PT Money

Sallie Mae Bank Savings Account: Includes a Upromise 10% Bonus

PT — Thu, 11 Mar 2010 20:32:06 +0000

Why is Sallie Mae a Bank Now?

Sallie Mae is getting into the online savings business. It makes sense I guess. They offer college loans and are finding, just like any lender, that they can do more loans by possibly taking on customers via online savings. Perfect marketing strategy actually. Get a bunch of guys like me with a kid to save money in their savings account and then by the time my kid needs to go to college, I use my savings, 529 plan, and add on a Sallie Mae loan to cover the rest. Genius.

Also, it probably doesn’t hurt them to get a nice influx of cash right now. That, plus, I think online banking is just becoming more acceptable these days, and since Sallie Mae doesn’t have to build bank buildings to make this happen, it works out for them.

About the Sallie Mae Savings Account

Their savings account it pretty straight forward. The rate is good compared to other online savings accounts. There is no minimum balance requirements like EverBank has. Although there are some minimum requirements if you want to take advantage of the 10% Upromise earnings match. See more below.

Fees? The only fees that I see on the account are a $5 statement fee (which you incur only if you have a statement mailed to you) and a excessive transaction fee (which is standard for online savings accounts) of $10 for each monthly withdrawal over 6. These fees are online savings industry standard and should never affect you if you just use the account as a normal savings account.

Certificates of Deposit

There are three different CD options at Sallie Mae: 12 months, 36 months, and 60 months. The rates are pretty straight forward and there are no minimums. The early withdrawal fees are standard. See how they compare with other CD rates and consider a CD laddering strategy.

Upromise 10% Annual Match on Earnings

This is where the Sallie Mae savings account shines. If you are Upromise user and earn a decent amount from Upromise each year, you will want to take advantage of this account. Here’s how the match works. Sallie Mae will look at your Upromise earnings at the end of the year (Dec 31) and multiply your total earnings for the year by 10%. They will then fund your Sallie Mae savings account with those bonus funds. That means if you earn $500 in Upromise earnings during the year, Sallie Mae will pay you $50 in bonus money. Nice.

Requirements to get the match:

To be eligible for the match you have to link your savings account to your Upromise account, and do one of the following: set up a automatic savings deposit of at least $25 OR fund the account with $5,000. Earnings from the annual match will be deposited in your savings account each February.

How To Open Either the Savings Account or the CDs

You will need to visit Sallie Mae Bank. Select which account you want (savings or CD). Then, provide the following information: SSN, drivers license or other ID, and checkbook to get your account and routing number for the initial deposit. You will also need joint account member info if you plan on making it a joint account.

The set up process is really quick. And once you’ve made your initial deposit you’re off and running. Remember to get the 10% Upromise earnings bonus you will need to create the $25 automated savings deposit, or fund at least $5k.

Common Tax Deductions for Freelancers

PT — Thu, 11 Mar 2010 08:06:05 +0000

If you are a freelancer with your own business there are numerous tax deductions that you will want to be aware of. Why? Well, a tax deduction reduces the amount of taxable income you’ll have when you file your taxes. Here is a look at some of the most common tax deductions for freelancers:

Home Office Space Deduction

If you work from home you are entitled to write off your dedicated work space. You can write off a percentage of your mortgage or rent in relation to the size of the space that you use to conduct your business. A portion of your homeowners or renters insurance is also a deduction.

Percentage of Bills

If you are using your home to conduct your business, a percentage of your utilities, phone and internet can be deducted. If you have a dedicated fax and phone line for your business, that is also a business write off.

Technology Expenses

Most everyone who runs their own business today uses some type of technology to do so. You can write off any technology purchases you make and use to conduct your business including computer equipment, computer upgrades, fax machines, internet routers, printers, web cameras, zip drives and the list goes on. Any computer software you use for your business is also deductible.

Office Supplies

This includes purchase you made on everything from your desk, filing cabinets, desk chairs to paper, pens, paper clips or any other supplies you use to conduct your business. Envelopes and the cost of postage are also tax deductions.

Business Related Expenses

This includes everything from business cards and letter head to copyright and incorporation fees.

Education, Training and Subscriptions Fees

This can be a large array of items including seminar fees, workshop fees or any other type of educational course fee related to your business. Educational magazine subscriptions, other subscription fees for anything related to your business, professional affiliation or association fees are all considered tax deductible.

On-Line Fees

If you have a website, you can deduct the cost of your domain name(s) and web hosting fees.

Travel Expenses

Any time you travel for your business there are numerous tax deductions. These include transportation expenses like parking fees, mileage, airfare, taxis, buses and trains. Other travel deductions include hotel rooms, office space rental, meals on the road and even your cleaning or laundry expenses while traveling. Some of your travel expenses will be 100% deductible while others will only be 50% deductible – consult with a tax professional if you are unsure.

Everything Else

Other expenses you can write off include your health insurance (if you are paying for it through your business), annual credit card fees paid to a credit card used for business purposes, unpaid client invoices and fees from collecting money like Paypal or bank fees. If you rent a post office box or safe deposit box for your business those fees are also deductible. Tax software and tax preparation fees are deductible as well. Finally, client related expenses like the cost of a business lunch or gifts given to clients are also tax deductible.

As you can see, if you own your own business there are numerous tax deductions you need to be aware of. In order for you not to miss anything it will be important to carefully keep track of all of your expenditures throughout the year. Always make sure to document and keep receipts for all of your expenses. A great tool to do this with is Quicken.

This article is provided for Backtaxeshelp.com, a site designed to help you with IRS back taxes. Owing back taxes to the IRS is stressful, and negligence will only worsen the situation. Learn how to pay back taxes.

Mvelopes: Automated, Online, Envelope Budgeting System (Plus Bill Pay)

PT — Wed, 10 Mar 2010 22:29:58 +0000

This week (or two) of budgeting reviews continues as I take a look at Mvelopes. Mvelopes is an automated, access-from-anywhere, budgeting tool based on the envelope system of budgeting. It also comes with bill pay.

Upfront, it’s important to tell you that Mvelopes is a subscription based system. So, along with all the nice features, you have to pay a monthly fee. Albeit a very low fee. But Mvelopes is a solid budgeting tool and has been recognized as such: PC World gave them a World Class Award – one of The 100 Best Products of the Year. Here’s how Mvelopes describes themselves:

“Mvelopes is the most effective online personal finance and spending management system ever. Mvelopes Personal is an online budgeting system that makes it easy to create an effective personal budget and track every aspect of your spending as it happens. It will help you always know exactly how much you have left to spend, instantly know the impact of every spending decision, effectively manage credit card spending, and quickly create an easy to use household budgeting plan.”

What You’ll Get with Mvelopes

Financial Account Aggregation – See all your accounts in one place and visualize your financial situation at a glance. This helps you track your net worth effectively.

Traditional Envelope System – Mvelopes, as the name suggests, is built on the idea that at the beginning of the month you put your income into different spending folders (or envelopes). Then you spend the rest of the month using the money from the envelopes. This helps you to spend every dollar before you earn it. That way you can make sure you spend it on things like savings, debt reduction, and giving. Mvelopes sets this up automatically for you each month once you’ve done the initial setup. You can quickly transfer money between envelope (drag and drop), and you can even take into account credit card usage.

Online Based – No download needed. It’s online-based software. You log in to your account from any PC or Mac or mobile device. This is the big advantage Mvelopes has compared with You Need a Budget 3.

Bill Pay – Another big selling point for Mvelopes is the bill pay feature. I’m not aware of any other budgeting software that lets you do this. Pretty handy.

Community – Mvelopes has a very robust community of users who all interact via the community groups and forums. You can also get training, live support, articles, and even premium life coaching services. You can also make some referral money through Mvelopes. They have a refer a friend program where you can earn $15, and your friend saves 20%.

Free E-Book Download

The folks at Mvelopes created a free E-Book to get you motivated and help you start using the Mvelope system. It’s called Money 4 Life. That link is a direct download. Right click and “save as” to put it on your computer and read it at your convenience.

First Steps with Mvelopes

I tested out Mvelopes using their free trial and I walked through the first steps. Be aware that you will need to sign up with a credit card for the free trial. You just need to set yourself a reminder to cancel in the event you’re not happy.

When you first sign up and get into the system, you’ll need to add accounts your financial accounts (link bank and credit accounts using online credentials), automate your bill payments, set a spending plan, fund your various envelopes, and finally, set up mobile phone access.

So there you have it. Mvelopes looks like it has some great benefits to offer for those people who want an online system to help them manage their spending and create a better financial future. If you’ve used Mvelopes extensively I’d love to hear your thoughts in the comments below.

Easy Money: Good and Not So Great Ways to Get Money Fast

PT — Tue, 09 Mar 2010 20:03:34 +0000

Sorry to disappoint you 80’s comedy fans, but I’m not talking about the Rodney Dangerfield flick from 1983, Easy Money. I’m referring to you and your finances. How can you get cash quick if you needed it badly? Let’s say some unfortunate event happened and you needed a large sum of cash immediately (within a day or two). You’ve got no time to actually get a job to earn or make extra money. How could you get some easy money?

Here are a few ways, listed somewhat in order of risk to your finances. I definitely don’t recommend all of these ideas. But, hey, when times are tough and you need money fast, who am I to judge?

Return Things – Made any purchases recently? Gather up your receipts and take some stuff back for a refund.

Sell Some Stuff – Use EBay for small and unique items. Set no reserve, and a one day auction, and let it fly. Use your free local Craigslist for large or generic items. This helps avoid any shipping costs too.

Consignment Shops – Gather up all of your unused clothing and sell them for quick cash as a consignment shop.

Sell Some Gold and Other Metals – Don’t use one of those Cash4Gold places. Just go to a local jeweler and pawn shop to get the value. It may take a bit longer, but you will get a more reasonable price.

Bob from Christian PF shared good several ideas like the one’s above in a post titled, 15 Ways to Make $200 Quick. Now for a few moves that require a bit of risk.

Raid Your Emergency Fund – This is what you’ve been saving it for. Go to the well. Don’t have one yet? Learn to build an emergency fund.

Cash Out a CD Early – You’ll likely lose any money you’ve earned with the CD, that is unless you have a no penalty CD from Ally Bank. See a current list of the best CDs online.

Peer-to-Peer Lending - Sites like Prosper and Lending Club will allow you to requests bids for your loan. Your loan will take a few days to get funded. But the rates can be better than credit card rates.

Personal Loan – A bank or local credit union sometimes have small personal loans they are willing to do. An income and a balance in your account will help a bit.

Tap Your Home Equity – If you have equity built up in your home, take out a home equity line of credit (HELOC). These rates can be better than other places, and the principle is going right back into your home. But using these funds to afford excess consumer spending is simply moving in the wrong direction with your finances.

Credit Card Cash Advance – These can be costly because of the interest rate, but are a quick method for getting cash in your bank account. Look for a card with a promotional interest rate if possible.

Borrow from Your 401K – Most employers allow this. While it completely goes against your original intentions for that money, taking a loan from your 401K effective way for getting a large sum of money fast. Just make sure you are aware of the rules (i.e. what happens if you’re fired?).

Loans from Friends and Family – I think this is one of the last places you should look for funds. With so many other places to find funds, what risk harming personal relationships.

Payday Loan – And last, and certainly least, the payday loan. Don’t use this method for quick cash unless it is the last place you can find money on earth.

Did I leave anything out? How would you get quick cash?

Unautomate Your Finances: A Simple Passionate Approach to Money

PT — Tue, 09 Mar 2010 16:30:56 +0000

A new financial guidebook just became available that I really like. It’s called Unautomate Your Finances: A Simple, Passionate Approach to Money. It was created by Baker from Man vs Debt. I was able to get an advanced copy of the guide and thought I’d share a bit of my thoughts on the book. First, here’s what you’ll get with the complete package:

Unautomate Your Finances: What’s Inside?

A comprehensive 83-page eBook, featuring “The Unautomation Theory”, “The Science of Unautomation”, and “Applying Unautomation”. Over 25,000 words dedicated to providing everything you need to adopt a simple, passionate approach to money.

A 27-minute video interview with Leo Babauta of ZenHabits.net. Baker interviews Leo on how he applied the principles of simplicity and minimalism to dramatically turn around his financial life. Powerful insights from a leader in simplicity, blogging, and productivity.

A 29-minute audio interview with J.D. Roth of GetRichSlowly.org, one of the top personal finance blogs on the web. J.D. joins Baker on a call to discuss his own financial recovery story and what it’s like now that he’s in the “third phase of personal finance”.

A 2-page, custom-designed PDF version (printable) of the minimalist budgeting system discussed in main guide.

A bare bones Excel template for those who want to take the minimalist budgeting system digital.

Free Extended Updates! Over the next 6 months, Baker will be releasing sample case studies, FAQ’s, and exclusive interviews… for free!

That’s a lot of information/inspiration for the small fee that Baker is charging. Read more about Unautomate Your Finances: A Simple, Passionate Approach to Money.

My Thoughts on Unautomate Your Finances

First, don’t be thrown off by the title. I’m a huge fan of saving more money using automated techniques, so I didn’t know if I would like the message in the book. But Baker isn’t against using automated tools like direct deposit and bill pay. What he does stress is keeping things simple and doing it consciously.

But he doesn’t stop there with his message. His guide goes into great detail, giving you specific steps for simplifying your finances by spending consciously, simplifying your budget, and he shares his own debt reduction techniques which he’s used to pay off thousands of dollars in debt. This guide will no doubt challenge what you’re currently doing with your money and your life.

I know Baker and I know he’s put a lot of hard work into this guide. Give a listen to his video and see if you connect with his message. If so, I encourage you to pick up his guide. Unautomate Your Finances: A Simple, Passionate Approach to Money.

Best Online Checking Accounts

PT — Tue, 09 Mar 2010 00:25:17 +0000

Scroll down for an updated list of the best online checking accounts.

New Opportunities in the Online Checking Account World

We’ve seen a lot of recent activity in the online checking world as more and more people are getting comfortable with having a checking account without any physical branches. I personally still use two checking accounts, one online and one with Bank of America. However, my BOA account has long been just a place to make my deposits and write checks. Everything gets transferred over and our daily spending comes out of our ING DIRECT Electric Orange account.

In the past I simply referred readers to the Electric Orange account as the place to go for online checking. Well, there are some new online checking accounts you should be aware of. Here’s the current list that I’m aware of (old and new included).

Ally Interest Checking – This account just rolled out. It’s the newest available. Has some nice features: free bill pay, free ATM use on all ATMs, free checks, unlimited check writing, no fees or minimums.

PerkStreet Financial – They have a unique thing going on: cash back checking. So you are essentially earning your rewards on your daily spending versus your running balance. There’s an opportunity to rack up good rewards here. The initial cash back bonus rate is nice too. A large network of free ATMs. Free checks and bill pay.

EverBank FreeNet Checking – A solid rate, especially for the first 3 months. You must maintain a minimum account balance of $50,000 to to get their top rate though, and at least $5,000 to avoid fees. They have award-winning online banking, live customer service 24/7, and unlimited check writing.

ING DIRECT Electric Orange Account – This is the account I currently use. It’s attached to a great savings account. Has an excellent website and online bill pay features. Similar to PerkStreet in terms of number of ATMs.

FNBO Direct Online BillPay Account – I’ve used this account in the past and had positive results. They are currently offering the highest rate besides EverBank, who only serves higher balance accounts. Great web interface and comes with a Visa Checkcard (Debit Card) for your purchasing beyond paying the bills. Free ATM use is limited.

What to Look for in an Online Checking Account

I thought I’d jot down some things to keep you eye on if you’re considering an online checking account.

Debit Card and ATMs – It’s important to have access to your money with an online checking account. There needs to be a solid debit card attached to the account, along with plenty of free ATMs to utilize.
A Great Website Interface – It’s all online, so it better be good. A good online interface will respond quickly and be easy to understand and navigate. And it needs to be up 24/7.
Free Bill Pay and Checks - Most of these banks have free bill pay and checks. This is pretty standard now. Look out for limits on the number of checks you can write though if that’s a big thing for you.
Access to an Attached Savings Account – How easy will it be for you to move your spending account money to your savings and vice versa. Online bank transfers can take a long time. If there’s a connected account, you can take some of this headache away.
FDIC Insured – As with any cash account, the main goal is usually security. So ensure your online checking account is FDIC insured to the full $250,000. All that I list here are.

Comparison of the Top Online Checking Accounts

Bank	Rate	Review	ATMs	Rewards
FNBO Direct Online BillPay Account	1.25%	FNBO Direct Review	840,000 PLUS locations - 4 Free Withdrawals Per Month	None
PerkStreet Financial	0%	PerkStreet Review	37,000+ free ATMs through STARsf®	2% Cash Back
ING DIRECT Electric Orange	0.24%	Electric Orange Review	35,000+ free ATMs through Allpoint™	None
Ally Interest Checking	View	Ally Bank Review	All Fees Refunded	None
EverBank FreeNet Checking	2.25%	EverBank Review	All Fees Refunded if Balance >$5,000	None
E*Trade Checking	0.15%	Pending	All Fees Refunded	None

Which online checking account are you using and why?

How to Find the Best Roth IRA Rates

PT — Mon, 08 Mar 2010 20:55:21 +0000

Have you ever wondered what the best Roth IRA rates are? Well, you are not alone. Many people looking to start investing for their retirement think the same thing. The problem is that Roth IRAs don’t really have rates like a savings account or CD. They are just investment vehicles (or accounts).

What is a Roth IRA?

The Roth IRA or Roth Individual Retirement Arrangement (or Account or Agreement) was created as part of the Tax Payer Relief Act of 1997. Yes, this is a US Government created retirement account. But the Government doesn’t control where the account is opened or what investments you put into the Roth IRA. They simply allow for the creation of the account and for the specific tax treatment to be applied to it. Translation: the Government doesn’t tax your retirement earnings in a Roth IRA. This tax treatment makes it essentially the opposite of a Traditional IRA or a 401K. Bottom line: it’s a good thing. Get on board.

It’s worth pointing out that a Roth IRA should be used for investing for retirement. That’s their intended purpose. Not fixed rate chasing. Contributions to a Roth IRA are limited each year ($5,000 in 2009) and certain income thresholds apply.

A Roth IRA is Not an Investment: No Rates

A Roth IRA is simply a place to stash your investments to give them a better tax treatment. However, you can put several types of investments in your Roth IRA, including some fixed-rate type investments. Your Roth IRA can contain the same types of investments that you do outside of your Roth IRA (i.e. taxable investing). Within a Roth IRA you can have money market funds, CDs, individual stocks, bonds, mutual funds, index funds, and in some cases, a savings account (some local credit unions allow this). It’s importance to note that most IRAs only have the option of the money market fund for your cash. These funds, although stable, are not FDIC Insured.

The takeaway here is that when looking into rates, you should look at what’s inside your Roth IRA. It’s what’s inside that counts! (sorry…couldn’t resist)

Check out some of the best rates on Savings Accounts and CDs.

How to Find Low Cost Investments for Your Roth IRA

While you can’t control the interest rates of return for most of your assets in a Roth IRA (see 2009 Recession as an example), you can typically control the amount of fees you’ll incur. As a general rule, the lower the need to have someone else actively manage the funds in the account, the more likely that the investment has low fees. Therefore, an index fund is going to have lower costs than say, a target-date fund or a mutual fund. If you want to avoid management fees, stay away from managed investments. Read anything by Mr. John C. Bogle for more on this. Like I said above, you can also invest in CDs and money market funds within your Roth IRA. But these typically are temporary holding places for your cash when you’re deciding on which stock or bond fund to invest in.

No Fee and Low Minimum Balance Roth IRAs

Not every institution (bank, credit union, brokerage) treats their Roth IRA the same. Some may have high minimum balance requirements. For the beginner this can be discouraging. Here are a list of the places you can open a Roth IRA, starting with some of the low-cost brokerages.

Low Cost Brokerages Offering Roth IRAs

ShareBuilder – No fees and no minimums. $4 automatic trades. $9.95 for all others. Connect it to your ING DIRECT Orange Savings Account.

Zecco – No fees and no minimums. Free Stock Trades! 10 free stock trades every month with $25,000 in assets or 25 trades per month. Otherwise, it’s just $4.50 per trade.

TradeKing – No fees and no minimums. $4.95 stock trades.

ETrade – No minimum balance requirement and no custodial fees if you use their electronic statements. $9.95 stock trades.

Large Brokerage Firms with Roth IRAs

Vanguard – This is where I have my Roth IRA. They have no fees as long as you’re in their funds and use electronic statements. And they have very low cost investment options. The only downside to using them is that their funds have high minimum balance requirements. Therefore if you don’t have at least $1,000 to invest initially, you’ll have to stick your money in their money market fund until you’ve built up enough to invest. See my walk through of the Vanguard Roth IRA account opening process.

Others you might want to check out are Fidelity, Schwab, and T.Rowe Price.

Quick Tax Tip About Roth IRAs

Did you know you can actually contribute to a Roth IRA up until you file your taxes in 2010 and have it count against your maximum contribution limit for 2009? That means you still have time to invest in a Roth IRA for 2009. Already filed you taxes? Just start saving to contribute towards your 2010 Roth IRA.

Free Office Space Anywhere in the World

PT — Sun, 07 Mar 2010 06:15:38 +0000

Free Office Space for the World Traveler

I just received a great tip from Karol over at Ridiculously Extraordinary. In his newly released online e-book, How to Live Anywhere he shares, amongst many other tips, how you can get free access to airline lounges and free access to office space at over 1,000 Regus business lounge locations by being a Platinum Card® from American Express card holder.

While it’s not exactly “anywhere” in the world like my title suggests, they (Regus) are located in most major cities throughout the world. In their business lounges you get a quite place to work, free wifi, and even free coffee and tea.

What’s the catch? Well, the Platinum Card® from American Express comes with a pretty hefty annual fee ($450). If you plan on using an office only a few days while traveling you’ll quickly make this back though, as Regus lounges and airline lounges can be expenses at the daily rate.

Couple the free Regus business lounge with a free Skype account and you’ve got yourself a nice free office space anywhere you are. There’s your world traveler money tip for the day.

A Peek Inside the Free Office Space at Regus

Update: I recently visited my local Regus offices to confirm this deal and to see what the business lounges look like. The deal is accurate as described above, but here’s more detail. When you sign up for the Amex card above, they will send you an invite to check out the Regus offices and get their Gold Businessworld Card for free (that’s normally $49 per month). This Gold card allows you free access year round to any of the business lounges in their locations. Here are some picture of my local business lounge (click to enlarge):

Get started with this deal. Sign up with the Platinum Card® from American Express.

Plutus Awards and Other Links

In other news, 52 Ways to Make Extra Money…Revisited, was nominated for a Plutus Award under the best personal finance e-book category. Kudos to my designer, Ryan, and all the people who contributed to the book.

Ryan at Cash Money Life shared a great guide on Organizing Your Small Business Finances. Debt Free Adventure shares Saving Money: An American Virtue Reborn. FiscalGeek shares Why the Gym is a Waste of Money. Jason from My Money Minute just reached 200,000 Miles on His Car. This is exactly where I want to be in the future with our 2 vehicles. Ron from The Wisdom Journal shares his Tips for Yard Sales. Mrs Money at Ultimate Money Blog lists 7 Uses for Mason Jars. Makes me think of my Grandmother’s homemade jelly. Virtual Office ServiceA Virtual Office Service provides complete virtual office services including Virtual Fax, Phone, Mail and Answering Services.

Carnivals I’ve been in lately… Financial Planning, Rich Money Habits, Debt Reduction, Money Hacks Carnival, Financial Planning, Personal Finance, Frugality, Money Stories, Taxes

Question of the Week: Who Does Your Car Service?

PT — Fri, 05 Mar 2010 15:55:05 +0000

I’m taking our car to get serviced this afternoon. I really hate spending money on car maintenance. I’m not really a “car guy.” I just need something to get back and forth with. So when I have to shell out $30 to $50 to get the oil changed, it just doesn’t feel good. I know it’s better than the alternative though: running out of oil and having the engine implode.

I found a local service shop, at the recommendation of a friend, that only works on our type of car. We’re lucky in that the prices aren’t that expensive compared to other local mechanic shops or dealerships. However, I know I could probably save a bit of money by going to a quick oil change type place, or doing it myself. I just have a little more piece of mind knowing that the guy working on my vehicle has seen a million others just like it.

I know some people use their dealerships (with or without a service plan), others use a local mechanic, some of you may even do it yourself. I guess there are pros and cons to each approach.

So, my question today is, “who services your vehicles and why?” Oh, and a bonus question is “how often do you change the oil?”

How Credit Card Numbers Are Generated

Guest — Fri, 05 Mar 2010 06:20:08 +0000

If you’re looking for a credit card generator you’ve come to the wrong place. While you can’t actually generate a credit card number which will be valid and accepted for a payment, you can find out more about how our current credit card numbers are validated and test the theory on the cards in your wallet. Your credit card numbers may seem to be made up of a series of random numbers and whether you know those numbers off by heart or not, in the US they are verified according to a simple mathematical system you can learn, and use as a great party trick too.

The Luhn Algorithm

In 1954 – before the world was immersed in credit card debt – Hans Peter Luhn patented an algorithm which is now known as the Luhn Algorithm. Every credit card and debit card number in the United States follows Luhn’s Algorithm so that every US credit card provider can be sure there are no errors when they create and distribute their cards. You can use the Luhn Algorithm to verify any credit card you have in your purse right now, and here is an example credit card number to show you how it works:

5412 7534 5678 9123

Firstly, the check digit is isolated on the card and that is the last number in the sequence – in this case it is the three. Then start with the number to the left of the check digit and double that number, and every second number on the card, this is what you end up with:

(10)4(2)2 (14)5(6)4 (10)6(14)8 (18)1(4)3

Then add together the digits of any double digit number to create a single digit number and this is the result:

1422 5564 1658 9143

Now when these numbers are added up they equal 66, which means this example credit card number is not real as the result of a real credit card number would be evenly divisible by 10. Also, even though you are able to generate a credit card number which works out to be divisible by 10 according to Luhn’s theory, there are other security features which you are not able to duplicate such as the CVV2, CVC2 and the CID numbers which are those ones printed on the front or back of a credit card for additional authentication that the card is present in a transaction.

Generating Valid Credit Card Numbers

Having cracked the credit card number code, it is important to keep in mind that US banks and credit card providers don’t use the Luhn Algorithm to prevent fraud or identity theft, but for their own administrative needs. Therefore, to create a fake credit card with a valid number and valid security authentication is impossible. If you wanted to create a valid three digit CVV2 security code, you would need the primary account number, the four digit expiry date, a unique three digit service code and a set of DES keys. It is not just one piece of account information which is required to generate credit card security codes and this, coupled with the fact that there are almost endless numerical combinations, makes it impossible to create a fake credit card, and makes it impossible for someone to use your credit card number if they don’t have the additional security codes.

So while it is interesting to be able to validate your own credit card numbers, and actually quite mind-boggling to think that every single credit card being used in the US adheres to this mathematical system, that system doesn’t make it possible to generate a valid credit card number – only validate an existing credit card number. It also means you can feel more secure knowing just how hard and how impossible it is to conduct credit card fraud, and how unlikely it is someone can charge purchases to your credit card number, without your actual credit card.

Fred is a personal finance writer at Credit Card Finder. He helps people to compare credit cards online.