Funny Money Friday: Credit Song

Money doesn't have to be boring! Each week, CreditBloggers.com takes a look at the lighter side of the personal finance world in a series called Funny Money Friday.

Being a huge credit geek, I love it when credit gets a mention in mainstream culture. It's becoming more and more common to see story lines about identity theft, credit scores, predatory lending, etc. on TV sitcoms, movies and music.

One of my favorite credit mentions right now is from British pop singer, Lilly Allen. The song, Everything's Just Wonderful is super catchy and the refrain goes like this:

I wanna get a flat I know I can't afford it,
It's just the bureaucrats who won't give me a mortgage,
Well it's very funny cos I got your #$*&@%&^ money,
And I'm never gonna get it just because of my bad credit
Oh well I guess I mustn't grumble,
I suppose that's just the way the cookie crumbles.

Lilly, we're here for you if you need any help with your bad credit! Just send an email to tidbits@credit.com. Happy Friday!

When the Bill's Not In the Mail

A consumer recently wrote me about a problem with her Sears/Citibank account. Her story has an important warning I want to share with everyone.

This woman I'll call "Shelly" had a payment due on her account March 14, 2006, but she didn't receive a billing statement for it. She realized on  March 17, 2006 that it hadn't arrived so she called the card issuer immediately, and paid it by phone. She told me she did not receive a statement for that month because it was sent it to a wrong address, though the issuer had been sending it to the correct address for over a year, and she did not change her address.

The next month her interest rate rose from 5.9% (with a payment of  $135.00 a month) to 32% interest (with a payment of over $300). She couldn't afford the higher payment and tried to negotiate it down. She continued to pay $135/month which resulted in fees and penalties. Her balance is now over $11,000. (It was $9000 when the mess started.)

I contacted the card issuer on Shelly's behalf, and they are looking into her problem.

I am also sending Shelly a copy of Managing Debt for Dummies, a new book that just came out in the Dummies series. Written by long-time consumer advocates and attorney John Ventura and Mary Reed, it offers straightforward smart advice for digging out of that hole and getting ahead. Like Ventura and Reed's other books it gives the straight scoop on your options and how to make sense of them.

But back to the story...

If Shelly is correct in her assertion that the bill was mailed to the wrong address, and she made good on the payment immediately when she noticed it, a 32% rate hike seems unnecessarily harsh. I don't think an issuer should more than quadruple the interest rate because of a mistake that appears, at least in good part, to be their fault. (Actually I think there are few reasons for a 32% rate!)

The good news is there is a federal law that comes into play here. Under the Fair Credit Billing Act, if an issuer doesn't send your billing statement (provided you gave adequate notice of a change in address) then you can dispute the matter under that law. If you write to the issuer within 60 days of the date the statement should have been mailed to you, then the issuer can't charge interest as a result of the error.

However, Shelly did what most of us would do -- she called the issuer. But phoning does not preserve your rights under the Fair Credit Billing Act. Only a letter sent to the billing errors address on her statement would have sufficed.

Shelly tells me she did write, but after that all-important 60-day window closed. Had she written the issuer promptly, she would definitely have a been protected against extra interest charges.

Hopefully Citibank will do the right thing and work out the problem with Shelly. I'll let you know what I hear from them.

In the meantime, keep in mind that if you have any kind of billing dispute with your credit card, always follow up right away in writing, send the dispute certified mail, and keep a copy of your correspondence for your records.

Update: Citibank emailed me and let me know they reversed the additional interest charges on Shelly's account. Great news for her, and thanks to Citi for doing the right thing!

Is Your State Selling Your Identity?

How would you feel if you found out your state was selling your name, address, and Social Security number to anyone with an Internet connection, a credit card, and six bucks?

Well, if you live in California, that's exactly what's been happening. If you don't, don't assume you're in the clear — plenty of other states are doing the same thing.

In 2004, a website run by the California Secretary of State's office began selling public documents containing names, addresses, Social Security numbers, and in some cases even the signatures of people who had applied for secured loans — in other words, people who put up collateral as part of their loan application process. Tens of thousands of Californians are in that category.

That finally came to an end just last week when California Assembly member Dave Jones blew the whistle on the practice and demanded it stop. "For the past three years, the state has been in the data broker business," said Jones. "This is a gold mine for identity thieves."

Soren Tjernell, senior legislative assistant to Assemblyman Jones, had been hunting down breaches of personal information by public officials. Tjernell got a tip that the Secretary of State's website might be a good place to start, so he paid his six bucks and gave it a try. The first document he downloaded contained the names, addresses, SSNs, and signatures of two individuals — a real bargain at three dollars an identity. "It was wickedly easy," Tjernell told me.

The documents in question (known as Uniform Commercial Code, or UCC forms) are checked by lenders and title insurance companies to make sure secured loan applicants aren't using the same collateral for more than one loan. "The SSN is a way to distinguish among all the Dan Smiths out there," notes Tjernell. For their purposes, however, the last four digits of the SSN work just as well.

Jones has introduced California Assembly Bill 1168, which would let the Secretary of State's office reject documents submitted with SSNs and require local governments to black out the first five digits of SSNs on records released to the public. In the meantime, at Jones' prompting, California Secretary of State Debra Bowen has blocked online access to the UCC documents and will redact all but the last four digits of any SSNs before releasing them.

"We wanted to strike a balance between legitimate use of public records and personal privacy," says Tjernell. "We're not trying to block information on government decisions, or even personal transactions. But the right to privacy is in the Constitution."

All this matters to you for a couple of reasons. Obviously, if you've applied for a secured loan in California, it's one more reason to be vigilant against identity theft and fraud. That means checking your credit report regularly for signs of abuse, monitoring bank and billing statements closely for charges you can't explain, and protecting yourself against mail theft, mail redirection, and other favorite moves in the identity thief's playbook. Unfortunately, you have no way to know whose hands your data might be in or what they might do with it. That makes caution the only reasonable course.

This is also one more sign of how utterly broken the system is. The fact that we still use Social Security numbers as an identifier is appalling. Using knowledge of your SSN (or any portion of it) as authentication — that is, to give you access to things like bank, phone, and credit card accounts — is just plain stupid.

Which brings us to those last four digits. As long as Verizon, T-Mobile, and thousands of other companies accept them as proof of identity — and they do — revealing them to the public punches a hole in the wall protecting your accounts from abuse. They may not be enough to open a new line of credit in your name, but they can still compromise your accounts and enable identity thieves to build on the sensitive information they already have. Businesses that rely on them need another system, even if it's less convenient — one that doesn't expose their customers to the risk of identity theft.

Tjernell acknowledges that Jones' bill doesn't address the whole problem. "We have wrestled with this issue. Obviously we need to stop using those last four digits as an identifier. We haven't figured that part out yet." Meanwhile, if AB 1168 makes it harder for criminals to plop down six bucks and open a new line of credit in someone else's name, it'll be a big step in the right direction.

Have you applied for a secured loan in California? Does your state have your identity data up for grabs? Who should take responsibility when a data breach leads to a stolen identity? We'd like to hear from you in our comments below.

Decoding Bank of America's Latest Credit Card Fee

The headaches have been nearly endless since the day that my MBNA credit card switched over to Bank of America. There were problems logging in to my account online. Readers reported dramatic increases in their annual percentage rates. Now, I received a long letter from Bank of America full of new fees and hidden catches.

Bank of America sent out this three page "Important Amendments to your Credit Card Agreement" letter over the last few weeks. Most customers probably threw it directly into the trash. But if you read closely, you would see that Bank of America has implemented a new minimum finance charge.

Translation: Unless you pay your entire Bank of America credit card balance in full each month, you'll be charged a minimum finance fee of $1.50 or a full finance charge on the balance, whichever is greater.

Most credit card issuers (including Citibank and Capital One) only charge a minimum finance fee of $0.50 each month. Bank of America's change represents a pretty major fee increase.

Below the minimum finance notice are instructions for rejecting this change. According to the notice, you can send your rejection before May 1 in a letter to Bank of America - P.O. Box 15718 - Wilmington, DE 19850. However, their customer service team told me that all this rejection does is temporarily freeze your account. Once you use your card for a purchase again you virtually "accept" the change and are stuck with the fee all over again.

This lovely letter also included a notice that my account will no longer have a grace period unless I pay the balance in full by the due date each month, that late payments and over limit fees go as high as $39 and that they will charge a 2% fee for international charges.

Bank of America is obviously trying to find new ways to nickel and dime customers who rarely carry over a balance on their accounts. If I so much as pay ten cents less than the full amount due on my account, I'd be looking at some serious fees.

The timing of these changes is especially odd given that the whole credit card industry is under congressional scrutiny for charging excessive fees. Instead of following in Citibank's footsteps and voluntarily cutting back on their worst fees, Bank of America appears to be stepping it up. I don't know about you, but I don't feel like using my BofA account anytime soon.

How Well Do You Know Your Mortgage?

34% of homeowners do not know what type of mortgage they own, according to a Bankrate.com poll released this morning. That's an incredible statistic. In this current climate of mortgage panic and subprime implosion, isn't every homeowner at least a little worried about where their own home loan stands? It only gets worse as the survey results go on:

- 28% of homebuyers worry about how they will afford their payments next year.
- 34% of homebuyers with an adjustable rate mortgage (ARM) don't know what they will do when their loan readjusts.

Holy cow. This does not bode well for the mortgage market in the coming months. A huge volume of ARM loans are scheduled to have their rates reset this fall and it doesn't sound like many borrowers are prepared. ARM reset volume for the coming months is clearly laid out in this chart from Credit Suisse. The subprime mortgage industry implosion may just be the tip of the iceberg.

If you are a homeowner, please at least take a look at what kind of mortgage you have today. If you have an ARM loan with a reset in the next few months you need to start planning now for that change. If you are considering refinancing, check your credit scores, estimate your new loan rates and evaluate the cost of that process.  If you are not going to refinance, calculate your monthly payment increase and create a plan for managing the extra costs.

Do you know what kind of mortgage you have? Do you have a plan for dealing with an ARM reset? Share your feedback in the comments section below.

Is the Mortgage Market Tightening?

With all the news about the meltdown of sub-prime lenders it is interesting to contemplate where the industry is going. What effect will this have on all classes of borrowers?

Let's remember that there is a bell-shaped curve of borrowers out there. Some are A-paper borrowers and they will be unaffected by the turmoil. 

Those who don't have much of a down payment will find fewer lenders offering 100% financing.  If you have a good job and are concentrating on paying off debt, it probably makes sense to put something into the savings account instead. Many people can easily handle the debt they have and think that lenders want them debt free. Not so.  They just want your qualifying ratios to be within guidelines. So long as your ratios are less than, say, the mid-40% range, having a down payment will be more important than a lower debt load. Your goal should be to accumulate a 5% down payment.

For those who are credit challenged, it will be more important to have FICO scores that are higher than was acceptable before.  Where a 580 FICO score might have been OK before, a lender might now want 620.  Where 680 might have been OK on a no-income-verification loan, a lender might want to see 720 now. It's always been a good idea wo clean up credit. Now it's going to be mandatory.

Across the board anything that looks as if it adds to risk is going to be shunned or there will be more pricing hits that would apply. Either way, for the borrower who is out there on the margin, it's going to be a little tougher.  You won't find lenders beating at your door.

These are just indications that the mortgage industry is going to be sliding back to doing business the old-fashioned way, you remember, when you were expected to have good credit, a good job with documentable income, and a down payment in the bank.

Identity Thieves Have Their Own Thriving Global Market Place

Cyber crooks are now collaborating and competing across the globe via their own vast online networks to buy, sell, and barter stolen information, including Social Security, credit card, and bank card numbers -– as well as passwords and PINs (personal identification numbers).

A U.S. credit card with a card verification number can now be bought and sold for as little as a buck. Personal identities, which include a U.S. bank account, credit card, date of birth, and Social Security number, can be had for anywhere between $14 and $18. Thieves no longer have to go to the trouble to steal our info –- they can simply buy it –- and then take our money and use our credit. 

These are some of the key findings from Symantec's new "Internet Security Threat Report," which covers the last six months of 2006. The data come from over 40,000 sensors in 180 countries, as well as from 2 million decoy email accounts. Symantec, which makes Norton anti-virus software, found more of all the things we don't want in cyberspace -– more information being stolen, more data "leaking" from government and corporations, more spam, and more code being written to steal confidential information.

More than 6 million computers worldwide were "bot-infected" during this time period, which means that they could be unwittingly used as robots (aka zombies), doing the dirty work for spammers, hackers, and identity thieves. That's a 29% increase over the first half of 2006. At the same time, the number of servers used to control these bots decreased by 25%, which tells the folks at Symantec that bot network owners are both consolidating and growing their networks.

Spam accounted for six out of ten emails during the second half of 2006, and 30% of them had to do with the financial services industry, including 166,248 "unique" phishing messages. That averages out to 904 separate messages a day that looked like they came from legit outfits but were really from crooks trying to get us to give up personal info.   

How’s Your Computer Security?
If you haven't taken a hard look at your computer security lately, use Symantec's findings to motivate you to get:

• A firewall to protect PCs from hackers and spoofers (who use unprotected email addresses to hide their identities).
• Anti-virus software to detect and remove viruses and worms.
• Anti-spyware to keep inquiring "eyes" out of tracking online behavior and using the info to their advantage.
• An Identity theft/credit monitoring service to make sure no one has stolen your identity

Click here for Credit.com's recommendations.

Four Important Reminders

1. Do NOT to click on attachments unless you know who sent it to you … and why!
2. Always think before you download … and get your kids to do likewise. If you aren't positive it's safe, don't do it!
3. Never provide financial or other personal info unless you initiated the email exchange. Otherwise, you could unknowingly help thieves who are "phishing" for ways to take advantage of you. Credit.com offers many other tips for safeguarding your identity.
4. Be careful with your equipment! One of the key findings from Symantec's "Internet Security Threat Report" is that over half of all data breaches happened because a computer, hard drive, or USB memory key got lost or stolen. We all need to pay closer attention to the safety of our hardware! Do you know where your laptop is?

Debriefing Your Finances After a Vacation

Today is my first day back in the office after a ten day vacation. I wish I could say I'm relaxed and refreshed from the trip, but the huge amounts of email sorting and luggage unpacking have quickly brought me back down to earth. When you return from a vacation, especially an international trip, there are a few important things to do for your finances: 

1. Look at your credit card and bank statements - Quickly take a look online at your recent card activity from the trip. Are there any suspicious charges you don't remember making? Any charges that are higher than you authorized? It is common to encounter a bit of credit card fraud while traveling. If you do find something, immediately notify your financial institution about the fraud and check your credit reports.

2. Check your mail - Hopefully, you placed an online mail hold before you left on vacation so that your personal mail wasn't left vulnerable to thieves. Once your held mail is delivered, go through it to see if there are any bills or other financial mail that require your attention. Shake out catalogs and magazines that might have bills crammed in their pages. If you are missing a bill, check your account and watch the mailbox. A missing bill could be a sign of an identity thief.

3. Pay your bills - Any bills that came while you were on vacation should be paid and sent off right away. You wouldn't want a late payment damaging your credit scores. If you paid for your vacation expenses with a credit card (a good idea for the extra fraud protection), create a plan for paying off the debt balances as soon as possible. Carrying high balances on your credit cards can also damage your scores.

Ahk! I still have 300+ emails to get through today. Time to stop blogging and get back to deleting!

Reader Question: False Credit Repair Promises

We've received some really great questions over the last week. It seems like lot of people are trying to refinance their mortgages and working on improving their credit. Here's one great example from a reader named Harlan:

Why is it that everyone my wife and I talk to says they can get all the inquiries and negative records off our credit reports but it never gets done?

Hmmm...what is a nice way to say that the people Harlan has talked to are liars?  It's tough to put lipstick on that pig! Credit repair offices love to advertise that they can remove accurate negative information from your credit reports. But the reality is that there is no legal or effective way to remove accurate credit report information.

Under the Fair Credit Reporting Act, negative records each have a set expiration date. Inquiries remain on your credit report for two years, collection accounts for seven, late payments for seven, bankruptcy for ten, etc. These records cannot be removed before their expiration date by law unless they are inaccurate. If inaccurate or past their expiration date, consumers have a right to dispute records with the credit bureaus.

Credit repair companies try to "outsmart" this system by sending dispute letters to the credit bureaus on your behalf for records that are accurate. There are very few legitimate credit repair agencies out there. Most are only interested in getting your money and tip-toeing around the law. Best case scenario with credit repair, you'll lose some money. Worst case scenario, you could unknowingly commit a federal crime and end up in a bunch of trouble.

I think the FTC does a particularly good job of explaining the problems with credit repair and ways to work on your credit safely.  Remember, the best way to improve your credit is on your own for free.

Funny Money Friday: Credit Cards Now Accepted in Jail

Money doesn't have to be boring! Each week, CreditBloggers.com takes a look at the lighter side of the personal finance world in a series called Funny Money Friday.

First it was credit card kiosks in churches...now there are going to be credit card machines in jail!

The Missoula County Detention Center announced earlier this week that they have started accepting credit cards for bail payments. The new payment system allows people to bail themselves out and is designed to control jail overcrowding issues. According to an Associated Press article:

"The credit card machine is now installed at the jail, so if you get arrested and want to bail yourself out, you can put it on your credit card," said Margaret Borg, a former chief public defender here.

This actually could be a very good idea for those in trouble with the law. Bail bond offices charge you a non-refundable 10% fee for posting bail on your behalf. If the courts allow you to pay this 10%  balance by credit card instead, you would get the amount back in full when you showed up in court and would only have to pay the interest on the balance. Plus, I think most people would rather risk dealing with credit card collection agents instead of bounty hunters.

My own personal experiences with jails and bail bonds are sadly lacking. Do any of our readers have some tips to share? 

Brave New Mortgage World?

For two years I have been writing about the potential for an implosion in the real estate market, not the highly discussed bubble, which I never believed in, but the impact on the real estate market when the sub-prime lending industry crashed and burned. Of course, today, you can't pick up a paper without reading a tale of woe about borrowers and another story about lenders biting the dust.

There is another problem, however. Some investors who hold mortgage backed securities collateralized by those loans may be subject to rules that, in the event of a downgrade in quality, will force them to adjust the book value of those securities down to current market value.

If Moody's Investor Service downgrades a security and it drops to say 90% of its face value, the investor has to take a write-off on the books. Even worse, some investors may not be allowed to keep investments other than those rated investment grade. They will have to sell them on a downgrade. Other institutional investors may not want to have "downgraded quality" securities listed on their end-of-quarter reports and may decide to sell the securities, thus changing a paper loss into a real loss.  And of course, this being a supply and demand world, increasing the supply of bonds for sale reduces their value even further.

Clearly, whatever segment of the market is made up of buyers who aren't credit-worthy is going to be in trouble. For the rest of the market, which I will define as real people using real money to make down payments and getting loans that they can actually afford, it's going to be business as usual. Those of us who have specialized in high quality loans are still going to be servicing our clients with traditional products.

One additional opportunity, however, is that some properties currently owned by people who can't afford their homes will be coming on the market—some before and some after foreclosure. There are times when more money can be made during a downturn than when things are rockin' along. We might see real buying opportunities for those who are in the market for income property.

Bottom line, I think that we have seen that the brave new world as defined by the sub-prime lenders, and it was fraught with peril. Give me the boring old world any day.

Reader Question: Do Pre-Approved Offers Hurt Your Credit?

I love answering reader questions! It's a great way to keep track of the credit and personal finance questions that are on your mind. We recently received this message from a reader named Josh:

Does an inquiry from a pre-approved offer in the mail lower my credit score much?

Good news! Inquiries from pre-approved offers are called "promotional inquiries" and do not harm your credit score at all. These inquires will only appear on a disclosure credit report ordered through www.annualcreditreport.com or in response to a denial for credit. Standard, retail credit reports don't show these inquiries.

If you apply for a pre-approved offer you receive, your credit will be checked again. This time as a "hard inquiry" that could take a few points from your credit score. Keep in mind that pre-approval is not a guarantee that you'll be approved for the account. The creditor will take a closer look at your credit and finances before their final decision.

You can stop credit card marketers from sending you pre-approved offers in the mail and save a few trees by calling 1-888-5-OPT-OUT or going online to www.optoutprescreen.com. Next question? Send your money and credit questions to tidbits@credit.com.

How to Notify the Credit Bureaus when Someone Dies

Hopefully, none of our readers will need to use this advice any time soon. Knock on wood. But the passing of relatives and friends is an unavoidable part of life that we all must face now and again. Along with putting an obituary in the paper and planning a funeral, there are some important financial steps to take when someone close to you dies.

It is a wise move to notify the credit bureaus so they can put a death notice on the person's credit report. This helps prevent identity thieves from using their credit history. In order to place this request you will need to mail a copy of the person's death certificate to each of the three bureaus at these addresses:

Equifax
P.O. Box 105069
Atlanta, GA 30348

Experian
P.O. Box 9530
Allen, TX 75013

TransUnion
P.O. Box 6790
Fullerton, CA 92634

You should also contact any financial institutions that the deceased had accounts with. Credit cards, loans, savings accounts, investment accounts and more will all need to be notified.  The best method is usually to call the general customer service number. If that doesn't work, try contacting the fraud and identity theft center for assistance. When credit cards are closed, the balance should be paid by the estate.

TIAA-CREF has a great series of articles that cover everything you'll need to do when someone close to you passes away. If you have an experience or tip you would like to share, please post your feedback in the comments section below.

Debt is Not Illegal!

A chiropractor I know has over $110,000 in student loan debt incurred to get his professional degree. I’ll call him Bill for purposes of this blog.

Bill is hardworking and smart, but after a few years in the chiropractic field, it was pretty obvious to him that he wasn’t going to make the kind of living he expected, and certainly not the kind of income he would need to pay off that student loan debt and buy things like shelter and groceries. In fact, things got so tough for a while that he filed bankruptcy to discharge credit card debt he couldn't manage. Of course, he couldn't discharge or reduce the student loan debt in bankruptcy.

Since then, he’s been working hard in his new field (which doesn’t require his degree), and he’s looked at many avenues for dealing with the debt. He consolidated to a lower rate, but that was before rates went even lower than his consolidation rate. So he’s stuck – permanently – with that 8% rate. That rate could have been much lower if he waited to consolidate when rates dropped to rock bottom, but he could neither predict future rate drops, or afford to wait.

I want to emphasize that point. You may only be able to consolidate your federal student loans once. Is that insane? Imagine if you could only refinance a $120,000 mortgage once, and otherwise you are stuck with that rate until the loan is paid off!

Finally, Bill was approached by a company that seemed to have the answer to his prayers…a process that would eliminate his student loan debt! The company assured him that over a two-year period they could negotiate to have his debt wiped out.

Bill was pretty excited about the program, but it sounded fishy to me, so I asked Bill to conference me in on the call with the company representative before he forked over any money.

Sure enough, the company salesperson started with an argument that “debt is illegal” and that, since Bill had already paid more than the amount of the debt back, the company could call the student loan holder on its “illegal” practices and have the obligation erased. For this, Bill would pay an upfront fee of $9000!

When Bill asked for references from consumers, the representative explained that this method is hush-hush and clients didn’t really want to be bothered with calls from other consumers. (Actually, I would think that anyone who got that kind of debt erased would be singing the firm’s praises from the rooftops. I know if it worked for Bill he would be happy to recruit a thousand clients to the firm.) When Bill pressed the point, she admitted that the first clients were just starting to finish up that two year process.

Of course, I couldn’t find the company listed with the Better Business Bureau or on the Internet.

Listening to the representative’s lies and excuses got my blood boiling. I cut the sales pitch short and warned her that companies promoting these debt elimination schemes were being shut down by the FTC, FBI and other regulators.

If you are thinking of paying money for “debt elimination,” I want warn you: debt is not illegal. If anything, last week’s Congressional hearings illustrated how truly legal debt is…even when it comes to outrageous interest rates and fees!

The folks promoting debt elimination schemes are the same ones that say you don’t have to pay taxes.

Bill is going to have to pay back his student loans. There is no way out of it. He’ll work hard, he’ll struggle, and he may not be able to put a dime aside for his own children’s educations, as he tries to repay the loan for his. But he is stuck with the debt.

Keep in mind that debt elimination is different than credit counseling or debt negotiation/debt settlement. Unfortunately, when it comes to student loans, those last two options, which can be legitimate, are not available either.

The hearings on credit card practices have created quite a stir. It's going to be time to get things stirred up on the topic of student loans again, as well.

Survey: What do you Think of Credit Card Reforms?

Credit-card-mania has taken over Capitol Hill! All this talk of late fees, over-limit fees, default APR's, introductory rates, double-billing cycles, universal default clauses, retroactive interest rates and foreign currency conversion fees has my head spinning! What do you think about Congress investigating the credit card industry? Take our online survey today:

Get Free Opinion Polls

Spring Break for College Students and Credit Cards

Spring break is quite literally the holy grail for credit card marketers. Students are already a favorite demographic for card issuers because they tend to be active credit users with a lot of brand loyalty. Spring break brings together large volumes of students from across the country in centralized location. When you add alcohol, impaired judgment and freebie give-aways; the credit card issuers can't lose.

Offering a free t-shirt or some other ten cent give-away, credit card issuers can potentially get tens of thousands of students to apply for credit cards over spring break. Of course, each credit card application damages the student's credit score with a hard inquiry. If approved for the card, the student is stuck with the card on their credit report for seven or more years even if they cancel the account a few months late. I wonder how many students return from spring break with five or six brand new credit cards in their name.

Hard to believe? Pretty ridiculous? The producers of the The Daily Show agreed! The news satire show did a segment on the prevalence of spring break marketing last year called "Beach Ploys." You can watch the must-see clip staring Dan Bakkedahl online here for free.

Funny Money Friday: Financial Bingo

Money doesn't have to be boring! Each week, CreditBloggers.com takes a look at the lighter side of the personal finance world in a series called Funny Money Friday.

It has been a big week for the financial world.  The subprime lending industry is sinking fast and credit card issuers are being asked to testify in Congress. This calls for some...bingo? Inspired by the genius Orange County Bubblelicious Bingo (pdf) from the folks at OC Flip Track we've created two bingo cards for the coming consumer finance fall-out. You can play along at home!

Credit Card Industry Reform Bingo. Which of the credit card industry's favorite fees and fine print traps will be the first to go? Mark your bingo card when universal default clauses get banned or late fees get new limits. We'll keep you posted on the news from Congress:

Subprime Lender Implosion Bingo. This bingo game has already started. According to the Mortgage Implode-o-Meter, 34 subprime lenders have croaked so far. The third largest subprime lender in the US, New Century, just went kaput yesterday. The subprime loan problem isn't likely to go away soon. Check the implode-o-meter daily to update your bingo card with the latest lenders to go under as a result of irresponsible lending practices:

Happy Friday!

Shoot-out at the Sub-prime Corral

During the post dot-com world of the early 2000s, the mortgage industry was reputed to be responsible for more new job creations than any other sector of the economy.  Exact figures are difficult to find because so many lending operations are buried inside larger organizations. Whatever the number, the refinance mania of 2002 and 2003 created a lot of jobs.

A disproportionate share of the jobs was added in the sub-prime arena where an industry was created virtually overnight. A large number of companies, as it turns out, are headquartered in my backyard in Orange County, CA.  So while I had a front row seat on the industry's growth, I am also watching this same industry come apart at the seams.

Those in the "responsible" end of the industry watched with dismay as we saw these lenders seemingly willing to lend to anyone! Not only that, their normal operating practices were questionable. Many borrowers who could actually have gotten A-paper rates were sold loans at B or C quality loan interest rates because that is what these lenders did.

They also, according to legal settlements, deceived borrowers as to the terms of the loans they were getting, failing to disclose things like severe pre-payment penalties that kept these borrowers in high interest rate loans for long periods of time, preventing them from refinancing into lower interest rate loans that they qualified for.

Finally, over charging was rampant. Loan officers who were previously making $10 per hour flipping burgers found themselves able to make $100,000 per year. And they did it all, not by helping their customers, but by deceiving them, taking advantage of them, and making egregious fees far greater than would have been charged ethically.

The industry is now in a state of imminent collapse with many companies shuttering their doors or firing employees and dramatically reducing the size of their operations. Just in the last week, every morning's newspaper carried a story about the demise of, or trouble at, another company.

Of those that are left, the market has savaged their stocks.  Short-sellers made a bundle on these positions with the stocks of many lenders dropping by over 50%.  In fact the only buyers today may be the short-sellers covering their positions.

The industry will now give up those jobs and those employees a lot faster than those jobs that were created. It will be interesting to see who will be left standing after the Shoot-out at the Sub-prime Corral is over.

Borrowers who may have been counting on those "liberal" sub-prime lenders will not find much help there. So do what we've said all along: straighten out your finances, starting with improving your credit standing. The better you do your part, the more help will be available to you.

A Brief Summary of the Proposed Credit Card Reforms

Those of us in the consumer finance and credit education world continues to rejoice at the news that credit card issuers are being investigated for their unfair fee and rates policies. The current panel hearing led by Senator Carl Levin is asking some long overdue tough questions! Not to be mean spirited, but it is nice to see the credit card issuers sweating a little bit about having to explain their treatment of consumers!

There are a lot potential reforms being tossed around in relation to this senate hearing. A group of consumer advocacy organizations including Consumer's Union and USPIRG, issued a press release calling for the following:

• Banning the Universal Default Clause
• Limits on credit card fee amounts and frequency
• Requiring creditors to verify repayment ability for new customer
• Limits on marketing to students and teens
• Limits on the amount creditors can collect in bankruptcy filings
• Ban on retroactive interest rate increases
• No more "any time, any reason" rate change policies
• Policy change to accept payments as on time by postmark date instead time received
• Stop roll-over of over-limit fees from month to month
• No over-limit fees for transactions approved by the credit card issuer
• Clarification of "invitation to apply" offers that imply pre-approval.
• Simplification of pricing disclosures
• Add a minimum payment warning on credit card statements
• A ban on introductory and teaser rates
• Improved "Schumer's Box" disclosures
• A ban on mandatory arbitration agreements

Whew! That is a long list and full of some really good reformation ideas. In addition to these proposed changes, I'd also like to see these reforms:

• Limits or better disclosure of foreign currency conversion fees (often a whopping 3%).
• Clearer consumer rights and terms for credit card rewards and miles
• An end to the policy of mailing credit card customers "blank" checks unless specifically requested
• Mandatory accurate reporting of credit limits to the credit bureaus (Capital One, I'm looking at you)
• Clear disclosures about how payments are applied when you have a special promotional balances and a regular balance on your credit account
• Changes to credit scoring formulas to stop penalizing consumers when they canceling credit card accounts. This would lead to more consumer negotiation power

What other reforms would you like to see enacted? Share your ideas in the comments section below.

Capitol Hill Takes on Credit Cards

Today is one of the rare days when I wish I could watch C-Span. I'd be glued to the tube watching the Senate Permanent Subcommittee on Investigations, which is holding hearings on widespread credit card abuses. I can't wait for tonight's evening news shows, so I can catch up on who said what. (I know … I sound like a total geek!)

These hearings are partly based on a September 2006 Government Accountability Office report with the catchy title, "Credit Cards: Increased Complexity in Rates and Fees Heightens Need for More Effective Disclosures to Consumers." The GAO found several questionable finance charges, fees, and disclosure practices among the 28 popular credit cards it studied.

The report also points out just how deep a hole we've dug for ourselves over the last 25 years. With the credit card industry's help, we went from charging around $69 billion a year on our cards in 1980 to over $1.8 trillion a year in 2005. Our increased use of plastic has, of course, added to the expansion in household debt, which grew from $59 billion to some $830 billion during the same time period.

The senators, led by Subcommittee Chair Carl Levin, are exploring the possibility of new legislation to stop the highly profitable credit card industry from taking advantage of people who can least afford their over-the-top interest rates and fees.

I thought I'd check out how the hearings were playing in the business community, so I surfed on over to Forbes.com. What I read on the "HOME PAGE FOR THE WORLD’S BUSINESS LEADERS" was music to my ears:

"The credit card industry has among the lightest regulation in the nation, and lawmakers appear ready to give federal regulators more power to tame companies' lending policies if necessary. But they are also hoping that by working with the largest credit issuers, such as Citigroup, Chase Card Services, MBNA America, Bank of America and Capital One Financial … that a change in industry practices will have a trickle down effect to smaller lenders."

Chances are, the bank execs who testify will, for the most part, defend their practices as responsible, and based on sound business principles. They'll probably point to recent examples of lenders having begun to improve the system on their own. While some banker will no doubt apologize for some egregious 'error," I don't expect any of them to speak in favor of new legislation.

Americans for Fairness in Lending
Many consumer advocates will be testifying as well, and they will be pressing for new legislation to eliminate reckless and abusive lending by credit card companies. Organizations such as the Consumer Federation of America, Consumer Action, Demos, NAACP, National Council of La Raza, and the UAW have joined forces to form Americans for Fairness in Lending (AFFIL), which wants among other things, as Forbes.com puts it:

"an end to the practice of retroactive rate increases (essentially applying higher interest rates to existing balances), mandatory arbitration clauses, which prevent consumers from taking companies to court, and an end to universal default.  From a consumer's standpoint, none of these seem like unreasonable requests."

I don't know about you, but when Forbes.com points out that the credit card industry has "among the lightest regulation in the nation" and that none of the legislative changes consumer advocates want "seem like unreasonable requests" – I get the feeling that maybe even the business community realizes that it's time for some big changes –  ones that will make life much easier on cardholders.

What changes would you like to see Congress enact to make lending and borrowing fairer, safer and more consumer friendly?

How to Stop Being a Subprime Borrower

Yesterday we ran through a quick overview of the problems in the subprime mortgage industry. The conclusion at the end of the post was that subprime borrowers are going to be in a pinch over the next few months. Subprime lenders are raising their minimum credit score limits, making it harder for borrowers with bad credit to refinance or get a loan.

It sounds like a good time to stop being a subprime consumer! Let's talk about some steps you can take to boost your credit scores above 650:

1. Work on your credit card debt - Ideally, you want your total credit card debts to be around 10% of your total credit limits. That means only using $1,000 in credit if you have $10,000 in credit limits. You can improve this ratio by paying off your debts or by increasing your credit limits.
2. Pay your bills on time - Making late payments on your credit cards and loans has a huge negative impact on your credit scores. 30 and 60 day late payments are bad, but it is those 90 day late payments you really need to avoid like the plague. With the convenience of online banking these days, there is no excuse to have late payments.
   
3. Avoid applications for credit - If you are going to buy a home or refinance in the next 6 months, try not to apply for an auto loan, new credit card or other new credit. Wait until after you've received your mortgage loan to shop for new accounts.
4. Remove inaccurate negative records - Give your credit history a good scrubbing 3-6 months before a loan application. Look for negative records that are inaccurate, fraudulent or expired. If you find a problem, you can file a dispute with the credit bureaus to have it removed.
5. Don't make any sudden moves - Many consumers act too quickly and ended up hurting their credit instead of improving it. If a broker tells you should close all your credit accounts or a neighbor tells you that checking your credit lowers your score, research their (in this case, terrible) advice before deciding if it will help your score.

Stop being a suprime borrower today! Consumers with scores in the low 600's have an especially good chance of being able to improve their scores quickly.

A Quick Dissection of Supbrime Mortgage Problems and What it Means to You

Headlines are flying and stock prices as diving...what is happening to the US subprime mortgage industry? I'm no economist, but I took a stab at breaking down the news into plain English. Let's start with a few definitions:

• Subprime Borrower - In lender speak, this is any consumer who doesn't meet the basic criteria for "prime" rates. Usually, it means the borrower has a credit score below the 650-620 range. According to Fair Isaac, about 40% of the population has a score below 700.
• Subprime Mortgages - Lenders compensate for a borrower's risky credit by charging higher rates. A majority of subprime loans are adjustable rate and about 70% of subprime loans have prepayment penalties that discourage borrowers from refinancing.
  

Now, let's take a look at the facts:

• The subprime mortgage industry grew very rapidly over the last decade. Subprime mortgage loans accounted for 5% of originations in 1994 vs. 16% of originations in 2006.
• Mortgage delinquency and foreclosure rates are on the rise in many areas. This chart from San Diego shows the dramatic spike over the last few months and this report found that 13% of subprime borrowers are more than a month late with their loan payments.
• Many large banks (including HSBC and New Century) publicly admitted to underestimating the default risk on their subprime mortgage business and have warned of trouble ahead.
• Many subprime mortgage lenders have closed, filed for bankruptcy, been sold or faced major financial hits recently. There is even a site called the Mortgage Lender Implode-o-Meter that tracks these closures daily.
• ABX indexes (ABX-HE-BBB) are dropping sharply. This is complicated, but basically means investors are choosing not to own insurance against defaulting mortgage bonds.
• Federal regulators are investigating the subprime mortgage industry; saying that "subprime borrowers may not fully understand the risks" of their unorthodox loans.
• Mortgage giant, Freddie Mac, has announced plans to stop buying certain kinds of high-risk loans and will apply new standards.

What does this mean to you?

• Suprime mortgage rates are on the rise as lenders try to regain their balance.
• Borrowers with bad credit are going to find it harder to get a home loan or refinance. Subprime lender, First Franklin, recently sent an email to its brokers that raised the minimum score for 100% financing from 580 to 620.
• Mortgage lenders may be less willing to help borrowers who are struggling to pay their bill. Traditionally, banks offered forbearance programs and payment plans to borrowers in trouble. Gretchen Morgenson's column (subscription required) in the New York Times addressed this topic.
• The stock market is shaky in reaction to the financial news from subprime mortgage lenders. Subprime loan news played a role in last week's stock market drop.
• Regulators may continue to take a closer look at the subprime loan market and could pass lending reforms that would impact more banks and consumers.

Whew! That was a mouthful. Did it help you better understand the subprime mortgage issues that are in the news today? It certainly helped me clear some things up. Tomorrow, we'll talk about how you can stop being a subprime consumer.

Midnight at the Regulators' Ball

In a speech made back in December 2005, John C. Dugan, Comptroller of the Currency warned that Option ARMs posed a threat to consumers and to lenders.  I was thrilled that this problem, which responsible professionals have been worrying about for years, finally came to the attention of regulators. I wrote an article about this back then, some 15 months ago.

Well, they have FINALLY gotten around to announcing that they "might" do something about it.  The problem is being addressed by a task force made up by officials from the following government agencies:

• Office of the Comptroller of the Currency, Treasury (OCC)
• Board of Governors of the Federal Reserve System (Board)
• Federal Deposit Insurance Corporation (FDIC)
• Office of Thrift Supervision, Treasury (OTS)
• National Credit Union Administration (NCUA)

The task force has issued a combined press release inviting comments from interested parties. You can see their entire announcement online here.

Maybe taking 15 months to announce possible action is fast by Washington standards, but it's an action that is long overdue. In the task force press release they identified the following problems:

• Initial period then adjusts to a variable index rate plus a margin for the remaining term of the loan;
• Approving borrowers without considering appropriate documentation of their income;
• Setting very high or no limits on how much the payment amount or the interest rate may increase ("payment or rate caps") at reset periods, potentially causing a substantial increase in the monthly payment amount "payment shock"
• Containing product features likely to result in frequent refinancing to maintain an affordable monthly payment;
• Including substantial prepayment penalties and/or prepayment penalties that extend beyond the initial interest rate adjustment period; and/or
• Providing borrowers with inadequate information relative to product features, material loan terms and product risks, prepayment penalties, and the borrower's obligations for property taxes and insurance.

I am pleased that they are taking action but don't think that anything serious is liable to happen, depending upon who takes action and what lenders are regulated. I am not sure who regulates whom but I think that mostly they are talking about Federally Chartered Banks that, in my opinion have not been the biggest offenders in the business. In fact, some big banks who fall under their scrutiny never have offered Option ARMs, figuring out at the management level that they just didn't want to play in that ball park.  Good for them.

I think that the worst abusers of borrowers are among the subprime lenders who are (probably or possibly) not regulated by these people anyway.  So any rule-making they come up with will not apply to anyone they don't regulate.

That doesn't mean that something more can't happen. What I hope for is that, regardless of regulatory oversight, Wall Street sources that have been buying these loans from subprime lenders shut off the tap of money. The ballooning risks of that market are going to come home to roost with higher default rates and greater losses.  That will shut down those practices in a hurry.

MTV's True Life Documentary Shows the Real Cost of Being in Debt

MTV's True Life special "I'm in Debt" is the financial equivalent of one of those "Blood on the Pavement" driver's ed videos. It's horrifying and should be required viewing for all teenagers.

The three twenty-somethings profiled on the show have already accumulated massive amounts of debt with little or no income available to pay it off:

• Amy (22) has $14,000 in credit card debt and is marginally employed. Debt collectors call her constantly and she still splurges on tanning and shopping.
• Daniel (25) has a $900/month mortgage payment, thousands in credit card debt and is in between jobs.
• Ashley (21) has $20,000 in credit card debt. Her debts have forced her to move back home with her parents and consider bankruptcy.

I wish I could find a clip of this show online; MTV only has a summary and slide show. The real star of the episode is bankruptcy attorney, Russell Simonetta. He takes the time to explain the bankruptcy process to Ashley and the impact it will have on her credit. He even goes so far to talk to her about how bankruptcy could stop her from getting an apartment, loan or job in the future. Hooray for Russell! I hope that there are more sincere and smart bankruptcy attorneys out there like him.

In contrast, the credit counselor Ashley goes to see (as required for bankruptcy filings) tries to sell her on a 41-month debt negotiation plan that will damage her credit extensively and only save her $3,000 in the long run. This scene highlights just how worthless the government mandated credit c