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Department staff, the announcement said, have been reviewing the 21 waterfowl refuges along the Missouri River and developing criteria to ...
Long-Term Care Health Insurance Provisions and Costs
by
Charles Lamson
Whether you purchase long-term care insurance as an individual or through an employer-sponsored plan, it is important to understand what you are buying. Substantial variation exists between products, so you must be especially careful to evaluate the provisions of each policy. Policy provisions are important factors in determining the premium for each policy. Let's take a closer look at the most important policy provisions to consider in purchasing long-term care insurance:
Type of Care. Some long-term care policies offer benefits only for nursing home care, whereas others pay only for services in the insured's home, such as skilled or unskilled nursing care, physical therapy, homemakers, and home health aides. Because you cannot easily predict whether a person might need to be in a nursing home, most financial planners recommend policies that cover both. Many of these policies focus on nursing home care, and any expenses for healthcare in the insured's home are covered in a rider (a provision of aninsurancepolicy that adds to or amends the coverage or terms) to the basic policy. Many policies also cover assisted-living, adult daycare and other community-care programs, alternative care, and respite care for the caregiver.
Eligibility Requirements. Some very important provisions determine whether the insured will receive payment for claims. These are known as gatekeeper provisions. The most liberal policies state that the insured will qualify for benefits as long as his or her physician orders the care. A common and much more restrictive provision pays only for long-term care that is medically necessary due to sickness or injury.
One common gatekeeper provision requires the insured's inability to perform a given number of activities of daily living (ADLs), such as bathing, dressing, or eating. Some policies also provide care for cognitive impairment or when medically necessary and prescribed by the patient's physician. In the case of an Alzheimer's patient who remains physically healthy, inclusion of cognitive abilities as ADLswould be extremely important. Newer policies no longer require a certain period of nursing home care before covering home healthcare services.
Services Covered. Most policies today cover several levels of service in state-licensed nursing homes; specifically skilled, intermediate and custodial care. Skilled care is needed when a patient requires constant attention from a medical professional, such as a physician or registered nurse. Intermediate care is provided when the patient needs medical attention or supervision but not the constant attention of a medical professional. Custodial care provides assistance in the normal activities of daily living, but no medical attention or supervision; a physician or nurse may be on call, however. Most long-term care policies also cover home care services, such as skilled or unskilled nursing care, physical therapy, homemakers, and home health aides provided by state-licensed or Medicare-certified home health agencies. Newer policies no longer require a certain period of nursing home care before covering home healthcare services.
Daily Benefits. Long-term care policies reimburse the insured for services incurred up to a daily maximum. For nursing home care policies, the daily maximums generally range from $50 to $300, depending on the amount of premium the insured is willing to pay. For combination nursing home and home care policies, the maximum home care benefit is normally half the nursing home maximum.
Benefit Duration. The maximum duration of benefits ranges from 1 year to the insured's lifetime. Lifetime coverage is very expensive, however. The consumer should realize that the average stay in a nursing home is now about 2.5 years (2005). Most financial planners recommend the purchase of a policy with a duration of 3 to 6 years to provide the insured with protection for a longer-than-average period of care.
Waiting Period. Even if the insured meets the eligibility requirements of his or her policy, he or she must pay long-term care expenses during the waiting or elimination, period. Typical waiting periods are 90 to 100 days. Although premiums are much lower for policies with longer waiting periods, the insured must have liquid assets to cover his or her expenses during that period. If the insured is still receiving care after the waiting period expires, he or she will begin to receive benefits for the duration of the policy as long as its eligibility requirements continue to be met.
Renewability. Most long-term care insurance policies now contain a guaranteed renewability provision to insure continued coverage for your lifetime as long as you continue to pay the premiums. This clause does not ensure a level premium over time, however. Nearly all policies allow the insurer to raise premiums if the claims experience for your peer group of policyholders is unfavorable. Watch out for policies with an optional renewability clause. These policies are renewable only at the option of the insurer.
Preexisting conditions. Many policies include a preexisting conditionsclause, ranging from 6 to 12 months. On the other hand, many policies have no such clause, which effectively eliminates one important source of possible claim disputes.
Inflation Protection. Many policies offer riders that, for an additional premium, allow you to increase your benefits over time so that benefits roughly match the rising cost of nursing home and home healthcare. Most inflation protection riders allow you to increase benefits by a flat amount, often 5 percent, per year.
Premium Levels. Long-term care insurance is expensive, and premiums vary widely among insurance companies. For example, a healthy 65 year-old may pay about $2,000 per year for a policy that pays for 4 years' care at $100 per day for nursing home care and $50 per day for home care, with a 100-day waiting period and a 5 percent inflation rider. The same coverage may cost a 50 year-old $850 per year, and a 79 year-old, $5,900 per year. Because of this marked rise in premium with age, some financial planners recommend buying long-term care insurance when you are fairly young.
smart sites
Confused about long-term care insurance coverage? The Guide to Long-Term Health Care at the Health Insurance Association of America site, www.hiaa.org, will provide the answers.
*SOURCE:PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 380-383*
You must choose one or more plans to provide coverage for you and your dependents. If you are employed, first review the various health insurance plans your company offers. If you can't get coverage from an employer, get plan descriptions and policy costs from several providers, including a group plan from a professional or trade organization. Then take your time and carefully read the plan materials to understand exactly what is covered, and at what cost. Next, add up what you have spent on medical costs over the past few years and what you might expect to spend in the future, so you can see what your costs would be under various plans.
How do you find health insurance if you have just graduated from college, don't yet have a job, and can no longer be covered by your parents' policy? Or maybe you are between jobs or need time to search out the best policy but do not want to be without protection.
You will have to ask yourself some difficult questions to decide whether you want an indemnity or a managed care plan, and then to choose the particular plan:
How important is cost compared with having freedom of choice? You may have to pay more to stay with your current doctor if he or she is not part of a managed care plan you are considering. Also, you have to decide if you can live with the managed care plan's approach to healthcare.
Will you be reimbursed if you choose a managed care plan and want to see an out of network provider? For most people, the managed care route is cheaper, even if you visit a doctor only once a year, because of indemnity plan "reasonable charge" provisions.
What type of coverage do you need? Everyone has different needs; one person may want a plan with good maternity and pediatric care, whereas another wants outpatient mental health benefits. Make sure the plans you consider offer what you want.
How good is the managed care network? Look at the participating doctors and hospitals to see how many of your providers are part of the plan. Check out the credentials of participating providers; a good sign is accreditation from the National Committee for Quality Assurance (NCQA). Are the providers' locations convenient for you? What preventive medical programs does it provide? Has membership grown? Talk to friends and associates to see what their experiences have been with the plan.
How old are you and how is your health? Many financial advisors recommend buying the lowest-cost plan---which may be an indemnity plan with a high deductible---if you are young and healthy.
Once you have considered all of the coverage and resources that are available to you, consider where gaps in your health insurance coverage potentially lie and how best to fill them. Doing this requires an understanding of the features, policy provisions, and coverage provided by various insurance carriers and policies.
smart.sites
What grade did your health plan get on its quality “report card” this year? The National Committee on Quality Assurance (NCQA) can tell you: www.ncqa.org.
*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 370-371*
Selecting a life insurance company is an important part of shopping for life insurance. In addition to looking for a firm that provides reasonably priced products, attractive contract features, and good customer service, it is vital to consider the financial health of any insurance firm before buying a life insurance policy. You want to be certain that the company will be around and have the assets to pay your beneficiaries should you die. Even before you die, however, the financial stability of your insurance company is important. If the company fails, you may be forced to buy a new policy at less-favorable rates.
To narrow your choices, age and size are useful indicators. Unless a good reason exists to do otherwise, you should probably limit the companies you consider to those that have been doing business for 25 years or more and that have annual premium value in excess of $50 million. Although these criteria will root out a lot of smaller firms, there will be plenty of companies left from which to choose. You may also find that one company is preferable for your term protection and another for your whole life needs.
Factors to consider before making the final choice include the firm's reputation, financial history, commissions and other fees, and the specifics of their policy provisions. If you are choosing a company for a cash value life insurance policy, the company's investment performance and dividend history is also an important consideration and dividend history is also an important consideration.
How do you find all of this information? Luckily, private rating agencies have done much of the work for you. These agencies use publicly available financial data from insurance companies to analyze their debt structure, pricing practices, and management strategies in an effort to assess their financial stability. The purpose is to evaluate the insurance company's ability to pay future claims made by policyholders, known as claims paying ability. In most cases, insurance firms pay ratings agencies a fee for this rating service. The ratings agencies then give each insurance firm a "grade" based on their analysis of the firm's financial data.
The three biggest rating agencies include A.M. Best Company, Moody's Investor Service, and Standard & Poor's Corporation (S&P). Two smaller, but growing, rating agencies are Fitch Inc. and Weis Ratings, Inc. Weiss does not charge a fee to the insurance firms it examines. Exhibit 1 provides detailed contact information for each of the major rating agencies, including their Internet addresses. Basic rating information is usually free of charge at these sites. You can also usually find these ratings on the insurance company's Web site, or you can ask your agent how the company is rated by Best's, Moody's, and S&P.
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Each rating agency uses its own grading system. When looking at these ratings, however, keep several things in mind. With the exception of Moody's and Weiss, the ratings agencies will not publish a firm's rating if the insurer requests that it be withheld. Obviously, an insurance firm receiving a low rating is more likely to suppress publication, something that should be viewed as a clear signal that it is an insurance company to avoid. Also, remember that a high rating does not insure lasting financial stability. Even highly rated insurance firms can quickly encounter financial difficulties. In fact, in a recent report A.M. Best noted that fewer life insurers are receiving top ratings. It is a good idea, therefore, to check the ratings of your insurance carrier periodically even after you have purchased a policy.
Most experts agree that it is wise to purchase life insurance only from insurance companies that are assigned ratings by at least two of the major rating agencies and are consistently rated in the top two or three categories (say, Aaa, Aa1, or Aa2 by Moody's) by each of the major agencies from which they received ratings.
*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 345-346*
Life insurance planning is an important part of every successful financial plan. Its primary purpose is to protect your dependents from financial loss in the event of your untimely death. In essence, it provides an umbrella of protection for your loved ones by protecting the assets you've built up during your life and providing funds to help your family reach important financial goals even after you die.
Benefits of Life Insurance
In spite of its importance to sound financial planning, many people put off the decision to buy life insurance, in part because life insurance is associated with something unpleasant in many people's minds---namely, death. People do not like to talk about death or the things closely associated with it, so they often put off considering their life insurance needs. Life insurance is also intangible. You cannot see, smell, taste, or touch its benefits---and those benefits mainly happen after you have died. However, life insurance does have very important benefits that should not be ignored in the financial planning process.
The benefits of life insurance include:
Financial Protection for Dependents: If you have family or loved ones who depend on your income, what would happen to them after you die? Would they be able to maintain their current lifestyle, stay in your home, or afford a college education? Life insurance provides a financial cushion for your dependents, giving them a set amount of money after your death that they can use for many different purposes. For example, your spouse may use your life insurance proceeds to pay off the mortgage on your home so your family can continue to live there comfortably or set aside funds for your child's college education. In, short, the most important benefit of life insurance is providing financial protection for your dependents after your death.
Protection from Creditors: A life insurance policy can be structured so that death benefits are paid directly to a named beneficiary rather than being considered as part of your estate. This means that even if you have outstanding bills and debts at the time of your death, creditors cannot claim the cash benefits from your life insurance policy, providing further financial protection for your dependents.
Tax Benefits: Life insurance proceeds paid to your heirs, as a rule, are not subject to state or federal income taxes. Further, if certain requirements are met, policy proceeds can pass to named beneficiaries free of any estate taxes.
Vehicle for Savings: Some types of life insurance policies can serve as a savings vehicle, particularly for those who are looking for safety of principal. In particular, variable life policies are more investment vehicles than they are life insurance products. However, do not assume that all life insurance products can be considered savings instruments. The comparison is often inappropriate.
Just like other aspects of personal financial planning, life insurance decisions can be made easier by following a step-by-step approach to answer the following questions:
Do you need life insurance?
If so, how much life insurance do you need?
Which type of life insurance is best given your financial objectives?
What factors should be considered in making the final purchase decision?
Do You Need Life Insurance?
The first question to ask when considering the purchase of life insurance is if, in fact, you need it. Not everyone does. Many factors, including your personal situation and other financial resources, play a role in determining your need for life insurance. Remember, the major purpose of life insurance is to provide financial security for your dependents in the event of your death. Life insurance can also provide other benefits but they are all a distant second to this primary reason for buying life insurance.
Who needs life insurance? In general, life insurance should be considered if you have dependents counting on you for financial support. Therefore, a single adult who does not have children or other relatives to support may not need life insurance at all. Children also usually do not require insurance on their life.
Once you marry, your life insurance requirements should be reevaluated, depending on your spouse's earning potential and assets---such as a house---that you want to protect. The need for life insurance increases the most when children enter the picture, because young families stand to suffer the greatest financial hardship from the premature death of a parent. Even a non-wage-earning parent may require some life insurance to assure that children will be adequately cared for if the parent died.
As families build assets, their life insurance requirements continue to change, both in terms of the amount of insurance needed and the type of policy necessary to meet their financial objectives and protect their assets. Other life changes will also affect your life insurance needs. For example, if you divorce or your spouse dies, you may require additional life insurance to protect your children. In contrast, once your children finish school and are on their own, the need for life insurance may drop. In later years, life insurance needs vary depending on the availability of other financial resources, such as pensions and investments, to provide for your dependents.
*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 322-323*
Matt Salvatore, director of the department, said the city plans to clear an access path to the Old Missouri River Trail monument, a small gray ...
Bankruptcy: Paying the Ultimate Price for Credit Abuse
by
Charles Lamson
It certainly would not be an overstatement to say that during the 1980s and 1990s, debt was in! In fact, the explosion of debt that has occurred since 1980 is almost incomprehensible. The national debt rose from less than a trillion dollars when the 1980s began to about $21.6 trillion on October 28, 2018. Businesses also took on debt at a rapid pace. And not to be outdone, consumers were using credit like there was no tomorrow. So it should not be too surprising that when you couple the heavy debt load with a serious economic recession (like the one we had in 1990 to 1991) and a very slow economic recovery (from 1992 to 1993), you have all the ingredients of a real financial crisis. And that is what happened, as personal bankruptcies soared---indeed, nearly a million people a year filled for personal bankruptcy during that period. Even during the strong economic expansion from 1994 to 1997, the number of bankruptcies continued to climb.
When too many people are too heavily in debt, a recession (or some other economic reversal) can come along and push many of them over the edge. But let's face it, the recession is not the main culprit here, because the only way a recession can push you over the edge is if you are already sitting on it! The real culprit is excess debt. Some people simply abuse credit by taking on more than they can afford. Maybe they are pursuing a lifestyle beyond their means, or an unfortunate event---like the loss of a job---takes place.
Whatever the cause, sooner or later, they start missing payments and their credit rating begins to deteriorate. Unless some corrective actions are taken, this is followed by repossession of property, and eventually, even bankruptcy. these people basically have reached the end of a long line of deteriorating financial affairs. Households that cannot resolve serious credit problems on their own need help from the courts. Two legal remedies that are widely used under such circumstances include (1) the Wage Earner Plan and (2) straight bankruptcy.
Wage Earner Plan
The Wage Earner Plan (as defined in Chapter 13 of the U.S. Bankruptcy Code) is a workout procedure that involves some type of debt restructuring---usually by establishing a debt repayment schedule that is more compatible to the person's income. It may be a viable alternative for someone who has a steady source of income not more than $750,000 in secured debt and $250,000 in unsecured debt and a reasonably good chance of being able to repay the debts in 3 to 5 years. A majority of creditors must agree to the plan, and interest charges, along with late payment penalties, are waived for the repayment period. Creditors usually will go along with this plan because they stand to lose more in a straight bankruptcy. After the plan is approved, the individual makes periodic payments to the court, which then pays off the creditors. Throughout the process, the individual retains the use of, and keeps title to, all of his or her assets. Chapter 13 filings account for less than 30 percent of all personal bankruptcies.
Straight Bankruptcy
Straight bankruptcy, which is allowed under Chapter 7 of the bankruptcy code, can be viewed as a legal procedure that results in "wiping the slate clean and start anew." About 70 percent of those filing personal bankruptcy choose this route. However, state bankruptcy does not eliminate all the debtor's obligation, nor does the debtor necessarily lose all of his or her assets. For example, the debtor must make certain tax payments and keep up alimony and child-support payments but is allowed to retain certain payments from Social Security, retirement, veterans', and disability benefits. In addition, the debtor may retain the equity in a home (up to $17,425), a car (up to $2,775), and other personal assets, such as clothing, books, and tools of his or her trade. These are minimums as established by federal regulation; generally, state laws are much more generous with regard to the amount the debtor is allowed to keep. The choice of federal or state regulations would depend on the debtor's assets.
Other Bankruptcy Options
Although most individual bankruptcies involve either straight liquidations or Wage Earner Plans, several other options have been added recently. To begin with, the U.S. Supreme Court ruled that individuals could now file for reorganization under Chapter 11 of the bankruptcy code---a type of bankruptcy that had been previously reserved mostly for businesses. Chapter 11 bankruptcy is for individuals who do not qualify for Chapter 13 reorganization---either because they exceed the debt limitations or do not have a regular source of income---but who want to try to restructure their debt. For these people, Chapter 11 is really the only alternative to straight bankruptcy. Like the Wage Earner Plan discussed above. Chapter 11 filers can restructure their debts, or a portion of them to be repaid over time. The big difference is that in Chapter 11 bankruptcies, the creditors vote on---and can possibly block---the restructuring plan. This, of course, means the reorganization process can drag on for years and and involve hefty legal fees, which probably explains why Chapter 11 is used in only about 1 percent of all personal bankruptcies.
The second alternative now available is a so-called Chapter 20 bankruptcy---it is labeled as such because it combines parts of both Chapters 7 and 13. Although not actually a part of the bankruptcy code, the procedure allows individuals to wipe out their unsecured debt as per Chapter 7, and then use Chapter 13 to restructure their secured debt, including mortgages, home equity loans, and nondischargeable debts, such as certain tax and child support payments.
*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 265-267*
Does it seem that every week there is at least one new credit card application in your mailbox? Well, there's a very good reason for that, because each year, the 20,000 or so institutions and organizations that issue these cards mail out over 3 billion credit card applications! Everyone of these unsolicited pieces of junk mail try to give the impression that their offer is better than all the rest. It is very easy to be overwhelmed by all these choices. And although we've discussed in earlier posts how credit cards and revolving lines of credit can simplify your life financially, you can get into trouble unless you use them wisely. That is why you should carefully shop around to choose the right credit cards for your personal situation, understand the advantages and disadvantages that credit cards present, know how to resolve credit problems, and how to avoid the ultimate cost of credit abuse---bankruptcy.
Shop Around for the Best Deal
They say it pays to shop around, and when it comes to credit cards, that adage certainly holds true. With all the fees and high interest costs, it pays to get the best deal possible. So, where do you start? Most credit experts suggest the first thing you should do is step back and take a look at yourself. What kind of "spender" are you, and how do you pay your bills? The fact is, no single credit card is right for everyone. If you pay off your card balance each month, you will want a card that is different from the one that is right for someone who carries a credit balance from month to month and may only pay the minimum due.
Regardless of which category you fall into, there are basically four card features to look for:
Annual fees
Rate of interest charged
Length of the grace period
Method of calculating balances
Now, if you normally pay your account balance in full each month, get a card with no annual fees and a long grace period. The rate of interest on the card is really irrelevant, since you do not carry account balances from month to month anyway.
In sharp contrast, if you do not pay your account in full, then look for cards that charge a low rate of interest on unpaid balances. The length of the grace period is not all that important here, but obviously, other things being equal, you are putting off with low (or no) annual fees. Sometimes, however, "other things aren't equal," in which case you have to decide between interest rates and annual fees. If you are not a big spender and do not build up big balances on your credit card (i.e., the card balance rarely goes above $400 or $500), then avoid cards with annual fees and get one with as low a rate of interest as possible. On the other hand, if you do carry big balances (say, $1,000 or more), then you will probably be better off paying an annual fee (even a relatively high one) to keep the rate of interest on the card as low as possible. For example, with a $2,000 average balance, your total yearly finance charges (including annual fees) will be less with a card that has, say, a $50 annual fee and an interest rate of 15 percent than one which has no annual fee but charges a higher (19 percent) rate of interest.
The bottom line is---do not take the first credit card that comes along. Instead, get the one that is right for you. To do that, learn as much as you can about the credit cards you've been offered or are considering. Be sure to read the credit agreement carefully and look for information about annual fees, grace periods, interest rates, and how finance charges are calculated. And do not overlook all those other charges and fees you may get socked with if you are ever late with a payment or go over your credit limit; not that you are going to make it a habit of doing these things, but just in case. Also, if the local deals aren't all that great, you might want to consider cards that are offered nationally. Many banks market their cards throughout the United States, and it may pay to check them out. To help you do that, look to publications like Money magazine and Kiplinger's Personal Finance magazine. They have Internet sites located at www.money.com and www.kiplinger.com, respectively. These magazines and Internet sites regularly publish information about banks and other financial institutions that offer low-cost credit cards nationally.
One final point: Some people, it seems, spend a lot of time and energy shopping for deals, jumping from one card to another to take advantage of low introductory rates. Although a strategy like this may result in lower payments, it can backfire if the low rates significantly rise after the introductory period, or if you miss a payment. A wiser approach is to shop around, check for better deals from time to time, and then direct the rest of your energy toward working to reduce (or even eliminate) any monthly balances.
*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 260-261*
Basically, a credit bureau is a type of reporting agency that gathers and sells information about individual borrowers. If, as is often the case, the lender does not know you personally, it must rely on a cost effective way of verifying your employment and credit history. It would be far too expensive and time-consuming for individual creditors to confirm your credit application on their own, so they turn to credit bureaus that maintain fairly detailed credit files about you.
Contrary to popular opinion, your credit file does not contain everything anyone would ever want to know about you---there is nothing on your lifestyle, friends, habits, or religious or political affiliations. Instead most of the information is pretty dull stuff, and covers such things as:
Your name, Social Security number, age, number of dependents, and current and previous addresses
Your employment record, including current and past employers and salary data, if available
Your credit history, including the number of loans and credit lines you have, number of credit cards issued in your name, your payment record, and account balances
Public records data involving bankruptcies, tax liens, foreclosures, civil suits, and criminal convictions
The names of firms and financial institutions that have recently requested copies of your file
While one late MasterCard payment probably will not make much of a difference on an otherwise clean credit file, a definite pattern of delinquencies (consistently being 30 to 60 days late with your payments) or a personal bankruptcy certainly will. Unfortunately, poor credit traits will stick with you for a long time, because delinquencies will remain on your credit file for as long as 7 years, and bankruptcies for ten years.
Local credit bureaus (there are about a thousand of them) are established and mutually owned by local merchants and banks. They collect and store credit information on people living within the community and make it available, for a fee to members who request it. Local bureaus are linked together nationally through one of the "big three" national bureaus---Trans-Union, Equifax Credit Information Services, and Experian---each of which provides the mechanism for obtaining credit information from almost any place in the United States. It is important to understand that credit bureaus merely collect and provide credit information. They do not analyze it, they do not rate it (or at least they're not supposed to), and they certainly do not make the final credit decision.
Credit bureaus have been heavily criticized because of the large numbers of reporting errors and their poor record in correcting these errors on a timely and efficient basis. And consumers have been frustrated by the time-consuming process and credit bureaus' apparent "care less" attitude about their mistakes---as far as they are concerned, you are guilty until you are proven innocent. Fortunately, things have changed in recent years as the major credit bureaus have taken a more consumer oriented approach, greatly improving their customer service and dispute resolution procedures and making reports easier to read. Many of these changes were formalized by a 1995 amendment to the Fair Credit Reporting Act that established industry guidelines for credit reporting procedures. According to this legislation, credit bureaus must provide you with low-cost copies of your own credit report, and they must have toll-free phone numbers. Disputes must be resolved in 30 days and take the consumer's documentation into account, not just the creditor's.
Even with these changes, though, credit bureaus still make mistakes. Unfortunately, when they do, it can mean big problems for you, because a credit report can effect whether or not you get credit. Millions of Americans have learned the hard way that their credit records are riddled with errors. You should ensure that your credit report accurately reflects your credit history. The best way to do this is to obtain a copy or your own credit report, and then go through it very carefully. If you do find a mistake, let the credit bureau know immediately---and by all means, put it in writing; then request a copy of the corrected file to make sure that the mistake has been eliminated. Most consumer advisors recommend that you review your credit files annually.
You are entitled to one free copy of your credit report every 12 months from each of the three nationwide credit reporting companies. Order online from annualcreditreport.com, the only authorized website for free credit reports, or call 1-877-322-8228.
*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, PGS. 251-253*
Here is a familiar situation. A couple buys a home for $85,000; some 10 years later, it is worth $165,000. The couple now has an asset worth $165,000 on which all they owe is the original mortgage, which may now have a balance of, say, $45,000. The couple clearly has built up a substantial amount of equity in their home: $165,000 - $45,000 = $120,000. But how can they tap that equity without having to sell their home? The answer is to obtain a home equity credit line. Such lines are like unsecured personal credit lines except that they are secured with a second mortgage on the home. Offered by most banks, S&Ls, major brokerage firms, and a growing number of credit unions, these lines of credit allow you to tap up to 100 percent of the equity in their homes, or in some cases, even more---the majority of the lenders set their maximum credit lines at 75 to 80 percent of the market value of the home, which reduces the amount of money they will lend. For a variety of reasons, including attractive tax features, the popularity of home equity credit lines has grown almost exponentially. Indeed, the amount of home equity loans outstanding today actually exceeds the amount of credit card debt outstanding!
Here is how these lines work. Recall the couple in our example has built up an equity of $120,000 in their home---equity against which they can borrow through a home equity credit line. Assuming they have a good credit record and using a 75 percent loan-to-market value ration, a bank would be willing to lend up to $123,750; that is, 75 percent of the value of the home is .75 x $165,000 = $123,750. Subtracting the $45,000 still due on the first mortgage, we see that our example could qualify for a home equity credit line of a whopping $78,750. Note, in this case, that if the bank had been willing to lend the couple 100 percent of the equity in their home, it would have given them a (much higher credit line of $120,000, which is the difference between what the house is worth and what they still owe on it. Most lenders do not like to do this because it results in very large credit lines and, perhaps more important, it does not provide the lender with much of a cushion should the borrower default.
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If you need a home equity line of credit but your credit is not the best, Bankrate.com can point you to the best rates in your own state or suggest a more distant bank with a good deal: www.bankrate.com.
Home equity lines also have an interesting tax feature that you should be aware of---that is, the annual interest charges on such lines may be fully deductible for those who itemize. This is the only type of consumer loan that still qualifies for such tax treatment. According to the latest provisions of the tax code, a homeowner is allowed to fully deduct the interest charges on home equity loans of up to $100,000, regardless of the original cost of the house or use of the proceeds. Indeed, the only restriction is that the amount of total indebtedness on the house cannot exceed its fair market value---which is highly unlikely, because homeowners usually cannot borrow more than 75 to 80 percent of the market value of the house anyway. (Effectively, the interest on that portion of the loan that exceeds $100,000, or 100 percent of the market value of the house---whichever is lower---cannot be treated as a tax-deductible expense.) In our preceding example, the homeowners could take out the full amount of their credit line ($78,750), and every dime they paid in interest would be tax-deductible. If they paid, say, $7,400 in interest, and if they were in the 28 percent tax bracket, this feature would reduce their tax liability by some $2,070---(i.e., $7,400 x .28)---given, of course, that they itemize their deductions.
Not only do home equity credit lines offer shelter from taxes, they are also among the cheapest forms of consumer credit. For example, while the average rate on standard credit cards in mid-2003 was 13.8 percent, the average rate on home equity credit lines was less than half that, or 6.2 percent. To see what that can mean to you as a borrower, assume you have $10,000 in consumer debt outstanding. If you had borrowed that money through a standard consumer loan at, say, 9.5 percent, you would pay interest of $950 per year---none of which would be tax deductible. But borrow the same amount through a home equity credit line at 6.2 percent, and you will pay only $620 in interest. That is all tax deductible though, so if you are in the 28 percent tax bracket, the after-tax cost to you would be $620 x (1 - .28) = $446. This is less than half the cost of the other loan! So, which would you rather pay for a $10,000 loan, $950 or $446? That is really not a tough decision, but it does explain, in large part, why these lines have become so popular and are today one of the fastest growing forms of consumer credit.
Home equity credit lines are offered by a variety of financial institutions, from banks and S&Ls to major brokerage houses. All sorts of credit terms and credit lines are available, and most of them carry repayment periods of 10 to 15 years, or longer. What is perhaps most startling, however, is the maximum amount of credit available under these lines---indeed, $100,000 figures are not at all unusual. And it is precisely because of the enormous amount of money available that this form of credit should be used with caution. The fact that you have equity in your home does not mean that you have the cash flow necessary to service the debt that such a credit line imposes. Remember that your house is the collateral. If you cannot repay the loan, you could lose it! At the minimum, paying for major expenditures through a home equity credit line should be done only after you have determined that you can afford the purchase and the required monthly payments will fit comfortably within your budget.
*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 248-250*
