Protecting Yourself from Identity Theft

Identity thieves can empty your bank account, max out your credit cards, open new accounts in your name, and purchase furniture, cars, and even homes on the basis of your credit history. And if an identity thief gives your personal information to the police during an arrest and then doesn’t show up for a court date, you can be arrested and jailed.

There are basically two types of identity theft:

1. Account takeover - a thief gets your existing credit or debit cards (or even just the account numbers and expiration dates) and goes on a shopping spree at your expense
2. Application fraud - a thief gets your Social Security number and uses it (along with other information about you) to obtain new credit in your name

You may never be able to completely prevent either type of identity theft, but here are some steps you can take to help protect yourself from becoming a victim.

Check Yourself Out
It’s important to review your credit report periodically. Check to make sure that all the information is correct, and stay on the lookout for any fraudulent activity.

As of September 2005, you can get your credit report for free once a year. To do so, contact the Annual Credit Report Request Service online at www.annualcreditreport.com or call (877) 322-8228.

If you need to correct any information or dispute any entries, contact the three national credit reporting agencies:

1. Equifax: www.equifax.com 1-800-525-6285
2. Experian: www.experian.com 1-888-397-3742
3. TransUnion: www.transunion.com 1-800-680-7289

Secure Your Social
Your most important personal identifier is your Social Security number (SSN). Guard it carefully. Never carry your Social Security card with you unless you’ll need it that day. The same goes for other forms of identification (for example, health insurance cards) that display your SSN. If your state uses your SSN as your driver’s license number, request an alternate number.

Do not have your SSN preprinted on your checks, and don’t let merchants write it on your checks. Don’t give it out over the phone unless you initiate the call to an organization you trust. Ask the three major credit reporting agencies to scramble it on your credit reports. Try to avoid listing it on employment applications; offer instead to provide it during a job interview.

Don’t Leave Home With It
Most of us carry a checkbook and several credit cards, debit cards, and telephone cards with us all the time. That’s a bad idea because if your wallet or purse is stolen, the thief will have a treasure chest of new toys to play with.

Carry only the cards and/or checks you’ll need for any one trip. And keep a written record of all your account numbers, credit card expiration dates, and the telephone numbers of the customer service and fraud departments in a secure place–at home.

Keep Your Receipts
When you make a purchase with a credit or debit card, you’re given a receipt. Don’t throw it away or leave it behind; it may contain your credit or debit card number. And don’t leave it in the shopping bag inside your car while you continue shopping; if your car is broken into and the item you bought is stolen, your identity may be as well.

Save your receipts until you can check them against your monthly credit card and bank statements, and watch your statements for purchases you didn’t make.

When You Toss It, Shred It
Before you throw out any financial records such as credit or debit card receipts and statements, canceled checks, or even offers for credit you receive in the mail, shred the documents, preferably with a cross-cut shredder. If you don’t, you may find the thief going through your dumpster was looking for more than last week’s takeout.

Keep a Low Profile
The more your personal information is available to others, the more likely you are to be victimized by identity theft. While you don’t need to become a hermit in a cave, there are steps you can take to help minimize your exposure:

• Stop telephone calls from national telemarketers by listing your telephone number with the Federal Trade Commission’s National Do Not Call Registry by calling (888) 382-1222 or registering online at www.donotcall.gov.
• Remove your name from most national mailing and e-mailing lists, as well as most telemarketing lists. Write the Direct Marketing Association at 1120 Avenue of the Americas, New York, NY 10036-6700, or register online at www.dmaconsumers.org.
• Remove your name from marketing lists prepared by the three national consumer reporting agencies. Call (888) 567-8688 or register online at www.optoutprescreen.com.
• When given the opportunity to do so by your bank, investment firm, insurance company, and credit card companies, opt out of allowing them to share your financial information with other organizations.
• You may even want to consider having your name and address removed from the telephone book and reverse directories.
• Never provide any personal information via phone, letter, or e-mail unless you initiated the transaction. Legitimate businesses should already have your information on file, and will not call you or e-mail you to ask for it.

Take a Byte Out of Crime
Whatever else you may want your computer to do, you don’t want it to inadvertently reveal your personal information to others. Take steps to help assure that this won’t happen.

Install a firewall to prevent hackers from obtaining information from your hard drive or hijacking your computer to use it for committing other crimes. This is especially important if you use a high-speed connection that leaves you continuously connected to the Internet. Moreover, install virus protection software and update it on a regular basis.

Try to avoid storing personal and financial information on a laptop; if it’s stolen, the thief may obtain more than your computer. If you must store such information on your laptop, make it as difficult as possible for a thief by protecting these files with a strong password–one that’s 6 to 8 characters long, and that contains letters (upper and lower case), numbers, and symbols.

Don’t Talk to Strangers
Opening e-mails from people you don’t know, especially if you download attached files or click on hyperlinks within the message, can expose you to viruses, infect your computer with “spyware” that captures information by recording your keystrokes, or lead you to “spoofs” (websites that replicate legitimate business sites) designed to trick you into revealing personal information that can be used to steal your identity.

If you wish to visit a business’s legitimate website, use your stored bookmark or type the URL address directly in
to the browser. If you provide personal or financial information about yourself over the Internet, do so only at secure websites; to determine if a site is secure, look for a URL that begins with “https” (instead of “http”) or a lock icon on the browser’s status bar.

Wipe It Clean
When it comes time to upgrade to a new computer, remove all your personal information from the old one before you dispose of it. Dragging all files to the “trash” isn’t sufficient to do the job; “deleted’” hard drive data can easily be recovered with common computer programs. Instead, overwrite the hard drive by using a “wipe” utility program. The minimal cost of investing in this software may save you from being truly wiped out by an identity thief down the road.

How to Survive a Financial Emergency

Have you started setting some money aside in the event of a financial emergency? You never know when the car will need four new tires, the refrigerator will die, or you will need to fly across the country immediately to visit a sick relative. And the way most people are going–living paycheck to paycheck–any financial hiccup could quickly snowball into a major financial crisis. As discussed before, an emergency “rainy day” fund is a critical part of your financial arsenal. In fact, every one of our financially-independent clients fully expect the unexpected, and you should too for one simple reason: You never know when or where a financial emergency will occur.

Second Opinion
You probably think we’re overreacting. We’re screaming about the sky falling and you just don’t have the time to deal with it right now. Trust us; this is a critical component for your financial success, and it should not be ignored. Still don’t believe us? The Motley Fool has a great article detailing additional reasons why the emergency fund a critical piece of your financial journey.

“Emergencies or even should-have-been-foreseen expenses will spring a credit card trap on you that can take years to escape from. How Foolish it is to have the money you’ll need soon safely accruing interest instead of charging that valve job or honeymoon and paying double-digit interest rates on it for years.”

A Little at a Time
You don’t have to inherit a $10,000 windfall to sock away cash for a rainy day. Just put aside a few bucks each month, and before you know it, your rainy-day-fund will provide the security and financial peace of mind you need.

What is a Trust?

Our clients often ask would happen to their assets upon death, incapacity, transfer, or bankruptcy. We usually respond with an “it depends”, but at some point the conversation usually evolves into a discussion of trusts. A trust essentially helps you accomplish many estate planning goals. The power of a trust is in its versatility–many types of trusts exist, and each is designed for a specific purpose.

Living Trust
A living trust (also called an inter vivos trust) is a trust you create during your lifetime rather than after your death by the terms of your will (that type is called a testamentary trust). Living trusts are revocable–you keep control over the trust assets, and can change the trust or even dissolve it at any time. This type of trust is useful if you want assets to avoid probate and shield them from public scrutiny, and/or if you want to provide for someone else to manage your assets should you become incapacitated. Living trusts, however, will not minimize taxes or protect assets from creditors.

Irrevocable Trust
An irrevocable trust is one that, once created, you generally can’t change or dissolve, and you must give up total control over the trust assets. On the other hand, an irrevocable trust can provide certain tax advantages and asset protection. The following are all irrevocable trusts designed to achieve particular objectives:

Bypass Trust
When a person leaves his or her entire estate to a surviving spouse, assets pass free from federal estate tax because of the marital deduction.

QTIP Trust
A QTIP (qualified terminable interest property) trust (also called a marital deduction trust) is, like the bypass trust, used by spouses to minimize estate taxes. For maximum estate tax savings, a QTIP trust is often paired with a bypass trust. Because the first spouse to die names the ultimate beneficiaries, a QTIP is often used to provide for children of a previous marriage.

Irrevocable Life Insurance Trust (ILIT)
The proceeds of your life insurance policy will be subject to federal estate tax if you own the policy, or your estate receives the proceeds. Often, this asset pushes an estate over the exemption amount.

Charitable Remainder Trust
A charitable remainder trust allows you to give money or property to charity while continuing to receive income (fixed or variable) from the property for life or for a period of time up to 20 years. You and/or other beneficiaries receive distributions from the trust annually, and the charity receives the remaining assets when the trust ends. You get an immediate income tax deduction for the charitable interest (subject to limitations), as well as gift and estate tax deductions. You also avoid capital gains tax on the donated assets.

Trust a Team
If your head is spinning, don’t worry. A trust is not a do-it-yourself arrangement. Trusts should be properly structured and carefully drafted to achieve the desired results for your specific situation. Be sure to consult an experienced financial or legal professional to implement the best solution for you.

Maintaining Your Financial Records

More than ever, people are using their computers to prepare tax returns, monitor banking activities, and manage investment portfolios. In fact, many of our clients have completely eliminated the paper trail in their financial lives, preferring instead to receive and archive all financial statements electronically. But are electronic records adequate?

Paper vs. Electronic
Generally, an electronic record has the same worth as a paper record for tax and legal purposes. And the rules for how long you should keep electronic records are the same as for paper records.

But if you decide to go the electronic route, you must take extra steps to make sure your records are safe. This means keeping at least two copies of your electronic records: one copy on your hard drive and another copy on a removable hard drive device, an external data server, or burned onto a CD or DVD. In fact, even if you have paper records, if you own a scanner, you might consider digitizing important records into your computer. If you need help deciding how to organize your documents, your local computer retailer offers software designed to simplify financial record keeping.

Many banks and financial institutions now keep electronic images of your financial records, such as monthly canceled checks or quarterly brokerage statements. If you don’t download important items and save them on your own computer, inquire about the institution’s policy on how long it will store your records, and how you can access them if you need them. You wouldn’t want to lose a tax deduction because your bank didn’t keep an electronic image of a canceled check for a sufficient period of time.

How Long Should You Keep Financial Records?

Tax records–We recommend keeping your tax records for up to seven years. This is because the IRS has three years from a tax return’s due date to challenge your return, and it has up to six years to challenge your return if you’ve underreported your income by 25% or more in a given year. The tax records you should keep include statements related to wages, deductions, dividend or interest income, capital gains or losses, and business profits. As for the actual tax returns, it’s a good idea to keep copies indefinitely.

Retirement records–You should keep year-end 401(k) account statements at least until you retire, along with any rollover paperwork. Similarly, you should hold on to records that detail your IRA contribution and withdrawal activity–year-end statements should suffice. Also, keep copies of tax forms related to your IRAs until all money is withdrawn from the accounts.

Investment records–When you purchase stocks, mutual funds, and other investments, you need to keep records relating to how much you paid (i.e. “cost basis”) so you can document the amount of gain/loss when you sell the asset. You should also keep paperwork showing periodic purchases or the reinvestment of dividends related to the asset, if applicable (again, year-end statements should suffice). When you sell the investment, the records should be kept for up to seven years according to the rules above for tax records.

Home improvement records–If and when you sell your home, you’ll need to calculate the costs of any permanent home improvements that you’ve made for tax purposes. So make sure to keep copies of all work invoices and canceled checks related to your home.

It’s All on Your Shoulders
While electronic records can help cut down on the volume of financial paperwork you need to store in your filing cabinet, it’s your responsibility to make sure you can access all records–paper and electronic–if and when you need them.

A personal finance block party!

You probably aren’t aware that the Web is teeming with consumers just like you: stretching a modest paycheck, examining the various college savings vehicles, and agonizing about investing for their future.

Get Connected
Over at FIRE Finance, the 101st Edition of the Carnival of Personal Finance is underway. For those of you who are new to the Blogosphere, a carnival is essentially an online magazine focused around a specific topic or concept–in this case, personal finance. Every carnival has a title, a topic, editors, contributors, and an audience.

Editions of the carnival typically come out on a regular basis, and the carnival’s editor (or host) is responsible for assembling and linking the host page to all of the contributors that have submitted articles. The editor also provides witty remarks to tie the various articles together and to entertain the carnival readers.

Check It Out
Stroll on over to the carnival. There’s no cotton candy or funnel cake, but FIRE Finance has collected some wonderful articles including:

• 8 Ways To Improve Your Credit To Get a Mortgage - Michael at South Florida Realtor
• Advice for New Graduates: Credit and Financing - DDL at Make Your Nut
• Does Bundling Your Cable, Phone & Internet Save Any Money? - David at My Two Dollars
• Ameriprise Nickels and Dimes My Roth IRA Transfer - Junger at Online Savings Blog
• 10 Reasons People Retire Poor - Jeffrey at Savings Advice
• Introduction to CDs - Piggy at The Piggy Banker

…and many more

Etiquette, Interrupted
Remember how your mother always told you how impolite it was to talk about money in public? Well, get ready to rethink personal finance as this new wave of personal finance bloggers open their bank statements, investment portfolios, and every other detail of their personal lives to readers. Who knows, you may even pick up some nuggets of financial wisdom along the way.

As always, Lightship Mutual does not expressly endorse opinions or advice from third parties. However, we do believe it is in our client’s best interests to navigate through the diverse opinions and to become actively involved in a financial community of dynamic thoughts and discussions.

Wealth: A Product of Passion

I am consistently asked “Damon, how do I become a millionaire?” I used to answer with “Get a high-paying job and save wisely”. And let’s be honest, these elements are vital to the financial freedom of millions. But as I thought more about the question, and learned more about financial markets, I then came to the conclusion that wise investments brought wealth (See: Google’s stock price). But now, on the brink of opening our first financial-planning office, and after speaking with audiences around the country, I now firmly believe that the answer to the question is simply…Passion.

Okay. Now let’s be real. Passion alone will not necessarily attain one’s dreams of wealth and financial independence. Many people are passionate about many things (i.e. Designer shoes, Paris Hilton’s love life, and the 1972 Miami Dolphins) but this doesn’t necessarily spell success.

Opportunities for personal growth exist for most Americans, but they will not all succeed. Other key traits that we constantly observe with our wealthier clients include determination, insight, and a strong belief in oneself. SmartMoney.com recently wrote about an interesting group of people it calls The $5 Million Club, and the key traits listed above can be found in every profile.

So, try this. For a moment, forget about money. Just think about what makes your desires burn? What would you love to spend the rest of your days doing if you weren’t pre-occupied with a pay check? Would you want to:

• Play the concert piano?
• Sail the open seas?
• Volunteer at the local community center?
• Teach our nation’s youth?

From our observations, problems arise when individuals reverse this cycle and instead choose to focus on money. This order is unnatural and pre-mature, particularly since money can create such an insatiable appetite for more. What if instead of focusing on money, you instead decided to pursue your dreams?

Imagine the personal happiness and success you will achieve when you actually love what you do.

So now, when people ask me, “Damon, how do I become a millionaire?”, I respond with one word: Passion. Passion is how you let go of the fear and greed, and ultimately, how you become “wealthy”. The funny thing is, that with passion, you will gain so much joy from the people, places, and events along the way, that you feel wealthy whether you have a million bucks or not. And that’s a beautiful thing.

Establishing a Credit History

What is credit?
When you say you want credit, you are seeking to purchase goods or services today and forego all or a portion of the payment until a later date. You may or may not be bound by a payment plan. You may or may not be required to pay a percentage of the purchase price up front (down payment). You may or may not pay a fee (interest) in exchange for the privilege of buying now and paying later. But in all cases, you are making a purchase and being trusted to make final payment at some time in the future.

Why is credit so important?
Credit provides you with financial flexibility and security.

There are many reasons why you may seek credit. Here are a few examples:

• You move into your first apartment and don’t want to sleep on the floor while you are saving up money to buy a bed. You need credit.
• Your blind date orders the lobster, champagne, and a chocolate dessert. You only brought $40 cash. You need credit.
• You are traveling in another country with no access to your bank account and unexpectedly find a painting that will look great in your living room. You need credit.
• You are traveling through Big City, USA, when your car’s engine croaks. You didn’t anticipate such an emergency. You need credit (if you don’t have an emergency fund established).
• You can’t live through the summer without a heart-shaped swimming pool just like the one the neighbors got…we’ll forget about the fact that a YMCA membership is more cost-effective…If you remain unconvinced by our argument, then you will need credit.

Whether you’re unable to make immediate payment, can’t get access to your cash, are faced with unexpected circumstances, or simply recognize the time value of money, credit allows you to obtain goods and services today that you will not have to pay for until a later date. Used responsibly, credit can help you improve the quality of your life, overcome financial obstacles, and even (on rare occasions) save you money.

What does it mean to establish credit?
Establishing credit means establishing your reputation as a good credit risk.

When you make a purchase on credit, you are being trusted to make final payment at some time in the future. If you pay as agreed, the lender will likely want to do business with you again. If you don’t pay as agreed, the lender will likely be less willing to extend credit in the future or will charge you a higher interest rate. As time goes by, you establish a reputation. If you have paid your bills, it will be said that you are a “good credit risk”. This will enable you to obtain more credit from other lenders, in greater amounts.

If, however, you have not paid your bills, or have consistently paid them late, it will be said that you are a “bad credit risk”. Lenders and collection agencies will label you as a no-pay, a slow-pay, a deadbeat, sub-prime, or just plain bogus. It will become increasingly difficult (and expensive) to get credit.

Lenders usually rely on credit-reporting agencies to determine your reputation for creditworthiness. These reporting agencies collect data about credit transactions and attempt to keep accurate records on all borrowers in a particular area. There are at least three major providers of such information in the United States. For a fee, and with your permission, a lender can obtain a copy of your credit report and evaluate your reputation for creditworthiness (a limited amount of information can be gathered without your permission).

A typical credit report contains information about you, your address, your job, and your income. Most importantly, it contains a history of your experience with lenders. It typically includes details about who you obtained credit from, how much you borrowed, when you obtained it, when you paid it back, whether you were late, how often you were late, whether there is any outstanding balance, whether any collection actions were taken, and whether or not you filed for bankruptcy.

Convenient, low-cost access to credit is available only if you have established a favorable credit report. Lenders typically ask you to fill out a credit application when you are seeking credit (it is usually in the fine print of this application that you grant permission for them to obtain your credit report). However, information set forth in your credit application is likely to be seriously considered only if it is consistent with information obtained from a credit-reporting agency or verified independently (an inconvenient and time-consuming process).

Without a credit report, lenders have nothing to go on. It is easy for a lender to deny you credit when you have no credit history. Without a record of your credit experience, a potential lender deems you a mystery. The lender knows nothing about you or your reputation for creditworthiness. It may be easier for a lender to deny credit than to take a risk or conduct an independent investigation. If you cannot get a credit application approved, then you won’t be able to establish credit.

How do you get credit?
If you want to establish credit, you need a regular source of income. The income can be derived from a job, trust fund dividends, an allowance from your parents, government benefits, alimony, investment dividends, or any other source. What is important is that you have some kind of continuing and predictable cash flow. Without regular income, you cannot demonstrate an ability to make regular payments. Establishing a regular source of income is your first step.

Request credit from a lender who reports to a credit bureau
All your efforts to establish a credit rating will be wasted if your lender does not report repayment information to a recognized credit-reporting agency. Lenders are not required to report. Ask about their policy before you apply for credit. If the lender reports, then ask for a credit application.

Think small at first
By thinking small, you limit the lender’s exposure. Exposure is the lender’s total potential loss. If you have never obtained credit before, do not make your first request a personal loan for $40,000 with no collateral. This maximizes the lender’s exposure. The lender might be willing to extend you credit but not if big money is at stake. Try applying for a small loan, perhaps $500, and pay it off promptly. Then apply for another loan, perhaps a larger one. Eventually, you will have a solid credit relationship with that lender, and the credit activity will be reflected on your credit report.

Choose a credit card with a low credit limit
While thinking small, you may explore the chances of getting a credit card with a low credit limit. Major credit card companies frequently offer small lines of credit to groups such as college students or credit union members. If you are a student, look for applications in the back of campus magazines or in the school’s bookstore. Check with your credit union. Your status as a group member may be enough to get you a card. Get it, use it, and pay it off promptly. The activity will be reported to a reporting agency.

Apply for a retail store charge card<
br />If you don’t belong to a special group, try the local mall. Many retail stores issue charge cards, which are similar to credit cards, but can only be used at the issuing store. Most major retailers will offer charge cards to first-time borrowers. Ask for an application at the cash register or customer service counter. The interest rates are usually high and credit limits low for first-time borrowers, but if you use the card and pay your bills promptly, you will establish a credit rating. Furthermore, the store may sell your name and address to other retailers, who will mail you invitations to apply for their charge cards.

Obtain a gas card
Most major petroleum companies offer gas cards to first-time credit seekers. These can be used to purchase gas and services at any of the company’s stations. The credit limit is low and the balance must be paid in full every month. Ask for a card at your favorite gas station, or check popular magazines devoted to travel, vacation, automobiles, or business for applications and toll-free numbers.

Get the government to guarantee your loan
If you are a full-time college student, you probably qualify for one or more government-guaranteed loans. Most government-guaranteed student loans are available even if you do not have a credit history. Lenders are willing to extend enormous amounts of credit under these plans because the government agrees to repay the loan if you don’t.

Get a secured credit card
Many credit issuers offer secured credit cards. A secured credit card provides you with an open line of credit secured by a cash deposit. These types of cards typically come with a high interest rate. Here is how a secured credit card works. You give the credit card issuer a cash deposit. The credit issuer gives you a credit card with a credit limit equal to the cash deposit. You can charge up to the credit limit using the card, and then make monthly payments on the balance. If you fail to make the payments, the credit card issuer uses your cash deposit to cover the unpaid balance. If you make your payments as agreed, you will eventually establish credit and qualify for an unsecured credit card. The secured credit card issuer will return your deposit, less any unpaid balance due, when you cancel the account.

Hello World!

As Lightship Mutual joins the ranks of the online blogosphere, we look forward to providing insightful wit and biting commentary into today’s social, political, and technological events as they relate to your personal finances.

Mission: Blog
The Daily Compass represents the ongoing thoughts, musings, and opinions of the advisors of Lightship Mutual. This forum serves to compliment our monthly newsletter, ‘The Lightship Compass’. If you are not yet on our email list, click here to begin receiving our monthly publication, as well.

Staying true to our overall company’s mission, we believe that this forum belongs to you. We fully anticipate a heavy involvement from our site visitors, and we look forward to providing accurate, clear, fast responses to your questions and comments.

Here Comes the Neighborhood
As the new kids on the blogosphere block, we’re happy to be a part of your community. We promise: a well-manicured lawn, no loud music, and we’ll only decorate the backside of our house with pink and green shutters. So feel free to drop by anytime with some fruit cake, punch, or any other treats from the welcome wagon. There are always interesting conversations around here, and we are truly excited to be a part of your online experience.

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