Rebuilding Credit After Bankruptcy

You can do it! Just because “Bankruptcy” is still on your credit report, doesn’t mean you can’t improve your creditworthiness and obtain credit. There are ways to rebuild credit after a bankruptcy. You can do it yourself – we recommend that you do NOT pay high fees to a company or person to do this for you. In a relatively short time you can bring up your credit score and qualify for quality loans with competitive rates. Knowing this and adopting a positive attitude will make you more successful.

Avoid paying for services you likely do not need. Because so many millions of people have bankruptcy on their credit report at any given time, a marketplace has grown to make a profit from them. Avoid spending on unnecessary services such as credit monitoring, credit insurance, and credit repair schemes. Read on and you can repair your own credit and probably do so better than anyone else.

Remember why credit is important to YOU. Some people talk about their credit like it’s a badge of honor. But all credit costs you money in the form of interest and other fees. U.S. consumers use too much credit and save too little. So before you think about using credit, ask yourself if this use of credit will help you reach YOUR biggest financial goals or whether you should just wait and pay cash. Be sure that the payments you will make for any credit fit comfortably into your spending plan without sacrificing any needs such as an emergency fund or enough insurance.

Be wary of credit cards. Credit card debt plays a major role in many bankruptcies. Many bankruptcy filers did not use their credit cards for luxuries so much as to mask an unbalanced budget. When you’ve been through a bankruptcy, the last thing you want to do is to get back into credit card debt. If you think that’s even a possibility for you, then seriously consider not having any credit cards. In many ways, life without credit cards is sweet, simple and stress-free. You simply pay cash for whatever you want to buy. If you don’t have the money to pay for it, you wait until you do before you buy. If you do trust yourself with credit cards, remember, you should use them in this same way:
Don’t put anything on a credit card unless you can pay it off in full each month, on time. Credit card use should be reserved for the convenience of not having to carry cash. Remember, because of the way interest, fees, and penalties are calculated on credit cards, carrying a balance on a credit card is one of the easiest ways to slip back into debt trouble.

Having said all of that, it still is a good thing to have good credit. You may need good credit to be able to finance a house or vehicle. Now, here’s what you should know about rebuilding your credit after bankruptcy!

Step 1: Check Your Reports For Errors

First make sure your credit report is correct. The only place to get your free report is from the “central source” at www.annualcreditreport.com or 1-877-FACT ACT. First, check that all accounts discharged in your bankruptcy show zero balances. Credit Reporting Agencies (CRAs) are not required to report all truthful information about you; they are only prohibited from reporting untrue information. Therefore, some accounts may have the notation “included in bankruptcy” while other accounts do not. As long as all of the debts wiped out by your bankruptcy carry zero balances, the information is not false.

Most negative items should only show up on your credit report for seven (7) years, after which time they must be removed. Exceptions include bankruptcies under Chapters 7, 11, or 12, which can remain for 10 years, and tax liens, which can remain for 15 years. A common error is when a “bad debt” is sold to a collection agency or other lender who then reports it as if the 7 years were just beginning. Be aware that paying off a debt is not a reason for it to be removed from your report. But having an item appear on your credit report when it should be removed is an error that can be fixed.

Step 2: Take Action To Correct Your Credit Report

By Federal Law (The Fair Credit Reporting Act as amended by the Fair and Accurate Credit Transactions Act or “FACTA”), Credit Reporting Agencies (CRAs) must take action to correct errors you point out to them, if you do so in the correct manner.

• First, get your report from the CRA in question. You must be able to show them the error or disputed item on that CRA’s report. Telling a CRA that a lender told you about an error is not the same thing.
• Second, write a letter telling the CRA and the creditor why the information is wrong or too old to be reported. Be specific.
• Attach some form of proof of why the item is wrong. For instance, copies of your bankruptcy discharge papers showing that a creditor was included in your bankruptcy, or an old credit report showing negative information reported on the same debt, but by a prior holder of that debt.
• Send copies of your letter, the pertinent part of the CRA’s report and your proof to the CRA and the creditor by certified mail, return receipt requested. This will cost a bit more in postage, but you will get cards in the mail, signed by an employee of the CRA and creditor, proving that the CRA and creditor did receive your letters and when.
• The CRA has 30 to 45 days to investigate your claim and must then respond to you. It’s best to copy the creditor so that the creditor cannot later claim ignorance and report incorrect information again.
• The three main CRAs, Experian, TransUnion and Equifax, have information on their web sites on how to dispute items on your report. They also provide an on-line dispute method. Remember to keep everything in writing and copy the creditor. Avoid purchasing services on the three CRA’s web sites since they are expensive and usually unnecessary. You are entitled to one free credit report per year from each of the three CRAs, but only through the “central source” at www.annualcreditreport.com. (There are some companies that call themselves “free” but are not). If you think you’re at risk for fraud or identity theft, you can have a freeze put on your credit file.

If you cannot resolve a dispute, you are entitled to add a “personal statement” of up to 100 words. This statement must appear on your credit report until the dispute is resolved.

Step 3: Re-Establishing Good Credit

Information from your credit report is used to calculate your credit score. Your credit score is the single most important factor lenders use to decide whether or not to give you a loan, and how much to charge you in interest and other fees.

Do I have to have debt to have a credit report? Unfortunately, with the traditional CRAs, the answer is “yes.” In order to have a traditional credit score and something other than a “blank” or non-existent credit report, you must have credit accounts. Credit reporting is purely voluntary: lenders are not required to report your payments and the CRAs are not required to report them either, both are just prohibited from reporting false information.

The three traditional CRAs usually do not report your on-time payments for things like rent and utilities. There is an “alternative” Credit Reporting Agency called PRBC** (Payment Reporting Builds Credit).

The three traditional CRAs usually do not report your on-time payments for things like rent and utilities.  There is an “alternative” Credit Reporting Agency called PRBC** (Payment Reporting Builds Credit) that does allow consumers to build a credit report based on these everyday bills.  Since it was purchased, consumers can no longer access PRBC directly.

To build a PRBC credit report, you must use one of PRBC’s “bill pay partners” which include Account Now, William Paid and Vision PrePaid.**  If you decide to use one of these services, be sure you select the option that reports to PRBC, not all do.  There is a small monthly fee for this service, but the fee is not as much as you would pay in interest for a loan each month. Although PRBC is not widely used by lenders, you can ask your lender to request your report from them.

All credit is not considered equal. For the purpose of your credit score, some credit is more valuable than others. Real estate loans (mortgages), vehicle loans or unsecured loans are all considered very good forms of credit. A high-interest loan from a finance company, a store charge account or a collection account may actually have a negative impact on your credit score. See “credit score negatives” to learn more. Having two types of credit will help to increase your credit score more quickly. “Installment loans” include any student loans, automobile loans, or signature loans. “Revolving credit” includes credit cards or home equity lines of credit.

Think local. If you are not a member of a credit union see if you can join one. If you can develop a relationship with a local credit union or a smaller local bank, you should be able to get an appointment to explain your situation to a personal banking representative. Honestly tell this banker why or how you got into financial trouble or had to file a bankruptcy. Tell the banker why you are in stable financial condition now and how you want to rebuild. Then, ask if the credit union or bank will consider making you a small, unsecured loan, for example, $2,000 for one year. Offer to put the $2,000 loan proceeds into a savings account with that same credit union or bank and simply use this account to make your monthly payments on time until the loan is paid if the credit union or bank will report your payments to the CRAs. You will still have to pay the extra interest from your own pocket, but if you don’t spend any of the loan amount, this will be a small price to establish an excellent credit line on your credit report.

Credit Cards. Many people file bankruptcy in part because of credit card debt. Naturally, you do not want to get in debt again! The correct way to use credit cards is only for the convenience of not having to carry cash and to get rewards. This means that you pay off your balance in full, on time, every single month. In other words, never charge something that you don’t have the money to pay for. Be honest with yourself. Credit cards are not for everyone. If you don’t trust yourself to use a credit card in this way, it’s best not to have any. But be aware that most debit cards do carry higher risks if lost or stolen.

Most people who have filed bankruptcy get many credit card offers mailed to them after their bankruptcy. These credit cards often carry high interest rates or “fine print” with unpleasant terms, but so long as you pay your bill on time, in full each month, these things won’t matter. When obtaining a credit card, you may wish to avoid companies whose policy is to not report credit limits and use your most recent balance instead, such as Capitol One and American Express. Using credit cards and making on-time payments without using too much of your available balance is one way to build good credit on your credit report. Some people find it helpful to use a credit card only for a particular expense category (food, gasoline, etc.) to help them track their spending in that category.

If you cannot get a regular credit card, then you may wish to get a “secured credit card.” This is a credit card from a bank where you deposit a sum with the bank to “secure,” or guarantee, the amount of credit that the bank will give you on the card. Since there is no risk to the bank, the bank will not care about any prior credit problems. The credit limits are usually about $200 to $500. With on-time payments the institution will often raise your credit limit without asking for a larger deposit. But read all the terms because some secured credit card offers can be misleading, such as limiting your purchases only to items from a certain catalogue.

Renting after bankruptcy. Be persistent and pro-active. Often if you tell people your situation up front, they will give you a chance. If the bankruptcy relieved you of your debts to the point where you are well able to afford the rent payments, you should be a good risk to a landlord. Explain this to them.

I really want to get a house and a mortgage. This is a common goal and a good one. But it’s also the biggest, most important purchase most people ever make, so don’t rush it! If apartment living is not for you, look for a home, condo, or town home to rent; you can often find one for rent by an owner. Can you get a mortgage within a year or less of bankruptcy? Probably, yes, but usually with terrible terms that may cause you financial hardship and heartache in the future! The better choice is to wait to get a home when you can make a down payment and qualify for a low interest, fixed-rate, standard mortgage. The difference between rushing it and waiting may not only be hundreds of dollars a month but also thousands of dollars over the course of the loan. Hybrid mortgage products can lead to disaster. Finally, be sure you realize all the costs of homeownership before you buy. There’s not just the principal and interest on the mortgage, but the money for real estate taxes, required homeowner’s insurance, maintenance of the home, etc. If you must get a mortgage sooner, look for a fixed rate mortgage with no pre-payment penalties and no odd terms. Then you can try to refinance in a few years when you’ve rebuilt your credit more. See “Home Buying Tips” coming soon from Hummingbird.

Co-Signers. If someone else is willing to put his or her credit and finances on the line for you, a co-signer with good credit can really help you to get better credit terms. On the other hand, you should know that merely being an “authorized user” on someone else’s account doesn’t really help your credit.

Step 4: Getting Your Credit Score

Credit scores are NOT free, they cost about $15. By far the most widely used credit score is the FICO® credit score from Fair Isaac and Company.** But the three major CRAs want to have some of this business, so they have invented their own score, called by their own name (“the Equifax Score™”), or other names. Hummingbird recommends that you do not waste your money on a credit score other than the FICO® score because many lenders do not use the other scores; the FICO® score is the one that is almost universally used. The exact method of computing your score is a trade secret. You can order your score and learn more at www.myfico.com. Be aware that other “middle-man” companies offering credit scores may surcharge you for other items.

FICO® scores range from 350 to 850, the higher the better. A small difference in your credit score can make a HUGE difference in the amount you pay for a large loan like a mortgage.

Step 5: Improving Your Credit Score

Here are the items that make up your FICO® credit score

1. 35% of your credit score is based upon payment history: Whether you paid on time and the seriousness of any delinquencies.
2. 30% of your credit score is based on the amounts you owe, including the percentage of the credit you have available versus what you’ve actually used.
3. 15% is based upon the length of your credit history. This takes into account how long you’ve had your accounts and how long it’s been since your last activity.
4. 10% of your score is based on new credit: opening new accounts and lender “inquiries” or requests for your report.
5. The final 10% is based on the type of credit you have. Whether it’s a store account, credit cards, installment loans, mortgage debt or consumer finance debt. Some types of credit are better than others. To learn more, go to www.myfico.com

Credit Score Positives

• Make all payments on time.
• Pay any installment loans (auto payments, student loans) you still have on time, every time. Making payments on time is one of the best ways to restore your credit.
• Make all payments on time.
• Pay extra when ever possible. Showing you can pay off existing debt is a great way to improve your credit rating.
• Make all payments on time.
• Pay off any charges you make in full before the due date, you do not need to carry a balance to raise your credit score, just make all payments on time.
• Make all payments on time.
• The longer you’ve had the account the better. New credit is not as good for your score as credit you have had for a long time.
• Make all payments on time.
• If you do get behind, get current and stay current.

Credit Score Negatives

• Avoid poor forms of credit that may negatively impact your score (rent-to-own, pay day loans, store accounts, finance companies).
• Avoid using more than 30% of your credit limit on any account.
• Avoid “moving debt” from one lender to another. It is much better to just pay it off.
• Avoid opening a great deal of new credit that you don’t need just to rebuild your credit report. This can have a negative impact.
• Don’t close unused accounts just to boost your score; it can backfire in the short run.

Be patient. Take the necessary steps and then give it a bit of time for your track record to age. You’ll be happy with the results!

In conclusion, remember that your credit score is only the largest single factor used in lenders’ decisions. Each lender has its own lending policies that may include your ratio of debt to income, job length and other factors. The most important things to remember are:

1. To use credit wisely to reach your most important goals.
2. To be sure any use of credit fits comfortably into a balanced spending plan and Not to look for credit anticipating that you’ll get only inferior loans. There’s a big market place and your report and score will be improving all the time. Search for a good deal, give it time and you will get one, regardless of the bankruptcy.

Remember, if you don’t trust your ability to stick to the “positives” and avoid the “negatives” listed below, then do not get a credit card or other revolving credit.  If you must have credit, try using one of PRBC’s bill pay partners (Account Now, William Paid, Vision PrePaid or Rush Card)** but beware of “fine print” restrictions and fees.  Otherwise try to save and pay cash to avoid credit entirely.

**Hummingbird does not endorse any companies. Hummingbird mentions other sources of information that it considers helpful to the reader, but does not guarantee the accuracy or completeness of any entity’s information.

“I don’t know where my money goes.”

“I don’t know much about investing.”

“I wish I could control my spending more.”

If you’ve ever thought any of the above, consider this:  When you were a baby you weren’t good at walking or talking. You learned!  No one is “bad” with money, they merely lack knowledge.

Knowledge = power.

Lack of knowledge =  weakness.

The more you know about money, the better you can protect yourself and your family– and build a secure future.

Money management is usually not taught to us so we come by our financial ignorance honestly.  Make this year the year that you resolve to begin to learn:

• How to be in better control of your money
• How to best use your money, and
• How to save more and live better.

Our website has quality financial education that is completely free of ads and marketing.  All our education is free and we will not try to sell you anything!  Hummingbird also provides other trusted sources for you to get free, quality financial education materials.

If you devote even one hour per week to reading personal finance educational materials, you will have made huge gains in your knowledge by the end of the year!

Resolve to start today!

© Hummingbird Credit Counseling and Education, Inc. 2011.  All rights reserved.

There are three main places to opt out of commercial mail that we think of as “junk mail”

• The Credit Reporting Agencies (CRAs)
• The Direct Marketing Association (DMA), and
• Other sources such as sweepstakes and stores

Here’s a quick guide to taking charge of your mail box.

Opt Out of Credit Report Generated Offers

The 3 major Credit Reporting Agencies (CRAs) that keep consumers’ credit reports also sell consumer names and addresses that meet certain criteria to companies.  To stop pre-approved credit card offers and remove your name from the generated lists, call the “Opt Out” hotline for the three major credit bureaus, Equifax, Trans Union and Experian at (888) 5OPT-OUT (888-567-8688) or visit www.optoutprescreen.com.

Choose What You Get From Direct Mailers

The Direct Marketing Association or DMA is a trade group for direct mail advertisers.  When you register with the Mail Preference Service of the DMA, your name and address are placed in a “do not mail” file which is updated monthly. DMA members are required to update their lists at least quarterly, and some do it monthly. Businesses who are not members of the DMA may also take advantage of this “do not mail” list, so registering with the DMA will reduce much of your junk mail.

The DMA Mail Preference Service allows you to select what types of mail you wish to receive or not receive.  There are 4 categories: credit offers, magazine subscriptions, catalogues and other mail.  For each category you can choose to opt out from particular companies or the entire category.  DMA opt outs expire and must be renewed every three years.  From the home page, www.dmachoice.org select Consumer Guides.

Other Sources of Mail Offers

Opting out with the CRAs and DMA won’t end solicitations from local merchants, religious and charitable associations, professional and alumni associations, and companies with which you already conduct business. To stop mail from such sources as well as mail addressed to “occupant” or “resident” you must contact each source directly.  Instructions on how to get rid of most “occupant” flyers is available at www.privacyrights.org in the fact sheets under the topic heading “Junk Mail/Faxes/Email.”

Avoid Sweepstakes and Sneaky Opt-Ins

Ever wonder how companies can afford to give away huge cash prizes just from selling magazines and trinkets?  It’s because they make more money selling your information than they do from selling products.  The real intent of sweepstakes is to collect names and addresses to sell to marketing companies—and your odds of actually winning are one in hundreds of millions or worse.

Companies with which you do business may sell or trade your name and address unless you specifically request that your information be kept private. Often when you order from a catalog or apply for a credit card, there will be a small box for you to check if you wish to opt out of future mail or email.  The box that is checked by default is usually to include you in such mailings. If you want to protect your privacy, tell companies you do business with not to sell your personal information.

Reduce Email Ads and Spam

The DMA also offers an email opt out service that is free to consumers.  It is called e-MPS for email mail preference service.  Although registration with e-MPS will help reduce the number of e-mails you receive, it will not stop all commercial e-mails. You may continue to receive e-mails from groups or advertisers who do not use e-MPS to clean their lists.  E-MPS also does not affect business-to-business type emails received at your place of employment.

The DMA does not provide marketers with consumer e-mail lists. The E-mail Preference Service (e-MPS) is available to companies for the sole purpose of removing consumer e-mail addresses from their e-mail lists.  Up to three email addresses may be registered in the DMA’s e-MPS.  To access all of the DMA’s options for eliminating mail, calls and emails, go to www.dmaconsumers.org and select “Consumer Assistance.”

Take Further Action and Learn More

After taking the steps in this article, you will likely still receive some junk mail.  For in-depth coverage of how to eliminate all or nearly all junk mail, go to the Privacy Rights Clearinghouse at www.privacyrights.org select “Junk Mail/Faxes/Email” from the topic list, and read the fact sheets offered there.

© Hummingbird Credit Counseling and Education, Inc. 2011.  All rights reserved.

The main advantages to layaway are the ability to “reserve” a special gift by making payments to the store before the holiday and avoiding credit card debt. But few things are free and layaway is no exception.

Is it worth the service fee?
Layaway can be a smart way to shop for the holiday if you are aware of all the layaway policies for any retailer you use for the service. There is almost always a non-refundable service fee for the layaway. Service fees are usually $5 to $10. Stores may charge multiple service fees each time the layaway service is used. So multiple fees may be charged if items are put on layaway at different times. And layaway service fees are non-refundable.

Will you pay other fees?
If you cannot make the payments according to the store’s layaway policy, you will lose your layaway item and any money you have paid will have fees deducted. Most stores offering layaway charge $10 to $25 as a cancellation fee. Some stores may also charge a re-stocking fee.

What are the rules?
Stores differ but typical rules may include the following:
• Merchandise exclusions. Some stores restrict layaway to certain types of merchandise. Examples are limiting layaway to in-store items versus those available online or excluding jewelry or other categories of goods.
• Down payments. Most stores require a minimum down payment amount in addition to the layaway service fee.
• Terms of payment. All stores have a deadline date by which payment in full must be made. Some stores also require minimum weekly payment amounts per item.
• Terms of pick up. Most stores specify how and when you must pick up your layaway as well when you cannot do so. For instance, Saturday pickups may be excluded.
• Other restrictions. Most stores have a minimum price amount per item required for layaway.

What’s the refund policy?
The service fee and cancellation fee is usually deducted from any layaway that is canceled or not completed according to the store’s terms.

The Bottom Line: Is Layaway worth the price for you?
Depending on the fees you will end up paying, using layaway for a lower cost item may cost you more than you’d pay if you charged it to your credit card.  Here’s an example.

Comparison of a $50 holiday gift item purchased on Layaway versus a typical Credit Card

Using the same terms, a $100 item would cost $105 on a two month layaway and $103 on the credit card. When comparing layaway to using a credit card, you should consider not only the interest rate of the credit card but also whether you’re confident that you can and will pay the credit card balance in the same period of time as the layaway. Some people are afraid of using too much credit and feel it’s worth the slightly higher cost of layaway to pay as they go. The key is to be aware of your choices. And unless the item is something that’s likely to be out of stock by the time you’ve saved the purchase price, saving to pay cash will always save you money over credit or layaway.

© Hummingbird Credit Counseling and Education, Inc. 2011. All rights reserved.

Few of us can afford to be without our incomes for a long period, but we all should have plans for that possibility.  Here are the 5 things you can do to prepare for financial disaster.

1.   Survival priorities.  Write down your priorities if the worst were to happen and you were permanently unable to work.  Chances are your priorities would be your dependents, your health and a safe place to live, not your credit score!  Survival and needs take on a whole different aspect when your circumstances alter drastically.

2. Don’t let a positive attitude (or anything else!) make you an ostrich.  An ostrich will put its head in the sand to hide its eyes when it is afraid.

It’s always important to think positively, especially in the face of adversity.  But positive thinking should not blind us to reality and the need to take action before things get worse.

Avoid these pitfalls:

“Another big job is around the corner, I shouldn’t settle for less”

You could still be waiting for the big job as you become destitute. Just because you take one or more survival jobs doesn’t mean you won’t continue to seek out better possibilities.

“My business will be profitable soon!”

One of the hardest things in the world is to pull the plug on an unprofitable business. Your dreams for the business were big and you have already invested so much time and money.

“We must keep our house no matter what.”

You need safe shelter that is adequate for your basic needs but no particular home is ever a “must” for anyone.  Too often savings are put into a home with little or no equity,  that will be lost in the long run.  Or equity is used up and the home is ultimately lost.

The bottom line is to avoid depleting your savings or retirement accounts due to lack of action you will have to take eventually.  Change is scary but drastic situations call for drastic changes!

3.   Don’t make non-essentials into “musts.”  Hindsight is 20/20.  Common regrets voiced by bankruptcy clients include failing to cut expenses to the bone soon enough, pouring money into a home that’s not realistic to keep, and putting “good credit” ahead of long term survival.  Believing that things always get better and just working hard will solve the problem leads many people to dig a deeper financial hole.

4.  Don’t wait to plan for a financial disaster.  Write down survival priorities and look at alternatives now.  You will need to re-do your financial survival plan each time your circumstance change (i.e you have another child, your income goes down, you take on a new expense).

Consider how you would respond to the financial challenges posed by various “worst-case” income-loss scenarios such as if you (or a spouse/partner) is out of work for a year or more, becomes permanently disabled, or can only find work that pays 1/3 of current income.  Also consider unexpected expense increase possibilities such as if you or one of your dependents needed expensive medical or nursing care not covered by insurance; if you need to relocate but couldn’t sell your home for enough to break even and it takes 10 years for the value to recover; or if your vehicle is totaled and insurance pays you little.  In each instance, think about what would be necessary to adjust your finances to survive.

5.  Get legal advice early to ascertain options.  Bankruptcy should not necessarily be the “last resort” although most people think of it that way.  Depending on the circumstances, a bankruptcy can allow a mortgage to be “caught up” over time or prevent the loss of retirement savings and other property.  But waiting too long can decrease the options available in bankruptcy, so it’s important to get advice early.

Bankruptcy is not something that anyone would desire unless it was absolutely necessary, but it exists in our Constitution and our laws for a reason; To give honest people in financial distress a “fresh start” so that they can rebuild and avoid poverty.  Many people think bankruptcy is only for quitters or deadbeats.  But there is biblical reference to debt forgiveness (Deuteronomy 15:1-2) and many famous people have filed bankruptcy and gone on to become very successful.  Examples include Milton Hershey (Hershey’s Chocolate), Walt Disney, Henry Ford, Thomas Jefferson and Dave Ramsey to name just a few.  Whether you use bankruptcy or not, you owe it to yourself and your family to learn all that you can about your options and the possible consequences of your financial situation.

We must all hope for the best, plan for the worst and accept what comes.  Most people can rebuild after a financial disaster and after a bankruptcy.  If circumstances make rebuilding impossible, getting legal advice from a respected bankruptcy attorney will help insure your future.  Don’t be an ostrich!

(c) Hummingbird Credit Counseling and Education, Inc. 2011.  All rights reserved.

Companies selling credit or identity theft protection market their dubious products by spreading fear.  And these services almost all require a monthly fee, that adds up quickly over time.

The reality is that no service can offer true protection from identity theft or credit tampering.  For example, the Federal Trade Commission recently accepted an $11 million  settlement from Life Lock for false claims.  The best protection consumers have is simple (though not always easy) and is FREE.

For good credit:

• Pay all bills on time
• Don’t open a lot of new credit and try to maintain accounts over time
• Don’t use more than 30% of your available credit

To prevent or catch ID theft or unauthorized use of your credit:

• Obtain one free credit report from each of the three big Credit Reporting Agencies (CRAs) every four months through the central source: www.annualcreditreport.com.  Avoid all other sites that sound like they offer “free” credit reports because they don’t.  Other sites are imposters.  There is only one source for your free credit reports.
• Check your credit reports carefully for errors and edit your credit by correcting any errors in writing with the CRA.
• Always safeguard your personal information, especially your bank account information, credit account numbers, date of birth and social security number.  Most forms asking for it will let you omit your Social Security Number if you tell them you don’t want to provide it.  A social security card is best kept locked up, not in your wallet.
• Never give any personal information to anyone that contacts you.  Anyone who contacts you and asks for personal information is usually not who they say they are!

Avoid the “racket” of paying for monthly credit alerts, credit scores, and identity theft protection.  Paying for these unnecessary and often ineffective services is not an effective use of your hard-earned money.

(c) Hummingbird Credit Counseling and Education, Inc. 2010.  All rights reserved.

Haven’t you wished that you could save more of your hard earned money?   Money in the bank increases your options and takes away some of those end-of-the-month headaches.  Sometimes, it just seems that you just don’t know where to start.  But by taking small steps, financial victory is reachable; more of your money will be available to use for your financial goals.  Some of the suggestions in this article will fit your life and your situation, some will not.  Try to adapt the ideas you think you can fit into your life and you will find that slowly but surely, you will get big results. This article has the following sections you may access by clicking below.

BASIC CONCEPTS OF SAVINGS

COMPARISON SHOPPING– “SHOP” BEFORE YOU BUY

• Services
• Goods
• Pre-Shopping

TIME YOUR PURCHASE TO SAVE

AVOID USING CREDIT: YOU WON’T REGRET IT!

BUILD SAVINGS EACH MONTH

• Eliminate Debt Before You Build Long-Term Savings
• Don’t Use Tax Refunds As Savings
• Pay Yourself First
• Automate to Accumulate
• Bank the Change!
• The Envelope Method

STOP MONEY LEAKS

• Children Can Help You and Learn at the Same Time!
• Tracking Spending to Stay on Your Plan

BIG PROBLEMS MAY DEMAND BIG CHANGES

BASIC CONCEPTS OF SAVING

“A penny saved is a penny earned”

“A stitch in time saves nine.”

- Benjamin Franklin

These two famous sayings describe the various ways in which savings contribute to your financial wellbeing.  Saving money allows you to set money aside to meet future needs or goals. You save money by avoiding unnecessary spending and reducing the amount spent on necessary items.  And you save when you conserve and take care of your possessions so you don’t have to spend money repairing or replacing them.

First look at what you are spending your money on.  Is it a “need,” something you cannot do without, or something you want?   Many things are a mixture of need and want.  Even with needs—shelter, food, transportation to work, medical care—there are still probably ways that you can spend less by shopping wisely.  If it is something you want—a new television, new clothes, a new car—look honestly at whether or not the purchase will fit into your spending plan: Can you pay cash for the item and still cover all your needs?  Do you have insurance and an emergency fund in place?  If not, you must take care of these needs before satisfying your wants.  Don’t pay attention to what others do, they may not be on the path to financial victory.

If you determine that something you want is not a true need, you can’t pay cash for it and are going to use credit, STOP and ask yourself:

1. Will buying this thing on credit help me to achieve MY long-term financial goals?
2. Will the thing I am buying on credit still have plenty of value when I am done paying for it?
3. Does the credit payment fit comfortably into my spending plan?

If you can’t answer all of these questions with an absolute “yes,” consider whether you can wait until you have more money to buy it with cash instead of credit or at least have a more substantial down payment.  The pleasure you might get from possessing the item will be far outweighed by your worry and stress during the time you will be paying the credit bill.

COMPARISON SHOPPING– “SHOP” BEFORE YOU BUY

One way to save money on things you need is to “comparison shop.”  The verb “to shop” is defined as “seeking and examining goods offered for sale.” Often we say we’re going shopping when more accurately we’re going “buying.”  To shop is to really examine and compare values.

Services

Except for certain things such as electricity, there is competition among companies for your business.  Make them earn it.  You can comparison shop for goods as well as most services such as insurance, cell phone service, telephone service, cable or satellite television, home repairs, and Internet services.  When shopping for services, research prices, quality and restrictions.  Do not sign up with the first company you talk to, get quotes from several different companies and then decide what fits your budget and lifestyle best.

Goods

Compare ads in the paper or on line from the different supermarkets to see which one has the lowest prices for the food you like to buy or which appliance shop or superstore has the television you want for less.  From groceries to appliances you can compare and save on the products you buy.  Of course, you’ll want to figure in the cost of gasoline or public transportation to get you to the various stores when comparing possible savings from shopping at one place rather than another.  It would not save money to go to Store A to buy meat at $1.00 off if you have to spend over $4.00 worth of gas to get there.    Considering the price of gas, it may even pay to buy some things online if you do not need to examine the items before purchase.  Just remember to add all additional tax, handling, and shipping costs when you compare the online price.

Pre-Shopping

Pre-shopping is researching or shopping for an item before you are ready to make your decision and before you go to a store to buy.  There are many sources of information to help you pre-shop such as consumer product magazines, newsletters and websites that rate and compare services.  Many companies have their own web sites so you can look at the product information and pricing on your computer in the privacy of your home or at the county library, without a salesperson trying to pressure you.  As you do your comparison-shopping, think seriously about what features you truly need, instead of features that are nice or flashy but you probably won’t use too often.  Don’t get romanced by all the “bells and whistles” that can be bought with an appliance or a service.  Think hard about what would be adequate for you.   If you do this pre-shopping before you ever set foot in the store, you will be less likely to be pressured into buying more than you wanted by an enthusiastic salesperson.

Pre-shopping will also save precious commodities—your time and transportation costs.  By figuring out in advance what you want to buy and where you want to buy it, you will spend far less time going from store to store in the actual buying process.  Whether you are buying a toaster, a washing machine, shoes, or a car, pre-shopping and comparing prices will save you money, time, and stress.

TIME YOUR PURCHASE TO SAVE

Everyone loves a bargain.  You can make your own bargains for both products and services if you use timing to your advantage.   Most stores have tremendous after holiday sales and after season sales.  If you see something you want for yourself as you Christmas shop, wait until the day after Christmas to get it when it will probably be significantly discounted.  If you can wait until June to buy your new spring outfit, most stores will have their spring line on sale.  Wait until the “white sales” are on to buy your towels and bedding.

Timing can give you savings on services as well as goods!  Cellular and cable services are discounted in advertised promotion.  Even your Dentist may offer a discount for work done during slow periods such as the holiday season.  So if you need non-emergency medical treatments, ask the health care professional if there are any discounts for scheduling the procedure at a certain time.  After all, it never hurts to ask, and it might result in a discount.

AVOID USING CREDIT: YOU WON’T REGRET IT!

After you have done your pre-shopping comparisons and are ready to buy, try to avoid using a credit, if at all possible, to pay for the item or service.  Credit card balances are the easiest, most common way to get into debt trouble, so plan to use cash, or a check.  If you have the cash to pay your credit card balance in full, then using a credit card for the purchase is fine, and may even give you some benefits in case of faulty merchandise.  The point is not to carry a balance on a credit card.

Be aware that it is human nature for us to buy more and spend more when using “plastic” because it doesn’t feel like you’re spending real money.  Wait staff in restaurants know that they can expect bigger tips when credit is used rather than cash.   Even where you think you are getting a bargain, remember, if you cannot pay your credit card balance in full, the interest charged on the balance will make the price of your purchase much more expensive than if you had used cash, so it may not be a bargain after all.

Some stores and gas stations give a discount if you use cash.  In fact, many of the discount grocery stores require you use cash.  The savings in such stores usually are so significant from shopping at a regular grocery store that putting that plastic away and using cash will really help your pocketbook.  Using cash or checks will help you spend less so try to develop that cash/check only habit.  Save your use of credit for important things like a mortgage or an education– things that will retain their value long after you finish paying the credit bill.

BUILD SAVINGS EACH MONTH

We all need savings to survive.  Everyone should have an emergency fund of a minimum of 3-6 months’ worth of expenses set aside in a savings account that can be accessed without any penalties.  In any given 10-year period, 75% of our population will experience an “emergency” expense, but if you are prepared, it will be less of an emergency!  In addition, most people want to save for homeownership, education, and retirement or old-age.  Social security and medicare will not be enough to maintain the standard of living most people want.  This section will look at specific strategies to help you save or save more.  But first, some saving strategies that are not recommended!

Eliminate Debt Before You Build Long-Term Savings

Many people carry balances on credit cards but have more money saved than what it would cost to pay off their debt.  This does not make good financial sense since credit card interest costs more than the return you can get on investments.  Of course, it is wise to keep at least some cash “cushion” for emergencies, but in general, you should pay off any credit cards or store accounts before building your long-term savings.  To get detailed help on paying off your debt, Log In to Hummingbird’s free Power Pay tool!  This free tool will show you exactly how to pay off your debt the fastest and most cost-efficient way.

NOTE: “Eliminating debt” before you build savings means that you not only pay off your credit cards, but keep them paid off! This in turn means that you have a balanced spending plan so you won’t have to run up more credit. Hummingbird’s learning center has an article, video, and Spending Planner tool to help you with this.

Don’t Use Tax Refunds As Savings

Many people consider tax refunds to be Christmas in April—a kind of forced savings account where you pay in all year but then in April/May you get a nice check from Uncle Sam.  However, that is NOT a good savings strategy.  If you usually get a large refund from the government, it means too much is being taken out of your check each pay period.  Money that the government is holding for you is money you earn no interest on.  More importantly, this money that’s not in your paycheck is money that could prevent you from going into debt.  Since the IRS doesn’t pay you interest on the extra money it’s holding in your name, why let them hold more of your money than is necessary to pay your tax?  Talk to your employer’s personnel office or your tax preparer to figure out the number of exemptions you need to put down on your W-2 to make the amount taken out each month more accurately reflect the amount of tax you’ll owe the government.  You’ll get a smaller refund at tax time but you’ll have more money each pay period to help you balance your budget or earn you interest in a savings account.   That’s smarter than letting the government earn the interest on your money all year.

Pay Yourself First

You probably have heard the phrase, “pay yourself first.”   This does not mean indulging your “I wants” before paying your bills.  Paying yourself first means that the first thing you do each pay period is put a little bit aside in a savings account.  If you put away a do-able amount for savings before you spend anything or pay your bills, you will have the beginning of an investment fund or emergency fund.  The idea is that if the amount is reasonable for your budget, you will simply have less to spend and, having less for non-essential, you will make the amount left after the savings deduction cover your expenses.  By putting this amount in a savings or money market account, you will earn interest so the amount of money saved will grow.  The hard part is deciding how much to put aside and then having the discipline to do it.  There are several ways to make this saving easier.

Automate to Accumulate

If your paycheck is direct deposited into your bank account, you usually can direct that some of that money  go directly into a separate savings or money market account.  This makes your savings automatic– the amount you save never even shows up in your checking account.  If you make a realistic amount of savings automatic and plan your spending around the amount that you have left, it won’t be long before you don’t even miss the money now going into savings.  The sooner you start, the sooner that nest egg starts growing.  Remember, extra money in the bank gives you options that you wouldn’t have if you did not have that cash reserve.

Example: Ruby started having $100 taken out of her pension check each month and put in her savings account.  With a good interest rate on her account, at the end of three years, she had nearly $3800.00.  When Ruby needed hearing aids, she was able to take advantage of a sizable discount for a cash purchase instead of the installment plan.  Ruby saved on the hearing aids and still had a good nest egg left in her savings account.

If you are not already doing so, take advantage of any deferred compensation or 401(k) program your employer offers.  This can also be “automated” by having some of your paycheck diverted to the program.  These programs are a big help for retirement savings because the money you contribute is “pre-tax” so you don’t have to pay tax on it now.  Even better, many employers actually will match some of your contribution to such a program, so by contributing, you get extra money from your employer.  Be aware that this type of savings is strictly for retirement; in most cases you cannot draw out money until you reach a certain age without incurring significant cash and tax penalties.  So retirement savings through your employer is something to take advantage of after you have the essentials of insurance and an emergency fund of 3 to 6 months’ worth of expenses in an account you can reach with no penalties.

Bank the Change

Do you find that you are carrying around pockets full of change?  Are there pennies and nickels lying around your house?  Dump that change into a can or jar and then once a month, take the change to the bank and deposit it in your savings account.  You will be surprised how much you can build up in a year that way—and your pocketbook or pockets won’t seem nearly so heavy.

The Envelope Method

To reach your financial goals, you may need to change your spending habits.  A great way to get control over your spending is use the “envelope method.”  First, make a realistic spending plan.  Hummingbird’s free Learning Center has an article, Video, and a Spending Planner tool that are a big help with this.  Once you have developed a thorough, accurate spending plan that balances your spending and accounts for an amount to go into savings each month, try the “envelope method.”  Here’s how it works:

Continue to pay your essential monthly bills such as home utilities, car payments, insurance and rent or house payment.  For all other expenses (food, gasoline, cell phone, etc.) put the cash amount your spending plan has allocated for each area into separate envelopes.  So, based on your spending plan, you’ll have separate cash envelopes for each other expense you have such as “food/groceries”, “entertainment,” “transportation,” “personal grooming,” “clothes”.  When there is no money left in the envelope for that particular category, you cannot spend any more on that category until the envelope gets refilled when you are paid again.

This method works because you actually see what you have left each time you reach into an envelope to get the cash for an item. For example, you look into your transportation envelope and see that the high pump prices have left you with too little to get to work next week.  So you are left with the option of finding another, less expensive way to get to work such as taking the bus or train, or taking money from another envelope and cutting your spending in THAT area.  Many people swear by this method since it shows you what is happening to your money in such a concrete, visual way.  You may wish to put your receipts into the envelope as you pay for things so that at the end of the month you can see exactly where the money was spent within the separate categories of expenses.  This information will help you to change how you are spending your money in the different categories.

STOP MONEY LEAKS

Do you often get to the end of a month or a pay period and have no idea where your money went?  We call this a money leak because the money seems to just leak from your pocket.  The best way to stop these money leaks is to track your spending every day for a month.  This means carrying a little notebook or index card and a pencil to record every purchase you make each day.  You must be strict about not spending a single penny without writing it down.  If the entire family does this, you’ll quickly identify areas in which you can save and behaviors that can be changed to result in significant savings.  For instance, tracking your spending will probably leave you surprised at how much your family spends on food and beverages away from home.  Packing lunches to carry to work and school can save substantially and allow you to eat more healthfully.  You can pack those lunches as you are cleaning up after dinner and avoid the morning rush.  Stopping money leaks can become a competitive sport or game in your family.

Here’s a true example:

Jerry had to do all the grocery shopping during his wife’s illness and he couldn’t figure out where all the money went.  Then he got interested in how much he could save and began using coupons and buying generic brands when possible.  He compared his weekly savings with those of his wife’s friends and became so good at his competitive savings game that when his wife got well he continued to do the grocery shopping.  Their children nicknamed him “Generic Jerry” but they followed his example of frugal grocery shopping.

Children Can Help You and Learn at the Same Time

Stopping money leaks is also a wonderful family activity.  When asked to, children are usually eager to help their parents with any project, especially if they understand the possible rewards.  This is also a good way to begin to teach your children about money.  Ask your kids to help you with specific saving strategies, such as packing lunches each night and frugal grocery shopping, their enthusiasm can be a big help.  If you put savings in specific terms that have real meaning to your children, saving can become a competitive game for them to see who can save the most.  When motivated, children generally are more persistent and detail-oriented than adults.  If your kids are motivated by the goal and understand ways to save, they can help you tremendously.  For example, if a child could be told that the family needs to save in order to have a vacation, or simply to continue to make ends meet, and is given information on savings, that child may stop you from spending on unnecessary items or help find bargains for you.  An understanding of the family finances may prevent demands for new video games or expensive shoes.  Advertisements are aimed at children, so having your child part on your savings team will go a long way to reducing the influence of advertising.

Tracking Spending to Stay on Your Plan

Tracking your spending by writing down every single cent as it is spent isn’t just a way to stop money leaks, it’s a way to get a reality check about where you are deviating from your spending plan.  For example, the major increases in energy, transportation or medical costs may be consuming much more of your income than your realize and than your spending plan reflects.  Knowledge is power and you can’t balance your income and expenses until you know exactly where your money is going.

BIG PROBLEMS MAY DEMAND BIG CHANGES

If your spending plan doesn’t balance, you must take action!  If you’ve done all you can to track your spending and eliminate money leaks but your expenses are still more than your income, you’ll have to make bigger changes to reduce your spending, increase your income, or both.  BIG changes may be necessary to get back on track, but the sooner you bite the bullet and make those changes, the sooner you will get yourself out of the stressful debt cycle.  Sometimes drastic change is necessary to get yourself back on your feet financially.

One solution is to get a roommate or housemate to share the cost of utilities and rent or the mortgage payment.  Of course, be certain you learn enough about the person to feel confident that you will get along with them, and that he or she is a trustworthy person who will and can make the agreed payments and will do his or her share in keeping the house or apartment clean.  To be clear on both sides, be sure that both of you sign a written agreement setting out the rights and responsibilities of each person.

If you are self-employed and have an office outside your home, consider moving your office to your home.  This eliminates office rent and utilities and you’ll also save on transportation costs.  Having a home office also allows you to eat at home, in itself a substantial savings.  And usually a portion of your home utilities and rent or mortgage payment will be tax-deductible when you have an office in your home.  Check first to be sure that there are no covenants or rules against a home office where you live.  If there are none, and if your business is something that can be run out of your home, give it a try.  However, if you are self employed and even with expense reductions, you still are not making a profit or breaking even after giving the business a chance to get started, it is probably time for a reality check and for you to go get a job that brings in a steady paycheck.  It’s hard to give up a dream, but you must face reality and perhaps defer your dream until you become stronger financially and have saved more capital to cushion your own business.

Increasing your income is another big change you should consider.  Another job or a part time job for you, your spouse, or your teenage child, even for a short period of time, might bring in the extra cash to eliminate some debt and balance your spending plan.  Be sure to think through the realities of what any extra employment will require in terms of time, and transportation or child-care expenses. When they are given an understanding of why you need the help, most teens are proud to be a part of solving their family’s financial problems.

Sometimes, due to childcare responsibilities, you cannot leave the house.  This does not make you unable to do part time or even full time work.  You can work from home.  While this area is full of scams and fraud, if you take wise precautions, it is possible for you to earn some additional income from home.  Warning: do not take this step without first learning how to avoid the scams.  See Work at Home Schemes and Earning Extra Income from Home for more information.  Additional information on how to avoid scams in this area is available from the Federal Trade Commission, the American Association of Retired Persons or the Better Business Bureau.

Remember that while you cannot borrow your way out of debt, your parents or a sibling might be willing to give you some short term help until you get back on your feet.  Try never to borrow from anyone, but go to your family before you resort to high interest loans or payday lenders

Finally, in a drastic situation, you may need to find affordable housing or move in with someone else until you can balance your spending plan.  If you have a family member or friend who has the room and is willing, consider swallowing your pride and moving in with them for a while.  It may cost you some of your independence, but this can really help you get back on your feet.   This option is one you would only use in a drastic situation, but it is an option if your back is against the wall financially.  No matter how dismal your situation, there are always options and you have the power to change your current circumstances for the better!

(c) 2008 Hummingbird Credit Counseling and Financial Education, Inc. All rights reserved.

Having trouble paying your bills? Getting dunning notices from creditors? Are your accounts being turned over to debt collectors? Are you worried about losing your home or your car?

You’re not alone. Many people face a financial crisis some time in their lives. Whether the crisis is caused by personal or family illness, the loss of a job, or overspending, it can seem overwhelming. But often, it can be overcome. Your financial situation doesn’t have to go from bad to worse.

If you or someone you know is in financial hot water, consider these options: realistic budgeting, credit counseling from a reputable organization, debt consolidation, or bankruptcy. Debt negotiation is yet another option. How do you know which will work best for you? It depends on your level of debt, your level of discipline, and your prospects for the future.

Self-Help

Developing a Budget: The first step toward taking control of your financial situation is to do a realistic assessment of how much money you take in and how much money you spend. Start by listing your income from all sources. Then, list your “fixed” expenses — those that are the same each month — like mortgage payments or rent, car payments, and insurance premiums. Next, list the expenses that vary — like entertainment, recreation, and clothing. Writing down all your expenses, even those that seem insignificant, is a helpful way to track your spending patterns, identify necessary expenses, and prioritize the rest. The goal is to make sure you can make ends meet on the basics: housing, food, health care, insurance, and education.

Your public library and bookstores have information about budgeting and money management techniques. In addition, computer software programs can be useful tools for developing and maintaining a budget, balancing your checkbook, and creating plans to save money and pay down your debt.

Contacting Your Creditors: Contact your creditors immediately if you’re having trouble making ends meet. Tell them why it’s difficult for you, and try to work out a modified payment plan that reduces your payments to a more manageable level. Don’t wait until your accounts have been turned over to a debt collector. At that point, your creditors have given up on you.

Dealing with Debt Collectors: The Fair Debt Collection Practices Act is the federal law that dictates how and when a debt collector may contact you. A debt collector may not call you before 8 a.m., after 9 p.m., or while you’re at work if the collector knows that your employer doesn’t approve of the calls. Collectors may not harass you, lie, or use unfair practices when they try to collect a debt. And they must honor a written request from you to stop further contact.

Managing Your Auto and Home Loans: Your debts can be unsecured or secured. Secured debts usually are tied to an asset, like your car for a car loan, or your house for a mortgage. If you stop making payments, lenders can repossess your car or foreclose on your house. Unsecured debts are not tied to any asset, and include most credit card debt, bills for medical care, signature loans, and debts for other types of services.

Most automobile financing agreements allow a creditor to repossess your car any time you’re in default. No notice is required. If your car is repossessed, you may have to pay the balance due on the loan, as well as towing and storage costs, to get it back. If you can’t do this, the creditor may sell the car. If you see default approaching, you may be better off selling the car yourself and paying off the debt: You’ll avoid the added costs of repossession and a negative entry on your credit report.

If you fall behind on your mortgage, contact your lender immediately to avoid foreclosure. Most lenders are willing to work with you if they believe you’re acting in good faith and the situation is temporary. Some lenders may reduce or suspend your payments for a short time. When you resume regular payments, though, you may have to pay an additional amount toward the past due total. Other lenders may agree to change the terms of the mortgage by extending the repayment period to reduce the monthly debt. Ask whether additional fees would be assessed for these changes, and calculate how much they total in the long term.

If you and your lender cannot work out a plan, contact a housing counseling agency. Some agencies limit their counseling services to homeowners with FHA mortgages, but many offer free help to any homeowner who’s having trouble making mortgage payments. Call the local office of the Department of Housing and Urban Development or the housing authority in your state, city, or county for help in finding a legitimate housing counseling agency near you

Credit Counseling and Debt Management Plans

Credit Counseling: If you’re not disciplined enough to create a workable budget and stick to it, can’t work out a repayment plan with your creditors, or can’t keep track of mounting bills, consider contacting a credit counseling organization. Many credit counseling organizations are nonprofit and work with you to solve your financial problems. But be aware that, just because an organization says it’s “nonprofit,” there’s no guarantee that its services are free, affordable, or even legitimate. In fact, some credit counseling organizations charge high fees, which may be hidden, or urge consumers to make “voluntary” contributions that can cause more debt.

Most credit counselors offer services through local offices, the Internet, or on the telephone. If possible, find an organization that offers in-person counseling. Many universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service operate nonprofit credit counseling programs. Your financial institution, local consumer protection agency, and friends and family also may be good sources of information and referrals.

Reputable credit counseling organizations can advise you on managing your money and debts, help you develop a budget, and offer free educational materials and workshops. Their counselors are certified and trained in the areas of consumer credit, money and debt management, and budgeting. Counselors discuss your entire financial situation with you, and help you develop a personalized plan to solve your money problems. An initial counseling session typically lasts an hour, with an offer of follow-up sessions.

Debt Management Plans: If your financial problems stem from too much debt or your inability to repay your debts, a credit counseling agency may recommend that you enroll in a debt management plan (DMP). A DMP alone is not credit counseling, and DMPs are not for everyone. You should sign up for one of these plans only after a certified credit counselor has spent time thoroughly reviewing your financial situation, and has offered you customized advice on managing your money. Even if a DMP is appropriate for you, a reputable credit counseling organization still can help you create a budget and teach you money management skills.

In a DMP, you deposit money each month with the credit counseling organization, which uses your deposits to pay your unsecured debts, like your credit card bills, student loans, and medical bills, according to a payment schedule the counselor develops with you and your creditors. Your creditors may agree to lower your interest rates or waive certain fees, but check with all your creditors to be sure they offer the concessions that a credit counseling organization describes to you. A successful DMP requires you to make regular, timely payments, and could take 48 months or more to complete. Ask the credit counselor to estimate how long it will take for you to complete the plan. You may have to agree not to apply for — or use — any additional credit while you’re participating in the plan.

Protect Yourself

Be wary of credit counseling organizations that:

• charge high up-front or monthly fees for enrolling in credit counseling or a DMP.
• pressure you to make “voluntary contributions,” another name for fees.
• won’t send you free information about the services they provide without requiring you to provide personal financial information, such as credit card account numbers, and balances.
• try to enroll you in a DMP without spending time reviewing your financial situation.
• offer to enroll you in a DMP without teaching you budgeting and money management skills.
• demand that you make payments into a DMP before your creditors have accepted you into the program.

Debt Consolidation

You may be able to lower your cost of credit by consolidating your debt through a second mortgage or a home equity line of credit. Remember that these loans require you to put up your home as collateral. If you can’t make the payments — or if your payments are late — you could lose your home.

What’s more, the costs of consolidation loans can add up. In addition to interest on the loans, you may have to pay “points,” with one point equal to one percent of the amount you borrow. Still, these loans may provide certain tax advantages that are not available with other kinds of credit.

Bankruptcy

Personal bankruptcy generally is considered the debt management option of last resort because the results are long-lasting and far reaching. People who follow the bankruptcy rules receive a discharge — a court order that says they don’t have to repay certain debts. However, bankruptcy information (both the date of your filing and the later date of discharge) stay on your credit report for 10 years, and can make it difficult to obtain credit, buy a home, get life insurance, or sometimes get a job. Still, bankruptcy is a legal procedure that offers a fresh start for people who have gotten into financial difficulty and can’t satisfy their debts.

There are two primary types of personal bankruptcy: Chapter 13 and Chapter 7. Each must be filed in federal bankruptcy court. As of April 2006, the filing fees run about $274 for Chapter 13 and $299 for Chapter 7. Attorney fees are additional and can vary.

Effective October 2005, Congress made sweeping changes to the bankruptcy laws. The net effect of these changes is to give consumers more incentive to seek bankruptcy relief under Chapter 13 rather than Chapter 7. Chapter 13 allows people with a steady income to keep property, like a mortgaged house or a car, that they might otherwise lose through the bankruptcy process. In Chapter 13, the court approves a repayment plan that allows you to use your future income to pay off your debts during a three-to-five-year period, rather than surrender any property. After you have made all the payments under the plan, you receive a discharge of your debts.

Chapter 7 is known as straight bankruptcy, and involves liquidation of all assets that are not exempt. Exempt property may include automobiles, work-related tools, and basic household furnishings. Some of your property may be sold by a court-appointed official — a trustee — or turned over to your creditors. The new bankruptcy laws have changed the time period during which you can receive a discharge through Chapter 7. You now must wait 8 years after receiving a discharge in Chapter 7 before you can file again under that chapter. The Chapter 13 waiting period is much shorter and can be as little as two years between filings.

Both types of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions, garnishments and utility shut-offs, and debt collection activities. Both also provide exemptions that allow people to keep certain assets, although exemption amounts vary by state. Note that personal bankruptcy usually does not erase child support, alimony, fines, taxes, and some student loan obligations. And, unless you have an acceptable plan to catch up on your debt under Chapter 13, bankruptcy usually does not allow you to keep property when your creditor has an unpaid mortgage or security lien on it.

Another major change to the bankruptcy laws involves certain hurdles that a consumer must clear before even filing for bankruptcy, no matter what the chapter. You must get credit counseling from a government-approved organization within six months before you file for any bankruptcy relief. You can find a state-by-state list of government-approved organizations at www.usdoj.gov/ust. That is the website of the U.S. Trustee Program, the organization within the U.S. Department of Justice that supervises bankruptcy cases and trustees. Also, before you file a Chapter 7 bankruptcy case, you must satisfy a “means test.” This test requires you to confirm that your income does not exceed a certain amount. The amount varies by state and is publicized by the U.S. Trustee Program at www.usdoj.gov/ust.

Debt Negotiation Programs

Debt negotiation differs greatly from credit counseling and DMPs. It can be very risky, and have a long term negative impact on your credit report and, in turn, your ability to get credit. That’s why many states have laws regulating debt negotiation companies and the services they offer. Contact your state Attorney General for more information.

The Claims

Debt negotiation firms may claim they’re nonprofit. They also may claim that they can arrange for your unsecured debt — typically credit card debt — to be paid off for anywhere from 10 to 50 percent of the balance owed. For example, if you owe $10,000 on a credit card, a debt negotiation firm may claim it can arrange for you to pay it off with a lesser amount, say $4,000.

The firms often pitch their services as an alternative to bankruptcy. They may claim that using their services will have little or no negative impact on your ability to get credit in the future, or that any negative information can be removed from your credit report when you complete their debt negotiation program. The firms usually tell you to stop making payments to your creditors, and instead, send payments to the debt negotiation company. The firm may promise to hold your funds in a special account and pay your creditors on your behalf.

The Truth

Just because a debt negotiation company describes itself as a “nonprofit” organization, there’s no guarantee that the services they offer are legitimate. There also is no guarantee that a creditor will accept partial payment of a legitimate debt. In fact, if you stop making payments on a credit card, late fees and interest usually are added to the debt each month. If you exceed your credit limit, additional fees and charges also can be added. This can cause your original debt to double or triple. What’s more, most debt negotiation companies charge consumers substantial fees for their services, including a fee to establish the account with the debt negotiator, a monthly service fee, and a final fee of a percentage of the money you’ve supposedly saved.

While creditors have no obligation to agree to negotiate the amount a consumer owes, they have a legal obligation to provide accurate information to the credit reporting agencies, including your failure to make monthly payments. That can result in a negative entry on your credit report. And in certain situations, creditors may have the right to sue you to recover the money you owe. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home. Finally, the Internal Revenue Service may consider any amount of forgiven debt to be taxable income.

Damage Control

Turning to a business that offers help in solving debt problems may seem like a reasonable solution when your bills become unmanageable. But before you do business with any company, check it out with your state Attorney General, local consumer protection agency, and the Better Business Bureau. They can tell you if any consumer complaints are on file about the firm you’re considering doing business with. Ask your state Attorney General if the company is required to be licensed to work in your state and, if so, whether it is.

Some businesses that offer to help you with your debt problems may charge high fees and fail to follow through on the services they sell. Others may misrepresent the terms of a debt consolidation loan, failing to explain certain costs or mention that you’re signing over your home as collateral. Businesses advertising voluntary debt reorganization plans may not explain that the plan is a bankruptcy filing, tell you everything that’s involved, or help you through what can be a long and complex process.

In addition, some companies guarantee you a loan if you pay a fee in advance. The fee may range from $100 to several hundred dollars. Resist the temptation to follow up on these advance-fee loan guarantees. They may be illegal. It is true that many legitimate creditors offer extensions of credit through telemarketing and require an application or appraisal fee in advance. But legitimate creditors never guarantee that the consumer will get the loan — or even represent that a loan is likely. Under the federal Telemarketing Sales Rule, a seller or tele-marketer who guarantees or represents a high likelihood of your getting a loan or some other extension of credit may not ask for or accept payment until you’ve received the loan.

You should be cautious of claims from so-called credit repair clinics. Many companies appeal to consumers with poor credit histories, promising to clean up credit reports for a fee. But you already have the right to have any inaccurate information in your file corrected. And a credit repair clinic cannot have accurate information removed from your credit report, despite their promises. You also should know that federal and some state laws prohibit these companies from charging you for their services until the services are fully performed. Only time and a conscientious effort to repay your debts will improve your credit report.

If you’re thinking about getting help to stabilize your financial situation, do some homework first. Find out what services a business provides and what it costs, and don’t rely on verbal promises. Get everything in writing, and read your contracts carefully.

For More Information

For more information, see “Fiscal Fitness: Choosing a Credit Counselor,” under Consumer Information, ‘In Debt?’ at www.ftc.gov

The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint or to get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

FOOD & CONSUMABLES

• More Home Cooking
• So Help You: The List and Nothing But the List!
• Don’t Pay Extra for Convenience
• Learn Home Economics
• Grow Your Own!
• Consider Your Source
• Creative Comparison-Shopping

TRANSPORTATION

UTILITY SAVINGS

CLOTHING, HOUSEHOLD GOODS & PERSONAL CARE

RECREATION AND ENTERTAINMENT

HOLIDAY SAVINGS

LET YOUR GOALS MOTIVATE YOUR BEHAVIOR

FOOD & CONSUMABLES

Food and consumable items account for a large percentage of our “variable” spending. Variable spending items vary or fluctuate, unlike fixed expenses such as a car payment. Variable expenses have some flexibility and are therefore a spending area we have the power to change in order to create savings. Here are a number of ways to save in this area.

More Home Cooking

You can save a great deal of money and improve your nutrition by cooking more and reducing the amount you spend on eating out. For some people, this may be a life style change but it can give you benefits in many areas of your life. Many single people who work a lot of hours and don’t have much skill in the kitchen claim they can eat just as cheaply by eating out. That simply isn’t true but if you’re in this group, you’ll have to be open to learning new things. You may actually enjoy learning to prepare some simple dishes and you can also lose weight and eat more healthfully. Even if you’re the only one in your household, you can freeze extra portions so you needn’t eat the same thing 3 days in a row. If you invest in a slow-cooker, you can even set it up the night before, take it from the fridge in the morning, plug it in, and you’ll have dinner when you get home!

So Help You: The List and Nothing But the List!

Here are some strategies to maximize your savings at the grocery store. The most important thing to do is to PLAN. First, pre-shop by looking at grocery store ads and specials at the stores near you. These can often be found in the newspaper or online. Based on this research, make your meal plans for several days. Don’t forget lunches and snacks that you’ll pack to be eaten away from home. Recipes for every taste, cooking level and dietary need are free and easy to browse on the Internet. Once you’ve made your meal plan, go over the recipes and your kitchen for what you’ll need, and make a list. For your staples and household items, keep a pad of paper on your kitchen counter and, as you use up things, write down what you need to replace. A well thought out grocery list is a critical tool to save you time and money, prevent you from forgetting things, and hopefully keep you from impulse buying.

When you’re ready to shop, be sure you have your list and any coupons you’ll use. Time your grocery shopping with doing other things in a shopping center to save on your transportation costs, but do not go shopping for groceries when you are hungry, tired, rushed or upset. In those instances, often you will buy more than you had planned to get, will buy “comfort food,” or will be in such a hurry to leave the store that you will not take the time needed to compare items for the best deals. For the same reason, try not to shop with young children if possible. The goal is to stick to your list, and nothing but your list! Try to keep your financial goals in mind to keep yourself motivated.

Don’t Pay Extra for Convenience

When it comes to food, think “do it yourself.” Convenience foods cost more and are usually not as healthy. Frozen dinners are far more expensive than when you make the meal from scratch; it costs less to prepare your fruit and vegetables than to buy them pre-cut or pre-washed; and it’s far less expensive to make a cake or pie yourself than to buy one. You’ll also reap the bonuses of better-tasting and more healthy food since it won’t have preservatives and you will have control of how much salt is used, the quality of the meat or vegetables, whether skim or whole milk is used, etc. You will be trading some of your time for savings.

You’ll also save by limiting your purchases of sweets, soft drinks, snack foods, tobacco, and, if applicable, alcohol. Sweets, soft drinks and many snack foods are loaded with sugar so they take care of your hunger momentarily, but actually cause you to get hungrier faster, resulting in your eating more and spending more for food.

Learn Home Economics

It’s been conjectured that the high cost of healthful foods will make America fatter, since junk food and starches are cheaper. With knowledge, that need not be true: what’s good for your health can be good for your wallet. For instance, a bag of split peas or dried lentils combined, with onion, celery, and carrots can be made into a nutritious stew or soup that will feed a family for pennies per meal. Lentils and beans are a good protein substitute for meat. Cooking grains like brown rice, bulgur wheat and barley are is much cheaper and healthier than buying boxed, ready-to-eat cereals. You can cook them ahead and reheat in the morning, or invest in some microwave-save high-sided containers for microwaving oatmeal and other low-cost, filling, and nutritious cereals. Your state cooperative extension will provide other valuable tips on how to stretch your food dollar and maintain good nutrition. Find your state extension office at www.csrees.usda.gov/Extension.

Grow Your Own!

What a concept! You save really big bucks AND get the following added benefits:

• You know where your produce comes from.
• You know what chemicals and pesticides have been used on your food.
• Gardening is a family activity that gives a sense of achievement.
• You’ll get exercise and fresh air.
• You’ll be going “green,” reducing pollution and your carbon footprint because you won’t be buying produce transported from distant states and foreign countries.
• Extra produce can be preserved by freezing or canning.
• Extra produce can also be a source of revenue!

Anyone can do this. Even if you rent, or live in an urban area you can become an “urban gardener” and access or create a community garden. There are a number of non-profit organizations that can teach you everything you need to know to be successful. Did you know that one plastic wading pool (children’s pool) will produce up to 40 pounds of vegetables per growing season for under $10? Over ten years, counting the cost of everything you need (about $30 for the pool, soil, transplants and seeds) it comes to 8¢ per pound of food grown! And that’s just for one wading pool!

Preserve your harvest. If you do own land, consider planting trees that will bear edible fruit or nuts. If you have such trees, be sure to harvest the fruit or nuts. Most produce should be washed and blanched before freezing. There are specific tips for freezing each type of produce and you can find a variety of guides by typing “how to freeze vegetables” into your web browser. Consider investing in a new or used freezer to maximize your savings. Canning fruit and vegetables is another option, but this requires some equipment and learning techniques.

To learn more about community and urban gardens, see www.communitygarden.org. To learn more about wading pool and other container gardens, search container or wading pool vegetable gardening on the Internet or in your library. A great source for general information is www.cityfarmer.info

Consider Your Source

Non-food items, such as paper products, cleaning supplies, and toiletries often cost less at discount superstores rather than groceries or supermarkets. Also consider where you will get the best value for food purchases. The food at a convenience store is always much more expensive, you pay for convenience. A nearby grocery store or a “Superstore” will give you the best value for your food dollar. To save even more, look for the new grocery discount stores that require you pay in cash, bring your own bags, and rent your shopping carts. If such a store is nearby, it’s a big money saver. By limiting variety, offering mostly generics and reducing overhead like bags and employees, these stores offer excellent savings. You simply trade a bit of convenience and variety for savings. But always determine if the distance you must drive to a store will cost more than you will save.

Creative Comparison-Shopping

Use Unit Pricing. Packaging can be very deceiving. Unit pricing will give you the price per ounce, pound, or other unit of measurement. Unit pricing is posted on store shelves beneath each product or on the label of meats and other items, but it’s best to carry a small calculator with you just in case. A calculator will also let you figure in coupon savings. Never assume! Sometimes the generic brand, large size, or item with coupon savings can actually cost more than the item you would think is more expensive.

Also consider what you need and can use– a 36 ounce can of tomatoes may be a better deal, but if you’ll only use 16 ounces and the rest will probably go to waste, you may be better off buying only what you know that you need.

About those Coupons. Conventional wisdom says to clip coupons for the items you normally buy and carry them with you, but not to buy something just because you have a coupon for it. However, in today’s challenging economic environment, many people are making coupon use a hobby that boarders on being a competitive sport! The Internet can be a convenient source for coupons.

Always compare the price of the item using the coupon with the cost of the store brand. Often, even with coupons, the store brand is still less expensive. Try using a notebook or wallet to organize coupons by category and make them easier to use. Of course you should use any savings cards offered by grocery stores, but always comparing the unit price on what looks like a good deal.

Think outside the box. Finally, get creative with your comparisons– can you substitute a different form of the same or similar foods and save? Most frozen fish is less than fish from the seafood counter, and the so-called “fresh” fish has very often been frozen once already. If you need tomato sauce for a recipe, you could substitute or partially substitute tomato paste, or canned tomatoes that are diced, stewed, crushed or whole? For other vegetables, compare canned, frozen, and fresh to see the best buy. With microwaves a part of most kitchens, it is almost as easy to cook fresh vegetables as to open a can. Store brands can equal name brands in nutritional value, but check labels to be sure

So, to save on food, cook at home, plan your meals, make lists and stick to them, don’t pay for convenience, learn home economics, and try to grow your own produce. Finally, carefully select your groceries in quantities that you realistically can use or freeze before they go bad.

TRANSPORTATION

Save on gas. Whether you own a vehicle or use public transportation, the huge increases in fuel costs have caused transportation costs to increase dramatically. This makes it more important than ever to plan your trips for maximum efficiency. Try to organize what you need to do so that you can do things in one trip, instead of multiple trips. As is true with all of the ways to save, the most important thing you can do to conserve on gasoline and transportation costs is to PLAN AHEAD. Try to plan your shopping needs around other appointments or errands such as medical and dental visits, banking and trips to the library.

Map your route and make a list of your errands. Computer technology and services such as Google Maps and Map Quest can help you find the best routes and services like GasBuddy.com allow you to find the cheapest gas in your area. See www.fueleconomy.gov for a wealth of information on fuel efficiency and savings, including the cheapest fuel sources in your area.

Keeping to the speed limit will save you money; not only will you avoid tickets, every mile above 60 MPH significantly increases your gas usage. Investing in regular maintenance of your vehicle will save you money in fuel, reduce repair expenses and add to the life of your vehicle. Make certain that your tires are inflated to the proper pressure—that will help your gas mileage. Keep your windows up on the highway, even if you need to run air conditioning; It is less expensive than the extra fuel consumed from the drag caused by open windows at high speeds. Idling for more than a minute or so wastes more fuel than turning off your engine and restarting. Avoid keeping unneeded items in your vehicle since the more weight you haul, the more gas you use.

If you can use public transportation to get to work, you’ll save money, help the environment and have that time to read, plan your day, or just relax. If you don’t have access to public transportation or you can’t make it work for you, try organizing or joining a carpool to get to and from your job; this can save you a bundle. Also consider trying to organize a neighborhood carpool to take turns taking children to school, people to work, or running errand for each other. By carpooling, not only will you be saving, you may make some new friends!

Other transportation tips. Learn how to save when buying a new or used car, leasing or renting a vehicle and on vehicle repairs by looking at the articles and consumer resources on Hummingbird’s Learning Center. The government and the Federal Trade Commission have valuable information, too. You will save on air travel if you are able to book in advance, be flexible with your dates, and stay over a Saturday night. Be sure to check directly with every airline that flies where you are going. The government offers free information at http://airconsumer.ost.dot.gov

UTILITY SAVINGS

Despite how it may sometimes seem, cable television, cellular phones and Internet services are not necessary to our survival. These discretionary spending areas are places where you can save a great deal if you have the desire to change your financial situation.

Is it really a “deal?” It is possible to save a great deal by “bundling” utility services such as cable, Internet and phone service for a flat price from a single provider. Before switching your service, see Telephone Service Via Internet, comparison shop and carefully study all terms and conditions of the service plan before making a commitment. Remember that although packages offer bargains for services and features, you are not truly “saving” money if you are paying for services and features that you don’t truly need. Features that are nice, but not really necessary, may be included in your package and save over what you would otherwise pay for them. But if you wouldn’t pay for those features on their own, it’s not a true “savings.” It is easy to get dazzled by fancy features and options. Focus on what you truly need and how you can save on those needs.

As is true with your car, home maintenance will return big savings in utilities. Simple things such as changing filters, caulking around windows or using weather stripping, or installing/using ceiling fans can make a big difference.

To function properly, heating and cooling systems must stay clean. Change the filter in your system once a month, especially if you have dogs or cats or live in a dusty area. The cost of the filter change can avoid your having to pay the much larger cost of replacing an expensive part in your system. It also means the air conditioner or heater does not have to work as hard and so less electricity is used. This will significantly hold down the cost of your electricity.

Of course, where you set your thermostat can be a big electricity saver; a few degrees can save a great deal. So set your thermostat a few degrees cooler for heating and a few degrees warmer for air conditioning and wear warm or cool clothing to reduce your energy bills. Of course you’ll want to adjust your thermostat if you’ll be away from home, but even when you are gone from your home for an extended period, leave your thermostat at about 50 degrees Fahrenheit in the winter and about 85 degrees Fahrenheit in the summer and never turn off your system entirely. You risk damage to your house if you allow it to get cold enough in the winter for the pipes to freeze, or get mildew and other problems if you turn your air conditioner entirely off.

Lower the temperature on your water heater to save on your energy bill. If you have a gas water heater, this is easy, but if you have an electric water heater, be careful to shut off the breaker to the water heater before you go into the area where the thermostat is located. If you fail to shut off the circuit breaker before adjusting an electric water heater, you could put your screwdriver in the wrong place and blow a circuit or hurt yourself. Another way to save is to wrap you water heater with insulation. Such insulation can be purchased from most home building supply stores.

If your house has air leakage, blocking that outside air from coming in will decrease your utility bill. Insulate your attic by putting weather-stripping around doors and windows. Replace your light bulbs with energy efficient light bulbs. Finally, lower your energy bill by turning off whatever you are not using—television, radio, lights, whatever, and by unplugging chargers or other electronics that you are not using. These chargers draw power even when they are not being used! For more energy saving tips, see www1.eere.energy.gov/consumer and other online sources.

CLOTHING, HOUSEHOLD GOODS AND PERSONAL CARE

If you’re shopping for new clothes, using timing to your advantage by shopping at the end of a season when the prices are reduced drastically. Discount stores often have last season’s name-brand designer clothes at a greatly reduced price. But to save the most on clothes, visit thrift shops or consignment shops to buy used clothing. These stores offer quality clothing and household furnishings at a fraction of the cost of new and it’s now become chic to buy used and “vintage” clothing. Thrift stores also offer household goods and furnishings at great savings and some will even deliver heavy purchases.

Another good source of bargains for household goods are yard sales. You’ll have to separate the treasure from the trash, but many good things that can be purchased for next to nothing if you take the time to look. Also, you might want to consider having your own yard sale, perhaps with several neighbors so you will have enough stuff to draw interested buyers, with the items you no longer need or use. This can earn you some extra money while also helping you get rid of clutter in your house.

Try to recycle clothing among your family. If your child grows out of an outfit, “hand it down” to a younger child in your family or a friend’s family. If your friends and extended family do the same, you can all save on clothing.

Finally, remember the saying, “a stitch in time saves nine”? You will save if you take care of your clothes; sew on that button, fix the hem, sew any tears and keep your clothes clean by washing any stains off as quickly as you can. Washing and ironing shirts yourself saves doubly since the shirts will last much longer than if you send them to the cleaners. Save and extend clothing life by hand washing instead of dry-cleaning. If you need to have something dry cleaned, look for discount cleaners near your home or work or look for discounts and coupons for dry cleaners.

To save on personal care, try a simple hair style that does not require a lot of money to maintain. Investing in a clipper will allow you to provide men’s haircuts at home. Do your own nails or trade this service with a friend; you do mine, I’ll do yours. If you don’t feel up to the task of doing your hair yourself, check into beauty schools in your area. Many of these schools offer free services to the public as practice for their students.

RECREATION AND ENTERTAINMENT

Everyone needs some entertainment and diversion– life cannot be all work and no play. But eating out, movies, shows and concerts are expensive and are discretionary areas in which you can learn to save. Clearly we can save by limiting the number of times we eat out, even at fast food places.

Restaurants. When you do choose to eat out, you can save by eating out for lunch rather than dinner and by ordering water rather than a beverage for which there is a charge. While lunch prices are always less than dinner prices, if you do go out to dinner, there still are ways to save. Many restaurants send out great coupons so you can go out to eat at the restaurant and yet pay far less than the going rate. If you get a book of coupons in the mail, go through it carefully; there usually are some great deals at nice places. The Internet is another way to find restaurant coupons in your area.

Going to the theater is fun but think about occasionally having “movie night” at home by renting a video or even checking one out of the local library. Your popcorn and snacks at home will cost far less than theater prices.

Free entertainment. Check your newspaper for community or university sponsored events that are free to the public. You may be surprised and pleased at what is available. A trip to most museums is either free or low cost and can be surprisingly enjoyable. Many universities have movie series that are open to the public as well as to the students. Check out the websites of colleges near you and you may be able to see a quality show for much less than at the regular movie theater.

Check out your library. Your local library can help you save money. It has many resources that you can borrow or use instead of buying them. Libraries usually have computers you can use for Internet access. Use your local library instead of purchasing books for yourself and your children. You also can usually check out videos and free learning programs for children from the library. Libraries subscribe to numerous magazines and newspapers so you could save money by reading papers and magazines at the library rather than paying for a subscription. Balance the cost of convenience against the savings involved in going to the library to do your magazine reading, Internet surfing, and book selecting.

Swap or go pre-owned. Create your own informal library system by swapping used entertainment items like books, CDs, videos, and console games with friends, relatives, or neighbors who will use them and let you have some of their used items in return. Many local music, video, and game stores buy back their used musical CDs, movies and video games and some offer trade in or swap programs. Thrift stores and used book stores also offer books and videos for under a dollar. Internet sites like www.swap.com and www.bookmooch.com allow members to exchange books, and sometimes videos and CDs at no cost except for shipping.

Celebrations. Having family events at home instead of at a restaurant or amusement park saves money for everyone and has other advantages. Hosting celebrations at home allows other family members to contribute to the party by bringing a covered dish or snack. Baking cakes or cookies for birthday parties or other family events instead of getting them from a bakery adds a personal touch that often means far more than a fancy iced cake, and certainly costs less–just some of your time and the cost of the ingredients.

Vacations. Vacations are a particularly expensive form of recreation. If you know that you want to take a vacation each year, figure the total cost of your vacation and make “vacation savings” an item in your monthly spending plan. You can minimize the price tag of a vacation by modifying what you intend to do. A camping trip is good family fun and usually much less expensive than staying at a hotel. If camping is not your idea of fun, look for reasonably priced hotels that offer kitchenettes so that you can save by cooking some of your meals instead of having to eat every meal at a restaurant. Planning and comparison-shopping can save you money in this area. An Entertainment coupon book may be worth the cost if the hotel you want is in the book. Several Internet services allow you to save a great deal on hotels and car rentals if you are willing to be flexible about the area and agree to purchase a certain category of room versus knowing which hotel you will get.

HOLIDAYS SAVINGS

Holidays take up a small part of the calendar but often eat up too much of our discretionary income. There are a number of ways you can prevent holidays from ruining your finances, but the first thing is to think about the big picture. There are a lot of emotions wrapped up in the holiday seasons. Retailers bombard us with advertisements suggesting that not getting a certain toy, electronic gadget or piece of jewelry will somehow make the holiday disappointing. But the true pleasure of holidays and celebrations comes from the fellowship of family and friends rather than the gifts exchanged. Some people actually dread holidays because they worry that they will spend too much or too little for a gift in comparison to what someone else gives them, that their gift recipients may not like their gift, etc. This is a far cry from the spirit of holiday seasons.

Avoid this type of worry and avoid working all year to pay for holiday over-spending by discussing holiday gift giving with your immediate and extended family. Set a limit for gifts and stick to it. Homemade gifts such as photograph albums, baked goods, artwork, poems or anything else you can create will be more personal and unique than anything you can buy and your recipient will probably appreciate it more than a gift bought at the last minute.

As with vacations, you can budget an amount to save toward your holiday spending and save toward your goal each month. “Christmas club” accounts are still offered by some financial institutions, and you can create your own savings account for holiday spending. As long as you have the discipline to stay within your total holiday budget, you can also plan ahead and buy throughout the year. For example, you see something in July that you think your sister would like for Christmas and you can afford it then, buy it and put it away. That way you spread your purchases throughout the year, can take advantage of bargains during the year, and you will have less stressful shopping during the frenzied weeks before the holiday season. Layaway plans offered by many stores are far better than using credit and paying interest on the debt.

Try to limit the number of people on your gift list. With the agreement of your extended family, try writing the names of each family member on small pieces of paper, fold them, put them in a bowl or hat and then have each family member draw a piece of paper. The family agrees to buy a gift only for the person whose name he or she drew. Keeping the selections secret adds to the spice of this family gift giving. This will save the entire family stress and money.

LET YOUR GOALS MOTIVATE YOUR BEHAVIOR

These are just a few ideas to get you thinking about the ways you can modify what you do in order to save money. Where there’s a will there’s a way. Think about your financial goals, both short-term and long-term. The importance you place on achieving your goals should guide your spending and saving behavior. With desire to save and willingness to modify how you do things, you can reduce your spending and achieve your financial goals.

(c)2008 Hummingbird Credit Counseling and Education, Inc. All rights reserved.

The keys to getting a vehicle

Getting a vehicle is one of the most important financial decisions you make. To become a smart buyer, you need knowledge.

Whether you decide to lease or buy, the smart consumer has an attitude that says, “I can learn enough about cars, how the car business works, and how car financing works, to take control and save myself money!” By entering the automotive market with this attitude and the necessary knowledge, you will be in control of the process rather than letting the process control you! You will become a successful buyer.

The information in this guide provides a detailed look at vehicle buying and leasing and other important things to think about. It is meant to help you in your decision-making and guide you through the vehicle-buying process.

Needs vs. Wants

Needs are the necessities of life such as food, shelter and clothing. In today’s world, transportation is usually a need. If you cannot walk or take public transportation to work and shopping, a vehicle is a need for you.

Wants are things we would like to have, but which are not necessities. You may want power locks and power windows on your vehicle, but unless you have special needs, these features probably are not necessary to fill your transportation needs.

Do you need a luxury car or basic transportation? Do you need a new car or just a reliable one? Often there is a lot of “want” mixed into our needs. It is important for you, and anyone else involved in your transportation decision, to distinguish between your actual needs and your wants. Being able to recognize the difference between needs and wants will help you to prioritize how your vehicle dollars are spent.

Taking the Initial Steps:

• First, distinguish between your needs and your wants. Consider purchases that put your needs before your wants.
• Do your research before you buy. Determine the features that
  you must have to fill your needs.

Needs

“Needs” are things that you cannot survive without. For example, if you have two children, then a vehicle with more than 2 seats would be a need.

Some needs are also known as “must haves”. They are assumed to be a basic essential. When buying a car, you would not ask if the car has four wheels, but you most certainly need them!

Wants

Wants differ because they are based on our perceptions. Although they are not absolute needs, they can be high up on the priority list. Using the example above, wanting power locks in your vehicle might be a high priority if you have children, assuming that you believe power locks would make the vehicle safer.

The lowest level “want” is a “like.” There are things we like that we may not be able to afford. They are the “nice-to-haves” that are icing on the cake. For example, your needs may be met with a Toyota, but you might like a Lexus.

Sometimes you don’t know what you like until you see it. These are “surprise likes.” When buying a car, surprise likes can cost you a lot of money! This is why it’s so important to do your research before you shop for a major purchase. Figure out your needs and wants then make a list. Once your list is completed, you are ready to research the price of your car.

Vehicle Researching

To research a new vehicle:

• Research the MSRP (Manufacturer’s Suggested Retail Price) and the discount pricing of all new vehicles that satisfy your list of needs and wants. This extra effort can really save you money when negotiating a discount price with a dealer. Consult publications and services such as Consumer Reports Magazine and car valuation sources like National Auto Dealers Association(NADA), Kelly Blue Book, or Edmunds.** Some sources may be accessed free on the Internet www.NADA.com, www.KBB.com, www.Edmunds.com, etc..
• Compare the price of different vehicles to their features, performance, fuel efficiency and maintenance costs. Then return to your list of needs and wants to determine which model has the greatest value to you.

To research a used vehicle:

• Consult the car valuation sources listed above. You may also want to look at local newspaper ads, but bear in mind that the condition of advertised vehicles may not be apparent.
• Always obtain your own inspection before you purchase any used vehicle! A good mechanic can spot things that won’t always show up on a Car Fax** report; things like flood damage, structural defects, or odometer fraud. You may need to pay about $100 to have this done, but it will be money well spent!
• Compare the features, price, condition and performance of different used vehicles against your list of needs and wants to determine which one will have the greatest value to you.

Research the vehicle. You can access Internet sites dedicated to new, used, and discount car pricing, even if you don’t have a personal computer or Internet service. Most public libraries allow you to use their computers and Internet service without charge other than for printing. Once you’ve narrowed your car choices, you can compare the fuel efficiency, frequency of repair and maintenance costs on each model in auto-related consumer magazines. These magazines are also often available at your public library. You can also check out the chat rooms dedicated to specific car makes and models to learn more on durability and maintenance. The U.S. Department of Transportation’s Auto Safety Hotline (1-800-424-9393) gives information on recalls.

Research sellers. Vehicles are sold through different outlets, including dealerships, car superstores, the Internet, and private sellers. Ask friends and relatives for recommendations on sellers. To check out a seller, you can contact the Better Business Bureau (BBB)** or the consumer protection division of your state’s Attorney General’s office.

Vehicle Leasing Basics

Important things to know when leasing a car:

• You will not own the vehicle-the leasing company will.
• You are not in the process of buying the vehicle, either–the leasing company is.
• In a lease, you are essentially paying “rent” for the use of the vehicle for the length of the lease.
• You will have to pay extra at the end of the lease for any excess mileage or wear and tear.
• If the leased vehicle is totaled in an accident, you will usually be responsible for paying any difference between the lease amount and the insurance payout.
• You cannot get out of a lease “early” without paying the total amount due under the lease or early termination penalty fees.

Understand Leasing Concepts

The idea behind leasing is to pay the amount by which a vehicle depreciates throughout the length of your lease. Depreciation is the difference between a vehicle’s original value and its value at the end of your lease. The value of the vehicle at the end of the lease is called “residual value.” Depreciation is the primary factor that determines the cost of leasing, although other costs are added. The idea is for you to pay rent for the use of the leased vehicle.Here’s an example:

$30,000 (original value) – $13,000 (depreciation over 3 years) = $17,000
(residual value)  

It is important to realize that the low monthly price of a lease is only buying you the use of a vehicle. At the end of the lease you will have no trade-in, nothing to sell. If you do choose to lease, research different makes and models because vehicles do not all depreciate at the same rate over the same period of time.

Avoid leases that are more than three years long. If a lease is over 3 years, you may end up upside down (owing more for a thing than what it is worth) if the leased vehicle is declared a total loss in an accident. In such a case, there would be a “gap” between the amount the insurance company would pay and the amount due under the lease. You would be responsible for this extra amount, unless you have sufficient gap insurance.

Know the Leasing Process

1. Negotiate the lease price first, without discussing any trade-in. Negotiating the cost of your leased vehicle is the first and most important thing you should do. Offer a price that is less than the MSRP. Negotiating the lease price is critical because you are charged interest on the price, NOT the vehicle’s residual value.

Your negotiation should not include any other factors, including the value of your trade-in. Your trade-in is an entirely separate issue that should not be discussed until after you have agreed on the price of your leased vehicle.

2. Don’t let yourself be “sold.” Vehicle salespeople can be pushy. Stand your ground and remember that it’s your money. Always negotiate; the worst that can happen is that they say no. Because you have done your research, you will know when to use the power of walking away.

3. Look out for “hidden” charges! Capitalized costs are extra charges added into your lease. Be sure you find out about all capitalized costs, have them itemized for you and understand what these costs are for. Capitalized costs may include an “acquisition fee.” Acquisition fees are similar to points paid on a mortgage loan and typically are not specified in lease contracts, so it’s not readily apparent that you’re paying them. Another possible capitalized cost is the balance owed on the vehicle that you’re trading in, less any allowance for applied trade-in credit.

4. Don’t lease longer than 3 years. Lease terms usually come in periods of 24, 36, or 48 months although unusual lease terms are sometimes promoted. Beware of any lease longer than 3 years (36 months). Your lease term should not be longer than the manufacturer’s warranty on the vehicle. Short-term leases are the best choice because of the “gap” problem referenced above and because vehicles usually begin having functional problems after the fourth or fifth year.

Leasing Quick Tips

1. A lease contract is stricter than a financing contract to purchase a vehicle. If you think, for any reason, that you might end your leasing contract early, DO NOT LEASE. This is costly. Leasing companies don’t like it when customers try to ‘get out’ of a lease, so they punish you for doing so…in DOLLARS.
2. If you plan on ultimately owning the car, leasing will cost you more. It is almost always more expensive to lease the car and later exercise your purchase right than to buy the vehicle from the start, using credit wisely.
3. Lemon Laws do not apply to leased vehicles in some states. Check your leasing company’s reputation and your state’s current lemon law.
4. Remember that sales tax may be added to advertised lease payments. The quoted lease payments usually don’t include sales tax, and when sales tax is added, your monthly payments may be higher than you think. Most states tax your monthly payment, but some states reportedly tax the car’s full value even though you are using only a portion of the car’s value. Be sure you know (and get in writing) the amount of your monthly payment, including any sales tax. This is especially important if you live in Illinois or Texas.
5. Watch your numbers. Check for any additions, or ‘junk fees,’ that the dealership may add to your lease contract. Examine all the lease documents line by line. Know what the termination fees are before you sign. The initial price of the vehicle is the biggest factor in determining your payment, so always negotiate this first, before you discuss trade-in value. Be alert. For example, if a dealer offers to take $3,000 off the price of the $25,000 car you want to lease, make sure that $3,000 is not added back in somewhere else, by lengthening the term of the lease, or in “hidden” costs and fees.
6. Stick to your leasing limits! Don’t go over your pre-determined mileage. Extra miles can cost about 10-15 cents per mile. For example, if you go over your limit even by 5000 miles, you may have a mileage fee ranging from $500-750. This can really add up!
7. Check with your insurance agent before you lease and figure this into your costs. Most leasing companies require you to keep auto insurance with higher, more expensive coverage. Any extra insurance costs should be figured into your transportation budget and can be an additional cost of leasing. A typical policy for a leased vehicle would include $100,000 per person/$300,000 per occurrence liability coverage, $50,000 property liability coverage and require that you have no higher than a $500 deductible.Remember, the car belongs to the leasing company, and they want to protect their investment.
8. Keep good records. Document all oil changes, tune-ups, inspections, etc. and make sure you do them on time or the leasing company might charge extra for excess ‘wear and tear.’ To avoid disputes and extra charges, have your leased vehicle detailed and photograph it thoroughly before you turn it in. Then be present for your car inspection and get a copy of the report.
9. Do not make large down payments on leases. In a purchase contract, a down payment has value because it lowers your principal and therefore lowers your monthly payment. But with a lease, you receive no advantage and lessen the advantage leases offer:Less money upfront.
10. Get gap insurance if needed. This type of insurance covers situations such as theft or wreck, when you end up owing more on the lease than the car is worth. Standard insurance will cover up to the car’s value or even the replacement value, but if the lease amount you owe is higher, standard insurance will not cover the difference. If you have negotiated well and stick with a short lease, gap insurance may not be necessary (see above). Many leasing companies include gap insurance as part of the lease.

Lemon Laws

A “lemon” is a vehicle that continues to have a defect that substantially impairs its use, value, or safety. In general, if the vehicle has been repaired 4 or more times for the same defect within a defined warranty period and the defect has not been fixed, the vehicle qualifies as a lemon. State laws differ, and not all states even have lemon laws, so research a lemon law summary or state statutes for your particular state. Note that the “warranty period” for the purpose of a lemon law may or may not be the same as the manufacturer’s warranty period.

Whether or not your car falls under a state’s lemon law is based on several factors. Some states include used and lease cars in their lemon laws. Some states have separate laws for used vehicles. Some states provide protection only for new cars. In some states, the law is not clear as to whether leased vehicles are covered or not.

Some sources of more information on lemon laws:

• Non-profit organizations such as www.autosafety.org
• The Consumer Protection Division of your state Attorney General’s office
• Your local library
• A lawyer with experience in this area
• Your local Bar Association or Legal Aid Office

Leasing Versus Buying

It’s a common dilemma: Should I lease or buy a car– which is better?

There is no single answer. Although leasing may give you a lower monthly payment, the total costs are usually more expensive than buying. You should avoid leases longer than 36 months. When you lease, you are paying “rent” on your vehicle. At the end of the lease term, you will have nothing except the issue of turning in a leased vehicle, which can be unpleasant, with disputes over penalties for unusual wear and tear.

In the final analysis, whether you buy or lease depends on your situation and what is most important to you. So, when making a ‘lease or buy’ decision, look at your personal priorities as well as the financial comparisons.

Read the statements below; if you agree with them, then leasing might be right for you!

• It is more important to me to change cars often and always have a late model car than it is for me to build equity in a vehicle.
• I keep my cars in great condition.
• I know how long and how far I will drive my vehicle.
• I have a steady income and the possibility of a lower income is unlikely in the future.
• I drive less than 15,000 miles per year.
• I do not plan on moving to another state.

Now read this set of statements. If you agree with these, then buying a car might be right for you!

• I drive more than 15,000 miles per year.
• I tend to hold onto cars for more than five years.
• I like the idea of ownership.
• I like to customize my car.
• I want my money to build up trade-in or resale value.

LEASING VERSUS BUYING: A SHORT SUMMARY

• When you buy, you pay for the entire cost of a vehicle, regardless of the mileage you use. Assuming you are not paying cash, you usually make a down payment, pay any sales tax in cash or roll it into the loan, and pay an interest rate determined by your lender based on your credit history. You make your first payment a month after you sign your contract.
• When you lease, you pay for only a portion of a vehicle’s cost, the portion you use during the lease term, plus other fees. In most states, you pay sales tax only on your monthly payments (with exceptions), and you pay a financial rate called a money factor that is similar to the interest rate on a loan. You may also be required to pay special lease-related fees such as capitalized costs, deposits and higher insurance costs. You make your first payment at the time you sign your contract — for the month ahead.

Click here for a real-life Leasing Versus Buying example.

How the Buying Process Works

When purchasing a vehicle, you have two options:

1) You can pay cash or

2) You can get a loan*

Here are some things you should know:

Avoid being upside down- be able to afford the payment on a loan no longer than 4 years!

If you get a loan to finance a vehicle, remember the “Rule of 3 to 4.” Since you have already done your research, you will know what you want to pay for the vehicle and how much you can afford in a monthly payment. It is best to finance a vehicle for no more than 3 years, but avoid ever financing a vehicle for longer than 4 years. This is a maximum of 48 months. The reason for this is to prevent you from being “upside down” in your vehicle. Being upside down means owing more for your vehicle than it is worth. If you cannot afford the payments on a new vehicle financed for 48 months, then you should look for a less expensive vehicle to meet your needs.

To understand the term “upside down” you first need to understand depreciation. Depreciation is the decline in an object’s value over time. A vehicle loses about 15 to 20 percent of its value each year, and it tends to lose more than this amount the first year. For example, a brand new $20,000 car is worth about $15,000 at the end of the first year. The primary reason for the large drop in value is that when you purchase the new vehicle from a dealer, you are paying retail price. Once you drive the car off the lot, if you were to sell it, it would only bring its wholesale price. Also, the money spent on taxes and licensing is gone for good. At the end of the second year, the same vehicle is worth only about $12,750 (85% of the value at the end of the first year).

Now, let’s say you financed a $20,000 car by obtaining a loan for 5 years. At the end of two years, you may still owe $15,000 on the car. In this situation, your car’s value would be $2,250 less than what you owe on it. This is known as being upside down. Dealers who advertise that they can put you in a new car “even if you’re upside down on your current vehicle,” simply take the excess loan amount ($2,250 in this example) and roll it into the new loan. Now, after two years you would be “double upside down” on the second vehicle! It looks like this:

So, “double upside down” is when, despite being upside down, you finance another new vehicle and the amount of negative equity from the first vehicle loan is rolled into the new loan. Since the new car loses a great deal of its value in the first year of ownership, you will not only be upside down on the new vehicle, but your loan on this vehicle includes the “upside down” amount from your prior vehicle. This is known as “double upside down.” This can continue to become triple, or quadruple “upside down” so that you owe much more than what your vehicle is worth because of continuing to refinance before you have equity in a vehicle. To avoid becoming upside down, do not finance a vehicle for over 48 months, 36 months is even better. If you can’t afford the payments, look for a less expensive vehicle.

When you are upside down (have negative equity because you owe more than the value) on a vehicle and it is declared a total loss because of an accident, the insurance company will only pay the vehicle’s value, in this case less than the debt owed on the vehicle. The amount the insurance does not cover is called a “deficiency balance.” If you do not have Gap Insurance, you will be responsible for paying any deficiency balance.

Vehicle financing basics.

Financing is more expensive than paying cash because you are purchasing on credit, which includes interest and other possible loan costs. Used vehicle loans normally have higher annual percentage rates (APRs) and shorter loan periods than new vehicle loans. Be cautious about advertisements that offer financing to first-time buyers or people with bad credit. These offers often require a big down payment and a high APR or a loan term that is too long. If you cannot get any other financing, then: (1) be sure that the used vehicle will be reliable transportation for you for the length of the loan and beyond (pay a good mechanic to inspect the vehicle before you buy and ask him or her about this); and (2) be sure that the payment will fit comfortably into your spending plan.

Buying a vehicle is actually a series of negotiated transactions, including:

• Negotiating the purchase of the vehicle;
• Negotiating the sale or trade-in price of your current vehicle; and
• Potentially negotiating the purchase of other products and services such as vehicle protection packages, extended service contracts, etc.

*If you are not paying cash for your car, please also visit our Auto Financing section.

The vehicle purchase process in 5 Steps.

First step: Decide whether you want a New or Used?.

Second step: Decide from whom you will buy: A dealership, a car superstore, over the Internet or a Private Seller.

Third step: Decide what to do with your current vehicle. If you are not going to keep it, then you can sell it yourself or trade it in when you purchase the new vehicle. Selling it yourself will usually get you more money, but there are other factors to consider such as the time it will take you to market and show the car, dealing with potential buyers, collecting funds, money spent on advertising, etc.

Trading in your vehicle is the other option. The first and most important thing when trading-in your vehicle is – negotiate the price of the vehicle you are buying before you discuss a trade-in price! If a dealer asks you whether you are trading-in, simply say you want to focus on the car you’re buying first. Vehicle salespeople can be pushy. Stand your ground and remember that it’s your money. Always negotiate; the worst that can happen is that they say no. Because you have done your research, you will know when to use the power of walking away.

If you still owe money on the loan of your trade-in, remember that you, not the dealership, are responsible for paying off the loan. Also remember that you can’t sell a vehicle without paying any loan against it in full. If you’re using the vehicle for a trade-in, only the amount of the trade-in above the amount you owe on the vehicle will go towards the price of the new vehicle. For example, if you still owe $10,000 and the dealership offers you $12,000 for the trade-in, the $2,000 difference is the actual amount you are getting toward the purchase of your new vehicle.

Results if you are “upside down” on a vehicle:

If you owe more on your vehicle than you can get for the trade (you are upside down on the loan), then instead of lowering the amount of your new vehicle loan, you will have the difference added to your new loan! For example, if you still owe $10,000 and the dealership gives you only $8,000 in trade, the other $2,000 will be added to the price of the vehicle you’re buying! In this situation, if you finance for longer than three years, you could be “double upside down” on your new purchase. It would be better to keep the existing vehicle, at least until it’s worth what you owe on it. Otherwise, you will be paying for the new car and for the negative value of the old car you don’t even own any more.

Last but not least, before you take your trade-in to the dealership, have it professionally detailed. This usually increases the value you receive for your trade-in.

Fourth Step: Get your insurance quote before you sign a contract! One true story will show you why. Sue had a car that was paid for. Because money was tight, she carried only liability insurance, which cost her $62 per month. Her vehicle broke down and she had to finance a used car. All commercial lenders and leasing companies require full insurance coverage on any vehicle they are financing. Sue called her insurance company from the car dealer’s office, but they were unable to give her a quote at the time. Sue signed the contract to finance the car for payments of $142 per month. She later discovered that a traffic violation she thought was off her driving record was still there. Her insurance payment ended up being $351 per month, more than double her car payment! She couldn’t afford this and when the insurance lapsed for non-payment, the car dealer repossessed her vehicle. Don’t let this happen to you. Get your insurance quote before you sign!

Fifth Step: Decide whether to purchase vehicle options, extra packages and/or extended warranties. There are many vehicle feature options to consider and salesmen often use them to increase the price of the vehicle (and their profit) by selling you additional features you may not want or need (see “Wants” in Needs vs. Wants). Examples of such options include: automatic transmission, a more powerful engine, anti-lock brakes, four-wheel drive, CD/AM/FM stereo, cruise control, power windows, power door locks, remote-adjustable mirrors, sunroof, tilt steering column and alloy wheels. The point here is to research the prices for these options before you go to the dealership, know what you can afford and what such options are truly worth to you.

Extras are another source of extra profit for the salesman. Typically, the value of a vehicle is not increased very much compared to the cost of extras like fabric protection and paint sealant. Most vehicles already come with these items and if you really want extra protection, you can do it yourself for very little money.

Extended warranties may
cost hundreds of dollars and are worth considering only if you plan to own the car a long time. The manufacturers’ warranty that comes with a new vehicle is usually sufficient, offering bumper-to-bumper coverage of three years or 36,000 miles and even longer coverage on the power train. If you are intent on buying an extended warranty, purchase one from the auto manufacturer; avoid buying any “third party” warranties.

If you are purchasing a used vehicle from a dealer, the dealer is subject to the Federal Trade Commission’s Used Car Rule. The Used Car Rule is in effect in all states except Maine and Wisconsin (these states have their own similar laws). Under this rule, the dealer must provide a disclosure document—a “Buyer’s Guide“– that gives consumers the following important purchasing and warranty information:

• Whether the vehicle is being sold “as is” or with a warranty;
• What percentage of the repair costs a dealer will pay under warranty;
• That oral promises are difficult to enforce;
• To get all promises in writing;
• To keep the Buyer’s Guide for reference after the sale;
• The major mechanical and electrical systems on the car and some of the major problems consumers should look out for; and
• To ask to have the car inspected by an independent mechanic before they buy.

Click here for a list of Buying Quick Tips.

Auto Financing

Look at other financing sources before you go to a dealership.

Understand that dealerships want to finance your vehicle because it’s profitable for them. They make money from vehicle financing! Before you even go to a dealership, take the time to compare other auto loan rates available to you. Check a local credit union, a local bank, and other options via the Internet. If your credit is not good, see Rebuilding Credit.

Know your numbers. The higher your credit score, the better your interest rate is likely to be. Find out your credit score several months before you begin looking for a car. This will give you time to correct any mistakes on your credit report, or to begin improving your credit score if it needs improving. You should know your credit score before you start shopping for a car loan. To find out more about your credit score and how you can improve it, see Rebuilding Credit.

Avoid financing over four years. Remember the Rule of 3 to 4! Don’t finance a car for more than four years. Loans that span 60 months or more cost you much more in interest, even though the monthly payments are less. And, if you finance for a longer amount of time, you are likely going to end up owing more than the car is worth at some point. To avoid this, use a large down payment so that you can afford to finance the balance for 4 years or less, or else find a less expensive car you can afford to pay for in no more than 4 years.

New or Used?

• Depreciation: When
  you buy a new vehicle, as soon as you drive it off the dealer’s lot, a huge chunk of the vehicle’s value is gone forever because it is no longer new. New cars generally lose about 25 percent of their resale value the first year. Some models hold their value better than others. When you buy used, the car already has started depreciating, so someone else has taken the big, initial depreciation hit. To learn more about vehicle depreciation, see How the Buying Process Works.
• Costs: When you buy new, you pay more, and not just for the initial purchase, but also in taxes, higher insurance premiums, registration and licensing fees. On the other hand, used car owners have to consider the higher maintenance costs of keeping an older car running (such as replacing brakes, muffler and battery), as well as the possibility of a major repair (like replacing the transmission). This is where good research on makes, models and your particular used vehicle pays off: the more reliable the research, the less likelihood of unexpected expenses or buying a lemon.
• Warranties:The advantage is clearly with new cars here. Basic manufacturer’s warranties are standard with new cars, and you can buy extended warranties for an additional cost. Avoid warranties from third parties. Some dealers may offer a limited warranty on a used car, but these are typically much weaker than a new-car warranty. And if you buy used from a private individual, it’s highly unlikely that you would receive any kind of warranty at all.
• History: Many buyers want to know the exact history of a vehicle that they might buy. When purchasing a new vehicle, there is no real track record established, you’re simply buying on the model’s potential track record. However, there are various sources that track vehicle models’ repairs and defects. To learn more, visit Vehicle Researching. Some places to check a used car’s history
  are: www.edmunds.com, www.CarFax.com, and www.car-history-reports.com**
• Condition: The “shiny new” factor is a big selling point to some buyers. Some people also like the idea of being the original owner of a vehicle so they can be sure of how the vehicle
  is treated and maintained. On the other hand, the leasing market has created a large pool of previously leased cars that are good values since the individual and leasing company have taken the big hit on depreciation. You must decide what’s most important to you.

Private Seller

An alternative to buying from a dealer is buying from an individual. You may see ads in newspapers, on bulletin boards, or on a car. Buying a car from a private seller is very different from buying a car from a dealer.

• Private sellers generally are not covered by the Used Car Rule and do not have to issue a Buyer’s Guide. The Federal Trade Commission’s (FTC’s) Used Car Rule says that anyone who sells more than 6 vehicles per year, excluding RVs and motorcycles, must post the FTC’s “Buyer’s Guide” on any used vehicle offered for sale. Although the FTC’s rules do not usually apply to private sellers, you can still use the Guide’s list of a vehicle’s major systems as a shopping tool. To see the “Buyer’s Guide” and for more information, see the FTC’s web site at www.ftc.gov. You should always have your own mechanic inspect the vehicle before you make any commitment. There are mobile inspectors who can come to the vehicle’s location if the seller will not allow it to be moved.
• Vehicles purchased from a private seller usually do not have warranties or implied warranties. That means a private sale probably will be on an “as is” basis, unless your purchase agreement with the seller specifically states otherwise. You can enforce the terms of a written contract, but verbal promises are usually not enforceable. A used vehicle may be covered by a manufacturer’s warranty or a separately purchased service contract, but such warranties and service contracts may not be transferable to you, and other limits or costs may apply. Before you buy, review any warranty or service contract it has and be sure you understand all the terms.
• Many states do not require private sellers to ensure that their vehicles will pass state inspection or carry a minimum warranty before they offer them for sale. Ask the consumer protection division of your state Attorney General’s office or local consumer rights group for the requirements in your state.

Warranties

What are vehicle warranties?

Warranties are contracts that pay the costs of certain repairs. They are like vehicle repair insurance. The manufacturers’ warranty that comes with a new vehicle is usually enough, offering bumper-to-bumper coverage of three years or 36,000 miles and even longer coverage on the power train. You can also purchase extended warranties.

NEW VEHICLES:

You will get a manufacturer’s warranty on new vehicles. You can buy an additional, extended warranty from the manufacturer if you wish.

USED VEHICLES:

For used vehicles, you can buy a warranty from your own insurance company unless there is warranty coverage remaining on the vehicle that can legally transfer to you and you have this in writing.

WHAT TO AVOID:

Avoid buying warranties from other third parties such as vehicle dealers and warranty companies.

Extended Warranties. When your manufacturer’s warranty expires, you will have no coverage for repair bills. Extended warranties continue repair coverage as specified and also have benefits such as towing, car rental, toll free assistance, trip interruption insurance and lost key lockout. When the manufacturer’s warranty ends, the extended warranty can go into effect for another few years. If you want an extended warranty, it is crucial to purchase one early. Just like life insurance, the longer you wait, the more it will cost, so if you plan to buy a warranty, lock in your savings when your car is young and healthy. As more repair data surfaces on your make of vehicle, it may be placed into a higher rate class, making an extended warranty more expensive. Once you buy your extended warranty, your rate class cannot change. Get it sooner, not later.

DO NOT buy an extended warranty at the time you purchase. With car dealer extended auto warranties, you often pay double for less coverage. Remember that dealerships usually have a high mark-up on extended warranties. Although you do want to purchase an extended warranty while your car is still “young,” you should not make this decision until you have researched cost and coverage options.

Buying Quick Tips

• Check your credit score before you shop! Your score is the major factor in what loan terms you can get. The lower your credit score, the more money you will be paying in interest rates; the higher your credit score, the better your loan terms will be. You can check your credit score and report online. Review your credit report before the dealership sees it. Your credit report is available free from www.annualcreditreport.com and your credit score is available for about $15 from Fair Isaac Corporation** at www.myfico.com. To learn more about credit reports and credit scores, including how to improve them, see Rebuilding Credit.
• Research Sellers. Vehicles are sold through different types of outlets including car dealerships, superstores, and over the Internet. Ask friends and relatives for recommendations. You can contact the consumer protection division of your state Attorney General’s Office or your local Better Business Bureau (BBB) to check a particular dealer.
• Know your trade-in value before you shop. Kelly Blue Book, the NADA Used Car Pricing Guide, and Edmunds are all available free on the Internet. Local editions are often available in libraries, banks and bookstores.
• Research non-dealer financing options before you go shopping. Many
  people use dealer financing because it’s convenient– you buy a car and finance it at the same place. But there’s a difference between what dealers ‘sell’ you and what dealerships ‘buy’ from the bank. That difference is the dealer’s profit and more money you will pay! If you arrange your own financing with a local bank or credit union, the extra effort can mean significant savings for you!
• Be sure you know your cancellation or return rights, if any. In some states, you may have no cooling-off period or cancellation right. In some states, you may have up to three days to change your mind on your purchase. In other states, you would have to buy a cancellation policy and in still other states, once you sign the contract there’s no turning back. The safest thing is to ask your seller what its cancellation and return policy is and then have them show you where the policy is written in your contract. It’s also good to find out where your state stands on this issue before you buy.
• Take a careful test drive. Drive the car in all ways you normally would drive. Go up hills, enter the freeway, make a controlled emergency stop, etc. to be sure how well the car functions and handles. Don’t let music or the salesperson distract you during the test drive.
• If you buy a used vehicle, you MUST get an independent mechanic to give it a thorough inspection BEFORE you purchase it. There is no substitute for this and once you purchase the vehicle it may be too late. It is well worth the mechanic’s fee to save you from accidentally buying a lemon! An independent inspection is a good idea even if the vehicle you are trying to purchase has been “certified” by a dealer and is being sold with a warranty. Do NOT rely on the safety inspection of the vehicle alone; safety inspections do not evaluate the mechanical reliability of the vehicle. If the seller will not let you take the vehicle off the premises, look in the yellow pages, Internet, etc. for a mobile vehicle inspector who will come to the vehicle’s location.
• Check out the history of used vehicles. You have the right to request the names and history of previous owners. Dealers are required to provide this information to you as a potential buyer. Remember, buying a car “as is” means YOU are responsible for any hidden defects and necessary repairs. Some places to check a car’s history are:www.edmunds.com; www.carfax.com; and www.car-history-reports.com**
• Do not rely on spoken promises. Get all promises in writing. Dealers are required to place the Federal Trade Commission’s “Buyer’s Guide” in cars that have been previously owned. Any agreement made outside of a Buyer’s Guide provided to you must be in writing to protect your rights. To view the Buyer’s Guide, go to www.ftc.gov.
• Make sure you read every line on every document and understand what is required of you. Be sure there are no blank spaces. Your signature binds you to every obligation in that contract.

Gap Insurance

The resale value of a new vehicle drops quickly once it is driven off the Dealer’s lot. Often, this results in the new owner owing more than the vehicle is worth, or being “upside down” on the vehicle. Depending on such factors as make, model, loan terms and condition of the vehicle, it could take several years before the vehicle is worth more than what is owed on its loan. You can also be “upside down” on a leased vehicle if it is involved in an accident or stolen. This means that more is owed on the lease contract than what the insurance company will pay. Whether it’s a new vehicle, used vehicle or leased vehicle, you can be upside down (owe more than the value of the vehicle and/or the insurance on the vehicle) for many reasons.

When a vehicle is repossessed or declared a total loss because of an accident while you still owe money for it, you will still owe any loan balance after deducting the proceeds from the sale or the insurance payment. Generally, vehicles sold after repossession bring very, very low prices because they are sold at wholesale auction. The lender can then pursue you for the difference between the loan amount and the amount the lender gets from auction, plus the lender’s cost of repossession and sale. This amount is called a “deficiency balance.” Similarly, when insurance makes payment for a total loss, the amount is often much less than what you owe.

Regardless of the reason, anytime more is owed on a vehicle than the amount available from sale or insurance, there is a “gap” between the amount owed and the amount available from the vehicle to pay the loan or lease.

Gap insurance provides financial protection for consumers when such a gap exists between the actual value of their vehicle and the amount of money owed to their lender or leasing company. It’s best to avoid having a “gap” in the first place by keeping loans and leases to 3 years. If you cannot afford the payments (they do not fit into your spending plan) over 3 to 4 years, you should get a less expensive car.

For example:

Bob bought a new car for $30,000. Six months later he’s involved in a bad car crash and his insurance company declares the vehicle a “total loss.” Bob still owes $28,000 on his car loan, but the insurance company will only give Bob the current trade-in value of $26,000. Bob has a “gap” or difference of $2,000 that he owes but the insurance will not pay.

If Bob has gap insurance, it would pay Bob’s lender the difference
(gap) of $2,000.

**Hummingbird does not endorse any companies. Hummingbird mentions other sources of information that it considers helpful to the reader, but does not guarantee the accuracy or completeness of any entity’s information.

The Federal Trade Commission (FTC) wants you to know about these payment technologies and how to make your transactions as safe and secure as possible. Keep these tips in mind as other forms of electronic commerce, like mobile and wireless transactions, become more available.

AND HOW WOULD YOU LIKE TO PAY?

Most online shoppers use credit cards to pay for their online purchases. But debit cards — which authorize merchants to debit your bank account electronically — are increasing in use. Your debit card may be an automated teller machine (ATM) card that can be used for retail purchases. To complete a debit card transaction, you may have to use a personal identification number (PIN), some form of a signature or other identification, or a combination of these identifiers. Some cards have both credit and debit features: You select the payment option at the point-of-sale. But remember, although a debit card may look like a credit card, the money for debit purchases is transferred almost immediately from your bank account to the merchant’s account. In addition, your liability limits for a lost or stolen debit card and unauthorized use are different from your liability if your credit card is lost, stolen or used without your authorization.

Other electronic payment systems — sometimes referred to as “electronic money” or “e-money” — also are now common. Their goal is to make purchasing simpler. For example, “stored-value” cards let you transfer cash value to a card. They’re commonly used on public transportation, at colleges and universities, at gas stations, and for prepaid telephone use. Many retailers also sell stored-value cards in place of gift certificates. Some stored-value cards work offline, say, to buy a candy bar at a vending machine; others work online, for example, to buy an item from a website; some have both offline and online features. Some cards can be “reloaded” with additional value, at a cash machine; other cards are “disposable” — you throw them away after you use all their value. Some stored-value cards contain computer chips that make them “smart” cards: These cards may act like a credit card as well as a debit card, and also may contain stored value.

Some Internet-based payment systems allow value to be transmitted through computers, sometimes called “e-wallets.” You can use “e-wallets” to make “micropayments” — very small online or offline payments for things like a magazine or fast food. When you buy something using your e-wallet, the balance on your online account decreases by that amount. “E-wallets” may work by using some form of stored value or by automatically accessing an account you’ve set up through a computer system connected to your credit or debit card account.

“PAYING” IT SAFE

The FTC encourages you to take steps to make sure your transactions are secure and your personal information is protected. Although you can’t control fraud or deception on the Internet, you can take action to recognize it, avoid it and report it. Here’s how.

• Use a secure browser — software that encrypts or scrambles the purchase information you send over the Internet — to help guard the security of your information as it is transmitted to a website. Be sure your browser has the most up-to-date encryption capabilities by using the latest version available from the manufacturer. You also can download some browsers for free over the Internet. When submitting your purchase information, look for the “lock” icon on the browser’s status bar, and the phrase “https” in the URL address for a website, to be sure your information is secure during transmission.
• Check the site’s privacy policy, before you provide any personal financial information to a website. In particular, determine how the information will be used or shared with others. Also check the site’s statements about the security provided for your information. Some websites’ disclosures are easier to find than others — look at the bottom of the home page, on order forms or in the “About” or “FAQs” section of a site. If you’re not comfortable with the policy, consider doing business elsewhere.
• Read and understand the refund and shipping policies of a website you visit, before you make your purchase. Look closely at disclosures about the website’s refund and shipping policies. Again, search through the website for these disclosures.
• Keep your personal information private. Don’t disclose your personal information — your address, telephone number, Social Security number, bank account number or e-mail address — unless you know who’s collecting the information, why they’re collecting it and how they’ll use it.
• Give payment information only to businesses you know and trust, and only when and where it is appropriate — like an order form. Never give your password to anyone online, even your Internet service provider. Do not download files sent to you by strangers or click on hyperlinks from people you don’t know. Opening a file could expose your system to a computer virus or a program that could hijack your modem.
• Keep records of your online transactions and check your e-mail for contacts by merchants with whom you’re doing business. Merchants may send you important information about your purchases.
• Review your monthly credit card and bank statements for any errors or unauthorized purchases promptly and thoroughly. Notify your credit or debit card issuer immediately if your credit or debit card or checkbook is lost or stolen, or if you suspect someone is using your accounts without your permission.

REPORT PROBLEMS IMMEDIATELY

Fair Credit Billing and Electronic Fund Transfer Acts

The Fair Credit Billing Act (FCBA) and Electronic Fund Transfer Act (EFTA) establish protections against lost or stolen credit or debit cards, and procedures for resolving errors on credit and bank account statements that can include:

• credit charges or electronic fund transfers that you — or anyone you’ve authorized to use your account — have not made;
• credit charges or electronic fund transfers that are incorrectly identified or show the wrong amount or date;
• computation or similar errors;
• a failure to properly reflect payments or credits, or electronic fund transfers;
• not mailing or delivering credit billing statements to your current address, as long as that address was received by the creditor in writing at least 20 days before the billing period ended; and
• credit charges or electronic fund transfers for which you request an explanation or documentation, because of a possible error.

For credit: The FCBA generally applies to “open end” credit accounts — that is, credit cards and revolving charge accounts, like department store accounts. It does not apply to loans or credit sales that are paid according to a fixed schedule until the entire amount is paid back, like an automobile loan.

Lost or stolen credit cards: Under the FCBA, your liability for lost or stolen credit cards is limited to $50. If the loss involves only your credit card number (not the card itself), you have no liability for unauthorized use. It’s best to notify your card issuer promptly upon discovering the loss. Many companies have toll-free numbers and 24-hour service to deal with such emergencies. Always follow up with a letter and keep a copy for your records.

Billing errors: The FCBA’s settlement procedures apply to disputes about “billing errors” for open-end accounts, including unauthorized charges (you cannot be liable for more than $50 for unauthorized credit charges); charges for goods or services you didn’t accept or weren’t delivered as agreed; charges that are incorrectly identified or show the wrong amount or date; math errors; a failure to properly reflect payments or credits; not mailing or delivering credit billing statements to your current address, if the address was received by the creditor in writing at least 20 days before the billing period ended; and charges for which you request an explanation or documentation, because of a possible error.

To take advantage of the FCBA’s consumer protections for errors on your account, write to the creditor at the address given for “billing inquiries,” not the address for sending your payments. Include your name, address, account number and a description of the billing error. Send your letter so that it reaches the creditor within 60 days after the first bill containing the error was mailed to you. And if you send your letter by certified mail, return receipt requested, you’ll have proof that the creditor received it. Include copies (not originals) of sales slips or other documents that support your position. Keep a copy of your dispute letter.

The creditor must acknowledge your dispute in writing within 30 days after it is received, unless the problem is resolved within that period. The creditor must con-duct an investigation and either correct the mistake or explain why the bill is believed to be correct, within two billing cycles (but not more than 90 days), unless the creditor provides a permanent credit instead. You may withhold payment of the amount in dispute and any related finance charges and the creditor may not take any action to collect that amount during the dispute.

For debit: The EFTA applies to electronic fund transfers — transactions involving automated teller machines (ATMs), debit cards and other point-of-sale debit transactions, and other electronic banking transactions that can result in the withdrawal of cash from your bank account.

Lost or stolen debit cards: If someone uses your debit card, or makes other electronic fund transfers, without your permission, you can lose from $50 to $500 or more, depending on when you report the loss or theft. If you report the loss within two business days after you discover the problem, you will not be responsible for more than $50 for unauthorized use. However, if you do not report the loss within two business days after you realize the card is missing, but you do report its loss within 60 days after your statement is mailed to you, you could lose as much as $500 because of an unauthorized withdrawal. And, if you do not report an unauthorized transfer or withdrawal within 60 days after your statement is mailed to you, you risk unlimited loss. That means you could lose all the money in your account and the unused portion of your maximum line of credit established for overdrafts.

Some financial institutions may voluntarily cap your liability at $50 for certain types of transactions, regardless of when you report the loss or theft; because this is voluntary, their policies could change at any time. Ask your financial institution about its liability limits.

EFT errors: The EFTA’s error procedures apply to certain problems. This can include:

• electronic fund transfers that you — or anyone you’ve authorized to use your account — have not made;
• incorrect electronic fund transfers;
• omitted electronic fund transfers;
• a failure to properly reflect electronic fund transfers; and
• electronic fund transfers for which you request an explanation or documentation, because of a possible error.

To take advantage of the EFTA’s error resolution procedures, you must notify your financial institution of the problem not later than 60 days after the statement containing the problem or error was sent. Although most financial institutions have a toll-free number to report the problem, you should follow-up in writing. For retail purchases, your financial institution has up to 10 business days to investigate after receiving your notice of the error. The financial institution must tell you the results of its investigation within three business days of completing its investigation. The error must be corrected within one business day after determining the error has occurred. If the institution needs more time, it may take up to 90 days, in many situations, to complete the investigation — but only if it returns the money in dispute to your account within 10 business days after receiving notice of the error, while it reviews your concerns.

For stored-value: The FCBA and the EFTA may not cover stored-value cards or transactions involving them, so you may not be covered for loss or misuse of the card. However, stored-value cards still might be useful for micropayments and other small purchases online because they can be convenient and — in some cases — offer anonymity. Before you buy a stored-value card or other form of e-money, ask the issuer for written information about the product’s features. Find out the card’s dollar limit, whether it is reloadable or disposable, if there’s an expiration date, and any fees to use, reload or redeem (return it for a refund) the product. At the same time, ask about your rights and responsibilities. For example, does the issuer offer any protection in the case of a lost, stolen, misused, or malfunctioning card, and who do you call if you have a question or problem with the card?

FOR MORE INFORMATION

Your financial institution, local consumer protection agency and law enforcement agencies like the Federal Trade Commission or your state Attorney General are among the many organizations working to help consumers understand electronic commerce and new online payment options.

The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint or to get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

In order for each of us to reach financial victory and get the things that we value most, there are two “essential goals” without which all of our other financial goals may be lost.  One essential goal is an emergency fund.  An emergency fund is 3 to 6 months’ worth of your expenses in savings that you can get to quickly, without penalties or red tape.  To learn more about this, see “What is a Spending Plan?” Large, unexpected expenses (such as medical bills or big repair bills) will hit all of us at some point.  An emergency fund prevents these unavoidable expenses from truly becoming a financial emergency, or putting you in debt.

Insurance is the other “essential goal,” without which you risk all of your other financial goals.  This article is the first in a series about insurance and what you need to know.

If you do not have enough insurance or emergency funds, you should make them your very first goals since without either one, you can easily lose any other goals.  Essential goals, once reached, are the foundation on which you build everything else so that it will last!  For more information on effective goal-setting practices, see Goal Setting for Financial Victory

Don’t “Gamble” with Your Future (A True Story)

This story is true.  “Tom” is a nice gentleman, in his sixties, who had nursed his parents and his wife until they passed away.  He had stayed out of debt and saved his money so that he could pay off his modest manufactured home and the lot it was on.  He had no remaining family and worked part time to supplement his small retirement income.  He came to see a bankruptcy lawyer, and said:

“I know this is my fault, because I took a chance and gambled, yes, I gambled just as surely as if I had gone to Las Vegas.  Y’see, I’ve been healthy all my life and my budget was tight, so I went without insurance.  Well, last Fall, I had a heart attack and had to have bypass surgery.  Now, the hospital says I owe them over $80,000 and I don’t have it to pay.  Can you help me?”

Unfortunately, the bankruptcy lawyer could not help Tom because the laws at that time did not allow him to protect his home, which was paid in full, and get rid of his debt.  Tom’s income was not enough to allow for payments and the hospital was within its legal rights to sue Tom, take a lien against his home, and even foreclose!

Understand Insurance Terms

To help you with this article, here’s a review of some basic insurance terms:

Premium =  The cost or payment on an insurance policy.

Lapse = When your insurance stops and is no longer in force, usually due to failure to pay the premium.

Deductible = The amount you must pay from your own pocket before the insurance policy will start to pay claims under the policy.

Exclusion =  An event or circumstance that is “excluded” and not covered under an insurance policy.  Examples are floods or pre-existing medical conditions.

There are many types of insurance.  The other articles in this series will cover the most important kinds of insurance to have and some types to avoid. Next, let’s look at what you should know as an insurance consumer.

Shop and compare coverage and prices

Smart consumers always comparison shop before making purchases.  This applies to insurance decisions, too.  When looking for a particular type of insurance coverage, don’t think the only thing you need to know is the policy’s amount.  You will want to compare any coverage exclusions, deductibles, and the nature of the insurance to evaluate the amount of coverage you can get for your money.  You will also want to feel confidence in the person or company from which you buy the insurance, as well as in the particular insurance company that is issuing the policy.

“Agents” versus “Brokers”

You can get insurance quotes from web sites, insurance companies and their agents, and licensed insurance brokers.  It is very important to know about your source of information when you make decisions.  In general, you will get the best advice from a licensed insurance agent or “broker” who has the ability to work with a number of different insurance companies.

In contrast, another person who calls him/herself an “insurance agent” may actually be a “direct-writer” or “captive agent” who works only for one insurance company.  You want a trained, knowledgeable professional to advise you on the best options for you, not simply what one company offers.

Finding a knowledgeable, independent insurance advisor

Don’t assume that you’ll necessarily get a better deal by purchasing insurance on the Internet, thus avoiding a commission.  A trained, independent insurance professional can usually compete with Internet rates while giving you advice specific to your situation.

If you have a CPA or Accountant prepare your tax return, he or she may have some good recommendations.  Friends, business colleagues and neighbors may also have positive or negative experiences with a particular person or company.

Once you have identified some potential insurance brokers, look at what products they sell.  You want to feel good about the insurance companies they represent and the range of choices in the types of policies they offer.  Standard and Poor’s, Moody’s and A.M. Best are companies that rate the stability of insurance companies.  When you feel satisfied with your list of possible insurance brokers, check on their licensing and training.

Licensing

Look for a broker that is licensed in by your state’s insurance office or Board.  Licensing requires training.  Find out what is required to be licensed in your state by going to your state’s insurance department.  To find out more about this, click here.

Training and Knowledge

Additionally, look for an insurance broker with good training.  There are numerous certifications that an insurance broker can earn.  Examples of insurance credentials are: LUTCF (Life Underwriter Training Council Fellow), CLU (Chartered Life Underwriter), CPCU (Chartered Property Casualty Underwriters), CIC (Certified Insurance Counselor), and AAI (Accredited Adviser in Insurance), but there are many other designations, too numerous to list.  Don’t be afraid to ask not only what initials after a broker’s name mean.  Take the time to find out that designation’s education requirements; some designations require far more training than others.  Ask whether your broker maintains membership in any insurance organizations that provide continuing education.

Now that you have a “short list” of possible brokers, your final decision should be based on an in-person meeting with each of them to be sure the one you choose is independent and attentive to your needs.

Interviewing a Potential Insurance Broker

Ask questions regarding the types of policies that your broker sells in any given area of insurance.  For example, if your broker only sells whole life or “cash value” life insurance policies, he or she might not tell you about low-cost term life insurance.  Do enough of your own research to know that your agent is advising you on options and choices before you make any decisions.

You want an insurance adviser who will be more concerned with your needs, budget and best interests than in simply making a sale, but how can you tell?  Be prepared to ask questions.  Be sure the agent explains things to you so that you fully understand, or volunteers to research the answer and get back to you.  Avoid anyone that doesn’t ask a lot of questions about you, or who seems pushy and more interested in making a sale than learning about you and answering your questions.  While five years experience in the insurance business is great, you won’t want to start with an agent who is approaching retirement since he or she won’t be there for you by the time you retire.

(c) 2010 Hummingbird Credit Counseling and Education, Inc. All rights reserved.