The unexpected way lotteries can boost your savings

September 10, 2013

| Money Rates Columnist

The meager savings account interest rates found at most financial institutions may not be enough to convince everyone to stash their money at the bank, but offering a chance to win a cash prize for making a deposit may bring dramatically more savers into the fold.

That's according to recent research by several groups on the subject of prize-linked savings accounts. The chance to win big seems to be a sufficient motivation for many individuals to save in everything from savings bonds to certificates of deposit (CDs).

The link between prizes and savings

Last month, the non-profit Doorways to Dreams Fund issued a report on its Save Your Refund program, which encouraged those receiving a federal tax return to put at least $50 in a qualified savings account. In exchange, they would be entered for a chance to win a $250 weekly prize or a $25,000 grand prize.

Although relatively few individuals took advantage of the program in its first year -- only 772 entries were received -- Doorways to Dreams says it was pleased with the results and that it plans to run the promotion again in 2014. The average participant saved 33 percent of their tax return, and $691,797 was saved in savings bonds, savings accounts, CDs and IRAs, among other qualified options.

The Save Your Refund program comes on the heels of Doorways to Dreams' highly popular Save to Win pilot program in Michigan. That program enters individuals into cash drawings for every $25 they deposit into a savings certificate at participating credit unions.

In 2012, more than 15,000 individuals participated in the Save to Win program at 58 Michigan credit unions. They saved nearly $44 million and had an average year-end balance of more than $2,800. In addition, 82 percent of accounts open in December 2011 rolled over to 2012. What's more, 94 percent of self-reported non-savers rolled over their accounts, which may indicate that a cash prize trumps today's CD yields when it comes to encouraging savings.

The trouble with prize-linked savings

While prize-linked savings accounts appear to be successful at luring non-savers to deposit money, they also aren't legal at most of the country's major institutions. According to policy research group The Heritage Foundation, federal law restricts the use of prize-linked savings promotions at banks.

But while the promotions may be off-limits to banks, credit unions in some states can offer cash prizes as an incentive for saving. In a May 2013 report, The Heritage Foundation notes that 10 states may allow credit unions to offer prize-linked savings.

As concerns grow about the ability of many Americans to retire comfortably, more states could warm to prize-linked savings options. In June 2013, the National Bureau of Economic Research issued a paper indicating that prize-linked savings were particularly appealing to lottery players and those with low bank account balances -- groups that may especially benefit from having more money in the bank.

If these programs do take off, entering the lottery may eventually pay off for plenty of savers -- even if they never claim a jackpot.

Why retiring earlier may equal dying later

August 30, 2013

| Money Rates Columnist

How long you live may not only depend on your diet, exercise habits and genetics -- it could also be linked to how early you retire, according to a study released this month by the Tinbergen Institute at the University of Amsterdam.

Researchers from the university analyzed data relating to a 2005 decision to give Dutch civil servants a one-time opportunity to retire at age 55, instead of the usual early retirement ages of 61 or 62 or the full retirement age of 65.

According to the study's findings, men who retired early decreased their chance of dying within the next five years by 42.3 percent, or by 2.5 percentage points. Perhaps even more surprising was the fact that these early retirees had the lowest probability of death during that five-year period, even when compared to younger demographics. Women didn't seem to experience the same benefit, although females tended to have a lower death rate anyway.

The study hypothesized that the lower stress levels the early retirees may have encountered could have contributed to their lower mortality rates. Other studies, such as a 2011 report from Carnegie Mellon University that found that stress may interfere with how the body deals with inflammation, have suggested that stress could be a contributing factor in some illnesses.

Weighing an early retirement

The study was intended to provide guidance on how early retirements may impact public pension funds, but its lessons may be relevant to individual retirement funds as well.

Early retirement combined with long life not only means you have to stretch your retirement money over more years, but that you also have fewer working years in which to sock away money into your 401(k), IRAs and savings accounts.

Given that the savings rates of U.S. workers have been below 5 percent for most of the last decade, it may be impossible for many to afford retirement at age 55. A 2013 study by the Employee Benefits Research Institute found that nearly half of U.S. workers are not at all confident or not too confident in their ability to retire comfortably in the future.

Also, unlike their Dutch counterparts in the study, U.S. workers who retire at age 55 would have to completely self-fund their retirement until age 62, the earliest age at which they can begin receiving Social Security payments.

But the news for late retirees it isn't all bad. According to a French study, working longer may help prevent Alzheimer's disease, indicating that a late retirement may provide some benefits to brain health.

But whether you aim to retire early and live longer, or work later and be mentally sharper, planning carefully for your financial needs in retirement is likely a sensible move.

Trust your mortgage servicer? Maybe you shouldn't

August 26, 2013

| Money Rates Columnist

Don't count on your mortgage servicer to be honest with you about the status of your loan modification application. That's one of the findings from an industry review by the federal Consumer Financial Protection Bureau.

The bureau released a report last week that described serious issues with the way mortgage servicers transfer accounts, process payments and work with homeowners. In addition, it discovered that some nonbank mortgage servicers may lack independent auditing or otherwise be out of compliance with federal law.

"Today's report highlights both the mortgage servicing problems throughout the industry and the challenges of making sure that nonbanks are following federal law" said CFPB Director Richard Cordray in a written statement. "Fixing both is a priority for us."

Poor communication, sloppy paperwork among problems

Mortgage servicers are companies that process loan payments on behalf of lenders, and they may handle various other duties related to these loans, including foreclosure proceedings. The CFPB report identified three areas where mortgage servicers may fail to properly protect the consumers they serve.

  • Account transfers
  • Payment processing
  • Loss mitigation

Specifically, the bureau discovered some mortgage servicers fail to properly inform customers when their mortgages are transferred to a new servicer. The CFPB notes that when transfers take place, servicers may have disorganized paperwork and no protocols in place to protect key documents.

Similarly, consumers may not be notified of new payment addresses in a timely manner, resulting in late payments. Some servicers also fail to make property tax payments from escrow accounts as expected or delay cancellation of private mortgage insurance.

Loss mitigation appears to be an area of significant concern, with the CFPB unearthing evidence of poor procedures, lengthy application review times and inconsistent underwriting standards for loan modifications. Even more distressing for consumers may be the deceptive communications reportedly found at some servicers. According to the CFPB, failure to be transparent and clear in communications may have accelerated foreclosures in some cases.

The best and worst mortgage servicers

Customers don't always have a choice on who services their mortgage, but research suggests that there are major differences in how customers perceive various servicers.

A 2013 survey by J.D. Power and Associates found Branch Banking & Trust had the highest customer satisfaction among primary mortgage servicers. It was the fourth straight year the servicer had topped this list. Regions Mortgage placed second for customer satisfaction in the survey, and SunTrust Mortgage placed third.

Meanwhile, Nationstar Mortgage landed in the bottom spot for customer service satisfaction, just ahead of Ocwen Loan Servicing and EverHome Mortgage.

Because of the frequent sales between mortgage servicers, having the best servicer at loan origination is no guarantee that the loan will not be transferred to another servicer in the future. Because the CFPB says companies do not always promptly notify customers of loan transfers, consumers may find it wise to carefully review their loan statements each month.

In addition, to avoid late fees or penalties, customers may want to double-check their statement for changes to their payment mailing address and to confirm with their municipality that their property taxes have been paid on time.

3 prepaid cards that outperform the rest

August 21, 2013

| Money Rates Columnist

According to the Pew Charitable Trusts, consumers will load an estimated $200 billion on prepaid cards this year. But if you're considering one of these cards, you may want to think twice before you randomly pick one off the rack.

A study released last month by Consumer Reports says there are significant differences in the value provided by the various cards on the market. The report highlighted three cards that it says offer the best deal to consumers.

Seeking the best prepaid cards

Consumer Reports looked at 26 prepaid cards affiliated with a number of banks, businesses and celebrities. Among the cards reviewed were offerings from Chase, Walmart and former basketball star Magic Johnson.

The cards were rated on the basis of their value, fee clarity, convenience and safety. However, value was the factor that showed the most significant variation between the cards. No card received an "excellent" rating for value and only two -- the American Express Bluebird and the H&R Block Emerald Prepaid MasterCard -- received "very good" ratings in that category.

Overall, the report recommended only three prepaid cards.

  • Bluebird with direct deposit
  • H&R Block Emerald Prepaid MasterCard
  • Green Dot Card

While Bluebird card without direct deposit was not recommended, the only difference between this card and the recommended Bluebird card was the convenience factor. The Bluebird card with direct deposit was ranked "very good" for convenience while the version without direct deposit only ranked "good" in this category.

A competitor to checking accounts?

Although prepaid cards aren't likely to replace traditional checking accounts and debit cards anytime soon, they appear to be gaining popularity among those who don't use bank accounts. A 2012 report from the FDIC found 17.8 percent of unbanked individuals -- those without an established checking or savings account -- had used prepaid cards in 2011, compared to just 12.2 percent who had used them in 2009.

Some prepaid cards have also been accused of being checking accounts in disguise. Earlier this year, Bluebird cards were extended FDIC insurance, and most cards now offer direct-deposit options that allow them to function more like checking accounts. If that's not enough, some cards will even issue checks to users.

As for security, Consumer Reports gave high marks to nearly every card surveyed. The only card that didn't receive an "excellent" rating for security was the American Express for Target card, which received a "poor" score for reasons not disclosed in the report.

Despite the new features they offer and their growing popularity, even the best prepaid cards may not be a good fit for everyone. As with most financial products, purchasing a prepaid card without reading the fine print could lead to some unfortunate surprises.

Credit union credit cards: a threat to big banks?

August 15, 2013

| Money Rates Columnist

While they may not put the major credit card issuers out of business anytime soon, credit unions are convincing more of their members to carry union-issued plastic.

Callahan & Associates, a financial consulting firm, released a report last month that found that credit card penetration rates at credit unions reached 15.3 percent in 2013. That number is 55 basis points greater than 2012 levels and 95 basis points more than five years ago.

But while the overall gains are modest, the report notes that some individual credit unions claim credit card penetration rates of up to 65 percent, suggesting that unions that emphasize credit cards could make major gains in the future. Still, some industry analysts question whether credit unions are willing to offer cards that truly rival those offered by major banks.

Credit unions that have succeeded with credit cards

For credit unions, credit card market penetration refers to the number of members who have a credit union-issued card. For example, the industry average of 15 percent means that 15 of every 100 credit union members have a credit card affiliated with their institution.

According to Callahan & Associates, the credit union with the best market penetration can't be found on the list of the nation's 50 largest credit unions. Instead, it is Taupa Lithuanian Federal Credit Union in South Boston, Massachusetts. The 33-year-old institution only has 1,200 members, but more than 65 percent of them carry a Taupa Lithuanian credit card.

Nationwide, the analysis found that at least of half the members at the following credit unions had a credit card opened through their institution.

  • Taupa Lithuanian in Massachusetts: 65.66 percent
  • Valley One Community in Ohio: 60 percent
  • O.A.S. Staff in the District of Columbia: 58.18 percent
  • Napus in Virginia: 53.6 percent
  • Entrust in Virginia: 51.83 percent
  • KUE in Kentucky: 51.31 percent
  • Houston Police in Texas: 51.25 percent
  • School Employees Lorain County in Ohio: 50.66 percent

The need for more competitive terms

While credit unions have made some progress with their credit cards, their terms may still not be attractive enough to lure customers from their big-brand cards. That's according to a report from card-processing organization Card Services for Credit Unions, which notes that institutions may have to offer more if they want to compete with cards offered by major banks.

Among the strategies suggested in the report is the adoption of zero-interest teaser rates and the development of rewards credit card programs that are on par or better than those offered by banks. However, the rewards might not have to be anything extravagant. At Taupa Lithuanian, the incentive they use to convince members to open an account is a $10 coupon to the SBLCA Lithuanian Kitchen.

The first step, however, may simply be to get credit unions to offer credit cards. Callahan & Associates says that during the first quarter of 2013, only 54 percent of credit unions offered credit cards to their members.

While credit unions may incur some expense in setting up a credit card program, Card Services for Credit Unions argues it could be even more costly for institutions to ignore customer demand for credit cards. With banks offering attractive deals for customers who open both credit card and deposit accounts, credit unions may lose members who decide to consolidate their business elsewhere.

But if the numbers from Callahan & Associates signify a trend, credit unions who take the plunge may be able to count on more customers at least considering their credit card.

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