Be Careful Believing the Numbers from Credit Counselors

Before I get started, there might credit counselors out there that are legitimate. I have seen many of these proposals and pored over the numbers.

I have found 100% of the time that the numbers on these proposals are completely wrong. Thus, they are misleading.

I looked at one this morning and they promised this listener that he would be out of debt in 41 months. He has roughly 10 debts. There are so many errors and misrepresentations on this page that I don’t have enough space to detail it all.

Let’s just start out with one. He has a Bank of America debt of $4,742 that he is paying $208 a month and the interest rate is 32%. The company said that they would lower that interest rate to 18% and he would pay $111 a month. Now they say he would be debt free in 41 months.

It would take him 69 months to pay $111 a month at 18%. That is 28 months more than the proposal states. In addition, he would be out of that debt in 35 months if he just kept on the regular schedule.

It is amazing that the Federal Trade Commission allows these companies to operate. The problem is that anyone can get into this business. People often ask me if this is a good solution. As you can see, it is not!

In addition, you run the risk of getting put in collections while in one of these programs. You also run the risk of penalties. You basically face all types of risks by participating.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Politicians and the Credit Industry

Yesterday, I wrote about how the credit industry is desperately trying to clean up their image because of pressure from Congress. Congress has really been putting the pressure on the credit industry to change their anti-consumer practices of charging outrageous fees and higher interest rates.

Since this makes perfect sense, why does it take an act of Congress (no pun intended) to get this accomplished? Why wouldn’t any self-proclaimed Congressional leader see the unethical nature of these credit practices and just pass legislation to fix them?

Well, it is because they are politicians. Through the years, the big hitters in the credit industry have lined the coffers of many a politician’s re-election campaign. Thus, you scratch my back and I will scratch yours.

They have heavily contributed to the Republican side of the aisle while not really showing much love to the Democrats. As a result, the Republicans allowed this to get completely out of control. Now, the credit industry probably wishes they would have shown a little more love to the Democrats now that they are in power.

So, the Democrats really don’t have a back to scratch so they are going after the credit industry…..or are they? The current legislation by Democratic Senators Levin and McCaskill is excellent legislation that would prohibit these anti-consumer practices.

It is so good that it brings up a red flag for me and begs the question, “Is this piece of legislation a campaign contribution negotiation technique?” In other words, if the credit industry will start scratching my back, we will make sure that this legislation is a little more credit industry friendly.

Sorry to be so critical of our leaders in Congress. However, they are politicians and politics is politics. This will be interesting to track.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

The New Friendly Face of Credit – The Wolf behind Sheep’s Clothing

Congress has been coming down hard on the credit card industry for their use of the universal default clause. This is a clause in your credit card terms and conditions that you sign off on that gives credit card companies to ability to raise the default credit card rates as high as 32% if they determine that you have become a risk.

Chase has just recently announced their clear and simple plan. They are eliminating this practice as of March 2008. In a Dallas Morning News article, Capital One states that they raise a consumer’s rate only "if they pay us more than three days late twice in a 12-month period."

A spokeswoman for Bank of America said, "We do not engage, and never have engaged, in the practice of universal default for our consumer credit cards based on the customer's failure to repay obligations to other creditors."

So are credit companies really becoming more consumer-friendly? Not really.

Bank of America says that they never have engaged in the practice of universal default. However, if you look at their terms and conditions, it says:

We reserve the right to change the APRs in our discretion.

Another company that claims that they don’t engage in the practice has this on their terms and conditions:

In the future, we may increase your non-introductory APRs if market conditions
change.

I would define universal default agreement as the ability to change credit card rates for any reason. If you read the terms and conditions, they still reserve that right. They just don’t call it the universal default clause.

Remember, credit card companies just want the money that they make off of high interest rates, as well as the money that they make off of your mistakes. Be careful when a credit card company wants to be your friend.

My favorite is “a change in market conditions” – what about current credit conditions?

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Are We Already in a Recession and Just Don’t Know It?

Another brutal day on Wall Street. After Friday’s rebound, stocks returned to the intense selling that has been the norm for November. Further fears in the credit markets sent the S&P 500 down 32 points, or 2.32%, and the Dow Jones Industrial Average down 237 points, or 1.83%. It was yet another tough day on Wall Street. This bad period for stocks started just twenty-five days ago on November 1st and it is already down 9% since that time period.

A look at stock prices can give us a real good perspective at how things are in economy. Stock prices are typically a good predictor of things to come.

Financial stocks are reflective of the big problems that we are facing in the credit markets. Citigroup, Merrill Lynch, and Bear Sterns are all close to a 50% decline from their 2007 stock market highs.

If you take a look at retail, it doesn’t get much better. Wal-Mart, a good overall barometer for consumer spending, is down levels not seen since October of 1999. If you were invested in that stock, you would be at the same stock price now that you were eight years ago.

I wrote about retail sales yesterday in my blog and on my stock market outlook because this will give us a very good indication of the health of the consumer. For the most part, retail sales were stronger this year than last year on Black Friday. However, much of this was due to the aggressive marketing of midnight sales and the fact that retailers were practically giving merchandize away.

Retailers have figured out that to get the consumer in the door you have to slash prices. The problem is that retailers cannot afford to continue to sell merchandise at these levels for the next thirty days. Wall Street is dependent upon consumer spending to keep this economy going.

So, taking a look at the housing market, consumer debt, high energy prices, lay-offs, and slowing wage growth, it begs one to ask the question: “Are we already in a recession?” If not, I think that we are getting ever so close to one. If we are, market investors need to take a look at their portfolios and consider battening down the hatches. The stock market does not do well in recessions. The average loss in a recession is over 30%.

So how do you respond? Make sure you review my article on the 3 ways of investing. The bottom line is to have a game plan and know your risk.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Happy Cyber Monday

I cannot stress the importance of this Christmas retail season. This is a big test for the consumer. Wall Street is bracing for the worst, expecting retail sales to be the lowest in five years.

Why is there such an importance placed on this year? I would argue that one of the main factors to keeping us out of a recession is consumer spending. The consumer has not slowed down in a very long time. Through the use of debt, consumer spending has remained vigilant even through the tough years at the beginning of this decade.

Last Friday (Black Friday) was the start of the Christmas retail season. This year, Black Friday was stronger than last year. So, are we in the clear? You have to look behind the headline numbers. I would argue that these numbers don’t even remotely tell the whole story.

1) In order to get customers in the stores, retailers had to give the items away. The discounts were extremely deep. For the debt trapped consumer, these deals were necessary. Thus, they are going to show up in droves.
2) The average amount of money spent per consumer was lower than last year. You could look at that stat in one of two ways. The average could be down because of the low prices or it could be down because consumers are spending less. I would suggest it is a little of both.
3) The marketing of the 3 a.m. and 4 a.m. sales was a huge hit. That, in combination with the low prices, packed the consumers into the stores.

The big question is what happens in the next few weeks before Christmas? What happens after the deep discounts end? This will tell volumes about the state of the consumer. As long as retailers are willing to lend money and defer payments, the sales should be propped up to a certain degree. However, I doubt we are going to see strong retail sales for this Christmas season.

Today is cyber Monday and is the online shopping version of Black Friday.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

More and More Scams

These are two examples that came in today of scams that listeners have received:

Example 1
I seem to be getting a lot of emails stating that I have won various lotteries from different countries from the U.K. to South Africa to Nigeria. These emails do not have my name in them, and I believe they are scams. Also, I keep getting emails about jobs in which I would cash checks and keep a percentage of the money and send the money back (usually to someone in another country) by wire transfer. I know these have to be scams, but I am afraid some people may be fooled by them. I almost got fooled by a check-cashing scheme by someone buying some Avon products from me (from my Avon website). Some of the emails sound very legitimate with official-looking information, but I always remember the saying "if it sounds too good to be true, it probably is." I just wanted to let you know about these check-cashing and lottery scams. I seem to be getting these emails everyday.

Example 2
Bob,
Caught part of your program on Monday and heard about the check scam. We have heard from a company in London called Long-well Textiles, LTD, and he is describing the same set up. Checks mailed to you, you cash, keep 10% and wire the rest to his account in London. The first envelope arrived today and we declined accepting it and he is most upset and saying it is not a scam. We had found some info on this on the internet, however, we have not located it again.

Please be careful – these scammers are working hard to steal your money!!

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

The Government Grant Scam

A few weeks ago, I wrote about financial scams (read blog here) where people would give you a check to cash and tell you that you could keep some of that money just for cashing the check. You then cash the check, send them a part of the proceeds, and then the check bounces and you are out the money that you sent.

Well, there is another scam going right now and these scammers are bold in using advertisements and websites. It is the free grant money scam.

One listener writes in:

I know that this is too good to be true, but I wanted to run this by you....
Have you heard of www.Contactgrantpeople.com?
I just received a letter in the mail from this company stating that they
are a broker at Grant Organization and that I have been selected to receive a
$9960.00 cash grant. This money comes from large corporations and wealthy
individuals that give away money in a form of financial assistance. The
check is for $4980 and if I cash or deposit the check, I must send him his 10%
commission ($498.00) and then they will send the remaining $4980 airmail
express.

Now I cannot speak to whether or not these people are scammers. This is a real website. Everything that they advertise does fit. This is what the Federal Trade Commission had to say about this scam:

"The defendants advertised guaranteed 'free grants.' But the only grant was to
them. They took consumers' money, they did not honor their guarantees, and they
gave consumers nothing more than empty promises of free money," said Howard
Beales, Director of the FTC's Bureau of Consumer Protection. "Consumers should
keep in mind that most sources of grant money have strict criteria; they do not
give individuals money for nothing." (to read article, click here)

Here is a simple rule of thumb when it comes to this sort of thing:
Never take any offer where someone is just going to give you something for doing virtually nothing. There is no free lunch.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Is Your Money Market in Danger of Losing Money?

Are money market funds in danger of losing money due to short-term investments in bonds that hold sub-prime mortgages? The problems with sub-prime mortgages are apparently affecting money market accounts. Depending on what type of money market you have, there could be trouble brewing.

One money market account just recently offered its shareholders a way out of their account by accepting $0.96 for every $1 deposited.

This account was an enhanced money market account, which is an account designed to give a higher return than a normal money market account. In doing this, they take additional risk. Those funds will end up taking the loss. They can also be categorized as ultra-short bond funds, which are intended to be safer investments. However, one of the ultra-short bond funds year to date has had over an -8% loss.

What about money market accounts that have exposure to the risk from sub-prime loans? Of course, this isn’t something that you want to bank on. However, most major money market funds will step in and replenish their money market accounts with money to make up for any losses. A mutual fund or brokerage company that is a big player in the money market arena cannot afford the negative publicity that results from losses in accounts that are assumed to be relatively safe. People count on money market accounts to be safe. At the same time, you have to realize that they do take risk.

Keep in mind that money market accounts are not FDIC insured. Money on deposit in these accounts is insured by the FDIC for up to $ 100,000.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

How To Approach This Market – The Three Ways To Invest

I had a listener send me an e-mail a while back with this message. “You talk about how much risk is in the market. However, you never tell us what to do.” Well, I am here to give my analysis and teach you how to handle most things as a steward of your God-given assets. Most of the advice that I give is to be taken as general direction. It is a little bit tough to give specific advice when I don’t know your particular situation.

Generally speaking, there are three ways to face this stock market right now. Without question, you could find yourself in one of these three places.

1) Invest defensively – This would simply mean reducing your exposure to stocks and risky bond investments and increasing your cash and fixed investment exposure. I put together an entire analysis on this type of strategy. You can find the paper here.
2) Invest Offensively – There are ways to make money in bear markets or declining markets. They consist of investing in bear market type mutual funds and strategic investment strategy. For more information, you can go here.
3) Buy and Hold – This strategy never really made sense to me. If the risk is increasing in the stock market, it has been a longer-than-average time since we have experienced a bear market, and uncertainty is at a high, then just staying invested because you are invested for the long-term makes no sense to me. Investing is a probability game. If the probability of being invested has a potentially high probability of giving you high returns over the next six to twelve months, then stay invested. If the probabilities don’t seem to be that great, then go to either the first or second strategy.

The bottom line is to commit to strategy and have a sound basis for it. There are plenty of people that would disagree with my assessment of the third way to invest. However, keep in mind that it is extremely tough to just bounce back from a loss of -35%, which is the average loss of a bear market. At some point, we will face that situation again. Cycles still occur. Who knows the timing? At some point, it is important for every investor to acknowledge that timing might be sooner than later. Whether it is now or four months from now, I think that we are at that time.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Does It Make Sense To Pay Someone For A Bi-Weekly Mortgage Program?

I had a listener call in last week with a question about bi-weekly mortgage payments. Does it make sense to pay someone to make your payments for you on a bi-weekly basis?

First, let’s go over the concept of bi-weekly mortgages. A bi-weekly mortgage payment is paid every two weeks instead of being paid once a month. As a result of this strategy, you end up paying one additional payment a year and could pay off your mortgage approximately seven years sooner. In most cases, it is almost impossible for you as a consumer to make these bi-weekly payments without the assistance of a biweekly program.

These programs can cost as much as $ 295 to set-up and $ 5.50 a month for maintenance. Are these programs worth it?

There are two other ways to get an extra payment in each year. First, you could increase your payment each month so that at the end of twelve months, you have paid thirteen months’ payments instead of twelve months’ payments.

You could also just make one extra payment at the beginning of the year. Let’s look at the results of these three strategies using a $100,000 mortgage, 30 year fixed, at 7% interest rate.

Strategy 1 – Divide up the extra payment over twelve months
Total Interest Paid $ 105,381

Strategy 2 – One extra payment a year
Total Interest Paid $ 106,660

Strategy 3 – Bi-Weekly Payment
Total Interest Paid $ 103,958.73

It would look like the best strategy is the third one. Remember that I said you would have to use a service in order to make the bi-weekly payments. Therefore, we need to add that cost into the equation.

Costs for Strategy 3:
Total monthly costs of $ 5.50 a month over lifetime of program $ 1,545.50
Total upfront cost $ 295.00
Total Costs $ 1,840.50

So does it make sense to use a service?

Strategy 1 You do it yourself
Total interest $ 105,381

Strategy 3 You pay someone for a bi-weekly program
Total interest plus program costs $ 105,799.23

Why pay someone an additional $ 418.23 to do something that you can do for yourself for free?

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Don’t Fall For The Fake Check Scam

There is a scam sweeping the nation where people are losing an average of $3000 to $4000 if they fall for it. It is a fake check scam. Here is how it works:

This scam takes on many different forms. So the form is not what is important. The important thing is to be able to identify the basis of the scam. It all starts when someone gives you a realistic-looking check or money order and asks you to send cash somewhere in return.

The person will typically have a very sensational story to back up this request. You deposit the fake check or money order, send the cash, and then, just like that, you are personally out all of that money.

The problem with these scams is that the money order and the check look very real. If you present it to the bank, they are going to honor it and deposit it into your account. The problem comes when the bank discovers that the check or money order is a fake. Then you are out the money.

Some examples of the scam:
- The Scammer will ask you to cash a check or money order as a favor.
- If you are selling something, they will write the check or money order for more than the price requesting cash back.
- It might be a company that hires you to work at home, and as part of your job duties, you deposit checks or money orders in your account.
- It could be a check that you receive as part of an advance for winning a sweepstakes or some type of foreign business deal.

Scammers are also looking for victims on Ebay, Craig’s list, online dating sites, etc.

So how do you protect yourself from being a victim? First, don’t just automatically trust someone in any transaction that you don’t know. That is the number one rule of thumb. If it involves money and favors, don’t trust it. Second, there is a not legitimate reason why anyone would have you cash a check for them and then send the money. Third, there has to be risk involved if you are dealing with someone who can’t get a check cashed.

Finally, don’t do anything that involves money or giving personal information in any situation where you are approached. If someone calls you and asks for verification of information, don’t give it to them. If you approached through an e-mail, don’t respond.

That one piece of advice will work to prevent most scams from being successful.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Can You Ever Save Too Much Money? Saving With a Purpose

I received an interesting e-mail from a listener the other day.

“Is there such a thing as saving too much? My husband and I don't have any credit card debt, car loans, etc. We only have our mortgage in the way of debt. I contribute the max to my 401k and also have $75 auto-drafted into a savings account weekly. I think I am doing all the right things, but it often feels like we are ‘scraping by’. I think saving is the right thing to do, but my husband feels that I am ‘rat holing’ money and wants me to loosen up. Is there such a thing as saving too much?”

The answer in short is yes. There always has to be a balance between saving and spending. Most of the time, it is the other way around. The spending is way out of line in relation to saving.

You only want to save the amount of money necessary to help you achieve your goals. Thus, you need to save with a purpose. A saving plan needs direction. Without direction, you could catch yourself overdoing it and experience the feeling of just “scraping by.”

So, go through this process. Determine what you are saving for. For most of us, that would be retirement. So, let’s use that as the example. Determine what age you are going to retire. Determine the amount of money you need each month. Determine how long you think that you will need that money being paid to you each month.

Then add in social security, any pensions, and current investments. With all of that data, a financial advisor can tell you approximately how much you need to be saving each month. If you are achieving that monthly amount, then you are reaching your savings goals. That is saving with a purpose!

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Are These Debt Negotiation Companies Worth It?

This might be too long for a blog. However, I thought it was important to expose the reality of these so-called debt solution companies. Most of these companies will market that they can take your current debt and negotiate on your behalf to reduce that amount by up to 80%. I received a proposal that a listener received from a debt settlement company for $ 48,000.00 worth of debt.

This company proposed that they were going to reduce his debt by roughly 60% and he was going to owe only $ 19,014.27. However, he was going to pay this company $ 7,313.18 for that service.

Here is the reality of these services:

Contrary to what they say, most creditors will aggressively negotiate with anyone past a certain point. This is not rocket science and something that you can do for yourself.

In their proposal, they start with a certain amount of debt. They give you a dollar amount that you are going to pay each month for 48 months to complete their “forecasted” program. However, they cannot guarantee that the penalties and interest on those debts will go away. It is very likely that over the next 48 months, that original $ 48,000 debt will have greatly increased due to penalties and interest.

They get paid the entire fee up-front. The first 13 payments will go to fund their fee. After that, you are at their mercy. They have been paid.

Creditors can still choose to sue you. They will not represent you in a lawsuit. If you are sued, you are on your own. This is the big risk. You have 48 months (in Texas) that you are potentially subject to a lawsuit. Whether you are with a company or not, you are at risk of a lawsuit.

If any of your accounts are current prior to accepting the program, they will go into default and ruin your credit. For this system to work, they have to be extremely behind.

These companies state they will stop debt collector calls. You can stop debt collector calls with a simple letter.

The bottom line is that you are going to pay big bucks upfront to a company that will make sure that your credit goes into the tank, offer no protection from being sued, and negotiate on your behalf something that you can do yourself.

It is yet another smoke and mirrors marketing scheme from the credit industry. Unfortunately, only time will tell if a program like this will work. You sign off that there are no guarantees. As in the case presented above, this listener will be out $ 7,000 within the first 13 months, whether it works or not.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Trading Stocks and Waxing Cars is Easy – Just Ask the Guy on the Commercial

I don’t know whether to take it as an insult to intelligence or marketing genius. I love these late night infomercials or the commercials on satellite radio that market the secret formula for making millions in stocks.

“Hey Bill, where did you get that new car, that new house, and that new speed boat?” “Why Jack, I made that money trading stocks in my spare time.”
“How did you ever learn to trade stocks?” asks Jack.
“I simply went to this website and ordered this CD that tells me everything that I need to know. Anyone can do it.”
(I really cannot make this stuff up)

As I listen to those types of commercials, a few thoughts cross my mind. First, could that type of commercial really entice someone to call and order some informational CD, suckering them into spending thousands of dollars on some bogus stock trading system? Second, if these companies are spending all of this money marketing this garbage, it must work. Finally, this type of marketing is intended to appeal to a powerful emotion.

Show me the Holy Grail, something that is easy, and a slam dunk way to make money.

The problem is that it doesn’t quite work that way. As Michael Covel says in his excellent book called “Trend Following,” there is no holy grail. There is no slam dunk way to make money in trading stocks. Even the greatest of stock traders will tell you that no one has it figured out.

Trading stock is tough. If it weren’t, everyone would be doing it and no one would be losing money. Unfortunately, stock trading doesn’t quite work that way. Always remember marketing often creates a fantasy world that has a slim chance of actually turning into reality.

Don’t become a marketing casualty. The bottom line is that there are no slam dunk solutions.

I wish I would have known that the day I bought a bottle of that miracle car wax at the State Fair. If you have been to the car show, you probably saw the presentation. It is the wax that turns your faded dull car instantly into a brand new shiny car. You can set your hood on fire (I didn’t actually try that one) and nothing happens to the car.

Well, years ago I tried it on an older car with faded paint. Imagine that! My paint didn’t turn out to be a shiny new car again. Why? Because there is no slam dunk solution!

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Why Is The Federal Reserve Board So Concerned?

The Federal Reserve Board is taking unusual actions in the markets in the face of what seems like a healthy economy and a stock market that is up nicely year to date.

In the last twenty four hours, the Fed has taken some very unusual emergency-like actions, as if we are facing some unspoken crisis.

In the past day, the Federal Reserve Board has taken three steps:

1) Lowered in federal funds rate
2) Lowered the discount rates making it easier for banks to borrow money
3) Pumped 41 billion dollars into the U.S. financial system

Why is this so unusual? Let’s look at the federal funds rate first. Typically they lower those rates when inflation concerns are not present and the economy is strong. Well the economy showed good growth yesterday in the 3rd quarter. There are definitely inflationary pressures with oil at record highs well over $ 90 a barrel.

Thursday’s infusion of 41 billion dollars into the U.S. financial system is the largest cash infusion since September 2001. In 2001, we were facing a stock market that was getting clobbered, a weak economy, and a devastating terrorist attack. Today, we have strong economic growth and what appears to be a strong stock market.

However, is everything so strong? This comes back to my central argument about debt. This is a debt problem. It was reported today that foreclosures have doubled over the past year. Other types of loans besides mortgages are going into default at an alarming clip. The record price of oil will start to make its way to the gas price, creating even more pressures on the consumer. Finally, signs are showing that the consumer is getting into trouble and that consumer spending is at risk.

The problem is that a debt bubble is bursting. It is a slow process and it takes a little while for it to spread through the system. Some will argue that the Fed will be able to save the day. Well there comes a day when their life-saving strategies might not work. If you look at these extraordinary measures taken over the past twenty four hours and you look at Thursday’s stock market decline. It doesn’t appear to be much in the way of confidence.

I know that I have been on this bearish bandwagon for a while now. Just because things have not shown up doesn’t mean that they are not there. Please be aware of the risk that you taking.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.