The Feds raise rates again; What does that mean for you? (6/30/06)

The Federal Reserve Board raised rates for the 17th straight time. Before I go into how this may affect you directly, I'll refresh your memory on how this works. The Federal Reserve Board controls monetary policy in the United States. They have a number of "economic indicators" that help them make decisions regarding monetary policy. The unemployment rate, the GDP, and consumer confidence index are examples of these economic indicators. The Federal Reserve Board is lead by the Chairman Ben Bernanke.

The key interest rate they are referring to is the Fed Funds rate. This is the rate that the Federal Reserve Bank charges member banks to borrow money. When the Fed charges banks more, banks in turn charge you more. The primary rate effected by the Fed Funds rate is the Prime Rate. Most credit cards, home equity loans, and short term loans (less than 1 year), are based on the Prime Rate.

Now, how does this affect you directly?
The Prime Rate today is now 8.25%. Most credit cards are tied to the Prime Rate, such as Prime + 4%. The Prime Rate on July 1, 2005 was 6.25% and on July 1, 2004, it was 4.25%. If you carry a balance of $3,000 on a credit card with an interest rate of Prime + 4%, you would have accrued approximately $21 in finance charges each month in July 2004. Today, you would accrue about $31 in finance charges. That's an increase of almost 50%. If you're carrying a balance of $10,000, that's a finance charge of over $100 a month if your rate is Prime + 4.

Credit card debt is never good to have, but it's even worse when you're getting slammed by rising interest rates. If you fail to increase the amount of money you pay to your credit cards each month, you'll only be digging a deeper hole for yourself to climb out of. It's imperative that you re-allocate your disposable income to decreasing your credit card debt.

Here's a few tips for reducing credit card debt:
1. Make a budget. Write down your net income and expenses on a sheet of paper. Putting these items on paper will give you greater organization. Remember, out of sight, out of mind.
2. Reduce your "luxury" expenses. Evaluate your "wants" vs. "needs". You'd be surprised how many "needs" are actually "wants". If you're having trouble with this, here are some examples of "wants": cell phone, cable TV, dining out, etc. Allocate those funds to your credit card debt.
3. If you've done all of the above and you still don't see any light at the end of tunnell, get a second (or third) job.

Keep in mind, getting out of debt is a simple equation: spend less than you earn. It's much tougher to implement after years of spending more than you earn. It could take years to climb out of debt depending on how much debt you have and how much you earn. Don't be discouraged if you can't eliminate your debt quickly. Most people can't. Debt consolidation loans are only temporary bandaids. The equation (spend less than you earn) is the only way to eliminate debt. Just like diet and exercise are the only ways to lose weight. Pills and Lypo are only temporary.

Please feel free to contact me if you have additional questions regarding this topic. As always, everything I discuss with you will be kept confidential. I'm going to write another blog entry shortly regarding extreme measures of trying to get out from under credit card debt.

Regulation CC: My fair warning (6/23/06)

As you can imagine, all banks must adhere to a number of regulations everyday. Most of these regulations are there to protect consumers and the bank. I had a recent situation with a client who got entangled with Regulation CC so I thought I'd enlighted you.

What is Regulation CC?
Regulation CC deals with the availablility of deposited funds. 99% of the time, your deposit is made available immediately. However, in some instances, the bank can place a seven day hold on any deposit for the following reasons:

1. Deposit to a new account and you're a new customer.
2. Deposit of a previously returned item (bad check).
3. Unusually large deposit.
4. If the deposit is being made to an account with repeated overdrafts.

Most of you will experience this regulation at some point in your financial lives, if you haven't already. If a seven day hold is placed on your deposit, you won't have access to those funds. They sit in your account and can't be touched. This regulation was put in place as a measure to protect banks from fraudulant deposits. If the bank, at any time, is unsure or suspicious of a check you deposit, this seven day hold ensures the bank of collecting funds prior to any withdrawals from the depositor's account.

The reasons for a hold listed above are simply guildlines. Each bank uses their own descretion when making a decision to place a hold. For example, the phrase "unusually large deposit" is a relative term. If the average balance in your checking account is $100 and you make a $20,000 deposit, this would be considered by most people's judgement to be an unusually large deposit. Therefore, a hold may be placed. The regulation requires that you be notified within 24 hours if a hold has been placed on your deposit. If you're making your deposit at a teller line (vs. an ATM), you'll more than likely be informed of the hold at that time.

The reason this is important to know is that Regulation CC can create a real mess. I'll give you an example. Suppose you sold your house and had a large check from the title company for sale proceeds. Prior to depositing that check, you decided to write a bunch of checks for bills and drop them in the mail. Upon making your deposit, it was determined by the bank that this was an unusually large deposit and a hold was placed on your funds. Meanwhile, your checks are beginning to clear your account, but are bouncing because the funds aren't available. Now you've got a mess which will take a long time to clean up.

There are a few ways to avoid a Regulation CC.
1. If you're opening a new account at a new bank, use cash. Banks can't place holds on cash.
2. Keep your account in good standing. Avoid overdrafts and don't deposit bad checks and the bank will be less likely to place a hold a particular deposit.
3. If you plan on making a large deposit, try to obtain those funds in the form of a cashier's check or sometimes referred to as an official check. Cashier's checks are almost as good as cash.

If you ever find yourself with a Regulation CC hold and it is unavoidable, just be aware of which funds are available and which funds aren't so you don't complicate the situation with bounced checks.