Paul Ferraresi

The new credit card law was signed into law in May 2009. This blog has previously written about the new terms that will dramatically affect you.

Now the credit card companies have until February 2010 to implement the new Government changes, but, each company can begin to change their programs starting immediately.

You must read every monthly statement and the T & C (terms and conditions). Many people are finding their credit lines are being cut, interest rates increased and payment cycles reduced. It is what it is, so, check your statements each month.

Other people are doing “plasectomies” with chainsaws on their cards. Keep in mind if you eliminate your cards, it will eventually negatively affect your credit scores with no activity. Also, the old adage holds true … it is better to have credit and not need it, than, need the credit and not be able to get it.

If you want to get back at the card company … charge things and pay them off in full immediately. They hate that!!!

A strong credit score can save you thousands in interest expense over your lifetime. There are many myths about how to maintain a strong score. A score of 720 or above will give you access to some of the best interest rates.

There are 3 credit rating agencies … Equifax, Experian and TransUnion. They all produce their own FICO Scores (developed from the Fair Issac Company) with various permutations and combinations of formulas. When you get all three company scores and if they are, say, 630, 721, and 752, then, the credit issuing company will use the middle score, in this case 721.

There are five components that go into your credit score and each makes up a percentage of your final score: Payment History (35%); amounts owed (30%); length of credit history (15%); new credit (10%) and types of credit (10%).

Some important thoughts to consider:
• The fastest way to ruin your credit score is with late payments
• Six months of on-time payments helps to build your score
• If you make a late payment, send a letter to the creditor and explain why it is late. Many times they will make an adjustment for you.
• Your payment history and amount owed is the most important items comprising 65% of your score
• Consistently pay more than the minimum due
• Keep the ratio of amount owed on the card to the credit line at no more than 40%. So with a $5,000 credit line never have the balance higher than $2,000. Yet, if you have a very low balance and you pay it off in full … it does you no good. Go figure!
• If you have a late payment history and pay off the entire balance, it does NOT clean up the late payments dings
• Credit history on a FICO score goes back 99 months (8¼ years for those with weak division skills)
• You can obtain 1 Free credit report per year per rating agency
• It takes 10 years for a bankruptcy to drop off and 7 years for adverse credit reports. Car loans and mortgages drop off in 4 years
• To rebuild credit get a gas card and/ or store charge, use it, but pay it off on time each month.

The average investor who tries to time the market habitually makes the wrong moves. Caught by the emotions of greed and fear, motivated by the media that constantly sells the “crisis du jour,” and not having a disciplined approach, they turn out to be the loser.

Look at today’s stock market. After skyrocketing from a market low in March 2009, the stock market (S&P 500) is up by over 40 percent, yet the main street investor is still disengaged and skeptical.

Looking back into the late 1990’s, most investors were confident that stocks were wealth-building perpetual-motion machines. Also the “buy and hold” disciples got religion around the top of the tech bubble in early 2000. At this point, the annualized trailing 10-year S&P 500 returns exceeded 15 percent, so the average investor poured into the market at the top. Bad move.
Today (October 2009), the trailing 10-year return is negative 2 percent (excluding dividends). It will stay weak until we absorb the melt-up returns of late 1999 and early 2000. Keep in mind the average rate of return for the S&P 500, since 1926, has been around 13 percent.

So, if the tremendous historical returns were a signal that was best left unheeded in 2000, then, do the lousy 10-year trailing numbers of today imply that … “the direction of mean reversion for asset classes will favor stocks again in the near future?”
Funny how the widespread acceptance of “buy and hold” was the mantra ten years ago, at the top, is being cast aside at the bottom. (Look back in history and you will see the same attitude every time the market drops.)

Research shows … over the previous period of negative decades, since 1900, the market was higher 70 percent of the time over the next one, three and five years. In fact, it was higher 100 percent of the time over the following decade. Also, the market returns over theses periods were, in general, better than average.

Keep in mind there are no guarantees for the future. At the same token, I have seen too many times over my career, how the markets always bounce back after severe setbacks (1973-74, 1981, 1987, 2000) and I believe the same will take place again. It will not be straight up, but I believe in America, the American people, the great companies of America and American ingenuity. Yet, I see people sitting on the sidelines until the market fully recovers and then they will invest at the top of the market … and … ride it down to a loss. They do it over and over again. Remember the definition of insanity?

Stay disciplined now … or experience regret later on …

Are IRAs Safe?

Retirement accounts are federally insured up to @250,000 per account at every bank. Congress raised the limit from $100,000 in 2006. This insurance is only for federally insured deposits.

The $250,000 limit for federal deposit protection applies to retirement accounts at banks and savings associations insured by the FDIC, as well as credit unions insured by the National Credit Union Administration (NCUA). (For non-retirement accounts, the FDIC or NCUA limit temporarily increased to $250,000 from $100,000 as part of 2008 Economic Stabilization Act, effective Oct. 3.)

The federal insurance coverage for retirement accounts applies to traditional and Roth IRAs, simplified employee pension (SEP) IRAs and savings incentive match plans for employees (SIMPLE) IRAs. In addition, the coverage also includes self-directed Keogh accounts, 457 plan accounts for state government employees and self-directed employer-sponsored defined contribution plans, including 401(K) and SIMPLE 401 (k) accounts.

DEFINING SELF-DIRECTED

For purposes of FDIC insurance, self-directed means that the plan participant can instruct administrators how his or her retirement funds are to be invested, including the ability to direct those funds to an FDIC-insured account. A retirement plan whose only investment option is the deposit accounts of a specified bank is not considered a self-directed account and is not covered by FDIC insurance. A plan for a single employee/employer can limit investments to a single option and will still be a self-directed plan under the insurance rules.

Under the FDIC/NCUA rules, all of an individual’s retirement accounts at the same insured bank are added together and insured up to a limit of $250,000. Thus, if you have $200,000 in a traditional IRA and $100,000 in a Roth IRA at ABC Bank, federal deposit insurance would cover $250,000 of those accounts, leaving $50,000 uninsured.

BENEFICIARY ISSUES

If an individual has a personal IRA and an inherited IRA at the same bank, they are insured separately for $250,000 each. Naming different beneficiaries on an individual’s retirement accounts will not affect the coverage limits for the individual, according to the rules.

If someone is a beneficiary of an account and not an owner, They have up to $250,000 in coverage on this account in addition to the $250,000 in coverage on their own personal IRA account. Retirement accounts are separately insured from any other deposits you may have at the same institution.

MOVING PARTS

For each IRA, you can do a rollover no more than once every 12 months (the once-per-year IRA rollover rule). If someone has done a rollover to or from an IRA within the past 12 months, they must wait until 12 months (365 days) have passed before doing a rollover from the same IRA. What happens if they violate the 12 month rule? They will owe income tax on the second withdrawal, plus 10% penalty if they are under age 59½, and those funds are no longer IRA funds.

The bottom line, then, is that you must check the history of each IRA account before determining whether you can do a rollover from it. Without this careful due diligence, you risk paying taxes and penalties on your retirement funds.

When a bank fails, depositors usually want to get their funds out as quickly as possible. That could mean receiving a check or cash. If the account is an IRA, a check made out to you is considered a rollover, and the 60-day rule and the once-per-year rollover limit both apply. If other IRA funds were rolled to or from the IRA account within the past 12 months, the depositor will have a taxable distribution.

To add insult to injury, if the funds come from an IRA at a failed bank and the balance is over $250,000, then, the depositor might only be able to withdraw $250,000 (the FDIC insured amount). But since that $250,000 cannot be rolled over to another IRA (because IRA funds were already rolled to or from that IRA within the past 12 months), then the entire $250,000 will be taxable and possibly subject to the 10% withdrawal penalty.

NON-BANK PROTECTION

Remember that FDIC/NCUA insurance applies only to bank deposits such as checking accounts, savings accounts, CDs and others. There is no federal deposit insurance for IRA investments in mutual funds, stocks, bonds and annuities; even if they are purchased from an FDIC- or NCUA- insured institution.

However, there is some protection for investments through the Securities Investor Protection Corp. (SIPC). Virtually all securities brokers belong to this organization. SIPC members contribute to a reserve fund that will reimburse investors up to $500,000 per customer, including up to $100,000 in cash.

Of course there is no SIPC reimbursement for investments that lose money.