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YOUR MONEY

Special Edition: Taking Charge of Your Money; Facts You Need for a Personal Money Makeover; How to Take a Personal Financial Stress Test; How to Pay Less for the Services You Use Every Day

Aired May 24, 2009 - 15:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


CHRISTINE ROMANS, CNN HOST: All right, welcome back to a special edition of "Your Money, Taking Charge." It's critical you put yourself in a position to take charge of your money.

Over the next hour, critical information to protect and grow your money, the facts you need for your personal moneymaker over.

I'm Christine Romans. Welcome to a special edition of "Your Money, Taking Charge."

ALI VELSHI, CNN HOST: And I'm Ali Velshi. Debt, bad credit, emergency funds, it can all seem pretty overwhelming. But our panel of experts are here to ensure that you can take control of your finances today.

For starters, we'll show you how to take a personal financial stress test.

ROMANS: It's easy, and you need it.

And did you know everything from cell phone bills to doctor bills are negotiable. How to pay less for the services you use every day.

But, first, Americans have been living beyond their means for too long. Look no further than our addiction to credit card debt. For too many those at first simple credit card purchases spiral into a vicious cycle of spending, high interest rates, late fees, and then ballooning balances.

VELSHI: You know, if only you knew when you were making that purchase that you are going to pay for this for so long.

As for all the issues that we're tackling in the next hour, we're going to explain the scope of the problem, and then offer some real solutions that you can use in dealing with your debt.

We begin with fortune editor-at-large Shawn Tully and Tamara Draut. She is the vice president of policy and programs of Demos, a non-partisan public policy research and advocacy association. Thanks to both of you for being here.

I think we can all agree -- we may not agree on the solutions, but we can all agree, Tamara, that we have a debt problem. How would you characterize it? How serious is our debt problem in this country on an individual level? TAMARA DRAUT, V.P. OF POLICY AND PROGRAMS, DEMOS: Well, it's serious. And let's start with the big number, which is households have $960 billion in credit card debt.

Now, let's break that down a little bit more. If you look at what the average low to middle income household who has credit card debt is carrying, it's about just over $9,800. So it's pretty significant.

And going into the recession, dealing with the recession is going to make paying off that balance a lot more difficult than it was beforehand.

ROMANS: One of the things, Tamara, that I wanted to ask you about is why are people carrying this debt? Is it because they're just going crazy and living beyond their means? Is it because wages have not kept up with the cost of living and they're having to, you know, go to the credit cards to just meet the daily bills? What is the reason?

DRAUT: Our household survey shows that a big reason here is dealing -- trying to bridge the gap between falling incomes and rising costs, and also using credit cards as a plastic safety net.

The top reasons people issued for the credit card debt they carry -- medical expenses, dealing with a job loss, helping to buy food and basic necessities. And those are the things that are really contributing to some very high levels of debt among particularly low and middle income households.

VELSHI: All right, Shawn, when we talk about people and handling their debt, we often use flat panel TV screens as an analogy, or cars, or things like that. This is an interesting idea, though, that if a quarter of your income for many Americans is debt and it's being used for necessities, what does that tell us?

Do you think this is a serious problem?

SHAWN TULLY, EDITOR AT LARGE, "FORTUNE": Yes, I do, because a lot of the debt was accumulated in a much better market and a much better job situation than we're in now. A lot of people who are -- essentially took out a credit card debt because the credit card companies made it so available and the costs were fairly reasonable for a long time.

The default rates on credit cards were only about 3 percent. Now they're approaching 10 percent.

So the banks loved it and thought the low default rates would go on forever. Unfortunately, they tripled.

So the problem is now that people who are losing their jobs don't want to pay this money back, can't afford to pay it back in a lot of cases, and the banks are forcing them to pay it back via very, very high interest rates in shortened periods of repayment, decrease in credit lines. We're seeing constantly people getting letters saying you're putting your payment schedule on a shorter schedule. We're raising your interest rates, some other debt problem has triggered a tremendous increase in your interest rate. If you try to take out another cash advance for interest rates, will increase, et cetera.

So at the same time people are strapped, clearly, the banks want to bring down these credit card balances substantially, and they are not at all anxious to allow people to draw down under the existing lines, which are shrinking by the day.

VELSHI: You know, Christine, you've been doing something regularly called "Romans' Numeral," and it's a number that we didn't know about and the significance. And your Roman numeral lately has been about credit.

ROMANS: That's right. Taking a look at a number that is sort of driving the story forward and a way to look at what it means for your money. The Roman numeral here is 688 months, or 57 1/3 years.

VELSHI: That is incredible. This is the number of years it will take you to pay off a credit card if you make the minimum payment every month.

ROMANS: That's right. At 18 percent interest, you pay only the 2 percent. We used Tamara's number of $9,827 for the average credit card debt for households that are carrying a balance. And if you just paid the minimum 2 percent and let it go, that is how long it would take to pay it off. You pay some $28,000 in interest.

Most people don't just pay the minimum. They pay $200 ...

VELSHI: And not everybody has an 18 percent credit card.

But Tamara, whose problem is this? Is this something that our viewers should sit here and say, "Oh, my goodness. Look at that, 57 years. Use the calculators online to solve your problem."

Is this a government problem in terms of regulation? Is this the banks problem? Is it all of our problem? Who solves it? How do we solve it? This is ridiculous.

DRAUT: Yes. Well, I think it's everybody's problem. And the solution has to be multifold.

I mean, first of all, we need -- and it's happening right now. We do need better regulations, because people are being walloped with surprise interest rate hikes that are being applied to their existing balance. So we need to rein in the abusive practices that ensure that people will have a very hard time paying off those balances.

And then we have to tackle some of the larger economic challenges that people are facing, and that is the reality. Their incomes have not gone up for about eight years, but healthcare costs are spiraling out of control. The cost of college is going up. Food, utilities, you name it. So we need to solve some of the fundamental economic problems facing middle income households.

ROMANS: Shawn, let's talk about personal responsibility here, because a lot of times when you talk about these issues, you will hear people say, look, this money doesn't come for free, and everyone should know this money doesn't come for free.

Is there an element here of we all went a little crazy over the past 20 years. In the 1908s when you had a credit card, it was a charge card that you paid off. In a way, has this easy availability of cheap credit helped hide some of the structural problems for us and now we have to pay?

TULLY: Absolutely. And you see the same problem in the mortgage market where people took out loans with exploding interest rates, and they're going to cause a tremendous problem going forward. Those are the ones that the banks, I think, will be forced to modify.

But the same thing happened with credit cards. Clearly, people went much too far with debt. And now that their incomes are shrinking in a lot of cases, this is proving to be a much higher proportion of the income in terms of the carrying costs.

But I agree with what Tamara said. Clearly, nobody can understand a lot of the small print in these credit card agreements. And people are getting hit with surprise increases and their interest rates and surprise shrinkages in the time they have to pay.

DRAUT: And that is going to change. Those changes are coming.

TULLY: I'm sorry?

DRAUT: Those changes are coming. They're going to change that. That's changing.

TULLY: Those changes are coming.

The change that is not good is capping interest rates in a lot of cases, because what happens then is that you just have a big shrinkage in the availability of credit card lending, and I think that's a mistake.

VELSHI: Shawn, good to talk to you. Thank you so much for being with us. Shawn Tully is editor-at-large at "Fortune," and Tamara Draut is the vice president of policy and programs at Demos.

How healthy are your finances? No more avoiding the question. We have actually got a way to test them, and we're going to do that next.

(COMMERCIAL BREAK)

VELSHI: This is one of the most helpful things I've come across. Do you know how healthy your personal finances are? If not, we can help you find out right now. ROMANS: And, boy, we really know more about our finances right after the last year. A lot of us have been really trying to take a look at just how healthy we are, and what we can stress test ourselves.

Our friends at CNNmoney.com will come up with a pretty easy way to test the strength of your money plan. Poppy Harlow is here to take us through.

You know, the banks had a big stress test. This is the stress test for you.

POPPY HARLOW, CNNMONEY.COM: This is more important -- for you, for the individual.

VELSHI: And it's less stressful to take the test.

That's true.

VELSHI: This is easy.

HARLOW: A little bit of stress involved when you look at the housing cost, at least here in New York City.

But let's show you what we're talking about. It's my favorite tool on CNNmoney.com. You go to the personal finance tab, click on it. What it brings up is this page. You enter your age. We put in "40 years old and an annual income of $50,000."

Hit go here, and what you will see is all of these different options. We picked a few.

So let's take a look at housing payments. What we put in for housing payments is $1,200 a month. That either your mortgage or your rent. It includes your property taxes, your insurance.

Click "enter" here on $50,000. Be careful because you're spending too much on housing. This payment really shouldn't exceed 28 percent of your gross income. That's hard to do in some cities, but that's what you should know on that.

When you look at debt, what we put in for this number is $1,800 a month. That does include your mortgage if you have one.

VELSHI: You have to make sure not to double calculate, your mortgage and the other one.

HARLOW: Yes, these are all independent readings upon. That's a great point, Ali.

So click "enter" and, there you go. Danger again -- on $50,000 a year you're carrying too much debt. That payment, again, including your mortgage, shouldn't exceed 36 percent of your gross income.

And this is a really important one. Where do your retirement savings stand right now? A lot of people are pulling back from what they put in their 401(k) right now, the market is so questionable.

If you're making $50,000 a year, you already have $75,000 put away as savings in the bank, and you're putting away $500 every month on top of that, there's some good news, you're on the right track for retirement right now. You can retire comfortably at this pace by age 65.

Very cool tool. Again, personal finance section right there on CNNmoneycom.

VELSHI: And they have a tab for emergency savings. They've got a tab for diversification for your 401(k) or IRA.

HARLOW: Absolutely

VELSHI: I mean, I've got to tell you, I really like the tools that are on money.com. I use them a lot. I wrote about them in my book. I direct people there. But this has got to be one of my favorites.

HARLOW: It's fantastic, because even if you're spending a little more than you can and you're not saving enough now, it's better to know that. Everyone says they don't even open they're 401(k) statements. You've got to do it. And you have to see where you stand.

ROMANS: ... you're paying more for your housing depending on where you live, you can adjust someplace else and see where you are someplace else to try make it all work out.

What I don't like is how many times it says "careful," every time I ...

HARLOW: Wait a second, I thought I was doing everything right!

VELSHI: If you want to get to that yourself, and you really, really should -- CNNmoney.com/financial health, a really great tool.

ROMANS: Poppy Harlow.

VELSHI: Once you know what financial shape you're in, it's time to take charge. So grab a pen and pair. It's time to cut your spending, lower your debt, and create a budget that actually does work for you.

ROMANS: A budget, that's right. Ryan Mack is the president of Optimum Capital Management and Louis Barajas is a financial adviser and author of the book "Latino Journey to Financial Greatness."

Gentleman, thank you for joining us.

Ryan, let me talk to you first, because I can't even count the number of times I've heard you say the starting is you've got to figure out what's coming in and what's going out. You start with a budget, and that is, frankly, the building blocks with everything that comes next in trying to figure out what to do with your money. RYAN MACK, PRESIDENT, OPTIMISM CAPITAL MANAGEMENT: The budget is probably one of the most boring but most helpful things in the entire financial plan. You can't do anything without a budget.

You can't figure out how long it will take for you to manage for your retirement account without a budget. You can't figure out how long it will take for you to put away funds for that vacation, to purchase your first home, when you're managing for your budget.

So we need the budget. As much as 60 percent of America is spending their money in a deficit just because they don't budget responsibly.

VELSHI: In other words, some people wouldn't choose to be in a deficit, but they don't know that they are.

Louis, this is a big issue, because, even if you sit down, if you decide this afternoon you want to do a budget, the reality is we miss most of the stuff that we spend. A lot of our spending is not stuff that would actually show up on our budget. Why is that?

LOUIS BARAJAS, FINANCIAL ADVISER: Absolutely, because there are things you're not taking into consideration.

For example, if you have to pay your auto registration fees that you're not going to pay like six months from now, or you're taking, let's say, just one day off to take your kids to some kind of amusement park. That's not going to go in the budget.

And technically, most of the time, most people will miss almost about $1,000 a month on their budget when they don't take things into considerations.

Also, birthdays, celebrations, anniversaries -- very few people take those things into consideration in the budget.

ROMANS: You say you can't change what you don't acknowledge. And I think that's a really important point.

You've got this really great sort of illustration, a debt dissolver, on how to kind of tackle this. Walk us through this. What do you mean?

BARAJAS: What happens is, again, you can't change what you don't acknowledge, and you really have to be aware of all your debt, because if you're not doing that, you'll have a lot of trouble dissolving that debt.

So what I do is I'll have you write down what kind of debt you have, whether it's a Mastercard, a Visa. Then I'll sit down.

And the most important thing is you want to be aware of what interest rate you're paying on that debt. Again, I sit down at the kitchen table, pull all the statements out for the client, and I'll ask them, "What's your interest rate on this credit card debt?" Most people don't even know. They'll tell you it's 13 percent when it's really 24.9 percent.

They you'll sit down and write the amount that you owe on this credit card debt. It's really important to write down the amount. Most people, again, think that they're owing a lot less.

Also what I want people to do is I want them to write the amount the limit that they have on their credit card debt -- I mean, not on their credit card debt, but how much money do they have left available, because we might use that if they have a lower interest rate card to transfer some ...

VELSHI: But in this particular case you have a $15,000 balance on a $15,000 available credit, so you're maxed out.

BARAJAS: You're maxed out.

VELSHI: In fact, you're probably likely to be hitting charges because you're going over your limit.

BARAJAS: Absolutely.

And the next thing is we want to make sure what the minimum payment is. Because, again, if you had a lower -- credit card, you would make the lowest payment there. And if you had more like this one, in case, you'd want to pay more.

In this case, this person was paying the lowest minimum payment. That was her monthly payment. So, that person, we want them to make more than the minimum payment. Otherwise they'll be paying this debt forever.

So there are a lot of strategies. And I have them write down strategies. Sit down. We're not going to use this credit card anymore. Maybe we'll transfer some of this debt to a lower interest rate debt. There are so many more things you can do. We'll call the credit card company to see if they can lower the debt for us.

Sometimes what we want to do -- we don't even realize all the different strategies that we can use.

So I use this as a tool. Just like we talked about the money.com tool that you just talked about right now, the stress test ...

VELSHI: Yes.

BARAJAS: This is a great tool, right?

VELSHI: It's fantastic. You can get this on many websites, including money.com. You can go there and you can enter your credit cards and the interest rates, and it will tell you if you increase the minimum payment, like you have said, or decrease it, how much longer it will take.

Now, Ryan, here's the thing. If somebody comes to you with this, that situation, where they're maxed and they're only making their minimum payment -- first of all, what are the strategies they can use to alleviate that?

Secondly, if they also don't have an emergency fund, do you advocate paying that credit card down or parts of it first so you can use that as an emergency fund, or do you think the emergency fund should be kept separately?

MACK: First of all, when you're talking about budgeting, three simple steps I really do with budgeting is really write down your estimated budget, take the next 30 days and write down a spending diary to figure out exactly where you're spending your money and where your money is going.

Then the third step is to put down an actual budget.

Now, once you figure out -- in this situation here, we have individuals already maxed out on their credit cards. They're paying 25 percent.

So at this interest rate, it's so high, it's kind of hard to defend putting money in an emergency that you'll only be earning maybe 2 to 3 percent interest rate maybe within this economic environment.

But the psychic income that sometimes individuals might have by putting -- if you have $400 a month extra on your surplus, putting 250 toward the credit card debt and maybe putting $50 into an emergency fund, you might not be getting the amount of return on the emergency funds.

But the psychic income, that go-get-them attitude, to say I have a little bit more money in my emergency fund, I'm saving some ...

VELSHI: Louis calls that a "confidence fund." Do you sort of agree with that, Louis, that sometimes you just have to have a little money on the side?

BARAJAS: Absolutely. You want to pay down the debt, you want to work this muscle, and you want to increase your savings, you want to work this muscle.

You want to make sure that there's some balance, because you want to give people confidence and self-esteem. And you want to give them a better future.

All of this is about doing the budget, paying down the debt, because we want to build people's self-esteem, we want to make sure their relationships are stronger, because, as we know, this financial stress of having too much debt, spending too much, is causing a lot of relationship problems across America right now.

ROMANS: I know. We have relationship problems, you and I, about money, don't we?

VELSHI: But we set a regular date to sit and talk every week.

ROMANS: We work it through ...

VELSHI: We sit and talk about money with everybody else.

ROMANS: Two hours every weekend.

Gentlemen, stick with us, because we want to talk more about emergency funds, and Ryan has some incredible stuff about how to make sure you're not spending money when you're emotional, because that can really kind of blow a budget out the window. So we're going to talk about all that, so stick with us, everybody, on that.

Ryan, and Louis, thanks.

You know your birthday, you know your Social Security number, hopefully, you know your anniversary. But do you know your credit score?

VELSHI: I would say most people say no.

ROMANS: The anniversary or the credit score?

VELSHI: The credit score.

ROMANS: It is your financial DNA. We'll show you how to make it better.

(COMMERCIAL BREAK)

VELSHI: Well, your employer, your bank, your credit card company, they'll all check your credit score at one point or another. But have you actually looked at that it lately?

ROMANS: If now, it's time to look into it, because having good credit is more important than ever.

Gerri Detweiler is a credit adviser at credit.com. She's also the author of "Reduce Debt, Reduce Stress." We were just talking about that.

VELSHI: Yes, that's exactly what we were talking about.

ROMANS: Stress is all about the factor that you can sleep at night with how much debt you have and what your situation is.

VELSHI: Gerri, good to see you. Thank you for being with us.

Let's just talk about the credit score. A lot of people are confused about the difference between the credit report and the credit score. What's the difference? Which is more important? What's the story?

GERRI DETWEILER, CREDIT.COM: Right. The credit report is the ingredients, and FICO makes the recipe that produces the score. So your credit score will be different depending on which credit bureau supplies the underlying information -- Experian, Equifax or Trans- Union.

In addition, one important thing to keep in mind is that many of the credit scores you get for free or maybe you get as a gift from one of your financial institutions, those are usually not FICO scores, and they're on a different scale.

So you can appear to have, say, an 800 credit score, which is golden with FICO, but it may be just so-so with one of these other scoring systems.

ROMANS: So what is the anatomy of a credit score? What goes in there that decides what my number is?

VELSHI: This is like the 11 herbs and spices, or the coke recipe. Do we know actually how it's done?

DETWEILER: I think it's in that vault with the coke recipe. It's pretty secretive.

There's about three main things that go into your credit score. Of course, we know that if you pay your bills late, you have a collection account, bankruptcy, foreclosure, all those things will be negative. That's about a third of your credit score is the negative information.

Another third of your credit score is the debt you carry. And what they're looking at there is how closer you are to your credit limits on primarily your credit cards. So the closer you get to the credit limits, the lower your credit score.

And there's no set number -- 50 percent is not perfect, 30 percent is not perfect -- 10 percent, using 10 percent of your available credit is probably ideal.

VELSHI: Wow.

DETWEILER: And then the other third is the other things, like how old is your credit score? How long have you had credit? How many recent inquiries are there into your credit score? Those other things make up the other third.

ROMANS: I have this credit card I've had since, like, 1992, the first credit card I ever had. And people keep telling me never close it. Use it, pay it on time, but don't close it, because it's good for your score. That's right, right?

DETWEILER: Yes, it's probably good advice. Unless they decide to charge you an annual fee, for example, because you're not profitable, you're not carrying a high enough balance. Then you can go ahead and close it.

But what you don't want to do is get your credit report, see all those old accounts you don't use anymore -- close them all out, because that typically will lower the score.

VELSHI: And make sure that it's noted that you closed it, as opposed to it was closed on you.

Gerri, tell me this. What's better? You say using 10 percent of your available credit. If you're using 90 percent of your available credit, that's bad, because they'll deem you to be using too much of your credit. If you're using none and you have too much available, can that hurt you?

DETWEILER: No. Having too much credit available will not hurt you with the FICO score. They don't care.

But I do recommend you keep those accounts active, because a lot of issuers now are closing inactive credit cards.

So just pull it out -- buy groceries, gasoline, something you buy anyway, pay it off in full. Keep the account active. That will help your credit score as well as reduce the likelihood they'll close the account on you.

ROMANS: Who looks that the score?

VELSHI: It's more than you think.

DETWEILER: Somebody who is looking at you for a job can look at it. Lenders, insurance companies, each your cell phone provider ...

VELSHI: Can your potential employer or current employer look at it without your permission?

DETWEILER: The only person who has to get your written permission is an employer. They have to get your written permission. Everybody else just has to have a legal purpose for you getting your credit score.

And the cell phone example is a good one. I was in line behind a woman trying to get a cell phone. She got turned down for the cell phone plan she wanted because of something on her credit report. So it is important to stay on top of it and check it and make sure it's accurate and complete.

ROMANS: Does it hurt if you check your credit score yourself? Does it show that you've opened up the account, does that hurt? Because you're always told don't do it too often because it makes it worse.

DETWEILER: That's a great question.

It does not hurt your credit score to check your own credit report. That's called a "soft inquiry." Nobody knows about it except you and the credit bureau. So don't worry. It's OK to monitor your credit.

VELSHI: OK, so we've got a lot of information on how it works. Now we're going to talk to you. We're going to come back and talk to Gerri about how to fix it. That's the question that people are giving us, how do you fix it? Should you pay someone to fix it for you? What's the safest way to go about fixing your credit score?

Now, if you're drowning in debt and you don't feel like there's anything you can do, we have some hope for you. We've got a simple way to get started right now.

(COMMERCIAL BREAK)

ROMANS: All right. Welcome back to a special edition of YOUR MONEY, Taking Charge. It's critical you put yourself in a position to get out of debt. This show is going to help you with the tools you need to do just that.

VELSHI: In addition to the ones that we can give you to help yourself, there are many options for credit counseling, but you have to beware of scams.

Back with us: Gerri Detweiler; she's a credit advisor with credit.com; and Todd Mark who's vice president of education at the Consumer Credit Counseling Service of Greater Dallas. Gerri, welcome back and Todd, good to speak to you again. It's been a long time.

Let's talk about a question we get a lot of and that is how to know when you need a credit counselor? How do you know when it's time to get outside help? Gerri, let's start with you.

DETWEILER: I think if you find that you cannot get ahead, yourself, there's absolutely no harm in getting some outside help from a credit counseling agency and the reason is it's confidential. The first consultation is probably free and at a minimum they can help you find some ways in your budget, which you were talking about before, find some ways in your budget to cut back and put more money towards your debt. So there's really no down side to getting that help.

ROMANS: And Todd, you say you need to just do a little bit of risk assessment here. If you're having trouble paying your credit card bills, if you're fighting with your spouse or having trouble at home over concerns about bills, it's time to see a credit counselor.

TODD MARK, CONSUMER CREDIT COUNSELING SERVICE: Absolutely. We actually designed a risk assessment test with the Dallas Morning News late last year. And we were ahead of the curve, before the federal reserve did a stress test for the banks, we were doing it for consumers. And we were looking at are you behind on your mortgage or your car?

What's the level of credit card debt that you have? And going away from the financial risks, looking at are you fighting with your spouse? Are you having trouble sleeping at night? Even are you have a rise in blood pressure? Your doctor telling you, you need to settle down a little bit. That's when you know it's time to see a credit counselor.

VELSHI: Where can people find the information on that test, by the way? How do they get something they can plug into?

MARK: They can go to the Dallas Morning News as dallasnews.com and search for "dollar wise" and you'll see the risk assessment test from CCC at Greater Dallas.

VELSHI: Gerri, you also have a bit of a calculation here, if you take up the minimum payments by the credit cards and multiply the total by 20 percent and add that, so basically take up your total, add 20 percent and if you can't pay that off yourself then you've got a problem.

DETWEILER: That's right. That's the calculation used to determine whether you can get out of debt on your own in three to five years. Your minimum payments plus 20 percent of that total added together. If you can pay that every month and not dig the hole any deeper, then you can probably pay off your debt on your own.

If you can't then you do need to talk to someone because you may need to reduce your interest rates, the monthly payments. You may be even in serious trouble and need to seek out the help of a bankruptcy attorney.

ROMANS: How do you make sure that you find somebody who's credible as a credit counselor who can help you've once you decided that you need to do this? And it's not somebody who's going to scam you. Ali was saying that he was getting some calls on the radio show from people who say that people have offered -- they think they're being scammed.

VELSHI: How do you know it's honest or and not; and what should it cost you?

MARK: Well, I would say the first thing you want to do is go to your tried and true non-profit credit counseling agency. There's generally a CCCS in every city and you can find an agency locator at NFCC.org.

And what you're looking for is this. Find a credit counselor that is accredited by the council of accreditation. You're looking for somebody that's certified, their counselors are trained, ideally college educated. You want to make sure that -- Counseling should generally be free, all of our budget, credit and debt...

ROMANS: How long should it take? Should I be prepared for three months working with a counselor? Six months work with a counselor? How long are you going to work with somebody and how long is it going to take to dig out of the debt?

MARK: Well, it really depends on the situation. Many people come to us one time for a budget and credit counseling assessment and then they go off and activate the action plan on their own. So it really depends if there's a lot of hand-holding, if they're doing something like debt management or when negotiating with a lender for a work-out option on their delinquent mortgage.

It depends how long you're talking about. But the initial assessment is generally about 60 to 90 minutes and they're going to look at three things: your income, your monthly expenses and all of your debt.

VELSHI: Gerri, should you be paying in advance for this and how do you determine what's a fair price to pay? DETWEILER: Generally, with credit counseling your initial consultation is going to be free and then the monthly payments are going to be pretty low.

But remember, there's also a lot of people who are finding they have too much debt and they can't afford credit counseling so they're turning to debt settlement firms. And the problem with some of the debt settlement firms is they charge huge fees up front, we're talking $1,200 and $3,000 up front and they don't necessarily have the incentive to help a consumer resolve or settle their debts on the back end. So those are the outfits you have to be very careful about.

ROMANS: Quickly, both of you, can you use online tools? Todd, you mentioned something for the risk assessment. Gerri, is there help you can get for online tools, and everything I want to point out to we're going to put on our Web site. We talked a lot about different tools. We're going to put them on our Web site.

But Gerri, is there anything you recommend?

DETWEILER: Oh, there's great budgeting and debt assessment tools. You can go to credit.com, we'll be happy to help you. You can go to places like mint.com, justthrived.com and many financial institutions offer some great budgeting tools. Wells Fargo has some good tools for consumers -- absolutely, there are great places to get your information together and get on a budget.

VELSHI: Gerri good to talk to you. Thanks you Gerri Detweiler is a credit adviser with credit.com. Todd Mark is the vice president of education of the Consumer Credit Counseling Services of Greater Dallas. He's going to stay with us and talk a little bit about what to do if you think bankruptcy is your only option.

ROMANS: All right. Listen up. This is a list you need to pay attention to: your cell phone bill, your medical bill, the cost of auto insurance, home insurance. You can lower every one of those bills today and we're going to show you how to do it.

(COMMERCIAL BREAK)

VELSHI: OK. We're giving you the tools you need to take charge of your money; try and stay out of debt. We're going to give you some steps to reduce your costs just by asking.

ROMANS: Negotiate. Your cell phone plan, your credit card interest rate and even your medical bills can all be negotiated. Here to tell us how to do just that is Jonathan Dahl, author of "1,001 Things They Won't Tell You: an insiders guide to spending, saving and living wisely" also editor in chief at Smart Money magazine. Smart Money

VELSHI: It fills itself with this kind of information.

ROMANS: Yes, absolutely. You can negotiate for all of this stuff. JONATHAN DAHL, AUTHOR, "1001 THINGS THEY WON'T TELL YOU": Yes. Let's start off with health. When you go to see your doctor, if you offer to pay in cash or with a check instead of credit card you know you're going save him on the fee he has to pay his credit card company. You can ask for a part of that.

We noticed particularly with dentist that when you ask for the procedure, if you're willing to do it in the middle of the week or in the summer when their business isn't booming, they may give you a deal they wouldn't normally give.

ROMANS: Just say, can I do this...

VELSHI: Well, how do you -- I mean, just asking sounds simple. What do you actually do? I've been going to my dentist for a few years and I all of a sudden I'm out of a job or my income's lower and want to save money, what exactly do I say?

DAHL: It's not as easy as some magazines and books might make it sound. What you want to do is find out who to talk to. It probably won't be the doctor. Usually even doctor's offices have a financial officer that deals with these kinds of things or front desk and that's really the place to start first, I think.

VELSHI: You know what upset me? I went to my dentist, I made an appointment with my dentist and I said, "How much is the procedure going to be, just so I need to know."

And he said, "Can't tell you."

ROMANS: What?

VELSHI: My dentist may be watching but I changed dentists as a result of that.

DAHL: One thing you might consider is combining procedures. I'm not saying if you're having your appendix out, that you just say throw in the tummy tuck at the same time...

ROMANS: And a root canal while you're at it.

DAHL: ...while you're at it. But let say having bunion surgery and both feet need it. You save a lot of money if you put it together.

ROMANS: Let's talk about car insurance because you can negotiate this. You can take advantage of the discounts that are offered but you can also research their competitor's plans and what you can call them up and say I'm driving less, I'm not driving as much as I used to.

DAHL: Yes. If your driving habits change there are discounts on your premium for that. So, for example, if you move and your commute is less or let's say you lose your job and you're not driving as much. They have hardship discounts. You just have to have documentation of how the habits changed. VELSHI: And it's a research-driven industry that you really can always compare and sometimes you can just call your insurance and say I can get a better deal somewhere else.

DAHL: We always say shop around but this is one industry where you really can. There are some good Web sites that list all the prices and then of course, you can say this is what this guy is offering me.

ROMANS: You see these stories about the kids who have to pay $1,000 in texting fees. Have you seen this?

DAHL: Yes.

ROMANS: OK. So if you're around the household...

VELSHI: You know what I say to that? Call somebody once in a while. Stop texting everybody and pick up the phone and call. It's cheaper.

ROMANS: In terms of cell phone costs, you can test drive other plans but you can also ask for lower fees for texting. All you have to do is ask.

DAHL: Well, people think cell phone companies are a nightmare to deal with, but in fact, complaints to the SEC about the cell phone company is they're down 13 percent over the last five years -- I just happened to have that memorized -- and they're actually more negotiable than you might think.

VELSHI: Let's talk a little about credit cards. We've been talking about that during the course of the show. People call us and say what can I do? My rate's gone up. Do I have any options? The credit card may not have done it. We're clearly learning, they didn't do anything illegal. It was in the fine print somewhere that they can raise your rate for pretty much any reason they want.

DAHL: Late fees is one thing that you can negotiate on because that's not as much a profit center for them so if you're late and they throw on a $20 bill you'll have a better luck going after that first.

ROMANS: I've had luck doing that before. All of a sudden you missed by a day and there's a $39 charge, you call, you call and you get transferred and you're transferred, you say, "look, I'm going to move my business some place else" and they'll say, "We'll take it off this one time."

VELSHI: What do you do about rights these days?

DAHL: One thing with credit card companies is don't wait for the wolves to come to the door like a lot of people get these enormous bills and they're afraid to even pay anything. It's kind of like, call them up because the times have changed now and they know that. They're under pressure and you're under pressure and there's much more negotiation that can go on right now. ROMANS: Well, they want your money. All of these people want your money, especially if we're talking about a hardship case. They all in the end want to be paid something because they're paying people, too.

DAHL: A little bit is more than nothing.

ROMANS: That's absolutely right.

VELSHI: If only the banks had thought about that before everybody got foreclosed...

ROMANS: We had a surgeon on a couple of weeks ago who was telling us about the medical bills. And he said that believe it or not, plastic surgeons are taking a lot of discounts because people are putting off their plastic surgery -- their cosmetic plastic surgery.

VELSHI: What do you think? What should I get?

ROMANS: I think you're perfect.

I think you're perfect.

VELSHI: Jonathan, thank you. This was a perfect segment. Good to have you.

Jonathan Dahl is the author of "1,001 Things They Won't Tell You: An insiders guide to spending, saving and living wisely."

ROMANS: All right.

VELSHI: Well declaring bankruptcy could be one of the hardest decisions that you have to make. What you absolutely need to know if that decision ever comes your way.

(COMMERCIAL BREAK)

VELSHI: Filing for bankruptcy can ruin your credit, it will ruin your credit. It makes it harder to get a loan and insurance coverage, even a job. Your potential employer can see if you filed for bankruptcy.

ROMANS: That's right. So you better be careful before you decide to do it. And when is it necessary to file for bankruptcy?

Todd Mark is vice president of education for the Consumer Credit Counseling Service of Greater Dallas. He's back with us.

You know when should you do this? This is a really big decision. Once was 20 years ago, 30 years ago you decided to file for personal bankruptcy this was admitting failure. Now for some people this is the only way they can restart, re-shuffle the deck and start again and try to be a success in their financial life.

How and when do you decide to do it? MARK: Well first off, that stigma you talked about from many years ago, that's gone. I don't want people to be fearing that. The consumer protection of bankruptcy is very important and today at CCCS of Greater Dallas we're seeing a severity of crisis greater than we've ever seen.

So when people come to us with debt three times their yearly income, it's obvious that getting help from a debt management or even a debt settlement, that's not going to help them. They're going to need to seek legal options.

When people are worried about the loss of their home they can't worry about their credit cards. They can't worry about their other unsecured debts. So they need to focus on their priorities and sometimes bankruptcy is a part of that solution.

VELSHI: Tell us what the process means because a lot of people think it means you don't have to pay anything anymore, but that's changed recently.

MARK: Yes. In 2005 the BAPCPA, the bankruptcy reform act changed things, but I don't want to scare people off and think that they can't file Chapter 7 or Chapter 13, because it absolutely is a right. It's a good and important consumer protection and more people are filing than ever before right now in response to high unemployment and the housing crisis.

VELSHI: How would you characterize it? What actually happens and what's different if I file for bankruptcy than before I filed for bankruptcy and couldn't make my payments.

MARK: The first thing, believe it or not, is you're required to seek credit counseling from a U.S. Trustee approved credit counseling agency. They do pre-filing counseling and pre-discharge education. And the reason for this was, A, they were trying to root out any abuses so the people that did have means of paying something toward their creditors weren't getting off scot-free through a Chapter 7.

But the real key to the credit counseling and education is it's a teachable moment. We're really here to help consumers emerge stronger as they go through bankruptcy and really help them understand the ramifications, the credit impact and how it's going to be living in a world maybe without credit or limited credit after the bankruptcy and living on a cash existence.

And how long it's gong to take to get into a home again because let's face it. Tie the credit issues with the housing crisis and we're having a lot of people that are filing bankruptcy to stave off foreclosure. They want to know how long is that bankruptcy going to keep me from getting another, maybe more affordable housing option.

ROMANS: So in declaring bankruptcy, you talked about attending this special approved counseling and also you need to get a referral for a bankruptcy attorney. This isn't critical and then you have to determine whether you qualify for Chapter 7 or Chapter 13. Define for us the distinctions between the two. MARK: Once you go to a credit counselor, you get a certificate. We will refer not directly to an attorney but your state or local bar, to NACBA, the National Association of Consumer Bankruptcy Attorneys and the attorney themselves will help you go through a median income test. They're going to figure out where you fall within your state income, if you're above or below that threshold. And then they've got a test to see if your judged expenses, if what they predict your expenses would be, would allow you to pay at least $100 a month over a five-year court-approved plan toward the creditors. If so, they're probably going steer you into Chapter 13.

If you don't have the means and specifically right now if you're unemployed and you have a history of little-to-no income, you're probably going to qualify for the Chapter 7.

VELSHI: Which means a clean slate.

MARK: A clean slate bankruptcy, versus Chapter 13, which is a reorganization and repayment of some money toward your credit.

VELSHI: When next does your credit get established? How long does it take under both of these?

MARK: Remember, bankruptcies are the one thing that can go beyond seven years on your credit report. They can last up to ten years.

Let's talk about the real impact. If you're looking to get a conventional mortgage generally for a Chapter 13, you're going to have to wait at least two years; for a Chapter 7, four years. But if you're looking at a government program like FHA, you're probably cutting that in half. So one year for a Chapter 13, two for a Chapter 7.

Let's remember that credit cards are a completely different issue. You may have a few cards that you keep out of the bankruptcy, that you keep going. But generally people are going to have to rebuild slowly their credit. And you maybe doing that to secure cards or just good practices that are paying off on time and in full your credit. That's one way to rebound and help build your credit after bankruptcy.

VELSHI: Great conversation, Todd. Thanks for being with us. Todd Mark is the vice president of education of Consumer Credit Counseling Service of Greater Dallas.

Christine, we've had phone calls on the radio show. We get them from people who are in such distress, such emotional and psychological distress over their financial situation. That's when I always say, that's one test of when bankruptcy might be right for you. You just don't need to have this affect your health.

ROMANS: But there are certainly ramifications of doing it. It's certainly a difficult process.

VELSHI: Absolutely serious. ROMANS: And it is a serious matter. Your heart goes out to people who have to make that decision. You just hope that you can start all over.

Save for a rainy day. Your grandmom was right, and now for millions of Americans, it's pouring. We're going to tell you where to find an umbrella.

(COMMERCIAL BREAK)

ROMANS: Your financial stability is only as secure as your rainy day fund. How long is yours, three months, six months?

VELSHI: Six. I think it needs to be longer, I truly think in this environment. I don't think for all of life but in and environment where it's entirely likely that one could lose their job or something could happen, I think you have to be more secure than that.

ROMANS: I have a pretty good rainy day fund only because I was saving up to buy a house. I was too nervous about having that money where it could hit so that turned out to be wise. There are a lot of people who are using their moneys in the market. Using their money to make money, who didn't keep money set aside and now they're in a little bit of trouble.

We're talking a little about how long your emergency fund should be to save for a rainy day.

VELSHI: The question a lot of people ask us, how do you even start? There are some ways you can start building your emergency fund, even if you're on a very, very tight budget.

We were talking a little about this earlier. Let's bring back Ryan Mack, he's the president of Optimum Capital Management and Louis Barajas, he's a personal wealth adviser.

Let's start with you, Ryan. What do you tell people? If they don't have an emergency fund, you and Louis both made the point earlier that it's psychologically advantageous, even if it's not big, even if it means not paying off some of your debt somewhere else, you think it's an absolute necessity.

MACK: Definitely. The emergency fund is one of the first things that you should try to strive for. I remember, I'm from Detroit, when the teachers went on strike, after three days, there were lines around the corner because most of the teachers didn't have enough capital to last longer than three days because they didn't have an emergency fund.

When you have a leaky roof, your car breaks down, driving around here in New York with all of these potholes, I was having to purchase new tires on our cars. We have to have an emergency fund to make sure we have capital to last through these rainy days.

The biggest thing about the emergency is just making sure you have that capital so you don't have to disturb your investment account. Because at the end of the day, the investment account should remain stable and you don't want to have to start tapping into your investment account and taking out funds that should be invested just because you might have gotten laid off from your job.

VELSHI: And you have to pay a penalty on and things like that.

MACK: Exactly.

VELSHI: Louis, tell us, how much should it be? Should it be a percentage of your income? And what's the best way to save so that you don't actually start tapping into it...

ROMANS: I would hear three months, six months; people now saying eight months. Can you put a definite time frame on it like that?

BARAJAS: I agree with all of you. You should put as much money as you possibly can. Again, in this type of economy, if you're losing your job, it might take you nine months to find another job. We had jobs where they were just so safe and you think we would never lose a job like teachers. Teachers in California are losing their jobs and they were only saving two months in emergency reserves. Now they're in deep trouble.

My ideal with human nature and practicality, you want to make sure that you set it up automatically because you want to make sure there's taking money from your checking account and put into your savings account or money in your job and putting it into some kind of savings account that will work.

Ideally, it should be saved in the bank. Ideally, you should save 10 percent. But that's ideally. Human nature says, you know what, just put as much as you possibly can. I always said never put it underneath the mattress. These days when nobody's saving, I don't care if it goes in a mattress or coffee can, it doesn't really matter. As long as...

VELSHI: The less accessible, probably the better.

BARAJAS: Absolutely.

VELSHI: Ryan, 3 percent is what we as a nation is saving right now. At the height of the recession in 1982, we were saving almost 13 percent of our income. Louis says he would like people to save 10 percent. What's reasonable?

MACK: I think 10 percent, at least 10 percent. You can go for even more than that if possible. This is where the budget comes into play. You really don't know how much you can save unless you write down everything and put everything up front so you can actually see how much of a surplus you have to go into savings.

ROMANS: Ryan, where can you find the money to save, if you think I just can't, I'm strapped. I have a kid in college. I've got the mortgage. I can't save any money. You say there are ways you can find the money by budgeting to save? MACK: I always say it's not necessarily not being able to save but having the lack of vision that said that's what you can save with. When you find that vision to save, maybe I can cut back on the shopping and going out eating as much or having maybe cutting my own hair every once in a while for those college students out there. Maybe trying to shop less frequently.

Packing a bagged lunch can save you as much as $100 a week. We don't even know how much we're spending with these $10 lunches that we're purchasing every day. Sometimes coming home from work, it's 5:00, you don't have to pick the kids up until 6:00. You're a little bit bored. What do people like to do? Let's go shopping.

All of those things that we do, we just have to just tone down and make sure that we're spending exactly what we have and generally what we have.

ROMANS: Ali, the money you save from your hair grooming where does that go?

VELSHI: I do that quite often, I do my own hair. Sometimes I go to a barber to do it, but I can do that myself. After that conversation I had with Rachael Ray, I have been buying groceries a lot more, eating out a lot less. That stuff really, really does help. It's a big difference.

ROMANS: Gentlemen, we have to leave it there. Thanks for the fantastic advice though. The bottom line I think from everyone here, we all need to save more. We've learned something. We need to save more.

VELSHI: And it's possible. These two guys are optimistic; they both deal with people who are in tough positions.

ROMANS: Absolutely. Louis Barajas, thank you so much sir for joining us today. Ryan Mack, Optimum Capital management, thank you very much, gentlemen.

VELSHI: And thank you all for joining us for this special edition of YOUR MONEY.

You can follow us on Facebook and Twitter. I'm @alivelshi and Christine's @christineromans.

ROMANS: And make sure you join us every week for YOUR MONEY, Saturdays at 1:00 p.m. Eastern, Sundays at 3:00. You can log on to cnnmoney.com anytime anywhere.

Have a great weekend, everybody.

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