Getting out of_debt_presentation(1)
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Getting out of_debt_presentation(1)
- 1. 1 Dealing With Debt Barbara O’Neill, Ph.D., CFP
- 2. 2 Participants will: Learn to use credit wisely Learn about the danger signs of debt Learn ways to cope with financial distress Learn about high-cost credit fees
- 3. 3 How Much In Debt Are You? Total up • Number of creditors • Individual debt balances • Total debt balance • Monthly payments for each creditor • Total of monthly payments
- 4. 4 How Much Do You Currently Owe? Creditor Outstanding Balance ______________________ ________ ______________________ ________ ______________________ ________ ______________________ ________ ______________________ ________ Total Indebtedness $_______
- 5. 5 Consumer Debt Ratios Consumer debt repayments (monthly) Take-home (net) pay (monthly) Example: $390 = 21.6% $1,800 (over the 10-15% recommended amount)
- 6. 6 Annual Debt Ratio Consumer debt + mortgage or rent (monthly) Take-home pay (monthly) Example: 390 + 720 = 1110 = 61.6% 1800 1800 (over the 40-50% recommended amount)
- 7. 7 Debt Danger Signs Getting a loan to repay existing debt Charging more each month than payments “Juggling” (rotating) payment of bills Using credit card cash advances for bills Chronically overdrawn bank accounts Depending on overtime to make ends meet Being at or near maximum credit limits Calls and letters about overdue bills
- 8. 8 3 Stages of Credit Difficulty Early - begin paying late penalties – pay minimum due – a month or 2 behind Later - bills are months overdue – difficult to pay minimum – creditors are making contact Final - court proceedings threatened/pending – wages subject to garnishment – secured items (car,etc) repossessed
- 9. 9 Strategies to Reduce Debt
- 10. 10 1. Try to Increase Income: • Adjust tax withholding on Form W-4 • Be a 2-income household/work overtime/sideline job • Increase child support or alimony • Food stamps, SSI, TANF, & other public benefits • Selling assets (second car, jewelry, etc) • Upgrading employment skills/job training programs • Charging adult children room and board • Use of tax benefits (earned income credit) • Request money loaned to others • Develop barter networks (carpooling, childcare, etc)
- 11. 11 2. Try to Decrease Expenses Trade in cars less frequently Switch to a long-distance savings plan Use only a no annual fee or low interest credit card Consider less expensive housing Install energy-saving devices or insulation Lower setting on water heater Shop at consignment and thrift stores Brown bag lunches and snacks Avoid vending machines: bring food from home
- 12. 12 3. Contact Creditors ASAP • Seek a deferment or reduced payments • Overdue payments -- add to end of loan contract • Be sure account is reported as CURRENT in credit reports Two Types of Late Payers: • People having trouble but trying to work things out • Deadbeats who have not paid their bills and ignore their creditors
- 13. 13 4.Credit Counseling • Budget counseling - nominal cost • Debt management program • Must incur no further debt & surrender credit cards • Administrative fee charged for cost of repaying bills • Will only take on clients with ability to repay debt National Foundation for Consumer Credit 800-388-2227 or www.nfcc.org In NJ, look for state-licensed counseling agencies
- 14. 14 5. Debt Consolidation Loan Take out one loan (e.g., home equity loan) to pay off a variety of creditors • Cannot not borrow your way out of debt! • May increase overall cost of loan • May pay a higher interest rate than before • May consolidate debts previously interest free • Temptation to overspend again Not a good option if you have “spending issues”
- 15. 15 6. Chapter 7 Bankruptcy (Liquidation) • Takes 4 to 6 months • Erases all obligations except: - child support - student loans - alimony - federal and state tax • Right to future income is retained • Surrender to trustee all assets that are not legally exempt • In NJ you can choose either federal or state bankruptcy exemptions
- 16. 16 7. Chapter 13 Bankruptcy (Reorganization) • Plan approved by court to repay all or part of debt within 3-5 years using future earnings • Creditors must get at least as much as would with Chapter 7 • Debtors must live within the plan • Debtors allowed to keep property; make monthly payments to trustee to pay creditors • Best for those with steady income & equity in home or car
- 17. 17 8. Owing the IRS Make contact with IRS---do NOT ignore them • Contact them well before April 15 deadline • Explain financial situation • #1 Rule: Penalty for not filing tax return is much greater than penalty for not paying tax • late filing: 5% of taxes for each month unpaid + interest • late payment: .5% for each unpaid month + interest
- 18. 18 9. Voluntary Surrender If unable to make payments: • return secured asset to creditor OR • Obtain creditor’s permission to sell the asset – Saves on repossession fees – Avoids repossession being listed on credit record – Sometimes creditor will accept asset as payment in full For a house, the term for voluntary surrender is “deed in lieu”
- 19. 19 10. PowerPay (Debt Acceleration) Start by sending each creditor whatever amount was previously sent As soon as you pay off one debt, apply the monthly payment amount (e.g., $30 to Sears) to a remaining debt Continue until all debts are repaid Greatest savings generally occur by repaying highest-interest debt first (e.g., department store credit cards)
- 20. 20 More About PowerPay Analyses available through Rutgers Cooperative Extension Users complete worksheet with the following data: • Name of creditors • Current balance • Monthly payment • Interest rate charged (APR)
- 21. 21 More About PowerPay II Analyses assume no additional debt Can also choose to repay debts in order of lowest balance or shortest term first Can do analyses with • optional extra monthly payments (e.g., $50/mo) • optional one-time lump sum payments Calendar shows the amount paid to each creditor
- 22. 22 Credit Card Payback $1,000 Balance ($20 Minimum Payment) Annual Interest Rate Credit Card Features 4% Minimum Monthly Payment 2% Minimum Monthly Payment 19 % APR # Payments Total Paid 60 $1,467 99 $1,987 15% APR # Payments Total Paid 55 $1,355 79 $1,584 13% APR # Payments Total Paid 53 $1,282 73 $1,463
- 23. 23 Credit Card Fees and Traps
- 24. 24 The Minimum Payment Trap Credit card minimum payments are calculated as a percentage of outstanding balance (usually average daily balance) Typically 2% to 3% of amount outstanding The lower the percentage required… • the LESS you’re required to pay per month • the MORE a debt will cost you over time
- 25. 25 Low Minimum Payments Beginning Balance APR Monthly Payments Total Interest Paid Months to Pay Off Balance $2,000 15.04% 2% $2,205.63 169 (14 yrs.) $2,000 15.04% 5% $589.74 65 (5.5 yrs.) $2,000 15.04% 10% $269.31 36 (3 yrs.) Always pay more than the minimum: It will save you a lot of money.
- 26. 26 Example: $5,000 balance and 17% Interest Rate 2% minimum payment $100 this month ($5,000 x .02) $11,304 total interest 40 years to repay 3% minimum payment $150 this month ($5,000 x .03) $4,296 total interest 18 years to repay 1% difference costs $7,008!
- 27. 27 Low Minimum = High Cost A credit card with a low interest rate and a low minimum payment can cost MORE THAN a card with a high interest rate and higher monthly payment Assume a $5,000 balance: • 15.9% rate and 2% minimum payment costs $9,538 total interest and takes 41 years to repay • 19.8% rate and 3% minimum payment costs $5,858 total interest and takes 21 years to repay
- 28. 28 Pay More Than the Minimum When you send in more than the minimum required payment, you: • Shrink the outstanding balance • Reduce the amount of interest owed • Cut the time you’re in debt
- 29. 29 Small Payments Add Up: 17% Interest and 2% Minimum $5,000 Balance • Extra 10 cents/day: save 11 years and $2,257 • Extra 25 cents/day: save 19 years and $4,148 • Extra $1.00/day: save 30 years and $7,624 $10,000 Balance • Extra 10 cents/day: save 12 years and $3,060 • Extra 25 cents/day: save 20 years and $5,970 • Extra $1.00/day: save 35 years and $12,615 Interest savings can exceed amount originally borrowed!
- 30. 30 Late Fees Are Increasing Consumers have less time to pay bills Leniency periods are reduced or eliminated Earlier payment posting deadlines Buyer Beware: Some credit cards with low interest rates charge high “nuisance” fees
- 31. 31 Over-The-Limit Fee Fee charged for exceeding credit limit Even though creditor approves purchase Charged monthly until balance drops below
- 32. 32 Transaction Fees Fee charged each time a credit card is used Example: 50 cents per charge Most common transaction fees are for • cash advances • balance transfers
- 33. 33 Penalty APRs High punitive interest rates Lenders profit from borrowers’ mistakes 2000 survey of 100 credit cards: • Average penalty APR was 22.84% • 8% higher than average APR for purchases Can be triggered by just one late payment
- 34. 34 Common Penalty APR Triggers: Minimum payment just one day late Two consecutive payments missed Two late payments within 6-month period Late payment to another creditor Account balance over the limit Change in cardholder’s financial situation
- 35. 35 Tiered Pricing Risk-based interest charges Range of possible APRs quoted • One example (2000 survey): 7.99% - 20.24% APR determined by applicant’s credit score Lower scores (subprime) pay higher APRs APR unknown until consumer gets card
- 36. 36 Cash Advances Cash loans from a credit card Expensive way to borrow money • No grace period • Cash advance transaction fee • Higher APR than for purchases • May use different method to calculate interest
- 37. 37 Punitive Policies “Inactivity” fees for: • not using credit card within specified period • using card less than specified number of times • charging less than a certain dollar amount Penalty for paying bill in full on time • Target: “convenience users” who do not pay interest
- 38. 38 Look For a Credit Card With A regular (non-teaser) APR of 15% or less A grace period of at least 25 days Late & over-the-limit fees of $20 or less No annual fee No penalty APR or a rate less than 20% Source: The Credit Card Trap, The State PIRGs
- 39. 39 Credit Card Disclosures-Front Introductory or promotional APR • Example: “1.9% APR with a balance transfer” Advertised credit line • Example: “Credit line from $5,000- $100,000” Special offers and privileges • Example: “Year-end summary of charges” Application deadline date • Example: “For transfers until April 1, 20xx”
- 40. 40 Credit Card Disclosures- Back “Schumer Box” required by law to include: • Actual APR (after introductory period) • APR formula (if rate is variable) • Length of grace period • Amount of annual fee, if any • Minimum finance charge • Transaction fees (e.g., cash advances) • Method of computing balance for billing • Late payment fees
- 41. 41 Online Credit Card Resources www.truthaboutcredit.org • Information and balance payment calculator www.creditalk.com • User-friendly credit card information www.bog.frb.fed.us/pubs/shop • Semi-annual credit card survey results www.consumer-action.org • Annual credit card survey results
- 42. 42 Credit Repair Scams “CREDIT PROBLEMS ? NO PROBLEMS!” “ERASE BAD CREDIT! 100% GUARANTEED!” “REMOVE BANKRUPTCY AND LIENS FROM YOUR FILE” “REPAIR AND REBUILD YOUR CREDIT FILE” “CREATE A NEW CREDIT IDENTITY LEGALLY”
- 43. 43 Credit Repair Companies Wear Many Disguises Many of these companies call themselves-- Credit Advisors Credit Rating Correction Services Credit Consultants Credit Doctors or “Debt Doctors” Credit Loan Consolidators Credit Clinics
- 44. 44 Credit Repair Can’t Be Done!
- 45. 45 Reporting Negative Information • Late payments: up to 7 years from payment due date • Chapter 7 bankruptcies: up to 10 years from filing date • Job paying over $75K and loan/life insurance over $150K: no time limit
- 46. 46 Know The Warning Signs Advance payment required Legal rights not explained Advice to create a new identity Advice to file frivolous disputes
- 47. 47 Credit Report Review for accuracy every 2-3 years and before making application for a large loan Credit File Request Form (handout) FREE once a year to all NJ residents
- 48. 48 Questions? Comments? Experiences? For additional financial resources, visit www.rce.rutgers.edu/money2000
Notas do Editor
- In recent years, many credit card issuers have lowered minimum required monthly payments from 4% to 5% of the outstanding balance to as low as 2%. This chart shows how you can pay a lower minimum monthly payment (i.e. 2% of the outstanding balance, instead of 4%), and, in the end, pay as much in interest costs on a13 percent credit card (with a 2% minimum) as on a 19 percent credit card (with a 4% minimum). Compare the interest owed at a 19 percent rate making 4 percent minimum monthly payments (top left) with a 13 percent rate making 2 percent minimum monthly payments (bottom right). The amount is virtually the same. The morale of the story is that low monthly payments = high credit card costs. Also compare the same interest rate with two different minimum payments. For example, the cost at a 19 percent APR with a 4 percent and a 2 percent minimum monthly payment ($1,467 versus $1,987). The total cost of credit at the lower (2%) minimum payment is over $500 more. You also pay interest for over three years more (99 months of payments - 60 months) with a 2 percent minimum payment. Also try to avoid offers to “skip a month” in payment. Interest still accrues and you have the same consequences as the example.
- Here is another look at how low minimum payments affect your financial well-being. It is based on a $2,000 beginning balance and a $20 minimum payment or the minimum required percent of the balance (e.g., 2%), whichever is greater. The APR of 15.04 percent is the average non-introductory, non-penalty APR found in the state Public Interest Research Group’s (PIRGs) 2000 survey of 100 credit card offers. Low minimum monthly payments are designed to sound attractive to consumers, but, they encourage cardholders to pay more in finance charges as the length of time required to pay off a balance increases significantly. Credit card companies have decreased minimum payments in recent years from the historic industry standard of 5 percent to a current standard of 2 percent to 3 percent. Look at the difference in total interest paid if a consumer makes a minimum payment of 2 percent, 5 percent, or 10 percent [of the outstanding balance, beginning with $2,000 owed]. The difference between 2 percent and at 5 percent is a whopping $1,615.89 ($2,205.63- $589.74). If your make a 10 percent monthly payment, you would save $1,936.32 ($2,205.63- $269.31) and have the debt paid off in 3 years versus 14 years. The moral: always pay more than the minimum. It will save you a lot of money.
- There are several reasons why more consumers are paying late fees and why credit card issuers’ income from these fees has increased dramatically. First, consumers have less time to pay their bills. According to the 2000 study of 100 credit card offers by NJPIRG, companies have shortened the length of time between arrival of monthly statements and the payment due date. The interval between getting a bill and sending in payment may be less than two weeks. This increases the chances of a late fee being assessed. Second, leniency periods have been reduced or eliminated. A leniency period is the amount of time after the due date (e.g., 10 days) that a payment can arrive before the company assesses a late fee. In the past, credit card companies often had leniency periods of 5 to 15 days. Today, according to NJPIRG, nearly two-thirds of credit cards impose late fees immediately. Third, credit card companies have moved posting deadlines to earlier times of the day, such as 8 am or 10 am [Note: these posting times are usually found in the “fine print” of a credit card agreement]. Since mail is rarely delivered this early, the net effect is that payment must be received the day before it is actually due to avoid a late fee. Some credit cards with relatively low interest rates (e.g., 12% to 15%) charge high “nuisance fees.” Thus, it is important to understand all credit card terms before applying for a credit card. The interest rate is not the only factor to consider. It is also important to avoid triggering charges such as late fees.
- An over-the-limit fee is a fee charged for exceeding your credit limit. With credit cards, borrowers are given a maximum credit line (e.g., $1,000) against which they can borrow. This credit line is noted when someone is first sent a credit card and also appears on their monthly statement. It can be increased by a lender or upon a consumer’s request. For example, a person with a $1,000 credit line may have charged $100. Their credit card statement would list these two figures and the fact that $900 of the credit line is available In past years, a creditor probably would have not allowed a credit card user to charge over their credit line. Their purchase would simply have been denied. Today, most creditors approve purchases over the limit but charge an over-the-limit fee every month until the outstanding balance falls below the credit limit. According to the 2000 survey of 100 credit cards by NJPIRG, every credit card issuer charged an over-the-limit fee. The average over-the-limit fee was $27.61 and fees ranged from $15 to $35 per offense (i.e., for every month that the balance is over a borrower’s credit line).
- Transaction fees are fees charged by some credit card issuers each time a credit card is used. The more frequently you use a credit card, the more transaction fees you pay. For example, a typical transaction fee is 50 cents per charge. If you use your credit card ten times in a month, your statement would show a total of $5.00 of transaction fees. There are also transaction fees for taking advantage of certain features of a credit card. Two common credit card transaction fees are fees charged for cash advances (a cash advance is where you obtain cash by charging the amount received to your credit card) and fees for transferring a balance from one credit card to another.
- Penalty annual percentage rates (APRs) are punitive interest rates that can be triggered by the slightest infraction (e.g., one, one day late payment). Often, these rates exceed 20%. Lenders increase borrowers’ interest rate significantly and profit from their mistakes. Sometimes a penalty rate remains in effect indefinitely while, in other cases, it is applicable only for a specified period (e.g., until a borrower makes a certain number of on-time payments). As always, a credit card issuer’s policy is spelled out in the “fine print” of their credit card disclosure statement. According to the 2000 survey of 100 credit cards by NJPIRG, the average penalty APR was 22.84% for accounts in “bad financial standing.” This rate is 52% higher than the average (non-penalty, non-introductory) APR for purchases (15.04%). Penalty rates ranged from 13.99% to 36.25% Penalty APRs can be triggered by just one late payment or, in some cases, even a late payment to another creditor. Thus, consumers whose payment is late get charged twice: once with a higher APR and again with a late fee. The increased cost is significant over time. According to NJPIRG, a $2,000 balance on a credit card with a regular 7.99% APR and 3% minimum payments would cost $466.73 in interest and take 84 months to repay. If the rate gets jacked up to a penalty APR of 24.90% (16.91% higher than the regular APR), the balance would take 169 months to repay and cost $3,314.87.
- Penalty annual percentage rates (APRs) are intended to be punitive and are generally much higher than regular APRs, sometimes as much as 12% or more higher. Credit card companies have many reasons, or “triggers,” for raising a borrower’s interest rate to a penalty APR. Among the most common are: A late minimum payment, sometimes just one day late Two consecutive payments are missed Two late payments within a 6-month period A late payment to another creditor. Many credit card companies periodically review existing customers’ credit files to check for changes in financial status. If a cardholder makes a single late payment to Company X, Company Y could charge them a penalty APR (even if payments to Company Y were always on time). Account balance over the limit Negative change in a cardholder’s financial situation (e.g., increased debt level)
- Tiered pricing is a trend that is catching on with credit card companies. It is also referred to as “risk-based pricing.” As noted in Module #5 on Subprime Lending, borrowers who have had one or more credit “blemishes” (e.g., late payments) generally pay more for credit than those with a good credit history. According to the NJPIRG report, The Credit Card Trap: How to Spot It, How to Avoid It, credit card companies that have adopted a tiered pricing structure will often quote a wide range of possible APRs rather than giving a firm quote to an applicant. According to a 2000 survey by Consumer Action, one-third of credit card issuers are quoting ranges of APRs. One bankcard that was surveyed had a particularly wide range from 7.99% to 20.24%. Credit card companies assess an applicant’s credit history and score and assign an APR accordingly within the advertised range. Applicants with lower scores pay higher rates and those with better scores pay less. The biggest problem with tiered pricing is that consumers don’t know what interest rate they’re getting when they apply, so they can comparison-shop. If they apply for a credit card and get unattractive terms, they have to cancel the account rather than simply not apply in the first place. It’s a lot of unnecessary hassle. In addition, if you decide to simply not use an unattractive tiered credit card, having a number of open credit lines in one’s credit file can be viewed negatively by potential lenders and lower your credit score.
- Cash advances are another trap for the unwary. Basically, they are cash loans made with a credit card. In other words, instead of using a credit card to make a purchase, a cardholder uses it to receive a cash loan. Often cash advances are made with “convenience checks” that are sent to cardholders. These are checks tied to a person’s credit card account. If a cardholder uses a check, the amount of the check is posted to their credit card account as a cash advance and cash advance policies apply. Cash advances are an expensive way to borrow money. There are four reasons for this: There is generally no grace period. Unlike grace periods for new purchases by cardholders who pay their bills in full and have no outstanding balance, interest accrues immediately on credit card cash advances. Thus, even if someone pays their bill as soon as it arrives, they will pay some interest. Most credit card companies charge transaction fees. The fee is a percentage of the transaction amount, often with a minimum fee (e.g., $10), no matter what the amount of the cash advance. The annual percentage rate (APR) for cash advances is often higher- sometimes much higher- than for purchases. For example, a card issuer might charge 10.9% for purchases and 19.8% (nearly double) for cash advances. To add further insult to injury, some creditors use a different balance calculation method for interest on cash advances than they do for purchases.
- Late fees and over-the-limit fees are punitive fees that affect “bad” cardholders (e.g., those with late payments and high balances). This slide describes punitive fees that affect “good” cardholders (e.g., those who are not late with payments and have low or no balances). Increasingly, credit card issuers are penalizing good behavior. For example, some are charging punitive fees to infrequent credit card users or cardholders who pay bills in full each month to avoid finance charges. Creditors claim that they are losing money on so-called “convenience users” who do not pay interest (Note: they still make money from fees and/or from charging merchants a fee based on a percentage of the amount cardholders charge). Policies vary among creditors, so it is important to read “the fine print.” Some credit issuers charge a fee when cardholders don’t use their credit card at all within a specified period (e.g., six months). Others charge if the card is not used a certain number of times within a specified period or if charges total less than a certain dollar amount (e.g., $3,000 per year). A few credit cards also charge a fee to cardholders who pay less than a certain amount (e.g., $25) of interest annually. As always, it is important to read “the fine print” to determine what penalties, if any, are charged.
- Shop around for a credit card. Terms and costs vary widely so it is important to compare offers to get the best deal. Draw yourself a grid and compare the features of at least three different credit cards side by side. Listed below are five things to look for in a credit card: A regular (non-teaser) APR of 15% or less. This is especially important for the approximately 56% of American consumers who do not pay off their balances each month (Source: Smart Money, “Fantastic Plastic,” May 2001). A grace period of at least 25 days. Also known as a “free period,” this is the period of time during which you can avoid a finance charge by paying your current balance in full before the due date shown on your statement. On most credit cards, grace periods apply only if the previous month’s balance is paid in full. Grace periods can range from 0 to 30 days. If there is no grace period, the card issuer will impose a finance charge from the date you use your credit card or from the date a transaction is posted to your account. Late and over-the-limit fees of $20 or less No annual fee (Hint: avoid affinity cards, such as those from airlines, which tend to offer credit cards with annual fees. Often the costs exceed the benefits). No penalty APR or a rate less than 20%
- These next two slides will discuss types of information that are disclosed to consumers. Some disclosures are required by law (back page) and some are done for marketing purposes so as to attract customers (front page). This slide describes information that is typically found on the front page and/or envelope of a credit card offer. This information is meant to entice consumers into applying for credit. Often this information is in the form of a letter that describes the benefits of a particular credit card. Information that is generally included on the front page of a credit offer includes: A low introductory or promotional APR (also known as a “teaser rate” because it does not last long). For example: “1.9% APR with balance transfers” or “5.9% APR for six months.” An advertised credit line, usually preceded by the words “credit line up to” or indicating a range of possible amounts. For example: “Maximum credit line of up to $20,000” or “Credit line from $5,000 to $100,000.” A description of special offers, services, and privileges offered to cardholders. For example: “Year-end summary of charges.” Application deadline date. Most credit card offers have stated expiration dates or deadlines by which an application must be returned. For example: “For balance transfers until April 1, 20xx.”
- The back page of a credit card offer contains the most important information, such as the amount and type of fees that are charged and the annual percentage rate (APR) and how it is calculated. By law, a disclosure chart (also known as a “Schumer Box,” named after the sponsor of the legislation) must include the following nine items: Actual APR after the introductory rate expires. Example: “7.9% introductory rate for six months. Thereafter, 17.9%.” APR formula if the rate is variable. Example: “The rate is determined by adding 8.4% (or 14.9% for the non-preferred rate) to the Prime Rate as published in The Wall Street Journal.” Length of grace period. Example: “Not less than 25 days.” Amount of annual fee, if any. Example: “XYZ Airline Visa, $55 annual fee.” Minimum finance charge. Example: “$.50, if a finance charge is imposed.” Transaction fees. Example: “Transaction fee for purchases: None; Transaction fee for cash advances: 3% of each cash advance ($5 minimum).” Method of computing balance for billing. Example: “Average daily balance (including new purchases)” Late payment fees. Example: “$29 late fee” Over-the-limit fees. Example: “$29 over-the-limit fee”
- This slide shows the URLs for four credit-related Web sites. Students are encouraged to visit these sites to obtain additional information about the wise use of credit and credit card features. www.truthaboutcredit.org is the State PIRG’s credit card education Web site. It has consumer information, advice for students, a balance payment calculator, and links to other online credit resources. www.creditalk.com is another helpful Web site. It contains user-friendly information about credit card terms. www.bog.frb.fed.us/pubs/shop is the Federal Reserve Board’s Web site. It includes results of a semi-annual survey of credit card terms and information about understanding credit card solicitations. www.consumer-action.org is the Web site of Consumer Action, a non-profit consumer advocacy organization. It includes information about their periodic surveys of credit card terms.
- Credit repair claims are on the rise. Advertisements for credit repair businesses are found in the classified sections of magazines and newspapers (review list of marketing pitches on the slide). Television infomercials also attract debt-stressed consumers. Radio announcements often provide 900-telephone numbers to call for additional information. Calls to 900 numbers result in very expensive telephone bills. Firms that claim that they can restore consumers’ creditworthiness for a fee exploit consumers experiencing financial difficulties. Many are outright scams (definition: an illegal operation involving money). A scam is a fraudulent business scheme. Sometimes credit repair companies are outright frauds. These companies swindle consumers by guaranteeing to repair their credit in exchange for a sum of money. Thirty-five states have laws governing the activities of credit repair firms. New Jersey is not one of them. However, a tough federal law, called the Credit Repair Organizations Act, became effective in 1997 and offers many protections to consumers.
- This slide shows some of the common phrases used in advertisements for credit repair organizations. Note that some of these terms attempt to provide an “air of legitimacy” by using “business-like” words like “consultant” and “advisor” or by making indirect references to the medical profession (e.g., clinic, doctor). Advertisements for credit repair firms often make it sound like there are legitimate ways that companies “in the know” can erase bad credit ratings. In addition, they can give the impression that “you can beat the system” with their assistance. They claim to have “insider” knowledge of ways to remove negative information. In reality, only time can erase an accurate, negative credit history. You simply need to wait the seven or ten (Chapter 7 bankruptcy) years necessary for negative information to drop off. In addition, technological improvements by credit bureaus (e.g., Experian, Equifax, Trans Union) and provisions in the Credit Repair Organizations Act make it difficult, not to mention illegal, to “hide” a poor credit history.
- According to the Do-It-Yourself Credit File Correction Guide from the National Center For Financial Education, credit repair can’t be done. In fact, it simply does not exist and consumers are wrong to expect that their debt problems can be erased. They can’t. That is why it is so important to maintain a positive credit history. Accurate and timely negative information (e.g., late payments) cannot be removed from your credit report, even if you have paid off a delinquent debt. A once-delinquent account that has been paid can remain in the credit bureau’s files up to seven years from the last scheduled payment. For example, if a payment was due in January 2001 and finally paid in July 2001, the late payment can remain in a person’s credit file until January 2008. Hence, there is no such thing as “credit repair” because credit files can only be changed over time or if information is incorrect (e.g., they include someone else’s data). Credit repair companies can’t do anything to improve your credit report that you can’t do for yourself at little or no cost. In addition, many of the strategies that they suggest are illegal.
- Below is a summary of regulations regarding the reporting of correct, negative information: Late payments can be reported up to seven years from the date of the last scheduled payment (i.e., the date that the late payment was originally due). A Chapter 7 bankruptcy can be reported for up to 10 years from the date of filing. Successful Chapter 13 bankruptcies are generally reported for 7 years. Information reported because of an application for a job with a salary of $75,000+ has no time limit. Information reported because of an application for $150,000+ of credit or life insurance has no time limit. Information concerning a lawsuit or a judgement against you can be reported for seven years or until the state statute of limitations expires. In New Jersey, the time period allowed to collect a court judgment is 20 years.
- Now that you’ve learned about some of the ways that credit repair organizations operate, let’s summarize with a list of “red flags,” or warning signs, of a fraudulent credit repair scheme. Beware of companies that: Want you to pay in advance for credit repair services before any services are provided. Do not tell you about your legal rights or what you can do for yourself for free (e.g., negotiate the reporting of payment information with creditors). Suggest that you try to invent a “new” credit identity by applying for a Taxpayer Identification Number to use instead of your Social Security Number. Advise you to repeatedly dispute information in your credit report. Remember, if you follow illegal advice obtained from a credit repair organization and commit fraud, you may be subject to prosecution.