As featured in The Wall Street Journal, Money Magazine, and more!

July 2007

Everybody Lies. That’s the mantra from House, a simple but entertaining television show, whose premises are strangely applicable to personal finance. Recently, Liz Pulliam Weston evaluated a survey about consumer credit card debt that used a mistaken assumption to create misleading data about average household debt.

When a survey says 90% of Americans are either liars or in denial about how much they owe on credit cards, you can bet it’s the surveyors who are the delusional ones. In June, released a GfK Roper poll that purported to detail Americans’ relationships with credit cards. The survey contained plenty of interesting tidbits, but the poll takers went aground when they tried asking how the respondents’ credit card debts compared to the national average.

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deviationThe survey started with the assumption that the average household owes $9,300. The surveyors then proceeded to ask respondents if they had less than $9,300 in credit card debt. When the good majority responded that they do in fact have less than that amount, the survey concluded that Americans are in denial or simply lying.

The problem is the $9,300 figure comes from a faulty or misunderstood study from, which among other things, considers businesses in their end-of-the-year credit tally.

Well, for one, it’s irritating seeing a lie quoted in so many news stories, speeches and blog entries about credit card debt. Our national discussions about consumer indebtedness and bankruptcy are being distorted by the idea that we’re waddling around with four- and five-figure credit card debts.

The myth also gives false comfort to folks who think they’re “average” for having credit card debt, when they’re actually charging down the road to financial ruin. (Those folks are also the ones I’ll hear from after this column is published, by the way. Their arguments usually boil down to “I have credit card debt, so the myth must be true.”)

But mostly, the myth reflects badly on Americans. Most of us tell the truth, most of us aren’t in denial, and most of us aren’t nearly as stupid as some pollsters would like to think.

Liz also writes about how an “average” (mean) figure in populations with a high standard deviation can be relatively meaningless. If three three-year-old cousins spend the afternoon with their 85-year-old grandpa, you could say the average age of the four individuals is 23.5, but the number 23.5 is not representative of the four individuals in any way that’s relevant. It might be better to take Grandpa out of the calculation and focus on the average age of the children. Similarly, the CardWeb statistics include the year-end balances for those who pay their bill off every month. These are individuals who don’t carry credit, so they should not be included in the sample.

It’s very easy to simply trust numbers that are published in conjunction with a survey or scientific study, but that easily leads to misunderstandings. Misinformation can be distributed as easily as information throughout the world and applied to other data, as did with this particular survey.

Now, here’s a question. Should people who play the 0% APR arbitrage game be included in statistics for credit card debt? They do hold the debt, but the debt was not obtained from a normal consumer action, like purchasing goods or services.

Photo: dan taylor


It pays to pay attention to letters from your banks and brokerages. If you don’t you could end up owing money to the government.

The Keogh Plan is a popular alternative to a traditional pension for individuals who are self-employed. It’s a tax-deferred retirement plan in which contributions are tax-deductible and mandatory distributions begin at age 70 years and 6 months. It was a popular option in the 1980s and 1990s, coinciding with a growth in 401(k) plans, although legislation established Keogh Plans in 1963.

In 2001, Congress enacted a law that changed laws pertaining to Keogh Plans. This change necessitated updates to account paperwork to be handled by participants, but many account holders were either uninformed or ignored notifications from their banks and brokerages.

If the Internal Revenue Service audits a retirement plan and discovers that its language is noncompliant under current law, any contributions made to the plan are not tax-deductible. All tax returns for the years affected must be redone, and earnings for the period of the audit, generally three years, are treated as taxable income. In addition, interest and often penalties, as well as taxes, are assessed.

TaxesThe bottom line is that all contributions made to the Keogh would be considered non-deductible, and anyone found to be out of compliance would owe taxes and penalities.

Professionals interviewed in a New York Times article recommend rolling Keogh Plan funds over into a SEP IRA. SEP IRAs, thanks to the same law that complicated the Keogh, now offer benefits above and beyond the older type. That won’t get you out of trouble if your Keogh was non-compliant. There is still a cumbersome process to clear if you haven’t been following the new rules.

It means assembling the original plan documents and all the amendments that the bank or brokerage offered for its prototype documents; filling out forms in a 70-page document, Rev.Proc.2006-27; and paying a $750 fee to the I.R.S. for plans covering 20 people or fewer. Most people will need a pension consultant to do the paperwork, he said, and that could cost several thousand dollars.

This is another reason amongst many arguing for the simplification of tax code.

For Keogh Plans, a Technicality Could Crack a Nest Egg [New York Times]


Earlier this month, I wrote about how overdraft fees are becoming more popular with banks finding ways to assess the fees more often, in tandem with raising what the customer owes each time — sometimes several within a day — an account is overdrawn. Laura Rowley’s latest column mentioned that a few congressmen are interested in restricting banks from certain practices.

Representatives Carolyn Maloney (D-N.Y.), Barney Frank (D-Mass.), and Julia Carson (D-Ind.) are sponsoring legislation (HR 946, or the Consumer Overdraft Protection Fair Practices Act) to protect consumers from abusive overdraft policies. The act contains four common-sense provisions to address some of the industry’s sneakier tactics. It would:

* Require written consent from the consumer before enrollment in an overdraft loan program.

* Require financial institutions to warn the customer when an ATM withdrawal will trigger a fee — and allow the customer to cancel the transaction at that time.

* Prohibit financial institutions from manipulating the order of check clearing or delaying the posting of deposits to increase customers’ overdraft loan fees.

* Amend the Truth in Lending Act to clarify that overdraft fees are finance charges, so that annual interest rates are reported. This would allow consumers to compare overdraft loans with other credit options — such as lines of credit, which typically offer annual interest rates of less than 20 percent.

U.S. CongressI think these are good changes, but shouldn’t replace the account owner’s responsibility to know their account balances — or a rough estimate — at any given time, as well as his or her responsibility to keep their account in good standing.

Banks may not be too keen to list their one-time overdraft charges as an annual percentage rate. I’m not sure it makes sense to do so, either. Perhaps seeing a 99% APR would be enough to discourage people from mindlessly overdrawing their accounts.

When I looked at Gary Coleman’s advertising for Cash Call, I saw that these short-term or payday loan outfits are required to list their fees as annual percentage rates. Although they are one time fees for each loan, the nature of the loans make the fees comparable to other loans’ annual percentage rates.

Some of those rates were above 150% APR. I’d be interested to see how banks calculate an annual percentage rate based on overdraft fees.

Photo credit: aewolf


I wish I could have sold my second quarter ESPP shares when they were awarded earlier this month. By the time next month’s trading window opens, I won’t have made as much money unless things swing around fast. Dow down to 13,435.53, S&P 500 down to 1,473.04, Nasdaq down to 2,599.34. [CNN]


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