MintLife Blog &#124; Personal Finance News &#38; Advice &#187; Jason Lankow

By the end of 1922 Germany found it was no longer able to pay the war reparations set forth by the Treaty of Versailles. French and Belgian armies responded by occupying Germany’s most productive, and industrial regions. German industrialists then ordered workers strikes, which put further pressure on an already frail economy. The German government countered this situation by printing unbacked currency with which it meant to pay both workers benefits, as well as its delinquent international debt. Supply and demand followed: too much money was circulated, and the money was soon considered worthless. In 1922, the largest denomination of the Papiermark was 50,000. A year later it was 100 Trillion. This means that by December 1923, the exchange rate with the US Dollar was 4.2 Trillion to 1. It is estimated that by November 1923, the yearly inflation rate was considered 325,000,000%. This means that the cost of goods were increasing about every two days. As a result, the Rentenmark was introduced at a rate of 1 to 1 Trillion of the Papiermark. Reparation payments eventually continued, and France and Belgium agreed to leave the country.

Hungary 1945-1946

The Great Depression put an initial strain on the Austrian Pengo, originally introduced with great strength as a replacement to the Austrian-Hungarian Korona in 1926, per the Treaty of Versailles. Next, the associated effects of World War II would run their course. In 1944, the Hungarian Pengo’s highest denomination was the 1,000 note. A year later it was 10,000,000. And by mid-1946, it was 100,000,000,000,000,000,000. Realizing that this type of hyperinflation and denomination increase was not sustainable – and after 20 short years – the Pengo was replaced by the Forint. There are famous pictures of this event, which include street sweepers cleaning the sea of Pengo notes that Hungarians so eagerly discarded. At the time of this replacement, the Pengo to Forint exchange, was Four Hundred Octillion (That’s 29 Zeros) to one. That same Forint would exchange for 11.74 to $1USD. Inflation has since continued at a much more subdued rate, and the current exchange is valued at approximately 195.2 Forint to 1 $USD. It is estimated that at the time of replacement, the value of all Hungarian currency in circulation equaled less than one-thousandth of one US dollar!

Chile 1971-1981

Shortly after the ascension to the office of president, Socialist President Salvador Allende, decreed that many of Chile’s leading industries would be nationalized. Owing predominately to management problems (with bureaucrats overseeing the market) this government soon began hemorrhaging money, and in order to subsidize the loss, the Chilean Central Bank began printing unbacked currency at an alarming rate. This resulted in an inflation rate of 600% by the end of 1972; inflation eventually skyrocketed to 1200% by the end of 1973. This was the same year General Augusto Pinochet’s US-backed coup d’état seized control and installed his populist military regime. Shortly thereafter, in 1985, the Escudo (1960-1975) was replaced by the New Peso at a rate of 1,000 to 1. Except for a slight depression in 1981, the Chilean economy recovered, largely due to the government’s decision to sell off newly acquired State-owned enterprises. The rest of Pinochet’ s tenure in Chile, however, is entirely another story.

Argentina 1975-1992

After unprecedented annual growth rates and record trade surpluses, panic and political unrest broke out between Argentine Trotskyists and the Perón loyalists, in the wake of the 1973 oil crisis. Conflict came to a head in 1975, when a sharp recession looked inevitable. The Argentine government then exacerbated the situation by refusing to borrow in order to cover its budget and trade deficits. In 1975, the largest Argentine Peso denomination was 1,000. A year later the 5,000 note was introduced. In March 1976, a violent coup was staged by the country’s military leaders, who promised to bring stability to the region. By ‘79, there was a 10,000 Peso banknote and by 1981, the Argentine Central Bank had introduced a 1,000,000 Peso note. The country’s economy declined, further worsening the situation – in between 1981 and 1982, Argentina’s GDP fell 12%, the worst single year decline since The Great Depression. When the currency was reformed in 1983, 1 Peso Argentino was exchanged for 10,000 of the “old” Peso. Then in 1985, the ‘Austral’ was introduced, which replaced the Peso Argentino at a rate of 1-to-1,0000 Then yet again, in 1992, the New Peso replaced the Austral this time at 1-to-10,000. This end result of this experience – in many circles referred to as, “The March of Zeros” – equated to a 1 New Peso equal to 100,000,000,000 Pre-’83 Pesos.

Peru 1988-1991

During the 1980s, Peru, like many Latin American countries introduced a number of trade liberalization polices. At the same time, government increased public spending, privatized enterprise, and neglected to service the nation’s external debt. As a result, by the end of the 1990s, Peru’s already small economy – which once had been enticing avenue for foreign direct investment – was experiencing not only negative economic growth, but also deficits of all types, as well as hyperinflation. While hyperinflation became apparent, the Peruvian government replaced the Peru “Old” Sol with the Inti, in 1985, at a rate of 1,000 to 1. The largest denomination of this new currency, was a 1,000 note. In two years, monthly inflation would increase by a rate of 132% in September 1988, and later 400% by September 1990. In order to facilitate the new higher prices of goods and services, new notes were introduced such as the 10,000,000 Inti note by 1991. Again, Peruvian government decided again to replace the currency, this time with the Neuvo Sol, at a rate of 1,000,000,000 to 1. The result was a currency that was worth one billion times that of only six years before.

Angola 1991 – 1999

Angola’s story is an unfortunate one, and while it is today one of the fastest growing economies in the world, the country was plagued by civil war from 1975 to 2002. This conflict placed a large strain on the nation’s economy, as well as its currency, the Kwanza. In 1991, the largest note was the 50,000 kwanza denomination. By ‘94, there was the 500,000 banknote. In 1995, the Readjusted Kwanza (Kwanza reajustado) was introduced for 1,000 Kwanzas. The new currency also had a 500,000 denomination. When the country changed currencies in again in 1999, the New Kwanza was introduced, exchanging for 1,000,000 of the reajustados; by this time, the new currency was equal to one billion of the pre-’91 Kwanzas.

Yugoslavia 1992-1995

Between 1988 and 1989, the Yugoslavian Dinar’s largest denomination switched from 50,000 to 2,000,000 notes. The New Dinar replaced the Dinar in 1992, at a rate of 1 to 10, with the highest denomination being 50,000. By 1993, this was 10,000,000,000. In answer to this sharp increase inflation, the government simply removed six zeros, meaning that the “Newer” Dinar replaced the “Old Dinar” at a rate of 1 to 1,000,000. In the next year the currency was replaced yet again, this time at the rate of 1 to 1,000,000,000! By January 1995, prices had increased a quadrillion percent in two years, and as a result the German Mark became the country’s Fiat currency. It is estimated that during the height of hyperinflation (December 1994), inflation was increasing by a rate of 100% per day. In fact many Yugoslavians during this time sought to forgo paying their bills for as long as possible, because it several weeks the amount owed would seem relatively cheap!

Belarus 1994-2002

Shortly after the Cold War, many of the newly independent Eastern Bloc states began to experience the pains of a currency fluctuation, and moving towards a market-based economy. At the time of independence, Belarus was had a relatively highly developed economy, and it’s citizens experienced a standard of living among the highest of eastern Europe. In 1993, the largest Belorussian note denomination in circulation was the 5,000 Rubles. By the end of the decade, this had increased to 5,000,000 notes. In an effort to displace this, the government replaced the new Ruble at an exchange rate of 1 to 1,000 “old” Ruble. Presently, the highest denomination is the 100,000 note, which is equal to 100,000,000 1993 Ruble. Many people credit the high rates of inflation to the leadership of Lukashenko who has been in office since 1994. Today 80% of the country’s industries are still nationalized.

Zimbabwe 2000-2009

When Zimbabwe became an independent African state in 1980, the Zimbabwe dollar was actually valued higher than the US dollar, at a rate of 1 to 1.25. Through a series of questionable race-based land seizures and rampant money-printing, the Zimbabwe dollar began to experience rampant inflation by the early 21st century. By 2004, inflation reached a then-all time high of 624%, before going below triple digits in 2005, and then surged up to to 1,730% in 2006. In August 2006, the currency was replaced with a New Zimbabwe dollar at a rate of 1 to 1,000. By mid-2007, inflation reached a yearly increase of 11,000%. By May 2008, 100 Million and 250 Million New Zimbabwe Dollars (ZWD) denominated notes were released, and less than two weeks later, a 500 Million ZWD note was introduced (valued at about $2.50). Then less than a week later, 5 B, 25 B and 50 B ZWD notes were introduced, and later, in July, a 100 B denomination was introduced. In August 2008, the government removed ten zeros from the currency, and 10 Billion ZWD became equal to 1 New ZWD, with an estimated annual inflation rate of about 500 quintillion (18 zeros) percent, with a monthly rate of 13 billion percent.

Should You Walk Away From Your Student Loans?

Jason Lankow — Fri, 08 May 2009 01:02:37 +0000

(Photo: Eric Rogers)

It’s not surprising that you didn’t realize what you were getting into with your student loan. You were just barely out of your teen years when you signed the paperwork. If you’re like most people, you probably had little understanding of what it means to incur debt and were lulled into a false sense of security with the knowledge that payments will be deferred for years to come. The language can throw you too. What’s the difference between a subsidized and an unsubsidized loan? What about federal vs private loans?, and so on. This lack of understanding can make you the victim of predatory interest rates from private student loan providers. But walking away from your student loan isn’t the same thing as walking away from your home loans. You’d better be aware of the consequences before you decide not to pay.

Put simply, the only way to absolve yourself of your responsibility to pay back your student loan is to die, or to become unable to work due to a serious disability.

From the government’s perspective, defaulting on an obligation to pay back a student loan, which in the case of federal loans, is lent with taxpayers’ dollars is almost as serious as not paying your taxes. While it’s not a federal offense to fail to repay these loans, the government, and government-approved student loan companies have ways of getting money that is owed. That said, what can you do when the debt seems to be too much to bear?

Student Loan Consolidation and Refinance

Federal student loans are locked in based on current rates at the time of each disbursement. This can vary when the loan documents are signed. Private loans typically have a higher rate, and are usually tied to an index such as the Prime Rate or Treasury averages, much like a credit card. These are typically locked in at a fixed rate, and also vary depending on what federal rates are in place.

As a result of loans being disbursed each semester, many students will find themselves with multiple loans at multiple rates. For students wishing to consolidate their loans, they must apply for this with each lender. This will generally result in say, four loans, with varying interest rates, being consolidated into one amount with a common rate.

Refinancing typically means reduced monthly payments with a longer repayment period – usually at a lower interest rate. If you have federal student loans, and private loans, the interest rates will most likely vary greatly, and must be refinanced separately as you cannot combine your federal student loan debt with private student loans. To get the best rate with either type, make sure your credit is in good shape before applying. Your credit will be referenced, and will play a role in refinancing at a preferred rate.

Deferment

Deferring the repayment of loans is typically granted for a number of valid reasons. This postpones the repayment of principal for a specific period of time. This is typically for people who continue to be enrolled in school, disabled students that are undergoing some type of rehabilitation, or those individuals that have left school and are either unemployed, or able to display a marked financial hardship. For subsidized loans, no interest accrues during this time. For private loans, interest will accrue and will be recapitalized (added to the loan balance), thus increasing the size of the loan.

Forbearance

Those without an approved reason for deferment, but are still unable or unwilling to pay, they may be granted forbearance. During this period, payments can be postponed or reduced, but interest will continue to accrue. Interest is not subsidized during a forbearance, as it’s viewed as a voluntary postponement by the debtor. As a result you are responsible for the additional interest accrued while payments to the principal are not being made and it’s added to the loan balance. These are typically granted in twelve month intervals, but can be made in shorter ones such as three or six month intervals.

Alternate Payment Options

As with any debt, there are always options based on an individual’s specific circumstances. Federal lenders are typically easier to work with than private lenders, but there are always options. For the former the options include: extended repayment, graduated repayment, income sensitive repayment, income contingent repayment, and income-based repayment. For more information on these options it’s best to contact your lender and ask about what they can do for you. As with a deferment or forbearance, it is extremely important to contact your lender to discuss this option while your account is in good standing. Should you allow your account to go into default, many of the above options will cease to be available.

Declaring Bankruptcy?

Nope. In nearly every circumstance, student loans are non-dischargeable. Walking away from student loans is not like walking away from a credit card, mortgage or car loan.

So, What are the Consequences?

Collections

Like any substantial debt, the companies you borrowed from will hound you if you stop paying. Then your account will probably be sent to collections. They will call, send letters, and in many cases start contacting your family if you fail to respond to their attempts. If you were a minor when applying for your student loans and your parents co-signed for you, then they can start calling them as well and put pressure on them to make your payments. Additionally, if your account goes to a collections agency, you will be liable for any legal and court costs associated with collection attempts.

Lawsuits

This is more common with private lenders, but students that default on their student loans may be sued for the full amount of their debt owed. Courts will typically enforce this via wage garnishments.

Job Hunting

These days, many companies run a background and credit check during the application process. This is increasingly popular for positions that require even a modest level of responsibility, especially financial responsibility. While bad credit is not always enough to bar getting hired, having defaulted on student loans is typically a red flag. In short, it can communicate a lot to an employer about an applicants’ ethics and track record.

Default Interest Rates

If you neglect to pay your student loans, you will accrue penalties, fees and interest. Your account will eventually adjust to a default rate, and it will continue to accrue interest until action is taken. The process and rates for each type of loan varies. For more information visit the Federal Financial Aid website

Damaged Credit

Going thirty days past due on your student loans will have a negative impact on your credit. So, you can imagine that walking away from your student loans will carry far greater consequences. Most estimate the credit impact of defaulting on student loans to be similar to the hit for a real-estate foreclosure. While debtors’ prisons have not existed for over a century here in the US, defaulting can haunt you and your credit report for around a decade. To make matters worse, if you had a co-signer on your loans, their credit will be similarly affected, unless they make the payments for you. This, of course, could then put a huge strain on personal relationships.

Wage Garnishments

Here’s the biggest difference between other debts (mortgage, auto, and credit cards, for example) and student loan debt: if you fail to pay your student loans, your lender can garnish your wages. Many people move abroad as an attempt to avoid repaying their student loans. For those with an excess of $100k, this can make sense at first. If you move to the EU and find employment there, and pay taxes there, there is no way the US government can garnish these foreign-based earnings. The problem is, if you want to return to the US and work one day, you’ll return to the unsavory reality of a much higher balance – due to accrued fees, penalties and compounded interest – and very likely, a wage garnishment.

Should You Buy a Home Right Now?

Jason Lankow — Thu, 26 Mar 2009 04:12:24 +0000

(Photo by Chad Jones)

Conventional wisdom says that buying is preferable to renting. Instead of throwing money away on a home, you can invest in your future and have the sense of fulfillment that comes from owning a home. Turns out, conventional wisdom is wrong. Today, many long-term renters are in a much stronger financial position than many recent homebuyers, and the last thing these homeowners are feeling is contentment. But the combination of firesale prices on homes, the drop in mortgage rates, and government assistance in the form of the first time home buyer tax credit, may have you reconsidering the idea of buying your own home. Is now a good time?

The Good

Here are a few of the reasons why now is a better time to buy a home than it has been at any point in the past few years:

Tax Credits

In the stimulus plan signed by President Obama, there is a first-time home buyer tax credit of $8,000, provided that you stay in the home for 36 months. This isn’t a tax deduction like your mortgage interest, which reduces your taxable income – a tax credit actually reduces your total income taxes owed. In addition, some states, such as California, are offering tax credits for home buyers that will further reduce your tax liability. Keep in mind that the federal program ends on December 1st of this year, and while it could easily end up being extended, it isn’t a given.

Rates last week dipped to an all-time low when the Fed announced that it would continue buying additional mortgage backed securities. Even though they ticked back up slightly in the past few days, with full income documentation and good credit, you can easily get down to 4.5% on a conventional 30 year fixed if you have 20% down, and if you want to get into an FHA loan, you can more typically get around 5.0% with a down payment of only 3.5%. Be careful when shopping for rates online, and think twice before giving out personal information. It is far better to ask friends and family for a strong personal recommendation, and use the information that you see on sites such as bankrate.com to approximate where your rate should be. Keep in mind that everyone’s scenario is different and there are a lot of new rate adjustments for conventional loans that didn’t exist in prior years, so you can easily end up paying 1 point (or percentage of the loan amount) for a loan that might cost your friend zero points for the same rate on the same day with the same lender.

Because You Don’t Absolutely Need to Buy

The best time to shop for a home is when you don’t need to. You can be as aggressive as you want to on your offer, and time is on your side because prices aren’t going to go back up overnight. If you are patient, you can find a home that you love, and just make sure that you can comfortably afford it and have a long-term plan to keep the property.

The Bad

These are factors that should not be driving your motivation to purchase a home right now:

Timing the Market Bottom

The same advice that applies to the stock market applies to the housing market. Don’t try to time it. If you have played around with the stock market in the past year and tried to catch a falling knife in the hopes of maximizing your return, you can probably look at the scars on your financial statements and let it serve as a reminder not to time the bottom. The turnaround in prices is gradual, and you are not going to miss out on an instant, overnight spike in real estate prices, no matter how fast the bank-owned properties are selling locally.

The Illusion of the Discount

Perhaps a new development popped up three years ago and was so shiny and perfect that you would have taken a third job to afford it. Now, the model that you love has popped up for $400,000 and all of the recent sales were at $450,000. In a stable market, that is great, but if you live in a declining market, you have now become the new comparable sale that any listings in the development in the near future will be measured against. So, if you buy this place for $400,000, and your new neighbor decides to move, they now will likely be advised by their real estate agent to price their property at or below your price in order to sell quickly. The same holds true for purchasing bank-owned properties. Bank-owned sales may be somewhat less frequent and given slightly less weight in determining the next sales prices in your neighborhood. However, if you buy in a neighborhood with a relatively high level of short sales and foreclosures, that great deal you just got on the bank-owned property just set the bar lower for the whole neighborhood.

The Ugly

If you don’t know what you are doing or have enough of a cash reserve to justify the risk, this real estate market can eat you alive, especially if you are short-sighted.

Fix It and Flip It

Unless you are lightning fast, experienced at managing renovation projects and holding plenty of cash that you are comfortable risking, that late night real estate fix-and-flip infomercial that was recorded in 2003 should not be considered your ticket to financial freedom. Of course there are gurus who have been waiting for this opportunity, and you are driving around listening to Robert Kiyosaki on iTunes with your Bluetooth intact looking for the bargain of the century. Just do your research, and don’t think that any particular property is the last opportunity you will ever have to get a great deal.

Until you see your local median price leveled off or even slightly increasing for a few months consecutively, you are dependent on sweat equity, which in many cases is wiped out by a few homes in the neighborhood going into foreclosure and further reducing home prices. Again, this market has become hyperlocal, down to the subdivision. In Orange County for example, prices for stronger neighborhoods may be down only 10% in the last year while properties less than a mile away have been cut in half or more in extreme cases.

Are you really ready?

How much are you paying now for rent? You should look at a good principal and interest calculator or talk to your lender to get the whole picture, including monthly amounts for taxes, insurance, any applicable homeowners association dues, and any applicable mortgage insurance. This is important even if you plan on paying taxes and insurance on your own (rather than impounding them and making monthly payments to the lender) because you will want to make sure to budget monthly to set aside for these expenses. So, if you are paying $1,500 currently for rent, and the new home will be $2,500, put your budget to the test and see how well your finances run when you put the amount of the increased housing expense (in this case $1,000) into your savings account. Take it out right when you pay your rent, and don’t touch it. This is a great test of how much you can really comfortably afford, and of course has the nice side effect of padding your savings for a few months before you start shopping for a home.

Of course, if you have a long-term plan to be in the home, the fluctuations and potential decrease in value in the near term doesn’t need to get you down, as the only price that matters is the price you are able to sell for when you need or want to move.

Who Does Obama’s Foreclosure Fix Really Help?

Jason Lankow — Fri, 06 Mar 2009 02:45:14 +0000

(zachvs)

For millions of homeowners, the past few months (or years) have been very confusing and frustrating as multiple government ‘fixes’ have turned out to be both inaccessible and, in many cases, downright imaginary. With estimates that one in five homes has a mortgage that is underwater, it is important to remember that there are plenty of options to pursue before you walk away from your home. From the FHA Hope Program to grand speeches by numerous politicians, we’re constantly being told that hope is on the way. But who do you talk to? When you call your lender, you get the run around, and you send documentation to get your loan modified, only to find that it sat on someone’s desk for three weeks. Will any of this change with Obama’s new plan that was announced yesterday? Here is who it helps, and what to do if you aren’t in the segment of the population that is eligible.

Who does this program help? First of all, you must be employed or receiving some type of income. If you are not receiving any income from any source, you will need to pursue a short sale or deed in lieu of foreclosure. This specific program helps people who have primary residence loans that are owned or backed by Fannie Mae and Freddie Mac up to $729,750 (although your loan servicing company could be anyone). Keep in mind that not all loans below this ceiling are Fannie or Freddie loans, and that this does not address another important issue – the piggyback, or 2nd mortgage. Of course, there is also a percentage of the population with loans higher than the threshold, but the authors of this package chose to help as many people as possible with the money allocated to staving off foreclosures, while the people who bought the multi-million dollar homes will need to pursue other courses of action.

If you do meet the initial criteria, your lender could potentially lower your rate as low as 2% in order to get you into the ideal range of 31% to 38% of your monthly income. Every scenario and rate will be unique as lenders weigh the cost of modifying the loan vs. foreclosing. The implementation of the program and the timing will vary among lenders and loan servicing companies, so you will have to be patient and will most likely start experiencing longer hold times, so just dial and put the phone on speaker and bake a cake while you are waiting.

The past year of course has seen an explosion of new loan modification and debt consolidation companies. The new industry shares some similarities with the mortgage business five years ago, when the lure of a fast buck drew plenty of good, honest people but even more people who took advantage of people to maximize commissions. You can almost imagine a scenario where the guy who made five percent commission on your loan and stuck you with a prepayment penalty on a loan that adjusted after one month is now on the other end of the phone offering to help you get your loan modified.

So, how do you find a reputable attorney and/or loan modification company to help you through the process. First, never go with the first person you talk to. There are companies that charge from $695 to $5,000 and higher to help you out, and it can be a daunting task to choose someone to help you out. You do not need to give each of the companies actual documentation, but you should be forthcoming about your exact scenario including loan amounts for both mortgages, approximate value of your home, and what your level of delinquency is. Once you have talked to three or four different companies, you should have a good feel for how they compare in terms of some of the following important criteria:

What is the upfront fee?
When is the next payment due, or is there a payment plan?
What is the total fee?
Is there an additional fee to have them handle a second mortgage concurrently?
How long until you hear back from their initial review of your documentation?
If the modification is not successful, how much of the fee is refundable and when?
VERY IMPORTANT: How do they define a successful loan modification? Is the bare minimum that they guarantee enough of a savings to actually make the home affordable?

Once they complete an initial review of your documentation, they will move forward by sending your documentation to your lender. Some lenders are offering blanket proposals that are sent out en masse overnight to struggling homeowners, and they simply offer to recapitalize the past due interest, which adds the interest amount to your principal balance and actually increases your monthly payment. Basically, the lender is seeing if you will bite on that offer and start making payments again. There are definitely people out there who are doing good work for homeowners, and if you can’t get a personal referral, at least search for recommendations or warnings about the local person you are dealing with.

Moving forward, we can expect to see many new programs as Congress seeks to address the housing crisis from all angles. In particular, there is an important measure, the so-called ‘cramdown bill’ in the Senate (which was approved in a slightly different version by the House today) to give judges authority in certain bankruptcy hearings to order lenders to modify loan terms and balances on a primary residence rather than foreclosing. Additionally, we can expect to see packages that deal with the larger and more complex problem of second mortgages. Of course, it also remains to be seen how long these changes will take and on a macro scale, how much it will ultimately prevent foreclosures on a wide scale and bring relative stability to the housing market.

Should You Walk Away From Your Taxes?

Jason Lankow — Fri, 27 Feb 2009 02:26:03 +0000

When things get as bad as they are in the current economic crisis, there’s a natural tendency to just walk away from your debt. But when it comes to taxes, doing so could eventually land you in jail. The state of affairs has been worsened by the mortgage crisis, the insolvency of banks, corporate bailouts and golden parachutes for executives. And to top it off, there is the admittance by states such as California, that some state-level tax refunds will be issued in the form of IOUs this time around. Before you give in to the temptation to just walk away, consider the implications and penalties that may ensue.

What If You Don’t File, or File Late?

Like most creditors, the IRS doesn’t think your unexpected bills, or personal financial circumstances are reason enough to abandon your debts. Especially in April. Unlike most creditors, however, the IRS has the resources of the federal government to ensure they track you down, and get the money they are looking for from you. It would therefore make sense to prioritize your finances each year in such a way that accounts for your tax liability owed, say before you take that next trip abroad, or perhaps even before any other debt for that matter.

If you fail to file a tax return on time:

-Penalties and interest will be assessed and applied to the original amount owed, which will increase the amount of tax due. Interest will continue to accrue on any outstanding balance.

-The IRS may file a substitute return for you. This return would only be based on information the IRS has from other sources, including W2 and 1099 income reported by others. As a result, additional exemptions and expenses that you would be entitled to will be overlooked, which in most cases, will lead to your tax liability being overstated.

-Once the tax owed amount is assessed, the IRS will start the collection process. The IRS has the authority to place a levy on wages or bank accounts. The IRS may also file a federal tax lien against your property.

It is important to make the distinction between the types of charges and/or penalties that may be brought up and applied to non-filers. While there are distinct implications for each type of offense, they are not mutually exclusive.

Penalties and Fees
There is a penalty for late filing of 5% of the tax not paid by the due date for each month, or part of a month, that your return is late. Generally, the maximum penalty is 25%. But if your return is more than 60 days late, the minimum penalty is $100 or the balance of the tax due on your return, whichever is smaller.

Criminal and Civil Charges
It is considered a criminal act to neglect to file a tax return when a tax liability is owed. This is not to say that the IRS will always pursue a criminal case against you. However, criminal charges may be brought against you at any time, within six years of the date that the tax return was due. The charges carry penalties of up to 1 year in prison and fines of up to $25,000, per year of not filing.

What if You Don’t Pay, or Can’t Pay?
There is a difference between choosing not to file your taxes and failing to pay your taxes on time. This typically is the distinction that is also made between those who choose not to pay taxes, and those that are unable to pay their taxes, or unable to pay their taxes in full. Effectively, not filing sends a message to the federal government of your attempt to not pay taxes: tax evasion. Failure to pay any or all of your taxes on time is typically an admission that you are not in a position to do so.

A lot of individuals are intimidated by taxes owed at the end of year, or have mismanaged money throughout the year and only begun to realize their tax situation in the eleventh hour. If you realize you are unable to pay the full amount before the April deadline, you are encouraged to contact the IRS to discuss your payment options. Filing previously late tax returns, and your 2008 tax return on time or asking for an extension to April 15th are the most important steps to take first. This will enable you to take advantage of every possible exemption, credit, and deduction possible, in an effort to minimize the amount owed for last year. The outstanding amount due for previous years, is the amount subject to penalties and interest, and is the amount to be discussed with the IRS, moving forward.

Penalties For Not Paying or Paying Late
Penalties and interest can be assessed on the taxes you owe forever. This means, that, if you were to be found to have not paid your taxes, for any year or group of years, interest on the outstanding tax liability would therefore be applied, and continue to accrue until paid in full. There are no deadlines on when the IRS may collect the amount owed (unlike the window that the IRS has to go after you for not filing).

Tax Payment Resolution
In some cases, the IRS may reduce or eliminate late penalties. The IRS, however, typically doesn’t waive interest that has accrued on unpaid tax bills. If you are unable to pay your taxes in full, it is suggested that you pursue a satisfactory resolution to this liability. The most common ways to do this include:

Short Term Extension – This is exactly what it sounds like. Based on your circumstances, the IRS may be able to reduce penalties and give an extension for you to repay your tax debt, before additional penalties, fees and interest accrue. This is typically 30-90 days.

Payment Plan – the IRS may allow for a repayment schedule, in order for the full repayment of a tax debt. This typically will be between 12-24 months and it will include interest. The IRS prefers to avoid longer repayment periods, but their main objective is to collect taxes, however possible. If the amount cannot be repaid within twelve months, an installment plan can be lengthened, based on individual circumstance.

Offer in Compromise – If the installment plan won’t work, there are other options. This settlement option is a process by which you – upon qualification – will pay the IRS, but less than 100% of what is due. The cases in which the IRS will most likely settle tax debts are:

-Doubt as to Liability – Doubt by the IRS that they may have assessed tax debt incorrectly.
-Doubt as to Collectability – Doubt by the IRS that you could ever repay the full amount owed.
-Effective Tax Administration – Tax is correct, and the amount owed could be collected, but the taxpayer would have to demonstrate that collection of the tax would create an economic hardship. They could also prove that the repayment of the tax debt would be unfair or inequitable.

What To Do and What Not To Do
The worst mistake people can make in regard to their taxes is to treat this liability as ‘just another bill.’ In most cases, if you choose to stiff the government they will find you. If you have recently come to the understanding that you are potentially liable for criminal offenses per tax law, it is suggested that you contact a tax attorney. As is the case with any other type of law, you will be afforded attorney-client privileges, by which they will not be forced to testify against you in a criminal hearing, as others would.

If you are unable to come up with the money still after trying to settle with the IRS, and even if the repayment plan is not sustainable, or even worse – you lose your job while repaying your old tax debts, there is still hope. The worst thing you could do is to pretend like not filing and not paying your taxes are problems that will go away once you ignore them. Many individuals fail to communicate with the IRS their personal circumstances, or the fact that things have changed. They may later find tax liens against their homes, or their wages garnished for taxes that had previously ignored, or even just to cover previous accrued interest. This is due to the fact that there are such broad misunderstandings on the public’s behalf regarding the collection process. So let it be clear: outstanding tax debt, unless otherwise settled, is collectible by any means necessary by the IRS, forever.

No matter how bad the situation is, the IRS will find a way to settle with you. This may not be in a way that will make you happy, but if your financial situation really is that bad, they will work out something that is at least bearable in most cases. And if you are unsure what to do, consult with experts, and if necessary an attorney. Much like the court system, the IRS will be more likely to work things out with you if you are honest, and preemptive in settling your account. Otherwise, the most ruthless collections methods in the West will be employed in order to get what is due. Keep in mind, the government has nearly 200 million adults, for which it is responsible. They do not have the time to politely ask you to pay your debts.

And, if you can avoid it, try and keep family out. Also, you should steer clear of paying your tax debts with a credit card, because then you will accrue interest on both the late payments and interest by the IRS, as well as by the credit card companies.

If you are behind, and do not know where to begin, the best thing to do is to call the IRS at 800-829-1040, and plan on being on hold for awhile, and at least be in communication with them so that you know where to begin, and so that they know that you care about resolving the debt.

Sources:

http://articles.moneycentral.msn.com/Taxes/PreparationTips/WhatIfYouCantPayTheIRS.aspx
http://www.irs.gov/businesses/small/article/0,,id=108330,00.html
http://www.irs.gov/businesses/small/article/0,,id=108330,00.html
http://www.irs.gov/newsroom/article/0,,id=201879,00.html

Modern Day Ghost Towns of Abandoned Real Estate

Jason Lankow — Fri, 13 Feb 2009 03:08:15 +0000

It may have seemed inevitable given the mortgage meltdown, but it is still shocking when you drive through a neighborhood that seems to be entirely filled with ‘For Sale’ signs. The cities here aren’t entirely deserted, of course, but they are examples of the cities that have been hit hard enough to lead residents to abandon their homes.

Detroit

Detroit’s economy has been hit hard in the last six months, with the Big Three automotive producing companies on the brink of bankruptcy and failure, and in need of government assistance. Due to the manufacturing industry, many experts estimate that the unemployment rate of the Detroit metropolitan area is at a generation-high 21%. Not surprising when 14% of automotive industry workers have been laid off in the last year. As a result of this highly localized recession, there are over twelve thousand abandoned homes in the Detroit area.

Riverside County, California

The last two decades have seen a surge of growth for the Inland Empire (better known as Riverside County), which had a population of 2.6 million in 1990; in 2007, the population was estimated to be 4.1 million. This massive eastern exodus from the more urban Los Angeles and the high prices of Orange County had a number of implications for the region. First of all, the move eastward drove up the demand and development of housing in the area, which steadily increased throughout the past decade. Secondly, these houses were purchased by many people who wanted to buy bigger homes for the buck than they could get in LA and the OC, which of course led to an increase in speculative building and investing. It is estimated that in 2005, only 15% of area homeowners could actually afford their houses, with the remaining 85% living beyond their means or in adjustable rate mortgages that had not yet adjusted. The latter, once adjusted, would then prove to be unaffordable.

It is also important to note that this area was a known hub for building up Southern California’s rapid suburban sprawl – not only was this one of the state’s regions with the most expansion, but it was also an area that furnished many of the construction companies with cheap labor that made surrounding communities’ growth possible. By August of 2008 alone, the foreclosure rate for the county was over 4,700 houses, up over 174% from August 2007. By the end of 2008, the median price of a home in Riverside county dropped to $220k, the first time it had dipped under $300k since the 1990s. In some Riverside County neighborhoods, as many as 20% of all homes are have been foreclosed and now sit vacant.

Stockton, California

Currently, 90% of all sales in the greater Stockton region are either foreclosures or short sales. The median house price dropped to $237K by December 08, the lowest it has been since February 2003. It is estimated that housing prices in former boom markets are more than 40% off what they had been leading up to 2007.

Las Vegas

Las Vegas and its surrounding suburbs are home to the nation’s third highest foreclosure rate for a metropolitan area, with 1 in 44 at some stage of foreclosure. By end the end of 2008, median housing prices deflated by $20,000 to the lowest since 2005. Housing inventory would also skyrocket to 30,000 in Q3 2008, with the pace of housing sales having declined 34% from the year prior. This volume is equal to 14-16 months of inventory of homes for sale, well above the national average of six to seven months.

Just over a year ago, the Greater Las Vegas Board of Realtors calculated that 45% of the 22,000 single-family houses for sale at the time were actually vacant. Most all of these were houses abandoned by new area residents, or investment properties by the area’s thousands of speculators who were drawn to the region because of its recent track record of housing price increases. Squatters are increasingly seen occupying the abandoned properties.

North Los Angeles County, California

With the vision of urban sprawl connecting Los Angeles to Bakersfield and the plans for a train connecting the two, builders began winding through the hills to the north from LA. Today, in Antelope Valley, for example, it is not unusual for long-term rental property owners to have to deal with tenants who recently lost their own home to foreclosure and are having difficulty getting back on their feet. In some cases, tenants do everything from the typical stripping of copper wire to be sold to the more bizarre use of cabinets for firewood. Abandoned investment properties are on the rise.

Miami, Florida

Miami-Dade and neighboring Broward counties have experienced an extremely high rate of foreclosures over the past two years. It is estimated that 143,000 homes were voluntarily given back to the bank, or foreclosed upon. In Miami-Dade County alone, there are currently 38,000 new condos that are recently completed, or near-completed that are vacant and show no prospects of immediate sale. The MLS for the country shows over 25,000 condos for sale in the county, which equate to a 4.5 year inventory. This of course, does not include unfinished units.

Many experts suggest that the housing market in Miami will witness a further devaluation in 2009 of over 20% of the median housing price. The biggest reason for this is arguably the over-development of medium and high-end condo constructions in the area, many of which are second or vacation homes. It is an extreme case of the common sense knowledge that second homes and investment properties are the most likely to be abandoned in favor of the owners’ primary residence when times get tight.

Phoenix, Arizona

Arizona ranks 48th in New Job Creation. Developers spread to the west to Phoenix and as far out as Buckeye and foreclosures are currently at a record high, which has resulted in plummeting housing prices. This is a hard pill to swallow for many recent first-time buyers, who are witnessing a sharp increase in their monthly mortgage payments, against the background of a house with a drastically decreasing value.

Of the 6,150 houses sold in the Phoenix metropolitan area in September 2008, an astounding 78% of these were vacant when sold. There are currently 55,000 homes for sale in Phoenix, of which 40% have been abandoned and are presently vacant. Most of these are currently bank-owned properties and are being sold at liquidated prices. According to area investor and resident, Donna Butera, this massive departure and house abandonment in Phoenix has had other implications in the community. Understandably, home owners are deciding to walk from their mortgages if the home they just agreed to buy for $350,000 is now only worth $270,000. As a result of the frustration, homeowners are removing everything they can from the homes before they abandon them, selling appliances, cupboards and virtually everything else, including the kitchen sink. As a result, it is not unusual to drive down a street in what was once a nicer suburban neighborhood in Phoenix and now see a majority of windowless abandoned homes.

10 Actors Who Found Success Off Camera

Jason Lankow — Thu, 05 Feb 2009 01:00:53 +0000

Facing an uncertain financial future, many are finding themselves at a crossroads. It’s times like this, when there’s little to lose and lots to gain, that it may make sense to go back to school to further your education, or even take a fork in your career path to consider career opportunities you would have never considered before. Diversification isn’t just a proven investment strategy, it can also be a way to leverage the money and influence gained in one endeavor to achieve success in an entirely different one.

The following examples are much more than mere American success stories. The career advice offered here can prove inspirational and educational for those looking for opportunities to pursue entrepreneurship, passive income generation or even a plan b. Because for every celebrity with a vanity apparel line, there are hundreds of Americans with great ideas (plush toys, organic cookies, etc.) that they are just waiting to become the next millionaires with.

Robert De Niro

Regarded as one of the most influential actors of his time, De Niro has most recently made a name for himself as a world-class restaurateur. De Niro has partnered with Iron Chef Nobu Matsuhisa to build a chain of highly successful and critically acclaimed sushi restaurants under the name ‘Nobu.’ With De Niro’s backing, Nobu has grown into a network of 21 locations in seven countries. Most recently, De Niro (along with other Hollywood A-listers) has partnered with Italian chef Agostino Sciandri in order to help grow his already successful Las Vegas based ‘Ago’ restaurant. New Ago locations have sprung up in New York, Miami, and Los Angeles, with more openings slated for the near future. It is very interesting to note that De Niro attributes his success to loving what he does; he could very easily promote these restaurants with a number of endorsements and high profile appearances, but he tends to let the restaurants speak for themselves.

(Source: L, R)

Paul Newman

Cool Hand Luke star Paul Newman started his multi-million dollar food products empire in 1982, with a single salad dressing recipe (co-founded with author A.E. Hotchner). Initially given away to friends as gifts, the dressing became the flagship product for the highly successful “Newman’s Own” brand. Since 1982, the brand has grown exponentially, and now distributes myriad products internationally including a new organics line called “Newman’s Organics.” According to the Newman’s website, the company has donated over $250 million since its founding. Interestingly, the company operates as a for-profit corporation, and gives 100 percent of its proceeds to grants and charities across the world. While Newman’s products have undoubtedly benefited from his reputation, their popularity for their intrinsic quality cannot be denied.

(Source: L, R)

Suzanne Somers

During the height of her successful television career, Somers began to venture into the world of celebrity endorsements, perhaps most famously a product known as the ‘Thighmaster.’ This would signal her emergence into the lifestyle products marketplace, in which she has since created a multi-million dollar empire. Somers’ business ventures were really ahead of the time, a realization that many beautiful actresses are not able to continue getting work as they age. Mostly marketed via the Home Shopping Network, Somers companies, ELO Somers and Port Carling Inc, sell personally branded beauty, diet and exercise, and fashion products. She also owns her own e-commerce site, as well as an Avon-esque direct sales company called, Suzanne.

(Source: L, R)

Kathy Ireland

Ireland was one of the most successful models in the 1980s, and eventually channeled this success to a career in acting. Although her acting career was somewhat brief, Ireland’s film and television appearances are relatively well known (Necessary Roughness, Loaded Weapon I). During the height of her popularity in 1993, Ireland founded Kathy Ireland Worldwide, a marketing and brand management agency. The business’ first move was to market socks under her famous name, which were to be exclusively distributed in North America through Kmart Stores. Immediately successful, Ireland has operated as the CEO of what has become an international brand, expanding to selling Ireland-branded furniture, make-up, clothing and other lifestyle products. It is estimated that the company’s annual sales are at around $1.4 Billion. Of this, Ireland’s annual salary is a paltry $10 Million.

(Source: L, R)

Jackie Chan

Jackie Chan is one of the most successful international stars of all time. After reaching superstar status in his native Hong Kong for his singing (over 20 albums released) and acting career, Chan came to the US with a string of well-received, and high-grossing action films. Recently, Chan has lent his name to a number of enterprises: his clothing line, launched in 2004 under the ‘JC’ moniker is currently distributed worldwide; Chan also has a sushi chain called Jackie’s Kitchen, with a number of locations throughout East Asia and Hawaii. Another one of his ventures, Jackie Chan’s Café, has locations in Singapore, Malaysia and the Philippines. Most recently, Chan has partnered with California Fitness to open a number of ‘Jackie Chan Signature Club’ gyms. Chan is a noted philanthropist, and donates a large percentage of his profits to various charities, research facilities and educational programs.

(Source: L, R)

Mel Gibson

Aside from his many acting and directorial accolades, Mel Gibson has had quite the successful run in the real estate game. He currently owns a number of properties in the U.S., Costa Rica, Fiji and Australia. In the last five years he has sold an estate in Connecticut for $40 Million, a property in Malibu, CA for $30 Million, which together accounted for a gross return of $37 Million. Gibson’s recent purchases include the Mago Island (Fiji) for $15 million, and a 400-acre ranch in Costa Rica for $26 Million. The exact value of his real estate portfolio is not entirely known, but it is safe to say that it is worth well over $100 Million. His most recent investment is development of a $10 Million dollar church in Malibu, which many speculate will offer some type of generous tax loopholes for the star.

(Source: L, R)

Jaclyn Smith

Jaclyn Smith is widely regarded as the godmother of celebrity fashion lines. The former ‘Charlie’s Angel’ star first partnered up with Kmart to sell her private label collection – owned and designed by Smith – as an alternative to simply endorsing other brands’ products. Since Smith’s product launch in 1985, it is estimated that 100 million women have purchased clothing and/or accessories from her line. According to Women’s Wear Daily, Smith’s line had the highest consumer awareness of any private label fashion line in the US.

(Source: L, R)

Robert Redford

Robert Redford is a true renaissance man: former model and college baseball player, actor, director, producer and founder of the successful Sundance brand. His first major investment was the purchase of a ski area just outside of Park City, Utah where he would establish the Sundance Resort (named after his character’s name in Butch Cassidy and the Sundance Kid). Redford has subsequently has founded the Sundance Film Festival, which is the largest independent film festival in the U.S, as well as one of the largest festivals in the world. Other Sundance enterprises include: Sundance Films, Sundance Catalog (an E-commerce site), and Sundance channel, and Sundance Cinemas. While Redford has not disclosed the total worth of his Sundance holdings, it is reported that he sold Sundance Channel in Mid 2008 for an estimated $496 million.

(Source: L, R)

Mary Kate and Ashley Olsen

In 1993, at the tender age of 8, the Olsen twins established a brand called Dualstar, which would serve as a parent company to their subsequent licensing deals. This has included the release of a number of Mary-Kate and Ashley-branded fashion and cosmetics products. Since ‘93, products bearing the Olsen twins’ names have been sold in over 5000 stores worldwide. Brands include a Wal-Mart distributed eponymous clothing and beauty supplies line marketed to girls ages 4-14, along with a high-end boutique line, Elizabeth and James, named after their other, non-celebrity siblings. The sisters’ combined holdings (mostly from their product lines) equate to a net worth of over $100 million. It is estimated that their combined brands net revenue for the girls of $15M per year.

(Source: L, R)

Going for the World’s Gold

Jason Lankow — Wed, 21 Jan 2009 01:59:19 +0000

With the economy in crisis, gold is viewed as an increasingly solid investment. Even in a slowing economy, gold prices improved 31% between 2007 and 2008, and reached prices in excess of $900 per ounce. It is still seen as a very safe investment compared to other commodities and the market as a whole. But have you ever wondered where you can find the largest reserves of this precious metal that is propping up the world’s economies?

Biggest Gold Mines

For the past century, gold mining has been dominated – in terms of production – by North America, Europe and South Africa. During this time, the mines were owned and run almost exclusively by private enterprises from these countries, and operations expanded into other regions as demand increased. Today, there are over 192 gold-producing countries.

The highest yields come mostly from Asia and Australia, and the largest of the world’s mines now include the Grasberg Mine in Papua, Indonesia and the Super Pit in New South Wales, Australia.

Grasberg mine – Indonesia (source)

Super Pit in Australia (source)

As of 2007, China is now officially the world’s largest producing country. At 276 metric tons (roughly 9.7 million ounces) per annum, China now produces over 10% of the world’s total gold production. It’s safe to say that China now experiencing its “gold rush”, which many of the western countries experienced during the nineteenth century. In fact, China has surpassed South Africa, which led the world in gold production from 1905 to 2007 to become the largest gold producing country in the world.

There have been some other noteworthy discoveries elsewhere in the world, such as the Great Mongolian Gold Rush of 2001 and the Apui Gold Rush in Brazil in 2006, but China is at the forefront of the discovery of new gold deposits. In 2007 alone, discoveries of 162 tons and 122 tons were found in remote areas, and with China’s expansive land mass this trend is only expected to continue.

Biggest Gold Reserves

With regards to reserves, however, currently most of the world’s gold is still heavily concentrated in the hands of the world’s wealthiest nations. Nearly two-thirds of all the world’s reserves are held by the United States and the European Union (With Germany as the principal reserves-holder) at 27% and 37% respectively. Translated in monetary terms, this means that the US holds approximately $241 Billion in gold reserves, most of which is still the trusty Civil War era Fort Knox.

Due to the recent high demand of gold, many small-scale farmers have entered the gold mining industry in an attempt to strike it rich, or at the very least support their families. There is an estimated 20 million small-scale miners around the world, with approximately 100 million people directly dependent on this type of artisanal mining. Many of these miners are from Africa, where recent discoveries have led many in recent years to begin pursuing this relatively untapped region (besides the aforementioned South Africa). For the most part this includes Africans from many of the poorer countries that are able to mine on tribal lands, alongside larger mining conglomerates to which many countries are now leasing their land.

Largest Gold Rush in US History

The Largest Gold Rush in US History was the California Gold Rush of 1848 to 1852, which saw the westward migration of 300,000 men, women and children vying for the opportunity to strike it rich. This was the largest gold rush of its kind, and still is the benchmark by which gold discoveries elsewhere in the world are measured. News of the California gold rush stimulated interest and consequent prospecting elsewhere in the world. This eventually led to the gold rushes in Australia, South Africa, Canada and in Western Europe.

Largest Gold Nugget Ever Found

The largest gold nugget ever recorded, was discovered by John Deason and Richard Oates in 1869, During the height of the Australian gold rush. Found in Moliagul, Victoria, Deason and Oates named the nugget “Welcome Stranger.” This huge nugget weighed in at a whopping 71kg, and fetched at the time, about £9,300.

The Largest Gold Deposits in the World:

Since the South African Gold Rush (1896-) nearly 40% of the gold mined in the world came from the Witwatersrand basin in South Africa. According to a 2002 article by National Geographic, scientists estimate that one-third of the world’s un-mined gold resources remain in this region.

The Most Expensive Gold Coin

In 2002, the one of the world’s rarest collector coins sold for the sum of $7.6 Million. The coin, the 1933 Double Eagle, was one of the last of its kind before the big gold meltdown in the US. After being in the hands of Egyptian royalty, it found it’s way back to New York years later.

It was gold’s perceived scarcity that originally lead to its worth. But even with the world’s central banks stockpiling gold at a record pace, and the mining conglomerates coming up with ever more creative ways to find it, this remains one investing strategy truly worth its weight.

Why Even Good Credit Might Get Cut

Jason Lankow — Fri, 16 Jan 2009 02:35:39 +0000

(Photo: Dan Esparza)

You can afford your mortgage, you have a high credit score and you pay your bills on time every month. So why did American Express just slash your credit limit? Could be because of where you shop?

A combination of the credit crisis and the increasing use of predictive analytic models for determining credit limits mean that it is no longer enough just to maintain a good credit rating. With credit card companies analyzing spending patterns, you have to pay more attention than ever to both where and how you shop.

Here are a few examples of some of the ways that good credit may get cut off.

Traveling Overseas

The internet has helped to create an environment where fraudulent transactions are so widespread and so expensive to prosecute, that most companies write off these transactions as a loss – or pass them on to the merchants who are victimized. As a result, credit card companies try to offer extra protection to their customers if a series of suspicious charges post to any individuals account, as a form of loss mitigation. The problem this poses for many travelers, is that the term ’suspicious charges’ is very subjective. Say for example, you are from Des Moines, Iowa and your monthly credit card transactions consist of weekly trips to Ralph’s and your neighborhood gas station. In this case, your spending habits will be scrutinized if you finance a backpacking trip through Southeast Asia. Therefore, it is very important that travel isn’t funded solely on a credit card, because you might find yourself in a foreign country without funds when the available credit is slashed.

Spending in stores that have high-risk customers

Many customers do not realize that their credit limits may be reduced due to where they shop. American Express is on the forefront of this movement, wherein banks would include where customers spend as part of their credit-limiting decisions. the cards are used at places like casinos and bars. To the bank, these are improper or unsustainable use of credit, that has a higher repayment risk.

Don’t Go Near Your Credit Limit, or Over It

One of the most important factors of your credit score is your average ratio of balance to credit line you keep. Keep the balance below 20 percent of the credit limit ideally, and definitely below 50 percent, as this is viewed by banks as more responsible borrowing and not quite a warning sign that you are dependent on the credit. The larger the percentage of your credit limit occupied by balance, the more you are viewed by the bank as being incapable of repaying a debt owed.

Banks often change their terms of your lenders agreement via mail, and a letter regarding a credit line reduction can actually be sent to you after your line has already been reduced. With that said, if you have the propensity to continually keep a higher balance on a credit card, you are more likely to have a credit line reduction. But even someone who keeps a high available balance isn’t safe from this move by the banks. As a result, a credit line reduction could change your balance-to-limit ratio dramatically, further worsening your credit score.

Any bank may reduce a credit line in any way they see fit, and for example a $10,000 credit line with a $3,000 balance could be reduced to a $5,000 credit line with the same balance. This would mean that your balance-to-limit ratio would be doubled, an experience that is increasingly likely to happen to any individual, irrespective of their repayment history. In some extreme cases, a credit line reduction could even be instigated by a bank to a level that is right at the current balance, thus leaving the borrower in a position of potentially going over his/her new credit line when finance charges are assessed. This can have a ripple effect on other accounts, in that, other lenders may see this as a red flag, and consequently reduce your credit line as well. For credit cards, it is good to try and pay off your balance every single month, but if you can’t or if you are already in trouble, make sure to call as credit companies are very willing to renegotiate delinquent balances and interest rates, often reducing 27% rates all the way down to 10%.

Are you paying attention to your credit report?

Most people don’t properly manage or monitor their credit report. And given the current financial climate, banks are consistently looking at ways to stave off risk. Many banks realize that one way to do this is to increase the interest rates of individuals that are paying their bills on time. Interest rate increases typically occur as a footnote that is easy to overlook on a monthly credit card statement, or may be a letter written to you as a “Dear Valued Customer” letter on corporate letter telling you that after years of valued business, you are now being rewarded with a higher interest rate. These letters of course offer the customer an opportunity to opt out or not agree with the change of terms. The consequence is that your account will likely be closed after a certain grace period.

This means that, for those willing to stand up to the credit card companies to say, “I will not stand for this!” there will be an ‘Account Closed’ notation on your credit card. In addition to the account closing phenomenon, not monitoring your credit report can lead to other potentially harmful notations – erroneous or not – staying on your report and affecting your credit. And of course, if your credit report declines, your credit lines are likely to decrease in tandem. Many consumers are unaware of these potentially negative marks on their credit report, or are unaware of ways to get them cleared from their record.

Make sure that if there are any notations on your account, that you process a claim with your bank and with the credit reporting agencies to get these removed. Even if you have made mistakes, you can request an explanation of your errors in writing. If a bank fails to provide this evidence, then the law says it will be removed from your report.

How to Set New Year’s Financial Resolutions You Can Keep

Jason Lankow — Fri, 02 Jan 2009 19:55:16 +0000