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The 2007 Plan To Build Your Credit–Part I: Things You Can Do Today To Improve Your Credit

admin — Sat, 07 Mar 2009 23:01:20 +0000

by Thom Fox

Most of us do not strive for bad credit. Layoffs, illness, divorce, and unexpected expenses are not things we plan on or look forward to, but they happen. If you have gone through a financial hardship and your credit rating has suffered, what should you do?

Fortunately it is not incredibly difficult to reestablish a good credit history. One of the easiest ways to get started is by obtaining a secured credit card. A secured card works just like a regular credit card, but with one difference—it requires a cash deposit. Your credit limit is usually determined by the amount of your deposit. Sometimes the credit limit is equal to the amount of your deposit; sometimes it is a bit more.

Before you use the secured card, take a moment to recall what caused your credit to suffer in the first place. Did you have an unexpected hardship, such as job loss or illness? Did you take on more debt than you could handle? Did you mismanage your money? Whatever the reasons were, remember that if they happened once, they can happen again.

The next step is to ask yourself if your situation really has improved. One of the most common traps consumers fall into is that they do not change their spending behaviors to match their new situation. The best way to get a handle on your spending is to create a budget. Once you have your budget on paper, ask yourself the following questions:

Does my income cover all of my expenses? If not, you need to either reduce your expenses or increase your income. Now is not the time to take on more debt.

Do I have any savings? If not, what kind of financial cushion do you have in case of an emergency? It is recommended that you have savings equal to four to six months of expenses. For many people, it can take quite some time to save this amount of money. Chances are good that if you are trying to reestablish your credit rating, you do not want to wait that long. There are practical issues to think about, such as having the ability to purchase a car or a home in the near future, and most of us need good credit to get those. To make sure you are comfortable taking on another monthly payment, pay yourself each month just as you would pay a creditor. Continue to pay yourself for four to six months. Start by opening a savings account with your next paycheck. By paying yourself each month, you will be saving some money and showing yourself what kind of effect new debt will have on your budget.

Can I afford to make another payment on time, every month? If there is any doubt, do not take on more credit. If you miss payments, you will continue to damage your credit rating, not reestablish it.

How much of a balance can I pay off all at once? You do not want your credit limit to exceed your ability to pay the balance in full. By keeping your credit limit down, you will never find yourself overextended. Remember, with a secured credit card, your deposit determines your credit limit, so you have some control over your credit limit. This system makes it easier to keep your balance manageable.

Once you reach the point where you are getting unsolicited credit card offers in the mail, do not apply for any unless they offer favorable terms. Just keep doing what you are doing, and over time you will see better offers as your credit rating improves.

Do not open too many accounts. Having too much available credit can hurt your credit rating as well as tempt you into old spending habits.

Maintaining a good credit rating is more than making timely payments; it requires sound money management and intelligent choices.

Thom Fox is a public speaker and personal finance author who has helped develop numerous programs for young people and adults. As an expert in the field of personal finance, he has served as a guest lecturer for the Bruce Wells Scholarship Upward Bound program at Clark University and as a panelist for the Nichols College “Cycle of Debt in America” student Q & A and the California JumpStart Coalition “Innovative Financial Literacy for Youth” conference.

Dealing With Debt Collectors

admin — Sat, 07 Mar 2009 22:53:57 +0000

by Thom Fox

All sorts of things can happen in life, many of them unpleasant. You may experience a financial setback that causes you to become delinquent on your bill payments. This situation can be stressful, especially when you have to deal with collection calls. Collectors are notoriously aggressive. No matter how many times you tell a collector that you can’t afford to make a payment or can pay only a little, the calls keep coming and coming.

Believe it or not, most collectors already have a very good understanding of your situation. An experienced bill collector knows you are stressed. What you’ll find is that some collectors are overly aggressive, bossy, and impossible to negotiate with. This type of collector will prey on your fears.

Other collectors may be polite, pleasant, and persuasive. These collectors are trying to get you to relax and let down your guard.

Many collectors are somewhere in between. They typically start off politely, but if you tell them you can’t pay, they may become more aggressive.

Let’s review some common situations:

Cardholder With No Money

This situation is perhaps the most difficult to be in because it virtually guarantees an onslaught of phone calls. Generally speaking, if a cardholder is able to make even just a partial payment, the collectors will probably not call again for about a week. If you cannot make even a partial payment, it is possible that you will get another call the very next day, depending on your state laws.

The absolute best thing someone dealing with a financial setback can do is talk to the collectors. Tell them your situation, why you cannot pay, and when you think you will be able to start paying. Under no circumstances, however, should you tell collectors about your current job, how much money you make, or even how much money you owe them. If you talk about your situation discreetly but honestly, your creditors may even offer a hardship payment plan to assist you. It is also very important not to make any promises you cannot keep. Don’t bother telling them the “check is in the mail” when it’s not, because they’ve heard that lie a million times before. Don’t set up a check by phone if you know it will bounce.

Cardholder With Some Money

If you’re in the process of getting back on your feet financially, you’re not going to be able to satisfy the demands of all the collectors. Too often, consumers try to satisfy one collector and leave nothing for the others. Ultimately, you’ll have to satisfy all the collectors, not just the one who is most persistent. Be sure to take care of your essential bills first (mortgage/rent, utilities, car loans, etc.). Work with the collectors using the funds you can put toward your accounts after your essential needs have been satisfied.

Cardholder With a Newly Stabilized Income

If you’re in the process of starting a new job, you may not be able to give the collectors the amounts they’d like. At the very least, you should send the minimum payments on the accounts that you’ve been able to pay in the past. Such a payment confirms your commitment to repaying your debt and can help protect you in the event that a creditor pursues legal action.

If you are still communicating with your original creditor and not a collection agency, you may be able to have your account brought current and stop the calls altogether. The creditors have a tool called a “re-age”. A re-age occurs when the creditor accepts a payment of a specified amount (usually 2 % of the balance) for two to three months in a row, and once these payments are made, the account is brought current with no need to make up any further back payments.

Getting behind on your debts may be stressful, but don’t add to your stress by making promises you cannot keep. Before agreeing to a payment of any kind, make sure you evaluate your entire financial situation. It’s extremely important that you make payment arrangements based on your ability to pay, and that you prioritize your obligations.
Thom Fox is a public speaker and personal finance author who has helped develop numerous programs for young people and adults. As an expert in the field of personal finance, Mr. Fox has served as a guest lecturer for the Bruce Wells Scholarship Upward Bound program at Clark University and a panelist for the Nichols College “Cycle of Debt in America” student Q & A and the California JumpStart Coalition “Innovative Financial Literacy for Youth” conference.

The 2007 Plan to Build Your Credit–Part II: Key steps you can do over time to improve your credit

admin — Fri, 06 Mar 2009 15:08:28 +0000

by Thom Fox

When you’re developing a long-term strategy to improve your credit, you need to focus on two main areas: the accuracy of your credit reports, and paying down credit card debt. By ensuring that the information contained in your credit profile is correct and by maintaining minimal debt, you reduce the amount of risk you present to lenders. The less risky a candidate you are, the lower the interest rates you’ll be offered.

Ensure your credit reports are accurate
It has been reported that close to 40% of all the credit reports in our country contain errors. This figure translates to roughly 190,000,000 incorrect reports. To ensure that your report is accurate, order a copy of each of your credit reports from TransUnion, Experian and Equifax. When you receive your reports, review the information closely. Be on the lookout for accounts that may not be yours, and check to be sure that your creditors have reported your payment history correctly.

If you find inaccurate or incomplete entries, you can take steps to correct them. You can file a dispute with the credit-reporting agency, listing the inaccurate information. Your dispute should be in writing and contain:

1. your complete name and address

2. a clear identification of each item in dispute

3. an explanation as to why you’re disputing the information

4. a request that an investigation be initiated

Be sure to include copies (not originals) of documents that support your claim. Send your letter by certified mail, return receipt requested, so you have proof that your claim was received. Also, keep copies of your dispute letter and enclosures for your records.

By law, the agency must investigate the item, usually within thirty days. During its investigation it must communicate with the information provider regarding the item in question so the provider can determine whether or not the dispute is valid. The information provider must conduct a review of the claim and report its findings to the agency. If the information provider finds that the disputed information is inaccurate, it must then notify all three credit-reporting agencies so your reports can be updated.

If the investigation does not resolve your dispute, you also have the right to add a one-hundred-word statement to your file, which must be included in future reports. At the conclusion of the investigation, the agency must provide you with a written account of the outcome. If the investigation results in any change, agencies are also required to provide an updated copy of your report.

Reduce your debt
While you’re in the process of reviewing your credit, develop a plan to pay down your debt. The following suggestions show how you can approach this task.

1. Stop using credit cards
Credit cards usually charge high rates of interest. Learn to pay by check or cash for things you want or need and stop increasing your credit card debt.

2. Request lower interest rates
If you have a good repayment history, you may be in a good position to negotiate an interest rate lower than the one you’re currently being charged. You can inform the creditor about lower offers you’ve received from other lenders and request that the creditor match or even beat those offers. Even if you’re able to get your interest rate reduced by just two percentage points, you’ll experience substantial savings over time.

3. Move high-interest-rate credit card balances to low-interest-rate credit cards
If, for example, you’re being charged 21% on one card, move the balance to a credit card charging 12%.

4. Target high interest cards
Continue to send more than the minimum payments to all of your credit cards while putting the bulk of your funds toward the card with the highest interest rate. When this account has been repaid, apply those funds to the card with the next highest interest rate. Continue this process until all of your cards have been repaid.

5. Make extra payments on credit cards
When you make your credit card payments, send an additional $5.00 or $10.00. Your debt will be paid off quicker, and you’ll save on interest charges. When using this method, your creditors may recognize that you have been sending extra payments and offer you a “payment holiday.” Stay committed to your plan and continue to make payments every month, even if the debtor claims no payment is due that month.

Thom Fox is a public speaker and personal finance author who has helped develop numerous programs for young people and adults. He can be reached at thomjfox@comcast.net

MAXED OUT—ONE MOVIE, TWO OPINIONS

admin — Fri, 06 Mar 2009 14:28:01 +0000

Maxed Out–Take I

During my career I’ve had the opportunity to meet some gifted and caring people doing their best to bring about positive change in our society. On March 14 I met a number of these individuals in an unlikely setting, a documentary premier at Harvard Law School.

“You’ll laugh! You’ll cry,” but soon you’ll come to the realization that the life stories presented in director James Scurlock’s Maxed Out constitute a Greek tragedy for our times. I wish I could tell you that it is some kind of Hollywood melodrama starring Tom Hanks and Meryl Streep, but the “stars” are just ordinary people like Janne O’Donnell and Trisha Johnson, mothers of college students whose burdensome credit card debt drove them to suicide.

Maxed Out also features interviews with former lending industry employees, debt collectors, consumers, lobbyists, and experts such as Harvard law professor Elizabeth Warren, who hosted last night’s premier and conducted the panel discussion that followed. In the film, the professor recounts a story that struck a particularly resonant chord in me. Several years ago, she made a presentation to the executives of a major credit card issuer. During her remarks, Professor Warren emphasized that the majority of American bankruptcies could be prevented simply by restricting the offers of credit to consumers already teetering on the brink of financial ruin. Needless to say, the professor’s suggestion provoked quite a hubbub among the bank’s executives, after which a lull came over the room as the president of the organization rose and proclaimed, “Those consumers comprise the most profitable part of our business!” Perhaps that’s why eight billion offers of credit went out last year, including several to a severely disabled twenty-six-year-old woman confined to a bed in a nursing home and to the aforementioned college students who committed suicide. Beaten down and bewildered by the banks’ lack of compassion, the mother of one of the deceased can ask only, “You’ve already taken my son. Isn’t that enough?”

A colleague of mine once noted, “In life, people will give you two types of information; the type that will benefit you, and the type that will benefit them.” That point is especially evident in the film as director Scurlock pursues the notion that a bank’s ideal customer is an unsophisticated consumer. Unsuspecting individuals are lured into signing contracts they can’t understand, and at terms that would make a mobster blush. Why not provide education in advance or discuss the consequences of default in plain English? Because one-third of credit card bank profits are derived from late, over-limit, zero-balance, and related fees! In our society, in which the desire for profit reigns over common sense, the only people who will pay are consumers.

In a sad commentary within the film, Robin Leach declares, “Nobody would watch ‘Lifestyles of the Poor and the Unknown,’”but I disagree wholeheartedly. Maxed Out is a must-see for anyone who uses credit; in other words, nearly all of the three hundred million people living in our country. The film accounts of political and corporate chicanery, abused and confused consumers, and serpent-like banking regulators will have you running to your local bookstore to grab one of the many personal finance books available.

We pay for what we don’t know, robbing from our future to get through today. With the challenges posed by rising healthcare costs, housing, tuition, and the prospect of a working retirement, we owe it to ourselves to become financially literate.

After the film ended, there was a panel discussion with James Scurlock, Professor Warren, and Kirsten Keefe, a housing attorney who also serves as the executive director of Americans for Fairness in Lending, a consumer advocacy group launched recently. There was a good deal of discussion about the economic impact of consumer spending, the legal interpretations of contracts, and a heartfelt comment from Professor Warren that will live with me forever. “To the lending community, consumers are merely annuities.” I hope to prevent this attitude from being confirmed in reality, and I hope you’ll join me in helping more American consumers reclaim control of our hard-earned money.

To learn more about the movie, visit www.maxedoutmovie.com.

For information regarding Americans for Fairness in Lending, visit www.americansforfairnessinlending.org

Thom Fox is a writer, author, and contributor to The First-Time HomeBuyer magazine. He can be reached at thomjfox@comcast.net.

Maxed Out–Take II

admin — Fri, 06 Mar 2009 14:16:57 +0000

You’re absolutely right, Thom. Maxed Out aims to enlighten us all to the practices of financial institutions that have contributed to higher profits for them, while showcasing the so-called “middle class,” which is going deeper into debt and even facing financial ruin.

I would add that credit card companies have also been good at attracting new full-time college students to apply and receive their first credit cards. Company approaches can be very seductive.

What teenager wouldn’t want a T-shirt, mug, or bottle opener (which, fifteen years later, I still have)? These genuine “necessities” represent items that students won’t have to use their limited allowance to purchase. Why wouldn’t you just fill out a short form to get them free?

Here’s the thing: as a college student born in this country, you may be an expert in spending, but not so much in reimbursing or paying back. You’re an expert in buying what you need the second you need it, but not so much in saving. While you may have borrowed gas money from time to time to get around with your friends, the credit card companies do not accept cheeseburgers in return, so it stands to reason when a college student is given $5,000 or more to “spend,” it might be too much of a shock to wrap around the mindset that you will have to hand it all back to the bank, plus interest–on the bank’s terms.

This point brings us to what I consider the best feature of this DVD release, the special features. “Oh no, Alex,” you say. “I don’t watch the special features. They’re wasted space on the DVD that frankly I’ve never even used!”

I understand. Many times the special-features sections are filled with hours of behind-the-scenes outtake special effects that could interest only a third-year film student; however, while the film Maxed Out places the blame for our financial woes squarely on the shoulders of credit card companies, banks, and other lenders, the five special-features segments on this disk do a good job of starting us on the path of financial education, and more importantly, empowerment, and none are more than fifteen minutes long.

Starting with the uncut version of the movie opening, “The Wise Use of Credit,” viewers get a surprisingly clear introduction on how to be responsible with credit. You may have to look past some dated references such as “Men work, so women should understand finances,” whether empowering or sexist, you decide, but the basics of handling your finances don’t change. There is even a step-by-step plan of action by Dave Ramsey on personal responsibility and becoming debt free.

The special feature section is rounded out by commentary by Harvard Law professor Elizabeth Warren on bankruptcy, a call to action by Americans for Fairness in Lending, as well as a slightly biting analysis of the components of a basic credit report by David Szwak.

On the whole, to watch only the Maxed Out movie portion of the DVD would be getting half the value of the Cloud 19-produced disk that thoughtfully and poignantly showcases the problem of unfair lending practices. Watch the first half for entertainment and shock value; watch the other half for solutions.

Alex France is a freelance writer and contributor to The First-Time HomeBuyer magazine. He can be reached at info@eotopublishing.com

Secured Credit Cards

admin — Fri, 06 Mar 2009 14:14:57 +0000

A basic step to rebuild or build your credit

If you’ve had difficulties with credit in the past, you may be finding it difficult to reestablish your credit as lending practices tighten. Don’t worry. There is a tried and true option that you shouldn’t overlook: the secured credit card. A secured card simply requires you to deposit funds into an account with the lender. In turn, the lender makes an amount of credit available to you through a credit card. The required deposit may range from a few hundred dollars to several thousand dollars, depending on the amount of credit you want to have available, but the benefits of reestablishing your credit make that amount a small price to pay.

Deposits

The deposit you’ll be required to make is the lender’s security against any default in payment. The deposit decreases the lender’s risk, because payment is virtually guaranteed. If you do fall behind on your payments, the lender can keep the deposit, which typically serves as the credit limit on the account (see below). The policies on deposit seizure vary from one institution to the next. Some creditors may take the deposit only in cases of severe delinquency, generally five to six months of late or missed payments, while other lenders seize the deposit if you miss a single payment. Another variable to consider is whether the deposit will earn interest. Some lenders allow interest to accrue on a deposit, while others don’t. Make a point of asking about interest if you’re considering a secured card.

Credit Limit

The credit limit on a secured card account can range anywhere from 50% to 100% of the amount you initially deposit, but many lenders will raise the amount of your limit as you continue to make your monthly payments on time. Some lenders actually allow for a credit limit greater than your deposit. For example, if your credit limit is set at 150% of your deposit, if you deposited $500, your credit limit would be $750.

Interest Rate

Lending is a risk-based business; the greater the risk, the higher the interest rate a consumer will be charged. Most people who opt for a secured card do so because they have no credit history or their credit report shows that they’ve had difficulty managing their credit in the recent past. The interest rates they’ve been offered on traditional cards and loans are astronomical, because they represent a higher degree of risk to potential lenders. One of the pleasant surprises of secured credit cards is that they typically don’t carry high rates, because there’s little risk that the lender won’t be paid. If you’re in the market for a secured card, shop around for the lowest rates and approach lenders who have the most reasonable terms. A good resource for locating and comparing secured credit cards is www.bankrate.com.

Fees

Like traditional credit cards, secured cards have costs associated with their use. Application fees, processing fees, and annual fees aren’t uncommon, so it’s important that you understand the potential costs that come with the card. Hundreds of secured credit card products are priced fairly, but an equal number aren’t, so you’ll have to do some research. Avoid cards with high fees, especially if a substantial amount of the deposit will be used to satisfy such fees. For instance, one particular secured card requires a $200 deposit. Consumers receive a $200 credit limit but have access to only $25 when they receive their card because of a one-time $175 “activation” fee.

Scams

The Federal Trade Commission issues warnings about unscrupulous companies looking to take advantage of unsophisticated or vulnerable consumers. One such scam identified by the agency involves ads that lead borrowers to believe that they’ll receive a credit card simply by calling a 900 number. Unwitting callers are then billed outrageous amounts, in some cases as much as $50, just for making the call. Many of these organizations require that consumers place several additional calls to complete their application process. In the end, consumers never receive a card and are left paying hundreds of dollars in telephone service fees.

Secured to Unsecured Account

Just like their more traditional counterparts, lenders that offer secured credit cards strive to build relationships with low-risk candidates. As a result, some institutions will allow its customers to convert to an unsecured credit card after the company has received a number of timely payments from the customer.

Lenders understand the challenges that people may face from time to time, and they’ve created secured credit cards as a positive step on the path back to credit worthiness. Using secured credit in combination with a commitment to reestablishing a positive payment history can help you build a stronger financial future.

Thom Fox is a public speaker and personal finance author who has helped develop numerous programs for young people and adults. He can be reached at thomjfox@comcast.net