Protect Yourself From Identity Theft

Every year millions of Americans experience identity theft and credit card fraud. Throughout 2017 alone, 158 million social security cards and 14.2 million credit card numbers were stolen. This was an 800% increase from 2016, and experts believe it will only get worse in the years to come. You may have heard about the Equifax breach in 2017, where hackers were able to steal approximately 146 million social security numbers among other personal information. In response to the Equifax breach, the U.S. Congress added a section on identity protection in the Economic Growth, Regulatory Relief, and Consumer Protection Act, which was passed in May 2018. This post will show you two methods on how to protect yourself from the horrors of identity theft, how the U.S. Congress enhanced our protection, and how to take action now.

Method One – Freeze Your Credit. When you freeze your credit, you are restricting access to your credit report to third parties, like lenders and creditors who need to access your credit reports before approving a loan. Once you freeze your credit, no one including you, will be able to open a credit card or loan in your name, thus protecting you and giving you peace of mind. To place a credit freeze, you will need to contact all three nationwide credit bureaus: Equifax, Experian, and TransUnion online or by phone. Once you do this, your credit must be frozen within one business day. Should you wish to unlock your credit, you will need to go online or call the three credit bureaus, and they will unfreeze your credit within an hour. In the past, you may have had to pay for a credit freeze, but now thanks to new legislation passed in 2018, freezing and unfreezing your credit are now free.

Call All Three Credit Bureaus to Freeze Your Credit

Equifax: Call 800-349-9960 or visit their website.

Experian: Call 888-397-3742 or visit their website.

TransUnion: Call 888-909-8872 or visit their website.

After you freeze your credit, the credit bureaus will give you a PIN number which you can use to unfreeze your credit at any time. If you lose the PIN (Please Don’t), it will be challenging to unlock your credit and probably take many hours on the phone with each of the three credit bureaus. I’d recommend you write it down and store it in a safe place, and not on your phone or computer. 

When you freeze your credit nothing really changes. You can continue making purchases with your credit card, using other forms of credit which you may have already established, and most importantly your credit score is not affected by a freeze. The only thing is, you cannot access additional credit. But know since you know how to unfreeze your credit, the process should be simple.

Method Two – Fraud Alert.  A fraud alert will not freeze your credit, but when you wish to open a credit card or loan, third parties must take reasonable action to contact you to confirm your identity. Usually, you will need to provide your phone number before placing an alert, which will be called if you or someone else attempts to open an account in your name. In the past, a fraud alert only lasted three months, but thanks to the recent legislation passed by the U.S Government, fraud alerts now last one year. If you want protection for longer than a year, you will need to renew the alert by contacting any one of the three credit bureaus. Once you place an alert with one credit bureau, the other two will be notified of the alert. This also applies for when you first create a fraud alert. Before writing this post, I set up an alert, by calling Equifax and took less than 5 minutes.

Credit Freezes and Fraud Alerts are two essential steps you can take to help prevent identity fraud. It is my opinion you set up a fraud alert at a minimum, and should you wish to have more protection, freeze your credit. In today’s world of cyber-attacks, like the Equifax breach in 2017, we must take these simple steps to protect our financial security.  Please leave comments and questions below.

When Can Debt Be Good?

Most people think debt is a bad word, and we should try our hardest to avoid it. I tend to agree, and try my hardest to avoid it. I presume I gained this perspective at a young age from my dad, who always told me to avoid debt when you can. But is this logic the best approach to being the most efficient with our money? We need to understand how debt can be good if used responsibly. After reading this post, you will understand how debt can be used to help grow your net worth and when you should avoid it.

Good Debt. Debt is generally considered a positive when the expected value of your net worth increases. We do this by leveraging our current financial position to achieve a positive return.  Below are a few scenarios when debt can be good:

Education. Gaining skills is critical to one's future success in today’s society. Unless your name is Bill Gates or Mark Zuckerberg, you will likely need to educate yourself at a university or college to earn more income. For example, let's say you take out a 10-year loan for $50,000 at an 8% interest rate. By using an amortization calculator (which you can access here), your total payments will equal $72,797 which works out to 120 monthly payments of $607. After you graduate college, you are able to secure a job producing an income of $50,000 which amounts to $4,167 per month. In summary, by acquiring debt of $50,000 or $607 per month you are able to generate a monthly income of $4,167. This is a fantastic return on your investment and shows how debt can be used as a tool to increase your net worth.

Investing. In the world of investing instead of taking on a loan, you use what is called margin. Buying on margin is how investors borrow money to purchase stocks, bonds, and other financial securities. The logic is this; if you can borrow on margin at 2% interest and earn a 5% return on your investment, then you earn 3%, or what investors call the “making the spread”. Napkin Note: Commercial banks like Citibank, Chase, and Bank of America earn the spread between depositors and borrowers. In return for your deposits, the bank pays you interest and uses your deposit to provide loans for other consumers for home, auto and credit card loans. These loans earn a higher interest rate than the rate the bank pays you for holding your deposits.

Residential Real Estate. Buying a home is likely the most significant purchase and hopefully one of the best investments you will make in your life. Again we utilize debt to leverage our current financial position. By placing as little as 10% down on certain real estate properties, you will own an asset which is worth 10 times more than your initial investment.  Let’s say you purchase a home for $200,000 but put down a 10% down payment, which is $20,000. After one year the home's value appreciates to $225,000 or 12.5%, and you decide to sell. Once you have paid off your loan, you will have earned $25,000 or a massive 125% return, which isn’t bad to say the least (not including closing fees and taxes). Now instead of purchasing a home you invest the $20,000 in Apple stock, and after one year the price of Apple's stock also appreciated by 12.5%, but here you only earned $2,500. Thus utilizing leverage to your advantage can prove extremely valuable.

So by now, you may begin to see a trend. In each of the three scenarios above, we leverage our current financial position (by taking on debt) to generate future cash flows, with the hopes of ultimately increasing our net worth. Below are a few additional ways where debt can be good.

·         Starting your business or investing in a start-up

·         Commercial Real Estate / Rental Property Investing (provides recurring monthly rental income)

Not a Sure Thing. One of Mike Tyson’s most famous quotes is “Everybody has a plan until they get punched in the mouth.” Just because you receive a good education doesn’t mean you’ll get a job right after you graduate college. You may have to accept a lower paying job to start. Not every investment you make will work out and what happened to those people who bought homes just before the Great Recession in 2008 and lost everything. Of course, we all plan on being successful, but we must be aware that things happen and we need to adapt to changes to grow. They’re no guarantees in life, so we must be smart and assess how much risk we are willing to take in return for the potential rewards.

Bad Debt. This is simple; bad debt is anything that will not increase your net worth. Understand this; if you take on debt that does not increase your wealth you are only taking the future money you earn to pay principal and interest on assets that fail to provide any future monetary value.

Don’t Use Debt For:

·         Fancy Cars*

·         Luxury Items*

·         Clothing

·         Game Systems

·         Vacations

·         Cell Phones

*Excludes rare antiques and collectible items.

Interest rates on your credit cards are incredibly high. For example, let's say I purchase a fancy TV for $1,500, and I choose to buy the TV with my credit card. I decide I can afford to pay $50 per month until the loan is paid off. My credit card currently charges me interest at a rate of 17.49% APR (Annual Percentage Rate). Using the debt repayment calculator from Credit Karma (which you can access here), it will take me 40 months or an additional $487 to pay off this loan. Your TV which initially cost you $1,500, now became almost $2,000, plus you will need to spend $50 less for 40 months to pay for this TV. And if that wasn't enough after you are finished paying this TV off, it will be almost three and a half years old and outdated.

The items listed above are items you should save for and pay off immediately. Should you charge them to your credit card, make sure you pay them off at the end of each month. Credit card debt can creep up on you, and before you know it, you’ll be paying 25% more for all the items you purchase because of the high-interest rates on credit cards.

The bottom line is don’t choose debt if you’re expected net worth will decrease as a result.