How to Get And Protect Your Money

July 15, 2008 — -- The bear market, housing crisis and sluggish economy have made it increasingly difficult to land a loan at a decent interest rate. "Good Morning America" financial contributor Mellody Hobson tells you what you need to know about home, auto and college loans in this economic environment.

But getting money isn't the only thing consumers are worried about. They're also questioning how to keep their funds safe after seeing big bank Indymac go under. Fox Business Network anchor Alexis Glick offered the skinny on how to keep your money safe.

Find out everything you need to know about borrowing 101 and how to keep your money safe below.

In response to the credit crisis and precipitous housing downturn, lending standards have become much more stringent across the board and banks are less and less willing to take on any additional risk. So, if you are looking to buy a home with less than 20 percent down and/or your credit is not great, you may have significant trouble securing financing.

My advice at this time would be to consider renting for a bit longer to give yourself more time to become a more appealing borrower.

If you are an existing homeowner with a fixed rate mortgage and you have been making your payments consistently, there is no need to worry — the terms of your loan and mortgage are unaffected.

However, if you have an adjustable rate mortgage and you are concerned about making payments once your rate adjusts, contact your lender now and try to work out a plan. Foreclosure is not a good option for anyone — the borrower or lender. It is in the best interest of all parties to try to negotiate terms that will allow a borrower to keep up with payments and maintain the home.

There is no question it has gotten much harder for students to get loans for college. Not only are many lenders disappearing from the marketplace altogether, but most of them are setting the bar much higher, making it harder for cash-strapped students and their families to qualify.

Then, with the rise in delinquencies in auto loans, it will likely be tougher to secure lending for car buying as well. In the fourth quarter of 2007 delinquencies on auto loans reached their highest levels since 1992. These delinquencies are a symptom of the weaker economy as well as falling housing values. Essentially, people have less and less money to spare and are having trouble making ends meet. And given the troubles in financial services and banking, lenders are going to be less willing to help out.

Several factors contribute to your credit score, including the type of credit you have, newly acquired credit and the length of your credit history. But the two biggest components are bill paying history, worth 35 percent, and credit utilization, worth 30 percent.

With bills, paying consistently and on time is critically important. In terms of credit utilization, a utilization ratio of 35 percent or less is good. To give a simple example, if you have two credit cards and between the two cards, you have combined limits of $10,000, you want to keep your total balance under $3,500 (or 35 percent of $10,000).

Keep in mind, although the components of a credit score are standard, you will find that your credit score will probably vary from credit bureau to credit bureau. So, my advice is not to get too obsessed with the number and really focus your efforts on debt reduction and on time bill payment. These two items are very important to lenders, so proving yourself here is key.

It may sound crazy, but now may be good time to entertain a loan from friend or family. That's an option you should leave on the table. If you do that, it's extraordinarily important to document it because that protects both parties and helps preserve the relationship in the event of a problem.

And also look into prosper.com. It's kind of like the eBay for loans, with private citizens doing the lending. Again, having thorough documentation is a must.

Smaller banks are not necessarily riskier. They usually are very well run, they're regulated by the Federal Reserve and they have FDIC insurance. But still, you could be at risk with a smaller bank, especially one that specializes in one specific industry or product. For example, a bank that specializes in construction loans would not be a good place to have money right now.

But a little context: Though you're reading the headlines about the failure of Indymac, which is the country's third largest bank failure, and while more banks are at risk,only 90 banks are currently on the FDIC's watch list. During the savings and loan crisis in the early 1990s, 834 banks failed or collapsed. In the past two years only six have collapsed.

So we need to take kind of a deep breath. There's a risk that more institutions will fail, but if you look at the situation in context, it's not that bad at all.

Individual accounts are insured up to $100,000 by the FDIC, which includes savings, checking, CDs and money market accounts.

Joint accounts are insured up to $200,000, while retirement accounts and IRAs are insured up to $250,000.

You can't buy excess protection above standard FDIC insurance. So diversifying — putting your money in different banks — is probably your best option. It can simplify matters if you choose one big bank that that has many insured subsidiaries.

Be aware that putting money in different banks may cost you some money because banks usually give you incentives, like higher interest rates, the more money you keep there. You'll give up those perks if you put smaller amounts of money in different banks.

The broker dealers have their own insurance, called SIPC, or the Security Investor Protection Corporation. So if you have a 401(k) with, Morgan Stanley, they cover up to a maximum of $500,000 dollars, of which $100,000 dollars is the maximum for cash. That insurance does not cover investment losses — if the mutual funds you invest in go down, for example. This insurance protects your account if the institution goes bankrupt.

Not all firms are covered by SIPC, so you need to check.

It can get complicated depending on the type of investments, but some of the best known broker dealers, like Goldman Sachs, Morgan Stanley, Lehman Brothers and even Bear Stearns and Wachovia also have what's referred to as excess SIPC (also known as CAPCO Or Customer Asset Protection) which insures assets above the SIPC insurance. So if you have more than $500,000 at one of the 15 participating institutions you will be protected for the assets or value of those assets above that amount.

You can find out more information at www.sipc.com or www.capcoexcess.com.

It always pays to do your homework. You should put your money with an FDIC insured bank or a SIPC insured broker dealer and preferably one who purchases that excess SIPC. But you should do your homework on the financial institution that you are investing with. It doesn't mean that bigger is necessarily better. Just make sure your money is in the hands of a financial institution that is weathering the storm better than others.