By John W. Schoen Senior producer
msnbc.com
updated 5/8/2009 9:44:35 AM ET 2009-05-08T13:44:35

With consumer prices under control — at least for now — inflation is no longer a big worry for most savers. But if you’re one of the inflation-averse savers who bought Series I savings bonds to protect you from inflation, you just got a nasty surprise.

Regarding Series I savings bond rates (now paying 0 percent) — will the inflation or fixed rates improve?
- C.P., Wisconsin

Call this the flip side of the government’s massive efforts to prop up the banking system and get the economy back on track. Low interest rates are great for lenders and borrowers. But they’ve made life a lot tougher for savers and retirees living off a lifetime of savings.

Series I bonds (the “I” is for inflation) are designed to protect you from the corrosive effect inflation has on the money you set aside for a rainy day. If you put away $100 today and inflation sends prices higher, your $100 won’t buy as much when that rainy day arrives.

To help get around this, Series I bonds come with two separate rates attached. The index rate, which is set when the bond is issued, is like the rate on any bond. It’s fixed for the life of the bond maturity (in this case 30 years), and you collect it no matter what happens to market interest rates.

The inflation protection comes in the form of a second, inflation-adjustment rate, which is set twice a year based on the Consumer Price Index. When prices are rising, you get, in effect, an extra bonus on your interest payments to offset the impact of inflation.

But lately, consumer prices have been falling, largely due to the collapse of oil prices. From September 2008 through March 2009, the CPI fell at an annualized rate of 5.56 percent. So when the inflation adjustment for Series I bonds was reset last week, it went negative —effectively wiping out any interest you’re due from the index rate. The overall return, however, cannot fall below zero.

That means your money is still safe from inflation, but you’re getting the same return you’d get by burying it in a coffee can in the back yard. Before you dump your Series I bonds and look for a higher return, here are a few things to keep in mind.

If prices really are falling, that means “deflation” is already pumping up the real value of your coffee can savings. If prices keep falling, your $100 rainy day fund will go farther when you decide to spend it in the future. So while your earning power has disappeared, you’re not losing buying power.

In fact, you’re still getting something of a break. The current index rate on the new Series I bonds is 0.10 percent. That’s less than you’d get with, say, a short-term CD, but not by much. When the Fed decides it wants to push short-terms rates to zero, it’s pretty hard to get out of the way.

You also need to look at the index rate when you originally bought the bond. If you’re holding a bond with a 5 percent index rate, you’ll get a decent return again once prices stop falling. Keep in mind that the current drop in prices will likely be short-lived. Given the Fed’s gigantic expansion of the money supply to force rates lower, many economists are worried about a possible surge in inflation down the road. If that happens, your Series I bonds will look a lot more attractive.

If you do decide to dump your Series I bonds, you’re in luck. Normally, if you sell a bond less than five years after you bought it, you have to pay a penalty equal to three months interest. Since you’re getting no interest, you’ll owe no penalty.

Who can I trust to clean up my credit and what is the average cost and time that it would take?
- Chris S., San Antonio, Texas

It’s very hard to generalize about how long it takes to improve your credit scores. You may hear lots of pitches offering shortcuts, but we have yet to come across a company that can successfully do this. Legitimate credit counselors and federal and state regulators generally agree that these pitches are almost always scams.

There are a few basic ways to improve your credit. Some of them just take time. If you’re just starting out, the credit agency wants to see a pattern of several years of good payment history, a steady job, a stable address, etc. There’s no magic in this: People who don’t pay their bills on time or don’t have a steady paycheck tend to be a higher credit risk for lenders. That’s all the score is designed to do: help figure out how likely you are to pay back a loan.

If you have a history of bad credit, it will also take some time to get back on track and demonstrate that you’re a better risk than your financial history would indicate. If you’ve got a default or collection on your record, the impact of that recedes with time. The bigger the credit problem, the longer it takes. A bankruptcy can weigh on your score for seven years.

There are other steps you can take right away, though. The biggest involves paying down large debts, getting monthly payments under control and making sure nothing gets more than 30 days overdue. For that, you may need to sit down with an accredited counselor and work out a budget and payment plan.

The National Foundation for Credit Counseling can help you find a legitimate, non-profit credit counseling agency near you. Many of these folks will help you at no cost; some charge a small fee to help them cover expenses.

I can't for the life of me fathom why closing a credit card hurts one's credit rating. It would seem the inverse, as less credit would be available and less chance of running one's cards up if a card is closed. That would mean other creditors would be more likely to get paid!
- Elaine B., New York

This is another one of those perverse examples of the Law of Unintended Consequences. If you’re having credit problems, what could make more sense than canceling some of your accounts? As you point out, this would seem to make you’re a better credit risk because you have less chance of running up more debt.

Alas, this is not necessarily the way your banker sees it. The reason is that the banker is looking at how much debt you’re using relative to the overall amount of credit you’ve been approved for. Here’s why canceling your accounts can make you look like a bigger risk:

Let’s say you have five cards with a $1,000 limit on each one and a $500 balance on one of them. With all five accounts open, you’re using just 10 percent of your total credit limit. Now, if you close the four cards with a zero balance, you still have $500 in debt, but only $1000 in available credit. Now you’re using 50 percent of your available credit. That’s what sends off alarm bells at the credit agency.

Here’s a better solution. Take the cards you don’t use and cut them up but leave the accounts open for awhile. As you pay down your outstanding balance, gradually close off the unused accounts one by one. And if you don’t pay an annual fee on those accounts, you might want just leave them open. You never can tell when you may need a little extra credit for a rainy day.

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