DEEEECLINED! Get the Details about Your Notice of Denial!

Doritos and Mountain Dew. That's all I wanted. It was my third year of law school in Florida. I walked into the gas station, grabbed my goods, and went to the counter to begin a day with a friend on his boat. I handed the items over to the clerk, he scanned them with a ubiquitous beep. I slid my card.

—Pause—

"DEEEEEECLINED!" He didn't so much scream it as much as he swung it like a blunt force weapon. The sound came from his not-so-insignificant gut. Like a Viking charging. My friend standing behind me heard him. Everyone heard him. I felt it. My mother, I am sure, felt a surge of disappointment six states away. I didn't have enough money to buy processed cheese and yellow caffeine. My friend who had been standing behind me gently added his items to mine, slid his card, and we left.

Getting declined hurts! It doesn't just hurt. It is personal. Somehow we feel it reflects on us as people. I know someone whose debit card was declined through a processing error—he paid with another card, went to the nearest ATM, printed of a balance receipt, and left it for the waitress to see that he really did have money.

People of all socio-economic classes currently struggle to obtain credit. According to the Federal Reserve Board's April 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices, banks continue to report "tightened credit standards on residential mortgages." So, if you've gotten rejected recently too, you are not alone. People who could get credit three years ago can't get credit now.

While the Viking at the gas station bellowed my rejection, you probably got a consumer credit "Dear John" letter, a.k.a. "Denial Notice". In no uncertain terms you were told "No." You are probably wondering why you received a denial notice, what it means, and what you can do.

The first step is to figure out why you were denied credit. The good news is that federal law grants you the right to obtain specific information. Getting your hands on the reason you were denied may not be easy, but the information can help you learn how to qualify next time.

Two key federal bodies of law provide you the right to receive specific information. First, the Equal Credit Opportunity Act (and Regulation B) prohibit certain discriminatory practices. These laws require creditors to explain the reason they denied you. They require creditors to keep certain records and send you these notices to document the actual reason you were denied. The second federal law requiring the denial notice is the Fair Credit Reporting Act. It requires creditors to tell you if they based your denial on information from a consumer-reporting agency (or other outside source) and to tell you if they obtained certain information from an affiliated company.

These laws mandate specific requirements for your denial letter. When you got denied, your notice was most likely titled: Disclosure of Right To Request Specific Reasons for Credit Denial or a Notice of Action Taken and Statement of Reasons. The first type of notice is very general and tells you that you can ask for more information. The second type of letter is more informative and actually lists the denial reason. If your notice didn't really tell you why you were denied, you can force the creditor to provide a specific reason, as long as you properly contact the creditor within 60 days.

To get the information, send a letter to the creditor at the address provided. Give them your information and tell them in writing that you "would like a statement of specific reasons why your application was denied." Always send your notice by certified mail, return receipt requested.

If your denial notice already included specific reasons, pay attention to those reasons. Creditors establish certain criteria, often called underwriting, and if you meet the criteria, creditors want to lend you money.  This is how they make money and stay in business. It is always possible the creditor may have misunderstood your financial situation.

Maybe you accidentally entered the wrong information on your application. If this is the case, the creditor may be amenable to providing credit if you can update your application with correct information. The creditor might have denied you based on your "length of employment."  While you may have entered "7" as the number of years you have worked for your employer, the credit analyst may have misunderstood your response to mean seven months. Or perhaps the creditor could not contact your credit references and denied you credit instead of notifying you about this problem. If you can alert your references, you may be able to get credit.

These are just examples, but you get the point. Don't curl up into ball or write poetry about it. Investigate it, learn from it, and use the information to your advantage. (And if you already wrote poetry about the experience, please post it!)

If you were denied because of something in your credit report, order your report and see what it says. If it contains inaccuracies, you can correct them with the consumer reporting agencies. 

Naturally, nobody wants to be declined. Certainly, "Dear John" letters don't feel good. That being said, federal law does provide you a great way to figure out what's going on with your credit. The good news is you can take the time to find out why you got denied so it won't happen again.

Justin B. Hosie – Justin Hosie is a member of Chambliss, Bahner & Stophel, P.C.’s Consumer Finance Group, focusing his practice on consumer financial services, the Federal Electronic Signatures Act, Truth in Lending Act, Equal Credit Opportunity Act, and Electronic Funds Transfer Act, as well as state regulatory compliance.

New York Times on Debt Settlement: Another Perspective

An article today in the New York Times warned about the perils of debt settlement, and a number of comments were posted in response. I’d like to add mine.

As a consumer educator for 22 years, I first shuddered when I heard about debt settlement. In fact, I recall writing an article about ten years ago where I said it was quite possibly the worst idea ever...Don’t pay your debts? Let them go delinquent? How could that ever help you solve a debt problem?

Unfortunately, though, I’ve had to change my tune. I am still opposed to the approach that many settlement companies are taking where they charge high upfront fees regardless of whether they help consumers, and I appreciate the warning about them in the article. But I don’t rule out settlement all together as a legitimate option for some consumers who are buried in bills.

Debt settlement has become popular because while consumer debt has increased, options for resolving that debt have contracted. Bankruptcy has become more difficult for some people to file, as Ben describes in his comments on the New York Times article. And credit counseling typically requires debtors to pay back 100% of their debt plus interest, often at double-digit rates. That simply doesn’t provide enough relief for them to dig themselves out from debt.

(Fortunately, new payment plan terms agreed to by the National Foundation for Consumer Credit and top creditors will allow more people to pay off their debts through reduced payments in a Debt Management Plan. This should make counseling a better option for more consumers. I’ll write about that in a separate post.)

In addition, most people I talk with have absolutely no desire to file for bankruptcy. They want to pay their debts back, but they cannot pay the full amount. They, too, often turn to settlement as a way out.

In an ideal world, borrowers should be able to negotiate directly with their creditors. However, when someone owes multiple creditors (as most people do when they are deeply in debt), each creditor will do its best to be at the top of the pile. The stress and pressure that causes can be impossible to handle for someone who is already struggling financially. I’ve spoken to people who are trying to pay as much as they can, but the calls are so constant that they fear they will lose their jobs. Others are suicidal. It only takes one creditor who is especially aggressive to push a borrower over the edge.

In writing my new e-book Reduce Debt, Reduce Stress, I interviewed several debtors who successfully completed settlement programs and were thankful that option was available to them because it allowed them to avoid bankruptcy. (Each owed too much to be able to complete a credit counseling program.)

In a comment on the article, Sudhir recommends that consumers check with the Better Business Bureau before choosing a settlement company. Unfortunately, however, the BBB does not recognize settlement companies as legitimate options and does not provide top ratings for settlement companies, even if they generate no complaints (and pay the membership fee).

However, I agree that consumers must be extremely cautious about choosing a settlement company to work with. These programs are not painless. Your credit will be ruined for a while because you stop paying, you could be sued, and there can be tax implications. Hang up on any company that makes settlement sound like an “easy, guaranteed” program to pay off your debt. You can read my Fourteen Questions to Ask a Settlement Company and use them to help you choose the right settlement partner.

And I also strongly recommend talking with a credit counseling agency to find out whether that may be the right option. Even if you have talked with one recently, you may want to try again, as the payment requirements are easing. Don’t be worried that counseling will affect your credit the same as bankruptcy. That’s not true anymore. FICO has changed their credit scoring model: When they calculate credit scores, they now ignore the fact that a consumer has gone through credit counseling. If you can pay back your debts through a Debt Management Program (DMP), do so.

I also recommend that you talk with a bankruptcy attorney who can help you evaluate the bankruptcy option. There are many wrong assumptions about bankruptcy floating around, including the notion that you can’t file if you make too much money. Only an attorney can give you the straight scoop on whether filing makes sense for your situation.

Finally, go in with open eyes. With settlement (like everything else), if it sounds too good to be true, it probably is.

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com. Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of the e-book Reduce Debt, Reduce Stress: Real-Life Solutions for Your Credit Crisis

Saving vs. Paying Off Debts: Which is the Right Choice for this Economy?

I received a great question earlier today from a reporter: Is it better to pay off credit card debt or build an emergency savings account in this tough economy?

This is a tough decision. In the past, the advice has always been to focus on paying the debt off first instead of saving. With a credit card charging 15% APR on your balance and a savings account only earning you 1%, the math isn't too hard to figure out. Your money goes further when you pay it toward your debt repayment.

But this tough economy makes the standard answer not exactly right. The possibility of losing your job is much more of a reality now than it was a year ago. With unemployment at over 8% and rising, you might not be able to find a new job quickly. Emergency funds are needed more than ever.

So, what's the right answer? At some level, it depends on your own money situation. If you already have some emergency savings and could easily find another job, you might want to focus more money on the debt repayment. If you have absolutely no savings and few options in the event that you lost a job,  maybe paying the minimums on your credit cards and building up your savings is the better choice.

Here are a few things to keep in mind when building an emergency savings account:

• Aim to have enough in your savings account to cover six months of necessary expenses. This includes mortgage or rent, credit card and loan minimums, insurance payments, and utilities.
• Be sure to count your unemployment insurance benefits when you're calculation how much you'll need each month.
• Don't forget to also include COBRA or other health insurance coverage in your plans. 
• Keep your funds in a high-yield savings account for the best savings rate and easy accessibility.
• Don't be afraid to start small. If six months isn't possible with your finances, start with a goal of saving enough for one month. 
• You should also have some extra available credit through your credit cards in case of an emergency. Only use a credit card for your expenses if you've run out of other options and have a good plan for repaying the debt. 

What would you chose: debt repayment or savings? Share your opinion in the comments section below.

Emily Peters – Credit.com's personal finance expert and former TransUnion credit bureau insider. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.

Silver Lining in a Dark Cloud?

Remember a few months ago when we said that the nation’s credit problems were likely to get worse before they got better? Unfortunately, a new report shows that they have, indeed, gotten worse. More Americans are now delinquent on their credit cards than at any previous time in history, according to a report by Fitch Ratings, a debt rating company.

The report finds that 3.75 percent of all credit card payments were at least 60 days late in January. That narrowly beat the previous record of 3.73 percent, set in February 1997. The news comes as more Americans find themselves squeezed by large-scale economic forces.

“U.S. consumers continue to struggle in the face of mounting pressures on multiple fronts, from employment to housing to net worth,” Michael Dean, a managing director at Fitch, said in the report.

That wasn’t the end of the bad news. Credit card companies reported that charge-offs rose 40 percent in January over the same time period in 2007, meaning that they were unable to recover 7.5 percent of all credit card charges. Charge-offs on retail store credit cards rose 44 percent, leaving 5.2 percent of the debt uncollectible. These were the highest levels recorded since Congress toughened bankruptcy laws in 2005, according to the report.

This follows news from last month (via LA Times blogs) that more Americans are missing the payments on their home equity lines of credit, and that the number of people delinquent on their car loan payments reached the highest levels ever recorded by the Mortgage Bankers Association.

What this means

The silver lining to this very dark cloud is that finally, Americans seem to be learning that they can no longer live beyond their means. While many people who are unable to pay their bills are the victims of unforeseen layoffs, some were simply stretched to the limit before the economy took a nosedive. The irony is that with car manufacturers offering deep discounts, Congress considering big incentives for home buyers and real estate prices falling in much of the country, now might be the best time in years to buy something big. If you are in a position to help spur the economy, however, just make sure you can actually afford the payments.

Credit.com has a worksheet to help you calculate your monthly budget.

More Bad Bill Collector Behavior

Pay your debts or your children will be taken away. It sounds like a twisted, modern-day version of a medieval debtors’ prison. But that actually is one of the many threats that bill collectors used in southern Illinois to bully and intimidate people into paying up, according to a lawsuit filed yesterday by Attorney General Lisa Madigan.

Collections agents with United Processing, Inc., a Jacksonville, Florida-based outfit allegedly told delinquent debtors that they would call the Illinois child protection agency and have their children placed in foster care if they did not pay up. Posing as attorneys, they also threatened to have the local sheriff come and arrest them, and if found guilty they would face two years in a federal prison.

“These defendants used malicious tactics to bully alleged debtors, their family members, and even their employers,” Madigan said in the press release. “This case is an egregious example of the unscrupulous methods often used to collect debts. These methods violate consumers’ rights and certainly will not be tolerated in Illinois.”

Madigan’s office received 11 complaints about United Processing since 2007. Her agency charged the company with violation of the Illinois Consumer Fraud and Deceptive Business Practices Act and the Illinois Collection Agency Act, since the company allegedly was operating without a license. Madigan will ask the court to permanently bar United Processing from ever doing business again in the state. She also will ask that the company be charged a $50,000 fine for each offense.

What you should know

As Madigan said in her press release, a collection agency saying that it has the power to remove a debt holder’s children from the home is an outlandish threat. But it’s an extreme example of the broader trend, in which collections companies bully, harass and intimidate people. Sometimes these practices violate the law. If a collections company calls you at all hours of the day and night and uses overly aggressive tactics, tell them to call during normal business hours and to be respectful. If they refuse, report them to the Better Business Bureau and to your state’s attorney general.

Visit Credit.com's Learning Center for the Top 10 Debt Collection Rights for Consumers.

Payday Lenders Gain Middle Class Customers

Payday lending, once considered a source of emergency credit for consumers mainly in lower income brackets, is gaining a new customer base: the middle class. With hundreds of thousands of Americans losing their jobs and more families drowning in debt, a growing number of middle class people are turning to payday lenders to cover the bills, even if it means paying annual interest rates approaching 500%.

Payday lenders’ rates are “pretty high,” Lunetta Blanks, a federal investigator, told the L.A. Times last week. “But when you need the money, you need the money.”

In California, payday lenders in recent years have spread out from central Los Angeles, opening hundreds of stores in more affluent outer suburbs, according to the newspaper’s analysis. Data from California banking regulators show that the trend started three years ago, but has accelerated as economic conditions worsen.

A similar pattern is happening in Norfolk, Virginia, where an investigation by the Virginian-Pilot newspaper found that payday lenders are moving into more affluent suburbs.

“Too many families live with no cushion, so when something goes wrong they turn to payday lenders,” Elizabeth Warren, a Harvard law professor who has studied the industry, told the L.A. Times. 

The problem, of course, is that most payday lenders charge exorbinant interest rates, often drawing borrowers into a perpetual cycle of debt. When a customer cannot pay off the first loan, it is “flipped” into a new, larger loan to cover the first. The average payday loan is flipped eight times, eventually costing $793 for an advance of just $325, according to the Center for Responsible Lending, a nonprofit consumers group.   

“It's almost sadder that they're hitting the middle-income folks,” Jay Speer, executive director of the Virginia Poverty Law Center, told the Virginian-Pilot. “It's people struggling to make ends meet, which includes people at fairly high income levels these days. The problem is, once you get in, you have such a hard time getting out.”

What to to

• Try to cut spending now, before you get into trouble. It doesn’t matter if you consider yourself middle-class. At 450-percent interest, a payday loan can wreck anybody’s long-term finances.

• Find better options. If you really need a small loan fast, many credit unions offer short-term loans with just 12-percent interest.

Bankruptcy Law Forces Consumers Into Foreclosure

After a $25-million lobbying campaign in 2005 by Bank of America, Citigroup, JP Morgan & Chase and Washington Mutual, Congress passed a law forcing people to continue paying their credit card debt even after they file for bankruptcy.  The banks got what they had wanted…and more than they had bargained for.

What wasn’t protected under the new bankruptcy code were mortgage payments. So now, instead of defaulting on their credit cards to keep their house, hundreds of thousands of Americans may be forced into home foreclosure, according to a story by Bloomberg News.

Removing credit cards from bankruptcy protection is causing 32,000 more people to foreclose on their house every quarter than otherwise would have under the current economy, according to a recent report by the Federal Reserve Bank of New York.

For the big banks, the results couldn’t have been more catastrophic. Washington Mutual earned $689 million from its credit card business in the third quarter of 2008, up 8.8 percent from the same period in 2007. Meanwhile, WaMu’s overly-aggressive investments in risky mortgage-backed securities caused it to be seized on Sept. 24 by federal regulators, who immediately chopped up what had been the nation’s largest savings and loan, and sold its best pieces to rival banks.

In 1998, when the nation’s largest banks created the National Consumer Bankruptcy Coalition for the purpose of rewriting the bankruptcy code, they already were earning billions of dollars every year from credit cards. But they wanted more. And in their rush to grab higher credit card fees, banks forgot about their huge investments in mortgages, which already have taken a $40-billion hit during this crisis.

“Be careful what you wish for,” Jay Westbrook, a business law professor at the University of Texas Law School in Austin, told Bloomberg. The big banks “wanted to make sure that people kept paying their credit cards, and what they're getting is more foreclosures."

Medical Debt is Up – How to Deal

Medical debt is on the rise even as more Americans forego medical care because they can’t afford it, according to a study by Commonwealth Fund Commission, a private foundation, as reported by trade publication Insight on Accounts Receivable Management. According to a recent survey of consumers by the foundation, the number of adults saying they have problems paying medical debt rose from 34 percent in 2005 to 41 percent in 2007.

The survey found that 37 percent of American adults went without health care in 2007, the major reason being a lack of affordable insurance. Over 75 million adults were either underinsured or uninsured in 2007, a 33-percent increase since 2003.  Though the increase may at first appear to be a boon for creditors and collection agencies, which thrive on high fees generated by outstanding debts, people in the industry say that the economy is so bad that many people with high medical bills can’t afford to pay at all.

“We’ve got a lot of debt here but trying to collect it [is a challenge],” Joe Kozumplik, CEO of medical debt collector CBM Services, told Credit and Collections World.  CBM has seen medical debt rise 40 percent in the past year.

It’s no surprise people are finding they can’t afford to pay off their medical bills. In 2006, the cost of health care for the average family rose by seven percent, more than twice the growth rate of the rest of the economy, according to a Commonwealth Fund report, and that rate of growth is projected to remain high through 2017. Americans spend $12,680 on the average employer-based health care plan – twice as much as similar plans in other industrialized countries – and more than the average yearly earnings of a person working full-time for minimum wage.

“There is now an urgent need for a national solution that will provide families with affordable coverage options to ensure access to timely health care and provide protection against catastrophic financial losses,” Sara R. Collins, assistant vice president of the Commonwealth Fund, said in testimony to Congress in October.

Things you can do:
-    Get health insurance. We know it’s expensive. But right now, even a simple medical procedure could bankrupt the average worker if he or she has to pay out-of-pocket. Consider valuing health insurance over salary the next time you look for a job.
-    Don’t get sick if you can help it. Not to sound flippant, but if you smoke, stop. If you’re overweight, exercise and eat right. Following common-sense health guidelines now is an easy way to maintain your financial health.
-    Get involved. President-elect Obama and Senator Ted Kennedy have said that health care reform is among their top priorities. In the New Year, Congress will begin considering proposals for how to fix our broken system. No time like the present to get educated on the issue so you can start pestering elected leaders.

And last but not least, Credit.com has helpful advice on dealing with medical debt.

Consumer Harassment Rises as Collections Boom

For many Americans with too much debt, the recent economic downturn could not come at a worse time. As more consumers fail to pay their debts and delinquency rates rise, debt collection has started to boom.

While bill collectors squeeze money out of strapped consumers, reports of questionable debt collection practices abound. In 2007 nearly 71,000 people complained to the Federal Trade Commission about over-aggressive collections agents, almost double the number from 2003. In October, Darrell McGraw, West Virginia’s Attorney General, sued Charles Howell and Associates, a Florida-based collections agency, for allegedly harassing and threatening debtors with arrest. McGraw alleges the company even took money from senior citizens who didn’t owe anything. (Charles Howell and Associates deny the allegations.)

“Well, we can expect this problem to get worse,” Missouri Attorney General Jay Nixon wrote on his blog for consumers.

If you’re getting calls from collections agencies, learn your rights:

1)    Don’t pay a debt you don’t owe: It may sound obvious, but it’s not. Collections agencies often launch enforcement actions against the wrong people thanks to the companies’ sloppy paperwork.  Under the federal Fair Debt Collection Practices Act [in PDF], you have the right to demand that the collections agency provides written proof of your debt.

2)    Debtors’ prisons died in Charles Dickens’ days: Collections calls are deliberately unpleasant, but agents cannot threaten you with arrest. They can not threaten to take your car without a court hearing, nor can they call before 8 a.m. or after 9 p.m. And if they drop the F-bomb, they’re crossing the line: under the law, no swearing is allowed.

3)    Don’t let agencies harass you: If collections agents call too often, write them a letter. You have the power to force them to stop.

4)    Know what you owe: Before making payments, check your statements and make sure the agency is not charging outrageous fees. Fees can be adjusted. You can refuse to pay until a more reasonable rate is set. If the agency refuses, report them to your state Attorney General and the Better Business Bureau.

5)    Don’t stop with a good thing: Once you start making payments, pay your debt in full. It will save you the trouble and added expense of going through collections again.

Learn more about handling collections agencies with Credit.com’s Collections Crash Course.

Consumer Debt Falls, Fees Rise

There’s good news and bad news for consumers emerging from the latest permutations of the global financial meltdown. On the plus side, there is initial evidence that Americans may be starting to live within their means. Consumers owed $7.9 billion less in August than they did in July, according to a report by the U.S. Federal Reserve that tracks both revolving debt, which is almost entirely made up of credit card debt, and non-revolving debt, which includes student and auto loans.

Of course, the new lower numbers nevertheless leave Americans with a large amount of revolving debt––$969 billion––in August, down from $969.6 billion in July, the report found. About 58 percent of people with credit cards don’t pay off their balances at the end of each month. And those who carry a balance every month owe over $17,000 apiece on average, according to the Consumer Federation of America (via Newsday).

On the cash side of the family balance sheet, however, things are getting worse. Fees for overdrawn bank accounts and out-of-network ATMs hit a new record high this year, according to a recent survey of banks by Bankrate.com (via L.A. Times). The average ATM fee is now $3.43. And the average bounced check now costs $28.95 in fees, a 2.5-percent increase from a year ago, the survey found. With banks’ huge bets in predatory mortgage loans continuing to wreak havoc in their balance sheets, increasing fees is one of the few guaranteed ways they have left to raise revenue. So look for these fees to rise even further in the coming months.

Here’s some advice for how to react to these trends:

• Follow the herd. Lots of people are trying to pay off their credit card balances and restrict themselves to using just one card. Now is a good time to follow their lead. “Try to pay off the one with the highest interest rate first, and then keep working at the others,” Candy Wright of GreenPath Debt Solutions, a Michigan-based nonprofit, told Newsday.

• Watch your statements like a hungry hawk. One of the last places you want to spend your hard-earned money is on fees incurred because you weren't watching your bank balance.  Credit.com lists 10 Ways to Avoid Overdraft and Bounced Check Fees.