Personal Banking E-Newsletter - February 2011

Tips for Transitions

Make the most of your retirement account options

It's a fact: The average American holds nine different jobs before the age of 34.* It's also a fact that the decisions you make about how to manage retirement assets when changing jobs can have a direct impact on your future financial health.

Case in point: "Cashing out" retirement plan assets before age 59½ (55 in some cases) can expose your savings to immediate income taxes and a 10% IRS early withdrawal penalty. On the other hand, there are several different strategies that could preserve the full value of your assets while allowing you to maintain tax-deferred growth potential.

Well Informed = Well Prepared

Option #1: Leave the Money Where It Is If the vested portion of the account balance in your former employer's plan has exceeded $5,000, you can generally leave the money in that plan. Any money that remains in an old plan still belongs to you and still has the potential for tax-deferred growth.** However, you won't be able to make additional contributions to that account.

Option #2: Transfer the Money to Your New Plan You may be able to roll over assets from an old plan to a new plan without triggering any penalty or immediate taxation. A primary benefit of this strategy is your ability to consolidate retirement assets into one account.**

Option #3: Transfer the Money to a Rollover IRA To avoid incurring any taxation or penalties, you can enact a direct rollover from your previous plan to an individual retirement account (IRA).** If you opt for an indirect transfer, you will receive a distribution check from your previous plan equal to the amount of your balance minus an automatic 20% tax withholding. You then have 60 days to deposit the entire amount of your previous balance into an IRA which means you will need to make up the 20% withholding out of your own pocket.***

Option #4: Take the Cash Because of the income tax obligations and potential 10% penalty described above, this approach could take the biggest bite out of your assets. Not only will the value of your savings drop immediately, but also you'll no longer have that money earmarked for retirement in a tax-advantaged account.

*Source: Bureau of Labor Statistics.

**Withdrawals will be taxed at ordinary income tax rates. Early withdrawals may trigger a 10% penalty tax.

***You will receive credit for the withholding when you file your next tax return.

© 2010 Standard & Poor's Financial Communications. All rights reserved.

Is it Safe to Open Your Wallet?

"The fall of 2010 marked a change in consumer spending habits," said Bernard Baumohl, the chief global economist at the Economic Outlook Group and the author of "The Secrets of Economic Indicators.” "Americans have been remarkably frugal in the last two years, and have made real progress in improving their household balance sheets. Now, this allows them to feel more comfortable about spending and borrowing again."

And spend they will. A recent survey from MasterCard found that the majority of consumers (61%) have no intention of cutting back spending in the new year even in the aftermath of their holiday shopping. Likewise, an American Express survey found that 54% of consumers plan to spend at least as much as they did last year, with 14% saying they will likely spend more. But perhaps the more startling statistic in the American Express study is the fact that consumers have drastically reduced their annual savings goals for the year, and they now plan to put aside an average of $2,600 in 2011 compared with $14,000 the year before.

"We're really starting to see consumers curtail their savings goals," said Mona Hamouly, a spokeswoman for American Express. "Our hunch is that consumers have been super focused on savings in the past and have hopefully accomplished their goals and now have given themselves the leniency to spend a little more on the things that really matter to them."

However, there are several factors at play here for consumers besides the simple desire to spend again after a long period of pinching pennies. Not only have many Americans worked to save more money in recent years, but they also have a larger amount of disposable income to start with these days, as the average salary in the U.S. after taxes increased by 0.3% in both October and November.

Moreover, even as the economy remains sluggish, there are an increasing number of signs telling average Americans to be hopeful. Specifically, the job market is seeing an improved employment rate, fewer people are collecting unemployment benefits for the first time and more companies are planning to hire in 2011.

"There's a sense that the worst is over and we can feel a bit more secure about our jobs and livelihoods now," Baumohl said.

Even those who are less optimistic about the current state of consumer spending admit that it will probably pick up noticeably by the second half of the year as the economy continues to improve.

"People certainly have more money to spend now, but spending is not booming quite yet," said Schwark Satyavolu, the CEO of BillShrink, an online service that helps users analyze and reduce their spending. "By the middle of this year, there will likely be enough visibility of a rebounding economy for consumers to loosen their purse strings more."

According to Hamouly, the most common things consumers plan to splurge on this year are image-driven purchases like manicures, pedicures, new clothes and gym memberships. Meanwhile, Baumohl expects that Americans will start buying more big-ticket items like cars and appliances, which they may have put off purchasing in recent years.

In fact, recent data hint that many consumers already have begun to make these purchases. Automobile sales were up significantly in November and December compared with the same time the year before, and are expected to boom this year. Sales of durable goods, which include items like appliances, increased by 0.2% in November, the most recent month for which data are available.

Even pricey luxury goods have made a strong comeback in recent months, and were expected to have a year-over-year sales increase of 10% by the end of 2010, making them one of the year's big success stories.

But if Americans are really on the verge of splurging more this year, it raises an obvious question: Are we ready to be a nation of big spenders again?

Old habits die hard

Much of the reason we entered a recession in the first place is that many Americans were living beyond their means, most notably by signing up for huge mortgages on homes that were well above their pay grade, or by overspending and racking up credit card debt.

Once the economy began to take a nose dive in late 2007, consumers made a concerted effort to bring their spending back in line, slowing the increase in credit card debt in 2008 to just 1.5% after several consecutive years of 4% to 5% increases. Americans ultimately reduced that debt by 4.4% in 2009. Many consumers recognized the need to shed their debts but were unable to pay them down, which left borrowers with little choice but to simply default. This is reflected by the steep increase in charge-offs, which occur when creditors determine the credit card debt is uncollectable.

To some extent, this created an inflated sense of how much progress consumers have made toward improving their finances.

"Consumers have much less debt in their wallets than they used to, but the reason they do is not because they paid it down, but rather because they charged it off," said Odysseas Papadimitriou, the CEO and founder of Card Hub, which tracks credit card data. The reality, according to Papadimitriou, is that consumer credit card debt is now "the same or more" than it was shortly before the recession.

However, this hasn't stopped consumers from reverting back to old habits. Credit card applications have climbed fairly consistently since the beginning of 2009, after dropping significantly in 2008, and total credit card debt began to increase in the fourth quarter of 2010 as consumers started to spend once more.

As Papadimitriou notes, this increase in spending and borrowing is particularly problematic for those who defaulted on their credit debts, as they now will be subject to higher interest rates from lenders for several years due to their poor credit.

But even for those who have adequately paid down their debt, this still may not be the right time to spend as freely as they did before the recession hit.

"Millions of consumers had their pre-recession income tied directly to the housing bubble, perhaps because they worked in that industry as real-estate agents and mortgage brokers, or were simply refinancing their home and using that line of credit to fuel their spending," Papadimitriou said. Because the housing industry remains weak and lenders have been forced to tighten their mortgage policies, Papadimitriou says it's unreasonable for these consumers to expect to resume the lifestyles they once had.

Who's entitled to splurge?

The only group of people who may safely be able to open up their wallets again are those who never lived beyond their means in the first place.

"There is certainly a category of consumers that did not have their spending fueled by the housing bubble, and who never missed a single payment during the Great Recession, but who decided to bring down their lifestyle and cut their spending to minimize their risks during the tough economy," Papadimitriou said. These frugal families and small-business owners, he says, make up about half the country and are really the only group of Americans who should "expect their spending to gradually go up to pre-recession levels."

For those consumers who fall into this category and are wondering whether to open up their wallets again, there is essentially one rule for deciding.

"You need to ask yourself if you have enough in savings to weather another storm," said Satyavolu, the BillShrink CEO. "Typically, that means you need to have between three to six months of living expenses in savings."

Beyond this, consumers should focus on trying to apply many of the same shopping tactics they used during the economic downturn in order to avoid spending beyond their limits.

According to Julia Scott, a shopping expert who runs the Bargain Babe deals site, it's as important as ever to think through each purchase and determine whether it's something you really need, if it's being sold for a good price and how it fits into your overall budget.

After all, having money doesn't mean you should spend more than you can afford. Ultimately, this may prove to be the lasting lesson from the recession for a new generation of consumers.

People ages 18 to 34 are far more likely than their elders to say they will focus on saving and budgeting this year, according to a recent study by Chase Card Services.

"This generation has learned a lesson from the big bust and wants to be more careful with their spending going forward," Satyavolu said.

So though this year may see many consumers return to their old spending ways, frugality will likely live on in the decades to come.

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12 Money Errors

Miscalculating your budget

Research suggests that creating an annual budget instead of a monthly one works better, largely because we feel less confident in our annual estimates, so we tend to add more cushioning for unexpected expenses. In one study, college students underestimated their monthly expenses by 40% while overestimating their annual expenses by 3%.

It's almost impossible to get ahead financially unless you save a significant chunk of your income -- ideally, $1 of every $3 you earn. But many people get tripped up by their housing costs. Traditionally, financial advisers have encouraged buyers to spend about one-third of their income on housing. But for many people, especially anyone with student loan debt, child care payments or other hefty expenses, that's too big a chunk.

Skimping on career investments

Investing in a career coach or development course can help you snag a promotion, get "unstuck" from a career rut or transition into your dream job. The price of one-on-one coaching typically starts at around $200 an hour, but less-formal advice can come from meeting with more-experienced colleagues over lunch or coffee.

Falling into spending traps

Rewards credit cards sound good in theory, but in reality they encourage you to spend more than you would otherwise. Economists dub this phenomenon "purchase acceleration," because you ramp up your spending when that reward is in sight. Rewards cards also carry a higher interest rate -- two percentage points, on average -- than cards that don't offer rewards.

Failing to negotiate prices

Even department stores often offer some wiggle room on their posted prices, and big-box stores usually match competitors' prices. This negotiating trend has become so prevalent that the advertising firm Cramer-Krasselt came up with a name for such pushy customers: "Neo-hagglers." But many consumers fail to realize that prices are flexible and don't bother asking for a better deal.

Earning income from only one source

The average worker now holds 10 different jobs before age 36. While some of those job changes are voluntary, many also result from layoffs. By earning income from a variety of sources, workers can increase their financial stability. Options for new sources of income include freelance work, a teaching gig at a local community college, or a potentially money-making blog.

Taking on too much -- or too little – debt

Not all debt is bad. It can enable you to return to school, buy much-needed professional outfits before receiving your first paycheck or even cover your rent during a tough month. Being so afraid of debt that you avoid it altogether can force you to miss out on opportunities, while taking on too much can lead to financial ruin.

Trying to beat the market

Timing the market would require a "Back to the Future"-style time machine. That's why investing a little bit at a time, regardless of the market's behavior, is the safest way to go. Retirement accounts such as 401k's, which invest money from your paycheck each month, make it easy to invest this way.

Paying too much attention to the Dow

Focusing too much on the ups and downs of the stock market just causes stress. When the market's plunging, concentrate instead on your hobbies, family and getting outside. Avoid cable television news, which often treats every dip in the market like a major crash. If your investments are well-diversified, then you've done all you can.

Counting on Social Security

As they think about retirement, today's thirty-somethings should be aware that the Social Security trust fund is scheduled to run out in 2037. That means, if nothing changes, benefits will shrink to about three-quarters of what they are now, because only money that is being paid into the system will be paid out. Young professionals need to plan on funding the bulk of their retirement with their own savings.

Overspending on gifts

Pollster John Zogby has found that the amount of money people say they intend to spend on Christmas gifts has been steadily declining since 2001. Consider joining that movement by making your gifts more meaningful and less expensive. Instead of pricey jewelry and electronics, consider cookbooks and museum dates. You can also consult websites such as to find unique do-it-yourself gift ideas.

Underestimating tax bills

People who earn money beyond their usual paycheck, from freelance work or a side business, are most at risk for owing a lot of money in April. And poor tax planning can also trigger additional fees. Married couples who earn similar high salaries are also at risk, because of the so-called marriage penalty. Check to see if you've been paying roughly the correct amount of taxes by reviewing your payroll stubs or other documentation.

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Secrets of a Former Identity Thief

We've all heard the standard tips about preventing identity theft and credit card fraud. But what would a real identity thief tell you if he had the chance? Dan DeFelippi, who was convicted of credit-card fraud and ID theft in 2004, says simply this: You can't be too careful.

DeFelippi, 29, mostly made fake credit cards with real credit card information he bought online. "I would make fake IDs to go with them, and then I'd buy laptops or other expensive items in the store and sell them on eBay," he says. DeFelippi was also involved in several other scams, including phishing schemes that exploited AOL and PayPal customers. Committing credit card fraud is still "ridiculously easy to do," he says. "Anyone with a computer and $100 could start making money tomorrow."

After his conviction, DeFelippi faced eight years in prison, but under a plea deal he agreed to perform community service and pay back more than $200,000 in restitution. He also worked for the U.S. Secret Service, helping infiltrate the online underground and training agents in the latest fraud techniques. His help led to the arrests of as many as 15 people over two years.

Today, he's a Web developer at a graphic design company in Rochester, N.Y. He agreed to take an hour with to share his story and his top tips on how to protect yourself.

Q: How did you get started?

A: When I was in middle school and high school, I was into what I would call innocent hacking. I wasn't trying to be malicious or make money. I was just interested to see what I could do. In college, I started selling fake IDs to make a little extra money. I was pretty active in online chat rooms where people would talk about this stuff, and I began to realize there was a whole world of credit card fraud where I could make a lot of money with very little effort. From there, it was just a huge downward spiral.

Q: You said you bought credit card data online. Tell me about that.

A: Every credit card has magnetic stripe on the back with data on it. There are people out there who hack into computers where that data is being stored. There are also people like waitresses and waiters with handheld skimmers who steal the data that way. Then they sell the data online. I'd pay $10 to $50 for the information from one card. Then I'd use an encoder to put that data on a fake card, go into a store and purchase stuff.

Q: Do identity thieves like some credit cards better than others?

A: Well, a lot of American Express cards have no set limit, so you'd be able to buy a lot more. However, the downside is that a lot of merchants require more security for American Express than for other cards. They may ask you to enter the four-digit code on the front of the card or your ZIP code. That information usually isn't in the magnetic stripe information. So if a card is skimmed, if someone has its magnetic stripe information, they would still need the number on the front or your ZIP code to commit fraud.

Q: What about debit cards?

A: I always recommend against them. With debit cards, it's your real money in your bank account you're playing with. So if someone gets your debit card information and uses it, your cash is gone until you fill out a lot of paperwork and persuade the bank to give it back to you. Credit cards are much better at protecting you against fraud. And if you're worried about debt, you can always pay them off every month.

Q: What's your No. 1 tip on how consumers can protect themselves?

A: You've probably heard this before, but the most important thing really is to watch your accounts. And I don't mean just checking your statement once a month. If you're only checking your statement once a month, someone can start using your card at the beginning of the billing cycle, and they can do a lot of damage before you catch it. You're talking thousands of dollars, and it will be a lot harder to catch them and dispute it. I use, which is a free aggregation service that allows you to put all your accounts on there and monitor everything at once. I check that every day. It's also a good idea to check your credit report at least twice a year to make sure no one has stolen your identity.

Q: Is online shopping safe?

A: You've got to be careful. It is really easy to create a fake online store or to create a store that sells stuff, but its real purpose is to collect credit card information. I'd try to stick to reputable sites or at least to sites that have reviews. A lot of times they'll create these stores that sell things that are widely searched for at prices that are incredibly low. If a deal is way too good to be true, it's probably a scam and they just want your information. The more information a website asks for, the more you need to be certain that this is information they really need and it's a legitimate site. Also, don't buy anything from somebody e-mailing you, no matter how good the offer sounds. If a company is sending you an ad through e-mail and you've never heard of the company, don't buy anything from them.

Q: How did your phishing scams work?

A: People are much savvier now. Back when I started, it wasn't that common. I was getting thousands and thousands of responses from single mailings. The first one I did, I targeted AOL users, because I thought they would be less computer literate and more likely to fall for my scams. We said, "Your credit card information has expired. Come to this site and update your information or your account will be closed." I did something similar with PayPal. I sent an e-mail that said, "Someone has accessed your account. We've locked your account. Please click here to access your account." We'd link them to a fake website and they'd give us their PayPal log-in information. Then we'd say, "For security purposes we've removed your account information. Please re-enter it."

Q: Where did you get the e-mail addresses for your phishing schemes?

A: There's software that allows you to harvest them from anyone who has posted their e-mail addresses online, so don't ever put your e-mail address on a website. If I was targeting a specific group, I'd try to find e-mails for that group. For the PayPal scam, I was trying to find people around my age or younger, so I targeted colleges and universities. I looked for ones in Massachusetts because I could make fake IDs from Massachusetts. As part of the scam, I'd get their date of birth, address, Social Security number and driver's license number. Then I could make a fake ID that had all accurate information on it. The only thing that wouldn't be real would be my picture. It's kind of scary how much information I could get.

Q: What other mistakes do consumers make on the Web?

A: When you're using your computer online, it's sending data back and forth between your computer and website. If someone gains access to that connection -- it's called sniffing -- they can capture the data between you and the website you're communicating with. That's the reason it's so important to access secure websites if you're putting in any sensitive data, so look for "https" in the Web address. A more recent issue is the free wireless offered all over the place. If you're using an open Wi-Fi connection, you should pretty much have the expectation that there is no security.

Q: What steps do you take to protect your own data online?

A: All financial services companies have two-factor authentication. So you typically have to put in a password plus something else. A lot of banks use questions, but that can actually give you a false sense of security because you can find out a lot of information about people online. So maybe this is extreme, but for those questions, I make up stuff. I don't put in my real information. For example, a common question is: "What city were you married in?" Well, I'm not married, but I'll answer that question so there's no way anyone could possibly know the answer. I try to make sure at least one of the questions has a made-up answer.

Q: What's your advice on using ATMs?

A: ATM skimming is the big thing right now because it's cash, and cash is king. Basically, that's where someone puts a card reader on the ATM machine, captures your PIN, then goes and drains your bank account. The skimmer device goes over the card slot, and it's designed to look like part of the ATM. Some of the equipment now is very good and it's hard to tell the difference between that and a real machine. So what you need to do is try to use the same ATM every time, and watch out for anything on the machine that looks out of the ordinary, especially something stuck on the front where you put your card in. Generally, I like to use ATM machines at banks rather than convenience stores or a bar or club. There have been incidents where thieves installed their own ATM machines in places with skimmers inside them. That's much less likely to happen at a bank.

Q: Is there more the banking industry could do to protect us?

A: The biggest thing they could do is get away from using magnetic stripes. They aren't that secure and anyone can get a magnetic stripe reader (a skimmer) for $5 to $10. The smart chips that are widely used in Europe and internationally are much more secure and harder to hack. They offer near 100% protection against fraud, at least from a skimming point of view, and they also require a PIN. But the credit card companies have done the math. They think people will use their credit cards less often if they had to put in a PIN. It might eliminate a lot of the fraud, but there would be less card use and they would end up losing money. So they're actually doing just the opposite, moving to a system where you can just have your credit card in your pocket -- you don't even have to swipe it to use it. The problem is, that's very unsecure. Anyone with equipment can sit out in their car and pick that up.

Q: How did you end up getting caught?

A: I went to Best Buy with a guy I was working with locally to buy a laptop, and the manager there was pretty well trained. When he swiped the card, he asked for my friend's ID. Most stores don't ask for ID. My friend gave him his fake driver's license, but then when the manager swiped the credit card, it came up "Call for authorization." A call for authorization, if you're trying to commit credit card fraud, is really bad; it means the credit card company has seen suspicious activity. The manager said he needed to go to the front desk to finish processing the order. As soon as he left, we walked as quickly as possible to the exit and left the store. The problem was, my friend had given the manager his fake ID with his picture.

They ran it on the news and caught him. He told them the whole story, so they ended up catching me, too. I really was better off getting caught when I did. I was lucky I didn't go to prison. Under the guidelines now, I'd probably have to serve at least two years. So anything I can do to help people now, to help compensate for what I've done, I'm trying to do.

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Credit Card Rates at Record Highs

Interest rates are now hovering near record highs, at an average rate of 14.72%. And if your credit is bad enough, you could even end up with a rate as high as 59.9% APR.

That's because while the CARD Act helped crack down on certain fees and requires more disclosures, it didn't cap every credit card holder's worst enemy: interest rates.

Sure, the new rules prevent banks from raising most interest rates retroactively, but there's no limit on the rates they can charge new customers.

"Rates are going up because card issuers know that once you get a card they can't raise the rates, so they're raising rates on the front end to ensure they get the revenue from that interest," said Beverly Harzog, credit card expert at

APRs have climbed more than 20% over the past two years and hit an all-time high of an average 14.78% in mid-November, based on weekly data collects from 100 of the nation's top credit card issuers.

And there's no end in sight. While interest rate caps have been proposed -- including a proposal earlier this month from New York Congressman Maurice Hinchey that would limit rates at 15% -- none have been passed into law so far.

So what do record high interest rates mean for you? If you have a terrible credit score, opening a credit card is going to be painful. Though rates vary depending on the card you apply for, with a score below 599 you'll likely be stuck facing an APR of 24% or higher, said Harzog. If you can get a card at all.

In fact, First Premier Bank offers a Gold MasterCard with a whopping 59.9% rate for those people with "less than perfect credit", according to its website. And that rate is actually down from the 79.9% rate it originally charged.

Even with a credit score between 600 to 649 -- still considered poor, but not terrible -- you're probably looking at rates around 20%.

Harzog recommends staying away from interest rates above 20% and instead getting a secured card from a lender like Orchard Bank as a way to build up credit so that you can eventually get a card with a decent rate.

With a secured card, you deposit money into an account and can use the card like a credit card -- and it impacts your credit just like a credit card does. But if you don't make payments, the bank will just take your own money out of the account.

"I don't suggest people ever carry a balance at such high interest rates," Harzog said. "A secured card is like a credit card on training wheels, so it will help you get your credit back on track."

With a credit score between 650 and 699, you're on your way to finding better interest rates, likely ranging between 15% and 19%.

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