Archive for June, 2007
Saturday, June 16th, 2007
Even though we’re still trying to avoid “lifestyle inflation”, we find that there are certain things that once you achieve, they are very, very hard to give up. Here’s just a few:
Living in a house, as opposed to an apartment
We started renting a single-family house two years ago, as opposed to a duplex or apartment complex. No more worrying about loud parties, television speakers, stomping feet, or people stealing my mail. No longer do I curse the invention of 5.1 surround sound and cheap speaker systems with subwoofers. I really don’t want to live in a condo again, but maybe I just need to live in nicer buildings than I used to…
Now I have to worry about not getting used to having too much square footage. I don’t think that’ll be a problem where we’re living, though.
Having your own washer and dryer
After having our own washer and dryer in the house, I don’t think I have ever go back to lugging 30 pounds of dirty laundry to the laundromat every few weeks. But somehow I did it for 7 years with no real ill effect. Of course, I did have to buy 30 pairs of boxers for those busy times when I couldn’t find time to make the trip.
Cellular phones
A few months ago I was actually trying to cancel my wireless service completely and have one less monthly bill, but I couldn’t pull the trigger. It’s actually pathetic how I use cell phones as a crutch for everything. Instead of actually making solid plans with people, everyone just wings it - “I’ll call you.” Instead of getting an address and using a map, you just call your friend once you get somewhere in the vicinity. I called a free 411 service about ten times this month alone when trying to find restaurant hours or locations. Good thing I found the Sprint SERO plan!
TiVo or other Digital VCR
I could probably live without cable TV, but if I have cable TV, I would need TiVo. I can’t really explain it. Just the idea of planning around commercial breaks or remembering to tape something every week seems completely alien to me now.
Is there an appliance, service, or other seemingly small thing that you now can’t live without?
Posted in Frugal Living | 41 Comments »
Thursday, June 14th, 2007
The hot real estate news this week is that interest rates on mortgage loans rose abruptly, thanks to some international happenings influencing Treasury rates here. According to this NY Times article, the national average for the 30-year fixed-rate mortgage jumped to 6.74 percent yesterday. At the beginning of the year, the average was only 6.18 percent.
As a potential homebuyer, my question is, will this be make homes more or less affordable? On one hand, rising interest rates will mean a bigger monthly payments for the same loan amount. But on the other, such higher payments may also start pushing home prices downwards. I’m sure the answer to this question is extremely complex, but I started to run some simple scenarios anyways.
Effect of Interest Rates on Monthly Payments
Here what happens when the rates change on a $300,000 loan:
As a rough estimate, when the interest rates rise by 1%, the mortgage payment rises by 11%. (Used the calculators at Dinkytown.)
Effect of Interest Rates on Affordability
For better or worse, lenders determine how much house you can afford by figuring out a maximum monthly payment based on your income. (I’ve written before about how these lending ratios can vary.) So if you keep the same maximum payment and the rates rise, then you can only afford a smaller loan amount. Here are some numbers starting with the previous example of a $300,000 loan.
So? Good or Bad?
I’m just using loan balances here, so I’m ignoring the dampening effect of house downpayments. And again, actual housing prices don’t fluctuate according to such simple rules. Maybe housing prices won’t drop enough to counter the higher payments from future interest rate hikes.
Still, one thing is for sure - people who have been shopping for homes may not be able to afford what they thought they could or maybe even were already pre-approved for. Rising interest rates can also affect the housing market in other indirect ways. For example, when people with adjustable-rate mortgage try to refinance to a lower fixed rate, they’ll either be rejected or still be faced with a much bigger mortgage payment. This may lead to more foreclosures and lower prices. At least I selfishly hope so…
Posted in Real Estate | 23 Comments »
Thursday, June 14th, 2007
As hundreds of high school kids run out this month and get their first summer job, they will also be greeted with their first wonderful paycheck… that and the phrase “What’s FICA and where did all my money go?” Ah, payroll taxes. First, some quick definitions of where your money is going other than federal, state, and local income taxes:
Social Security Tax
This is also commonly marked as FICA-O, SS, SSWT, or OASDI. If you work for an employer, 6.2% of your wages is withheld by the government for social security programs. Your employer also must contribute a 6.2% matching contribution that isn’t mentioned. For 2007, both the employee and employers contributions only apply to the first $97,500 of wages.
Medicare Tax
Also marked as FICA-M, MI, Med, or MWT, this tax is a flat 1.45% taken from your gross wages with no income limit to pay for Medicare, our national health insurance for the elderly. Your employer also kicks in another 1.45%.
Even though both of these contributions technically only go to pay current obligations and don’t even guarantee you benefits in the future, Uncle Sam is still taking 7.65% (15.3% total) out of each paycheck for help people survive their retirement years. It makes you wonder - shouldn’t we be doing at least the same on our end? Here are a few other observations from looking over my paystub:
Automatic Saving Helps Ensure Success
Notice how the government always get their payroll taxes before you even get cut a check. They know that in general people don’t budget well very well and tend to spend what they get. Can you imagine what would happen if everyone simply got a bill for Social Security and Medicare taxes at the end of the year? Yeesh. This is why you should “Pay Yourself First”, whether through automatic 401k deductions or automatic transfers into a savings account. It’s the best way to ensure it your savings will happen.
Pre-Tax Deductions Also Save On Payroll Taxes
Several other items can deducted from the paycheck automatically, on a pre-tax basis. Examples include:
- Health, Vision, and Dental Insurance
- Parking fees
- Healthcare Flexible Spending Accounts (FSAs)
- Dependent Care Spending Accounts
- Basic Life Insurance
I always thought that this just meant I didn’t have to pay income tax on these payments, but after doing some reverse math it turns out that I’m not subject to payroll taxes on them either! Try looking at your own paystub. That’s an additional 7.65% in savings on stuff that would otherwise be paid with after-tax money, making Flexible Spending Accounts and makes buying the employer health plan even a better deal than I had previously calculated.
Unfortunately, your 401(k) contributions are subject to SS/Medicare even though they are exempt from income taxes. However, when you make a withdrawal you do then pay income taxes, but not SS/Medicare. At least for now…
Posted in Taxes | 34 Comments »
Tuesday, June 12th, 2007
I’ve been toying again recently with the core and explore idea of putting a few thousand dollars into my Zecco account and testing out some active trading theories like options, swing-trading, technical analysis, fundamental analysis, whatever. I finally feel like I have a large enough portfolio that a thousand dollars is only a few percent of the total.
The money is already there, I just haven’t pulled the trigger yet. Now, I don’t have better than a 50/50 chance of beating the market, but I do think it would be fun to try and I could learn some things along the way. Does anyone else have a similar account?
In addition, I’ll be openly sharing all of my trades, and keeping track of my performance very carefully. That’s what I’ve always wanted - to actually see people who actively trade reveal their true performance. (And mock them - like you’ll be able to do to me! 
)
Posted in Investing | 48 Comments »
Tuesday, June 12th, 2007
If you run a business, even if only on the side, you still want to maximize the interest earned on your idle cash. Technically, if you’re a sole proprietor you can simply use a consumer high-interest savings account as there is no legal distinction between you and the business, but for accounting reasons it may be a good idea to separate the two. If you have an LLC or corporation, keeping your personal and business transactions separate is even more important.
While looking for a business-specific savings account, my criteria was a little different than before. I don’t mind rate-chasing a bit with personal accounts, but given the careful accounting records I need to keep, I wanted an institution I could stay with for a long time. Therefore, I was looking for (1) a consistently good rate even if not necessarily always the best, and (2) a place with good customer service.
After doing my research, I ended up opening a Fidelity Account for Businesses at Fidelity Investments several months ago, and it has been working well for me so far. Although you can buy everything from individual stocks to junk bonds with the account, I just keep use my core money market fund (FDRXX). It is actually a very flexible account, with the following features:
- FDRXX is currently yielding 4.96%.
- $2,500 to open, no annual fees.
- Minimum balance requirements waived since it is my Core account.
- Easy access: No limit transaction limit, free checkwriting, available ATM debit card
- Link electronically to multiple external bank accounts, quick transfers
- Great customer service, usually can reach a human in under a minute.
An new option has recently appeared - the ING Direct Orange for Business Savings Account, which also looks to be a competitive product:
- Currently yielding 5.00%
- No minimums, no fees
- Access is limited to online transfers to linked account
- Limit of 6 withdrawals per month due to being a savings account
- Only one linked account is allowed
- Good customer service, at least from what I’ve heard.
In a nutshell, the ING account is leaner and more simple, but it is harder to access your money. I like being able to keep most of my cash at Fidelity since I can write checks directly from that account instead of waiting for a transfer. I am also getting spoiled at Fidelity since whenever I call I get a courteous and knowledgeable human almost immediately! But I think either one would be a good addition for people currently using a business checking account paying little or no interest.
If I’m missing a great alternative, please let me know in the comments.
Posted in General | 17 Comments »
Monday, June 11th, 2007
Recently, my friend Yogin told me about a website called Farecast.com. It’s actually been around for a while now but somehow I’ve missed it… so maybe you have as well. There’s basically two parts to the website that are unique. Let’s say I’m planning a trip from Portland to San Francisco on 7/25-8/1. First they provide me the lowest fare history, which charts the lowest fare for your trip for up to the last 90 days:
Pretty cool! You can try to predict any trends yourself or simply see if you’re getting a good price relative to recent history. Another possible way to use the historical information is to help you decide what to bid on a site like Priceline.com or what to accept on Hotwire.
But FareCast also provides their own 7-day fare prediction to help you decide whether to buy now or wait. The arrow show how confident they are about it based on their algorithms:
To me, I would think the fare might actually rise more given the graph. But according to an independent audit, Farecast’s prediction accuracy was 74.5 percent. Not bad, but not awesome? But they’ll also put a little money where their mouths are by offering fare insurance when they are confident you should wait. Here’s how it works:
So you pay $10 upfront and wait. If they are wrong and prices go up, they reimburse you the difference. If they are right and prices go down, hopefully you saved at least $10. Worst case, prices stay the same and you’re out $10. This is interesting… anyone use this insurance before? Either way, I’ll definitely use this site in the future as part of my airfare research.
Added
Kayak is great, but don’t forget to try and book directly on the airline’s websites whenever possible, so you can take advantage of price drop refunds.
Posted in Frugal Living | 16 Comments »
Sunday, June 10th, 2007
First, I just want to say thanks for all the great and helpful comments on my post on trying to find a new mattress. I read every single comment, used many of them, and have purchased a new mattress! But before going into that I wanted to do a quick summary of all the tips.
Don’t go cheap. But don’t overpay, either.
Most readers, my friends, and even our parents told us not to go cheap on a mattress. People say you spend a third of your life on this thing. I agree that you shouldn’t buy solely based on price. But as you’ll see below, buying a mattress is intentionally confusing for the consumer, and the price on the exact same quality mattress can vary literally by a thousand dollars! So I respectfully disagree with “you get what you pay for”. Being frugal isn’t the same as being cheap! It’s shopping smart.
Go out to some stores and try them out.
Another good piece of advice that I got was to go out to the stores and try them all out. As reader and former mattress salesman Tim F suggests, you should wear some comfortable clothes (no skirts for women!) and spend at least 5 minutes laying on each bed exactly as you would normally sleep. You’re dropping a grand on something that’s supposed to last 10 years, so take your time and don’t let anyone rush you.
The exact same mattress can have 50 different names…
Chesterfield? Summerbrooke? Belmont? While looking at traditional coil mattresses, every single store had a different British name for what looked like the exact same bed. This is on purpose. From MattressHotline:
Why does each retailer have a different name for the same product?
This gives each retailer the opportunity to set their own unique price points and also give the perception of exclusivity.
Translation: We have huge profit margins, and we don’t want to enable you to easily comparison shop.
Check out this huge list of equivalent names just for the Simmons brand alone. I mean, I’ve heard of rebadging products, but a separate name for every store? Some brands attempt to justify this by using slightly different fabrics or designs that cover the identical mattresses. If you can figure out the name game, they also have comfort and durability guides that may be useful. (Thanks to reader John Tarnok.)
As for memory foam beds, I’m sure it’s equally hard to compare across brands. A salesperson said that Tempurpedic has a patent on their specific type of foam, so no other brand would be able to exactly offer the same product. My feeling is that as time goes by the copycats will catch up soon enough.
…so everyone can offer low-price guarantees.
You may have noticed that every single mattress store guarantees the lowest price. These names are why!! It gives them complete discretion. If they are willing to match your price, then they’ll give you an “equivalent” mattress (be careful that it is indeed equivalent). If they aren’t willing to go that low, they can simply say that it’s not the same mattress.
Our Experience - Trying to create our own Heavenly Bed
Like many people, we stayed at a Westin hotel (thanks to the Starwood American Express card) and we really liked their Heavenly Bed. In fact, you can buy the mattress and linens directly from them or also at Nordstrom’s. A queen mattress set with no linens is $1450 (including shipping). Recently there was even a 40% off coupon which someone was nice enough to e-mail me, but it’s now expired. So we had to create our own!
Read the rest of this entry…
Posted in Frugal Living | 34 Comments »
Friday, June 8th, 2007
Several people have asked me for some tips on how to find health insurance. I didn’t mean to scare anyone, but if my intense pain reminds someone to get insurance, at least something good came out of it! I did do some searching myself last year - the good news is that if you are young and in good health, you can get some high-deductible insurance for around $100 a month. The deductibles may still reach in the thousands, but $5,000 would be the least of your worries if you had just one serious incident. A reader got billed $3,075 for each CT scan taken!
Full-time Students
If your parents have family health insurance, you can usually remain covered under their plan until age 23 as long as you are a full-time student. For some states the age limit is even higher now. I know I did this as long as I could.
Otherwise, many universities will offer their own insurance package at a reduced cost. I knew someone over 40 who took a few units of community college every semester solely to qualify for the school’s cheap health coverage because it was cheap and took everyone regardless of pre-existing medical conditions. In my experience the quality of the plans varies wildly though, so I’d call around and compare first before signing up for rocks for jocks. I wonder if any online colleges are part of an affordable group plan?
Plans For Young Adults
A popular comparison site for health insurance is eHealthInsurance. I like it because they list a lot of the major insurers like Blue Cross Blue Shield, and you don’t have to give them your name or other personal information before seeing the plan’s specifics like monthly premium, deductible, and coinsurance percentage. They do require birth date and zip code. The quotes are usually for those in good health, so if you have pre-existing health problems the actual cost will be higher. Here are some sample results for a 28 year old male non-smoker in Oregon:
Cheapest:
Middle of the road: Lower deductible, higher monthly premium:
Another option to check out for those in CA, CO, GA, CT, NH, and NV is Tonik Health. It’s specifically for young hip folks (could they make the website any more tacky?), and they have plans starting from about $75 a month.
In certain states like Massachusetts, there may be special programs available directly from the state targeting young adults.
Otherwise, one might try a local independent insurance broker. (Yellow Pages?) I’ve never used one, but if you have specific needs or requests they might be able to better tailor a custom package. I did ask my State Farm insurance agent for a quote back when I was looking around, and it was pretty competitive.
Posted in Insurance | 26 Comments »
Friday, June 8th, 2007
This week was filled with wonderful firsts. I had:
- my first time cowering for an hour in the fetal position,
- my first emergency room visit,
- my first morphine shot,
- my first CT scan,
- …and my very first kidney stone!!
Ironically, I was just talking to a friend about how they planned to quit their corporate job and wander around the world for a while, working odd jobs like ski resort seasonal worker, bartender, or barista. Being the ever-practical geek, I pointed out that she should be sure to buy some health insurance or use COBRA. “I’ll just be real careful”, was the dreaded reply. Careful only gets you so far… (And I’m still waiting on my stone to pass!)
I haven’t gotten the hospital bill yet, but I’m sure it would be thousands of dollars without insurance. I’ll have to do the math and see if my decision to stay on my wife’s employer plan for $200 a month instead of going for the high-deductible HSA plan for $100-$150 per month was a good idea mathematically.
According to this PBS article Young Adults Fastest-Growing Group of Uninsured, the out-of-pocket costs can be pretty crazy:
Average day in hospital: $7,157
Burst appendix: $48,151
Fractured ankle, and a tib-fib fracture: $101,790
Geez, now I really want to see my bill.
Posted in Insurance | 72 Comments »
Thursday, June 7th, 2007
It appears that Zecco brokerage has now removed their minimum opening requirements, on top of their 40 free trades a month. I’m guessing this means you can start trading with any amount of money, which is nice because you can try them out with minimal commitment. You still need $2,000 to open a margin account, though. See my Zecco review for more information, and how to maximize the interest on your idle cash.
This got me to thinking - someone could now build the world’s tiniest diversified stock portfolio which tracks the entire world by buying:
- Vanguard FTSE All-World ex-US ETF (VEU) at ~$56 per share. This ETF essentially tracks the entire world’s publicly traded companies, minus that of the US, and holds over 1,500 representative stocks from 47 countries.
- Vanguard Total Stock Market ETF (VTI) at ~$151 per share. This ETF tracks the total US market via the Wilshire 5000 index and includes over 3,600 stocks.
To got the respective ratios approximately correct, you’d have to buy 3 shares of VEU and 1 share of VTI, for a total of only $319. This gives you 53% International/47% US, which is very close to how the market capitalization of the world is currently split up, which if I recall correctly is about 55%/45%.
I find it very cool that you can now track the world via over 5,000 stocks for about $300. With the free trades, the total cost to maintain this $319 portfolio would be just the slim expense ratios, which add up to… 53 cents a year!
…or you could just trade a bunch of stocks and do your best Warren Buffett imitation like everyone else is thinking.
Posted in Deals & Offers, Investing | 25 Comments »
Thursday, June 7th, 2007
Is it just me, or is CNBC TV becoming the financial network for those with 18-second attention spans? (Not that I’m not in their target audience!) Last night, I happened to catch their new series called The Millionaire Inside, which is supposed to bring together today’s “top money mentors” and share their secrets to success. The first episode, Your Guide To Wealth, included the following guests:
Even though I’ve never even heard of the last two, I actually had some hopes for this show… but after watching it I was completely underwhelmed. It was 30 minutes of each guru taking turns rehashing their same, old, vague sound-bites as to how to become a millionaire. In fact, the only amusing part was when Phil Town bashed real estate as a stupid investment compared to stocks, and the real estate folks started to get whipped in a tizzy. Here’s are the rest of my episode notes:
David Bach says:
- You can’t get rich with a budget. (How helpful!)
- Pay yourself first, make it automaticTM
- Buy a home as soon as possible, don’t rent.
Phil Town says:
- 15% annual return in stocks can be achieved with 15 minutes of research a week.
- Buy companies you know, when they are “on sale”.
- Rule #1 is “Don’t lose money”
- Don’t buy real estate, buy REITs instead
Loral Langemeier says:
- Be your own boss
- Make your own “cash machine” by starting your own business
- It’s okay to straddle, or keep your own job for a while.
Barbara Corcoran says:
- The shortcut to wealth is real estate
- Now is the perfect time to buy real estate, when everyone is unsure
- Set a goal to buy your 1st investment property in 6 months
Motivational? A little bit. Good advice? Some of it is, some of it is highly questionable. Vague? Nebulous? Oversimplified? YES.
Maybe the next few episodes will actually provide something actually practical or actionable, but I’m not holding my breath. If you don’t get CNBC, you can also download it for free on iTunes (search for “Millionaire Inside” or try this link.).
Posted in Investing, Real Estate | 26 Comments »
Tuesday, June 5th, 2007
While we’re on the topic of international banks, US-based Everbank does offer FDIC-Insured Certificates of Deposit denominated in various world currencies:
The three that stand out in interest rate perspective are the Icelandic krona, the New Zealand dollar, and the South African rand. But as I’ve said before, you are at the mercy of the future exchange rates on these currencies, so these should not be considered the equivalent of a dollar-denominated bank CD. FDIC only insures against bank failure - there is still the risk of loss of principal in these investments. According to Oanda, the exchange rates of the US dollar to the krona (USD:ISK) has varied by 23.4% within the last year, the New Zealand dollar (USD:NZD) has varied by 23.7%, and the South African rand (USD:ZAR) has varied by 19.3%.
From Wikipedia entry for the Icelandic krona:
As it stands, the Icelandic currency is a fully convertible but low-volume world currency, strongly managed by its central bank, with a high degree of volatility not only against the US and Canadian dollars, but also against the currencies of the other Nordic countries (Swedish krona, Norwegian krone, Danish krone and the euro). For example, during the first half of 2006, the Icelandic kr?na has ranged between 50 to 80 per US$.
If you bought US$100 of Icelandic Krona at 1:50, have it earn 15% in a year, but then exchange it back to US dollars at 1:80, you’d still be left with only US$72. Not so hot. Of course, if the opposite happened you could end up with $184! So really this seems like a way to make a bet against the dollar with a little bit of appreciation mixed in, if you feel so inclined. I’m amused by this option, but I think I’ll leave the gambling to Vegas for now. (The minimum investment is also $10,000.) I do want to visit Iceland though - perhaps for “investment research”? 
Added
Commenter Andy astutely points out that you’ll essentially be charged 1% in and out for a currency exchange fee as well - “The currency conversion rate will be within 1% of the wholesale spot price EverBank pays for the currency.” This will especially hurt the shorter-term CDs.
If you would like some more background on why interest rates in Iceland are so high, check out this NY Times article on Iceland’s fizzy economy. They are trying to tame inflation fueled by a hot stock market and housing boom, and definitely gives the vibe of a potentially volatile situation.
Posted in Banking, Investing | 49 Comments »
Tuesday, June 5th, 2007
You have seen via Google Ads on my or other financial sites advertising 8% CD rates from Millennium Bank. Wow, sounds great! But given the internet age, when you see “bank”, it could be from any corner of the world. The terms “certificate of deposit” or “savings account” may imply security here, but don’t necessarily mean anything internationally. The FDIC website gives some good guidance on Safe Internet Banking:
Read key information about the bank posted on its Web site.
Although it tries to distract you by saying it is owned by some Swiss trust company, if you read further it you find that Millennium Bank is located in the Caribbean nation of St. Vincent and the Grenadines (SVG). So, it’s not even located in the United States. From Wikipedia, St. Vincent has a population of just 119,000, it’s main industry is banana production, and has an unemployment rate of about 22%. Also of interest:
There is [...] a small offshore financial sector whose particularly restrictive secrecy laws have caused some international concern.
Does this sound like a place that you would want to keep your money? Maybe if you were trying to hide it! If something goes wrong, do you want to navigate a foreign system to get your money back?
Verify the bank?s insurance status.
This bank isn’t even located in the United States, so there’s no point in even running a bank search to see if it is FDIC insured. It doesn’t even appear to insure its deposits by any private or public agency. If a bank claims to be a subsidiary of a bank that is FDIC-insured, call the parent bank. If they’ve never heard of it, run away.
Gut check: Is it too good to be true?
Finally, risk and return are closely linked in legitimate bank products. If the best any other bank can do is barely 6%, there’s virtually no way a bank offering 8% return with the same level of risk. They have to be doing something riskier, whether it is making some currency bets or investing in lower-quality debt. Given the lack of disclosure of what these risks are, you might as well buy some junk bonds, which are at least rated by reputable independent companies.
Bottom line, I hope you’ll agree there’s absolutely no reason to put your money anywhere near this institution.
Posted in Banking | 224 Comments »
Monday, June 4th, 2007
About My Credit Card Debt
As usual, let me prevent any scathing e-mails by first explaining my high levels of credit card debt. In short, I’m borrowing money for free and keeping it in safe investments while earning me 5-6% interest. Along with other things, this helps me earn extra side income of thousands of dollars a year. Recently I wrote up a series of step-by-step posts on how I do this. Please do check it out if you are curious. This is why, although I have the ability to pay the balances off, I choose not too.
Commentary
- IRAs/401ks: The Dow breaks some arbitrary number!! Wee. While the CNBC shows have more things to chatter about, I continue to make my monthly $500 401(k) contributions.
- Brokerage: This consists of $2,173 in Bridgeway funds (BRSIX) and $1,054 of currently idle cash in my Zecco account.
- 529: This pops up because I ended up not using a portion of my 529 for tuition as intended. I guess the rest of this 529 will be left to grow for another 20 years until our kids need it.
- Good clean living (not really) gets us to $71,929 of non-retirement funds, reaching 67% of our midterm goal of house downpayment. Total cash is now $60,725.
You can see all my previous net worth updates here. Looking ahead to future expenses, we may buy some new furniture.
Posted in Goals | 29 Comments »
Sunday, June 3rd, 2007
I had written previously about renting out your credit score, which takes advantage of a loophole in the credit score formula and allows people with poor credit scores to pay others with excellent credit so as to be added as an authorized user. This currently legal act can boosts a poor credit score as much as 200 points, and is most commonly used to obtain a lower rate on their mortgage loans. As you might expect, lenders aren’t too happy about this.
According this AP article ‘Piggybacking’ Roils Credit Industry, this has led to some potential significant upcoming changes in the FICO scoring process:
Ninety percent of the largest U.S. banks base their loan decisions on FICO scores, which currently includes authorized user accounts. However, after discussions with lenders and industry officials, Fair Isaac said it intends to announce this week that all future versions of its FICO score methodology will no longer consider authorized user accounts, said Tom Quinn, Fair Isaac’s vice president of scoring solutions.
The next version is slated to roll out in September to one of the three main credit reporting agencies — Equifax Inc., Experian Information Solutions Inc. or TransUnion LLC — with the other two agencies receiving the new version some time in 2008.
Quinn also noted that some lenders generate their own scores using authorized user accounts in their calculations, so the practice may not be easily negated.
Other consumers besides credit renters stand to lose with the change, namely those for whom authorized user accounts were designed: college students on their parents’ cards and spouses with little to no credit of their own.
That’s too bad, I would think that there would be a better way to close the loophole. Perhaps simply make it illegal for one to accept money for adding an authorized user? That would at least shut down the websites running openly.
Posted in Credit Cards | 36 Comments »
