Of all the massive hacks of recent years, the Equifax hack may be the worst. Some 145 million persons had their personal information stolen. Even though other hacks may involve larger numbers (the Yahoo hack may have victimized 3 billion--yes, billion--accounts), Equifax had the crown jewels: Social Security numbers, birth dates, home addresses and phone numbers, and some credit card account numbers and drivers license numbers. Bad guys can use this information to open phony credit card and other loan accounts in your name, steal your tax refund, grab your Social Security check and get prescription drugs in your name (which could interfere with your ability to get medications and maybe even implicate you in police investigations).
What to do? The best thing is to freeze your credit accounts. These freezes, called security freezes, prevent new creditors and other persons from getting access to your credit information unless you specifically authorize it. It doesn't stop existing creditors and their collection agents, or the government from getting access. But it puts a substantial barrier in the way of fraudsters. It's not perfect--the bad guys might still try to use your stolen personal information to snare your tax refund or your Social Security benefits, or snag some opiods in your name. But a credit freeze is a lot better than the alternatives. Forget about credit monitoring and fraud alerts--they aren't great protection. And a credit lock isn't as good as a credit freeze. Credit freezes give you legal protection under state law, while a credit lock is just a contract with the credit reporting agency that may be difficult to enforce. Credit locks may also cost you more in fees (which is one reason the credit reporting agencies might want to sell you a credit lock).
Credit freezes can be a little inconvenient, because you have to lift them any time you want to apply for credit. But that is a lot less bother than the aggravation of cleaning up your credit after the bad guys have impersonated you (a process that can take months or years).
One more reason to freeze your credit is to make the idiots (the ones that got hacked) change things. The credit reporting agencies and banks and other lenders don't like freezes. They interfere with business and revenue flow. The credit reporting agencies and lenders have a harder time making money if a lot of people freeze their accounts. And that is the point. The current system using Social Security numbers as universal identification numbers has just been blown up by the Equifax hack. For all practical purposes, you have to assume that your Social Security number is publicly available. You have no privacy any more. You're not safe, and your finances are not safe. The SSN system of personal identification is now completely kaput.
Make 'em change. Freeze your credit and take profit opportunities away from the credit reporting agencies, and the banks and other lenders. Faced with a business downturn, these massive institutions will lead the way to change. With the potential loss of who knows how many millions of dollars of profit, they will implement posthaste new and improved systems of personal identification. Either that, or their senior executives' stock options will belly flop. And that they won't allow. So freeze your credit. It might be the best thing you can do right now for your financial privacy.
Showing posts with label credit card. Show all posts
Showing posts with label credit card. Show all posts
Monday, October 9, 2017
Monday, August 13, 2012
How the Federal Reserve Discourages Consumer Demand
The Fed has, for the past four years, waged a relentless war on interest rates, suppressing them to zero at the short end of the yield curve and to record lows at the long end. This was all done in the hope of encouraging lending and fostering consumer demand. With about 70% of the U.S. economy coming from consumption, there is good reason to try to encourage consumers. But the Fed's basic approach has been to tilt the playing field sharply toward borrowers and punish savers for having the temerity to be frugal, all with questionable impact on consumer demand.
The boost given to borrowers appears to be limited. Interest rates on credit cards have, if anything, been rising. This is in part due to changes in the law that have limited some of the fees with which banks previously whacked their customers. But the sharp drop in short term rates since 2008 has not been mirrored in the credit card market. With recent credit card rate increases, borrowers have the incentive to reduce balances, not boost spending.
In the mortgage markets, rates are reaching all time lows. But only a limited segment of mortgage borrowers are able to qualify for refinancing (and a lot that can refi have already done so). The people who need help the most (i.e., those underwater on their mortgages) find refinancing a tough slog, if possible at all.
In the business world, rates may or may not be dropping, depending on the creditworthiness of the borrower. Business people tend to be cautious right now, with all the headwinds from slowing economies in America and Asia, recession in Europe, the unsolvable Euro crisis, and near complete political dysfunction in Washington. Drops in interest rates aren't likely to greatly affect their view toward business borrowing, investment or hiring. That's evident from the fact that businesses are choosing to hold billions of dollars in cash for essentially no return rather than invest or hire. If you're not deploying your own cash to invest or hire, why would you borrow even at a low interest rate to invest or hire?
But the impact of low interest rates on savers is significant. Let's hypothetically take a relatively frugal American who is approaching or in retirement, and in 2006 had $750,000 in a diversified portfolio. During the financial crisis of 2007-08, this portfolio, we'll assume, was pummeled down to $500,000. Many investors victimized in this fashion have fled equities and put their reduced savings into fixed income investments. For the sake of simplicity, let's assume the Fed's war on interest rates kept the yield curve 1% below where it might have been with a somewhat more balanced approach by the Fed. (Thus, at the low end, the Fed would today be targeting a fed funds rate of 1 to 1.25% instead of today's 0 to 0.25%.) The interest lost by our hypothetical saver would be $5,000 a year. Compounded over 4 years, the saver would have lost about $20,302 before taxes. While this amount after taxes wouldn't buy a yacht, and only a modest car, consumption would probably be noticeably boosted if millions of Americans had enough additional money to buy a modest car.
Given that the Fed has promised to keep interest rates ultra low until late 2014, the lost income will reach approximately $30,760 per hypothetical saver in a couple of years. And this amount could increase if the Fed extends that promise into 2015 (a serious possibility).
It's important to keep in mind that these income losses are permanent. There is no way savers can recoup these losses. The Fed won't boost interest rates extra high later on in order to bail out the frugal. So savers' consumption will be permanently reduced.
The Fed claims to be greatly concerned with consumer expectations and their general state of mind, believing that public confidence is crucial to restoring demand and prosperity. The message sent by the Fed's long and continuing war on interest rates is that things are bad and will be bad for a long time. Any rational consumer, particularly those that are frugal to begin with, will hunker down, dig the fox hole even deeper, cover it with a sturdy layer of thick logs, camouflage it with an abundance of branches and brush, and never even dare to peek out.
The situation in Japan is illuminating. The Japanese central bank has, since its own financial crisis in 1989-90, banished positive interest rates from the land (encouraging the so-called carry trade, where Japanese citizens deploy their savings or borrowed yen into investments in foreign currencies that offer positive returns; thus Japan's capital is productively used in other nations). Japanese consumers have gone from being luxury hounds to penny pinchers and bargain hunters. Japan has been stagnant for more than two decades, and its most recent economic statistics show that the stagnation has become a seemingly permanent and undesired house guest. America appears to be headed down the same path. Although the headlines generated by politicians and candidates for political office promise solutions, hard evidence to be optimistic remains scarce. Even the tech sector, America's economic sweetheart, has offered a lot of disappointment lately, with Facebook's stock losing almost half its IPO valuation and other familiar tech companies serving up results akin to the financial equivalent of Spam quiche. Will America become Japan? This is no longer the question. The question now is how will America stop being like Japan.
The boost given to borrowers appears to be limited. Interest rates on credit cards have, if anything, been rising. This is in part due to changes in the law that have limited some of the fees with which banks previously whacked their customers. But the sharp drop in short term rates since 2008 has not been mirrored in the credit card market. With recent credit card rate increases, borrowers have the incentive to reduce balances, not boost spending.
In the mortgage markets, rates are reaching all time lows. But only a limited segment of mortgage borrowers are able to qualify for refinancing (and a lot that can refi have already done so). The people who need help the most (i.e., those underwater on their mortgages) find refinancing a tough slog, if possible at all.
In the business world, rates may or may not be dropping, depending on the creditworthiness of the borrower. Business people tend to be cautious right now, with all the headwinds from slowing economies in America and Asia, recession in Europe, the unsolvable Euro crisis, and near complete political dysfunction in Washington. Drops in interest rates aren't likely to greatly affect their view toward business borrowing, investment or hiring. That's evident from the fact that businesses are choosing to hold billions of dollars in cash for essentially no return rather than invest or hire. If you're not deploying your own cash to invest or hire, why would you borrow even at a low interest rate to invest or hire?
But the impact of low interest rates on savers is significant. Let's hypothetically take a relatively frugal American who is approaching or in retirement, and in 2006 had $750,000 in a diversified portfolio. During the financial crisis of 2007-08, this portfolio, we'll assume, was pummeled down to $500,000. Many investors victimized in this fashion have fled equities and put their reduced savings into fixed income investments. For the sake of simplicity, let's assume the Fed's war on interest rates kept the yield curve 1% below where it might have been with a somewhat more balanced approach by the Fed. (Thus, at the low end, the Fed would today be targeting a fed funds rate of 1 to 1.25% instead of today's 0 to 0.25%.) The interest lost by our hypothetical saver would be $5,000 a year. Compounded over 4 years, the saver would have lost about $20,302 before taxes. While this amount after taxes wouldn't buy a yacht, and only a modest car, consumption would probably be noticeably boosted if millions of Americans had enough additional money to buy a modest car.
Given that the Fed has promised to keep interest rates ultra low until late 2014, the lost income will reach approximately $30,760 per hypothetical saver in a couple of years. And this amount could increase if the Fed extends that promise into 2015 (a serious possibility).
It's important to keep in mind that these income losses are permanent. There is no way savers can recoup these losses. The Fed won't boost interest rates extra high later on in order to bail out the frugal. So savers' consumption will be permanently reduced.
The Fed claims to be greatly concerned with consumer expectations and their general state of mind, believing that public confidence is crucial to restoring demand and prosperity. The message sent by the Fed's long and continuing war on interest rates is that things are bad and will be bad for a long time. Any rational consumer, particularly those that are frugal to begin with, will hunker down, dig the fox hole even deeper, cover it with a sturdy layer of thick logs, camouflage it with an abundance of branches and brush, and never even dare to peek out.
The situation in Japan is illuminating. The Japanese central bank has, since its own financial crisis in 1989-90, banished positive interest rates from the land (encouraging the so-called carry trade, where Japanese citizens deploy their savings or borrowed yen into investments in foreign currencies that offer positive returns; thus Japan's capital is productively used in other nations). Japanese consumers have gone from being luxury hounds to penny pinchers and bargain hunters. Japan has been stagnant for more than two decades, and its most recent economic statistics show that the stagnation has become a seemingly permanent and undesired house guest. America appears to be headed down the same path. Although the headlines generated by politicians and candidates for political office promise solutions, hard evidence to be optimistic remains scarce. Even the tech sector, America's economic sweetheart, has offered a lot of disappointment lately, with Facebook's stock losing almost half its IPO valuation and other familiar tech companies serving up results akin to the financial equivalent of Spam quiche. Will America become Japan? This is no longer the question. The question now is how will America stop being like Japan.
Thursday, June 21, 2007
Debit or Credit?
If you have the choice of a debit card or a credit card, which should it be? The answer basically depends on your individual preferences. If you want a mechanism to make you live within your means, a debit card limits you to what's in your bank account. However, watch out for the temptation to tap into any overdraft protection you might have on your checking account--that's really nothing more than a line of credit with interest charges. And you have to monitor your bank account's balance continually, because debits that cause overdrafts are subject to overdraft fees. If you're the type to charge even your mid-afternoon coffee, a small charge that causes an overdraft can result in a fee much larger than the charge itself.
On the other hand, if you have an uneven income and/or uneven expenses, having the credit line provided by a credit card may be a convenience. The alternative would be to have a pool of savings that you could dip into as and when you needed it. But not everyone can set aside enough money to create that pool of cash. And for large purchases, credit cards are a must, unless you have a lot of cash saved up.
When it comes to theft or fraud, though, the rules tilt in favor of using a credit card. In general, your responsibility for unauthorized charges on a credit card is limited to $50, and some credit card companies waive even that. For debit cards, the limit is $50 if you report the loss of the card within two business days. But it goes up to $500 if you report the loss of the card after two business days. And if you're more than 60 days late reporting the loss of the card, you could be responsible for every penny in your bank account, plus the maximum amount of any overdraft protection on your account.
So how likely is it that you'd wait more than 2 days, or 60 days, before reporting the loss of a debit card, you ask? Not likely if someone pinches your wallet and you discover the loss minutes or an hour or two later. But that could be enough time for a clever crook to drain your bank account. Or, what if you use the debit card to buy something over the Internet, and a sleezemeister in a distant time zone steals your debit card number? You may not realize that you're in trouble until checks start bouncing and your bona fide charges are refused at the checkout lane. By then, your bank account could be empty and your overdraft protection entirely burned up. And all the legitimate checks and electronic payments you tried to send will bounce.
It could take the bank as many as 10 days to restore the funds to your bank account (because they'll want to investigate and make sure your claim of unauthorized use of the card is accurate). Unless you have a second bank account somewhere (preferably at a different bank for the sake of safety), you will have no cash, as in zero, zip, nada. And if this is a joint bank account for you and your spouse, you could be looking at a night or two on the living room couch.
Then, there's the question of all those checks and electronic payments that are bouncing. Maybe the bank will restore your funds eventually. But what about all the fees that other people are charging you for bouncing a check, or being late in making payment? You'll be late because you have to get them to resubmit the check to the bank after your account is restored, or because you'll have to resend the electronic payment after there's some money in the account to send. Ideally, everyone will be nice to you and not impose these fees. But you'll have to do a lot of explaining, and maybe a little begging and pleading.
With a credit card, your cash remains untouched, your legitimate checks and electronic payments won't bounce, and you're liable for $50 max. Yes, you'll have to contact the credit card company, and the sooner the better. But your worst case scenario is an argument with them about whether you owe them $50 or not, and many won't even hassle you over that.
Ultimately, the choice of credit or debit is a matter of personal preference. But if you prefer debit, be very, very careful with the card. Don't let others see your PIN. Don't use the card for Internet purchases. And keep track of your bank account balance. With a credit card, you have to rely on something else to control your spending besides the purchasing power of the card.
With either kind of card, you have to look over your monthly account statements carefully. These days, you never know if your card number has been stolen and a few charges quietly slipped onto your
account. A clever crook might do that to reduce the chances of detection. If you're not careful, you could be stuck with those charges, not because you'd necessarily be required to pay them but because you simply didn't notice them.
For more personal finance ideas, go to http://howtomakeamilliondollars.blogspot.com/2007/09/festival-of-under-30-finances.html.
Crime News: Stolen Homer Simpson statue recovered. http://www.wtop.com/?nid=456&sid=1171977. Whew. We're so relieved.
On the other hand, if you have an uneven income and/or uneven expenses, having the credit line provided by a credit card may be a convenience. The alternative would be to have a pool of savings that you could dip into as and when you needed it. But not everyone can set aside enough money to create that pool of cash. And for large purchases, credit cards are a must, unless you have a lot of cash saved up.
When it comes to theft or fraud, though, the rules tilt in favor of using a credit card. In general, your responsibility for unauthorized charges on a credit card is limited to $50, and some credit card companies waive even that. For debit cards, the limit is $50 if you report the loss of the card within two business days. But it goes up to $500 if you report the loss of the card after two business days. And if you're more than 60 days late reporting the loss of the card, you could be responsible for every penny in your bank account, plus the maximum amount of any overdraft protection on your account.
So how likely is it that you'd wait more than 2 days, or 60 days, before reporting the loss of a debit card, you ask? Not likely if someone pinches your wallet and you discover the loss minutes or an hour or two later. But that could be enough time for a clever crook to drain your bank account. Or, what if you use the debit card to buy something over the Internet, and a sleezemeister in a distant time zone steals your debit card number? You may not realize that you're in trouble until checks start bouncing and your bona fide charges are refused at the checkout lane. By then, your bank account could be empty and your overdraft protection entirely burned up. And all the legitimate checks and electronic payments you tried to send will bounce.
It could take the bank as many as 10 days to restore the funds to your bank account (because they'll want to investigate and make sure your claim of unauthorized use of the card is accurate). Unless you have a second bank account somewhere (preferably at a different bank for the sake of safety), you will have no cash, as in zero, zip, nada. And if this is a joint bank account for you and your spouse, you could be looking at a night or two on the living room couch.
Then, there's the question of all those checks and electronic payments that are bouncing. Maybe the bank will restore your funds eventually. But what about all the fees that other people are charging you for bouncing a check, or being late in making payment? You'll be late because you have to get them to resubmit the check to the bank after your account is restored, or because you'll have to resend the electronic payment after there's some money in the account to send. Ideally, everyone will be nice to you and not impose these fees. But you'll have to do a lot of explaining, and maybe a little begging and pleading.
With a credit card, your cash remains untouched, your legitimate checks and electronic payments won't bounce, and you're liable for $50 max. Yes, you'll have to contact the credit card company, and the sooner the better. But your worst case scenario is an argument with them about whether you owe them $50 or not, and many won't even hassle you over that.
Ultimately, the choice of credit or debit is a matter of personal preference. But if you prefer debit, be very, very careful with the card. Don't let others see your PIN. Don't use the card for Internet purchases. And keep track of your bank account balance. With a credit card, you have to rely on something else to control your spending besides the purchasing power of the card.
With either kind of card, you have to look over your monthly account statements carefully. These days, you never know if your card number has been stolen and a few charges quietly slipped onto your
account. A clever crook might do that to reduce the chances of detection. If you're not careful, you could be stuck with those charges, not because you'd necessarily be required to pay them but because you simply didn't notice them.
For more personal finance ideas, go to http://howtomakeamilliondollars.blogspot.com/2007/09/festival-of-under-30-finances.html.
Crime News: Stolen Homer Simpson statue recovered. http://www.wtop.com/?nid=456&sid=1171977. Whew. We're so relieved.
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