This picture says a thousand words ...
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Since the explosion of action on Capital Hill related to credit and Wall Street reform, new regulations continue to go into effect, impacting bottom-line bills for credit card consumers.

As the debate heats up and “Main Street” feels change in the air (and hopefully, in our pockets!) the UWSA financial blog is stepping in to help you stay abreast of current news and make sense of the trends.

Not surprisingly, The Wall Street Journal sides with banks in its latest analysis of the impact of financial regulations on interest rates and credit card options of ordinary consumers. WSJ argues that new rules are harming average credit customers, but consumers may have a contrary opinion: credit card losses are falling more than expected as ordinary people continue to improve their debt management strategies. As of July, delinquencies have reached their lowest level this year and bad loans are also on the decline. This news comes hot on the heels of even more credit card rules which prohibit the raising of interest rates until 12 months after a credit account becomes active, and requires creditors to warn their customers 45 days in advance of rate increases.

Inactivity fees are also on the chopping block this week, as credit card issuers will no longer be able to impose fines based on a lack of credit use. That said, card companies may eliminate accounts that haven’t been used recently at their discretion, so now may be a good time to break out that “emergency” credit card and buy a pack of gum! As regulations click into place, there are concerns from some quarters that a further credit crunch could negatively impact America’s ~9% unemployed; but savvy cardholders should remember that income is not part of your credit score.

Want to know more about the new law behind it all? Check out this overview, but don’t settle for secondhand information: also view the full bill text for yourself. Also of interest, the “granddaddy” of credit consumer protection laws in the United States, the Fair Credit Reporting Act and the lesser-known, but no less important, Fair Credit Billing Act. Our own UWSA blogs also has a variety of previous reform updates and analyses of relevant laws. Browse our archives and you’ll know a lot more about where, when, and how you’re protected from predatory credit and lending practices.

Meanwhile, what’s going on over on Wall Street? The Dodd-Frank Wall Street Reform Bill has already prompted some calls for repeal, while others claim it doesn’t go far enough, or, in fact, addresses the wrong problems. At least one Washington Post writer sounds a confident note about smart reform for bankers, and proponents are pinning their hopes for a more robust reform agenda on “The Woman Wall Street Hates.” And regardless of how you feel about Wall Street reform, everyone is concerned about a double dip recession! The final impact of the White House’s wrangling with big banks is unknown, but you can do your part by staying informed! Hope we’ve helped you do it!

New legislation means more "required reading" for creditors Photo by: Piotr Lewandowski (Stock Exchange)

It’s common wisdom – and it even happens to be true – that the longer your credit history, the better. The age of your revolving accounts, both individually and on average, is a major factor in determining your credit score.

Until recently, it was easy to “get in the game” of credit right out of high school, almost as soon as you hit 18. But many credit offers extended to college students have been rife with predatory practices and implicit in long-term debt burdens.

With this in mind, recent legislation aimed at protecting credit consumers has drastically altered the credit landscape for young people.

What’s Changed in Credit Cards for Young People?

In a word: everything. Consumers are now barred from opening a credit card account until age 21, unless they can provide evidence of financial solvency or get a responsible adult to co-sign. This means that the students most likely to start early on their credit history are those with part-time employment; for others, the question of obtaining a co-signer can open up a sticky financial mess for both child and parent.

As with life-changing transactions like mortgages, co-signing on a credit card for a student indelibly links the co-signer and principal of the credit card. In the event the young person cannot pay their credit card for whatever reason, the co-signer is financially and legally responsible for the outstanding balance. This can negatively impact the credit report of the co-signer as seriously as a default on a personal account.

As of now, there is no way to “break the link” between the two parties for a co-signed credit card; both should consider carefully whether applying for a given account is the right move, by reviewing the terms and conditions and coordinating on any major purchases. If an account is diligently maintained until age 21, it might be a good option to apply independently for new credit around that time, and eventually retire the older account – however, this will penalize the young person’s credit rating to some degree.

What Other Credit Options Are There?

Some students who hold a part-time job may remain eligible for credit in their own right even under new regulations. In some cases, this may include students whose income is derived from on-campus employment, including “work-study” financial aid. Likewise, parents can choose to help their kids become more credit savvy by making them authorized users of existing credit accounts. Unlike a joint credit card in the student’s name, this gives the responsible adult full control over the account. In joint accounts, though the co-signer may receive a monthly statement, all decisions are made jointly.

Ultimately, though new regulations make it more difficult to become established, they’ll also help regulators clamp down on unfair practices aimed at victimizing inexperienced consumers. In the long run, the regulatory situation makes credit a decision that requires dependent students to consult their parents, even if they’re away from home – while independent students who are financially sound will still be able to choose on their own. Instead of looking at it as a burden or unfair intrusion, consider it a chance to teach a few more lessons about financial responsibility in the face of real world challenges.

Let’s break the credit risk code!
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Earlier on UWSA we discussed your credit score and how to interpret it. Now, we introduce a new tool for raising your scores: your Credit Risk Reason Codes.

These codes are part of your credit report, and a few of the most pertinent ones may also be provided if you are rejected for a new credit line. Since descriptions are vague – numbers are sometimes all that’s included – many consumers do not realize these Risk Reason Codes can be extremely useful in diagnosing credit.

In the long run, tailoring your debt management strategy to take your personal “risk factors” into account can lead to lower credit card balances and a much easier time dealing with creditors of all kinds.

Seven Common Reason Codes and What to Do

There are less than 50 Risk Reason Codes, and some can be confusing. Depending on how mature your credit history is, and uses you’ve put your creditworthiness to, you’ll encounter different codes at different times. In some situations, credit scores can seem to plateau due to situations in your Risk Reasons; likewise, these clues are vital to deciphering why your score may be dropping or not rising as fast as you would prefer.

01: Amount owed on accounts too high: In short, the more debt a consumer holds, the more risk they will represent to creditors. At a certain point, a consumer is considered “debt burdened”; that is, their total monthly payments represent a substantial portion of their documented income. This Risk Reason represents conditions where creditors are concerned that further debt will imperil your ability to pay accounts. There are also several related messages, all of which are resolved by eliminating account balances and reducing long-term balances below 50% of available credit.

02: Level of delinquency on accounts too high: If you’ve been making payments late recently, you may encounter this. Take corrective action by communicating with your creditors and bill collectors, arranging for more favorable payment terms. If necessary, look into debt consolidation or credit counseling as a means of recovering your bearings and getting all of your accounts current.

03: Too few revolving accounts: In certain situations, especially early on in credit history, you might find that the number of accounts you have works against you. There are two ways this can happen: the more common is this; too few accounts. In terms of credit history, your accounts carry more weight as they age and you maintain them faithfully; so even if you strive to be responsible by holding few accounts, you may be penalized.

04: Too many revolving accounts: The opposite of the problem above is this. You can and should close down accounts you have no intention of using, and it may take some time to strike the right balance for your needs. Close accounts beginning with the newest first. To prevent “zombie debt”, be sure you obtain written confirmation of each closure along with a statement showing a zero balance on the account just prior to closure.

05: Too many accounts with balances: Even if balances are not high, having too many active accounts can result in a credit score penalty. That said, you have to balance this need with the need to maintain occasional use of each account to ensure your creditors don’t close them without consent. If you receive a notification of too many balances, it may simply be a matter of paying off low-balance, infrequently used accounts.

08: Too many account inquiries: “Credit pulls” that lenders execute when checking your credit history are also part of your records. If these become too frequent, they result in this Reason Code, further prejudicing your credit status. If at all possible, try to limit opening of new accounts to infrequent occasions six months apart or more. Also bear in mind that if you’re opening many new accounts, even if you are being approved for all of them, this can still temporarily damage your credit and lead to a Risk Code of its own.

19: Too few accounts paid as agreed: If you see this message, it’s another time to consider debt consolidation. This error means that there are a number of unsatisfied debt collection accounts outstanding against you. If this seems inaccurate, review your credit report thoroughly for evidence of inaccuracies, fraud, or “zombie debt” that you are sure has been paid in full, but is still reported as an outstanding balance.

Is your credit score “on target” for prime rates?
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Previously on UWSA, we discussed your credit report, the three major credit reporting agencies, and how to obtain your report for free.

For many purposes, the information in your report is enough to gauge the health of your credit history: you’ll be able to pinpoint problem accounts, inaccuracies, and potential fraud, all of which are major sources of trouble with your credit score.

But the credit score itself is a complementary tool, a reflection of the report developed by each agency; and in virtually all cases, it isn’t free.

Before you pay to check your credit score, a little explanation is in order.

How is Your Credit Score Used?

Your credit score is a simple “shorthand” that represents your total credit history. It can be accessed quickly by banks, lenders, and retailers for purposes like extending credit and deciding terms for loans, mortgages, insurance, and other major transactions. The credit score is accessed every you are assessed as a credit risk, and is understood as a measure of how likely it is that you will meet your obligations on time and in full according to the terms of your financial agreements. As a general concept, this measure of your fitness for credit is known as your creditworthiness. With each access or “pull” of your credit score, it is adversely affected; but as we saw before, many other factors have more weight.

What Do Different Credit Scores Mean?

Your credit score can range from 300 to 850, and tends to change every 30 days as your creditors report recent news about your accounts. Though the range and the interval of updates remain constant, different lenders may interpret scores differently: for example, one lender may offer its best interest rates to customers with a 775 rating, while others may require an 800 rating. The criteria for these internal decisions vary and are generally not totally transparent to consumers, but some guidelines can definitely be understood.

Only about 2% of people are on the lowest tier of the credit score, from about 300 to 499. Anyone in this category should seriously consider credit counseling, debt consolidation, and taking a proactive strategy in dealing with creditors. Opportunities for credit are severely restricted for such consumers and they may find themselves targeted by unscrupulous lenders who operate with predatory rates.

On the other side of the range, about 13% of people in the U.S. have scores from 800 to 850. These consumers have exceptional credit and, by definition, can expect to receive the most favorable rates. These consumers shouldn’t hesitate to compare different lenders, become savvy about options, and actively seek out the best rates. From the perspective of the lenders, there is no reason not to offer them.

The median score is about 700, meaning about half of all credit-holders can be found on either side of that divide. This makes 700 the mathematical middle score, “average” for most purposes. Scores below 620 to 640 are considered “sub-prime”, and consumers with these scores are considered serious risks. When analysts refer to “subprime lending”, they mean the trend of extending large amounts of credit to borrowers in this category.

Why Is My Credit Score Low?

Aside from fraud, errors, and delinquency, there are several other reasons why credit scores might be low or lower than expected, leading to rejection when dealing with lenders. Some of these reasons are more technical than others, but it’s important to understand them to optimize your debt management and achieve lower interest rates. In a future post, we’ll discuss the reasons that a particular request for credit might be rejected, what each one means, and how to address them.

Is your credit report everywhere you want to be?
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These days, as more and more people have found themselves dealing with creditors on unfavorable terms and fighting to pay household bills with mounting credit card balances, consumers are inundated with calls to keep an eye on their credit report.

Receiving a credit report from each of the three reporting agencies once a year is free, and it’s also a key step in detecting fraud and preventing identity theft.

Today, UWSA discusses the credit report: how to obtain it, how to read it, and how it relates to the credit score.

Obtaining Your Free Credit Report

Though there may be similar outlets with catchy jingles advertised on television, the official website maintained by the three credit reporting companies to meet their legal obligation to provide one free credit report per company per year; other services offering “free” credit reports usually do so under the condition that the user agree to credit monitoring or another fee-based service.

Using AnnualCreditReport.com, you can easily obtain reports from Experian, TransUnion, and Equifax. The website requests personally identifying information, including your Social Security number, and asks you several questions about your major credit history and past addresses to prevent fraud. Once verified, you are able to select one, two, or all three companies to receive credit reports from. Though the details of presentation differ, these reports are all essentially the same in intent and use.

Contents of Your Credit Report

Some essential features of your credit report include …

Complete transaction history. Your credit report includes past and present credit, loan, and other financial accounts and their status. You should explore these accounts, ensure that each one was legitimately opened by you, and verify that all accounts closed in the past are designated as such. Also included is the average age of opened accounts; a higher average age indicates a longer and more stable credit history, and therefore, a lower risk.

Potentially negative items. Modern credit reports generally single out “potentially negative items” such as account defaults for your attention. The website interface permits you to open a dispute case for these items from within your credit report. “Zombie debt” and other fraudulent or abusive practices, both from identity thieves and from creditors, can be detected by examining these entries.

Total indebtedness. Many modern credit reports allow you to estimate the total amount of payments due to all of your outstanding accounts and the type of debt that each one represents. Having a high amount of credit use in relation to your total credit line or total income are major factors that might prevent you from getting loans on favorable terms, and may result in restriction of current credit lines as consumer credit stagnates.

While much of a credit report is simple and easy to understand for a non-expert, there are a large number of features and facts not mentioned here. You can only access your free credit report once per year, and once you log off from your session, you generally cannot return to it. Be sure to set aside no less than an hour to understand your report thoroughly.

What About Credit Scores?

Your credit score is a numerical representation of overall credit risk, derived from the contents of your credit report. It’s an easy shorthand to understanding the health of your credit history, and is used constantly to determine your level of credit risk. Unfortunately, credit reporting companies are not legally obligated to provide your credit score with your credit report, and have monetized this as an add-on feature. We’ll discuss the credit score specifically and describe what each score means in a future UWSA post.

Ready to leave home after graduation? Not so fast!
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Inthe last few posts on UWSA, we’ve been talking about student debt. More than any other financial challenge, even high credit card balances, student loans and debt impact the lives of millions of young people on the long term. With tuition rising each year, and the job market unsteady, some experts are recommending systematic change to help students who are dealing with creditors and trying to establish themselves financially. Should college students consider staying at home a year after graduation?

Post-Graduation Options and Your Finances

In the U.S., there’s a long tradition of uprooting and moving far from home at a fairly young age, with college serving as a “practice run.” But many students do not now have the savings or job security it takes to make a down payment on a home and obtain a mortgage at favorable terms. Further, with friends in the same situation, roommates may not necessarily be able to keep up with their part of a rental agreement. What to do? Establishing yourself for about a year in your home community can help contribute to long-term stability, but it’s not the only route. Here are some options considered.

If possible, stay in school. One of the best places to weather a recession is in graduate school, especially if your agreement to attend is made before the economy “bottoms out.” Generally, universities sign contracts with graduate students that are binding and result in a substantial level of financial support, in exchange for academic progress and some teaching responsibility. This amounts to a secure “job” and, often, favorable living conditions in an area that benefits from the university’s presence. On the other hand, pursuing graduate study mid-recession can be more difficult.

Consider staying at home. Grace periods for student loans quickly expire, and can raise your monthly cost of living by hundreds of dollars. Seeking employment close to home can eliminate some recurring expenses and allow you to pay down common household bills like high credit card balances that might have built up during college, eliminating recurring payments. Temporarily staying at home may also count favorably in attempts to get consolidation loans, as you’ll have been at the residence for longer, and pay less. You’ll also have the benefit of being able to search for work in an area you’re familiar with; and should the worst happen and you find yourself underemployed, you’re likely to qualify for unemployment deferments for your federal student loans.

Evaluate the job market carefully. If you do plan to move soon after college, don’t rush! Network with former professors, bosses, co-workers, and other students to get leads for work. Narrow down your options by finding out the average rent and cost of living in areas you might want to live or might become employed. Consider seeking professional help from a career consultant to write and develop your resume and your interview skills. And save, save, save! It’s never too early, or too late, to begin building an emergency fund, and there are always unexpected expenses when you move. The best possible situation may be to start with a company “at home” and seek a transfer into your desired area in the future, after you’ve built up some social and professional capital at your workplace. Though this isn’t always possible, try to consider your options on the long term, with your budget in mind.

Is he thinking ahead to years of debt?
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Last time on UWSA we described the basic categories of college financial aid and how each one relates to a student’s financial future.

Now, we’ll zoom ahead a few years to discuss what happens after graduation, when both federal and private student loans fall due.

In today’s job market, a salary that can pay substantial student debts along with living costs within a short time of graduation simply isn’t guaranteed.

Knowing the ins and outs of repayment in advance can make debt management much easier.

Grace Periods, Forbearance, Deferments, and Forgiveness: What to Know

Depending on the type of loans you have, different payment plans will be available, and different criteria will be in place for grace periods, deferments, and loan forgiveness. The grace period is a time following graduation during which no payments are required and no interest accrues. For federal aid, grace periods are quite long, amounting to six months or more. Private loans vary, and may have no grace period at all.

Deferments are periods when no payments must be made, but during which interest continues to accrue. Deferments may be claimed or extended for various reasons, discussed below. Many private loans only permit deferment in cases where the student is continuing his or her studies at the graduate level and is enrolled with a full class load. However, federal loan deferments are much more flexible and there are more options.

Federal loan deferments generally last for 12 months and may be renewed or extended, either on the same basis, or based on new circumstances that also qualify. Loan forbearance is deferment in which the payee is willing, but not able to pay under the loan’s terms due to temporary financial hardship, and has similar implications.

Loan forgiveness is also sometimes possible in the case of government financial aid. Some federal workplaces allow for loan forgiveness after several years of service. There are also employers in the private sphere who may offer programs to help young employees defray the costs of their loans on the long term. In most other cases, loan forgiveness is only possible for students who die or become totally disabled.

Your Loan Deferment Options and What They Mean

Long-term loan deferment is not an answer to the problem of student debt; interest continues to accrue and larger payments will have to be made eventually. However, with an uncertain job market and economy, it’s only reasonable to know which deferments you qualify for. Here are some of the most typical ones. For information on all deferments, including complete eligibility criteria, visit Federal Direct Loan Servicing Online, the centralized resource for federal loans and repayment.

Armed Forces: Personnel who are actively serving in the U.S. military and who have agreed to serve for at least one year may qualify for deferment. National Guard service may also qualify one for deferment during a defined emergency.

Unemployment: Individuals seeking, but unable to find 30+ hours of work per week, and who expect this to go on at least three months, may qualify for a deferment for the duration of their unemployment if they continue to seek work.

Graduate Study: Students who are involved in continuing graduate-level education on at least a half-time basis usually qualify for a deferment for the duration of their program.

Tax Exempt Organization: Individuals working for a charitable nonprofit, directly engaged in service within the community that addresses the problems of poverty, may qualify for a deferment if making less than minimum wage.

Teacher Shortage Area: Qualified teachers who are working full time in a region, grade, or subject defined by the Department of Education as suffering a workforce shortage may qualify for a deferment.

Working Mother: Mothers of children who have not yet entered the first grade, and who do not earn more than $1 above federal minimum wage (currently set at $7.25 an hour) may qualify for a deferment.

Are you getting “hung out to dry” on student loans?
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One of the central facts of financial life for millions of young Americans is student debt.

Indebtedness related to tuition at university is one of the major sources of long-term debt burden in the United States, ranking alongside costly medical bills as a potential source of monetary heartache for years to come; even high credit card balances don’t pose the same systemic risk.

For many students whose families lack financial resources to pay full cost of attendance, loans covering some expenses are nearly inevitable. But, with forethought and diligence, long-term debts can be minimized.

This is the beginning of an ongoing series intended to shine a light on college finance. We’ll give you the facts you need to make sure you won’t be dealing with abusive creditors the day after graduation.

Federal Financial Aid Should Always Be Your First Stop

Federal student aid comes in the form of grants and loans. Grants never need to be repaid; they are essentially a “gift” intended to defray some of the costs of education. Loans, on the other hand, must be repaid. To make things more complicated, student loans come in “subsidized” and “unsubsidized” forms. Subsidized loans do not accrue interest while the student is in school, or during deferments or grace periods; unsubsidized loans do.

Subsidized loan eligibility is based on need, according to the income of the student’s parents or guardians. In many cases of high demonstrated need, a large portion of tuition can be paid through subsidized loans. Though federal loans have favorable and flexible repayment schedules, they are obviously not preferable to grants; but federal loans are relatively easy to obtain compared to grants and scholarships, discussed below.

Students who hope to qualify for federal aid must submit a simple Free Application for Federal Student Aid each year, which is used to measure financial need. A student with need is likely to qualify for both subsidized and unsubsidized loans, but can elect not to accept unsubsidized funds, or accept a smaller amount than was offered.

There’s No Such Thing as a Free Lunch – But Grants and Scholarships Come Close

Grant and scholarship are closely related terms. A grant is any money that is provided as a “gift” to help the student pay the costs of college. In effect, all scholarship money comes in the form of a grant: but unlike federal aid, most scholarships are based on direct, academic competition (in other words, “scholarship”) rather than need.

Scholarships in varying amounts are administered by thousands of different private and public agencies, and many require essays or other types of entries to qualify. Scholarships of this kind are called merit-based, and though an individual school may offer several, for the most part it’s up to the student to find, apply, and win them. Though they are the most favorable financially, it’s usually unreasonable to expect them to pay for a very large portion of expenses over several years.

State Colleges are Often More Financially Favorable Than Private Ones

State colleges offer favorable tuition rates to state residents, often a savings of 30% or more compared to rates for out-of-state residents. State colleges may also offer a larger proportion of need-based aid. However, state colleges are subject to budget crunches that many established private institutions can weather more successfully, and this has a direct impact on aid from year to year. In sheer monetary terms, state colleges are usually much less expensive, and transferring from a state college to a more “prestigious” private university usually leads to more financial aid at the private institution.

Private Student Aid is Often a Raw Deal

The final major category of student aid is private funds from for-profit student lenders who work with banks to obtain funds on your behalf. For many, some private loans will be inevitable. However, do everything you can to budget and cut costs before going this route. Repayment terms for private loans vary and are often unfavorable. Interest rates can be exorbitant, leading to long-term debt. Some student lenders have been implicated in abusive and deceptive practices, such as paying university administrators to advocate for their loan products in financial aid offices. If you must use private aid, compare all of your options carefully, and consider getting help from an independent financial adviser.

In our next installment, UWSA will answer questions about student debt repayment. What are your options? What about debt consolidation? Even though aid does not need to be repaid until after graduation, preparing from day one can save thousands of dollars.

Reward cards: leverage for your planned purchases?
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Savvy consumers like UWSA readers know that there are certain things you have to know before accepting any credit card offer.

Basic aspects of your credit agreement such as APR, maintenance fees, and overage charges can make a huge impact on future dangers of credit card debt.

A little while ago, we discussed how to use your debit card to help accumulate savings for small purchases and medium-term goals.

This time, we’ll talk about maximizing benefits from your credit lines.

Credit Card Features, Positive and Negative

Consumer credit is still sluggish at this phase in the recovery, but signs of improvement are starting to show up. Under today’s conditions, accepting credit offers that involve maintenance fees, prohibitive penalties on overages, or a lack of fraud protection is just plain unnecessary. Even if you’re at an early stage in your credit history, or have minor credit card debt issues in your past, don’t feel as if you have to take any offer that comes along. Even in responsible hands, a bad credit card is like a ticking time bomb, and it could very well do more harm than good to your finances in the end.

On the other hand, if you understand your buying habits well, you can use a credit card with strong benefits to your advantage, in conjunction with good debt management habits. This is one place where having a budget is good; it allows you to see the “hidden” places where your money goes, allowing you to understand and work with your spending patterns. However, some things about your budget may be more obvious than others. For example, if you know that you like to take international trips every year or two, a credit card that offers frequent flyer miles or “points” for purchases may be valuable to you.

Choosing (And Using) Special Credit Offers

Let’s take the frequent flyer example a little further. If you know that you are going to get a bonus in terms of “miles” for every purchase, then you gain something whenever you use the card. Treat the credit card like cash and pay it off immediately after every purchase; do not use it to go outside your usual spending habits, and definitely do not accrue credit card balances! Instead, look for ordinary purchases that you would normally make with cash, use the credit card, and pay the balance diligently – as soon as you get back from the store. You do not gather debt, and you end up minimizing, at least a little, the impact of big purchases you know are in your future. The same strategy can be used with cards that have other kinds of benefits and bonuses; just do not overdo it!

Of course, you should examine any benefits agreement closely and make sure you understand it well. Get a good sense of how the “points”, “miles”, or whatever else you’re getting translate to purchases in real terms, what’s required, and how you can redeem them. It’s no good to you if you can only use your accumulated benefits once a year, for example, or if you lose them after an extremely short time if you don’t use them. It is also a bad move if the benefits require a certain minimum balance or any other tricky provisions about the way your credit card actually works. Card benefits should work to enhance your spending profile, not complicate it – and credit cards should benefit you first and the company second. Do not let credit card companies “sell” you otherwise!

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In a previous post, we introduced 401(k) retirement savings plans. If started early and kept growing with a good rate of contribution from both employee and employer, the 401(k) can be one of the best ways to keep the bills paid after leaving the workforce.

But there’s the catch: the vitality of the 401(k) and its ability to stand up to big post-retirement challenges is built largely on employer contribution matching, where “the boss” chips in a quarter or more for every dollar an employee draws into his or her plan.

What happens when, after years of plugging along on your investment, an employer suddenly withdraws their support for contribution matching? Today, we’ll talk about what to do.

Key 1: You Can Protect Your 401(k) in a Job Switch

Under today’s economic conditions, thinking about switching job for better long-term dividends on your retirement plan definitely sounds like “the nuclear option.” But if you’re already considering a career move, the implications of non-matching over the decades might push you further in that direction. It is possible to protect your 401(k) funds while switching employers, but the process can be complex.

If your new employer has a comparable 401(k) plan, you can transfer your old plan to their new one. Remember that this should be executed as a “trustee-to-trustee transfer”, where the administrator company of your old plan deals directly with the administrator of your new plan. If, at any point in the process, your old plan administrator cuts you a check on the value of your 401(k), you’ll be hit with tax penalties that could reduce the value of your investment substantially; in some cases as much as 50%!

If you are not satisfied with the investment options offered by your new employer’s 401(k) plan, or are not eligible to transfer to the new plan (for example, due to a probationary period as part of your new employment) then you can opt for what’s called a “rollover” IRA. This is a somewhat complicated topic and will be covered in more depth in a future post.

Key 2: You Can “Tough it Out” – With the Right Moves

Jumping ship probably won’t be possible for the majority of workers, even once the boss axes contribution matching. After all, you’ve probably built up a lot of other forms of “equity” in your current place of business; human and professional “capital” that you aren’t eager to put aside. If you must continue on at a workplace where contribution matching has been eliminated, you should diversify your savings and investment strategy.

Your first move should be to evaluate the impact on your long-term savings; an independent financial advisor can help you determine this fairly easily. The second step is to open up other avenues for savings. While you should continue funding a 401(k) even without matching, it’s also wise to consider building up a cash reserve in a separate savings account or other low-risk investment.

The end of contribution matching may signal larger fiscal issues with your employer, and many experts recommend having 3-5 months’ worth of income saved up to protect you credit card debt and other bills in a disaster. This will prevent you from incurring penalties for using 401(k) funds early, and stop high credit card balances from mounting against household expenses if your income is endangered. Once you’re comfortable with the amount of cash you have on hand, increase your 401(k) contribution; to the maximum, if practical. This helps offset the damage from losing contribution matching.