Advanced Personal Finance

Ugh. It was bound to happen. My 4-year old daughter got her first credit card application in the mail yesterday.

After we put the recycling out on the curb last night, I reached into the mailbox and grabbed what was in there. Coming inside with her, I said, “Hey! This letter’s for you.” (I saw it was from AirTran - we signed her up for their frequent flier program)

“Really?!?”

“Yep. Here’s your mail, ma’am,” I said, making a production of handing over the envelope.

She tore right into the letter while I moved on to the only other non-junkmail item. Honestly, I thought AirTran had sent her some plan-related form letter. Soon, however, the real contents were strewn about the kitchen floor.

“Daddy, look! I got a card,” she happily proclaimed. She meant like a birthday card. I look and she’s holding a return envelope. “I’m going to keep my card over here, ok Daddy?” she said as she proudly placed it on her little activity/art table.

“Sure, baby. That’s great,” I said as enthusiastically as possible. I bend down to recover the rest of the envelope contents and am soon slapped in the face with the absurdity of the situation.

Way to go, AirTran. You just sent a credit card application to a 4-year old. Congratulations.

I tore up the application, but thinking about it now, I should have kept it. [Sniff] My baby’s first credit card application. [Sniff]

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Thursday, Experian announced that, starting November 1, it will allow consumers the option of ‘freezing’ their credit file. Experian is the final credit bureau to allow credit freezes. Equifax and Transunion have previously announced their intention to do so.  Their programs roll out October 15.

A credit freeze prevents access to your credit file. Since no one can check your credit, would-be identity thieves cannot open new lines of credit in your name.

It will cost $10 to freeze or unfreeze your file, unless your state’s law mandates a lower cost. The option to freeze your file will be available to consumers in all 50 states. Currently, only 39 states had provisions for freezing a credit file. This action makes that a moot point.

Here’s another post I wrote about credit freezes you might find of interest.  Among other things, this article explains how to go about freezing your files.

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With the deterioration of the housing market, there’s been an increased interest in ’short selling’ homes. I didn’t know much about short selling, so I did a little research. I should say up front that I don’t have any personal experience in this topic (thank goodness); here’s what I learned, though.

What is a short sale?

I covered the definition of a short sale in a previous post, but this is a refresher. A short sale is the sale of a house that has a mortgage greater than the current market value of that property. The bank agrees to forgive the outstanding mortgage balance after the sale completes. Short sales aren’t a given - the borrower must negotiate with the lender the accept the short sale.

Why would the bank agree to a short sale?

A short sale is isn’t so much a win/win as it is a lose less/lose less for both parties. The borrowers don’t have a place to live anymore. The lender’s don’t get paid back all they’re owed. On the other hand, the property doesn’t go to foreclosure, which is good for both of them.

In a foreclosure situation, especially in a down market, the lender can expect to recover less than if the property is sold short. Maybe they’d recover 75% 50% in an auction, but 85% in a short sale. It’s obviously not ideal for the lender, but at least they don’t have to sell the property.

The drawbacks for a borrower

As you would expect, there are several drawbacks to short selling for the borrower. Perhaps the biggest one is that they no longer have a place to live and any money they did put into the house is gone. Also, a short sale is going to show up on their credit report. It’s hard to say exactly what the effect will be on credit score, but anecdotally it’s somewhere in the neighborhood of a 80-100 point drop. That’s nowhere near the penalty for a foreclosure, but still significant.

There’s also another pitfall - taxes. The IRS treats the forgiven mortgage amount as income, so you’re going to pay taxes on that amount. When you’re talking about mortgage-size amounts of money, this could be very significant.

Other things to note about short sales

There are several other points about short sales to note. First, a lender might balk at paying the commission for a broker, which could complicate things.

Second, it takes some work to convince the lender to accept a short sale. You’ll have to be several months behind on payments and most likely have to show evidence of significant hardship that caused you to get so behind. Your mortgage resetting to a too-high-for-your-budget payment isn’t good enough. If you’ve lost your job, divorced, or have medical bills, you’re in a better negotiating position. Well…regarding the short sale, that is.

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Increasing identity theft. Government agencies losing personal data-rich laptops. Hackers breach retailers and data merchants. Is it time for a credit freeze?

What a credit freeze is

A credit freeze is used by someone to prevent their credit files from being shared with others. It places a certain level of security on your credit report by preventing most new accounts from being opened in your name. I say most because it’s possible for a company to extend credit without a credit check.

The prohibition against new credit is even for new accounts you authorize. That is, for you to open new credit lines, you must unfreeze your file.

A credit freeze involves informing the credit bureaus of your intent and, most likely, paying a small fee (typically $5 to $15). You also pay a fee to ‘unfreeze’ your file when you really do want a new account opened in your name.

As of August 2007, 32 states allow consumers to freeze their credit. Eight more make freezes available in 2008.

How to put a credit freeze on your information

The actual logistics of putting a freeze on your account varies by state. Consumers Union maintains this list of each state’s laws and instructions for freezing and unfreezing your file. By the way, I think it’s a freakin’ crime that the federal government hasn’t stepped up with uniform rules that apply across the nation, but whatever.

Why freeze

The benefits of a credit freeze are self-evident. Since no one can get new credit in your name, your identity cannot be stolen for that purpose. This doesn’t preclude the abuse of your stolen credit card account number, but it does stop credit unknown to you from being extended.

Obviously, it’s a pain in the butt to unfreeze and freeze your account when you really do want new credit. I say that’s a small price to pay. When 2008 rolls around (I live in a state where a law hasn’t yet taken effect), I’ll be freezing my file.

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USAA - Best. Bank. Ever.

The other day, I canceled two credit cards. That left me with just one, issued by my all-purpose financial services company, USAA. The problem is, I realized that card didn’t have a rewards program associated with it. No problem - I go to USAA’s site and look up my card. Sure enough, one of the options listed on the right sidebar is ‘choose rewards program.’

Here’s where I screw up.

USAA offers two rewards programs for credit cards, a points-based one and straight cash. So I fill out the little online form and hit ‘Go.’ It was at this point that things went wrong. At the next screen, it was apparent from the message that I’d just opened a new credit card account and closed my old one. The old one that I’ve had since about…forever.

Well, as Suze Orman and just about every other personal finance writer, blogger, or speaker will tell you until they’re blue in the face, it’s a bad idea to close your oldest credit card account. Closing credit card accounts has a negative impact on your FICO score, but I don’t generally care. In this case, however, I did.

Back to the point. I realize I’ve just closed my oldest account and I didn’t intend to. I call USAA and here’s where they re-demonstrate their coolness.

Me: “I was trying to convert my credit card to one of your rewards programs and I completed the process and got a message I’m not sure about. I read this message and I think it means I just closed my old credit card account. Is that correct.”

CSR: “Yes, you’ll be getting a new card in about a week.”

Me: “Ok, I don’t want to do that. Can you undo it?”

CSR: “Let me check on something. Can you hold on a second?”

Me: “Sure.”

…

CSR: “Ok, I’ve gone ahead and just converted your old account to the new rewards program. You’ll keep the same credit card number.”

I didn’t even ask if that was possible or for her to do it. This woman fixed a problem for a customer without the customer even having to ask her.

And that is why I love USAA so much.

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