Debt-to-Income Ratio (DTI): Using Financial Statements to Determine Financial Health

When a person’s personal economy is in turmoil, it is common for debt to mount while income either drops or stagnates. When the going continues to get tough, more credit may be needed either through extended lines, or new ones.

Potential creditors, such as Bank of America or the local car dealership, will offer or deny such lines based on a person’s debt-to-income ratio, or DTI.

Figuring a Person’s Debt-to-Income Ratio

The average person might think of debt as the entire amount borrowed compared to the entire amount earned. For example, if a person earning a yearly income of $90,000 has the following debts:

  • Home mortgage – $210,000
  • School Loan – $30,000
  • Auto loan – $20,000
  • Credit card – $3,500
  • Credit card – $2,500

Then it could be falsely concluded that their debt ($266,000) to income ($90,000) ratio was just under three, meaning $3 borrowed for each dollar earned.

Creditors, however, look at it in terms of the monthly obligations (also called a minimum payments) versus monthly income. Using the example above, it might look more like this:

  • Home mortgage – $1,500
  • School Loan – $300
  • Auto loan – $420
  • Credit card – $42
  • Credit card – $35

This means that the person above has a DTI of $2,297:$7,500, which is just over .3, meaning that 30% of this person’s earnings are called for at the start of the month, and he has the rest to live off of.

What is a Healthy Debt-to-Income Ratio?’s article titled “Calculating Your Debt-to-Income Ratio” notes that a lender’s maximum DTI is not to exceed .64, meaning that a person should not borrow more than $64 for each $100 earned.

It goes further to explain that a home payment should not exceed 28% of a person monthly income and that other debts should not total to exceed 36%, though there are some exceptions in cases of VA home loans.

But these numbers are subjective. For example, if one was to ask financial guru Dave Ramsey, he would strongly urge the person in the example above to utilize a debt snowball to bring his DTI down to zero.

Flaws in DTI

Debt-to-income ratios are flawed, and in a way that could prove harmful to someone calculating without the following knowledge.

The income used in DTI measurements is income before taxes. So, while the $7,500 used above may be the money that that person actually earned, he’ll only be able to access 72% of it since 28% will be taken out in federal income taxes, leaving his DTI to be $2,297:$5,400, or about .45.

Despite his high income, $45 of every $100 (at a minimum) will go to creditors.

Knowing one’s DTI is crucial for understanding short-term financial health. It can be found by keeping cash flow statements, which will help one keep a closer eye on the long-term financial health found in a balance sheet.

Where is a Good Place for Savings? With Interest Rates Declining, Where Should You Save Money?

The average interest on savings accounts in the UK has now gone below 1%, with some giving savers far less than that. When one considers inflation, this means that any cash in ordinary savings accounts is now decreasing in the real sense! So where should savers keep money in the current economic climate? Here is the advice of some experts.

Pay off as Much Debt as Possible

No matter how low the interest rate on any current debts people may have, it is better to pay it off and reduce the money in savings accounts. This is particularly true for those who have credit card and similar debts at a high rate of interest, but applies equally in the present climate to things such as mortgage debts. Experts advise keeping a small emergency savings fund, but suggest that this should not be more than three months salary; any more should be used to pay off any type of debt.

Put Extra Savings into a Cash ISA

Everyone is allowed to put £3600 per year into a cash ISA (Individual Savings Account). The interest on these is tax-free, and some are still offering a reasonable rate of interest. This should be the first place for any spare money. Many people only put money into cash ISAs at the end of the tax year, but one can do it at any time. It would be sensible to do this now, and if possible find one where the rate is fixed, before interest rates drop any lower.

Regular Savings Accounts

Some banks and buildings societies still have good rates for Regular Savings Accounts, where the saver puts in a set sum each month. The maximum is usually relatively small, around £500 at most. However the rates are usually fixed for the year, so this is worth doing now for those who have any spare cash. At the present time Barclays Monthly Saver, Close Brothers Premium gold Account, and Abbey Monthly Saver, were all offering rates over 5%.

Premium Bonds

Those with a significant amount of money in Premium Bonds usually have small wins at regular intervals, and of course there is always the possibility of winning a large amount. So this could be a sensible place to save at present, even for those who do not usually do anything approaching gambling. And since Premium Bonds are government owned, the original amount of money is always safe.

Perhaps the most important thing to do is keep an eye on savings rates and be prepared to move accounts if a better deal comes along. In the present economic situation this could make the difference between making a small gain at the end of the year, and losing money in real terms.

Higher Returns from a Stocks and Shares ISA: Investing in an Emerging Markets Fund or FTSE Tracker

The Inland Revenue has given investors the chance to benefit from tax-free savings by investing in an Individual Savings Account or ISA. It is possible to invest up to £7,200 in a stocks and shares ISA each tax year. The risk averse may wish to consider a cash ISA.

Risk Vs Reward – Higher Returns In a Stocks and Shares ISA

It is possible to keep capital safe and benefit from a steady capital growth in a cash ISA. A cash ISA won’t make anyone rich, but it is a great savings account for the risk averse. Other cautious investors wishing to take advantage of a stocks and shares ISA may wish to consider a protected capital FTSE tracker.

Just as risk is abhorrent to certain people, conservative investments are extremely unappealing to those wishing to take a chance to secure higher investment returns. Higher returns of 40-50% aren’t uncommon for those investing in an emerging markets fund.

Whilst everyone would like to enjoy tax-free savings and substantial gains in an emerging markets fund, it is important to accept that the investment capital is at risk. This means that it is vastly more sensible to invest in a variety of equity-based funds in order to spread this risk.

Different Types of Higher Risk Stocks and Shares ISA

  • Emerging markets fund. These funds seek to identify investment opportunities in fast-growing, emerging economies. These tend to concentrate on Asia and Eastern Europe;
  • Self-select ISA. It is possible for an investor to open a stocks and shares ISA with a non-advisory broker and select their own share portfolio. Some investors have created substantial tax-free savings by investing in technology shares before the boom. Others may wish to take advantage of falling banking shares;
  • Index trackers. Low management charges make a FTSE tracker a popular investment, particularly when market levels are low. Buying into a FTSE tracker can prove to be a very smart move after substantial falls for those prepared to take a longer term investment perspective;
  • Green funds. Those that don’t wish to compromise their ethics may wish to invest in green funds. Most funds marginally under-perform because of the higher ethical stance, but many still make holders of a stocks and shares ISA decent returns.

All investors have a different attitude towards risk so it is important to consider all options carefully before opting for a stocks and shares ISA. Those with a lower risk profile should normally opt for a cash ISA or capital-protected FTSE tracker ISA.

Why Choose an Individual Voluntary Arrangement? Debt Free with an IVA Debt Solution – No More Creditor Harassment

Those struggling with serious debts are able to choose between two main debt solutions: personal bankruptcy and an Individual Voluntary Arrangement. Both debt solutions result in a debt write-off, although the negative effects and percentage of debt written-off vary considerably.

What is an Individual Voluntary Arrangement?

An Individual Voluntary Arrangement is an agreement between a debtor and his creditors to write-off debt. How much debt can be written off is a matter of some conjecture, but it can be close to 75% for a small percentage of insolvents. Unlike a debt management plan, an IVA is legally binding on all creditors. The term of an IVA is normally 5 years and involves a pre-agreed monthly payment for the duration.

An Individual Voluntary Arrangement Prevents Creditor Harassment

Due to it being legally binding, it is against the law for a creditor to pursue someone for debts once they enter an Individual Voluntary Arrangement or declare personal bankruptcy. Should any creditor harassment occur, this should be reported to the Insolvency Practitioner immediately as it can be stopped.

An IVA Protects the Family Home

Unlike personal bankruptcy, an Individual Voluntary Arrangement serves to exclude the family home from the agreement. This means that someone with serious debts, such as credit card debt and unsecured loans, can continue to live in their home.

However, there is a clause drawn into almost all Individual Voluntary Arrangements that requires the insolvent to get a remortgage at the end of year 4. The terms of the IVA require that a remortgage be taken out for up to 80% of available equity although this will be based on affordability.

Professional Occupations and the Individual Voluntary Arrangement

Declaring personal bankruptcy would lead to the loss of a professional occupation. Those affected include: accountants, solicitors, government officials and financial advisors. It is believed that an Individual Voluntary Arrangement allows someone to maintain their professional status, although this is arguable.

Personal Bankruptcy and Money Lost through Speculation

Those who have lost money they have gained from unsecured loans, personal overdrafts and credit cards may find that they are affected by a Bankruptcy Restriction Order (BRO). This can mean that a bankrupt isn’t discharged for up to 15 years if he has been involved in stock trading or gambling. An IVA isn’t nearly as intrusive and doesn’t place further restrictions on an insolvent.

The IVA and Anonymity

Unlike personal bankruptcy, an IVA doesn’t result in an insolvency being published in the local newspaper and the London Gazette. An Individual Voluntary Arrangement is placed on a publicly available insolvency register, but few people tend to look at it.

An Individual Voluntary Arrangement is a suitable debt solution for those who have serious debts and are a home owner. Whilst it can help someone become debt free in 5 years, it isn’t suitable for everyone. Those with more modest financial difficulties should consider an alternative debt solution, such as a debt management plan.

Tracy Suttles on Selling Your Home

The following post is a guest post from Houston, Texas area real estate developer and entrepreneur Tracy Suttles. Tracy can be best contacted for questions, comments and concerns on Twitter at @tracydsuttles.

Homeowners make the decision to move for a variety of reasons from relocation to outgrowing their current residence or even having the desire to downsize after becoming empty-nesters. Regardless of the reason for the move, selling your home in today’s economy can be a difficult task.

Now more than ever most parts of the country are experiencing true buyer’s markets where the price of a home is no longer dictated by the neighborhood’s comp sales (houses with similar characteristics which have recently sold) but rather, by the price the buyer is willing to pay.

Preparing To Sell Your Home

The first thing a seller must do in preparation to put the home on the market is to completely emotionally divorce yourself from the house. Once the decision to sell is made, the house is no longer your home. You do not want a potential buyer to enter the house and see you and your family living there. The space must now be devoid of your personality so that the buyer can be free to visualize how his things will fit in this new space. A good first step is to take this opportunity to start a little early packing and box all the photographs you might have adorning your furniture. Photos make the space yours.

Another idea is to remove all the extraneous clutter you might have on kitchen counter tops, dressers and in any office space. The goal is make the the environment as visually clean and neutral as possible so that nothing distracts the buyers from seeing the true bones of the home.

The colors you have chosen for your walls are real indicators of your design style. You may love the way you painted your son’s room in his favorite team colors but overpowering colors do exactly that, they overpower the buyer. This might work against you when the time comes to negotiate the selling price. Take the time before you put the house on the market to make the colors of the home as neutral as possible. The money you spend before the sale can often help yield a higher sale price if the buyers feel your home is move in ready or turn key.

Maintaining a Good Relationship With Your Realtor

A good realtor will make sure that your home is priced properly, advertised well and often, and that any open houses will be conducted in a professional manner. Your realtor will also be the one to advocate for you when an offer comes in and price negotiations commence. It is often a good idea to choose a local realtor who knows your neighborhood well and who can advise a potential buyer about schools, shopping, restaurants and the like.

Perhaps the most important thing that you can do as a seller is to step back and allow the realtor to do his job. It is also one of the most difficult things to do as you are not only financially invested in your home but you are emotionally invested as well. You love your home and know how much care and upkeep you have put into it over the years. It may be very difficult to hear some of the critique that your realtor shares with you based on your home showings, but in order for the process to work smoothly, you must try to separate your feelings from the matter at hand…the swift sale of your home.

Once you neutralize your decor, price your home appropriately and have a realistic outlook for the time it might take to sell your home, you will be well prepared for the home sale price process.

Think Like an Entrepreneur — Be Your Own Boss

People over the age of 65 have a strong desire to remain independent for as long as possible. Sometimes what the elderly need is simply a helping hand. Whether it’s help in getting Christmas presents bought, wrapped and mailed out, or finding someone to drive them to the grocery store each week, the need is there and ever-growing. The following is a guest post from Avky Inc co-founder Kyle Uchitel.

Sometimes a task as simple as taking out the trash can change a senior’s attitude about staying happily independent. A drive to the pharmacy, help changing a light bulb — it sounds far too easy but can make the difference in a senior’s self-esteem and happy factor! Decide if being an entrepreneur is the goal and if it is, go to the source at Entrepreneur online to see how to start, run, and succeed in a new business.

Be Your Own Boss as a Personal Shopper or Driver

Create a service offering excellent care to clients by delivering a variety of opportunities. Being a personal shopper or driver requires a very low overhead to start. Get a business card and begin sharing it with elderly neighbors, family or friends.

Decide whether to charge an hourly fee or a combination of an hourly fee and a percentage of gas used for driving. Some business owners do both. Keeping good records is essential, both in logging in hours and miles driven per client. Clients’ sizes, favorite colors and other important details are critical for a personal shopper.

The great thing about getting started in this kind of business is that once referrals begin circulating in a neighborhood, retirement home or assisted living facility, the opportunity to work will grow and expand quickly.

Be a Professional Organizer

If this is a skill that feels effortless, then perhaps helping others organize their kitchens, closets and garages is just exactly the right position to consider. Helping others get organized at home is a skill that people will definitely pay for.

The earning potential varies on what is being done. There isn’t a standard fee structure for this kind of work, but anyone can go online to the National Association for Professional Organizers to see what the options include. Know what to charge before agreeing to complete a project.

Develop a Business Plan

This makes everything much simpler to cope with. Knowing exactly what the service provided includes, along with operating costs and pricing is necessary before starting.

And while there are many templates and sample business plans to consider, make a new business plan with the help of the United States Small Business Administration. They assist new business owners, large and small, and offer details that cover all aspects of opening a new small business.

Legal Aspects of Starting a New Small Business

Don’t forget to consider contacting an attorney and a CPA before starting out. Register the name of the new business with the appropriate state, decide whether a business license is necessary, obtain a sales tax number (if charging sales tax to clients), and obtain a federal tax ID number if incorporating is desired.

Go to the IRS to search for a free Small Business Tax Kit which offers plenty of information on getting started.

Name the Company

Think of and choose a name for the business that will be a good marketing tool, one that sends out the first impression of who the company is and what is being offered. Make sure the name hasn’t already been used by checking with Direct Incorporation in a free search. Order business cards or print out any material after registering the new name of the company in your state.

Being an entrepreneur can be as simple as offering a few days a week to serve others while gaining financial stability. Whether it’s personal shopping, driving, or organizing, there is a large group of people waiting to be served and they are willing to pay for it.

Educating Children About Finances

Even small children can be taught basic money concepts. Learning how to save and spend wisely are essential skills that will last a lifetime.

It’s never too early to talk to children about finances. Even preschoolers can learn simple money concepts while playing grocery store. Children often learn about money from their parents. How parents spend money and talk about bills in the presence of children speaks volumes. Teaching some simple lessons and techniques can help children establish positive spending and saving habits later in life.

Knowing the Difference between Want and Need

The simplest, yet one of the most important, lesson to teach children is the difference between want and need. Children often express their “need” to have something. Use this as a jumping off point for discussion. Discuss a few scenarios or create a game in an “I Spy” style. Even young children can understand that they need clothing, food and shelter, but want the latest video game.

Work on Counting Skills

Teach kids how to count money. Sounds simple, but it’s a common assumption that children automatically understand the concept of pennies, nickels, dimes and quarters. Create a work sheet to help children understand how to make, count and receive change. Allow children to pay for their own purchases at the checkout.

Evaluate Allowances

If children receive an allowance, have a reward system in place. Even preschoolers can accomplish simple tasks like picking up toys and making beds. Sit down as a family and place a monetary value on chores. Make a chart that lists names, chores and weekly allowance amounts. Discuss how an employee/employer relationship works. Most children appreciate being acknowledged and rewarded for following through on responsibilities. If the family budget is exceptionally strapped, be honest with children and discuss alternatives to receiving monetary allowances.

Open a Bank Account

Older children should be encouraged to open savings accounts. Depositing birthday and holiday money into a bank account is an excellent learning experience for children. Most bank associates are more than willing to explain types of accounts, interest rates, deposits and withdrawals with children. Whether your child opts for an online statement or monthly hardcopy, sit down and explain how to read and understand the account entries.

Teach Check Writing Skills

Even in this day of online bill pay, check writing is still a necessary skill. Point out the basic parts of a check and explain what information goes where. Have children draw a mock check, complete with check number, payee name, amount, date and memo. Describe the process of where the check goes after it’s mailed to an individual or company and what happens if there are insufficient funds to cover the check. Explain how to read and enter the necessary information into the check ledger and why it’s so important to keep it updated and accurate.

Involve Children in Garage and Online Sales

Involve children in ways to make extra money. Have a family garage sale. Ask children to choose personal items to sell. Have them put a price on each item. Have children help work the sale, negotiate prices, take money and make change. Sell items through online auctions. Children can list items, track bidding and help finalize sales.

Open communication between family members is important especially during difficult financial times. Teaching children about money, bills, finances and the economy early helps ensure they are better equipped to understand how to handle money later on in life. It’s never too early to start teaching children financial skills.

How the Federal Reserve Board Controls Money and Banking

What is money? Americans handle money every day of their lives, but few have any understanding of what money actually is or where it comes from. Money can be defined as a unit of account, a medium of exchange or a store of value, but this gives little idea of what the green stuff is or where it comes from.

Two Forms of Money: Currency and Demand Deposits

The first form of money is currency, more technically known as “Federal Reserve Notes.” A dollar bill actually is a note saying the Federal Reserve owes you one dollar. The dollar bill is also legal tender, which means it must be accepted as payment for goods or services.

The other form of money is demand deposits, which is sometimes called “checkbook money.” This is money that has been deposited in commercial banks and makes up the majority of all US money.

Material Value Behind Money and What is Behind Demand Deposits

Historically, banks were required to keep a store of gold or silver in reserve, in case someone came in and demanded “hard” money for his or her bank notes. On the basis of the reserves of gold or silver, banks lent many times the actual amount of their reserves. This worked well as long as both the depositor and the borrower didn’t come at the same time, demanding the bank’s demand deposits. By lending, banks actually created money because they lent far more than they actually had.

Today’s banks work much the same way, except there is no gold or silver behind the demand deposits. What is behind these demand deposits is somewhat hard to define. It consists of currency and coins, and deposits of commercial banks in the Federal Reserve. What this actually means is that it consists of the people’s faith in the Federal Reserve System.

What is the Federal Reserve Board and How Does the Fed Control Money and Banks?

So what is the Fed? How do these seven people in Washington affect the nation’s money supply? These seven people, making up the Board of Governors of the Federal Reserve System, are appointed by the President to rotating 14-year terms. They are not elected by the people, nor do the people have much control over the Fed’s decisions. Congress and the President also have little control over the Fed’s decisions. The Fed is basically an independent, semi-private, semi-public body. Yet it exercises almost complete control over the nations’s money.

The Fed does this in three ways. The first is by changing the legal reserve requirement. At present, all banks are required to keep in reserve at least 10 percent of their total amount of deposits. Suppose the Fed were to up this to 15 percent. Banks would then cut back on lending because more demand deposits would have to be kept in reserve. As loans were paid off, they would keep the money in reserve and stop lending until their reserves equaled 15 percent of their total deposits. If the Fed lowered the requirement, the opposite would take place. Banks would have “money to spare,” which would result in easy credit and more loans.

Another “tool” of the Fed is the discount rate. This is the rate of interest at which banks can borrow extra funds from the Fed. If the Fed raised the discount rate, it would discourage bank borrowing, which would decrease the amount of money banks would have to lend. A lower rate would result in banks borrowing more money, and thus having more money to lend.

The final and most often used way the Fed affects the money supply is through what is called “open market operations.” This involves the buying and selling of government bonds. For instance, the Fed decides to sell a certain amount in bonds to a private broker. The broker pays by writing a check. The Fed then presents this check to the private bank for payment. The private bank must, in turn, dig into its reserves. This reduction in reserves causes the bank to reduce the amount of lending. Again, by reversing operations, the opposite effect can be achieved. In order to encourage an increase in lending, the Fed can buy government bonds. The money it pays is then deposited into the reserve of the private bank, which means there is more money for lending purposes.

Through all this, the Fed cannot force people to borrow money. It can make it easier to borrow, thus encouraging it, but individuals and firms still have a choice as to whether or not they want to borrow. Banks also have the choice of whether or not they want to make money available for loans.

If there were no controls on the money supply, banks would lend money far beyond what they had in reserve. People would lose faith in their banks, and thus in the value of money supply.

Though the basis of money has changed over the years, its basic functions remain the same. These functions are kept under control by the Federal Reserve System.

What are the Advantages of Internet Banks and Online Banking?

Internet banking provides the convenience and ease of modern banking that most customers want. Nowadays, most major banks provide online banking accounts, although there are also some internet-only banks who provide all of their services online. Some of these banks provide a range of online bank accounts to suit different needs, while others specialise in one particular area, for example, savings accounts.

Online Banking Security

When it comes to managing and safeguarding one’s finances on the internet, online baking security is of paramount importance. Most high street and internet-based banks have plausible security measures in place to protect internet banking users from possible online crime and ensure that their money is safe. These include:

  • Automatic log out – if, whilst banking online, a customer inadvertently forget to log out of their account, the respective bank will automatically log him off after a short period of inactivity.
  • Secure log in process – the process for logging into internet bank accounts, although different for each bank, generally requires a customer ID and a valid password in order to log in.
  • Bank card readers- Most banks have also introduced the to use of card reader, in which online banking users would need to insert their bank card and use their PIN number to generate a unique login code. This code will then be used to access their accounts.
  • Disabling user accounts – as a security feature, after several failed attempts to log in to internet banking, most banks will automatically disable a user’s account until he or she can be verified again.

Instant and Convenient Banking System

Banking on the internet does not only allow account holders easy and fast access to their monies but it also allows them to do so at their convenience. Unlike traditional banking, which is limited to the bank’s hours of operation, online banking facilities are available any time of the day or night. This means that those who find it difficult to visit the bank within its hours of operation will have the ease and convenience of conducting a range of activities from home, including:

  • Paying bills online
  • Setting up standing orders
  • Managing accounts
  • Viewing and printing bank statements
  • Transferring money between accounts

Transferring money from one bank account to another no longer requires a long trip to the bank. Internet banking users can transfer money in a matter of minutes. Those in certain regions can also enjoy the benefit of receiving payment and money transfers a lot quicker. In the UK, for example, most major banks are part of a payments clearing scheme called Faster Payments. This scheme enables participating banks to process electronic payments in a matter of hours, typically two hours, after the transaction has been made.

Self-Service Banking Online

One of the greatest advantages of internet banking to users is the ability to manage online bank accounts when it suits them. Internet banking also proves very practical to those who travel frequently, with many banks offering international online banking facilities. Another benefit of banking on the web is the ability to check on the progress of transactions. For example, users who make a cash or cheque deposit at their bank’s self-service kiosk can go home and check that the transaction has been noted by the bank and is showing in the account.

Security of Mobile Banking Application: Mobile Banking Technology

The advent of mobile banking technology has definitely brought flexibility in the ease of banking transactions, but at the same time has increased the risk of banking frauds. Various mobile banking applications have been introduced by international and local banks throughout the world, but most of them have not been tested to the extreme against banking fraud.

Customers are definitely feeling more comfortable completing transactions through their mobile handsets, but at the same time, an awareness of the threats that mobile banking technology poses before them is necessary.

Mobile Banking Technology Threats

The increasing number of developers for software being used on smart phones has its pros and cons. The fact cannot be denied that a large number of developers has reduced the effective cost of any mobile application, but several cases have been reported where a developer has compromised with little tricks such as phishing and scanning, that ultimately capture a user’s confidential bank account information.

Security Flaws with Mobile Banking Applications

Since mobile banking applications make use of the GSM (Global System for Mobile Communication) and GPRS (General Packet Radio Service), the security of a transaction being carried out through a cell phone, also depends upon the security of data transfer through these services.

The GSM network uses A3/A8 mechanism to authenticate a cell phone over a mobile network. The most common algorithm used in this process is the COMP128, which was broken by Wagner and Goldberg in less than a day. Also, GSM uses the A5 algorithm to encrypt transmissions between a cell phone and a base station subsystem. This algorithm was also reverse engineered and cracked.

The GPRS has its flaws as well. Owing to the low processing capabilities of smart phones, the WTLS (Wireless Transport Layer Security) key sizes need to be restricted. These restricted key sizes are unable to meet the security requirements of the mobile banking applications.

A detailed version of the security flaws and their remedies was provided by Kelvin Chikomo, Ming Ki Chong, Alapan Arnab and Andrew Hutchison, in their journal titled, Security of Mobile Banking, for the University of Cape Town.

Security Measures to be Taken By Banks And Mobile Networks to Prevent Mobile Banking Fraud

The security measures that must be adopted to prevent such threats have to be divided into two broad categories viz, the steps to be followed by the bank and those to be followed by the bank’s customers.

One important step that all banks can take is to provide an official mobile banking application to its customers, that prevents them from using an application developed by another individual or entity. This helps users from falling into ‘phishing’ traps set by fraudulent developers.

Secondly, a secure and encrypted data transfer must be enabled between the user cell phone and the service provider, in this case, the telecom carrier. All further connections to the banks servers should be done through dedicated lines or virtual private networks.

Thirdly, transactions that ask for credit or debit, must pass through multiple levels of authentication such as authentication of the cell phone, the customer identification number and the secret mobile PIN or personal identification number allotted to a customer.

Fourthly, at any time during a transaction, the PIN must not be allowed to be transferred as plain text. It should be encrypted and must be interpreted only at the sending and receiving ends.

Precautions Needed While Using a Mobile Banking Application

Never keep messages on the mobile device that contain information such as login passwords sent by the bank. Make a note elsewhere and delete the message.

Secure the information needed for authentication of the cell phone over a network, such as the SIM card number and the SIM card module.

Security is essential not only for the mobile banking application but also for the cell phone. Password protect the mobile device if possible.

Choose a strong password to use the mobile application. Do not use the same passwords that are used for logging into email accounts or public forums.

Try not to flash the firmware of the mobile device with a software not trusted by the mobile phone vendor. Possible vulnerabilities in an untrusted software leave the device prone to security threats.

Various mobile software protection software such as mobile antivirus programs are available in the market. Use such software on the cell phone to prevent any malware from exploiting the cell phone’s system.

Consumer Awareness is the Biggest Asset Against Mobile Threats

According to Victor Smilgys, Tech CU’s AVP of eCommerce and a mobile security expert, “Fraudsters know that the key to their success lies in the consumer” (source: Credit Union Offers Mobile Banking Security Tips published in Dark Reading). It is the consumers who benefit from technology and it is consumers who lose to fraudsters. An aware customer is many times better than any security system. Hence, the safe use of a mobile banking application lies in the hands of an aware customer.