For years, the FDIC has insured bank accounts up to $100,000.

In light of the recent banking crisis and consumer fears, the FDIC insured banks up to $250,000 per account. The move was aimed at increasing American confidence in the banking system. It appears to have worked. However, the higher FDIC coverage limits were temporary.

FDIC Insured Banks $250,000 Coverage Limits Extended

When first implemented, the increased insurance limits on FDIC savings accounts and other FDIC insured accounts at most banks, was set to expire at the end of 2009. However, to avoid a rush of customers restructuring (withdrawing) money from various FDIC insured banks, in order to get back under the $100,000 limit, President Obama signed a law passed by Congress that extends the higher FDIC coverage until December 31, 2013.

However, the law does NOT include most retirement accounts including IRAs. So, those IRA CDs, or IRA Certificates of Deposit are NOT insured to $250,000 like your regular bank savings accounts or checking accounts.

To get higher government insurance amounts on retirement accounts, move them to an investment account, or brokerage account. Even a discount online brokerage account is good.

While investment accounts with brokers are not FDIC insured, they are insured by a similar quasi-governmental entity called SPIC. (What is SPIC? – SPIC Defined) Unlike the FDIC, the SPIC already insured the amount of cash in an SPIC insured brokerage account up to $500,000 per customer. However, there is a catch. Cash, and cash equivalent, claims are limited to $100,000. So, to take advantage of the higher limits, you’ll need to have your IRA invested in something other than money market funds and CDs.

If you are worried about the safety of your IRA principal, but still want the higher SPIC insurance ceiling, look for low-risk investments to use in your brokerage account.

But, before you run out and make any changes, make sure that you understand FDIC Insurance Limit Coverage first.

I was going through my stack of mail to look at (separate from the stack that has things that actually need taken care of) and came across an offer for Fidelity’s mySmart Cash Account.  Intrigued, I decided to take a look at the Fidelity checking account that they were so proud of that they included a glossy little flier to advertise it.  The result?  What the—?

Regular Bank Checking Sucks This Bad?

The Fidelity myCash account boasts exactly two features that do not count as minimum basic features for a checking account.  First, it pays interest.  How much interest?  Well, this is where Fidelity gets a little weasel-ish.  The flyer says that I will “Earn three times the national average…”  Um, OK.  How much is that?  Folks, it isn’t even in the fine print, that’s how much the rate must be worth!

A visit to Fidelity’s website reveals the depressing answer.  A balance of less than $5,000 in a myCash checking account will earn a whopping 0.20% APR.  Whoo hoo!  But wait!  Maybe if you have over $5,000 it is worthwhile?  Survey says? 0.20% again.  Yes, go through all of the steps and take the time to open a Fidelity mySmart Cash Account, and you too can earn a whole 0.20% interest.

Ironically, you can actually earn something in the neighborhood of 2% by using a money market fund, but when you are pandering to the fear of the people who can’t be bothered to read anything more than headlines by really pushing the whole FDIC insurance thing, you can’t switch gears and point out the much better rate that you can get in what is still a pretty safe account.

Oh, the other value added feature is unlimited ATM fee refunds.  That is nice, but hardly a huge deal anymore if you know what you are doing.  In other words, the Fidelity cash account is good enough, but nothing better.

This leads to the inevitable question.  Are regular bank checking accounts so bad now that this counts as a great deal, or is Fidelity just dutifully pushing another product in an effort to meet a marketing projection or to make their services more “sticky”?

Credit Union Free Checking Accounts

The reason I’ll have to do some research is that I have had my checking at my local credit union for many years, so I honestly have no idea what kind of shenanigans banks are pulling these days.  The free checking account at my credit union offers:

• FREE Online Bill Pay
• FREE Downloads into Quicken® and Microsoft® Money
• FREE Online Check Images
• UNLIMITED ATM withdrawals without any credit union fees (though they do not refund the fees charged by the ATMs)
• UNLIMITED check writing
• A FREE Visa Check Card
• No Minimum Balance
• No Monthly Fees
• No Annual Account Fees

Granted there is no interest paid on this account.  They do have an interest bearing checking account if you have a certain minimum balance.  It pays 0.15% starting at under $2,500 and by $5,000 it pays either 0.25% or 0.50% depending upon which version you have.  Guess there is no reason to try out that Fidelity cash management checking account thing after all.

Bummer.

Days like yesterday and today are why I write the Finance Gourmet.  For those of you who didn’t see it, the Federal Reserve, or Fed cut interest rates to between 0% and 0.25%.  All day today, the media has been droning on about what it means for consumers, homeowners, and the economy.  Unfortunately, they are in such a hurry to do so, that they skip over all the details.  So, here it is, what the Fed’s rate cut means to you.

• Interest Rates – Overall, short-term interest rates should fall in response to the Fed’s move.  Pay special attention to that important detail.  The monetary policy set by the Federal Reserve directly affects only short-term interest rates.  Long-term interest rates are set by the markets and the markets don’t always care what the Fed does, because the markets are not interested in what the interest rates are today, they care about what they will be in the future.
• Mortgages – Mortgages are long-term loans and as such, their rates follow long-term interest rates, in particular, the 10-year treasury. If you read the Interest Rates section above closely enough, you know why this is a big deal.  Just because the Fed cut rates, does not mean that mortgage rates are going down.  (See the next point).
• ARM or Adjustable Rate Mortgages – The entire purpose of adjustable rate mortgages or ARMs is to eliminate the long-term nature of a mortgage’s interest rate.  By adjusting the interest rate at regular intervals, the lender has no risk of locking in dollars at a rate lower than current rates.  The flip side of this equation can be the lowering of the mortgage rate as well, but many mortgages have language limiting the amount this can drop.
• Home Equity Line of Credit – Also known as HELOCs and not to be confused with home equity loans (which are usually fixed interest rate) these are the loans that are most likely to be affected by the Fed’s move.  Many of these loans have an adjustable interest rate set at PRIME + some percentage.  Borrowers with this type of loan may see some relief, however some of these loans have minimum rates as well.
• Credit Cards – This one is pretty much wishful thinking.  Most credit card interest rates are “fixed” because the credit card company can actually change the interest rate any time it wants to.  This is one of the most unfair practices in the credit card industry, but until the politicians in Washington make them change how they do business, don’t expect any changes.  If you happen to have a credit card with a PRIME + something rate, there may be a change, but virtually all credit card accounts have a minimum, or floor, interest rate, which has probably already been hit, so your rate isn’t going down.

What To Do Now That Interest Rates Have Been Cut

After reading the above, you should be aware that there are no quick and easy, or automatic solutions coming based on this rate cut.  Frankly, that isn’t really what it is supposed to do.  But, that doesn’t mean there is nothing you can do.

First, don’t count on the rate cut to change the interest rates on any of your current accounts.  Instead, check now, and keep checking to see if you can get a new account with a better rate.  If so, then applying for that new account may make sense.  Feel free to call your current lender and see if they will lower your rate, but don’t hold your breath.  Things have changed from a couple of years ago when saying “boo” to your lender got them to change the rate.

Second, if you do have an adjustable rate mortgage or HELOC, now is the time to pull out the documents you got at your closing and find out what your minimum rate is, and the day on which the rate is set, and the date on which the rate is changed (they most likely will not be the same.)  This way, you will know what to expect.  Most interest rates are reset based upon the Wall Street Journal published Prime interest rate on a certain day.  So, your mortgage may set the rate on the 1st Monday of the quarter, or the first Monday of the year, or whatever.  Since the cut came in December, it is possible that your rate will change if it is measured in January.  However, if you rate was measured before December 15, for an adjustment to occur on January 1, you just go screwed.  Make sure to keep looking around for better rates.

Third, if you have a fixed home equity loan (or a HELCO with a high floor interest rate), now is the time to check around on HELOCs.  Assuming you can get a much better rate and no (or very low) closing costs, it might make sense for you to roll over your home equity loan.  You can always go back to a fixed rate product when interest rates start rising again.  They didn’t come all the way down to zero all at once, and they won’t go all the way back up to 5% all at once either.  In the meantime, it might save you a good chunk of change.

Lastly, do not cancel credit cards (unless they have an annual fee, and then cancel them now) until you have replacements in hand.  With the current environment, banks and lenders are not necessarily making intelligent decisions and you may find it difficult to get new cards even with pristine credit and good ratios.  So, get new ones first, then cancel the old ones.

Most importantly, don’t get sucked up in the media hype.  The sky is not falling.  Things will come around again, they always do.  Do not listen to comparisons to the Great Depression.  The Great Depression not only had a stock market crash, but bread lines, and scores of bank failures.  The entire number of bank failures in 2008 still does not compare to the number of bank failures during the Great Depression, and unlike then, not a single account holder has lost a single cent.  This is not the same as then. That doesn’t mean there won’t be something new and bad that happens, but you can bank on the fact that it won’t be the same.

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Several years ago when I was a wild-eyed fresh out of college computer guy, I got my first “real” job with a local company. The company had around a 100 employees or so which meant that the HR person was the Office Manager. On my first day, the Office Manager went through all the basics with me: payday, W-4 forms, copies of my Social Security Card (or passport), and so on. We also went over my “Benefits.” Now, at the time, I didn’t much understand what benefits were or why I cared (other than insurance and vacation time) but, I understood what the word, benefit, meant, so I nodded along and paid close attention.

One of my benefits was the right to join a Credit Union. Back in those days credit unions were a little bit tighter in their membership requirements, still it wasn’t too hard to join one. But, since it was one of my benefits, I marched down right away and opened an account. It wouldn’t be until years later that I would understand that the reason my company offered me this benefit was because the [tag]credit union[/tag] offered me another benefit which was the ability to have direct deposit. Companies like direct deposit because it saves them from processing checks and credit unions and banks like direct deposit for the same reason, plus it is a pseudo-guarantee that you will have money in your account which they like as well.

Luckily for me, my benefit took me to [tag]Bellco Credit Union[/tag]. Bellco Credit Union was formerly the credit union for Mountain Bell employees, hence the name (Bell-co). It turns out that Bellco (as it is known locally) is one of the best credit unions around in Colorado. So, even as I became more financially savvy, I stayed a Bellco customer and have been for many years now. In the last year or two I’ve moved a lot of my stuff to Online Banks because of the better rates (ING Direct, and WAMU, but I’m still not sold on WAMU — I heartily recommend ING Direct). Recently, I logged on to my Bellco online account to find this:

If you can’t read it, the second tab there says Credit Score. I’ve been doing online banking for several years now and have never seen that before. Curious, I clicked on it expecting to get some sort of sales pitch for a $9.99/month credit monitoring service. Instead, I got this:

No sales pitch, nothing shifty, just my [tag]FICO[/tag] number [tag]credit score[/tag]: 755, which is up some from the last time I checked. How awesome is this? A free credit score from my credit union. Not for signing up for anything, but just because they have it and they might as well tell me what it is. (Most banks and credit unions, as well as most credit companies, pull your credit on a regular basis to keep up with your current situation. That way, it isn’t a surprise when you show up bankrupt some day, and also so that they know whether or not they want to notify you of some new services or features they have.)

Now, the nit-picking natters of finance will show up and claim that this isn’t my “real” credit score. Most people don’t know this, but you can actually get several different credit scores which will weight things differently. So, a “real” credit score is usually the on you use to get a mortgage and most people mean this one when they talk about your FICO score. But, there are also ones that weight your credit card history higher which are used primarily by the banking industry and credit card companies. Some people refer to this score as a FAKKO or FAKE-O score. The truth is it doesn’t matter.

Think of it this way. You have a scale in your house. When you get on it, it says that you weigh 195 lbs. Does it matter if this is your “real” weight? If a scale at NASA says that you actually weight 203 lbs. does this matter at all even though the number is off? It depends on what you are doing with the number. If you plan to walk across a bridge with a weight limit of 200 lbs. it matters, but if you want to know if you are gaining or losing weight does it matter? After all, if your scale says 198 lbs. next time you get on it, that number probably isn’t “real” either, but you do know that you gained 3 lbs. and that is what you care about.

Same thing with your FICO number and credit score. Unless you are actually applying for credit you don’t need the real number. I don’t know about you, but I get a new loan about once a year. The other 364 days all I need to know is if something I did made it go up or down. For example, last summer I closed a bunch of credit card accounts. I had these cards from back in my consultant days and did a lot of traveling so they were things like the American Express Hilton Points Rewards card. Now, Hilton is a great hotel and they are often perfectly located for business, but they aren’t really a tourist hotel. So, if I want to go to Savannah, Georgia and see the plantations and cherry blossoms and so on, I want to stay in the historic district. No Hilton there. If I want to stay over in the business are, there is a Hilton there. So, needless to say I wasn’t using this card or some of the others I had. (I use the American Express Hilton one now because I joined Costco and they only take American Express.)

When I went to get a new car (my old one came off of lease) I was stunned to find out that we had to pull all three credit scores in order to get one that was over 720. 720 was the cut off for the best rate (and in this situation the REAL number matters!). What caught me so off guard is that I have always had excellent credit. The only time I have EVER missed a payment was back in college when I moved back home for the summer and forgot to change my address with one company. Otherwise, perfect payment history. I ordered my credit reports and couldn’t find anything wrong. I didn’t have any missed payments, nothing! The difference was in my percentage of credit used. You see, I manage my cash flow very well, so I use credit cards to earn rewards like free trips and stuff. I cashed in a bunch of points for Baby’s R Us gift cards when my wife was pregnant and basically outfitted the nursery for free. As a result my credit cards always have a balance on them. I pay it off in full every month, but that still means there is a balance. That balance gets reported and since I closed all of my “empty” credit cards (Why not? I don’t use them) my percentage used went up. If I had known that was the effect, I obviously wouldn’t have done it.

How did I find out? I re-opened the Amex Hilton Card (for the Costco thing and to keep my existing Hilton Points from expiring) and then my wife’s car came off of lease (we bought that one) and my credit score was all of the sudden easily sailing over the 720 number. Now, I’m not willing to pay $10 a month or MORE! in order to watch my credit score, but it would be great if there was a way for me to check in on it every so often so I would know if something I did had a bad (or good) effect on it.

Yeah, Bellco! Good for you! Hopefully this thing updates every so often (quarterly would be fine) and I’ll keep checking it. Then, if I open say a Target Card (10% back after you spend $X) or a cash rebate gas card (1% back on gas sounds pretty good at $3 a gallon) I’ll know if it hurt my credit score and I’ll be able to do something about it before I’m applying for my next credit, whenever that might be.

If you live in Colorado, my advice is to open a Bellco account. Ask them what you have to open to get the online banking credit score. Then, track your score to see if what you do messes up your score. Sure, you probably have to leave $100 or something in an account you don’t use, but that beats paying $120 / year to see your score!

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