CreditBloggers

Credit Market Loosens Up – but Not for Consumers

credit.com — Thu, 20 Nov 2008 15:42:31 -0800

After a decade of easy money, an old adage about lending is coming true again: Banks only lend to those who least need help. After the U.S. Treasury sank $300 billion of taxpayer money into the banking system, a few types of loans have freed up, but the average company or consumer may find it difficult, if not impossible, to borrow in the coming months, The New York Times reports.

The good news is big companies with cash on hand are finding it easier to borrow commercial paper. “What’s commercial paper?” you may ask. Commercial paper is a promissory note that allows corporations to borrow significant sums of money, short-term, to meet their operating expenses. A key indicator of commercial paper costs, the London Interbank Offered Rate (LIBOR), dropped from 4.82 percent for three-month loans to 2.22 percent yesterday, according to bankrate.com.

But small companies, or corporations with shaky finances, cannot afford commercial paper, the Times reports. Meanwhile, long-term loan costs continue to rise for creditworthy companies and governments. This means that even those who work for a large company have no guarantees their employer will be able to afford to pay them in the upcoming months.

In spite of the Treasury Department’s efforts, the once-huge market for bonds secured by car loans, student loans and credit card debt no longer exist, the Times reports. If banks can’t bundle and sell their debt, the amount of money they have becomes limited, leading to higher consumer loan rates.
One example is Cascade Financial, a bank in Everett Washington that lost money on investments in Fannie Mae and Freddie Mac. Before Cascade Financial extends more consumer loans, it plans to use its $39 million in taxpayer money to pay off its own debt.

“As a bank, we’d like to make prudent loans,” Lars H. Johnson, Cascade’s chief financial officer, told the Times. “If we have the capital wherewithal, we’d do that. But we have to weigh that against what’s going on in the economy.”

What to do:

- Hunker down. Banks big and small are doing it, so the average consumer has little choice but to follow their lead. Cut out major expenses. And if your car dies, for example, consider paying cash for a beater.

- Wait to buy big. This may seem contradictory to the above advice above, but if you’ve been preparing to buy something big – especially a house – there’s widespread speculation that the Fed may cut interest rates to zero in the coming months. We just may be coming upon the perfect time to buy.

Never Co-Sign: A True Horror Story

EmilyPeters — Thu, 20 Nov 2008 10:07:04 -0800

We're serious when we tell people to avoid co-signing on someone else's credit card or loan. The risk isn't worth the reward. There are easier ways to help someone build their credit (authorized user account, private loan for a downpayment).

Still considering co-signing for a relative or friend? You wont after you hear this true co-signer horror story from Lee:

I co-signed for a credit card application for a friend (stupid-I know now) which some how turned into two accounts with the same credit card company. Without ever getting any statements for payment or any notices of the accounts being delinquent and not even one bill collector ever calling me, they probably have been trying to contact my friend, the nightmare has now come to light.

The credit card company went to court and received a judgment against my friend and me. Since they seem to not be able to get any assets or anything else from my so called friend, they are now trying to attach my assets. I cannot seem to be able to contact my so called friend anymore. I wonder why. Do not even know if he even has a job anymore.

Just to let you know for informational purposes the judgment including interest and court fees is around $10,000.00.

Yikes! Co-signing often doesn't turn out well, but this is a rare case where it has turned out pretty much as bad as possible. Lee agreed to be legally responsible for the debt when she co-signed for her friend. It isn't fair, but she's on the hook for repaying the amount that he charged up.

And, as a special bonus, her credit score is now damaged severely for the next 7 years. A court judgment is as bad for your credit score as a foreclosure or bankruptcy.

Friends don't let friends co-sign.

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

Consumer Harassment Rises as Collections Boom

credit.com — Tue, 18 Nov 2008 11:50:15 -0800

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.

Credit Education for Students

Curtis Arnold — Mon, 17 Nov 2008 12:40:09 -0800

Editor's Note: This article is part of a popular Q & A format series in which we interview experts and industry professionals that have made significant contributions to the credit card industry.

Now and then you stumble upon a little known website that has the potential to significantly impact high school students and young adults in a major way. I knew this was the case when I first saw the web site Consumer Jungle. This is a web site full of advice and Internet-exchange styled materials for anyone; especially our youth.

Consumer Jungle is designed to be an interactive aid to help high school students become literate, savvy consumers. It provides relevant consumer education in such areas as credit cards, transportation, personal finance, telecommunication, health, and e-commerce fraud. It offers interactive games, quizzes, and activities for the home or classroom with input from teachers, parents, and students.

I communicated with Robert Parlette who is a Consumer Law Attorney and major contributor of content to Consumer Jungle. I asked him for a bit of background on Consumer Jungle and learned that the site is owned by The Young Adult Consumer Education Trust (YACET) which is a national non-profit organization dedicated to promoting consumer literacy for young adults.

In communicating with Bob Parlette he added, “The official 501(c)(3) name for Consumer Jungle is ‘Young Adult Consumer Education Trust Group’. We adopted the name Consumer Jungle because it truly is a jungle out in the real world...somebody is always trying to take your money through some devious means.”

I continued questioning Bob on the site.

Mike: Consumer Jungle offers a main caption ‘Look for the hook.’ Can you elaborate?

Bob: I have long believed in the old saying there is a sucker born every minute. Everyday new scams are invented. Consumers need to be wary and always approach offers with a skeptical viewpoint. Look for the hook encapsulates that perspective.

Mike: What age group do you hope to reach and what are you offering to them?

Bob: The age group we focus on are older teens and young twenty year olds who are just getting started in life living on their own. We are offering tips on the practical problems they will be facing as they start out in life. These are things that young adults should learn from their parents or in High School, but don't. We address six subject matters:

Mike: What sources do you utilize when producing content?

Bob: Scott Kane and I are both consumer law attorneys and we contributed much of the material based on our own experiences. We have solicited input from businesses in the cell phone industry. We hired outside consultants in the health and internet areas.

Mike: I tried a few of your life simulations and found them very practical. What feedback have you gotten from young participants?

Bob: We have had this beta tested to a limited degree. The kids liked the concept but wanted instant feedback on the effects of their answers on their financial situation. We would like to partner with another organization to take this to the next level. Our resources are limited, but our ideas are many.

I would like to thank Bob for the time and energy he has devoted to Consumer Jungle and to commend him on his concern for the welfare of the young folks of our nation.

I think it is very fitting to conclude this piece with a quote from the Consumer Jungle philosophy: “The Consumer Jungle curriculum is based on a constructivist philosophy. We believe that learning is most effective when students have an opportunity to actively explore their world, gather information about it, and construct their own meaning from the experience….activities are often more relevant, engaging, and motivating to students because they are learner-focused and authentic, encourage critical thinking, and develop useful and long-lasting knowledge and skills." Between these words is an exceptionally powerful concept.

This article was written by Mike Killian. Mike has been writing about credit and debt management issues that are of importance to consumers for over 8 years. His articles have been referenced by various members of the media, including MSNBC and The Motley Fool. Mike has also offered debt elimination seminars to businesses and community colleges for many years.

Why has being a cash-only consumer harmed my credit score?

EmilyPeters — Mon, 17 Nov 2008 09:22:02 -0800

One silver lining of the current economic uncertainty is the new focus many of us have on saving and using money responsibly. A lot of us are thinking back to the experiences of our parents or grandparents during the great depression. Kathi wrote in with an interesting question over the weekend:

I am half Italian and pay for everything in cash. I was born in this country, but was raised by my Noni, my Italian grandma. I was taught this from an early age. My Noni, said, "You must save at least 50% for you and another 50% for rainy days and dreams."

At the age of 8, my Noni asked us do you know what "interest is"? We thought interest was something one is interested in, not interest in a savings and loan!

I should tell you I am 57 years old and my Noni died at 99 years of age. When she told us about the Depression, my sister and I were horrified! She traded a stove for a cow and with her 4 kids, on her own, found a shack and raised her 4 children. They were never on the bread lines! That cow gave them so much and she and the kids planted a vegetable garden. What resourcefulness!

Now for my problem. I only pay in cash. I was raised this way. If I do not have the cash, I will not buy it. I learned from the Depression. I owe nothing to anyone! Geez you would think this is great, but my credit score has gone down to 699. Before with a mortgage, I had an 800 score! Paying in cash and owing nothing to anyone has cost me my credit score to drop by 150 points!

Please advise me how I can get my score up to where I was before.

Kathi's in a great financial situation, but that doesn't necessarily translate to the best possible credit score. Credit scores are designed to evaluate how responsibly you use credit. Unfortunately, not using credit at all isn't viewed as being as responsible as using credit and making payments each month.

Kathi's mortgage was likely the only record on her credit report, and when it was paid off her score started to drop because there was no new information being reported. Luckily, her score is still high and she has options.

In order to get her credit score back on track, Kathi needs to open a new credit or loan account. It could be a loan, but she's not into financing. A credit card is a better idea. She can use the account once a month for a small purchase and can pay the bill off in full (avoiding any interest charges or fees). The positive credit data will be reported to the bureaus and her score should stay nice and high.

Tragic Mortgage Stories

randy37 — Sun, 16 Nov 2008 23:29:38 -0800

There were two stories about homeowners with mortgage problems in the New York Times this weekend. They bear some discussion. The first was a story about a then 64 year old lady who bought a home in 1999 for $192,000, putting $50,000 down. The payment on her $142,000 mortgage was, according to the article $1,700 per month. That includes taxes and insurance.

Starting in 2002 the lady became a serial refinancer who refinanced thirteen times. Her current mortgage balance is $544,000 and the home's value is now $480,000. Her monthly payment has risen to more than $4,000, more than she can possibly afford.

In the second case, in 2006 a single mother used $185,000 she had inherited to make a down payment on a $385,000 home. Her payment on her $200,000 loan was $1,874, just $100 less than her monthly take home pay. Obviously, the utility bills would be more than that $100.

Notwithstanding her precarious financial position, not only did she obtain financing, but another lender allowed her to refinance in 2007 and, astonishingly, another one did again this year. The current loan amount appears to have been more than the homes current value because, after foreclosure notices started coming, she arranged a short sale. The $185,000 she started out with two years ago is gone.

What's to be learned from this?

Let's talk about the first case. I see a parallel from the world of drug dealers. Once they get you to try drugs, they "got" you. As an objective observer, I see no reason for her to ever have refinanced. Yes, she could have done it once in 2002 when the rates dropped to the mid-5% range, and that would have saved her a little. But what she did in this series of refinances was to make, in total, huge fees for the title companies, attorney's offices, and all the lender fees.

Her mortgage balance increased by over $400,000 and the story does not tell how much of it she got to keep. It does say that the fees were $19,000 on one transaction and $39,000 on another. Clearly she was being financially raped by the mortgage industry.

In the other case, the borrower should never have bought a home. She could have invested the inheritance and received some $8,000 in interest income annually. With her earned income and the earnings on the investment, she could have lived quite comfortably in an apartment.

The aftermath is tragic. Families that were financially comfortable have been rocked and their finances savaged. The ultimate investors took or will take a loss on their investment. The money that was made was all by intermediaries. Let's leave out title companies and appraisers and the clerical workers who just do what they are told. The real money was made by the real estate agent in the second case, and a bunch of lenders and their mortgage loan officers, the Wall Street sources that bought the loans, the securitizers, the bond rating agencies, and those who sold them to the ultimate investors.

How do we prevent such things from happening again?

In each case, it wasn't just rapacious lenders at work. You have the other necessary factor, borrower ignorance. First, I see no evidence that these people tried to get an education, like buying a book about homebuying or financing. These people are characteristic of so many who just don’t see books as being of value, being an essential part of life.

What would have helped is that, at a critical time, had there been one impartial person, someone who would not make money on the transaction, to counsel each of these people, it all could be avoided. Unfortunately, there is no mechanism for this. Family members have often provided teh brakes, as in, "No, Momma. Don't do this!"

In the investment industry there are fee-based investment counselors who get paid once for preparing an investment plan. They don't get paid a commission on putting your money in specific investments.

In the mortgage industry, however, this service is not available. That's mostly due to the fact that borrowers simply do not want to pay for this service. I would simply love to have a business where I could, for say, $1,000, counsel people who were thinking of some real estate finance transaction. In all my years in the business, no one in any of the 48 states in which I am not licensed has asked me to do this or taken me up on my offer to do so.

The raw truth is that they THINK that they can get good advice for free. It seems to me that good, free advice is an oxymoron! They just pick up the phone and call a few lenders. But this trap is exactly what got these borrowers in the mess they are in.

Obviously there was no regulatory help here either, nor is there likely to be in the future. Regulators seem only to be able to come around and pee on the embers after the house has burned down. There has been some discussion about having regulations that would prevent lenders from doing a transaction where there was no economic benefit for the borrower. But that’s like HUD's statement that "loan officer compensation shall be reasonably related to the amount of work done." Booshwah!

If you have read this far, you are obviously serious about getting yourself educated about real estate finance and I hope that this illustrates the value of your effort and the reward that can be yours when you avoid traps and make good decisions.

For those who are interested in reading the original articles, click on the links.

STORY 1

STORY 2

Layaway: What’s Old is New Again

credit.com — Wed, 12 Nov 2008 14:32:36 -0800

If you’re too young to remember Ronald Reagan as president, allow us to re-introduce you to a new/old concept: Layaway. That’s where you pick out an item at a store and make monthly payments to that store until it’s paid off, usually with no interest. Most companies charge a fee of around $5, and require that all payments be made within 30 or 60 days.

Perhaps the best feature: When you take your prize home, your creditor doesn’t own it, you do. This might make one reconsider charging anything at 23-percent interest.

Kmart is pushing its revamped layaway program in TV ads, and Wal-Mart, Marshalls and TJ Maxx all offer it. In a holiday season where new shoppers will be fewer and farther between – sales are projected to rise by 2.2 percent over last year, the lowest rate since 2002 – chains expect layaway to be one of their few areas of growth this year.

“Retailers...are using [layaway programs] to their advantage during this holiday season because they know people are on a budget and they don't want to overspend,” Ellen Davis, vice president of the National Retail Federation, told US News and World Report recently.

Just in time, too, as 60 percent of banks told the Federal Reserve that they are tightening their credit card lending standards, according to a report [in PDF] this month.

How can I fix my credit right now?

EmilyPeters — Tue, 11 Nov 2008 15:45:57 -0800

Some of the simplest questions have the most complicated answers. For example, here's what Tom wrote in with today:

How can I fix my credit right now?

Whew...that's an eight word doozy of a question. Here's my answer, put as simply as possible:

1. Figure out what is breaking your credit first: A doctor can't prescribe without first knowing what's wrong. Take a look at your credit reports and credit scores. Are there negative records such as collection accounts? Late payments? High credit card balances? The "reason codes" included in your credit score should help point you in the write direction.

2. Run a test: Use Credit.com's free Credit Score Compass tool to estimate how changes in your financial situation could impact your score. See exactly how your actions to improve could help or hurt your credit.

3. Do the right thing: It's boring advice but it really works with credit. The best thing you can do in most situations is to have at least one active credit or loan account that you use responsibly and pay on time each month. This new positive information will help "push" out the negative data. You can also often give your score a boost by reducing your credit card balances.

4. Don't sweat the negative stuff: Sorry, there isn't a way to get a reposession, foreclosure, collection account, judgment, late payment or lien off your credit report before the set 7-10 year expiration date. They'll lose negative impact as they age but can't be removed or undone. Focus your efforts on things you do have the power to change.

5. Avoid "quick fixes" when it comes to credit: This is related to #4. There isn't a way to cheat the system. So don't waste your time with credit repair and piggybacking rip-offs. If you want to spend money on improving your credit, invest in a secured credit card or a downpayment on a small loan to use responsibly.

What's your advice for Tom? Share your tips in the comments section below.

Late Payment Rates for Your County

EmilyPeters — Mon, 10 Nov 2008 12:49:35 -0800

How many people in your county are missing their credit card payments? How many are late on their mortgages? How does it compare to the county next door?

Thanks to the Federal Reserve Bank of New York it's easy to get these answers. Their interactive delinquency map shows what percentage of people in each county are falling behind. And they have a second map that shows how these figures are changing.

Click on the map below to explore the numbers:

Holidays Are Coming: What's Your Plan?

Gerri_Detweiler — Mon, 10 Nov 2008 06:57:38 -0800

Now that the Halloween decorations have been cleared from the shelves, we know what’s next. In fact, I was just in my local Wal-mart and discovered an entire section that usually is dedicated to gardening items is now filled with Christmas decorations.

If you haven’t started planning for the holidays, I’ll give you another nudge to print out our free holiday spending planner and get started. The holidays are only weeks away!

Consumer Reports has just come out with a study reporting that 76 percent of consumers plan to cut back on holiday spending. They also note that 12 million Americans still carry debt from last year’s holiday shopping. Ouch.

The top gift that will be given will be clothing (even though it is often the most disappointing for the recipient), while the number two gift consumers are planning to give for 2008 are gift cards (66%), followed by toys (62%), cash (61%), electronics (47%), jewelry (40%), pet toys (31%) and small appliances (24%).

In my next holiday shopping post, we'll offer some holiday tightwad strategies of our own. We'd love to hear yours as well! Feel free to share them here.

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 Stop Debt Collectors: How to Protect Your Rights and Resolve Your Debts