Message from CFP Board

-Eleanor Blayney, CFP^® Consumer Advocate, CFP Board

The decision-makers in the 91 million households in America with at least one credit card holder are facing harder and harder choices. Just when out-of-work, out-of-home consumers are struggling to make their card payments, many credit card issuers are raising interest rates, charging higher fees, or lowering credit lines. Capitol Hill is now trying to change all that: President Obama has signed into law a bill intended to help financially-strapped consumers by restricting the lending practices of a $1 trillion industry.

This approach was hotly contested. Many consumers and analysts fear that government protection of the credit-needy will come at the expense of the credit-worthy: Those who pose the least credit risk may end up with higher lending costs, in a paradoxical inversion of the basic economics of risk-management.

Whatever the result of Congress' decision, the sustainable, long-term solution lies not with policy but with behavior. Americans need to rethink the way we use credit cards, because we have bad habits when it comes to plastic. It's time for self-control in addition to - or instead of - government control.

Here are a few common American credit card practices that we need to change:

• Thinking of credit cards as a way to get what we want, as opposed to a way to complete a transaction. Credit cards are for convenience, NOT affordability. Having a credit card may enable us to get things we could not otherwise, but it does not make these things more affordable.
  
  
• Thinking of credit cards as revolving loans with no due dates. When you borrow money, you have to pay it back by a certain date. Credit card companies have encouraged us to pretend there is no due date, by allowing minimum payments that for all practical purposes extend the pay-back period to an impossibly distant (and financially ruinous) time horizon. When you borrow from your credit card company, you should be thinking of the duration of that loan as less than 30 days.
  
  
• Thinking of credit cards as substitute for money. We allow our children to use our credit cards as a means of giving them money for their wants and needs. But credit cards do not, and cannot, teach our children the same financial lessons that cash, a checking account, or a debit card can. Credit cards do not prevent overspending in the way that getting an "insufficient funds" notice or running out of cash does.

Exerting financial self-control takes effort, planning and a goal. And learning self-control does not mean you have to go it alone. There are qualified professionals who can help you rethink how your credit card can serve you, instead of the other way around, and become a useful tool to help you build a secure financial future. Talk to a CERTIFIED FINANCIAL PLANNER™ professional about ways to be smart about credit. Unlike the credit card companies, these advisors have plenty to lend in times like these, in the form of qualified, competent advice to help you reach your financial goals.

Top News Stories

Obama Signs Credit-Card Overhaul Legislation Into Law
Wall Street Journal (05/22/09) Pulizzi, Henry J.

President Obama signed into law May 22 a bill that limits credit card companies' ability to increase interest rates and fees. The bill forbids certain practices such as retroactive rate increases and restricts companies' marketing to teenagers and college students. Credit card companies are also now required to post agreements online, mail statements 21 days before payment is due, and end the practice of shifting payment dates. Obama said, however, that the law does not condone reckless borrowers' behavior.


New Survey Shows Need for Greater Financial Literacy
Coloradoan (05/16/09)

Results from the National Foundation for Credit Counseling's (NFCC) annual Financial Literacy Survey reveal that Americans need more financial literacy training. Of the U.S. adults polled for the survey, 41 percent gave themselves a grade of C, D, or F on their knowledge of personal finance, and only 42 percent track their overall spending. Twenty-six percent said they do not pay all of their bills on time, while 15 percent have been behind on a credit card payment. When it comes to saving, 32 percent reported having no savings. Of these, 29 percent said they would charge an emergency expense on their credit card, and 26 percent said they would take out a loan if they had to. Only 23 percent of adults surveyed said they are saving more now than they did a year ago due to the economic recession. More than half (57 percent) said they are spending less than they were a year ago, but 45 percent of this group admitted that they would revert to their old spending habits if their financial outlook improved within the next year.

Personal Finance News

Financial Wisdom From a New Graduate
New York Times (05/23/09) Lieber, Ron

Madison Nipp recently graduated from Texas Tech University with the highest grade point average of anyone in the financial planning program, and she will begin work as a financial adviser at USAA in June. Nipp is critical of a provision in the recently passed credit card bill that makes it more difficult for college students to obtain credit cards, noting that she was unable to sign an apartment lease on her own because her lack of a credit card meant she did not have the three-year credit history required by the management company. When working with clients, Nipp also is likely to emphasize the importance of a balanced checkbook to track spending and identify any bank errors and urge them to establish a budget. She notes that college students used to spending their parents' money are in for a reality check and must take care not to amass a large amount of debt. Nipp also cautions against homeownership without taking into consideration the costs beyond the monthly mortgage payment, and she will encourage clients to take advantage of 401(k) matching programs and place as much after-tax money as possible into Roth IRAs.


Hiring Financial Help
Women in Business (05/20/2009) Gerhart, Judith

When looking for a financial planner, you should focus on someone who has obtained special credentials. Designations such as CERTIFIED FINANCIAL PLANNER™ certification help ensure that the individual has completed training standards and has a certain level of experience. Also, investing is just one aspect of financial planning, so if insurance or tax advice is needed you should look for someone who offers a wide range of services. You should interview at least three financial planners to find a professional who provides the services you want and who works well with you.


A Report Card for Your 401(k) Plan
CNNMoney (05/19/09) Updegrave, Walter

Employees wishing to see how their 401(k) plans stack up to others have several resources at their disposal, including the Web site of a new independent rating service called BrightScope, which uses data gathered mostly from public filings to assign numerical scores to company 401(k) plans on a scale of 0 to 100, based on factors such as employer match, investment options, vesting schedule, and fees. Additionally, several organizations, including the Investment Company Institute and the Employee Benefits Research Institute, compile data about 401(k)s through surveys and various studies. Experts say that even if your plan isn't great, you should still consider taking advantage of the tax benefits that come with contributing. Furthermore, you should contribute enough to your plan to get any employer matching funds.


Getting Personal: Retirees Can Reset Social Security Benefits
Dow Jones Newswires (05/18/09) Knight, Victoria E.

Investors can collect higher Social Security payments if they defer the benefit to age 70, say financial advisors of middle- and high-income earners anxious about their retirement savings. Those who began collecting Social Security at age 62 and want to return to work may start over, so long as they return the payments they have already received. By deferring, experts say, retirees can earn an additional 7 percent to 8 percent a year until they turn 70. The recession has forced some workers who anticipated a comfortable retirement padded by 401(k) benefits, Social Security, and other investments to come out of retirement and recoup retirement losses. "They're looking to create a bigger financial cushion," says Evensky & Katz LLC wealth manager Brett Horowitz, CFP®, who is informing clients about their option to reset their Social Security benefits. However, many advisors recommend that workers in poor physical health apply for Social Security as early as possible in order to maximize the benefits.


Rebalancing Kids’ 529 Plans Requires Care
East Valley Tribune (AZ) (05/16/09) Warren, Rebecca

Some states are opting to offer 529 college savings plans that are insured by the Federal Deposit Insurance Corp. (FDIC). Arizona, Ohio, Montana, Virginia, and Utah have implemented FDIC-insured investment options like savings accounts and certificates of deposit (CD), according to InvestmentNews. Ideally, says Rebecca Warren, CFP®, 529 funds should be placed in a mixture of equities and fixed-income investments. Even during financially turbulent times, it is important that the portfolio have some possibility of growth. Rolling one's investments into conservative investments may lock in losses of as much as 40 percent, so do your homework. With regard to CD investments, it is not possible to roll over funds from a matured CD into a new one more than twice in 2009--and once in other years, so "laddering" your investment (purchasing at regular intervals) may be inhibited. However, newer plans are being created to automatically roll over mature CDs into shorter-term investments when funds reach their target date of use. It may be worthwhile to use the cash in a younger child's plan to pay for the tuition of the older child's. Eventually, the equity investments in the older child's plan may recover their losses and finance the younger child's tuition.


How to Create a Rainy Day Fund
Creston News Advertiser (05/14/09)

Financial experts recommend taking certain steps to ensure financial security, such as creating an emergency cash fund in the form of a savings or money market fund. This fund should be worth at least three months to six months of living expenses and can be used to cover unexpected costs like car repairs. It is also essential to have auto, homeowners, and healthcare insurance, and business owner insurance if necessary. While a person is still young, they should look into acquiring disability insurance that provides some income in the case of debilitating illness or injury; such insurance is less expensive and easier to get at a younger age. Supplemental medical insurance may be needed as a person gets older because Medicare usually fails to cover all healthcare expenses. Long-term care insurance should be considered for providing medical or personal care services at home or at a nursing home. Estate planning is also crucial, and entails collaborating with legal, financial, and tax specialists.

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