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Personal Finance Blog By MoneyRates - August 2010

Half of bank customers choose checking account overdraft protection, American Bankers Association survey says.

August 31, 2010

By Barbara Marquand | Money Rates Columnist

Despite all the advice from personal finance experts to choose inexpensive ways to cover accidental checking account overdrafts, a lot of folks are apparently willing to pay 25 to 35 bucks a pop to ensure their debit card transactions go through when their balances are zero.

Almost half of bank customers, 46 percent, said they will, or already did, opt in for their bank's overdraft program and were willing to pay the attached fees, according to a new survey for the American Bankers Association.

"These results show that many bank customers value debit card overdraft protection and are willing to pay for the service," ABA Vice President Nessa Feddis said a press statement. "They are now in the driver's seat and control the way their accounts are managed."

New checking account debit card overdraft rules in effect now

The survey, conducted by an independent market research firm, polled more than 1,000 adults by phone Aug. 14 and 15, as new federal regulations went into effect Aug. 15 requiring banks to get permission from customers before paying debit card overdrafts and charging a fee for the service. An earlier phase of the rules went into effect in July requiring them to get permission from new account holders.

Previously, banks enrolled customers in the service automatically and charged fees each time they overdrew their accounts with their debit cards. Some customers racked up several charges a day without realizing their accounts were overdrawn. New rules were written after Congress passed a law requiring banks to get permission to enroll customers in such programs. A survey by Consumer Federation of America earlier this year reported the average overdraft fee at big banks was $35.

Other, less expensive ways to cover overdrafts include linking checking accounts to savings accounts for protection or linking checking accounts to lines of credit.

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News on auto loans points to more responsible consumer behavior

August 30, 2010

| MoneyRates.com Senior Financial Analyst, CFA

There's been a shortage of happy economic news lately, so a report on auto loans came as a welcome surprise. According to a study by credit reporting bureau TransUnion and reported by the Associated Press, the percentage of auto loans that were late by 60 days or more dropped to 0.53 percent from 0.73 percent a year earlier.

What's so great about that? It shows consumers are getting better control of their debts.

Auto loan data indicate strengthening household finances

The drop in delinquencies on auto loans is just one indication that consumers are improving their financial conditions. Lower delinquency rates on auto loans is part and parcel with a trend that has been emerging of late. Credit card balances are down. Household debt service ratios are down. People are getting out from under the mountain of debt that has been built up over the past decade.

This emerging pattern shows that we're not in for a quick fix. The Federal Reserve's actions--lowering interest rates to stimulate more borrowing--is a quick fix for the economy, but it's also a dead end. The last economic recovery was essentially built on increased borrowing, and look how that turned out.

A more solvent consumer would be the basis for a more sustainable recovery. It's a slower cure, but in the long run, stable households carrying less debt may best for what ails the U.S. economy.

The auto loans news is an indication that help is on the way, eventually. A stronger economy would mean more demand for loans, and it would also mean that the Fed could stop artificially driving market interest rates downward. Both would mean better money market rates, CD rates and savings account rates.

Posted in: Miscellaneous

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Savings accounts may be a victim of a flawed Fed policy

August 25, 2010

| MoneyRates.com Senior Financial Analyst, CFA

MoneyRates.com has previously detailed how people with savings accounts and other interest-bearing deposits have paid the price for the Federal Reserve's low interest rate policies. What may be even more galling is that these policies aren't working.

With the economic recovery clearly sputtering, it's time to look at some possible reasons why the Fed's low interest rate policies may not only be ineffective, but may actually be counterproductive.

  1. Low rates on savings accounts and other deposits take money out of the hands of healthy consumers. The idea is that low interest rates would stimulate the economy by making borrowing cheaper. However, borrowers seem intent on trying to pay down debt levels, not run them back up. So, low interest rates have been largely wasted in an environment of low lending volume, but they have taken money out of the hands of healthier consumers -- those with savings accounts and other positive balances earning interest.
  2. Low interest rates may make bankers even more reluctant to lend. Knowing the history of interest rates and inflation, banks might well be reluctant to lend at low interest rates, for fear of finding themselves stuck with those rates for years to come.
  3. The Fed may have a tiger by the tail. In its effort to drive down market interest rates, the Fed has accumulated over $2 trillion in mortgage and Treasury bond holdings. It now faces the dilemma of how to unwind those positions without swamping the market. In other words, the Fed finds itself committed to policies that aren't working.

With the Fed locked into keeping interest rates down, consumers had better shop for the best rates on savings accounts and other deposits, because that may be the only way you'll see higher rates for a while.

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Savings accounts, Social Security, pensions, investments: Will they provide enough income for retirement?

August 24, 2010

By Barbara Marquand | Money Rates Columnist

Seventy-five years after the Social Security program was launched, more than half of baby boomers who haven't retired yet plan to rely on Social Security for part of their retirement income, according to a recent report commissioned by the Insured Retirement Institute.

Surprising? Maybe not. Worrying? Certainly.

Many fear the wave of retiring baby boomers in coming decades could cripple the system.

"This is a clear indication that financial professionals, elected officials and the media all need to better educate consumers to look outside of Social Security to meet their guaranteed retirement income needs," Insured Retirement Institute President and CEO Cathy Weatherford said in a press statement.

Given the hits sustained by stock portfolios during the recession and the low returns on money market accounts, CDs and other low-risk investments, baby boomers are understandably worried about how they'll make ends meet once they stop working.

Do you know how much you should save?

Six out of 10 working baby boomers surveyed said they were concerned about outliving their savings and investments, and seven out of 10 said they were "afraid" they weren't saving enough.

Meanwhile, almost 80 percent of boomers within five years of retiring said they'd try to live on income alone, such as Social Security, pensions and interest paid on accounts like money market or savings accounts, according to the institute's report. More than half of boomers who are more than five years out from retiring say they're not sure how much they need to save for retirement.

The report is based on a survey of 4,100 households, 1,500 of which reported annual incomes of at least $100,000 or assets of $500,000 or more, not counting the value of their primary homes.

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Mortgage rates now look like the deal of a lifetime

August 23, 2010

| MoneyRates.com Senior Financial Analyst, CFA

Mortgage rates last week dipped to a new all-time low. In the midst of all the discouraging news about the economy, it's important not to lose sight of what an extraordinary opportunity these mortgage rates are for home buyers and homeowners.

According to Freddie Mac's weekly mortgage rate survey, 30-year mortgage rates checked in last week at 4.42 percent. Fifteen-year mortgage rates have been below 4 percent all month. A little historical perspective can highlight how unusual these rates really are.

Mortgage rates through time

Freddie Mac publishes mortgage rate history going back to April 1971. Since then, 30-year mortgage rates have ranged from the current low of 4.42 percent to a high of 18.45 percent in 1981. Prior to last year, 30-year mortgage rates had never dropped below 5 percent. Indeed, before the past decade, 30-year mortgage rates had never been below 6 percent.

With such a wide range of mortgage rates historically, what should be considered a "normal" mortgage rate? When you add up all the history, the average mortgage rate works out to 8.95 percent.

What the numbers mean

Mortgage rates as a percentage can seem like an abstraction, but running the numbers through a mortgage calculator yields a more concrete sense of what today's mortgage rates would mean in terms of a montly payment.

On a $200,000 30-year mortgage, the 8.95 percent average mortgage rate would require a $1,602.06 monthly payment. At current mortgage rates of 4.42 percent, that monthly payment would drop to $1,003.89.

There's no shortage of bad economic news out there, but you have to acknowledge that today's mortgage rates are truly the deal of a lifetime.

Posted in: Miscellaneous

Tagged in: interest, interest rates

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