Archive for the 'Debt' Category
Gold prices indicate economic instability
Comments(0)The price of gold is something that is highly debated by economists from varying schools of thought. The Austrian school of thought says that the value of gold is inherent and never changes, but that the value of fiat currency changes, and thus the price of gold. Other schools of economic thought argue that gold prices can go through boom bust periods, just like any other commodities. In history, the Austrian school of economics seems to win out.
The price of gold has been going up rapidly. Just a few years ago in 2003, the value of an ounce of gold was right around $270 per ounce. Fast forward to 2008 and the price of gold has quickly risen to $1000 per ounce, now down to the low $900s. This flee from fiat currency to gold has some investors worried that the world’s markets are about to enter a meltdown.
In the history of fiat currency, not a single one has lasted the test of time. Romans introduced the fiat currency, but after a series of wars and other large expenses, a loss of appetite for a fiat currency eventually fell to inflation. The problem with a fiat currency, Austrian economists argue, is that currency can be rapidly devalued due to inflation. The Romans did that, over history they clipped coins and printed currency that was not backed by anything of value. Because of this, historians warn, the world’s great empire faltered.
Now that gold prices are reaching their peaks there comes a new worry that inflation is rapidly devaluing the worlds currencies. The dollar has been devalued by over 97% in spending power since 1913, the year the Federal Reserve was created. Due to a larger money supply the market corrects itself with higher prices for goods.
The US Dollar has gone through some very important moments in history. In 1944 as WWII came to an end, the US Dollar was said to be as good as gold, thus the world placed their reserves in dollars rather than metals. By 1971, Nixon knew that the amount of gold would never cover the amount of dollars in circulation, thus the US went full-fledged fiat currency, no longer backed by any amount of gold.
The value of gold seems to be in a boom period for just the last 5 years after more than tripling in value. The expansion of credit during the 1990s and 2000s with the real estate boom boosted money supply and drove down the value of the dollar. Now that the dollar is no longer pegged to a specific value of metals, the price of gold floats with the amount of money in circulation.
Just in the last 6 months, the value of gold has risen from $600 per ounce to $1000. This gives us early warning signs that the amount of credit in the system is far too high and people are afraid to hold onto dollars. The money supply grew similarly today to how it did during the last Great Depression by doubling from 1920-1929 then dropping greatly from 1929-1933. Could it happen again? Austrian economists say yes.
A look at how your credit score works
Comments(1)Credit scores determine everything from job positions, insurance premiums and most importantly, the interest rate assessed to your line of credit. Your credit score is your worth as a borrower and a way for banks to determine risk. A high credit score shows that you have paid your bills on time, and that you are in good standings with your current creditors. A low score shows that you are unlikely to repay your debts. A credit score is calculated several factors, race or gender do not play any role. Neither do things such as time length of employment or medical history.
Your credit score is calculated by the amount of debt you have, the types of debt, how often you have paid your bills timely, how much new credit you have been seeking and how long you have had credit.
The largest portion, 35% of your score, is based solely on your payment history. If you have paid on time without being late on payments, chances are good that you will possess a good credit score. Lenders like to see that you can pay them back in a timely manner, thus they give lower rates to people with good credit.
The next 30% is based on how much money you owe, also known as utilization, or the amount you have used of each line of credit. If you have spent $10,000 on a credit card with a $15,000 credit line, you are above a 50% utilization, therefore your score will be negatively affected. Creditors like to see that you can manage your credit lines, rather than be slave to them.
Another 15% of your score is dedicated to your credit lifespan, or how long you have had credit lines open. Keeping old credit cards open, even if you do not use them, helps boost this part of your score by raising the average age of your accounts.
The remaining 20% is split between the types of credit you have open and how much credit you’ve been seeking. Its good to have a portfolio of credit, such as a credit card, mortgage and a car loan. This shows that you have experience with debt. The bank also takes into consideration how many inquiries are on your credit report, if you are actively seeking credit, you probably are in a financial hardship. When this is the case, most often lenders will either not want to lend you money, or they will do so at a greatly increased interest rate.
Peer to peer lending
Comments(0)Typically we would think of obtaining a loan from the friendly loan officer at the bank, rather than going to the general public for a loan. But new online lenders use eBay style bidding to allow people to get loans at rates they would have never previously received.
The old banking standard of using a credit score as a risk assessment hurts many new borrowers with healthy budgets but limited access to credit. Peer to peer lending is as easy as eBay, people bid on loans based on loan amount and interest rate, ultimately driving down the interest rate for the consumer.
This solution is great for both borrowers and investors. A borrower can get a 3 year, lower interest loan from thousands of people across Prosper.com who can lend as little as $25 per person. With a combined effort from the community, you can get access to a loan of up to $25,000 from people who are just like you. No need to go through the anxiety of heading off the to nearest corporate bank when there are thousands of people willing to help out in a time of need.
For investors, Prosper offers a great investment. A combination of investors spreads out risk and allows people to lend to more borrowers at one time. The creditworthiness of the borrower is shown next to their ID and many borrowers choose to open up their budgets to scrutiny. In most cases, it’s graduated college students who want to consolidate student debts and lower their interest rate.
Prosper.com manages all billing and credit bureau information. One payment is made to Prosper each month that is then distributed between all the investors. This style of lending lowers the closing costs and fees that comes with traditional borrowing and allows people to help others. The returns are rather splendid as well, as P2P lenders have some of the lowest delinquent repayments. Whether investor or borrower, there is a lot to gain from peer to peer lending.
How to write off thousands in interest costs
Tax time is here and in full swing, and if you’re like the average consumer, you likely paid thousands in interest and other charges due to high debts. Now there is a way to consolidate your debts into one low interest monthly payment and still be able to deduct the interest.
Home equity lines of credit (HELOC) have become very popular over the last decade thanks to the real estate boom. A HELOC is a line of credit against the amount of value you own in your own home. Thankfully, the government sees this just like a mortgage and will allow you to deduct your interest expense on your tax return.
A home equity line of credit works just like a credit card, although this form of payment usually comes with checks rather than plastic. A HELOC can be used to pay for almost anything your credit line will allow. Many people have used them to improve their homes, add a pool, take vacations or even to buy groceries and pay monthly bills. A HELOC provides the flexibility of a credit card with the low rates of a home equity loan.
How it works
A home equity line of credit is backed with the equity in your own home. For homeowners who have been in their home for a long time, a high credit line HELOC should be easy to obtain. Generally you can borrow up to 80% of the equity in your home.
Unlike a home equity loan, a line of credit can be used whenever you want, for whatever you want. Most home equity loans are only for even dollar amounts and come with high closing costs and fees and cannot be changed or used at the borrowers convenience. With the simple stroke of a pen, a borrower can fill out a check to pay for virtually anything which will then be charged against the HELOC account.
HELOCs usually have much lower interest than credit cards and have become popular for eliminating credit card debt. Many consolidation programs tout the easy credit lying in your own home as a way to pay off credit card debt in small monthly payments. Unlike HELOC interest, credit card interest is not tax deductible.
Anyone with any equity in their home should apply for a HELOC just to have in case of emergency, debt consolidation or future use. To consolidate debts, all a borrower has to do is write out a check for the amount of the debt and send it to their creditor. The credit card debt will be removed an added to the HELOC debt.
Interest deduction
Any debt can be put into a HELOC for interest deduction. Credit card debt and personal loan debt is the best for consolidation because it is usually high interest and not tax deductible. HELOCs have rates that are usually 8-10% lower than most credit cards, making them a bargain right from the start. With a HELOC rate of 8%, the effective rate is dropped to 6% when you consider the tax breaks. Anyone with high balances and high interest accounts should apply for a HELOC for instant debt consolidation.
How to easily save $100 per month
Saving an extra $100 per month will give your budget additional flexibility. There is a lot you can do with $100, such as paying down high interest debt, saving for future expenses, or even a luxurious vacation.
Cut the luxury
Small luxuries are the first place to look for cuts. Look into your wallet at the beginning of the week and at the end of the week, chances are that the small bills go quickly and you never have anything to show for it. The $4 cup of coffee in the morning, a $.75 candy bar at lunch and a gumball at the store might seem like a small amount at first, but this adds up to $150 per month.
Insurance premiums are out of this world
Insurance premiums are another place to save some additional cash without risking financial safety. Raising the deductible on your home or car insurance will drop your premiums by 25% or more. Increasing your deductible from $500 to $1000 will free up a significant portion of your budget while only adding additional liabilities if an emergency occurs. Why pay an extra $600 a year for just $500 more in protection on your car? Call your insurance broker and lower your deductible immediately.
Invest in cost saving devices
Invest in your future. Changing out light bulbs or your shower faucet head can bring instant savings in electric and water bills. New light bulb technology drops electricity use by 75% while still delivering the same amount of light. Low flow showerheads limit water usage but can still deliver the pressure that you enjoy from your traditional shower head.
Saving the small change
Start collecting spare change. The small amounts of money is quickly lost or spent on things we do not really need. The “gotcha” stores with the $1 items might sound cheap at first, but when you realize you have no need for them, they are no longer doing you any service. Start saving the small change and it will quickly add up.
