This Wednesday: Don’t Leave Home Without It
Problem:
Credit Cards. Credit Scores. Credit Reports. Credit. If you're reading this you've probably got them, for better or for worse. Unfortunately, if you're like most Americans (including us, until we did this research), you understand very little about them. But if you're not careful, they can sneak up from behind you and take control of your life. In fact, more often than not, they can take control of your life while staring you right in the face.
How many times this week has Capital One offered you a 0% APR with no annual fee and up to a $50,000 credit limit? Or 5% cash back on purchases and double air miles. Seriously, how many? My wife and I usually get three or four a week. Last Tuesday we got two offers each in a single day. We are not alone. Credit Card companies mail out over 6 billion offers each year. 641 million of those offers have been taken up and are responsible for $1.5 trillion (that's right, ta-ta-trillion) in consumer spending.
To pile the numbers up a little more, here they are in list form:
- 115 million Americans carry a balance on their credit cards from one month to the next, paying interest rates, in some cases, as high as 40%. The industry calls these customers “revolvers.–
- These revolvers carry an average balance of nearly $9,000, with an average interest rate of almost 18%.
- The total outstanding credit card debt in the US is more than $800 billion, equaling $128 billion in interest paid.
- The minimum payment on most of these cards in 2%. If a person pays the minimum, they are often paying little more than they are spending in interest alone.
- There is no legal limit to the interest rate credit cards can charge, nor is there a limit on late fees, returned check fees, or over-limit fees. These fees have reached as high as $40.
- If a late payment is reported on any loan, most other creditors automatically raise their interest rates.
- The Better Business Bureau receives more complaints about the credit card industry than any other.
Rather sobering statistics, eh? Here's the good news: we're here to help.
Make Progress:
A few months ago I recorded PBS' Frontline documentary, “Secret History of the Credit Card– on my DVR. When we decided to cover “credit– as this Wednesday's topic, the first thing I did to research it was sit down and watch this program. Then I sat and stared at a blank TV screen for what seemed like hours after it ended, blown away by what I had just learned.
The winner of both the 2004-2005 Emmy Award for Outstanding Investigative Journalism and the Alfred I. duPont-Columbia University Award in 2006, this documentary will likely enrage you and possibly comfort you, both at the same time. The things that credit card companies are legally allowed to get away with will flash-boil your blood, and yet it was oddly calming to learn how many people are in even worse shape with the credit card companies. Oddly calming, yet highly motivating.
“Secret History of the Credit Card– is available online in five parts in either Windows Media or RealPlayer formats. There is also a collaborative website with tons of great tools to educate yourself and fight the fe-fi-fo-fumming credit card industry. Or to help out the good people at PBS you can order a copy of the DVD here. This might be good option; there's a copiousness of mind-numbing information packed into an hour's-worth of minutes. Plus, you'll want to show everyone you know. As the show points out at the end, we'll have to fight numbers with numbers.
In 1989, Fair Isaac Corporation began using an algorithm to create a score by which lenders could judge how big of a risk it will be to loan you money or issue you a credit card. By 1991, all three major United States credit reporting agencies made these FICO scores available, and in 1995 many mortgage companies began using them for evaluating applicants. Now anyone who has opened a bank account, applied for a credit card or taken out a loan has a score.
Now that you've memorized that bit of history (there's a quiz later on), you need to know how your FICO score can affect you, because affect you it can, deeply, and for a long time. Like the time you got stood up for your high school prom. That kind of affect. When you apply for a credit card, mortgage, auto loan, debt consolidation loan, etc., potential lenders look at your credit score to determine if you qualify for the loan, how much (if any) they are willing to loan you, and what interest rate they are going to charge you for the loan.
Your score is essentially all of your credit information boiled like a frog (but without the mess) down to a three-digit number, ranging from 300-850. The higher the better: this ain't golf. Someone applying for a $200,000 mortgage with a score of 780 would qualify for the best interest rates and have a payment of less than $1,200 per month. That same loan for someone with a score of 550 has a monthly payment of over $1,700 (check your payments here). So, it's 500-bucks-a-month-important to have a good FICO score and to understand why that number is what it is. Here's the breakdown, the elucidation, the “skinny– :
- 35% – Payment history: This guy's the biggest. Collections, unpaid bills, late payments, over-limit spending, bankruptcies, foreclosures– ¦. I know it's easier said then done, but avoid these at all cost. If you need help, we'll tell you how to get it later.
- 30% – Outstanding debt: This one's tricky. It's not necessarily the amount of debt you have that negatively affects your score, but rather, how close you are to your credit limits on your unsecured debt. In other words, try your best to keep your balance lower than 30% of your credit limit. Easier said than done, I know. Believe me, I know.
- 15% – Length of your credit history: How long have your accounts been open? The longer, the better. Between this and maintaining a low credit limit percentage, you might want to think twice before closing that card that you never use.
- 10% – Recent inquiries: Whenever you apply for credit, you create an inquiry which can negatively affect your score. But don't worry about shopping for the best mortgage rate or auto-loan. Inquiries of the same variety within 14 days of each other don't have a negative impact. The exception, of course, is credit cards.
- 10% – Types of credit in use: Having installment loans, like mortgage and education will help your score, while a lot of revolving accounts (credit cards) will hurt it.
That's what you need to know about how your credit score is derived. But how do you change it? Read on, dear friends.
Your credit report is a record of your borrowing and repayment history made available to any potential lender. When you apply for a loan, they'll pull up this report containing everything you've borrowed, anything in collection, how much you owe, how often you're late with a payment, etc. In other words, all the things that are used to create a credit score. So in order to improve your credit score and make it easier to get a loan or a better interest rate, you have to know what's in that report.
Fortunately, on December 4, 2003, Congress passed the Fair and Accurate Credit Transactions Act (FACTA). This law allows everyone with a credit history to access their credit report from each of the three main credit bureaus, Equifax, Experian and Trans Union, once every twelve months at no charge.
There are hundreds of web sites that offer “free credit reports,– “instantly,– “hassle free,– “fast, free, and easy.– Beware of these sites. The last bit of information they ask for is a credit card number in order to enroll you in a monthly service. Don't do it, Daddy-o. The only web site that is authorized to fill orders for credit reports under FACTA is annualcreditreport.com. That's it. Fill out the information on that page and you will actually have a quick, easy, hassle-free, instant, yadda-yadda, credit report.
For you skeptics not comfortable filling in your information online, you can call 1-877-322-8228, or complete the Annual Credit Report Request Form, print it, and mail it to:
Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281
Once the report is in your hands, check it over. You have the right to dispute any information on your report that is not accurate and up-to-date. You should contact both the creditor that is in error and each credit bureau that has the error on file. The bureaus are required to investigate each claim and if they cannot verify the negative information within “a reasonable amount of time– (usually 30 days), the negative entry must be dropped.
Experian, Equifax, and Trans Union all have online dispute forms (click on each), or you can write an old-fashioned “snail-mail– letter to each. The FTC has a great sample letter that can be copied to increase your chances of winning your dispute as well as a very detailed description of how to go about doing it. It's hard enough to have a good credit report without having those inaccuracies on there. So get your report, then fix those errors. You work too hard for your money to have a creditor or credit bureau let bad information slip through and cost you moolah.
Oh, yeah. Looking over your credit report is also a surefire way to detect identity theft. That's a hassle you want to avoid like a wounded, hungry puma.
The first act of the new Congress following the 2004 Presidential and Congressional elections was to pass the Orwellian-named Bankruptcy Abuse Prevention and Consumer Protection Act. This law makes it much more difficult for consumers to file for protection from creditors, increased fees associated with bankruptcy protection, and made the consumer pay more to their creditors, while doing nothing to address the legal loopholes that allow multi-millionaires to protect their assets while they file for bankruptcy. All of this happened while most major bank and credit card companies were reporting record profits. 
There are no laws preventing credit card companies from raising interest rates on a whim. There are no limits to the interest rates they can charge, or the fees they can assess for going over your credit limit, making a late payment, or bouncing a check. It's time our representatives started legislating for the benefit of the middle and lower classes. So give your Senator or Representative (or both) a ring. You can find their numbers here. Need help with what to say? Try this:
“My name is (your name) and I am a voter from (your state and/or district) and I am outraged at the lack of consumer protection from credit card companies. If (your Senator or Congressperson) wants my support in their next election (he or she) will introduce legislation putting a cap on credit card interest rates, over-limit fees, and late fees. Thank you for your time.–
Of course, you don't want to wait for politicians to solve this problem, so here I go again, sounding like a spam email or that annoying commercial that comes on at two o'clock in the morning while your blankly staring at a rerun of M.A.S.H., your credit card debt keeping you miles from sleep. But I'll say it anyway: Get some help now, before it's too late!
You may have considered using a credit-counseling agency before, but everything on “the tube– (or plasma, LCD, DLP, or projection) or online looked like a scam. Or maybe you haven't, but should. I know how confusing and difficult it is to sift through all the bogus ads to find a counselor that's too-legit-to-quit (sorry). But in my extensive, and I mean EXTENSIVE, research of this topic almost all of the reputable credit information sites point to The National Foundation for Credit Counseling.
The FTC suggests that if you can't develop a plan to rid yourself of unsecured debt in one year, you should seek credit help. The NFCC will point you to accredited and reputable services, either local or national, by phone, Internet, or in person. Some require a small fee or a monthly charge for their continued service, but they can save you a 50-gallon-drum's worth of cash in the long run.
If your debt is James-Earl-Jones’-voice deep they may suggest a Debt Management Plan (DMP). This is a way to pay down debt by making a monthly deposit to the agency, which negotiates with your creditors to reduce or eliminate fees and interest rates, and then uses the money to pay off your debt. In many cases, large debts can be paid off in as little as 36 months.
Whatever they suggest you do, it's worth a call. I recommend doing it sooner rather than later; each month that goes by that you're paying 25% interest rate buries you deeper and deeper. I speak from unfortunate experience: the smaller the debt, the less stressful it is.
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