Archive for the ‘Personal Finance’ Category

A serious issue for consumers and law enforcement since the mid-1990s, identity theft and credit card fraud are still a growing problem in the United States.  Consumers can protect themselves by imposing credit freezes on their credit reports, all but eliminating any chance of this type of identity theft. Remarkably few Americans, though, are aware of this virtually foolproof way to protect against identity theft.

How Identity Theft and Credit Card Fraud are Related

Criminals acquire consumers’ personal information from a variety of sources and use it to file fraudulent credit applications. Lenders double-check the material on credit applications with one or more of the three credit reporting agencies, and if the credit report is positive, credit is usually issued. Thieves access the new accounts to purchase easily sold goods, saddling the victim with the costly and time-consuming job of restoring a ruined credit rating.

Third Party Monitors – A Costly, Ineffective Approach

Preventing identity theft by securing consumers’ personal data is virtually impossible, because the number of ways thieves can acquire the information is almost unlimited. In addition, of the countless companies and other organizations that have confidential consumer information, all it takes is a single breach of a single organization’s databank to compromise that information – and render irrelevant the security at all the other places. Nevertheless, many Americans pay high monthly fees for a third party to “monitor their credit” – that is, review their credit reports periodically and alert them to any suspicious activity such as new accounts being established or address changes recorded.

Credit monitoring is a cumbersome and inefficient approach to identity theft.  Some monitoring agencies will make monthly reports and expect the consumer to review and approve them, making the security process more cumbersome.  In addition, because the monitoring agencies report activity that’s already taken place, by the time the consumer learns about it, thieves may already have struck.

Most credit monitoring agencies promise to reimburse the consumer all costs of restoration of credit if it’s compromised, and some agencies do the restoration work themselves.  This is cold comfort when one considers that the criminal activity could have been prevented outright.

A Credit Freeze is a Better Alternative

Criminals cannot be stopped from acquiring consumers’ personal data or from filing fraudulent credit applications. Lenders, however, will not extend credit to those for whom a credit report is unavailable.  When a credit freeze is imposed, the credit bureau cannot issue a credit report, and the lender will not extend credit.

Setting up a credit freeze is easier, cheaper and more effective than any other program available to consumers. To freeze one’s credit with all three agencies can take less than half an hour and cost no more than $30.

All three credit reporting bureaus – TransUnion, Experian and Equifax – allow consumers to impose freezes online or by certified mail. TransUnion also permits freezes to be set up by phone. The exact cost for credit freezes and temporary thaws varies by state and other variables – in most states, for example, victims of identity theft are able to establish a freeze at no cost, and senior citizens get discounted rates in many states.

Consumers who’ve frozen their credit are able to “thaw” the freeze temporarily to allow a lender access to their credit report. This simple process can also be done online, by phone or by mail, utilizing a secret code set up when the credit freeze was established. In many cases, consumers can identify the lender(s) authorized to view their reports.

Note that a credit freeze won’t stop adverse information from being added to a credit report; consumers who temporarily thaw their credit reports should first obtain and review a copy to ensure its accuracy before permitting a third party to access it.

Opposition to Credit Freezes

Many groups oppose credit freezes, to varying degrees. Until 2004, when federal legislation mandated that they give consumers a free credit report annually, the three credit bureaus exercised absolute control over credit reports, and were very reluctant to share the information contained in the reports with consumers, even to let them correct inaccurate information. A credit freeze gives consumers far more power than they’ve ever had in the credit arena.

Lenders and retailers, for their part, oppose credit freezes because they limit consumers’ impulse spending. Lenders make money by issuing credit, and retailers earn commissions when consumers use their store to apply for a new credit account. Even though a temporary thaw of a frozen credit report is very easy, and usually cheaper than imposing the freeze, credit freezes put a significant damper on the kind of impulse spending associated with opening new credit accounts.

Take Charge of Your Credit and Fight Back!

A credit freeze is probably the easiest, cheapest and most effective weapon the average consumer has in combating identity theft, and should be the first weapon used by anyone concerned about the security of their credit reports.

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Funerals have become big business and corporate managers are working hard to squeeze out every last dollar. One of the most profitable and apparently compassionate products they’ve developed is the “pre-need” funeral package – basically, the prepaid funeral.

Industry-wide abuse and government regulation

Salespeople tout these plans as wonderfully beneficial, but there’s no shortage of horror stories. The families of deceased purchasers of prepaid funerals would be surprised by invoices for items not covered by the preneed contract – things like the services of a funeral director, a substitute casket, or even the cost of opening and closing the grave itself and actually burying the remains.

Many states responded with more or less consumer-friendly legislation, and today there’s a much higher degree of regulation over the industry. In some states, for instance, funds used for prepaid funerals must be placed into a trust under the consumer’s control. Many states also require funeral directors to advise purchasers of all the services and equipment their prepaid funeral contract will not cover.

The Mechanics of Prepayment

When a prepaid plan is selected, there are different ways to effect the payment. The first is a lump sum payment, which is not very common. The second is installment payments into a trust fund, which today is controlled by the purchaser in most states, but sometimes controlled by the funeral director. A third approach is the purchase of a whole-life insurance policy, which names the funeral director as the owner and beneficiary.

Why Preplanning Makes Sense, But Prepayment Doesn’t

There are some good reasons to avoid prepaying for a funeral, though, and the first is obvious – while it makes sense to preplan a funeral, it doesn’t usually make sense to prepay it. A funeral can preplanned with a funeral director and reviewed with a trusted loved one to whom you entrust the responsibility of carrying out your wishes.   Funeral plans can even be incorporated into a will.

Pre-funding a funeral can be arranged without involving the funeral home, though. This can be done by means of a simple trust fund established for burial purposes, or a simple term life insurance policy which names a trusted loved one as beneficiary. This will give the consumer and loved ones a great deal more flexibility in case of relocation or even simply changing one’s mind about funeral details.

Relocation and changing one’s mind, in fact, are two major reasons to think twice before prepaying a funeral. Americans move frequently. On average, about 15% of the American population moves in any given year, and a third of them are above age 50. That means that in any five-year period, as much as a quarter of all Americans over age 50 might move. The overwhelming majority of preneed funeral contracts aren’t transferable, though, and the refund policies generally favor the funeral homes, with some contracts refunding only 50%.

Likewise, people change, and so do their needs and plans. What may seem like an appropriate funeral plan when drawn up at age 50 may not make sense when reviewed at age 75, yet many preneed funeral contracts don’t permit any changes without significant penalties, or loss of certain protections like inflation protection. Moreover, if a purchaser decides on a cremation instead of a burial, the chances of getting a refund of the price differential are slim.

The Sales Pitch

As to the reasons given by the funeral industry:

  •  Don’t burden the family and loved ones with the task of planning a funeral during such a stress-filled period.

Preplanning a funeral makes sense, but there’s no need to pre-pay the funeral home, especially if prefunding arrangements are made within the family.

  • Why should the financial burden of a funeral be imposed on the family if the client can afford it now?

Why indeed? Nevertheless, prefunding a funeral without releasing control of funds to a funeral director for an event which may not take place for decades gives the family more flexibility and controlled.

  • The purchaser of a preneed funeral contract can lock in today’s prices and avoid the withering effects of inflation.

Although funeral costs have risen faster than the rate of inflation, both have been fairly moderate over the past few years. In addition, private prefunding of a funeral’s costs, if done in a financially prudent manner, will generally provide a greater return on the purchaser’s investment, and thus protection against inflation, than the standard installment plan sponsored by many funeral directors. Finally, in the event of relocation or a change of plans, most preneed contracts contain cancellation clauses that favor the funeral director to the detriment of the consumer.

While the financial aspects of preneed funeral contracts are under much closer official scrutiny today than when they were initiated, the question of the wisdom of pre-paying for a funeral hasn’t received much attention. The fact is, though, that there are prudent, meaningful alternatives to a prepaid funeral. There are circumstances in which a prepaid funeral is justified, such as when an individual is in the process of a Medicaid spend-down, but many more in which it’s not.