Overloaded With Debt? Symptoms and Solutions

Most of us intuitively believe we would know if we were overburdened by debt, that kind of stress should be clear and obvious. However for those who suffer a disconnect with common sense, and there are far too many among us, or for those whose rose-colored glasses are so thick they impervious to reality, here are some clear and concrete signs that your debt is getting the better of you:

> You spend in excess of 20% of your net income servicing debt other than your mortgage.

> You are not contributing to your 401(k) or other retirement plans because you need the take home pay to service your debt.

> You use credit cards out of necessity and not out of convenience.

> You are frequently hit with late payment fees.

> You continually reach the maximum limit on your credit cards.

> You play the game of credit card roulette using one card to pay off another.

> You cannot meet the minimum payment requirement on your credit cards.

If these statements hit too close to home or are precisely on the mark then it may be time for a dose of reality and financial maturity to take hold of you. What should you do to stop avoiding the problem and finally face up to it. Here are some steps you can take to begin addressing the problem head on:

> Start by contacting your creditors and asking them to reduce the interest rates and fees on your accounts. Your account history with them will factor in big in their willingness to negotiate with you. Use the offers you have received in the mail (a rare occasion where junk mail may actually benefit you) as an incentive for your creditors to compete for your business. If the first person you speak with declines your request, ask to speak with someone else higher up the chain. Of course your goal is to remain with the creditor you already have your account with because closing seasoned established accounts and transferring balances to another creditor, could adversely impact your credit score in striking opposition to your goals and intentions.

> You may want to consider transferring an account balance with one creditor to another if a new creditor is offering zero percent interest or another low introductory offer to entice new applicants to transfer their account balances. But if you play the transfer game you must be organized about it or risk defeating your purpose should rates spike up on you unexpectedly at the end of the brief introductory period. If you cannot be trusted to track this closely enough then you may want to consider opting for a low fixed rate offer that will remain unchanged for the duration of your debt. The key to implementing any balance transfer strategy is to eliminate the possibility of negatively impacting your credit score in the process by keeping the account which you are transferring out of open after you have moved onto a better deal. Closing any seasoned long term accounts can result in your credit score taking a hit.

> If you find you are unable to negotiate with your creditors on your own, or if you need help establishing a budget as well as some oversight to help get you out of debt and remain that way, consider using the resources of a credit counseling agency. Choose your agency carefully and keep a watchful eye on any possible conflicts of interest between your goal of paying off your debt as quickly and cheaply as possible and the agency's compensation structure. It is best to use a non-profit counseling service which is sponsored by the credit card companies collectively as penance for their credit-card peddling practices. A non-profit service should charge you only a nominal monthly fee or a fee based on a small percentage of your over all monthly debt service. Note that the only occasion where consulting with a credit counseling agency could adversely impact your credit score would be if the counseling agency works to reduce or re-negotiate your debt (i.e. changing either the payment or interest rate) with a creditor on your behalf and that creditor reports to the credit bureaus that the debt was "not paid as originally agreed". However if you use the service strictly for debt management and budget development purposes, this should not result in anything being reported to the credit bureaus.

> Filing for bankruptcy should naturally be your last resort and this process has been made far more difficult with the changes to the bankruptcy laws that went into effect in 2005. You will likely end up having to go to a court approved credit counseling agency before you can proceed in this direction and it may be wise to hire an attorney to advise you and help walk you through the process. If you do decide to go the bankruptcy route, and feel it is your only option, know that the decision will stay with you for some time to come making it more difficult to get credit at a prime rate. While most derogatory credit remarks will remain in your credit profile and on your credit report for a period of seven years, a bankruptcy filing will stain your credit history for ten years.


Always consult with your tax or financial and legal advisors regarding your own individual circumstances before taking any action which could have a significant impact on your personal taxes or finances.

Loophole Must be Closed on Misleading Credit Abuse

An inadvertent loophole in the federal Equal Credit Opportunity Act (or (ECOA) has provided an open invitation for those seeking to abuse and profit from it. The Act permits the use of what's referred to as an "authorized user" account to establish a credit history rather than actually having to open credit in ones own name, this essentially allows someone to hijack the credit history of another person. Becoming an authorized user on an account opened by someone else (even someone not related to you) allows the authorized user to transpose the account holder's credit history and make it their own seemingly through osmosis. Absurdly the authorized user may not even have physical access to the account but is only noted as being an authorized user by the legitimate account holder. ECOA does not have any limitations on the number of authorized users permitted on an account and does not prohibit the outright rental of authorized user accounts by persons having legitimately opened an account.

This is a shamefully misleading practice which credit repair companies have exploited to its fullest potential. These companies claim they can raise a less than stellar consumer's credit score by as much as 200 points in one to three months time. This feat is accomplished by despicably offering to pay a person possessing great credit a hefty rental fee, up to $2,000 in some cases, in exchange for being added as an authorized user on one of their accounts. Because the credit scoring system makes no distinction between the authorized user and the actual account holder, the credit history on the account is now seen as one and the same for both parties. This seemingly fraudulent practice is commonly referred to within the industry as "piggybacking".

Both Fair Isaacs (developer of the FICO Score) and all three major credit bureaus have products in the works which will discount this practice when reporting an individual's credit rating but no changes have been rolled out currently nor are any being widely used within the lending and credit industries. Appallingly lenders and creditors alerted both legislators and bank regulators to this problem some time ago but no action has been taken to make the practice illegal. Hopefully Fair Isaacs and the credit bureaus will be able to introduce their new systems and eliminate the faulty and misleading credit enhancing impact of this practice sooner rather then later. In the meantime the opportunity to abuse the system exists for those who wish to take advantage of and profit from it.

Those wishing to improve their credit scores will still be able to do so the old fashioned way. Note that even borrowers having filed for bankruptcy have been able to dramatically improve their scores and become "prime" borrowers in some cases within a period of only three years. By using credit wisely ones credit score can rebound with surprising resiliency. Using credit wisely means keeping the number of new accounts to a minimum, not closing any older accounts which reflect a good credit history and wrapping them into new accounts, also keeping the outstanding balances on all credit cards limited to a ceiling of 65% of the maximum limit allowed on the account. By following some simple guidelines you can turn a negative credit history into a positive one without having to pay someone you may not even know personally for the unethical privilege of hijacking their credit profile.

For those persons who lack a credit history altogether and would therefore have difficulty obtaining a credit score, Fair Isaacs (developer of the FICO Score) has created a new FICO expansion score to gage the creditworthiness of those persons having minimal to no information reflected with any of the three major credit bureaus. Rather than using traditional credit card and loan payment histories to calculate a FICO score, the new expansion score is obtained by using alternate credit sources such as utility bills along with checking account management histories. This new scoring system will make life considerably easier for young people just starting out as well as those persons who are new to the country. Many credit card companies, as well as auto financing sources, have begun to accept the expansion score however it has yet to be widely used and accepted by mortgage lenders at this time but the hope is that this acceptance is coming in the near future.

Legislation Watch: House Passes Bill Restricting Mortgage Lenders

Desperate to show responsiveness and action on behalf of the growing number of families hit by the subprime crisis, the House passed a bill on Thursday restricting the activities of mortgage lenders.
The bill forces mortgage lenders to obtain licenses to operate, makes them responsible for determining a family's true ability to pay mortgage payments, and fines them for pushing borrowers toward subprime loans.
The bill sponsors say the restrictions are designed to prevent additional families from falling prey to the mortgage crisis. They recognize that the bill won't help families currently in trouble, but will go towards a better future.
"What we have today is a bill that cannot undo what happened, but makes it much less likely it will happen in the future," said Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, to the Federal News Radio.
More than 2 million adjustable rate mortgages are scheduled to reset by the end of 2008, and many American homeowners are expected to fall into debt. Supporters of this bill say that this situation could have been averted with stronger rules, and that past practices in the sub-prime market amounted to predatory lending, with confusing terms, high fees, and too much pressure by lenders.
Opponents to the bill, including Republicans and the White House administration, warn that measures such as these and other congressional intervention can make things worse. They worried that action by Congress can make it harder for current mortgage holders to refinance, and are concerned that lenders would be expected to forecast borrower's ability to pay.
Banking associations also oppose the bill. The Mortgage Bankers Association says the bill will limit credit availability and options for homeowners.

The bill:

> Prohibits lenders from making loans that borrowers can't repay

> Bans lenders from pushing homeowners into refinancing that provide minimal benefit and exorbitant fees

> Outlaws excessive fees for late payments

> Makes Wall Street banks that package mortgage securities into investments accountable for lending law violation

> Creates the Nationwide Mortgage Licensing System and Registry, a system for mortgage bankers and bank loan officers

The bill passed 291-127 and now goes to the Senate, where another bill attempting to regulate the mortgage industry has been stalled for weeks.

Sub-prime Mortgage Debt Relief and the IRS

By Cameron Street

The downturn the housing market is currently experiencing was both predictable and inevitable. Speculative buying spread throughout many areas of the country fueled by the unprecedented availability of loans to borrowers in the sub-prime credit category as well as other types of high risk adjustable rate loan products. Wall Street and its investors in these loan products, called mortgage-backed securities and the now notorious collateral debts obligation (or CDOs) sparked this combustible cycle with their insatiable appetite for yield and their willingness to take on imprudent levels of uncharted risk. Sadly many of the borrowers who acquired their homes through either sub-prime or the high risk ever-rising-property-value dependent adjustable rate loan products are now faced with the fact that the party has ended and they are going to be left with a huge debt hangover. Foreclosure is on the horizon for a high percentage of these borrowers but tragically their problems will not end there. As if losing ones home and the resulting devastating blow to ones credit weren't enough, many homeowners may not be aware that debt cancellation (also called forgiveness) by your lender will result in a 1099 being generated with your name on it in the amount of the unpaid debt. Essentially, the IRS is going to tax you on the amount of debt cancelled or forgiven by a lender as if it were ordinary income you received within that year.

The debt you believed to be wiped out or "forgiven" by your lender is actually treated as income to you. For example if you were to borrow $250,000 from a lender to purchase your home and then you were to pay back only $50,000 and proceed to go into default on your payments after that, the lender will write off $200,000 in remaining outstanding debt which was owed by you and you would then receive a Form 1099-C (Cancellation of Debt) upon which ordinary income tax would be due. If interest on the mortgage is also forgiven, that could appear on the 1099-C as well depending upon whether or not the interest was tax deductible. Whenever personal debt is cancelled by any type of lender or creditor, the amount that is cancelled or forgiven is treated as ordinary income by the IRS unless the borrower in question is declared bankrupt or insolvent. A borrower would be deemed to be insolvent if after reducing the amount cancelled or forgiven debt from their original liabilities, the total outstanding debt still exceeds the borrower's total assets. You would claim relief of this kind on IRS Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) if applicable in your particular case.

However fortunately help may be on the way, The Mortgage Cancellation Tax Relief Act of 2007 (HR 1876) would attempt to expand protection from the IRS by shielding those borrowers who are not bankrupt or insolvent. The bill would in essence amend the tax code to exclude debt forgiveness on mortgages secured by a primary residence from being treated as ordinary income. It is interesting to note that this change or amendment would simply be a return to IRS policy prior to the last infamous lending debacle, also know as the Savings and Loan Crisis. This legislation could also assist the expanding number of homeowners who are on the brink of foreclosure and are considering either a "short sale" or a "deed-in-lieu of foreclosure". A short sale involves selling your home for less than the amount of the mortgage(s) secured against it and a deed-in-lieu of foreclosure is simply an agreement between you and your lender that will permit you to turn over your deed or ownership of the property to your lender rather than proceeding with the foreclosure process, both aforementioned events would currently trigger a 1099-C from your lender. The bill is currently in committee where it will be reviewed prior to proceeding onto a vote by Congress. If passed this could result in easing the nation's sub-prime mortgage debt hangover to the tune of $2 billion in debt relief, a welcome tonic indeed.

Always consult with your tax or financial advisor regarding your own individual circumstances before proceeding with any plan which may have a dramatic impact on your personal finances.

Bankruptcy Judges May be Given New Sub-Prime Related Authority

It is estimated that over 2 million homeowners who have acquired their homes by means of a sub-prime mortgage either have or will lose their home in foreclosure. It is also estimated that 25% of all sub-primes loans which were funded in the past 3 to 4 years will end in default wiping out approximately $145 billion in equity wealth as housing prices are on tap to continue declining over the next few years. Consumer action groups are taking the position that as home prices have already begun to decline on a nationwide basis, consumers, lenders and their investors will continue to lose much more over time if the pace of foreclosures is not stopped now. Compounding the problem for the consumer is the fact that current bankruptcy laws will make things more difficult for them in recovering from the devastating financial impact of losing ones home and trying to move forward with tarnished credit. As an unfortunate and untimely result of the 2005 changes to the bankruptcy code, an individual in financial trouble cannot pursue a bankruptcy filing option until they have first sought out credit counseling from a court approved credit counseling agency. This is a time consuming requirement which an individual facing foreclosure cannot afford as time is in very short supply.

Frustratingly only 1% of risky sub-prime mortgages have been modified during the period of January through September of 2007 and for the month of October only a nominal number of so called loan work-outs or modifications occurred. The loan modification or workout process can be extremely complicated and time consuming because of the number of players involved in a mortgage loan transaction, each may be required to sign off on or approve any changes to the original loan terms. Those players are as follows: the consumer, the mortgage broker (if applicable), the funding lender, the loan servicer and the investor in the loan's mortgage backed security or now infamous collateralized debt obligation (CDO). Because all the players may have a legal stake in the process the water gets murky and everybody is either afraid of being sued or may be considering suing another player. This makes for an extremely hostile and difficult process under which to modify original mortgage terms. The process is far easier for the consumer who obtained their loan through one source that processed, underwrote, funded and serviced the loan all under one roof.

So now it appears that what’s in the best interest of the consumer may be in the best interest of all parties involved and it may be left in the hands of a bankruptcy judge to decide. A bill sponsored by a congressional representative from North Carolina, Brad Miller (D), will allow bankruptcy judges to re-set mortgage payment terms at their discretion. This will bring mortgage debt in line with all other consumer debt from the perspective of how bankruptcy law handles insolvent homeowners. A judge would be allowed to change the interest rate on the loan, extend the loan term or even reduce the loan amount altogether, just as they would be permitted to do so with auto loans or with credit card debts. Bankruptcy courts have long been permitted to change the terms of mortgages on second or vacation homes as well as on family farms and now the primary residence would be given the same consideration.

While consumer groups are squarely behind the bill, the lending industry is naturally in strong opposition to it. Lending industry representatives claim that this legislation will end up harming the consumer in the long run because it will raise the cost of obtaining a mortgage by increasing the uncertainty and risk involved to all parties who extend credit to the consumer. They claim that rates and lending costs have been low historically because a home is secured by a real asset and if someone is allowed to come in and arbitrarily change the value of that asset, the cost of borrowing will rise for everyone. If the terms of an original loan contract, initially agreed upon by all parties, can be altered down the line, this will bring added risk and uncertainty, thus increased costs, into the entire mortgage equation. In the end it would appear that how the law is applied, and under what conditions and circumstances, will be the ultimate test of whether the lending industry’s claims bear out. However given the prevailing complicated circumstances, it would appear that no one but a judge may be able to ultimately determine the right thing to do in each individual case given the specific circumstances involved.

ARMs Ready to Adjust, Lenders Respond to Troubled Borrowers

Almost $50 billion in adjustable rate loans are scheduled to reset this month alone, many of them in the notorious sub-prime loan category, and $100 billion are on tap to reset by the end of 2008. It is estimated that over half the effected borrowers do not understand how their loans will reset or what their new payments will be. Sadly it may come as a shock to many borrowers whose payments could rise as much as 50%. It is also believed that many of the loans which were underwritten right up until the sub-prime implosion came to a boiling point last August, may pose an even greater risk to both the borrowers and lenders of the more recently closed loans as guidelines were not revised and tightened until that time. Since the housing market peaked at the beginning of 2006, home prices nationwide have fallen by as much as 6.5% and are expected to continue descending into next year. This decline in home prices could prevent the more recent crop of borrowers from selling as the inventory of housing climbs and values fall to levels which may be lower than the original mortgage, particularly for those borrowers having contributed little to nothing towards their down payment. Surprisingly 50% of the foreclosures which have occurred have happened without borrowers having ever consulted with their lender, therefore many lenders are now proactively attempting to get in front of the foreclosure problem by heading it off at the pass.

Countrywide Funding, the nation's top mortgage lender, and the company seemingly at the center of the sub-prime mortgage calamity, announced recently a plan to either refinance or complete loan modifications on up to 80,000 loans. Countrywide has on its books approximately $16 billion in mortgages due to reset by the end of 2008. The advantage that Countrywide may have over other mortgage lenders is that they are likely both the funder and servicer of many of these loans, making the process of managing the problem loans much more streamlined for them versus other lenders who have more channels of authorization to go through in resolving their problem loans. Many investors will lose money in the loan modification process so they are not going to readily cooperate but could be forced to weigh this loss against that of losses occurring in the foreclosure process. Loans servicers are faced with a lack of qualified staff to help them in the loan modification process as loan counselors will need to be hired and trained in accordance with the lender's and investor's loan modification guidelines. It is believed that if loan servicers cannot beef up their staff quickly enough to meet the demand that they may be left with no alternative but to simply permit the high risk adjustable rate borrowers to have an additional 3 to 5 years of the initially low teaser rate payments before taking any further action. Lenders may also require that any unpaid interest under the original loan terms simply be deferred as negative amortization and wrapped into the borrower's principal loan balance. This would hopefully permit sufficient time to pass so that housing prices could recover as well as all the parties to the transaction.

Tips for Capturing a Mortgage Fit for a Secret Agent

Source: Informa Research Services

It might not take an international secret agent like James Bond to get a great mortgage, but picking up a few pointers from the professionals doesn't hurt either.

While most people look primarily for the best interest rate, an attractive mortgage is more than just the best rate. Both lender's fees and prepayment penalties can put thousands of dollars between you and owning your home. Here are some pointers to help you acquire a mortgage fully equipped with "all the usual refinements" and save thousands on financing your home.

Ask the right questions and go with your intuition.
Mr. Bond never needs to ask a lot of questions, but he always knows the right ones to ask. Likewise, you should feel free to ask questions until you feel comfortable with the mortgage you have selected.

Similarly, don't be afraid to ask questions about the lender's or broker's fees, which may also include points. According to the Real Estate Settlement Procedures Act and Regulation Z of the Truth in Lending Act (TILA), the lender is required to fully disclose the cost of borrowing before your mortgage loan is finalized.

Always have an escape route available.
In the world of fictional espionage, there seems to always be a way out of every sticky situation. In mortgages, this is not always the case. However, one way to keep an escape route open is by opting out of a prepayment penalty loan. This will come in handy if life decides to throw any unexpected curves your way. For instance, you may plan on buying and living in a house for 20 or 30 years. But what happens if you have an unexpected career change or life event that requires you to sell the house during the first few years of owning it? Or what if rates drop next year and you would like to refinance? As long as you don't have a prepayment penalty, you can either sell or refinance your house as needed without paying a hefty fee. Prepayment penalties can be effective anywhere from the first six months to three years into the mortgage loan. Thus, this decision depends on how much flexibility you anticipate needing in the near future.

Furthermore, in addition to the aforementioned full disclosure of fees, Regulation Z of TILA also stipulates that for refinanced mortgages, through the right of rescission (or cancellation), the consumer has three business days to cancel their new loan without penalty.

Never fall for the tricks.
In the classic spy flick, the villain's antics are typically predictable. Similarly, the popular "bait-and-switch" move is one of the oldest tricks in the marketing book, so don't fall for it. Many financial institutions that offer mortgage loans use their best rates and lowest fees to lure customers into their establishments. However, there may be stringent requirements to qualify for the advertised offer. Often times, if the consumer does not meet all the requirements, they will then be offered a higher rate. To avoid falling victim to this predictable scheme, research mortgage rates before going to the financial institution, and know your credit score.

Use the resources available, such as the Internet, to research and become knowledgeable about mortgages and you'll see that with a little preparation, it doesn't take a super spy to find a great mortgage.

Alternative Minimum Tax Deadline Looming for Legislators

Lawmakers in Washington are scheduled to adjourn on November 16th and if they don't act by then an ever increasing number of taxpayers, about 25 million to be precise, are going to be hit with the so-called "wealth tax" also know as the alternative minimum tax or AMT. The vast majority of taxpayers that will be impacted in 2007 are going to be introduced to the AMT for the very first time and it will not be a pleasant introduction as the effected taxpayers will pay on average an additional $2,000 in income tax resulting from the AMT. To make matters worse, if congress fails to act fast enough, 25-50 million taxpayers could face a delay in the processing of their federal tax returns and consequently a delay in receiving their refunds.

The Internal Revenue Service (or IRS) needs at least 12 weeks to process any changes made to the alternative minimum tax (or AMT) from the time that new legislation is passed into law. The re-programming that is involved within the IRS computer system requires millions of lines of coding which cannot be implemented over night and will require time for testing as well. Unfortunately the AMT is an integral part of the IRS processing system and much time will be needed to alter it. Therefore should congress delay until December in making any AMT changes, the IRS would not be able to process some 25 to 50 million returns until the mid-March time frame at the earliest. Of course the deadline to file a return is not until April 15th however those taxpayers anticipating a refund tend to file their returns far ahead of that deadline and for the 2006 tax year, the average refund amounted to approximately $2,260. The IRS is scheduled to send its 1040 instruction forms to be printed on November 7th and the agency should be ready to begin processing 2007 tax returns by mid-January.

Unfortunately policy watchdogs and Washington insiders predict that major AMT reform legislation will not occur prior to 2009 and therefore would not go into effect until 2010 at the earliest. The best alternative for taxpayers would be if lawmakers were to pass a "patch" for 2007 which would prevent taxpayers with income levels at $45,000 (for joint filers) and $33,750 (for single filers) from being affected by the AMT this year. A patch was successfully implemented in 2006 which effectively raised the AMT exemption levels to $62,550 (for joint filers) and $42,250 (for single filers). The uncertainty surrounding the current AMT status has professional tax payers ready to pull their hair out as they have no way of currently determining which of their clients will be impacted.

The alternative minimum tax (AMT) was originally conceived 40 years ago to prevent a small number of high wealth individuals from eluding taxes altogether, a flaw in the tax system at the time actually allowed this to occur. The problem with the AMT system today is that it has not been indexed to the median income levels within the various geographic regions throughout the United States. Therefore the AMT tends to hit the residents of expensive coastal and urban areas disproportionately to the rest of the country. There is of course strong taxpayer support for correcting the inequities within the AMT system however the political support to do so is now limited to solutions which are revenue-neutral and will replace the $500 billion to $1 trillion in revenue that is expected to be generated from the AMT over the next decade. This is where the catch-22 arises as there is no agreement amongst legislators on how to replace the AMT generated revenues and there are now other looming political crisis's taking the spotlight away from AMT reform, such as the recent sub-prime mortgage debacle.

Beware of the potential impact of the AMT on you and your family if:

> You have a combined household income is in excess of $100,000.

> You take multiple itemized deductions, exemptions or credits which may not be permitted under the AMT system.

> You don't itemize your deductions. AMT does not allow the standard deduction.

> You have dependents or children. Personal and dependent exemptions are not permitted under the AMT system.

> You are a resident of a high income tax state. Even state, local and property taxes are not deductible under the stringent AMT system.

> You receive income from municipal bonds which is not subject to standard income tax but is subject to the AMT.

> Exercising stock options (or ISOs) is a large and notorious trigger for the AMT to come into play.

Micro-Loans Small Loans, Big Impact

While we continue the debate on what led to the collapse of the sub-prime market, there is good news circulating in the financial world and it's what is commonly referred to as micro-loans. If ever there was a feel good story in the loan universe, this is it. Micro-loans are part of a wonderful and exciting new category of banking called micro-credit. The economist from Bangladesh who pioneered this type of financing, Muhammad Yunus, deservingly won the Nobel Peace Prize for his efforts. These loans are made available to some of the most impoverished nations and people as sadly there are over a billion people in the world who survive off less than $1 a day. Micro-credit has been implemented in over 40 countries world-wide and is even available in the United States within the inner cities of urban areas. Micro-loans are far easier to obtain than traditional bank loans and are granted in average loan amounts ranging from $200 (within third world countries) to $13,000 (within more developed countries). The loans are used for small self-employment endeavors which generate income for the recipients to help sustain their families as well as moving them towards the path of financial self reliance. These loans have proven to be amazingly beneficial in fighting the war on poverty and they happen to have default rates which are less than half that of the sub-prime loans made by U.S. lenders.

Micro-credit lenders obtain their capital from both individual and institutional investors. In 2003, it is estimated that over 60 micro-credit lenders extended credit in an amount exceeding three billion, this is double the rate of micro-lending just three years earlier. You may be familiar with the concept of compound interest and the way these loans work you could think of them as compound lending. As one loan (plus interest) is repaid these funds are then lent out again to others and in essence recycled as the benefits resulting from them grow exponentially. Repayment of the loans is driven by social pressure, it is a system that encourages social responsibility and has a repayment rate exceeding 98%. Loan recipients can only apply for future loans once the others within their particular pool of micro-loan borrowers have repaid their outstanding debts. Micro-credit programs are a powerful tool in fighting poverty as it is the very poor themselves who are motivated to improve their circumstances through their own efforts and with this type of lending an investment is made in their future and they are given the power and control to change their own lives rather than simply given a hand out. It is women who also play a significant role in the system of micro-credit as women are generally considered good credit risks in that they choose to invest any funds received to benefit their families. Because women are often responsible for the raising and upbringing of the world's children, by helping women the lives of children are simultaneously improved as well.

The most successful micro-credit programs re-fund new loans with repaid interest on existing loans and are most beneficial when marketing and technical assistance are also provided to the loan recipients. Business planning and training may also be required of a potential loan candidate before an application is approved. The maximum term for a micro-loan is normally about six years with each micro-lender developing their own credit and lending guidelines. The loans are typically made to start-up type businesses and may require some kind of collateral or the personal guarantee of the loan recipient. Interest rates charged on these loans are high and could be as much as 20% on an annual basis, however the cost of underwriting and administering such small loans is very high, and with the currencies within a loan recipient's country normally somewhat weak, a higher rate is charged to insure there is sufficient funds to convert back to an investor's dollars and euros. The interest that each borrower pays on their loan is used to finance the cost of lending to another deserving recipient. Because these loans are powerful life changers that enable those living in poverty to help themselves, they deserve our collective international applause and support as well as substantially more than the paltry 2% of the world's development budget estimated at $60 billion. For more information on micro-loans and how you can get involved go to: www.kiva.org