Friday, October 9, 2009

Paying off child's debt strains family ties

It involves money and emotions, dollars and sense

By Sarah Angle

(Editor's note: The names of Jeff, Patricia, and Eric Banks have been changed to protect the privacy of the family we interviewed.)

When Jeff and Patricia Banks paid off their son's $6,000 credit card debt, they thought they were doing him a favor. Paying off child's debt has strains family ties

Their 24-year-old son Eric was paying the card's minimum balance each month at a hefty 22 percent interest rate. So, instead of paying a credit card company, he would pay back Mom and Dad, save himself a huge chunk of change in interest, and become a financially smart, stable adult.

That was the theory. Unfortunately, when it comes to family and finance, things don't always work out as planned. When parents think about whether to bail out a child from debt, more than money is at stake. Says psychotherapist and co-author of "The Financially Intelligent Parent," Dr. Eileen Gallo. "It's never a cut and dried answer ... you have to look at the situation."

Helping versus hurting
Gallo says that when deciding whether to bail a child out of debt, the first question parents should ask themselves is: "Will this action foster my child's independence or extend their dependence?"

As a parent, your goal is to provide your children with the skills they need to grow into successful, responsible, happy adults, right? So, Gallo asks, what is your action teaching your child? "If parents continually rescue their kids, they are helping them stay dependent." If you're going to help, Gallo says, make sure it's real help -- which means evaluating the child's financial history and asking why they're in debt to start with. When you can answer the "why?" question, you'll begin to understand where this behavior is coming from and if paying off the debt is really in the child's best interest.

Do they qualify for a loan?
There are many emotions involved when it comes to family and finances, says Charles Schwab financial consultant Richard Rosso, so it helps to look at the loan from a more analytical perspective. Rosso recommends taking these steps before signing over a check:

Step 1: Evaluate the child's past financial history. Was the child responsible with money growing up? Was he or she a saver or a spender?

Step 2: Write down a list of questions you want to ask the child. Think about the type of questions a lender asks before awarding a loan, such as job history, additional outstanding debts, collateral and savings.

Step 3: Write down the child's answers to your questions and use those answers to help formulate your lending decision.

Step 4: Have the child make a detailed budget (or give you a copy of one if it already exists).

Sign on the dotted line, Junior
Now that you've got something to work with (other than pure parental emotion!) you're ready to make an educated decision.

At this point, if your head and heart are screaming, "Yes, I do want to help my baby out of debt!" just remember the devil is in the details. Before you even think about writing a check, set up a clear -- no questions asked -- set of guidelines to ensure that you and your child know what's what.

North Carolina financial consultant Beth Gregg suggests signing a parent-child contract. The contract should list clear payment due dates and monthly payments. It should also address the consequences of not paying or paying late.

What about interest? If you do decide to charge it, Gregg says, have it written into the agreement. To avoid having the IRS consider the loan as a gift, charge, at a minimum, what the IRS calls the Applicable Federal Rate. To find that rate, go to the IRS Web site, search for "applicable federal rate" and click on the first link. Table 1 contains the loan rate you need -- select the one that matches the length of your loan.

Family + money = messy
Asked later if he was glad his parents paid off his credit card debt, Eric hesitates. "It was good, in a way," he says. "At the time it seemed like a good deal. But now, thinking back, it wasn't such a good choice."

Owing his parents money makes things awkward, says Eric. "The only time I really feel comfortable hanging out with them is at the first of the month -- when we've paid off everything and we're caught up. If it's at the end of the month, Dad always brings up money."

"You can ruin a family over money," says Gregg. "Because it's never just a business decision, and a lot of times not everything works out as planned."

Case in point: Eric. Besides straining his family relationships, he's still overspending, not saving and relying on the generosity of his parents to make his life work. To add fuel to the fire, Eric's wife has chosen not to work. So Jeff and Patricia don't feel like the couple is doing all they can to repay the debt. The family's problem: There were no initial guidelines set up between Eric and his parents. So now there are no clear expectations or rules to follow.

We know this type of financial situation can affect the relationship between parent and child, but according to Rosso, it can affect the dynamics of the entire family. "When a parent loans money to a financially irresponsible child, it can create animosity between other children in the family," explains Rosso. "Siblings who aren't getting a bailout may feel that Mom and Dad are being taken advantage of. They empathize with the parents and have animosity towards the brother or sister getting the loan."

Keep an eye on your retirement
Most parents have an innate tendency to put their children first, and finances are no exception. As sweet and selfless as that may be, it can come back to hurt you and your retirement.

"Parents need a real black-and-white picture of how much money they need to live on before offering to pay off a child's debt," says Gregg. "You sacrifice so much for your kids and then say, 'My gosh, I can't do what I want to do after working for 40 years.'"

Jeff Banks says the $6,000 they used to pay off Eric's credit card didn't really hurt them financially. And looking back, he says he would still do it again. "But I would hope for a better outcome ... that Eric would have stayed in the clear and not messed up his credit. But in the overall perspective of giving things to your kids, $6,000 isn't a big deal."

Nearly 100 charged worldwide in massive phishing scam bust

'Operation Phish Phry' nabs ID theft suspects in Egypt, U.S.

By Andrea Leptinsky

The FBI has charged more than 50 defendants -- the most ever charged in a cybercrime case -- for allegedly conspiring to steal the identities of thousands of Americans, the bureau announced.

The investigation, dubbed "Operation Phish Phry," includes 53 arrests in the United States and 43 arrests in Egypt. The FBI calls it "the largest number of defendants ever charged in a cybercrime case." Defendants in both countries worked together to obtain bank account numbers and related personal identification data from banking customers through "phishing," a method by which schemers use spam e-mails or pop-up messages to dupe victims into giving up their credit card and bank account numbers.

"This international phishing ring had a significant impact on two banks and caused huge headaches for hundreds, perhaps thousands, of bank customers," said George S. Cardona, acting U.S. Attorney, in a statement released by the FBI. "Organized, international criminal rings can only be confronted by an organized response by law enforcement across international borders, which we have seen in this case."

Tackling a growing problem
The operation began in 2007 when the FBI decided to crack down on criminal groups that were targeting U.S. financial infrastructure. The project grew in scope earlier this year when FBI uncovered intelligence involving individuals in Egypt, a discovery that prompted a joint investigation by the two countries' authorities.

Scammers in the United States and Egypt worked together methodically to carry out the scheme despite the 7,500 miles between them. According to the FBI, defendants in Egypt collected victims' bank information through phishing and then hacked into accounts at two banks. Once the accounts had been accessed, the Egyptian defendants communicated with the American defendants through text messages, Internet chat groups and phone calls to transfer funds from the compromised accounts to the newly created fraudulent accounts. The American defendants then wired a portion of the funds back over to the Egyptian defendants.

"The sophistication with which Phish Phry defendants operated represents an evolving and troubling paradigm in the way identity theft is now committed," said Keith Bolcar, acting assistant director of the FBI's Los Angeles bureau, also in the statement.

Each of the 53 American defendants named in the indictment returned last week by a federal grand jury in Los Angeles is charged with conspiracy to commit bank and wire fraud, a charge that carries a maximum penalty of 20 years in federal prison.

Don't take the bait
A study by technology research company Gartner indicated that more than 5 million American consumers lost money in 2008 to phishing attacks.

According to the Federal Trade Commission's, it's easy to protect yourself from becoming a phishing victim, with the right knowledge:

  1. Ignore e-mails and pop-up messages that claim to need your personal financial information. Don't click on any links inside the message, and don't cut and paste any links into a new browser window. Phishers make links look like they are taking you to one site, when it's really taking you to a false site designed to steal your information.
  2. Beware of phone trickery. Some messages ask you to call a phone number to update your account to access a refund. Scammers can even use technology to list a phone number from your home area code. If you need to reach an organization you do business with, call the number listed on your financial statements.
  3. Cover the basics. Stay up to date on your computer's anti-virus and anti-spyware software, as well as a firewall. Review your credit card and banking statements regularly to search for fraudulent use, and never, ever give out your personal or financial information through an e-mail.

The government has set up an e-mail address for consumers who believe they have been sent phishing e-mails. To report such e-mails, forward them to

Credit card balances fall by nearly $10 billion in August

By Jeremy M. Simon

Credit card balances plunged by almost $10 billion in August, according to new Federal Reserve data. This marks the 11th straight month of decline amid job losses and an ongoing change in consumer and lender attitudes toward plastic.

Consumer debt takes
another big fall

Consumer debt has fallen hard in recent months, including a big drop in August. The below chart breaks down how much of the overall debt comes from revolving debt -- nearly entirely made up of credit cards -- and how much from nonrevolving debt -- such as car loans or student loans. All numbers are in billions of dollars.

On Wednesday, the Fed released its monthly G.19 report on consumer credit. That report looks at various components of consumer debt, including revolving credit -- a loan category comprised almost entirely of credit card debt -- as well as nonrevolving debt, which includes such debt as auto loans, student loans and loans for mobile homes, boats and trailers.

The latest G.19 report showed that revolving credit plunged at an annualized rate of 13.1 percent in August, following a drop of 3.1 percent in July. The August monthly drop is the 11th in a row, dating back to October 2008, the longest on record. Overall, revolving debt fell to $899.4 billion from a total of $909.3 billion in July.

Nonrevolving credit dropped just 1.6 percent in August to $1.563 trillion. Taken as a whole, consumer debt fell $12 billion to $2.463 trillion in August -- the seventh straight monthly drop, dating back to February. The last time overall consumer credit fell for seven straight months was in 1991. It has never fallen eight months in a row since the Fed begin tracking it in 1943.

That just might change next month. The unemployment rate hit 9.8 -- a 26-year high -- in September, according to data released earlier this month, and most analysts don't expect that picture to dramatically change soon. Until it does, experts expect card balances to keep falling.

"The jobs picture has gotten bleak, and consumers don't spend in that environment. And more importantly, banks don't lend in that environment," says Richard Yamarone, director of economic research with Argus Research.

Three key factors
Chris Brendler, managing director with Stifel Nicolaus in Baltimore, says that ongoing pullback in credit card debt can be attributed to three factors: consumers' efforts to pay down debt and avoid card use, banks' reduction of credit lines available to consumers and sweeping credit card industry reforms set to be enacted in February.

For example, the Credit CARD Act "encourages the credit card companies to pull back on the use of intro rates and teaser rates," Brendler says. He notes that Discover indicated that the number of its teaser offers, which declined in the third quarter, will continue to fall through the end of 2009.

Credit card debt plunges in August

Consumer credit card debt dropped more than 13 percent in August, as job fears prompted Americans to rein in their debt.

Such behavior by banks is weighing on credit card debt, Brendler says, since cardholder spending tends to be encouraged by low interest rates offered by banks. "As they pull back [those offers], you see those balances decline," he says.

Additionally, Brendler says job losses are unlikely to help reverse the direction of falling credit card balances despite some predictions that the unemployed will be forced to cover their expenses using plastic. "I think that's being overshadowed by people looking to pay down debt," he says.Yamarone agrees that employment levels won't slow falling credit cards balances, noting that banks have already taken steps to prevent overuse by the unemployed. "They're slashing limits faster than consumers can rack up charges," he says.

Despite rising unemployment levels, around 90 percent of consumers are still employed, Brendler explains. So don't expect the revolving credit portion of future G.19 reports to get a boost from the unemployed.

In fact, "as long as joblessness remains concern No. 1, you're not going to see people spending and you're not going to see bank improving lending terms," Yamarone says.

Move to debit
Among those consumers who are still shopping, an increasing number of purchases are being put on debit cards. "You've also seen a pretty big shift away from credit cards toward debit cards," Brendler says. Debit cards now make up more than half of all transactions that don't involve cash, based on an August 2009 study from advisory services firm TowerGroup, compared with just 1 percent of transactions 15 years ago.

Retailers confirm that trend. The National Retail Federation, which yesterday forecast a 1 percent decline in holiday sales, has indicated that when putting purchases on plastic, consumers are choosing debit over credit.