President Obama is expected to sign a bill today that will encourage people to spend/borrow more money to spur the economy. First time homebuyers have been eligible to receive up to $8,000 as a tax credit since January as part of the economic stimulus package.

So that previous homeowners won’t feel left out and have to subsidize their neighbors home purchase, this new legislation allows previous homeowners to participate as well.

This isn’t a deduction, but a credit. Remember that a “tax credit” means that the IRS credits your tax liability account. A deduction just lessens the amount you’re taxed on.

Here are the details of the homebuyer’s tax credit:

Ten percent of the purchase price of your primary residence, up to a max of $8,000 is available for first time homebuyers, $6,500 for repeat buyers. “First time” buyers are defined as someone who hasn’t owned a home in the previous 3 years. Repeat buyers must have owned their current home at least 5 years. The tax credit isn’t available for homes costing over $800,000.

If you make less than $125,000 per year as an individual or less than $225,000 as a couple filing jointly (another marriage penalty), you are eligible. Those with individual incomes up to $145,000 and joint up to $245,000 are eligible for reduced benefits.

There IS a deadline! You have to sign your purchase agreement no later than April 30, 2010 and close on the home no later than June 30, 2010. If you’re a military member, the deadline is extended for one year if you’ve served outside the USA for at least 90 days between January 1, 2009 and May 1, 2010.

How to apply for the first time homebuyer tax credit

You can claim the tax credit on your federal income tax return. If the credit exceeds your tax liability, you will receive a refund. Those taxpayers who want an immediate refund, you can amend your 2008 return and claim your credit.

Critics of the legislation say the tax isn’t properly targeted because most people would’ve bought these homes anyway, but many Realtors disagree. They claim that 350,000 out of the 1.4 million homes already bought were purchased because of the credit.

An Insurance Pothole?

Potholes. The nemesis of drivers everywhere. They appear when you least expect them and they can do some real damage to your tires, your wheels, and even the frame of your vehicle. Potholes need to be filled quickly, before they get larger and damage more vehicles.

Insurance potholes act in the same way. They pop up when you least expect them and certainly when you don’t need them. When they rear their ugly heads they can do some real damage to your assets – especially your cash assets. Insurance potholes need to be filled too.

One of the biggest insurance potholes is a “gap” in coverage.

What is a “gap” in coverage? Other than a time gap, where you allow a non-payment of insurance premiums to cause your policy to lapse or go dormant, a gap in coverage occurs when what you want to insure is valued at more than the insurance you’ve purchased.

Car Insurance.

State law minimum requirements for car insurance vary from state to state but usually they’re very, very low. Many states only require you to purchase as little as $10,000 in property damage coverage per accident. So, if you have a car accident and it is deemed to be your fault, make sure the other vehicle isn’t worth more than $10,000. That means don’t hit an car less than one or two years old, no upscale European or Japanese models, no Cadillacs, Lincolns, or Corvettes. Think you can pull that off? If you have any doubts, you have a gap in coverage.

Life Insurance.

Far too many people believe that the younger crowd doesn’t need any life insurance but I disagree. Even if you don’t have dependents, the chances are very good you’ll have some final expenses associated with your untimely death .. should it occur. Do you really want your mother or father or other family members to have to face telling the hospital or your creditors that there isn’t enough money to pay them off? Do you really want your parents or family to have to shoulder the entire bill associated with your funeral? I know I didn’t. That’s why I bought a minimal policy, even before I had children, just so my wife wouldn’t face that ordeal.

Homeowner’s Insurance.

Wait a minute! Isn’t your home insured for it’s replacement value? Where could there be a gap in that insurance? My answer: how much is your jewelry insured for? How ‘bout your electronics? What about any antiques, guns, furs, or other of those items typically capped at a ridiculously low amount on homeowners insurance policies? If you have those items included in your homeowners insurance policy as an additional rider, you don’t have that gap in coverage.

Has your home increased in value since you bought your policy? If it has, you may be underinsured. If your home has actually decreased in value, you may be over insured and need to decrease it.

Renter’s Insurance.

You rent your apartment or house? You need renter’s insurance. Without it, if anything happens to the dwelling and you lose your personal belongings, you’re out of luck. Renter’s insurance is cheap.

Medical Insurance.

I know the Federal government is supposed to swoop down sometime in the near future and save us from the evil health care industry, but personally, I’m not holding my breath. Your gap in coverage with your health insurance may come in the form of a higher than standard deductible ($2,000 per person and up). If it is, a supplemental health insurance plan can close that gap and provide you with the necessary coverage so you’re not left holding a bill that’s much larger than you realized.

What do you do if you find a gap in coverage?

I’d recommend checking out NetQuote. When you fill out their simple form, you can get quotes from insurance agents without the hassle. NetQuote’s research shows that consumers save 20-40% by receiving multiple quotes and over 60% of consumers would recommend NetQuote to a friend!

Even if you don’t want to try NetQuote, give your regular insurance agent a call and schedule a time you can both examine your gaps in coverage and make sure they’re filled as soon as possible.

Photo by Heneghan

According to Credit Karma’s CEO, Ken Lin, 2009 has been a momentous year for credit issues – and I have to agree with him. Suddenly, frugality became cool, overspending was out, and consumers put more emphasis on savings and paying down their outstanding debt. Creditors hiked interest rates on credit cards, slashed credit limits, and raised minimum payments. As a result, legislators stepped in with the CARD Act and enacted new rules to govern credit card companies and supposedly protect consumers. Consumers became more diligent in shopping around for the best credit card deals, rather than accepting negative changes to their credit lines and home buyers were encouraged to take advantage of a $8000 first-time home buyer tax credit, even in the midst of a damaged housing market. Yeah, it was a momentous year.

The Top 10 consumer credit events for 2009:

1. Credit card companies charge for not using credit cards regularly, even if you carry a balance. In January, Chase began charging $10 a month to 400,000 customers who have large balances but little account activity.

2. Credit card companies change minimum payments at anytime with minimal notice. Chase increased the minimum payment from 2 percent to 5 percent for cardholders with large balances

3. Credit card interest rates generally increased for all major card issuers and even doubled or tripled for consumers who pay their bills on time. Citi sent some cardholders letters notifying them that the variable APR for purchases on Advantage Citicard’s would increase, in some cases to a 29.99%. The hike on interest rates has prompted Senate Banking Committee chairman Chris Dodd to step in and propose an immediate interest rate freeze on the estimated 700 million credit cards in circulation. No word yet on when it when or if it will happen.

4. Rewards programs are less rewarding. Citi’s Thank You Rewards program added a $39 fee for all tickets redeemed through its CitiMiles program. American Express’ Delta Sky Miles dropped its “Always Double Miles” program. Though many rewards cards are available, they’re getting harder to find.

5. Credit card companies lower limits or cancels cards altogether. Analysts expect credit card companies to cut limits by $2 trillion by mid-2010.

6. Creditors add annual fees to existing credit cards. In October, Bank of America announced it would start charging cardholders who pay in full each month an annual fee of $29 to $99 a year. Citigroup started charging annual fees to card holders who don’t put more than a specific amount on their cards, typically $2,400 a year.

7. Credit cards came under greater scrutiny. In May, President Obama signed new credit card legislation into law. In August, the first phase of the Credit Card Accountability, Responsibility and Disclosure (CARD) Act went into effect giving credit card users the choice to opt out of interest rate changes and other changes in their credit card agreements. In addition, creditors now have to provide consumers with 45 days’ warning of changes to their credit card accounts. The remainder of the legislation is scheduled to take effect in February 2010, but there’s already a push by legislators to move the deadline to December 2009 due to continued bad behavior by creditors. Congress is currently considering the addition of a Consumer Financial Protection Agency despite the existence of the Federal Trade Commission which already does the same thing!

8. Good credit and credit scores become essential. Many employers now check credit reports prior to offering a job applicant employment. In previous years when a credit score of 690 was considered good, consumers now need above 760 to get the best interest rates.

9. Consumers learn to be frugal and focus on savings. Debit card spending exceeded credit card spending for the first time ever in Q1 2009 according to MarketResearch.com. According to Credit Karma’s data, credit card debt nationwide decreased by 4% from June to September

10. Companies offer free online tools and resources as consumers learn to become more financially savvy. Credit Karma launched its Credit Report Card, which breaks down the contents of a consumers credit report and how it translates into a credit score.

But what did consumers really learn from all the turmoil this year and will it have a lasting impact on their financial behavior for the future? I was able to ask a few questions to Credit Karma’s CEO, Ken Lin. His company offers FREE credit scores to consumers. If you would like to get your credit score for FREE – check them out.

An interview with Ken Lin, CEO of Credit Karma

Ron: As the economy stabilizes, what consumer finance behaviors will be more apparent?

Ken: Two major themes are materializing as a result of the recent economic turmoil.

The first theme involves the consumer’s migration away from credit products. As an economy, we spent above our means, had multiple years with negative savings rates, and built enormous debt loads. I think many consumers are recognizing the problem and are finally pulling back. In fact, debit cards have now surpassed credit usage for the first time in history.

The second theme appears to be a re-alignment of credit risk and a movement back to fundamentals. Lenders have raised lending requirements and consumers are adjusting their behavior accordingly. Moving forward, consumers will have to focus on their debt management and credit if they want to be part of the new lending standards.

Ron: Will we see similar frugality or will consumers go back to charging more than they can afford?

Ken: Bankers and consumers tend to have short memories. But with all of the regulatory changes and the near collapse of our whole financial system, I suspect it will take many years of economic prosperity before we go back to the days of lax lending standards and abundance of credit liquidity.

Ron: What additional credit changes will take place in 2010?

Ken: The changes consumers will notice most will come from the CARD Act. The new legislation has several provisions meant to protect consumers. The most notable include requiring co-signers or documentation of employment for those under 21, the banning of universal default, and restrictions on when credit card companies can raise your rates.

The unfortunate downside of this legislation is that credit card companies may raise interest rates increase fees, and lower credit limits to compensate for the changes. In addition, it may make credit cards much harder to obtain for consumers with fair credit and likely more expensive for those with great credit.

Ron: What can consumers do to raise their credit score after changes have been made to their available credit?

Ken: Consumers with poor or fair credit may not have many options in this new credit environment. Most banks simply won’t want their business or if they do, there will be a high price for access to the credit. The good news is that most consumers can raise their credit score 50-100 within just a few months if they pay their bills on time.

Ron: What new credit legislation should consumers be aware of to protect themselves? Are there any drawbacks to these types of legislation?

Ken: There is the current CARD Act. Prior to that there was bankruptcy reform.  The problems with any legislation are the loopholes and unintended consequences.  For example, I don’t believe it was Congress’ intention to increase fees and interest rates with the CARD Act but that is the reaction by the financial services.

Thanks Ken, I appreciate you taking the time to inform us about these changes to the credit scene.

If you want to get a FREE credit score, be sure and check out Credit Karma.

Joey Chestnut

Do you ever wish that you had some kind of special talent or skill that you could use to make a lot of money and get out of debt, buy a first home, etc? Maybe you see people like Mark Zuckerberg who co-founded Facebook and is already a billionaire at the age of 25 thanks to his smarts and special skill set and become slightly jealous. Shoot, maybe you would even settle for being like Joey Chestnut the competitive eater who set a world record for eating 69 hot dogs with buns in 12 minutes. What do both Mark Zuckerberg and Joey Chestnut have in common? Each of them has a special skill set that they used to its fullest to become very successful. While not all of us can become as famous or as wealthy necessarily I do strongly believe that each of us could be considered an expert at something, anything – and with the proper direction we can turn that expertise into dollars in our pocket. Let me explain.

We are All Experts (in Something)

I would submit to you that you are an expert at something. I strongly believe that you know a particular subject area better than probably 90% of Americans. I also strongly believe that you can use this expert status and depth of knowledge about this niche to make yourself some money. Granted, these bold statements that I am making are true in different degrees with different people but I believe that these statement are true for everyone.

How to Find Out Your Area of Expertise

Many of you probably thought of your area of expertise the moment you first glanced at this page. For those who are still not so sure then here are some questions to ask yourself:

1. What do I enjoy doing? - Do you crochet for 3 hrs every day and know how to weave intricate “crochets”? (OK, you can probably gather that I for one am not an expert on crochet). Do you have a huge collection of Transformers that you still pose on your shelf as a 33 year old man? (Just for the record, I have not owned a Transformers action figure since I was about 9).
2. What am I good at? – Do guests rave about your cooking whenever you have company over? Are you the first person that your friends call when their car is “making a weird noise”? Do your friends hate inviting you over for poker night because you always win?
3. What did I study? – Did you graduate from college or trade school with a specialized degree?
4. What do I enjoy talking about? – Can you rattle on for hours about the Dallas Cowboys or geological formations or bond trading or equestrian sports or stamp collecting or (well, you get the picture)?
5. Do I have a specialized skill set learned from my job or business? – Do you have very specialized knowledge about a certain industry or product? Do you know things about a certain industry that only an “industry insider” would know?

I am willing to wager that every one of us could look through the above questions and come up with something (no matter how obscure) that we are somewhat of an expert in.

How to Make Some $$$ from Your Expertise

The next step to putting your newly discovered area of expertise to use making some money is to bring that knowledge to the world on the world wide web. The wonderful thing about the Internet is that even if your area of expertise happens to be “North Dakota Sheep Herding” then chances are that there is an audience that would love to learn about the knowledge that you have. Granted, you might not make as much money from advertisers or paying customers as someone who has a lot of knowledge about the stock market but you absolutely can develop a loyal following and make money in the process.

The wonderful thing about starting a website or blog and writing about something that you happen to already know a lot about is that A) You will already know what you should write about and B) Chances are that you enjoy the subject matter and can add some unique insight and helpful tips that someone who is not familiar with the subject or who does not enjoy the subject would be unable to.

To use two personal examples of putting some of these steps into practice: Ron started this site to talk about his passion for making wise financial choices and he is committed to not only providing top notch financial education but also providing insight into the different underlying character traits that influence our financial decisions. I am a CFP® and the owner of an independent insurance agency that sells Florida health insurance and so I had a lot of knowledge about various financial topics so I started a site to help people easily compare credit cards and a site to help people easily leave reviews and compare health insurance providers. My most recent venture is putting up a site that will allow people to easily do a car insurance comparison and find ways to save money on their auto insurance.

I would challenge you to ask yourself the questions above and see if you might be an expert in hiding that is primed to turn your specialized knowledge into a source of income. What do you think?

We’ve had it “drilled” into our heads for decades – reduce dependency on oil for the good of our planet, for the good of our air, for the good of our water. We’ve learned to drive less, drive smarter, recycle where possible, use natural or organic materials, and use less energy. No one would love to give the heave-ho to oil producing nations more than me, but what would happen if I followed that logic and reduced my dependency on money?

Isn’t that the definition of frugality?

What would my life and my future retirement look like if I didn’t NEED so much money? What would it be like to be retired and used much less to live comfortably? Could it even be done?

How I can reduce my dependency on money

1. Pay off debt. How much of your monthly income pays interest on your debts? Without no debt or interest charges eating up income, we could more easily finance our lifestyle.

2. Life a thrifty life. Thrifty doesn’t mean cheap, it just means being conscious of where your cash goes and willing to say no to things you don’t need. Frugality is all about efficiently using resources and avoiding waste.

3. Move to a smaller home. The recession has made it clear we don’t need huge houses – we really just want a home. Smaller homes have virtues all their own. Oh yeah, you could always consider renting!

4. Stay healthy. Medical costs can escalate very quickly, especially if you don’t have health insurance. Eat right (it’s cheaper), exercise, stop smoking, and reduce your overall stress level.

5. Take a bite out of your food budget. There are over 100 ways to reduce your food costs. Select the ones that apply to you and put them to use!

6. Reduce your need for energy. Adjust your thermostat, insulate and caulk your home, convert to energy efficient lighting, drive less and more sensibly, and use your slow cooker instead of the oven.

7. Use “free” services you’ve already paid for. Parks, museums, walking and biking trails, and even certain concerts were already paid for by your tax dollars. Enjoy them – you’ve already paid for them.

Really, there are thousands of ways to reduce our dependency on cash but the point is to NEED less money without surrender the quality of our lives.

How can you reduce your need for money? Remember that by saving today, you’re sending money to your future self. It isn’t a sacrifice, it’s just a delay in your usage.

“The unexamined life is not worth living.”  –Plato, speaking through Socrates in The Apology

Am I the only one who finds it ironic that one of the world’s wealthiest nations is the most impoverished in personal time? The more prosperous we become, the more we work and the less time we have for personal matters, including rest. We already know we must conquer the clock at work and get as much accomplished as possible, but many of those same principles should also apply at home.

• Get your goals in gear
• Make moments for things that matter
• Put your personal place in order
• Curb your commitments
• Hunt for harmony

Get your goals in gear

Just like at work, time management begins with goals, and just like at work, far too many times we’re reactive to the interruptions, opportunities, and problems as they arise. But unlike our careers, where expectations are hammered into our minds, we have the opportunity to decide which goals we should accommodate and which we should jettison.

1. Clarify your goals. Describe each of your goals in a written statement. Goals can range from rest, relaxation, family time, and exercise to hobbies, volunteering, and personal development.
2. Prioritize your goals. Arrange them into what’s most important to you.
3. Get your goals in gear. Determine what steps you need to take to get going on your goals. Decide what the next step will be.

Make moments for things that matter

“There’s never enough time to do everything, but there’s always enough time to do the important things.” –Brian Tracy

Schedule those things that are important then jealously guard that schedule. If a family vacation is highly important to you, then later you find that a retirement reception for a co-worker is scheduled for the evening you and your loved ones plan to leave, send your regrets. Don’t allow unimportant things, especially URGENT unimportant things, to crowd out what’s important to you. Make your moments matter!

Avoid scheduling your personal life so tightly that you have no flexibility for unanticipated events or opportunities. Keep a log of what you do during your empty time slots so you can evaluate whether you’re filling them with things that really don’t matter and have room for more things that do matter.

Put your personal place in order

Material possessions take up time whether you realize it or not. Cleaning, maintaining, caretaking, and working to make the payments all stem from the possessions we put in our personal home. By reducing the amount of “stuff” we own, we can realize time savings since we don’t have to clean, maintain, or pay for it.

Every so often, go around your home with a cardboard box. Fill it with anything you haven’t used for quite some time and with things you don’t anticipate needing anytime soon, including clothing. Seal the box and label it with the contents and the date. Then put it into storage for one year. At the end of the year, if you haven’t needed or used any of the items in the box, get rid of it. Donate the unused items to charity or give them away to someone who will use them. Alternately, sell them in a yard sale or online.

Curb your commitments

Commitments also take up your time Whether commitments are made to family, friends, civic organizations, the kid’s school, or volunteering, they’re the social glue that binds families and communities together. But some of us agree to commitments far too readily and without thinking about the impact they’ll have on our time management. To evaluate a commitment, ask yourself:

1. Will it produce real value for me and for others?
2. Are the benefits I will receive in line with the value I’ll provide?
3. Would ending this commitment cause harm to anyone?
4. Will I gain any time by ending this commitment?

Some commitments, like some relationships, aren’t worth the time we put into them – they’re lopsided one way or the other and lopsided relationships indicate an unhealthy dependency.

Hunt for harmony

A good work/life balance is as personal as personal finance and it’s an issue that won’t go away. It isn’t a “feel good issue” or an executive perk. A good work/life balance is how companies can insure that employees are able to meet both their work and personal goals. Both are important and by meeting both, companies realize the benefits of happy workers and lower turnover.

Summary

Three things take up the majority of your personal time:

• Things
• Commitments
• Relationships

By setting and prioritizing goals, making moments for things that matter, de-cluttering your life and home, reining in your commitments, and seeking a good work/life balance, you and I can insure that we make the most of our personal time and increase the richness of our relationships as well.

Imagine going to the grocery store to get some ideas on what to fix for a dinner party. As you’re pinching the fruit to test for ripeness, a man walks up to tell you that EVERYBODY needs to eat apples at least twice each day. Nonplussed, you meander to the bakery where a woman insists that all ciabatta bread is disgusting. Moving right along to the seafood aisle, a couple loudly proclaims that all dinner parties must serve grouper. It would be kinda ridiculous, wouldn’t it?

I think the same thing applies to a lot of what we read on the Internet. People’s opinions, good and bad, have a way of showing up and not all of it is applicable to you (you and your dinner guests may LOVE ciabatta bread!).

One size personal finance does not fit all

When I read the work of other bloggers or writers, I can see that each has taken their circumstances and played them to their advantage using the basic tenets of good money management. Personal finance IS personal!

Though there are some reliable guidelines, there are very few rules that are applicable to every person in every situation, so the next time you read a headline that says “everyone” or “all,” take it with a grain of salt.

By the numbers:

• 5 Practical Ways Anybody Can Become a Millionaire
• 5 Reasons You Need a Tax Professional
• 7 Bad Writing Habits You Learned in School
• 24 Ways to Help you Buy Cheap Used Books
• 5 Steps to Closing Old Bank Accounts

Personal development

• The Art of Forging Your Own Path
• the cruise, the bagel, and the black castle
• Optiphobia: Making Peace With Your Dreams (and Disappointments)
• Stop Waiting For Your Life To Be A Fairy Tale
• What’s Luck Got to Do with It?

Making the most of your money

• Best Discount Brokerage Firms
• Are Hybrid Cars Worth The Extra Cash?
• Earning Interest and Dividends on Someone Else’s Dime
• Organizing Your Way to a Simple Christmas
• How to pay off your mortgage early (4 methods)
• Avoid The Pressure To Spend

Over the past two years, I’ve regularly chronicled my disdain for debt, calling it slavery and listening to scores of readers who think it’s no big deal. To me, debt is always a big deal because it represents an obligation to someone else and I don’t take any of my obligations lightly.

Just like tens of thousands, I’ve placed a high priority on following the rules any creditors have set up and I’ve paid them all as regularly as I could. Most of my creditors have been paid off and I have a big, fat ZERO on my account balances. If I do charge something, I pay it off as soon as possible, so you can only imagine my surprise when I found that Bank of America and Citigroup plan to assess a new annual fee of $29 to $99 on customers like me. For the record, I closed my Citigroup card when they started charging me an annual fee and I’m just waiting to see if Bank of America plans to follow suit. Without it, they don’t make a lot of money on me.

It’s difficult to live without a credit card

It’s difficult to live without a credit card today. They provide consumer protection, they’re required if you want to rent a car or get a hotel room, they’re almost your only choice when buying anything on the Internet, and they are fast becoming the preferred method of payment at many retailers.

So what do I plan to do? I’m considering several different credit cards as an alternative to my old Bank of America card:

I think it would be easier to go ahead and get one of these credit cards now, before I’m forced to cancel my only credit card (the Bank of America card) because of some ridiculous fee. I don’t respond well to arbitrary fees! And yes, I’ll be paying the card off each and every month, all the while reaping the rewards for purchasing items I was going to buy anyway.

To my way of thinking, that’s free money!

Yesterday I wrote an article about 13 loans that scare me to death, but the truth is, almost all debt scares me to some degree. Now I know what you’re thinking – what about a mortgage, what about student loans, what about business loans, yada, yada, yada. What about those all important loans that are taken out to buy an income producing asset?

Yes some debt IS necessary to produce a certain lifestyle. My problem with most debt is that debt controls you. It controls your thoughts, your actions, your motivations, your choices regarding employment, and your life in general. It’s always in the back of your mind.

Debt controls you

Yes, just like the book title reads in Debt Is Slavery, debt puts you in chains of some sort. Don’t believe me? Think of it this way:

If you lost your job tomorrow, would you worry about how to pay your mortgage? “No, I have a 3 (or 6 or 12) month emergency fund.” Great – would you be worried at the mid way point of month 3, 6 or 12 if you still hadn’t found a job? That worry is debt’s control over your life. Now imagine the same scenario with a completely paid for home … it has a whole new flavor.

Debt is what keeps me awake at night. It makes me hedge my answers when asked my opinion at work. It makes me wonder if I have enough insurance. It makes me cautious with spending money on anything at all … especially something frivolous.

I’ve been in debt for all the right reasons:

• mortgage
• business loans
• student loans to get my undergraduate degree
• student loans to finish my degree 15 years later
• student loans to get my graduate degree

and for all the wrong reasons:

• to buy disposable items
• vacations
• restaurant meals
• cars and trucks
• gizmos and gadgets
• lifestyle debt

When I’m in debt (for whatever the reason), it’s always in the back of my mind. It’s an obligation that never turns off.

Debt drives the insurance industry

Debt is the reason for a lot of insurance. How much car insurance coverage would you get on a new vehicle if it was completely paid for when you drove it off the lot? My guess is a lot less than the bank demands – after all, that car isn’t fully yours just yet.

Avoiding future debt or too much current debt is the reason for mortgage insurance, the reason for a lot of life insurance, the reason for health insurance, disability insurance, and the list goes on.

Good debt vs. bad debt

Is there such a thing as good debt and bad debt? That depends on your perspective. Debt is great when it helps someone buy a home that appreciates in value, provides shelter for their family, and becomes a “home.” That same debt is very bad when the home declines in value, the owners cannot sell it for more than the mortgage balance, and the breadwinner dies with less than sufficient insurance to pay it off, forcing the family to make some very hard choices.

Debt is great when it enables a student to attend the university of their choice but it becomes very bad when the repayment schedule comes due and the student hasn’t found employment with a high enough salary to make the payments.

Debt is great when it helps a family start a business and provide goods and services to the community. That same debt is bad when the business falters and the owners have to sell all their assets to pay off the debt and avoid bankruptcy.

Debt is a double edged sword

Debt is a double edged sword, capable of doing a lot of good, but also capable of destroying your life. Handle that sword with the utmost care and deliberation, not with a flippant attitude.

Some people claim that fear is based on ignorance, but my personal fear of these financial vampires is based on knowledge. Some of these loans are scary because of how they’re structured, some loans are scary because of what you’re buying with them, still others qualify because of who you’re borrowing from. I plan to stay far away from these loan monsters:

1. Payday loans

Pay day loans thrust borrowers into a debt cycle that can be difficult to break because of their high interest rates and the fact that they’re designed to be extremely short-term. Many borrowers manage to pay only the weekly fee while the principle remains the same and the interest piles up. Payday loans are the monster that seems to never die.

2. Margin loans to buy stocks

Generally you can borrow up to half the value of the securities you wish to purchase and I know there are lots of people who have made a lot of money buying stocks on margin, but I’m not one of them … and I don’t plan to be. Buying stocks with a margin loan can make you a ton of money if the stock increases in value but it can magnify your losses if the stock loses value. If the stock loses large enough (usually 25 percent of the value of your loan), your broker can demand additional cash deposits to your account. If you can’t cover the demand for more money, your stocks can be sold by your broker. If your portfolio really hits the skids, you can end up with no stocks and owe money to your broker. That’s a lot of “ifs” but it happens all the time.

3. Tax refund anticipation loans

The best way to avoid needing this loan in the first place is to adjust your tax withholding. But if you do have a refund coming, getting a loan from your tax preparer is akin to using a loan shark. The interest rates (and fees) are so high they’re scary! You waited all year for this money, why not wait just a few more weeks and save the fees and interest? Hint: you’ll wait less if you use direct deposit to your checking or savings account.

4. Overdraft loans

I haven’t needed one of these loans in 15 years but that’s because I know how much money I have in my checking account and check it daily. These loans are scary because they indicate a lack of attention to your finances.

5. Car title loans

With a car title loan, a borrower secures a loans with a fully paid-for cars at one of these title loan shops. Failing to pay back the loan can have predictably severe consequences. If you don’t or can’t pay back the loan, the lender will take your car and sell it. And in many jurisdictions, the lender doesn’t have to give you back any profit from selling your car either.

6. Co-signed loans

Nothing like the responsibility of a financial obligation with none of the benefits. Co-signing a loan does just that, obligates you to pay for for something you don’t own. Sometimes parents help their children establish credit by co-signing a loan but a much better option is a secured credit card to build or re-build your credit score.

7. Debt consolidation loans

You can’t solve a debt problem by adding more debt. The biggest problem with a debt consolidation loan is that people typically charge their credit cards right back up after paying them off with a consolidation loan. Then they have TWO payments to make. A better plan is to implement a budget and a spending plan.

8. Credit card cash advance loans

Nothing like paying interest from day one, huh? I don’t have a problem with credit cards per se, so long as you pay them off each month to avoid the interest charges. My problem with a credit card cash advance is that it charges interest immediately.

9. Pawn shop loans

After watching Pawn Stars on cable, I’m amazed at how these guys negotiate. They are the masters at what professional negotiators call “bracketing,” where you know how much the other side wants up front, so you start way, way low, hoping to meet somewhere in the middle. The lower the pawn shop responds to the sellers initial offer, the lower that meeting point is. Pawn shops rarely lend anyone the full amount the borrower wants because the pawn shop values your stuff is much less than you do … and they have to make a profit should they have to sell it. When they do make a loan, it’s at exorbitant rates.

10. Loans with a longer term than the life of the product

Taking out a loan with a longer term than the life of the product is a bad deal for every person involved. The lender takes too much risk and the borrower is nuts! Who wants to be paying for something years after it’s useful life ends? If you do, the only incentive to repay is the fear of a lawsuit or damage to your credit report. Avoid any loan where the product will depreciate faster than the principle is paid.

11. Interest only loans

Taking out an interest only loan is like driving with one wheel in the sand – you’re going no where. Whether it’s for a home, a business, a product or a service, interest only loans favor the lender far more than the borrower. Use them with extreme caution in extreme circumstances.

12. Home equity loans

With the recent decline in home values, it’s hard to believe there could ever be people interested in borrowing against their home, but as the economy stabilizes, there’s a better than even chance that people and banks will renew their love of the home equity loan. Why is it scary? When you borrow against your home to pay for something, it’s usually indicative that your spending habits are out of control. Not only that, but to borrow against your home to pay off a car or credit cards, you’re using a 15 to 30 year loan to pay for products or services who’s useful life is only a fraction of those years.

13. Lifestyle loans

No matter what it is, a wedding, a vacation, a honeymoon, a recreational vehicle, a big screen television, hair implants, a car, a tummy tuck, whatever, borrowing money for a lifestyle change is a bad idea for your finances. The “bump” in your lifestyle is usually short lived yet the loan still has to be repaid.

There you have it, 13 of the most scary financial goblins around. I plan to stay far away from each of them.

What other loans or financial products scare YOU?

photo credit: Gilgongo