Debt, Credit Card & Consolidation Current News Digest

On The Brink by Henry Paulson is the first book I’ve read cover to cover in the last year. You’re probably not surprised to hear that I don’t read every single page of the books I review on Bargaineering but for On The Brink, I read every last page. On The Brink is Henry Paulson’s, then Treasury Secretary, account of the financial crisis that nearly brought the United States, and must of the world, to its knees. Throughout the crisis, I was reading all the news stories about various rescues, bankruptcies, etc. but I always knew there was more to the story. I knew that there were things going on behind the scenes that we wouldn’t hear about for quite some time and I didn’t expect to read about it in a book so soon.

If you want to learn what happened, what caused it, and what some of the most brilliant and hardworking financial minds in the world did to prevent a complete meltdown, then you need to read this book. It reads like a novel, Paulson is frank (which is awesome), and you walk away feeling like you actually understand what happened and why certain things were done. And for $14, it’s a bargain.

There are three things the book shared that really stood out:

• How absolutely horrible things actually were – I had no idea the extent and I read a lot,
• How things were nearly derailed by political posturing (it was like arguing over who gets which deck chair on the Titanic, after it has hit the iceberg) – all the populist rhetoric about being anti-bailout was counterproductive,
• How Russia tried to convince China to sell GSE holdings (Freddie Mac, Fannie Mae) to force the United States to use emergency powers to save them! (it was only a paragraph on page 160, but I thought it was alarming)

I think part of it was well crafted storytelling (to get across the seemingly frenetic pace) but the economic crisis was just one (or three) thing after another. First you had Fannie Mae and Freddie Mac, then there was Bear Stearns, then the failed attempt to sell off Lehman Brothers, then commercial paper freezing and money market funds breaking the bucks, Treasury yields going negative, then a liquidity rescue of AIG and a hurried sale of Merrill Lynch to Bank of America, and that only takes you to page 245 of a 434 page book! (not including afterword)

Remember when pundits complained about Paulson being an ex-Goldman Sachs CEO and how government and Wall Street were in bed together? If that wasn’t the case, I’m almost certain that our financial system would’ve collapse if we had non-financial types trying to rescue it. The relationships Paulson had with people on Wall Street and counterparts in other nations seem instrumental in engineering rescue after rescue after rescue.

Finally, one insight that the book never mentioned but seemed evident in Paulson’s account of what happened – the CEOs of these financial companies didn’t really care about money, they cared more about their legacy. Dick Fuld will forever be known as the guy holding the reins when the stagecoach called Lehman Brothers flew off the mountain. He was the FINAL Chairman and CEO of Lehman and he will forever be remembered for that. All those CEOs had enough money before they showed up for the job, it was about their legacy.

Honestly, I could write a lot more about what I thought of the book but it really wouldn’t do it justice. I think that if you want to understand what happened in the last two years, you must read this book. If you have ever made any statements about the crisis, reading this book will surprise you and probably make you eat some of yours words (or at least reconsider them).

On The Brink by Henry M. Paulson Jr. from personal finance blog Bargaineering.com.

At a recent gathering of amateur consumer advocates in New York City, discussion turned to this thorny topic: How do you focus the rage people feel about rip-offs on fixing the problem?  Consumers are quick to anger when a company unjustly charges a $35 late fee, but they seem far more reluctant to get involved as Congress debates legislation that would make the $35 fee illegal. Why? One obvious reason: Congress is slow and the legislative process is confusing.  

So here's a quick scorecard on the debate over creation of the proposed Consumer Financial Protection Agency, which would be the first new federal consumer protection agency since the 1970s.  While the congressional made-for-TV kabuki dance that will decide its fate won't take place for another several weeks, the real end game is happening right now, as Washington, D.C., appears to be slumbering under three feet of snow. So this is a good time to pay attention.

In case you missed the last episode, here's a quick background: Harvard bankruptcy professor Elizabeth Warren proposed a new agency several years ago that would regulate consumer contracts on financial matters like credit cards and mortgages. Warren, now a bit of a cult hero in consumer advocate circles, is currently chair of the oversight panel Congress set up to monitor the TARP bailout. Banks don't like her much, but she's the odds-on favorite to head the new consumer agency should it be signed into law.

During his campaign, President Barack Obama supported the idea of a new consumer protection agency, and he has called for its creation several times in the past year. In December, Rep. Barney Frank, D-Mass., ushered legislation through the House of Representatives — barely — that would create the agency. The Wall Street Reform and Consumer Protection Act passed by a 223-202 vote.

Note that this bill does much more than create a new consumer agency; it includes a full set of financial regulatory reform proposals. But creation of the consumer agency appears to be the most divisive issue.  Supporters say that only an independent agency could act as a worthy adversary to the banking industry. Opponents argue that it's folly to create a single-purpose bank regulator that has no interest in the safety and soundness of the institutions or the overall health of the industry.

Given the tight House vote, debate in the Senate was expected to be difficult,  and so far it has not disappointed.

Retiring Sen. Chris Dodd, D-Conn., is head of the Senate Banking Committee, which now controls the fate of the legislation. Last year, he'd indicated unflinching support for it. But in January, he flinched. Numerous reports indicated his willingness to negotiate away creation of the agency in exchange for other regulatory concessions from Republicans – specifically the senior Republican on the Banking Committee, Sen. Richard Shelby of Alabama.

The news sent consumer groups into a tizzy, with some predicting this meant the death of the Consumer Financial Protection Agency.

But turned out the obituaries were premature.  Last week, Dodd's office announced that he had reached an impasse with Shelby, and that he was abandoning efforts at a compromise. Instead, he said, he would propose legislation that resembled the House bill.

Warren, meanwhile, fresh from preaching to the choir during an appearance on Jon Stewart's “The Daily Show,” penned an impassioned op-ed in the Wall Street Journal reiterating the need for the agency.

“The same Wall Street CEOs who brought the economy to its knees have spent more than a year and hundreds of millions of dollars furiously lobbying Washington to kill the president’s proposal,” she wrote.

On Wednesday, Senate reform talks got a jump start, when Dodd opened negotiations with a different Republican on the Banking Committee, Sen. Bob Corker of Tennessee.  Both made public statements about the renewed talks on Thursday.

"Senator Corker has proved to be a serious thinker and a valuable asset to this committee,” Dodd said in his statement. “For that reason, I called him Tuesday night and asked him to negotiate the financial reform bill with me. We met in my office on Wednesday and given the importance of these issues he agreed. I am more optimistic than I have been in several weeks that we can develop a consensus bill to bring about the reforms the financial sector so desperately needs to prevent another economic crisis."

But does that mean creation of the agency is likely now?  Not at all.  Corker said Friday he is merely picking up where Shelby left off

"Like most Republicans I believe a stand-alone agency for consumer protection or separating those protections from safety and soundness are nonstarters,” he said, according to Reuters. 

What are they taking so long talking about?

There appear to be two issues which have bogged down — and might ultimately kill - the agency.  The first  is independence. The second, a bit more subtle, is an effort to protect the independence of state-level consumer protections.

By now, creation of a completely independent CFPA — something Republicans have compared to the Environmental Protection Agency — seems off the table. Most reports indicate that the agency will survive only if it is part of another regulator. It might be housed in the Treasury Department or be a part of the Federal Reserve, but could retain some independent rule-making authority.  And that's the sticking point.

In October, while there was a flurry of stories concerning the potential watering down of the new agency, Warren spoke to msnbc.com and appeared to draw a line in the sand. At the time, some areas of regulation, such as car loans, were removed from its purview by the House of Representatives. 

"I draw the line at independence," she said. "If the new agency isn't independent, it isn't worth doing."

But this week, a source familiar with the negotiations said consumer groups have warmed to the idea of the agency being housed in the Treasury Department, as long as it has full independence within the department, comparable to the Office of the Comptroller of the Currency, which is also technically part of Treasury.

Balber, from Consumer Watchdog, said the key distinction involves independent rule-making authority,

"It would depend on how something like that is structured," she said.  "The key is that no one would have veto power or some other form of power to weaken the agency's decisions. So a stand-alone agency that's part of Treasury could work," she said. "I don’t think it would work if it were housed within a prudential banking regulator (such the Federal Reserve). They are looking first and foremost at bank profits."

Meanwhile, state officials are worried about an issue that rears its head every time Congress considers consumer protection legislation – pre-emption.  Nationwide firms and industry groups often argue that federal law should trump, or pre-empt, state law, so that they don't have to abide by 51 different sets of rules. For example, a new federal law to require 45-day notice when raising a consumers' interest rate would override an existing state provision that requires a longer warning period. Obviously, state lawmakers and attorneys general have bitter distaste for pre-emption, which reduces their power and ability to regulate.

Because of hang-ups over the independence of the agency, negotiators haven't even begun to deal with the thorny issue of pre-emption yet, according to another source familiar with the talks. That means there are still significant obstacles in its way.

Meanwhile, opponents continue to voice their objections to creation of the agency. The U.S. Chamber of Commerce is leading the public fight, airing commercials that say the agency would hurt small businesses and making its case at the Web site Stopthecfpa.com.

Noted Republican pollster Frank Luntz has even gotten into the act, recently publishing a talking points memo called "The Language of Financial Reform." In it, he advises opponents of the Consumer Financial Protection Agency to paint it with the broad brush of "big government."

"Creating another costly government bureaucracy on top of existing bureaucracy isn’t a solution - it helped cause the problem," he advises, according to the memo obtained by The Huffington Post. He also instructs opponents to appeal to their voters by saying the legislation is full of "lobbyist loopholes" for industries like car dealers and pawn brokers.

There are two other x-factors that might become part of the discussion.  If a large U.S. bank supported creation of the agency, that would make it more palatable to Republicans.  Earlier this month, Bloomberg reported that Bank of America CEO Brian Moynihan has told White House officials that the bank was not "lobbying against the agency." The bank stopped short of supporting it, however.

Meanwhile, it's unclear how much the force of Elizabeth Warren's personality and popularity might be adding to the financial industry's aversion to the agency.  Banks are used to dealing with faceless, nameless bureaucrats.  A popular consumer advocate with a ready-made bully pulpit might be part of the reason they are digging in their heels. 

So the future of the agency, and the legislation, seems entirely up in the air, a moving target — another reason that U.S. consumers might find it difficult to engage in the debate.  Most observers feel that Dodd has the votes he needs to pass even the most liberal version of the bill through the Banking Committee, and that he intends to bring some financial reform bill to a vote on the Senate floor, probably in March. There, it is likely to find the same fate as health reform — it won't have 60 supporters and will die a parliamentary death unless at least some Republicans support it.  A source familiar with the discussions said Rep. Barney Frank wants to force a Senate vote, which would require Republicans opponents to cast a potentially unpopular vote against consumer reforms.  Balber is among many consumer advocates who would like to see issue come to a head.

"We are still concerned that something less than consumer agency will come out of this," she said. "Right now, things are constantly shifting. We are calling on Dodd to make his position clear. … Meaningful financial reform must make the marketplace safer for everyday Americans."

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The Move Your Money campaign peaked a few weeks ago but in our household we still haven’t yet made the change from a large bank to a local community bank or credit union. Part of the reason is inertia, the center spoke in our financial network map if our Bank of America account, but we’re working on it!

As I was doing some research for some unrelated projects, I discovered a useful resource at the FDIC. I’m always a fan of mostly useless trivia (this certainly falls in that category) so I was delighted to find a list of the largest banks in the United States. The FDIC captures all of this data for FDIC insured institutions, which is great, but it’s only updated annually, so this data is from June 30, 2009.

I bet you can name most of the banks on this list but I’d be surprised if you could name them all.

Ten Largest Banks in the U.S.

So which are the ten largest banks by deposits?

1. Bank of America: $907.3b in deposits, TARP participant.
2. Wells Fargo: $759.7b in deposits, TARP participant.
3. JPMorgan Chase: $639.7b in deposits, TARP participant.
4. Citibank: $320.8b in deposits, TARP participant.
5. PNC Bank: $188.1b in deposits, TARP participant.
6. US Bancorp: $151.9b in deposits, TARP participant.
7. Sun Trust: $118.5b in deposits, TARP participant.
8. Capital One Financial: $114.3b in deposits, TARP participant.
9. Toronto-Dominion (TD) Bank: $104.8b in deposits, as a Canadian bank it was not eligible for TARP funds.
10. BB&T: $95.0b in deposits, 2.12% market share, TARP participant.

With respect to the TARP, participation in the program isn’t an indication of bank health as many banks were forced to participate even if they didn’t want to.

This deposits information is available in the FDIC’s Share of Deposits report, which ” contains deposit data for branches and offices of all FDIC-insured institutions. The Federal Deposit Insurance Corporation (FDIC) collects deposit balances for commercial and savings banks as of June 30 of each year, and the Office of Thrift Supervision (OTS) collects the same data for savings institutions.” Here the results for the top 50 bank holding companies by total domestic deposits as of June 2009.

TARP information was taken from Wikipedia.

How many did you get right? I only got the first four banks (and not in the correct order… though I did know BoA was #1).

Ten Largest Banks in the U.S. from personal finance blog Bargaineering.com.

Bank of America has agreed to modify some of its home equity loans in cooperation with the government’s Home Affordable Modification Program (HAMP). Without such cooperation, borrowers can e denied loan modifications that could save their homes. Home equity lenders must agree to subordinate or release their liens before a first mortgage loan can be modified. Bank of America’s decision to work with federal modification programs could inspire more second mortgage lenders to follow suit. Although HAMP modified 66,465 mortgages as of December 31, 2009, almost 800,000 mortgage loans remain in trial modification status.

Mortgage Loan Modifications: Bank of America Going the Extra Mile

Bank of America cites concerns that modifying the first mortgage without modifying second mortgages (which typically includes home equity loans and balances owed on home equity lines of credit) may result in a modified loan that remains unaffordable for borrowers.

In a statement, Barbara Desoer, president of B of A Home Loans suggested that modifying home equity loans would further lower borrowers’ combined monthly mortgage payments. This could encourage financially challenged borrowers to stay in their homes rather than walking away from high payments on mortgage loan amounts exceeding their home’s current value.

Mortgage Loan Modification: Why Your Second Mortgage Lender Must Agree

Mortgage loans are secured by your home. In order to document their security interest, mortgage companies record mortgage documents with the county where your home is located. Recorded mortgage documents establish a sequence of lien holders that typically looks like this, with recording dates earliest to latest establishing priority:

1. Your county or local property tax authority, zoning restrictions, utility easements, and other covenants affecting your property.
2. Your primary mortgage loan (either the mortgage you used to buy your home, or a refinance mortgage loan)
3. Your home equity loan.

Modifying your primary mortgage loan requires recording new loan documents showing the modified terms of your mortgage. If your home equity lender does not agree to record a subordination agreement, the second mortgage could move into senior position over your modified first mortgage. Primary mortgage lenders do not allow this, so a home equity lender’s refusal to cooperate would cause your primary mortgage lender to refuse a loan modification. When preparing to contact your primary mortgage lender or a housing counselor about modifying your mortgage loan, make sure to have contact information for your home equity lender available.

Home equity lenders forfeit their interest in a home when the primary mortgage lender takes title to your property through foreclosure. Given this circumstance, it makes sense for first mortgage lenders and home equity lenders to work together in foreclosure prevention programs.

This week Liz Weston wrote about how to shop for a new bank and it made me think about how we chose the banks we work with now. For us, the criteria for judging a checking account differed from the criteria for judging a savings account. We use the two different types of accounts for different purposes, so the criteria for picking the “best” for us will vary between the two.

For a checking account, I’m looking for a brick and mortar back that is the cheapest option with the widest reach. By cheapest, I mean one where I won’t have to pay any fees as long as I meet fairly straightforward rules like a minimum balance. By widest reach, I want one where there are ATMs in as many areas as possible. That’s why we still have a Bank of America MyAccess Checking Account – no minimum balance and no monthly maintenance fee if opened online. There are Bank of America ATMs pretty much everywhere, so the reach part is satisfied.

For an online bank, it’s all about interest rates. Right now, most of our money is at Ally Bank because they lead the pack in high yield savings accounts. My strategy used to be to open an account at the highest yield bank and put any new savings into that account, but we’ve recently abandoned that practice. We’re trying to simplify our finances and opening a new account just to get a 0.1% difference isn’t worth it to us. (note: we weren’t rate chasing, as that rarely works out, we were only moving new money from checking to savings)

Lately, however, we’ve been thinking more about supporting local credit unions. When you go with a local credit union, it’s more likely that your funds will be reinvested back into the community. When that happens, the community, and thus you, benefits more than if your money sits on the balance sheet of a huge national conglomerate.

What do you look for in a bank and why do you do business with the ones that you are with now?

(Photo: alancleaver)

Your Take: What Do You Look For in a Bank or Credit Union? from personal finance blog Bargaineering.com.

Arianna Huffington made waves recently when she went on national television calling on  consumers to dump their big banks and deposit all their money into local, community banks.  Huffington's site, HuffingtonPost.com, threw its weight behind a Web site designed to make breaking up with your bank a little easier — MoveYourMoney.info. It includes a ZIP-code based locator to help consumers pick through the thousands of banks in the U.S. It even sports a short, cleverly edited video that juxtaposes the classic film “It's a Wonderful Life” with images from testy congressional hearings about the banking industry.

Driven largely by Huffington's media popularity, the site quickly gained traction. Huffington's appearances on MSNBC's Countdown and CNN's Larry King Live, among many others, had some observers calling MoveYourMoney a movement. One of Huffington's partners in the venture, Dennis Santiago of Institutional Risk Analytics, says visitors have searched for banks in more than 16,000 ZIP codes — better than half the ZIP codes in the country. 

It's far too early to tell if Huffington has done something that might genuinely take a bite out big banks — real data probably won't be available for months.   But Huffington is tapping into frustration that has been building since 2008 banking collapse and bailout, say advocates for credit unions and smaller, community banks.

"It has been developing for the last several months," said Bill Hampel, chief economist of the Credit Union National Association. "Annual growth in credit union members had been very weak for the past several years…but during the first 11 months of 2009, our growth rate doubled." Credit unions added 2 million new consumers  during that stretch, Hampel said.

Karen Tyson, spokeswoman for the Independent Community Bankers Association, said her 5,000 member banks were experiencing similar, frustration-driven growth.

"Community banks have, since the onset of the financial crisis, gained new customers," she said.   

The American banking system appears to provide seemingly endless alternatives.There are 8,000 banks and 7,600 federally insured credit unions, according to the American Bankers Association.

"The good news is people have choice," said Nessa Feddis, spokeswoman for the American Bankers Association.  "There's lots of competition, and if people are dissatisfied they should look around and vote with their feet."

But most don't.  A tiny group of large banks dominate.  In 2009, four banks — Citigroup, JPMorgan Chase, Bank of America and Wells Fargo — held 39 percent of all deposits in FDIC-insured banks, according to Reuters. 

The high concentration of account-holders — combined with a low concentration of good will – certainly seems create the potential for a mass exodus. So why the need for a Huffington Post-prompted movement?

It turns out the breaking up with your bank is hard to do. 

In 2008, the Federal Reserve published a study around what economists call "switching costs" — the pain and suffering consumers must face when trying to leave one bank to join another.  The results were disturbing.  The study, by Fed senior economist Timothy Hannan, found it was incredibly difficult for consumers to get reliable information about the true costs of the new bank, for example, and described what a "bargains-then-rip-off" strategy to reel in customers and then exploit them. 

The euphemistic  name for the strategy is a “two-period” model. )  Period one is a free toaster.  Period two is cascading overdraft fees.

Even worse, the true costs and fees levied on account holders may not even be available to consumers until they've committed to the new bank. In many cases, fee schedules aren’t listed on generic Web sites and  can only be viewed by account holders after they’ve logged in – so there is literally no way to comparison shop.

“There may be some lack of transparency with regard to pricing,"acknowledged American Bankers Association chief economist Keith Leggett.

The switching costs become apparent when trying to extract your old bank's tentacles from your new financial life.  Today, most consumers use their checking account for a dozen different activities — direct deposit of payroll checks, automated online bill payment of mortgages and auto loans, recurring debit card transactions, automatic savings plan deductions, credit card bill payment and so on.  Ending all these transactions, and starting the payments anew, is such a hassle that "inertia" often takes over, says Hampel.

"Changing where you have your checking account can be a royal pain in the neck," he said. "It's like if you lose a credit card and have to inform all those people you have a new one, only much worse than that."

To combat the switching cost problem, many credit unions have developed "switch kits" to grease the skids, including forms that help new consumers track the changes needed for all payments and deposits. Those may ease the pain a little, but ultimately getting a new bank means fighting through a lot of red tape.

Still, consumers should look past the hassle and find a bank or lending institution that suits their needs, says Leggett.

"Who you do banking with is very important.  It may be the most important financial relationship of your life, so you should do your homework," he said. 

Leggett welcomed the discussion about switching to smaller banks and credit unions started by the Huffington Post, but he cautioned consumers against a "knee-jerk" reaction to it.

"In not every case is a credit union better than a bank with regard to pricing or fee structure," he said, saying that credit unions have also been guilty of charging annoying fees, just like big banks. "People have to realize when looking for a financial provider that they should always shop around and find a provider who offers the appropriate level of convenience.

Smaller banks and credit unions, he warned, will not provide the same "product mix" as larger banks, and are less likely to offer benefits for using multiple products – such as free checks or discounted loans.

But credit unions provide obvious benefits – in the form of better interest rates, both on loans and deposits, said Hampel.  According to Datatrac Corp., average credit union credit card rates are currently more than one full interest point lower, car loans are 1.5 percent lower, and one–year CD rates are 0.30 percent higher.  (Banks currently enjoy a small edge over credit unions in mortgage rates.)

Meanwhile, community banks offer something big banks find nearly impossible to compete with — local ownership and the ability to talk with a familiar face in the event of unexpected financial hardship, said Tyson of the community bankers group.

“They always put customer service first, and doing right by the community first.  They will not give you a

loan purely to make a profit. And you’re not going to be just a number,” she said. “You’ll be able to walk in the door and you can find the bank president, and know that he lives in your community. … It's a different sort of a custoimer relationship.”

Like Huffington, Tyson sees the switching issue in a larger context.  Federal law provides for a nationwide "concentration cap" of 10 percent, meaning no one bank can control more than 10 percent of the U.S. deposit market. 

Because of the banking collapse and resulting consolidation – leaving four banks with nearly 40 percent of deposits —  the cap is currently being threatened, leaving the U.S. financial system concentrated in too few hands, Tyson said. Through its "Fix Too Big to Fail" marketing campaign, the community bankers group  is lobbying Congress to lower the cap and force large banks to divest some of their holdings.

"The only way to change the dynamic is to have legislation in place that makes it not as appealing to be … large institutions," she said.

RED TAPE WRESTLING TIPS
Marketing campaign and blog-initiated movement aside, it’s always a good idea to review your financial relationships and see if you can get a better deal.  Consumers interested in investigating a move away from big banks should know it takes a bit of work, but there’s plenty of help available online, and one or two lunch hours should do the trick. Here are some tips:

* Rates aren't everything, and people matter. Leggett points out that many consumers are far too concerned with the published interest rate they'll earn on savings and checking accounts, and sometimes pick banks based on small differences.  Given that current rates are so low, earned interest should be of little concern at the moment; fee schedules are more significant. But even more important is the likelihood that the bank will treat you like a human being should anything go wrong; if, for example, you accidentally overdraw your account and land a series of overdraft fees.  Will a familiar teller help you, or will you end up stuck on a long voice mail tree?  We all make mistakes. It’s hard to put a price tag on the reassurance that you’ll be treated like a person, and not a criminal, when your turn comes.

* Don't forget the middle child. Feddis points out that there is middle ground between the four huge banks and thousands of small banks — what she calls "medium-sized" institutions.  They might offer the best of both worlds.

* Beat the feared late fee:  The real fear over switching comes from the potential for a missed loan or credit card payment, or double payments that could lead to an overdraft. There are several ways to ease the transition between institutions, although all of them involve a little extra money.

The easiest thing to do is double up. Keep both accounts open and keep all your payments turned on until you can confirm that new payments have been received by the old payee.  This will require having a lot of extra money to spare. A variation involves paying with your new account a full 10 days earlier, giving you time to cancel scheduled payments from your old account. You'll still need the extra money in case a payment lands in limbo. In either case, it's good to set up overdraft protection on both accounts by linking the checking account to a credit card, savings account or line of credit, so there's backup if you screw up.

The simplest – but most time-consuming — method is to open the new account without closing the old one, and then switching one bill payment one month at a time to the new account, making sure each one is set up properly before switching the next one.

*If your credit card issuer has cut you off: Many consumers find they are losing available credit on their cards or losing their cards altogether.  This hurts their credit score.  Hampel said consumers thus spurned should still apply to a credit union for a new card and will likely get the account as long as their credit isn't severely damaged. Expect a lower credit limit than you're used to, however — credit unions are much more stingy about credit card maximums.  That's a good thing, Leggett says:  that's partly why the bank credit credit card default rate  is currently around 10 percent, while credit union rates are down near 2.5 percent.

*Finding an alternative. While credit unions have certain limitations on membership, Leggett says that virtually all U.S. adults are eligible to join at least a few credit unions.  If you're stumped, try the credit union locator at

http://icba.org/consumer/BankLocator.cfm?sn.ItemNumber=51757

To find a small bank, try the bank locator

http://icba.org/consumer/BankLocator.cfm?sn.ItemNumber=51757

or use the Huffington Post tool, which lists only banks graded B or higher on Institutional Risk Analytics’  scale.

——————-

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What Congress giveth, credit card companies are poised to take away.

In six weeks, the final major provisions of the Credit Card Accountability, Responsibility and Disclosure (CARD) Act will take effect.  The law prohibits many egregious tactics used by card issuers, such as retroactively raising interest rates on consumers' balances.  But issuers have reacted to the sweeping new consumer protection law by quickly inventing new egregious tactics, including raising rates and lowering credit limits on half of all U.S. cardholders. 

And that may just be the beginning. Bill Hardekopf of Lowcards.com expects a series of new “gotchas” from card issuers in the year ahead, as they struggle to recover revenue lost to the CARD Act or the economic downturn.  Here are six new booby traps consumers should watch for this year.

1) More cards with annual fees

Today, only about 20 percent of credit cards come with annual fees, Hardekopf said, and consumers with good credit can easily avoid them. That will be less true this coming year. Already, Bank of America is surprising some existing customers by adding fees ranging from $29 to $99.  

Annual fees need not be so obvious, however.  Citibank is demanding $2,400 minimum annual spending from some customers — otherwise, they face a $35 fee.

It's important to carefully watch your bill to see if an annual fee has been added, Hardekopf warns. Otherwise, you might pay the fee unknowingly.

Despite the expected onslaught of annual fees, Hardekopf says consumers should still be able to find annual fee-free cards. 

"I believe the credit card industry is competitive enough to where there will be an issuer or issuers who will offer free cards," he said.

Consumers who are tagged with a new fee should seriously consider dumping the card and getting a new one. That should be done with care, however. Never close the old card without receiving a new one first, because closing the card will hurt your credit score and could prevent you from getting a new one.  Even closing it later will hurt your score, but probably not enough to exceed an unwanted $99 annual fee.

2) Fixed-rate cards changed to variable rates

It will be harder for banks to raise consumers' credit card rates once Feb. 22 rolls around. There is one loophole: Variable rates will still float up and down in line with the Prime Rate. Since bank rates have nowhere to go but up, variable rate card rates will definitely be going up.  Watch the mail for notice that your fixed-rate card is no longer fixed. If you don't like the change, consider switching to a new card – but follow the advice above.

3) Increases in interest rates

Many existing cardholders have already endured rate hikes; now, it's time for new cardholders to get hit. The CARD Act has no limits on the rates that consumers can be charged when applying for new credit cards.  Unable to raise rates on current customers, banks will target new customers with higher prices.  Why is this important? Consumers who feel jilted will be shopping around, and may not find options as many attractive alternatives as in the past.

4) Increases in existing fees

The CARD Act eliminated some fees, such as over-limit fees, but it did nothing to cap other fees. The best example so far: balance transfers between cards have typically been 3 percent for some time.  Last year, Bank of America hiked the fee to 4 percent and recently JP Morgan Chase raised its to 5 percent. Cash advance fees will likely follow suit, and late fees probably won't be far behind.

5) New fees

This is the most alarming area of all.

"Overall, I think fees is the big word for 2010," Hardekopf said. "There are people dreaming up fees right now that you and I have never heard of."

Card companies are taking tips from other industries in their fee-invention schemes, he said.  Some issuers are charging $1 a month for paper bills (imitating the cell phone industry). Fifth Third Bancorp recently added a $19 inactivity fee for customers who don't use their cards during a year. (Stockbrokers were the trail blazers on that one.

"Since fees represent such a cash cow for issuers, expect aggressive increases in existing fees as well as some brand new fees on your credit cards," he said.

6) Futzing with rewards

Decreasing the value of rewards points might not sound as harsh as a penalty fee, but it is.  Card issuers have myriad ways they can toy with rewards values, and many have begun doing so in earnest. Many miles cards now require more points for travel; some have added "tiers" that make travel more expensive, effectively devaluing the points. Other cuts are more obvious: Cash reward cards that lower their percentage rebate, for example. One of Hardekopf's personal cards now rebates only 1.25 percent of all purchases, down from 1.5 percent.

"I'm an avid user of credit cards. I put everything on my card just so we can get the cash back," he said. "This decrease in rewards is costing us money and I'm irritated."

Better or worse?

While the CARD Act contains many positive consumer protections, it's open for debate whether consumers will be better off after it takes effect than they were before, given the reaction by banks.  Hardekopf thinks there's not much room for debate.

"I think consumers are worse off than they were before," he said.  "Taken with what the issuers have done in response to the CARD ACT, I do think it has hurt more people than it helped."

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What some call America’s most notorious hidden fee is about to be dealt a serious blow, as new rules kick in that will eliminate many of the booby traps that lead to bank account overdraft fees. 

Already, in advance of the Federal Reserve regulations coming in July, many banks are allowing consumers to opt out of the "courtesy" overdraft coverage and associated, cascading $35 fees.

But it should come as no surprise that there's a catch. In fact, there are lots of them. Topping the list: Consumers who opt out of overdraft protection now may find themselves in the worst of both worlds. Their transactions will be denied and they will face a $35 insufficient funds fee anyway.

"My card is being denied and checks are being returned, but the fee remains, “ wrote Ginnie Logan, who banks at Elevations Credit Union in Colorado and recently opted out of what the organization calls courtesy pay. "Essentially the issue hasn’t gotten any better. In fact, it has gotten worse."

Logan’s sentiment would sting consumer advocate groups who spent years fighting high bank overdraft fees. Expect a new round of consumer frustration  this year as insufficient funds fees make a comeback and consumers try to understand why. We'll try to explain.

Much of the frustration with overdraft fees came from the element of surprise.  While most consumers understood the danger of writing a check that might send their account balance into the red, few realized that they could overspend their balance by swiping debit cards or withdrawing cash at ATMs. The new regulations are designed to end those surprises: Beginning in July, banks will not be able to honor the last two kinds of transactions charges and assess the overdraft fee unless those consumers have opted in to a overdraft protection program.

Bank of America, JP Morgan Chase and a number of other institutions already have announced that consumers may call and opt out of overdraft coverage now.  Most consumer advocates, including Consumers Union staff attorney Lauren Bowne, recommend that account holders immediately do so.

That, however, can lead to an unnerving conversation with your bank.  During a recent call to Bank of America, an msnbc.com reporter was told, "You may still incur overdraft charges in some cases," ever after opting out. That’s because lags between credit and debit transactions and the time they are posted to your account can still cause headaches.

It's possible, for example, that an online bill payment could be sent when a checking account balance is above zero, but not debited until later, after a series of other withdrawals have sent  the balance to zero.  That would still result in an overdraft fee, because the bank could not have known the "true" balance of the account would dip below zero when it initiated the e-payment.

In addition, there are numerous circumstances under which opting out would case transactions to be denied, triggering an insufficient funds fee.

Wire transfers or checks would bounce the old fashioned way, for example. At Bank of America, the insufficient funds fee is $35 – same as the overdraft fee.

Still, the Bank of America operator gave assurances that opting out would eliminate the possibility of debit card purchases leading to overdraft fees.

That should reassure consumers who aren’t so sure. Several have e-mailed msnbc.com recently suggesting they are still seeing overdraft fees related to debit card swipes after opting out.  The confusion is understandable, given the complexity of the systems involved. It doesn’t help that Bank of America operators won’t provide paper documentation of the procedure, its terms and conditions, or confirmation of the account change. The only way to confirm overdraft protection had been removed is to call after five days and ask another customer service representative to check, she said.

At operator at Logan's credit union gave a less black-and-white answer to the debit purchase/overdraft question.

"From what I've seen that's not happening," he said. "But it is possible."

 He described some potentially thorny time-lag situations. Not all merchants immediately process transactions — many transmit transactions in batches every hour or two, for example –  so it would be possible for a consumer to swipe their debit card four or five times in different stores during a day before the bank realizes the account holder's balance had gone south of zero.

Consumers who use ATMs outside their own banks' network could also face this problem, as some ATMs perform what are called "stand-in" authorizations, and don't transmit transaction information until later in the day.  That could also result in an overdrawn account.

Still, he said such situations were extremely rare.

The American Bankers Association offered several warnings about this kind of confusion last year while arguing against overdraft reform. But Nessa Feddis, spokeswoman for the trade group, said much of the confusion should be cleared up by the time the new Fed rules kick in this summer.

"The rule is very consumer-oriented,” she said. “… The Fed did a lot of testing and the rule forces banks to do things the way consumers would want them in each situation.” After July, she said, banks will not be able to charge a fee because of a lag in batch transactions, for example, because the Fed decided that consumers could not be expected to know about merchant transmission procedures.

The new rules aren’t perfect, however. Many consumers would want small debit card transactions or ATM withdrawals denied when their balance is at zero (saving a overdraft $35 fee), but prefer that checks be honored (since they would result in an insufficient funds fee anyway, and they would also lead to additional fees from the jilted merchant).  But many banks' systems can't handle such a split decision, Feddis said. Overdraft protection must either be on or off.

Consumers who misunderstand their overdraft protection has been removed may wind up bouncing a lot of checks.

"There are a lot of operational issues that still have to be solved," Feddis said.  "Some of these things will be resolved, but it might be through a different kind of product.” One possibility: banks will offer incentives to customers to keep larger minimum balances in their accounts to avoid overdraft situations, she said.

Despite the confusion, and the "worst of both worlds" possibility, the Consumer Union’s Bowne said she's sticking by her initial advice.

"Overall, I still think it is sound advice to opt-out of overdraft, when possible, as we wait for the rule to go into effect," she said.  "I cannot envision a scenario where a bank would charge a consumer for ‘attempting’ a debit or ATM transaction in which the consumer never completes the transaction. … That being said, nothing much surprises me with respect to these bank practices and without seeing the actual terms and conditions from the different banks it is hard to be certain."

Red Tape Wrestling Tips
You should opt out of overdraft protection now if you bank allows it. The end goal here is to avoid overdrawing your checking account through debit purchases or ATM withdrawals. You never want to pay $40 for a $5 hamburger, as has happened to many people in recent years. But there are hazards.

If you have overdrawn your account in the past year, think before you opt out. A bounced check can have more far-reaching consequences than an overdraft fee.  You might end up in the ChexSystems database and lose check-writing privileges, for example.  So don't opt-out until you are ready to stay out of the red.

Consumers who live near a zero balance will find that so-called “account holds” placed on debit purchases by gas stations and some other businesses can cause headaches in a post-overdraft-fee world.  Holds, which exceed the transaction price, can freeze funds for days and cause confusing time lags. Be cautious using your debit card for purchases at firms that place holds.  One tip: If you must use debit, use a PIN instead of a signature. PIN-debit transactions generally are processed faster than signature-debits, so that will help you keep your account balance up to date.

When July comes, look for a mandatory notice from the bank about the new procedures. Don't fall for comes-ons advertising "courtesy" protection.  If you do nothing, you won't have it. And that's probably your best choice.

After you opt out, and the fed rule kicks in, when might you be hit with a fee?  When the bank has to “return” an attempted payment to you – a bounced check, for example, or an e-payment that can’t be honored. 

The safe way to protect yourself from overdrawing your checking account is to link it to other accounts – your savings account, a credit card, or even a line of credit. Everyone makes mistakes. Yours will be less costly if you borrow your own money through linked accounts than if you borrow the bank’s money through a “courtesy.”

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“The only thing that gives me pleasure is to see my dividend coming in.” –John D. Rockefeller.

I’ve been taking a look at dividend stocks lately, if recent post about how dividend stocks rock is any indication, because of how dividends are taxed. To help me make sure I’m not going off track, or falling too much in love with them, I asked The Dividend Guy to write a guest post on where these types of stocks fit in your portfolio.

Dividends have been helpful in my portfolio. However, I have not simply used dividends for the sake of using dividends because I like the income. Instead, I have a very specific strategy that has worked well for me. Perhaps this strategy may work for you, or you can adjust it to fit your own needs. Either way, I would love to hear your comments so that we all can learn a little bit more about this game we call investing.

What Are Dividends

Before we get into it, let’s quickly discuss what dividends are. Dividends are essentially cash payments to shareholders that are paid out from a company’s earnings. It is as simple as that.

In slightly more detail, companies use dividends to pass on their profits directly to shareholders. The most common method of dividend payment is in the form of cash: a company will pay a small percentage of its profits to the owner of each share of stock. Sometime dividends can be paid as more shares, however that is not nearly as common.

Why Dividends

People invest for dividends for a number of reasons, however the primary one is that they are looking for income from those shares. Income aside, there are really two other reasons investors use dividends as part of an investment strategy:

1. Compound Growth
Dividends provide an investor with cash they can use. One option is simply spending that money on that new TV. However, as we are all dedicated investors that is not what we are doing right? Instead, we are funneling those dividends back into our portfolio. Investing these dividends into more investments provides us with a compounding effect in our portfolios. I will talk about this later.

2. A Big Part of Historical Returns
Dividends have been a huge contributor to stock market returns in the past. Have a look at the following chart from Plexus Asset Management:

Click to Enlarge

As it is clear to see, dividends have been a huge component of stock market returns and I don’t think can be ignored as part of a well built portfolio.

The Most Powerful Dividends

The real crux of a dividend investor’s strategy often lies in one real important concept: dividend growth. Dividend growth stocks are the creme de la creme of dividend stocks. In essence, dividend growth stocks are stocks that increase their dividends year after year for many years.

If you look at the following chart, from fellow dividend investor Dividend Growth Investor, you can see how dividend growers have done compared to other components of the market. These are the stocks that we are interested in.

Click to Enlarge

How to Use Dividend Growth in Your Portfolio

Now let’s get into how to use dividend growth in a portfolio. Here are three ways that I like to suggest people go about it.

1. Build a core portfolio of index funds
As a dividend investor, people are usually surprised when I say that the first step in build a dividend portfolio is building a core portfolio of index funds. The market is hard to beat, and in this day and age any investor who lags the performance of the market is missing out.

As such, the first step I suggest is to determine an asset allocation that meets your needs, and then populate that asset allocation with low cost index funds or index ETFs.

2. Supplement with Dividend Growth Stocks
Once that core portfolio is build up, then an investor can move on to dividend growth stocks. There are two alternatives to do that:

Alt 1: Find Index Funds that Track Dividend Growth
The easiest and most diversified way to add a dividend growth component to your portfolio is to use index funds that track dividend growth stocks. These funds buy a basket of securities that are known to be dividend growth stocks.
One option for these types of funds include the The PowerShares Dividend Achievers Portfolio (PFM), which is based on the Mergent Broad Dividend Achievers Index. These companies are U.S. equities with at least 10 consecutive years of dividend growth.

Another example is the SPDR S&P Dividend ETF (SDY), which tracks the S&P High Yield Dividend Aristocrats Index. This index is comprised of companies that have increased dividends for at least 25 years.

Research these funds and see how they can be incorporated into your overall asset allocation.

Alt 2: Buy Your Own – Start with Dividend Aristocrats
The other alternative for dividend growth investing is buying individual stocks on their own. This can be a good alternative if you have the time, inclination for intensive stock research, and money available to buy a number of dividend growth stocks to ensure proper diversification. If you do meet these prerequisites, then the best place to start your research is with the Dividend Aristocrat index. As mentioned, these are stocks that have a 25 year track record of increasing dividends and typically represent fundamentally strong and stable companies.

Keep in mind, individual stock selection is tricky so you need to really do your homework because any stock can tank quickly (remember Bank of America). The full stock selection process is obviously beyond the scope of this article so if you are interest in this do some digging around the internet for how to research stocks.

3. Reinvest Those Dividends

This is an important step, because it is where the real gains come from. As I mentioned earlier, investors use dividends for the compounded growth that can provide. To get that growth, it is important to take those dividends received, and funnel them back into additional investment assets. That can mean buying more of the company that was paying you the dividends, or using the dividends to buy shares in one of your core index funds or other dividend shares. Either way, you are putting that money back to work for you.

Summary

A dividend growth strategy is a very powerful tool in a portfolio. The compounded growth and high portion of stock market returns that come from dividends cannot be ignored. If this is of interest to you, then consider the suggestions for how to use dividend growth in your own portfolio and start to make some changes.

The Dividend Guy writes about dividend growth investing. His posts cover many aspects of the investing process including dividend growth stock selection, asset allocation, and stock market research. Visit him at TheDividendGuyBlog.com.

(Photo: epitti)

Where Dividend Stocks Fit in Your Portfolio from personal finance blog Bargaineering.com.

Right now may be the best time ever in the history of the world to take out a personal loan and use that personal loan for the purpose of debt consolidation or debt settlement.

Here are three reasons why, if you’ve ever thought about taking out a personal loan to pay off other unsecured debts, such as credit cards, now is the time to do that deed.

1. By All Means, Kick the Banks When They’re Down

If you’ve gotten yourself in trouble with credit cards, you know how brutal the interest and penalties can be.

Good news: those banks are now in desperate mode because they hope and pray that the millions of people in your exact situation pay back all or part of those outstanding credit card bills. With the U.S. job market still struggling, those paybacks have not exactly been flowing like Niagara into bank bank accounts.

On the contrary, Bank of America is enduring a charge-off rate of 13 percent. Charge-off occurs when a bank declares a loan dead and gone as far as recoverability is concerned.

In such an environment, imagine yourself being the “good borrower” who takes out a personal loan and makes the bank an offer they can refuse, but might as well take because what are the other options?

2. Credit Card Companies Under Severe Political Pressure

Banks and credit card companies are under incredible pressure to discontinue the predatory lending attitudes regarding credit cards that have proved so profitable to them over recent years.

As this Bloomberg column describes, the “party is over” for credit card companies.

This political environment can’t help but enhance the appeal of your (relatively) generous offer to pay the credit card company a portion of what you owe in return for a cancellation of the remainder of the debt.

3. Data About “Collectability” Starting to Become Available

If you do choose to take out a personal loan in order to do some form of debt consolidation or debt settlement, you obviously want to know what payback percentage is going to be accepted. That sort of data is starting to emerge, thanks to the thousands of individual consumers and debt settlement companies that have completed or are currently engaged in debt settlement negotiation.

According to this insightful story about credit card collections agencies, paying 10 percent on what you owe may not be too much to ask. By that math, you may be able to settle $20,000 in credit card debt with a $2,000 personal loan. Math like that doesn’t come around every day–and won’t last forever, either.

Get it while it’s hot!

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