Unraveling Your Money Worries

Don't know how to find foreclosed properties in your area? Want to know what to ask your credit-card company? Having trouble with financial terms?

In these hard times, people need financial help more than ever, and Thursday on The Early Show, financial adviser Ray Martin had the answers to a few of our viewers' questions:

Question: I recently got letters from two of my credit cards stating they were raising my interest rate on new purchases and existing purchases as well. I have until May to reject this change to the terms of my credit cards. Are they allowed to do that? I'm sure they are. I think I know why, my credit score from Transunion is 726 out of 990 and rated as a C; but Equifax has me at 734, very good, and Experion's is 749 and considered excellent by them. Why is my score from Transunion so low when they all have the same information? If I reject the changes to the terms of my credit cards, they will close those accounts. Won't that have a negative impact on my credit score? What should I do?

First, a little tutorial on credit scores. The range of credit scores issued by FICO is 300 to 850, with 850 being the best. While FICO credit score is the most widely used and referenced credit score, it is not the only credit score used. Others are developed by independent companies, credit reporting agencies, and even some lenders. These include VantageScore, which is developed jointly by Experian, Equifax and TransUnion; scores range from 501 (High Risk) to 990 (Super Prime).

Each credit reporting agency calculates your score based on the credit history it has for you. To find out why your score at TransUnion is lower, you should compare credit history reports from the three bureaus. It is possible that there may be some incorrect information in the TransUnion credit history that is affecting your score there. If that is the case, correcting this could increase your score.

Before you accept or reject the change in terms on your credit cards, I suggest that you contact the credit card issuers and ask them to explain the specific reasons for increasing the interest rate. Lenders may make decisions in regards to credit cards and auto loans based on a single agency's score, although others, such as mortgage lenders, often will look at all three scores.

What will happen to your credit score if you do not accept the new terms and close the accounts? The answer depends on how much credit is available on these accounts and how long you have been using them. About 30 percent of a FICO score is based on the amounts you owe on all your accounts, the number of accounts with balances, and how much of your available credit you are using. The more you owe compared to your credit limit -- or the less unused credit you have available -- the lower your score will be. Also, about 15 percent of your FICO credit score is based on the length of your credit history. Accounts that are current and have a longer credit history will increase your score. But if these two credit card accounts are a small proportion of your overall available credit, then the impact to your credit score by closing them may not be significant.

Question: I live in Colorado Springs, Colo. Myself, my husband and a couple of my in-laws are looking for an investment property to rent. You did a segment on "Bargins on the Waterfront" in Cape Coral, Fla. We have been doing some research trying to find a good location and I would like to know your opinion on that particular area. I noticed where houses there on the waterfront were going for around $300,000 and now have dropped down to around $80,000. Is this true? And what are the advantages and disadvantages of buying foreclosed properties? Any information or resources you can provide would be greatly appreciated.

First a little 101 on Foreclosures. Basically there are four types of residential real estate property transactions:

• Straight sale: the seller and buyer agree on a price and the sales price is more than what is owed on the mortgage.
• Short sale: the sales price is for less than what is owed on the mortgage, and the seller has to get the bank's approval to release its lien on the property so that the buyer can take title.
• Pre-Foreclosure Auction: the owner has been evicted and the mortgage lender has foreclosed. The property is no longer occupied and the property is offered at auction. Buyers must agree to buy that day, often without any inspections. Typically, the mortgage lender will bid an amount that is equal to what is owed on the property. Often, this is still more than what most folks are willing to pay and therefore the property will become Bank Owned.
• Post-Foreclosure -- Bank Owned: this property has been through the foreclosure process and now it is owned by the bank that holds the mortgage. This is also referred to as Real Estate Owned, or "REO," a reference to the name of the department in banks that own and manage foreclosed properties.

In the current distressed real estate markets, the lowest price typically can be found on Post Foreclosure -- Bank Owned property. This is the option of last resort, when no buyers can be found during a short sale or a pre-foreclosure auction. Since banks are not in the business of owning and managing property, they typically offer property for sale with low prices in an attempt to entice buyers. But once they reach a point of "price discovery," when bank-owned property is selling in a short period of time, banks will start refusing the first offers they receive or begin raising prices on other property they offer for sale.

Here are some of the advantages of buying Bank Owned or REO property:

• Ability to Inspect Home and Title: Since the bank holds title to the property, you have time to arrange for an inspection and a title search, which removes some of the risk.
• Obtain Attractive Financing: Banks may offer attractive financing on a property they own;they have an interest in unloading the home.
• Lower Prices: Current studies of sales activity in areas with a lot of bank-owned property show that bank-owned properties are sold for lower unit prices (price per square foot) as compared to short sales or straight sales. Of course, this may also be due to other factors such as condition and location of the property.

The disadvantages to buying REO property are:

• Banks seek multiple bids. Since banks want top dollar, they will be willing to hold out until they receive multiple bids for a property.
• Expect Delays: Buyers' brokers often report that working with some banks can be difficult. Also expect extra work, unreturned phone calls, and a wait of several weeks after you make an offer. But in areas where a lot of bank-owned property is on the marker, brokers say banks are being more responsive to reasonable offers. This could mean that they know they have a lot more foreclosures in the pipeline.

Question:I'm totally confused about (annuities), and I'm just wondering if you could give me the pros and cons of them."

When it comes to annuities, They are simple in concept: an annuity is an investment contract between an insurance company and an investor, in which the insurance company provides some form of guaranteed investment return. But there are so many details and variations that it's no wonder folks are confused!

For investment purposes, there are basically two types of annuities: fixed and variable. Fixed annuities provide a stable rate of interest, guaranteed by the issuing insurance company. Variable annuities provide a menu of investment funds that range from cash, bonds and stocks and you have to decide which funds to use and how to mix them.

In regards to payments, there are two categories: immediate or deferred. When you buy an immediate annuity, you immediately get a monthly payment. In a deferred annuity, invested money grows, and at a later date you can elect to "annuitize" or begin the process of receiving regular monthly payments.

Annuities can provide the following benefits:

• Tax-deferred growth and compounding within the annuity contract
  
• Guaranteed rates of return on your dollars
  
• Guaranteed lifetime payments if you annuitize (in some cases you don't even have to annuitize in order to receive this benefit)

Note that the guarantees are only as strong as the insurance company that issued the annuity. In other words, if the insurance company fails, the promise is no good. You should mitigate this risk by using only the financially strongest/most highly rated insurance companies.

You have to pay for the guarantees somehow, so there are additional fees and costs. Some contracts have surrender periods, which means that you are charged extra fees that can make you tie up your money longer than you want.
IRS rules restrict how you take money out of an annuity. Distributions may be taxable and/or penalized.

The bottom line: Annuities can be confusing. You can pay hefty commissions and fees to insurance companies and their agents, which is not necessarily a bad thing, as long as buying the annuity is suitable for your situation. But don't make a final decision about buying an annuity until you have received advice or a second opinion from a trusted and unbiased financial professional.