Charging Responsibly

Especially during the busy summer travel and vacation season, lots of credit card consumers will be faced with an often-perplexing question or choice. Should they go ahead and pay extra for auto insurance when renting a car, or decline it and hope that they are covered by their credit card membership’s insurance program?

 

Sometimes the cost of a daily rental car insurance premium is a huge additional expense that can escalate the cost of auto rentals into the stratosphere. But without it, if there is an accident, the renter could wind up owing a car rental company the price of a brand new car. So when a car rental representative poses the question it can be a little intimidating or downright scary, although you may already have plenty of coverage in the event of an accident because of your regular auto policy plus the coverage provided by your credit card company.

 

The trick is to sort it all out before you get to the car rental counter, so here is some information to help you feel more educated and informed – and hopefully save some money.

Credit card rental car insurance typically covers damage caused to a rental car by a collision or the theft of the vehicle, and it is designed to augment your main auto insurance policy coverage – and to pay that policy’s deductable.

If you do not have any car insurance you have to ask yourself two questions. First, are you even legal to drive? In many states across the USA you cannot operate a motor vehicle without minimum coverage, so if you own a car but do not have insurance, you may need to go out and buy some. The other question to answer is whether or not your credit card company will cover you in the event that you do not have any other car insurance. You will need to contact your credit card company or carefully read the small print on your cardholder agreement to find out for sure.

Note that the level of coverage will be determined by not just which credit card company your card was issued by, but also by the type of card membership you happen to have. A standard Visa, American Express, or MasterCard may have less perks – and less car rental insurance coverage – than would a preferred or VIP type membership such as those represented by a Gold or Platinum version of the card.

If your card does indeed offer car rental coverage then it will typically kick in as soon as you sign the contract to rent the vehicle – as long as you are careful to pay for the rental with that particular credit card. You can then decline the additional rental company coverage or “collision damage waiver.” Should you get into an accident then you will want to contact your credit card company as soon as possible and give them a written report of the accident and a request for your insurance claim.

The length of time you are covered for each rental transaction may also vary by credit card company, so that is another detail to verify. Some companies will cover you for 15 consecutive days, for example, whereas others may cover you for an entire month. Some rental agencies may also charge additional administrative fees for processing an accident report, and if that is the case then the credit card insurance policy may not fully reimburse you for all of those miscellaneous charges. Keep in mind, too, that if you rented the car outside the USA then special exclusions may apply. There are also exclusions for certain kinds of vehicles like sports cars, luxury SUVs, or antique automobiles – just as there will be on almost any kind of car insurance policy.

You may also run into problems or a denial of your claim if you violated any provisions of the rental agreement – such as driving the car on unpaved roads, exceeding the speed limit, or driving behind the geographical region specified in your contract. If the police report states that you were driving while under the influence of illegal drugs or alcohol then forget about it. You certainly will not be covered by the credit card insurance, because you were engaged in illegal activity at the time of the accident.

As usual, the best approach before signing any kind of legally binding contract is to carefully read it and then ask any questions you have about the terms and conditions. But don’t expect to get straight answers, because legal matters are usually pretty convoluted and they may be hard for the clerk at a rental car agency to understand or explain. The customer service rep on the phone at the card company may also be confused about what kind of coverage is included – especially since you are likely to end up talking by phone to a card company representative based in India or Pakistan.  If you are really worried – or you frequently rent cars – you may want to invest some time in doing research, tracking down the right person to give you precise answers, or even running the issue past a qualified lawyer.

2010 is a year full of technological surprises and innovations, from new types of electronic book readers and Internet-enabled cell phones to the fast-selling Apple iPad computer device. Meanwhile social networking is occupying the time of hundreds of millions of people of all ages. People are constantly using devices and sites like Twitter and Facebook to connect or reconnect with friends, do business networking, post blogs or videos, keep up with their celebrity icons, or just get a glimpse into the lives of other people in the tech-connected universe. But now, in addition to the many social shopping Web sites that have been around for a long time, there is a new trend emerging that involving tracking your purchases through social media mechanisms.

The newest contributor to this rather strange and different kind of high-tech social networking phenomenon is a company called Swipely. Swipely basically tracks your credit card swipes – and those of lots of other people – in such a way that consumers like yourself can instantly and automatically post information about what they bought with plastic online. Then you can talk about those purchases and credit card swipes with your friends.

If you have lots of extra cash burning a hole in your pocket these days and are looking for a way to invest in futuristic technological ventures related to the exploding world of social networking, you might want to look into become an investor in Swipely, Inc. Already the company has raised about $8 million in financing from professional investors like Greylock Partners, First Round Capital, and SV Angel. Before that the founders of the Swipely venture has a million bucks in seed capital, and the CEO of the organization is Angus Davis, a successful entrepreneur who used to work for Netscape Communications. Davis later launched a company that was sold a few years ago to Microsoft for close to a billion dollars in cash.

Although this idea of sharing credit card purchase info with other people on the Web makes some people skeptical that it can succeed, there is already another company doing the same kind of thing. Blippy – a company that also has millions of dollars in investment money – posts your purchases and the dollar amount that you spent. Swipely decided to do things a bit differently, so while it lets you post info about what you buy, it doesn’t reveal to others how much you actually spent. So if you snagged a real bargain you may have to go online and talk it up and brag about on your own.

Explaining the appeal of his Swipely company and its service, and defending the decision not to post dollar amounts of purchases, CEO Davis said “It’s about telling a story. It’s about what you bought, where and why, not how much.”

So if you join Swipely you will then basically log on, view the purchases you made, determine which ones you want other people to see, and then direct the site to post just those. Or you can set your preferences to post info about all of the purchases you make with your plastic. You can also email your receipts to Swipely or let the service automatically upload that info from merchants with whom you transact credit card business.

CEO Davis says that in practice, lots of people who are socializing through Swipely don’t just concentrate on what they bought, but they use their purchases as a starting point for a friendship. Once people break the ice based on buying habits, for example, they often make other social connections. Maybe you posted a purchase of a plane ticket to Rome or the fact that you bought a new pair of shoes in Tokyo. Someone interested in learning more about Italy might strike up an online conversation with you because they notice you went to Rome. Or maybe you’ll meet some other people who like to buy shoes because of your Japan purchase. Then again you might get messages from people who are really into Japanese sushi or Tokyo pop culture.

Swipely also says it could help you out in practical ways that the company is still working to develop and refine. Davis gave one example, saying that Swipely may soon be able to track your purchases and then send you an alert or notification to let you know that you might be able to buy the same item nearby for a better price. If you buy gasoline for $3 a gallon, for example, Swipely may be able to inform you that a gas station a block away has gas for only $2.80 per gallon.

But Davis likens Swipely and its appeal to that of other social networks such as Facebook and Twitter, and he thinks it will appeal to people in similar ways as a forum for making new and interesting social connections.

Banks are still under pressure from Capitol Hill when it comes to charging high fees on credit cards, but this time it is not about fees and rates that you pay as a cardholder. Now the attention has shifted to dealing with the way credit card merchants – those retailers who accept plastic as payment from customers like you – are being treated by the credit card companies.

Each time a merchant at a store, restaurant, hotel, or other business swipes your card they gets charged a merchant fee. This fee, credit card companies say, helps to pay for the most of providing and maintaining the sophisticated system and technological infrastructure that has to be in place in order for us to do tens of millions of credit card transaction per day at card terminals around the globe. But many merchants – especially those who are small business owners based in the USA – say that they are paying way too much to the card companies. These merchant fees typically average around 2.5 percent per transaction, although in some cases merchants may pay three or four percent. So that means that if you swipe your card, for example, and buy something for $100 the merchant has to pay two, three, or even four dollars out of that sale to cover the credit card merchant fee. If a store does a million dollars per year in credit card transaction, they wind up paying somewhere in the neighborhood of $25,000 just in merchant credit card fees.

But now, as small businesses suffer through a tough economic slump in the wake of one of the worst recessions in world history, many in Congress think it is time to cap those merchant fees.

The United States Senate just approved a measure that was sponsored by Senator Richard J. Durbin of Illinois that would set price caps on merchant fees while letting stores give customers discounts for paying with cash or using cards that charge lower merchant fees.

The bill passed by a rather wide bipartisan margin despite the fact that it is very controversial and is vehemently opposed by banks and credit card companies. The bill goes further by putting regulation of so-called “swipe fees” for debit cards under the control of the Federal Reserve.

In a statement to reporters Senator Durbin defended his bill, saying “Small businesses and their customers will be able to keep more of their own money. Making sure small businesses can grow and prosper is vital to putting our country back on solid economic footing.”

Banks are still reeling from recently enacted regulatory reform of the financial industry that put limits on how they can charge you for fees, penalties, and interest rates, so this new legislation has them up in arms. They have been depending more heavily on swipe fees as a source of revenue to help them bolster profits in the wake of the credit card reforms put into place earlier this year.

So in response to Senator Durbin’s bill they are threatening that this kind of change will ultimately hurt cardholders. The CEO for the American Bankers Association, for example, told the media that “In order for banks to cover their basic costs, it will have to be charged back to the consumer.”

But retailer merchants disagree with that prediction, and they say that because of the current swipe fees they are forced to pay that consumers are already paying too much. That’s because retailers have to factor in those swipe fees when they price their merchandise or services. Many small business organizations say that lowering the swipe fees will be good for consumers because it will remove those added costs and take pressure off retailers when it comes to pricing goods and services.

The National Association of Convenience Stores, for instance, reported that its members paid $7.4 billion in swipe fees in 2009, making merchant credit card costs the second-largest expense in that industry expense next to wages and salaries for labor.

A spokesperson for the National Retail Federation praised the passage of the bill through the senate, saying that it will help to “reverse the hijacking of the U.S. payment system.”

Next the bill will go to the House of Representatives for a vote, so stay tuned to see what happens in the coming weeks and months. If the legislation passes it would represent a landmark decision that would potentially put billions of dollars into the coffers of small businesses. That would hopefully get passed along to consumers while helping to strengthen the overall economy, although credit card companies warn that it could have the opposite effect.

In response to new and more stringent regulations regarding consumer protection, credit card companies have unveiled a whole range of new card features that are intended to help you manage your money and track your expenses. Some of these cards – like Chase Freedom, to name just one – are pretty helpful, especially if you have a hard time keeping up with your monthly purchases, sticking to a budget, or figuring out exactly what is the best way to quickly and effectively pay off your credit card balances and save more money.

Most of these new menus of features include on that allows you to isolate a specific purchase and pay it off sooner in order to avoid paying excessive interest. Or you can list some everyday expenses for recurring purchases like groceries or gas, and the card will put those into a special category and let you pay them off each month – even while you’re carrying other purchases over as an outstanding balance. These features will not make you a better consumer without your input – because all they will do is help you organize your expenses, keep track of them in a more understandable way, and avoid paying too much interest. It’s still up to you to make payments on time and control your spending habits or impulses. But with a little motivation these tools can do wonders to help you get your finances squared away.

The best thing to do to really leverage credit card use to your advantage is to use all of these new features while also using a card that has some good perks. It’s important to find a card that matches your spending or your lifestyle, too, because what rewards one consumer may not do much to help somebody else. If you never go out to eat in restaurants or travel very much, for example, it doesn’t make sense to apply for cards that reward you with frequent flier miles or double points for eating in selected restaurants. But if you buy lots of gasoline and also shop inside the gas station for buying things like beverages, your daily newspaper, and your lunches while you’re on the go, then a gasoline company credit card with rewards might be just the ticket. Some of them give you rebates on all your purchases including those inside the store – not just ones made at the gas pump – so the idea is to tailor your credit card to your own unique spending patterns.

But do read the credit card rewards terms and guidelines carefully. Some rewards may not kick in until you’ve spend a certain dollar amount, for instance, or you may have to spend a certain amount every month in order to qualify for special perks. Many frequent flier programs will have expiration dates on them, for example, so you need to keep the card active by using it at least once in awhile – otherwise you risk losing your rewards. Most cards reward you a lot more for shopping with specific merchants on their list, and there are cards that limit how much cash back you can earn – whereas other cards set no caps and have no expiration dates.

If you are one of those credit card customers who never carry a balance and always pays your entire credit card bill off before the due date, then you probably don’t have much use for spending and budgeting controls. But you may still enjoy some of the features offered by your card company. You can use the categorized annual expense reports, for example, to help you itemize your business expenses for tax purposes – and you can analyze your spending patterns and habits to look for new ways to save.

There are also some simple customer preferences you can set up through your online credit card account, so that whenever you approach a certain spending threshold you get an email notification to let you know you’re about to max-out your budget. You can pick whatever threshold or dollar amount you like, too, so that if even if you have a credit limit of $1,500 you can get “approaching your credit limit” alerts for whatever amount you want. If you decide you only want to charge a maximum of $150 a month on that card, for example, then despite the fact that you have a credit limit that is 10 times higher you can get alerts each time your spending or balance exceeds $150. That might be handy if you are trying to stick to a tight budget or wean yourself off of the habit of charging everything to plastic. Those alerts are also great for security reasons. You can be notified whenever the spending on your card hits a certain dollar amount with a 24-hour timeframe, for example. So if someone steals your credit card information and goes on a buying binge you’ll be alerted before they get too far out of control.

Most people just enjoy the convenience of not carrying cash so they carry plastic and pay off their credit card bills immediately. Others carry a Visa or MasterCard because of the necessity of using a credit card for certain transactions like renting a car, when merchants or service providers are reluctant to do business with someone who does not have their own credit card. But for the vast majority of people who have credit cards, they also use them to postpone payments for purchases.

 

Instead of using a layaway plan they just charge it to their plastic and then pay off the balance over a period of months or even years. This is especially useful for people who are making a relatively large purchase, because in that case the credit card becomes an instant way to get a consumer loan. Rather than going to the bank and applying for loan to cover the expense, the cardholder just charges it and then figures out a way to pay off that balance when the time comes.

 

For quite a few years the IRS has let taxpayers use credit cards to pay their taxes, too, and that is often a really tempting way to use a credit card because most people have a hard time coming up with a large chunk of cash at tax time. But while the idea of charging tax payments to a credit card is appealing, there are reasons why it may not also be such a smart and financially prudent method.

One reason that is at the top of the list is that when you pay the IRS with a credit card, you automatically get hit with an extra fee. Normally when you make a payment with a credit card to a merchant, for example, the merchant ends up paying the credit card company a merchant fee. That fee is built into the cost of doing business, and it typically runs in the neighborhood of 2-3 percent. So although you may not be aware of it, every time you spend $100 the retailers you do business with pay the credit card company about two or three dollars. But the IRS is a government agency responsible for collecting revenues from taxpayers, not giving money to credit card companies. So there are laws that prevent the IRS from paying any kind of service charges to your credit card company. Since that’s the way it works – and since credit card companies still want their share of the transaction – you wind up having to pay it yourself in the form of an administrative fee.

The cost is not much compared to what you’re paying, but you need to be aware of it because it does increase the cost to you. If you pay $5,000 in income tax using a Visa card, for example, be sure to note that you’ll also pay about $110 in additional credit card fees. You pay that even though you might pay your entire credit card bill off at the end of the month without carrying a balance forward – but anyone paying taxes with a credit card will probably also plan on carrying the balance for at least a few months. So that means you also have to figure in the cost of servicing that credit card debt by paying interest. If you pay a pretty high interest rate that could wind up costing you a bundle, and if you make a late payment along the way you could find yourself paying a much higher rate than previously planned.

Then there are those clever taxpayers who just want to pay their taxes with a credit card to earn extra points or rewards. If you have a rewards card of some kind, this might be a really easy way to rack up some fast points or get some big perks. You charge your big IRS bill, earn the rewards, and then pay off the credit card balance right away to avoid interest payments. But think twice – and study your credit card agreement carefully – before rushing headlong into this kind of strategy because many card companies are hip to that trick. Some used to give you five percent cash back, for instance, but now they only give you one percent. Since you’re paying almost three times that much just in the merchant fee, you wind up losing money on the deal.

A recent article in USA Today, for example, explained that American Express lets its cardholders pay taxes with the credit card, but that for every dollar you pay in taxes you have to forfeit 200 rewards points. So rather than earning easy points with that kind of strategy you would wind up having the whole think backfire on you. Pay a tax bill of $5,000 and you’ll give up a million rewards points.

But if you do a good job of managing your finances and you are really strapped for cash at tax time, it might still make sense to you to postpone the payment a little while by using your credit card. You avoid getting in trouble with the IRS and if you pay off the credit card within 2-3 months you don’t pay too big of a price for that added convenience. Keep in mind that carrying a big balance might lower your credit rating, however, so you might be better off trying to figure out another way to come up with money needed to pay those taxes on time.

We certainly hear plenty about protecting our credit cards, ATM cards, and financial identities. Lots of crooks are out there stealing not just cash but entire credit accounts and they can hijack your whole credit history without leaving a trace of evidence behind. People sell us ways to lock down our social security numbers. They teach us to come up with more creative passwords that cannot be decoded. Companies have technology to protect our computers, our homes, and our cars. But rarely do we hear of any good strategies for protecting our credit cards and ATM cards from physical damage. The magnetic strip or stripe on the back of those cards – the bar that holds so much valuable account information about us – is really nothing more than a thin piece of magnetic material not much thicker than scotch tape or an onion skin. But if it gets corrupted, scratched, scraped, or otherwise damaged it can render a credit card or bank ATM card useless.

 

That can present huge problems, especially if you are traveling to a foreign country, are trying to use your card late at night when banks and other offices are closed, or if you are using a machine – like to pay for gas or get money from an ATM. There you are with a perfectly good credit score, a valid credit card or bank debit card. But you cannot use any of it thanks to some grit or grime that got the best of that inconspicuous strip of magnetic material on the back of the card.

 

The good news is that there is an easy way to protect your cards and those fragile magnetic stripes that get swiped by ATM machines and merchant gadgets. Keeping your wallet free of sand or grit is one way, but sometimes your card is not even in a wallet. A better solution is to keep it always stored in a little credit card sized envelope or sheathe. Many banks have these and will give them to you for free. Just ask a bank officer for one. If they do not have any, you can make your own by taking an ordinary envelope and cutting it and then gluing or taping it so that it is just the perfect size to hold your credit card. Or you can use something like a thin plastic luggage tag cover.

 

The idea is to find something thin and sleek that won’t take up room but will easily cover your card to guard it from scratches. Slip the card inside this simple protective cover whenever you’re not using it and it should last for years and years – rather than breaking down on you just when you need it the most.

Heading into a highly contested election season, members of Congress are gaining even more momentum regarding efforts to regulate the financial industry and demonstrate a legislative commitment to protecting the average American consumer. One of the latest proposed pieces of legislation includes amendments to rein in exorbitantly high credit card interest rates and fees.

There is one being put forward by Senator Bernard Sanders of Vermont that would cap the interest rate that your credit card company can charge on unpaid balances at 15 percent. Currently many credit cards – and perhaps the majority of major credit cards – are already charging more than that. A lot of credit cards, for example, now carry regular APR rates of 19 percent or more. Then if you have a low credit score or violate one of the terms of your credit card agreement by making a late payment or going over the imposed spending limit you can wind up paying a rate that is in the mid to high 20 percent range. His bill would cap your rate at 15 percent interest.

But most Washington observers believe that Senator Sander’s idea won’t get very far in Congress due to pressure from the credit card industry. The proposed bill is most likely a gesture or token move by the politician to help him win populist backing from his constituents by showing that he is willing to stand up against big banks. That particular stance resonates with many Americans these days because they are fed up with perceived mistreatment from banks and other lenders. It also helps to explain why Congress is ratcheting up the pressure on banks right now – despite the fact that Congress just recently passed a major credit card industry regulations overhaul bill that went into effect earlier in 2010.

But another proposal that does have a decent chance of passing into law is one that would close a legal credit card industry loophole that was created about 30 years ago. Back then the Supreme Court ruled that banks are to be governed not by laws from state to state but instead by the laws of the particular state where the bank has its main offices or its credit card division headquarters.

If you’ve ever wondered why so many credit card companies are based out of the tiny little state of Delaware or the rather remote and rural state of South Dakota, for example, the reason is that those two states have lots of laws that favor financial institutions and credit card companies. So ever since that Supreme Court ruling back in 1978, the credit card divisions of most big banks have established their offices and legal residency within South Dakota or Delaware to take advantage of the relatively lax consumer protection statutes in those places. That’s why they can get away with charging you interest rates that go as high as 28 or 30 percent, because in the states of South Dakota and Delaware there is no limit on interest rates.

Of course this can be a huge financial boon to those states with weaker rules, because the states get to collect tax revenues from the banks and credit card divisions that are based within their jurisdictions. Having big credit card operations headquartered in a state also creates jobs and other economic perks. In the wake of that landmark Supreme Court ruling, in fact, many other states besides Delaware and South Dakota have loosened up their own consumer protection laws regarding credit card lending.

But individual states could regain control of how banks operate within their borders, no matter where the banks happen to be headquartered, under the proposal being urged by a bipartisan group of senators. The two who crafted the proposal are Senator Sheldon Whitehouse, a Democrat from Delaware’s neighboring state of Rhode Island and Senator Thad Cochran, Republican from Mississippi.

At a press conference Senator Whitehouse said that “Right now, because of this loophole, the big corporations trump state governments.” That is a system that he and other Congressional legislators – plus lots of state governments – believe needs to be changed. Senator Brown of Ohio, who also supports the bill, has pointed out that in his home state there are laws preventing the interest rates on loans of less than $100,000 from exceeding eight percent. But his state has no control over what credit card companies based in other states are able to charge the people of Ohio. Senator Sanders of Vermont believes that charging very high rates of interest on credit cards, especially during this time of economic uncertainty and high unemployment, is unethical and should be stopped.

So in the coming months we may see Congress take even more aggressive steps toward reining in credit card interest rates, but for the time being we will have to wait and see how the rest of the senators and representatives decide to vote on this newest round of proposals.

Lots of Americans changed their credit card habits within the past two or three years because they realized how problematic it could be to carry too much debt or rely on plastic instead of budgeting cash. As a result there are many cardholders who have open lines of credit or credit card limits that they never use. These dormant accounts do not make any money for credit card issuers, however, so lots of banks and other card company institutions have started to tack on fees if you haven’t used your card in a while. These inactivity fees can get expensive, and they really serve no purpose for you as a consumer. With annual dormancy or inactivity fees hitting prices of as much as $90, it pays to be vigilant.

 

Most card issuers will not add an annual charge as long as you take out your card three or four times a year – about once each quarter – and use it to make a purchase. You can even pay off the balance right away instead of rolling it over into the next payment cycle so that you do not have to pay additional interest. Your card company will still make a small amount of money from that kind of infrequent use because the merchants you deal with have to pay a sum to the card company even if you do not pay any credit card interest.

 

It’s a good idea to take an inventory of all of your credit cards this year, even the ones you hardly ever or never use. You can cancel the dormant ones, of course, but that could lower your credit score because having open lines of credit you do not use looks good in terms of your FICO score. Most experts recommend that instead of closing the accounts completely that you just use them a few times as year as described above. That way you get to keep them – and keep your credit score stronger – free of charge. Of course if they are cards that charge an annual fee anyway you may want to close them if they aren’t used and either have fewer cards in your wallet or shift to a card that does not charge any annual fee.

Jumbo loans are a special category of home mortgages that are much bigger than the typical or average home loans. Those who buy more expensive homes – like those that cost upwards of $750,000 or so – often have to use a jumbo loan because conventional loans or standard everyday loans are not made in such large amounts of money.

The size of a jumbo loan changes from time to time, based on the housing market and other financial industry factors. A few years ago, for example, the most you could get with a conventional loan was about $450,000 and if you needed more than that you had to qualify for a jumbo mortgage. Now the limit is up around $730,000 because home prices have trended higher over the past 10-15 years. But if you want to buy a house that costs $730,000 or more you will most likely need a jumbo loan, and lots of homes these days sell in that upscale price range.

During the height of the mortgage crisis the market for jumbo loans almost disappeared because lenders were afraid to loan such large amounts and investors who make these kinds of loans pulled their money back for safekeeping. If you could find a large jumbo mortgage during that phase, the interest rates were exorbitant, sometimes two or three hundred percent higher than a conventional loan. So the sales of high-priced homes came to a screeching halt because buyers could not get financing.

Now the situation is finally starting to normalize again for jumbo mortgages, however, and home loans in the top dollar category are again being offered at reasonable prices with competitive interest rates. That spells good news for both buyers and sellers of luxury homes or properties in very expensive locations like Hawaii and parts of California and New York, and is another sign that the mortgage and real estate markets are recovering.

The adjustable rate mortgage or ARM loan was super popular during the real estate boom, and then it caused serious problems as people who took out low interest rate ARM mortgages got bushwhacked by adjusted rates that skyrocketed their monthly payments. Everyone shifted as fast as they could into more reliable and safe fixed-rate loans, because those carry interest rates that never change – even if prevailing rates go through the roof. Those who didn’t get to move into fixed rates loans added to the historically high numbers of defaulting homeowners and millions of ARM loan borrowers lost their houses to foreclosure.

 

But rates have been relatively low and steady for the past couple of years, and in the wake of the credit crunch the Treasury and Federal Reserve acted in ways that dropped interest rates very low. Those who had ARM loans during that period of time probably fared quite well, because if they took out those ARM loans when rates were high they enjoyed watched their mortgage rates and monthly payments drop as the Fed slashed rates down to the bone. Suddenly ARM loans did not look so scary any more, and according to recent mortgage industry statistics the popularity of adjustable rate mortgages is coming back.

But smart borrowers should still beware the ARM mortgage. With mounting national debt the Fed is under pressure to start ratcheting rates back up again, and even if they keep rates where they are for 2010 we will likely see rates start to climb as soon as the economy begins to recover. Once they start going up they will probably have to keep rising in order to keep the economy under control, and that will make any ARM loans that are originated now get increasingly expensive over the next several years. Those who stick to fixed-rate loans, on the other hand, will have nothing to worry about because their loans are not going to be volatile but will stay the same year in and year out until they are paid off in full.