Credit Cards and the Law – Senate OKs Consumer Friendly Bill

A senate bill that is expected to be signed into law soon is going to change the way credit card companies do business.

In addition to putting limits on interest rate change policies and the fees that can be imposed for credit mistakes, the bill also seeks to place limits on who can get a card based on age. Like any change to an existing business practice, this will have big implications for both the credit industry and the consumers of credit.

I will be analyzing the impact of this bill over the next several days. In the mean time, take a look at this:

Senate OKs bill to reign in credit industry

What Is A “Cram Down” When You Re-Affirm A Debt?

Well, it is over.  You filed bankruptcy, and met with the trustee, and your bankruptcy case is over.  You now either have a schedule of payments with a Chapter 13, or you wiped most of your debt clean with a Chapter 7.

But there may be a few assets that you decided to keep that you have to re-affirm.  When you re-affirm the debt, you are promising to pay the debt off according to a new payment amount and schedule.  It may be the same as it was, but it may not.

When I re-affirmed my truck, my credit union offered to let me do a ‘cram down’.  I was upside down on my truck, meaning I owed more than it was worth.  The difference was about $4500.00.  My credit union knew that I was unlikely to want to keep the truck, since it was no longer worth what I owed.

If the credit union had taken the truck back, not only would they have lost the extra money I owed on it, but they also would have lost the money paid to the auction house that sold it, and whatever the lower amount was that it sold for.  My banker told me they were looking at losing about $8700.00 on the truck when all was said and done.

So, they opted for a different route.  By bringing my truck loan down to the current market value, I saved money, they saved money, and they would make a bit back on the interest that I paid.

For me, this was a great deal.  I got to keep the truck, and my payment was reduced.  For my credit union, It was a decent end to a bad situation.

If you are re-affirming a debt, and the debt has a well-define market value, be sure you talk to your lender if you owe more than what your property is worth.  It may be easier to keep your debt than to try to get a replacement for your property.

Make sure you take a hard look before you do this though.  My truck had some problems that I still had to get fixed, and it ended up that I could have gotten a loan for a different car.  It wouldn’t have been as nice, but there would have been no cash out of pocket for the new vehicle, while I had to pay for repairs to my truck.

What Is Junk Debt And Why Do I Care About It?

You may have heard of ‘junk’ categories before.

You can find junk bonds, junk dealers, and junker cars.  The term means the same thing:  an item of low or poor value.

Well, now we have junk debt.  Junk debt is debt that is either uncollectible through ‘normal’ means, or debt of very low value.

I’ll give you an example:

I got a letter 2 days ago from a law firm.  They claim I owe $40.00 from a parking ticket 7 years ago.

Think about it.  They paid about a buck to send the letter.  They probably bought the debt for about $8.00.  So, they stand to make about $30.00 if they can collect the whole thing.

But they have 2 problems.  First, the statute of limitations in my state is 6 years.  So they can’t sue me.  Second, they will have to prove it is mine, and that I didn’t pay it.  Both of these are tough to get past if you know how to deal with the debt collector.

Low margins.  Old debt.  No legal recourse.  Seriously, this is junk.

So why do they buy it?  Well, many people look at these old accounts, and settle for much less.  A $20.00 payment is a huge profit for the collector, and costs less than the movie you buy when you are checking out of Wal Mart.

That one happened to be cheap.  But how about bigger ticket items?

Utility companies, library fines, parking tickets, local taxes – all these things are being sold as junk debt.  Many of the accounts are decades old, and they are virtually un-provable.  The firms that buy these accounts have a hard time collecting, but almost all of what they collect is profit. Many people just go ahead and pay when they get the bill, just so it ‘won’t show up on their credit report’.

Why do I care?  These debts can be reported to the credit bureaus.  If the old debt is reported, it will affect your credit scores negatively.  As someone who is concerned about credit, you need to avoid this at all costs.

If you are notified you owe an old debt, you need to contest the debt.  Make sure the debt is actually yours, and don’t settle with what the collection company tells you.

Remember, these can end up on your credit report, but usually they are so old they can’t stick.  You can get them cleaned up, and get rid of them, with out paying, but you need to understand how to clean those credit reports up.  Make sure you do the research and understand how to fix the problem.  Or, just read my book!

Can I Ask a Credit Card Company to Reconsider When They Deny Me Credit?

I hate those letters.  I used to get them a lot.  They tell me that I have been denied, yet again, for the credit card that I wanted.

It was my fault.  My credit scores were terrible.  I couldn’t really blame the companies that I applied with.  I had a bankruptcy, and late payments, and car repossession, and a foreclosure, and over limits, and things like that.  But I am a really nice guy, and I have a job!

They don’t care.

As far as a creditor is concerned, I am a set of numbers.  I have a score, and a few ratings, and a number of payments that were late 30, 60, or 90 days.  All they care about is those numbers, and the dates those numbers occurred.

But, I was trying to rebuild my credit!  I had learned about credit, and become responsible.  My payments were on time, I paid more than I had to, and I NEVER went over my limit!  It’s true, I didn’t really need any more credit, but I wanted more to build my scores with.

What to do?  Well, I decided to go with the personal touch.

I took that denial letter, and I called them!  I called GE Credit.  The customer service person that I talked to was very pleasant, listened to my explanation, and told me he couldn’t help.  He invited me to write a letter to explain my case, and promised they would review it.

I wrote down the address, thanked him for his time, and wrote a letter.  I explained what had happened in my life, what I had learned, and how I was moving forward to improve my credit situation.  I sent the letter, and waited.

A couple of weeks later, I had a new card!  They liked my letter enough to give me a line.  $500.00 to start, but it WAS a start.

That credit will stay with me for a long time.  I use the card very little, but it is a big part of my credit-building toolbox.  And all it took was a 5 minute phone call, and a single letter.  And 27 cents for a stamp (oh, the good old days of cheap postage).

If you get a denial letter, show them you are a serious credit consumer with a plan.  Let them know that you recognize your failures, and have a plan for success.  You may not get the result you want, but on the other hand they may just award you that card of your dreams.

Just don’t expect an unlimited credit line from Amex.  It isn’t going to happen.  Yet.

Why Do I Have To Apply For The Mortgage Company’s Loan When I Am Trying To Buy A Short Sale From Them?

I was talking to my realtor today, and heard some interesting information.

She is helping a young couple and their kids relocate from another state.  They have a fairly limited budget, and are trying to stay under a $150,000.00 purchase price.  This couple has been pre-qualified through a lender they chose, and have a pre-qual letter, so they can purchase up to that $150k mark.

They found a house they like, and decided to put in an offer on it.  The house is owned by Countrywide Mortgage, and they had a little surprise that went along with the offer.

They told the couple that they would have to fill out a Countrywide mortgage application before the offer would be considered!

Now, I know that times are tough for mortgage companies.  I know they have taken a beating.  But this seems really extreme.  Let’s take a look at what this does:

1)      The couple applying for the loan are going to take a hit on their credit scores.  Queries against your report that are similar in nature, such as several mortgage applications within a short amount of time, are considered ’shopping’, and do not ding your credit.  However, since this couple qualified several months ago, the new app will be a big hit.  It is only 5 to 20 points, but if that drops their credit scores a bracket, it will affect other rates that they may be eligible for.

2)      The original mortgage company may be out of luck on this loan.  Countrywide may win the mortgage, and that means another company loses business.  Normally I am fine with this, but not if the application is coerced and is not what the couple intended to do originally.

3)      This adds extra time to the whole process.  This couple is relocating for work (he is in the military and is being re-assigned), and they have to move quickly.  Now they make have to stay in temporary housing for several months, much longer than they had hoped, before their place will be available.

4)      Unless the mortgage company is being really generous, the purchaser might have to pay for the privilege of filling out yet another loan application.

Why would a mortgage company do this?

Well, financially it makes a lot of sense.  The mortgage company has taken a loss on the principle of the house.  Let’s say this was originally a $180,000.00 loan.  It now sells for $150,000.00.  That is a $30,000.00 loss, correct?  Well, not exactly.

The first several hundred payments on a property are largely interest.  If this house had a $1,000.00 payment for, say, 5 years, $60,000.00 would have been paid out.  Let’s be conservative, and say that $40,000.00 of that was interest (that is pretty conservative).  In that case, after the mortgage company paid back their expenses and the interest they had to pay on the loan from their financers, it probably made a profit on that interest of $20,000.00 or so.  My numbers aren’t exact, obviously, but they make a profit on every payment.  Otherwise they wouldn’t be in business.

They also wrote off the bad debt on taxes.  That takes even more away from their loss.

They had to eat some bucks on the short sale.  Fine.  That is part of doing business.  Now they are looking to make money back.

When a short sale happens, the original lender loses any monthly profit on the loan, unless, of course, the new loan is through them as well.  They want that loan!  The new buyer has to qualify, of course, but if they can hang on to the loan they can make up some of the loss.  So, it makes perfect sense that they want an opportunity to get the loan.

I can see why they do this, but I am not happy about it.  Any time I have to fill out additional paperwork, take a credit score hit, and get nothing out of it other than the privilege of being able to buy something, I feel wronged.  This is a business practice that feels predatory, and I would hope that enough people boycott companies pursuing this practice that it will soon come to an end.

Minimum payments on credit cards are rising

This is an article from bankrate.com showing that the average consumer is now making the minimum payments on their credit cards.

I will be adding a post after this one discussing the impact of making the minimum payments.

This might be worth taking a look:

http://www.bankrate.com/brm/news/debt/20050503a1.asp

FrontLine’s “The Secret History of The Credit Card”

I found this news story put together by FrontLine and The New York Times.

It talks about some of the hostory of credit cards, but also many of the dirty little secrets of the credit industry.  If you are looking for some background, this is a good place to start.

http://www.pbs.org/wgbh/pages/frontline/shows/credit/

Can I Save An Account That Is Going To Collections?

Well, it happened.  You didn’t make your payments, and now your account is going to collections.  I know how you feel.  You get a sinking feeling in your gut, you know this is going to make getting credit really tough, and you start to worry about getting sued.

 

If you act early enough, you may be able to save this account.  Each creditor has its own policy, but many are becoming more lenient as they are trying to work with debtors (you) to keep accounts open and money coming in.

 

If you feel that an account is going to be closed and sent to collections, you need to do several things quickly.  First, call your creditor!  Talk to them about your situation, and explain that you are getting back on track and want to make good on your debt.  You may have to pay penalties and fees, but there is a possibility that you can get them to work with you.

 

Second, be prepared to make a payment immediately!  They will have a ‘minimum payment’ needed to bring the account back into good standing.  This is usually not negotiable, and they will want it now.

 

Third, be prepared to make a regular payment!  You will have to pay on time, and the required amount, in order to keep your card in good standing.  If you miss a payment, or don’t pay that minimum, your creditor may feel that they have no choice but to close the account.

 

Start working to manage your bills more effectively to make sure you don’t create more problems for yourself.  Typically, after 1 year of regular payments, your creditors get more lenient and will work with you on interest rates, card limits, and payment schedules if you run into a problem.  Don’t miss another payment, and make sure you pay at least the minimums when you make a payment.;  Paying extra always reflects very well on you as well.

 

If you do save the account, you should be aware it will come with penalties.  You will almost certainly pay a higher interest rate.  Your credit limit will probably be reduced.  And, it will be a LONG time before your creditor is willing to make any kind of a concession for you!

Technorati Tags: finance, collections, debt collection, collection agency. degault, credit cards, payment, credit score, credit report

Why Did My Credit Card Company Reduce My Credit Limit?

Becky has a JC Penney card, issued by GE Money Bank. She has never been late (she showed me her payment history online), and is well below her credit limit of $400.00. A few days ago, right after she made a large payment and paid the card off, she got a letter telling her that her credit limit would be reduced to $100.00 or her current credit limit, whichever was greater.

Now, fortunately for Becky, she had just paid off the card. Or maybe that was unfortunate. She now has a $100.00 limit on her JCP card. From the standpoint of her ability to spend, she doesn’t really care. She has worked hard to be able to live on a cash basis. However, from a total credit line standpoint, this really hurt her.

Part of your credit score is determined by your total credit used divided by your total limit. If your limit is decreased, your scores might fall, as your percentages rise. Since Becky is working on rebuilding credit, having this kind of a change might adversely impact her scores.

So why did JCP do this? Well, there is an easy answer. They are trying to weather the financial storm. They are taking clients who might be a risk and reducing their credit limits. How do they determine risk? Well, as is normal with their practice, they look at credit history, ability to pay, and how much credit a person has. If they find a situation that might cause a potential problem, they are within their rights to reduce the rate.

In Becky’s case, she had recently applied for, and been approved for, a new credit card with a $1500.00 limit. This was because she had taken care of her credit, and never missed a payment. However, that new card ended up being a big red flag for JCP. At some point, a creditor will look at your available limits, calculate the max payment you might have to make if you maxed out all of your cards, and then decide if they think you will be able to pay things back. If your creditors think you can’t pay back what you use on your cards, they may reduce your limits!

How can you combat this? Well, Becky called in and talked to a JCP credit service person. They told her that ALL accounts had their credit limits reduced! I can’t verify this, but in talking to 4 other people that have JCP cards, they all got similar letters. Of course, the people I spend time with talking about credit have all had some credit problems in the past, so they might not be indicative of the normal treatment of a customer by JCP. Becky was told she couldn’t get her limit raised.

What are your options? Well, you really have two. You can either live with the decision, or you can pay your account off and cancel it. Personally, I think canceling your card is a bad idea. First, it hurts your credit aging, and second, it reduces your total available credit by the credit limit on your card.

When you have a limit lowered, immediately start paying the balance down to improve your debt ratios. When you get it paid down, just stuff it in your sock drawer and leave it there for emergencies.

Your creditors can do damage to your scores, but you can recover quickly from a credit limit being lowered by a creditor. Make sure, if your limit is lowered, that you contact the creditor to find out why, and see if they will reconsider. But, unless you have a really good reason to do so, don’t close those cards as that can hurt your scores more than the reduced credit limit.

Can I Get Sued For Medical Debt If I Receive Medicaid?

I found an interesting article today on Debt Law Network.

It discusses if your creditors have the right to pursue you for any money that should have been covered by Medicaid at the time of treatment.

The answer, according to US law, is NO!  As long as you were covered by Medicaid at the time of the service, then Medicaid pays the bill, not you.

Go read the article.  Good stuff.