Account Titling (1/12/06)

The primary reason I started writing the banker story was to pass along information and experiences so all of you could avoid financial mistakes and mishaps that other banking customers make everyday. Well, this story is one that I hope you all read and follow.

Have you thought about how your checking account is titled? If you haven’t, you’re not alone because most people don’t. Most people don’t understand the importance of the titling of their checking account, and how it could have a big impact on their life.

I’ll give you an example. Recently, a customer of mine was in a serious car accident. He and his wife kept separate checking accounts at separate banks. They were both “sole owner” on their respective accounts and therefore, did not have signatory rights on each other’s account. Fortunately, my customer survived, but he was in very serious condition for several weeks. Since most of the bills were paid from his account, his wife needed to get access to those funds so she could continue to pay their bills. Since my customer was incapacitated and unable to provide verbal or written authorization, I was unable to legally grant access to his checking account. We eventually came up with a legal resolution to the situation. However, it ended up being a tough lesson on how account titling can make things difficult.

Before you can review the titling of your accounts, you must understand the different titling options, what they mean, and how it can affect you. Some of my comments may be a little direct.
Sole Owner
The sole owner account title is just what it sounds like. Just you, no one else, no matter what the circumstances are. If you find yourself in a position where you’re unable to write checks or withdrawal funds, no one else will be able to negotiate items on your behalf.

If you die, the bank will freeze the assets in the account. There’s only three ways these funds will be released from the bank. 1.) If there’s a relatively small balance in the account, and someone can provide sufficient evidence that they contributed personal funds to pay for your funeral, the bank can legally release funds to that person. 2.) If you have enough assets, a probate estate will be established in your name by the probate division of your local government. A personal representative will be appointed to liquidate other assets in your name. Those liquidated assets will be collected into an estate account, then eventually distributed to your heirs as instructed in a will or by the judgment of a court (the court follows strict guidelines on how to disburse those funds). Your creditors will also have an opportunity to claim funds in your estate for monies you may owe. Assets in your estate will also be subjected to large estate taxes and probate court fees. 3.) If no one comes forward to claim your account funds, they will be turned over to the probate division and a public administrator will be assigned the responsibility of tracking down the appropriate heirs to distribute those funds. If no heirs are found or the amount is very little, the money is eventually turned over to the state where they will be registered under unclaimed property.

To avoid these three scenarios, you can assign a payable on death beneficiary. Upon your death, the designated person can provide your death certificate to the bank and gain access to the funds. This is very easy to do. Just take the full name, social security number, and date of birth of the person you’d like to name as your POD beneficiary to a bank branch. If you name someone as your POD beneficiary, I recommend you inform that person (assuming that they won’t want to bump you off for your riches). A couple of notes regarding a POD beneficiary: 1.) Please keep in mind that your POD beneficiary cannot gain access to funds or information about your account until you’re dead. 2.) If you choose more than one POD beneficiary, your funds will be divided equally upon your death. You can’t designate unequal portions to multiple POD beneficiaries.

Joint Ownership
This is also referred to as joint tenants with rights of survivorship (JTWRS). This titling consists of two or more people that have 100% ownership rights to the account. You can have as many joint owners as you wish on an account, although most banks probably have a limitation. The most I’ve ever seen on one account was six individuals. This means that all six people have 100% ownership rights to the account. Therefore, you better trust the person you add as a joint signer because they will have the legal ability to take all of your money and run.

There are several benefits to JTWRS. If you’re unable to gain access to your account (i.e. hurt in a car accident, or on an extended vacation), someone else will be able to access the funds on your behalf. If you die, the funds will not be subjected to the same fate as they would otherwise be, if your account was titled as a sole owner. The funds would simply be retained by the surviving owner(s). On the other hand, anyone who’s a joint signer on your account can gain access to your account funds and information. So choose your joint owners carefully and be aware of the risks involved. While rare, I have seen customers surprised to find out that their daughter went on a shopping spree with their checking account…and it was completely legal.

You can add a POD beneficiary to a joint account, but all joint owners must die prior to the beneficiary gaining access.

Trust
A trust is a legal entity that can be set up by an attorney. There are many different types of trusts that serve different purposes. I won’t go into details regarding trusts because it will bore most of you. Trusts are simply a creative and complex way to pass your assets directly onto your heirs according to a specific set of instructions. In order for your assets to be subjected to the instructions in the trust, they must be titled in the trust. Any asset titled in the name of a trust, including a checking account, will not be subjected to a probated estate. Most people don’t create a trust until they’ve accumulated a larger amount of wealth or their family situation has become quite complex as it pertains to their heirs. If you want to know more about trusts and how they work, feel free to e-mail me or call me.

Summary
There are a few other different types of titling, but these three are the most common. Please take the time to review how your assets are titled on everything from your checking account to investments. If you have an IRA or a 401K, be sure to name beneficiaries.

If you’re married and you hold separate accounts, I suggest you make each other joint owners (assuming you trust each other) to avoid my customer’s situation. If your parents are single, or feel that this is an issue they should be concerned with, please forward this blog onto them. If you have siblings who are single, maybe they should look into adding a joint signer on their accounts. If you have a secret savings account, you should at least add someone as a POD beneficiary. If you already know the social security number and date of birth of your POD beneficiary, you can add them to your account without them even knowing (although I normally suggest that you inform the person that you’re designating as your POD beneficiary).

Titling is important on all accounts, including brokerage accounts, savings accounts, investment accounts, etc. Do yourself and your heirs a favor by reviewing the titling of your accounts.
Feel free to post any questions you have by using the comments link. If you want your question to be confidential, you can e-mail me at: Brad.Landsbaum@commercebank.com.

Change in Bankruptcy Laws (12/16/05)

Sorry I haven't graced your presence with a Banker's Story in over a month. I've been trying to track down information on a new bankruptcy law that was passed in April and took effect on Oct. 17, 2005. The Office of the Comptroller of the Currency (OCC) and Congress wrote the bill entitled Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Of course there's several theories on how this law can effect you and me and how corporations, especially credit card companies, will respond. Instead of adding more theories, I'll give you a short summary of the facts regarding the bankruptcy portion of the law.

New Bankruptcy Law
In 2004, 72% of all bankruptcies files were Chapter 7 (CNN-Money). A distance second place was Chapter 13 filings. Chapter 7 bankruptcy allows a debtor to "write off" more of their debt, allowing what's known as a "fresh start." Chapter 13 requires a repayment plan of up to five years. It's up to the discretion of the court to determine which debts will be included in the repayment plan under Chapter 13. Any debts not addressed by the repayment plan, don't have to be paid. The new law will reduce the number Chapter 7 filings by requiring more consumers to file for Chapter 13 instead. This determination will be made by a formula that takes into consideration your "necessary" expenses and your annual income compared to your state's median income. What's that mean? It means you can't rack up a bunch of debt, then expect to clear it out by filing Chapter 7 bankruptcy. On top of that, you must meet with a consumer credit counselor at least six months prior to filing for bankruptcy.

Now, how will this effect you? Many credit card companies have begun to raise their minimum payment to encourage people to pay down their debt. If you carry large balances on your credit cards, you may have already seen this change. The average credit card balance is now $12,000. Many personal finance experts think this tougher bankruptcy law is just the beginning of stricter industry standards in an attempt to reduce the average consumer's debt.

Links Below
I've put a couple of links below. The first link is the OCC's summary of the new bankruptcy law. It reduces the 195 page bill to a 20-page summary. The second link is CNN Money's debt reduction calculator. It will allow you to input your credit card debt information, including interest rate and minimum payment. It will then calculate how long it will take you to payoff your credit card. For example, if your credit card balance is $5,000, your interest rate is 10%, and you pay $100 per month, it will take you almost 16 years to payoff that credit card (assuming you don't use it and the interest rate doesn't change). It will also tell you how much that timeframe will cost you in interest changes. By playing with the numbers a little, you can put together a manageable debt budget for yourself.

OCC Summary: http://www.occ.treas.gov/law/SummaryoftheHighlightsofBankruptcyLaw109-8.pdf

Debt Reduction Planner: http://cgi.money.cnn.com/tools/debtplanner/debtplanner.jsp

I want to finish off this Banker's Story by telling you that I recommend bankruptcy only as a last resort to solving your debt problems. Filing for bankruptcy can hurt you financially for many years. I also want to say that I hope nobody benefited from this Banker's Story. Not needing to know this information is a good thing. If you know someone who might find this information useful, including the links, feel free to pass it along.

Your Credit Report (3/16/05)

I've seen and heard a lot of horror stories over the past eight years involving an individual's credit history. Your credit history is an easy thing to forget about, since most people don't pay attention to it until they need it the most.

Obtain your Credit Report
In case you haven't heard, Congress created a central website last year were you can obtain a free copy of your credit report: http://www.blogger.com/www.annualcreditreport.com. This service is not yet available to all people in the U.S. It became available to Missourians on March 1. You can check the website to determine the availability for your state. I've already used this website to pull my own credit report and it's a legitimate website and won't try to sell you additional services. Once you begin the process of obtaining your credit report, you'll need to provide some general information about yourself and it will ask you to verify your identity by answering a few questions. There are three main credit reporting agencies that you must choose from to get your credit report (Equifax, Experian, and TransUnion). I've had the best experience with TransUnion. On top of that, they are headquartered in St. Louis. So if you live in St. Louis, might as well support the local economy while you're at it.

What's it all mean?
The credit report is much more reader-friendly on this website. I won't go into all the details of the contents in the credit report. If you have any questions about how to read it or what something means, feel free to call me or e-mail me. I'd be happy to go over it with you piece by piece. They give you the option of paying them to get your actual credit score. However, I would advise against this unless you're planning on obtaining credit in the near future or the curiosity is killing you. I believe the cost is $5.95. If you decide to get your credit score, it's called a FICO score. It stands for the Fair Isaac and Company. It's call that because this company came up with the formula for getting the score.

Here's a summary of how they get the score:
The number can range from 300 to 900
35% of the score is based on your payment history.
30% of the score is based on outstanding debt.
15% of the score is based on the length of time you've had credit.
10% of the score is based on the number of inquiries on your report.
10% of the score is based on the types of credit you currently have.

Now you're asking, "what's a good score to have?" The answer: It depends on what type of loan you're getting and who you're getting it from. Generally, anything below 600 isn't good, 600-700 is decent, 700-750 is good, 750-800 is excellent, and 800 and up is flawless. I've only seen a few above 800. Many lenders have something called credit based pricing. This means upon credit approval, the worse your credit is, the higher your interest rate will be.

Beware
If you're in a bind with your credit, I urge you to be vigilant of companies that claim they can fix your credit history. I heard a claim on a radio advertisement the other day, "I can turn your debt into riches, no matter how much debt you have or how much money you make." This is obviously a bunch of crap. The only proven way to get out of debt is to spend less money than you make. It's a real simple formula, but not always easy to do. Remember, it could take several years. I recommend avoiding bankrupcy at all costs.

Credit Card Scam (11/3/05)

This month's banking story is a little different. Since I work at a bank, I receive regular e-mail notifications about fraud and scams. Most of the scams I see can be avoided by using common sense. Most people know not to give any of their personal information over the phone or to a stranger. Especially your account numbers. The most recent scam brought to my attention went much deeper than the normal scams we've all heard about. This story was sent to us by our fraud department, as told by a customer. Please read below so you can protect yourself.
You'll probably hear about this one on Dateline or 60 Minutes before too long. Let me know if you have any questions.
_____________

Subject: Warning: New credit card Scam Date: Sun, 30 Oct 2005 08:11:36 +0200
WARNING...New Credit Card Scam.
Note, the callers do not ask for your card number; THEY already have it.
This information is worth reading. By understanding how the VISA & MasterCard Telephone Credit Card Scam works, you'll be better prepared to protect yourself.
My husband was called on Wednesday from "VISA", and I was called on Thursday from "MasterCard".

The scam works like this: Person calling says, "This is (name), and I'm calling from the Security and Fraud Department at VISA. My Badge Number is 12460 your card has been flagged for an unusual purchase pattern, and I'm calling to verify. This would be on your VISA card which was issued by (name of bank). Did you purchase an Anti-Telemarketing Device for $497.99 from a Marketing company based in Arizona?" When you say "No", the caller continues with, "Then we will be issuing a credit to your account. This is a company we have been watching and the charges range from $297 to $497, just under the $500 purchase pattern that flags most cards. Before your next statement, the credit will be sent to (gives you your address), is that correct?" You say "yes". The caller continues - "I will be starting a Fraud investigation.

If you have any questions, you should call the 1- 800 number listed on the back of your card (1-800-VISA) and ask for Security. You will need to refer to this Control Number. The caller then gives you a 6 digit number. "Do you need me to read it again?"

Here's the IMPORTANT part on how the scam works. The caller then says, "I need to verify you are in possession of Your card". He'll ask you to "turn your card over and look for some numbers". There are 7 numbers; the first 4 are part of your card number, the next 3 are the security Numbers' that verify you are the possessor of the card. These are the numbers you sometimes use to make Internet purchases to prove you have the card. The caller will ask you to read the 3 numbers to him. After you tell the caller the 3 numbers, he'll say, "That is correct, I just needed to verify that the card has not been lost or stolen, and that you still have your card. Do you have any other questions?" After you say No, the caller then thanks you and states, "Don't hesitate to call back if you do", and hangs up.

You actually say very little, and they never ask for or tell you the Card number. But after we were called on Wednesday, we called back within 20 minutes to ask a question. Are we glad we did! The REAL VISA Security Department told us it was a scam and in the last 15 minutes a new purchase of $497.99 was charged to our card.

Long story made short - we made a real fraud report and closed the VISA account. VISA is reissuing us a new number. What the scammers want is the 3-digit PIN number on the back of the card. Don't give it to them. Instead, tell them you'll call VISA or Master card directly for verification of their conversation.

The real VISA told us that they will never ask for anything on the card as they already know the information since they issued the card! If you give the scammers your 3 Digit PIN Number, you think you're receiving a credit.

However, by the time you get your statement you'll see charges for purchases you didn't make, and by then it's almost to late and/or more difficult to actually file a fraud report.
What makes this more remarkable is that on Thursday, I got a call from a "Jason Richardson of MasterCard" with a word-for-word repeat of the VISA scam. This time I didn't let him finish. I hung up! We filed a Police report, as instructed by VISA. The police said they are taking several of these reports daily! They also urged us to tell everybody we know that this scam is happening.

Different Types of Investments (10/3/05)

I'll preface this banker story by telling you that I'm not a licensed investment professional. My specialty is lending money. However, I work with highly qualified CFA's with many years of experience. As a result, I've gained a solid surface of knowledge regarding a number of different investment options. If you need a tangible measure of the breadth of my knowledge on this topic, I'd rate it a five on a scale from 1 to 10. Whereas, your average high school graduate may be a 1 and Warren Buffet is a 10 (if you know who Warren Buffet is, you're an automatic 2 on the scale).

These are all investments that anybody can purchase from the appropriate investment representative or, in some cases, you can purchase online. I'll give you a brief explanation of the investment, the typical purchaser based on risk tolerance, and some buzz words associated with the investment you can use to impress your friends. As I've mentioned in the past, the recipients of the Banker's Story all vary in knowledge. So, forgive me if I bore you with things you already know. Here goes....

Stocks
Stock, or shares, represent ownership of a corporation. There are a few different types of stock, but the most common is.....common stock. Stock prices go up and down all the time and are traded on one of the various exchanges, such as the NASDAQ or NYSE. Since owning stock means you're a partial owner of the corporation, you get to help make the decisions, sort of. Each share represents one vote when issues are put to a stockholder vote. Sounds cool, huh? Not really. Unless you own a lot of stock, your vote has very little impact. In some cases, one person calls all the shots because they may own at least 50.1% of the shares issued by that corporation. On top of that, they send you big (and boring) annual reports about the company and periodic voting cards, and who needs more mail.

Many of you have probably heard of the DOW Jones Industrial Average. The DJIA is simply a market indicator. It's made up of 30 major industrial companies and is probably the most reported indicator in the media. The fluctuations in the DJIA do not necessarily correlate with the fluctuations of the stock you own.
Risk: Stocks are the riskiest type of investment. If you own stock in one company, and that company goes out of business, your stock will become worthless (See: Enron). However, if that company performs very well and the stock triples in value, you'll make a lot of money. It's a calculated gamble in almost all cases.
Buzz words: Many investors refer to stocks as securities. Stocks also have classifications based on company size. There are small-caps, mid-caps, and large caps. The stocks in the DJIA are called Blue Chips. So if some wealthy fellow corners you at a cocktail party and tells you how his large caps are doing, he's talking about the stock he owns in a large company.

Mutual Funds
There are three different types of mutual funds: stock funds, bond funds, and money market funds. Stock Funds are investments that own a collection of various stocks. When you purchase shares in a stock fund, your money is pooled with money from other investors to create greater buying power than you would have if you had invested on your own. Since a stock fund consists of many stocks (sometimes hundreds), you're less dependant on one or two companies. If one company within the fund goes out of business, you won't lose all your money. Each stock fund is run by a fund manager, which identifies and publishes certain objectives for the fund so you can choose which one is best for you. Some funds are more aggressive and riskier than others. For example, one fund may have a conservative strategy and invest only in large, well known, and stable companies, such as Coca-Cola and Proctor & Gamble. For the explanation of a bond or money market fund, simply read this paragraph again and insert the word "bond" & "money market" respectively where the word "stock" is.
Risk: The investment diversification of the mutual fund is the most important characteristic. Because of this, typically a mutual fund is less risky than individual stock. Bond funds and money market funds are even less risky.
Buzz words: There are over 10,500 different mutual funds on the market today. They all have names which typically include the name of the company that runs the fund and the type of fund it is. For example, you could purchase shares of the Commerce Mid-Cap Growth Fund. A shrewd investor may refer to them simply as, funds.

Bonds
A Bond is debt issued to the public. This is an instrument an entity uses to acquire large sums of money. The most typical bonds are corporate bonds and government bonds (also referred to an Municipal Bonds). For example, St. Louis County may issue a bond offering to the public so they can obtain funds to build a new highway. When you own a bond, it will pay you an interest rate and have a maturity. For example, you could buy a $1,000 bond which pays an interest rate of 4% with a 10 year maturity. This means, you would be paid $40 per year for ten years, and get $1,000 at maturity. Simple, huh? Bonds can get complicated when they are bought or sold prior to maturity. Then you need a really smart person to valuate them.
Risk: Like stocks, the issuer of a bond can go out of business and take your money with them. At issue, all bonds are given a rating based on the strength of the entity issuing them. The higher the rating, the safer the bond. Believe it or not, government bonds typically have high ratings than bonds issued by companies. A bond's initial rating can be upgraded or downgraded at anytime. Overall, bonds are safer than both stocks and mutual funds.
Buzz words: Government bonds are sometimes referred to as Muni's (this stands for Municipal Bond). Bonds of the lowest ratings (below C by Moody's), are called Junk Bonds. Bonds rated higher (BBB or higher by Moody's) are called Investment Grade Bonds.

Savings Bonds
Perhaps, these are among the safest investments. However, they don't pay much. There are two main types of savings bonds, I and EE Bonds. The interest rate paid on these bonds change semi-annually. Both of these types of savings bonds will earn interest for 30 years, but the interest isn't paid to you until you cash them in. You can purchase them at any bank and a small certificate will be mailed to you by the United States Treasury. If your grandmother bought you a savings bond when you were born, you can go to http://www.ussavingsbonds.gov/ to find out how much it's worth.
Risk: Very low, almost none. Unless, of course, the Federal Government goes out of business.
Buzz words: Savings bonds aren't "cool" to own. As a result, there's no buzz word to impress your friends.

Certificate of Deposit
These are issued by a bank. They too are a very safe investment. They vary in maturity length. The longer the term, the higher the interest rate. A 30-day CD pays a lower interest rate than a 12-month CD. Both tend to pay a higher interest rate than a savings account since you're giving up access to them. When you purchase a CD, you can't cash it in until maturity. Otherwise, there will be a small penalty. These are good investment choices if you have a chunk of money that you'd like to set aside for a year before using it as a down payment on a house. While you'll earn a little interest, you'll also avoid losing any principal such as the probability of investing in stocks or stock funds. If you purchase a $10,000 CD for 12 months at 3.5%, you'll cash it in at maturity for $10,350.
Risk: Very low, FDIC insured by banks.
Buzz words: None, unless the word "CD" counts.

These investments are most common. If you're interested in knowing more about other investment options such as foreign currency, futures, options, or commodities, let me know and I'll answer some questions on an individual basis or get you in touch with a licensed professional.

Again, let me know if you (a) want me to take you off the recipient list and (b) if you would like me to address certain topics in future stories. I also accept comments regarding the stories. It would make me feel good about myself if you (a) actually liked this story or (b) cared to read it at all.

Who should you invest with? (8/12/05)

As I glance through my list of recipients, there's a lot of you at an age where you are beginning to think about investing. I'm not an investment guru, so don't expect any hot stock tips from me. This story will inform you about who to go to for your investment needs. For example, what's the difference between Ameritrade and Harvey the stock broker. I'll go into each type of intestment professional and what their specialty is and when to choose them for your investment needs.

Stock Broker
What is a stock broker? A stock broker is essentially a person licensed to buy and sell securities (a security is stocks, mutual funds, etc). They work as representatives for a brokerage firm such as Edward Jones or Merrill Lynch. If you have a pot of cash and want to purchase stock, mutual funds, bonds, treasury bills, etc., they can purchase them for you. You pay them a transaction fee for each transaction they do for you. The fees typically vary based on the amount you purchase and the type of investment you purchase.
Pros: The benefit of using a stock broker is human interaction. In the increasing world of online brokerage services, some consumers enjoy having someone they can call or visit to make investment transactions.
Cons: Stock brokers charge higher transaction fees than online brokerage services and their licensing regulations don't allow them to give advice. However, because online brokerage services are threatening to put all stock brokers out of business, the regulators have been more lenient on their ability to give advice so they can be more valuable. Another disadvantage to using a stock broker is their motive. The more transactions they do for you, the more fees they collect. Therefore, they sometimes purchase a lot of crap you don't need or want. Many customers have come to me with their 250-page monthly statement from their broker with a really confused look on their face.
In a nutshell: Use a stock broker if you're a novice. They can explain to you how the process works and make it a very pain-free experience. But beware. If you're a novice, some stock brokers love to take advantage of easy prey. Be sure to use a reputable one or get a referral. I know a few very smart, well-spoken and honest stock brokers. If you're planning on using a stock broker, you can do a background check on them by going to http://www.nasd.com/. This is the watchdog for investment professionals.

Online Brokerage Service
What is an online brokerage service? There's a ton of these. Even large brokerage firms such as Edward Jones and Charles Schwab now allow customers to make transactions online. They are typically very easy to use and offer a number of online tools for company research, market news, and stock comparisons.
Pros: Transactions are typically cheap, sometimes as a low as $6 per transaction. If you're into doing your own market research, they will provide access to some great tools.
Cons: If you have a question, good luck. You're basically on your own. I had a good experience with the online brokerage service I used, but I've heard some nightmare stories.
In a nutshell: Make sure you know what you're doing and use a service that has a good customer service department. Be sure to read the fine print. The transaction charges may be small, but they may access a monthly or annual account maintenance fee. They may even have a minimum balance requirement or a minimum number of annual transactions you must meet.

Trust Company
What is a trust company? A trust company is a fiduciary that offers a wide range of specialized services, including accounting, investment, and estate planning services. This is typically for people with higher investment accounts and have specific trust documentation that requires additional regulations. Minimum investment is typically $500,000 so I won't go into this in great detail. However, it is closer to my heart since I work for The Commerce Trust Company.
Pros: Combines the resources of attorneys, trust administrators, financial planners, accountants, and investment analysts all in one place and charge a single, flat fee based on the amount of assets in your account. The cost of using each of these professional individually would cost a lot more money. Perhaps the greatest advantage is unbiased advice.
Cons: Not cost effective until you have a much bigger pile of loot.
In a nutshell: If you have a lot of money, a trust company is an easy choice to make.

There are other terms used to describe people that perform the same tasks listed above, such as investment professionals or securities traders (they're all the same). These are the three primary ways to invest in marketable securities. I want to make sure you're aware that investing with any of these investment entities involves some level of risk depending on how you invest your money. Any marketable security is subject to market risks and you could loose some or all of your money. We've all heard stories about day-traders that make a lot of money in one stock of a very short period of time (sometimes in one day). This is a very risky hobby and typically takes a lot of money to get big gains. Investing in the stock market should be a long term (greater than five years) strategy for savings.

Overdraft Protection (6/14/05)

I'm aware that my Banker's Story doesn't always pertain to everyone. And, hopefully this one pertains to very few of you. I've had several inquiries over the years regarding overdraft situations, whether by bank error or account holder error. Therefore, I thought I'd address a few ways to avoid overdrafts and how to deal with them once they occur.

We've all been overdrawn before, or "bounced" a check. I know millionaires who overdraw their account every month. Most of the time, it's not because they don't have the money, it's because they weren't keeping track of their balance. Things like automatic debits and debit cards are making it more difficult for people to keep a tally on their monthly expenses.

Over the last decade, banks have come up with several ways to avoid overdrafts by offering new services to help customers keep track of their accounts. You're probably familiar with 24-hour account information hotlines, or online banking services. Most banks offer these services for free. However, some banks require a minimum balance to obtain their online services for free. Other banks may charge or have usage restrictions. Either way, if your bank offers this service for free, use it. You can typically sign up for the services via the internet without having to visit a local branch. The 24-hour account information lines, or VRU (voice response units) are a little old fashioned for today's technology. However, if you're not a computer user, this is the only other way to obtain your account information before your statement arrives.

Online Banking
You can view your account information 24 hours a day, 7 days a week from anywhere in the world. Most online services even allow you to view a copy of a recent check. In the event you forget to write down a transaction in your register, you could view copy of it online (Adobe Acrobat is necessary for this function in most cases). Please keep in mind that the bank only knows what has cleared your account. Because of this, the balance you see online is rarely the actual balance in your account, because it doesn't take into consideration the transactions you've made which haven't cleared yet. I know this sounds pretty elementary to most of you, but I've had to make this distinction on many occasions with customers. In the end, online banking is a great tool to utilize in the war against overdrafts, especially if you're not a meticulous record keeper or you're the type of person that doesn't balance their checkbook each month.

Overdraft Protection
Most banks have products available they refer to as overdraft protection. Be sure to read the fine print when signing up for these products. Banks don't like to hand out "get-out-of-jail-free" cards for nothing. I'll give you three primary forms of overdraft protection that are most common.

Credit Card: At Commerce Bank, you can obtain a credit card and tie this card to your account. In the event your account becomes overdrawn, cash advances will be charged to your card in $50 increments to cover the overdraft. You won't receive any overdraft fees, but there will be a small cash advance fee (3% of the advance) as well as finance charges on the credit card if the balance isn't paid off.

Savings transfer: I know of two banks that have this option. This form of overdraft protection allows you to tie your checking account and savings account together so in the instance of an overdraft, funds are automatically transferred to your checking. There's a small fee assessed each time this transfer occurs.

Line of Credit: This form of overdraft protection allows you to tie your checking account to a line of credit set up at the bank which will be triggered when an overdraft occurs. Again, interest will be charged at the time the overdraft occurs. Regular lines of credit or home equity lines of credit can typically be used.

Although there are fees or charges for these services, they may save you money if you tend to overdraw your account on a regular basis. Overdraft fees are typically much higher. Or, in many cases, you aren't charged anything if you don't use the service as it costs nothing to set up. You may want to look into something like this for preventative measures.

Now, what happens when an overdraft situation occurs?
At most banks, there's an operations department that monitors an overdraft report each morning. At this time, a decision is made to either return the item that's overdrawing the account and charge a fee, or pay the item (even though it overdraws the account) and charge a fee. Most of the time, these decisions are automated. For example, if you're overdrawn by less that $100, the system will typically pay the item if your account doesn't have any negative history with regards to overdrafts. If an account has a bad history of overdrafts, the system will typically return all items regardless of the negative balance. The system doesn't pay attention to the specific item which is overdrawing the account. For example, the system won't decide to pay your mortgage, but not your debit to Wal-Mart. It doesn't matter if a check is clearing the account or an automatic debit. The decisions are made based on the account activity. At the time of an overdraft, a notice will be mailed to you indicating the fate of your overdraft item and the fees assessed to your account.

If an overdraft item is paid, the merchant will never know that your account was overdrawn. If items are returned, you have a larger problem. Some merchants will send your check through a second time to be paid. Some merchants will not. In this event, you'll need to contact the payee to inform them of the situation. If you bounce a check written to an individual, they will receive the check back from the bank as a "returned deposited item". At this point, you should probably write them another check (if they will accept another check from you at this point). If items are returned due to a bank error, the bank should furnish a written letter of explanation and help you rectify the situation, including waiving all overdraft fees and assuming the fees charged to you by the merchants who received a bad check.

Fees and Repercussions
The fees for an overdraft are typically $15 to $30 per item. Some banks have implemented an increasing fee scale. For example, your first overdraft offense may be $15 per item, and increase $5 for each additional offense (with a maximum fee, or course). These fees are debited directly from your account. It's important to note that having an overdraft DOES NOT effect your credit report or credit rating. Banks do not report overdrafts to any outside agency. The only time an overdraft can really hurt you from a long-term standpoint is when an account is left overdrawn for greater than 30 days. If an account remains negative for greater than 30 days, most banks will close the account and "write off" the negative balance as a loss and report the customer to a national company called Chexsystems. You may have heard of this company because all banks run your name and social security number through this service before opening an account for you. In a nutshell, it can tell banks if you're a good account holder. If you ever get reported to Chexsystems, good luck getting out of their system. I've had customers spill their guts to me about how they ran out of cash and had to skip town. And, after paying the bank back for the loss that was incurred, they still were unable to clear their name from Chexsytems. It's a monkey you'll carry on your back for seven years. Therefore, if you're ever overdrawn, be sure to rectify, quickly.

Having an overdraft is no big deal. Having repeated overdrafts is a large problem that you'll need to address. The fees will eat you alive. I've seen customers with hundreds of dollars in overdraft fees. Banks make a lot of money from these fees, and justifiably so as there are easy ways and inexpensive ways to avoid these mishaps. Feel free to contact me if you have any questions.

How Interest Rates are Determined (4/26/05)

There are many different types of interest rates. I'll address the ones that are most common: Credit cards, Car/Boat loans, and mortgage rates. Feel free to skip a section if it's not relevant to you.

Before I go into those individual categories, I'll enlighten you a little on how rates tend to go up or down "in general". The Federal Banking System is governed by the Federal Reserve Board. The head of the Federal Reserve Board is Alan Greenspan. Many economists call him the 2nd most powerful man in the country (don't tell Dick Chaney). He controls monetary policy in the United States which makes a great impact on our economy. There are several different factors that go into the boards' decisions. Among them are the inflation report, unemployment report, consumer spending report, etc. The board meets periodically, and among their many duties in regulating national banks, they will typically make a decision regarding a key federal interest rate. The rate they control is called the Federal Discount Rate. This is the rate the Federal Reserve Bank charges member banks to borrow money.

When they raise this key interest rate, everyone, including credit card companies and member banks will follow suit. The rate that banks charge for floating credit facilities is called the Prime Rate. This is most likely something you've heard of. Don't be mistaken: The Federal Reserve Board does not control the Prime Rate, but their decision regarding the Federal Discount Rate will influence the decision banks make regarding the Prime Rate. The Prime rate today is 5.75% (April 2005).

Credit Cards
Credit Cards are typically referred to as floating rate credit facilities. This means the rate is typically tied to the Prime Rate with a margin. The vast majority of credit card rates are somewhere between Prime + 0% and Prime + 5%. This is sometimes determined by your credit score. The better your credit score is, the better your rate will be. Your statement will have your rate printed on it in bold letters. So, if your rate is 7.75%, then you know your rate is most likely Prime + 2%. This is a good rate. After all, credit cards are considered high risk to banks since they are not secured (no collateral). A lower rate of Prime + 0% is typically reserved for people with very good credit or they may have a significant fiduciary relationship with the bank. Most importantly, when the Federal Reserve Board raises the discount rate, the rate on your credit card will go up as well almost 99% of the time.

Now, some credit card companies have introductory rates. These are typically a fixed rate for so many months. Be sure to find out what the rate will be once the the introductory period ends. Credit card companies, such as Capital One or MBNA America typically have lower rates than banks. Shop around if rate is one of your primary concerns.

Several companies will reserve the right to raise your rate upon a late payment (this policy is usually buried in the fine print on the back of your statement). Sometimes, they'll raise it as high as 20%. If this happens to you, I highly recommend that you transfer your balances to another card as soon as possible. Credit card companies are pretty strict and are not likely to lower your rate once this happens, no matter what your sob story is. There are plenty of other credit card companies eager to gain your business. You may even find a great introductory rate if you're willing to transfer your balances.

Car/Boat Loans
These loans are typically referred to as installment loans because they have a level payment that's made monthly until the loan is paid off. Again, in some cases, these rates are also determined by the borrower's credit score. Higher credit score, lower rate (you know the drill by now). New car rates are lower than used car rates because the collateral is in better shape and the loan is considered lower risk.
All car rates are typically determined by four factors:
1. New or used car
2. Credit score
3. Term of loan (how many months)
4. Amount of loan

For example, if you want to borrow $20,000 for a new car over six years, the rate will be about 6.15%. This same loan over three years is 6.25%. The rate is usually lower for longer terms since the bank is making more money from the deal for a longer period of time. Most of these loans do not have a pre-payment penalty (meaning you can pay them off early without a penalty). Therefore, if you want the shorter term, simply get a loan for the longer term with the lower rate and make additional principal payments to pay it off early.

Banks typically can not compete with dealers on car loan rates. The dealers are much more willing to go lower on the rate if they know they're going to make a sale. I know some people hate to haggle with the dealership, but it can save you money if they know you're going to walk over a small break on the interest rate. If you're buying a new car, there may be a special offer, such as 0% financing for 36 months (or something like that). If this is available, take it.

If you're borrowing a small amount of money for a used car, don't get too stressed about the rate. The payment will not be effected that much by the rate. For example: If you borrow $10,000 over three years, the payment at 6% is $304 and the payment at 7% is $308. Some people shop around rates for days, only to find out it saves them a couple of bucks a month. The difference in this particular example is a savings of $144 over three years.

If you're going to purchase a car, I suggest you go to your bank first and obtain their published rates and work out some possible payment scenarios. Some banks give discounts to their customers on installment loans. Once you're armed with what your bank can offer, see what the dealership can offer while you're shopping for a car. Don't lie to the dealership in order to get a better rate. Dealers have very close relationships with banks and they will know if you're lying.

Car salesman have a negotiation tactic to be aware of: "What kind of payment are you looking for?" This is a clear red flag if a salesman asks you this. They figure, if you get the monthly payment you ask for, he can screw you on the cost of the car and the rate. Sure, you can get a brand new $35,000 Lexus for $450 a month. But the dealership would charge you 8% interest over nine years in this scenario. Always look at the details of the transaction before signing on the bottom line. At $450 a month for nine years, that $35,000 Lexus will cost you a total of over $49,000. Financing a car is expensive, so put down some cash if you have it. Otherwise, most dealerships and banks are willing to finance 100% of the purchase.

Mortgage Rates
As you probably know, these are very competitive. Shop around and shop as often if you wish.
Mortgage rates are based on three primary factors:
1. Mortgage Type
2. Type of property (primary residence, investment property, vacation home, etc).
3. Amount of loan

There are several different types of mortgage loan products. Here are the most common:
1. 30-year fixed rate - Rate stays fixed for 30 years.
2. 15-year fixed rate - Same as 30 year fixed, but for 15 years.
3. ARM (Adjustable Rate Mortgage). This loan has a fixed rate period, this can adjust every year following that fixed rate period. For example, a 5/1 ARM mortgage will stay fixed for 5 years, then changes each year after that based on a set margin and index.
4. Interest only - Payment is interest only without reduction in principal.

The longer the fixed rate period, the higher the interest rate. This is because the bank is taking on more risk based on the volatility of the market over a longer term. Therefore, a 30-year fixed rate loan is higher than a 5/1 ARM. All rates can fluctuate on a daily basis and don't necessarily influence each other. Daily rate sheets are printed by most banks or you can find rates online or in the newspaper.

Since rates tend to fluctuate, it's very crucial to "lock in" a rate when you want to refinance or sign a contract to purchase a house. Most mortgage companies have some sort of "float down" period. This means, if the rate drops after to lock in your rate, they will lower your rate to meet the current rate. They won't volunteer to do this for you, so make sure you're aware of the provision (if one exists) and hold them to it.

The primary thing to be aware of when obtaining a mortgage is the fees involved. Beware of a broker. They sell their loans once you close so they make their money primarily on fees. Some banks sell their loans too, but typically won't screw you on the fees like a broker will do. Most of the fees I'm referring to are very common. They are the appraisal, title insurance, recording fees, credit report, etc. These are fees that everyone charges and they should be fairly similar across the board. The fees to look out for are the fees the mortgage company charges to process the loan. This is typically referred to as one of the following: a loan processing fee, underwriting fee, broker fee, or funding fee, etc. This is the fee you need to watch out for. No one should be charging you $1,000 to do a mortgage for you. If this fee is greater than $500, you're being robbed. All lenders are required by law to send you initial mortgage disclosures within three days of your application. Do yourself a favor and look over these, especially the document titled "Good Faith Estimate". This document has a breakdown of all the probable fees.

I won't go into all the details about mortgages and mortgage rates. There are so many different scenarios and I may bore you with all of them. Feel free to call me and I can take a look at your specific situation and address your specific questions. I can even go over your mortgage disclosures with you and let you know if you're getting a good deal.