways to analyze data. You can set up Quicken to do automatic bill paying, write checks, and export your financial information to tax software.” My take: All this information lives on your computer, rather than on a third-party Web site, which is often a big selling feature for its users. If you’re comfortable online, though, check out:

Yodlee Money Center. ShopSmart says, “Yodlee, which is fully online, displays a complete list of expenses and lets you remove what you don’t want to track, which is a real plus. It lets you customize charts and graphs in ways the other free Web sites don’t. You also can input checks that haven’t cleared so you know what cash is still on hand. Yodlee is the only online service ShopSmart looked at that lets you set up automatic bill paying.” My take: Yodlee provides account aggregation for banks, and it’s the most robust expense-tracking site for those who are comfortable doing their finances “in the cloud.”

For people who want community support to reach their goals, ShopSmart liked:

Geezeo, noting that the site “lets you set up particular goals—say, paying off your credit-card debt or saving for a vacation—and share your experiences with other Geezeo participants.”  ShopSmart wasn’t fond of the busy layout or the fact that Geezeo doesn’t include check numbers in the account statements it downloads from your bank, but notes “it’s the only one of the four free online sites ShopSmart tried that doesn’t require you to store your passwords and account numbers on its server, which might be important to you.”

Finally, for those who “just can’t be bothered setting up another online account,” ShopSmart suggested:

Your own bank or credit card company. “Bank of America, Wells Fargo, Discover Card, and other financial-services companies offer their own versions of budgeting software for online customers. Usually they don’t allow you to add info from other accounts, but if most of your transactions reside in one place, you might prefer this system. Check with your financial institution to see if it offers such a service.”