Archive for March, 2011

The Good and Bad News About Old Credit Card Debt

Monday, March 28th, 2011

If you got in over your head and had to simply stop making payments on one or more credit card accounts, you know it’s done damage to your credit scores.

At first the account will show on your credit report as 30, 60, or 90 days late. Eventually it will probably become a charge-off – sitting there on your credit report doing you damage.

The good news about that is that as time passes and you keep all other accounts current, the importance of this default will recede and your scores will begin to inch higher. Then, after 7 years from the date the account became delinquent, the charge-off will be dropped from your report.

Do check to make sure this has been done – studies show that over 70% of all credit reports have errors, and failure to remove negative information on time is a common one.

When this day passes and the information is removed from your credit report, your credit scores will see an immediate increase.

The bad news is that this won’t stop creditors from hounding you. In fact, collection attempts can go on forever, in spite of the Statute of Limitations.

The Statute of Limitations is different from state to state, but for unsecured debt such as a credit card it is typically 4 to 6 years from your last payment date. Once a bad debt or charge-off outlives the statute of limitations, you cannot legally be sued for collection. If a creditor does sue you after this date, you can counter-sue and collect.

But just because they can’t sue you doesn’t mean they will stop harassing you.

When a credit card company charges-off a debt they can recoup a small portion of their loss by selling the debt to a collection agency. If that agency is unsuccessful in collecting from you, they’ll sell it for a bit less to another collection agency. This can go on for years – selling for less each time.

And, each time a new collection agency buys your credit card debt, they’ll attempt to collect. Some of them can be very aggressive in their efforts, despite the rules set forth in the Fair Debt Collection Practices Act (FDCPA).

The good news about that is that if your debt has outlived the Statute of Limitations, you can tell collectors to stop contacting you. If they persist, they’re in violation of the FDCPA and you will report them.

But of course, once they’re forced to cease their efforts, they’ll just sell the credit card debt to someone else, and you’ll have to tell them the same thing.

So, the good news about old credit card debt is that it will cease to harm your credit scores after 7 years. The bad news is that you may be dealing with debt collectors for the rest of your life.

If You Institute a New Program and it Turns Out to Be a Flop, What Do You Do?

Monday, March 28th, 2011

If you’re the Federal Government, you can do one of two things:

* Expand it and spend more money
* Do away with it

    In the case of the failed HAMP (Home Affordable Modification) program, it appears that they’re trying to do both.

    Expand it: Under the terms of the Frank-Dodd act, a new regulation is requiring loan servicers to tell homeowners in writing why they’ve been turned down for a loan modification. But the guidelines don’t cover all loans, so you may or may not get a letter if you’re turned down.

    After being rejected and told why, homeowners have 30 days to file an appeal and provide written proof that some of the data used in the decision was wrong. Then the servicer has the choice of taking a second look at the request or rejecting it again.

    Part two of that regulation is the creation of a new government website where homeowners will be able to input their own information to see if they might be eligible for loan modification under HAMP guidelines. The website is scheduled to be ready by late Spring.

    Do away with it: Meanwhile, the House Financial Services Committee voted on March 9 to do away with the HAMP program entirely. The proposal has now gone to the full House of Representatives for consideration, and of course there are proponents and critics on both sides of the issue.

    Treasury Secretary Geithner testified on March 8, saying that elimination of HAMP would “cause a huge amount of damage” to the housing market.

    However, an October 2010 report from the Special Inspector General for the Troubled Asset Relief Program asserted that failed loan modifications have hurt consumers. The report noted that they’ve led to higher outstanding principal balances and destroyed credit ratings for troubled borrowers. No doubt that those troubled borrowers would agree.

    Perhaps the new website will be ready just in time for the program to shut down?

    Why did HAMP fail?

    Why, when the program was expected to help between 3 and 4 million homeowners avoid foreclosure within its first 6 months, has it now helped only 600,000 – after nearly 2 years?

    The most likely reason is that the participation by the banks was voluntary. In addition, those who did participate didn’t have to follow any guidelines in deciding whether to start – or finish – a loan modification.

    Guidelines do exist in the form of a NPV – a “Net present value” test that determines whether a loan modification makes financial sense for the lender. If a loan meets both that test, and the bank’s own proprietary loan modification guidelines, the servicer must offer the borrower a trial modification.

    However, as far too many homeowners have learned, they don’t have to make it permanent.

    Apparently because this is all voluntary on the part of the banks, there are no enforcement mechanisms and no penalties for failure to follow the HAMP guidelines.

    The new website is no different. It will offer only the official HAMP guidelines, so passing that test will not be a guarantee of being accepted for a loan modification.

    Apparently, the primary benefit to the new regulations is to remove some of the mystery – so homeowners will have a clue about why they didn’t get a loan modification.

    Need a New Credit Card? Consider Your Use Before You Choose

    Thursday, March 24th, 2011

    There’s no such thing as a “One size fits all” credit card any more, so it pays to do some research and consider how you’ll use the card before you fill out that application form.

    Right now dozens of card issuers are offering cash back rewards to get you to choose their card, but you’ll find that some of these cash back cards will benefit you, while others may not.

    First, some impose an annual fee while others do not. You’ll have to weigh their rewards against the annual fee to determine whether it makes financial sense to carry those cards.

    Most offer 1% back on purchases –  while some offer as much as 5% back under certain circumstances.

    That sounds good, but even at 5% cash back, a consumer would have to charge nearly $1,200  just to break even after paying a $59 annual fee. At 1% cash back, he or she would have to charge $5,900!

    Many cash-back rewards credit cards today offer 1% on most purchases, but from 2% to 5% on purchases made in specific spending categories. For instance, a card may give back more for use at a luxury hotel or at restaurants. Another might give higher rewards for gasoline or grocery purchases.

    Some, such as Discover Cards, offer “bonus” cash-back percentages for use in different categories at different times of the year. They might offer more for resort spending in the summer and for clothing store purchases in winter.

    Next, some cards only give rewards after you’ve spent a specific dollar amount. For instance, one American Express card offers 5% back on “ordinary purchases” – but only after you’ve spent $6,500 in a given year. If you don’t charge that much, that incentive is no benefit to you. On the other hand, some restrict the amount you can earn each year.

    The way rewards are delivered varies between cards, too. Some will automatically credit your account or mail you a check when your rewards reach a set threshold. Others hang on to the money until you request it.

    Some cards allow you to accumulate your rewards as a kind of  “savings account” until you want to use them. Others require you to request the rewards on time or they’ll expire.

    With all these variables to choose from, you can probably find a card that fits the way you use credit. So take your time, do your research, and get some true rewards from your cash-back rewards credit card.

    Montana Senator Seeks to Delay New Decision by the Federal Reserve

    Wednesday, March 23rd, 2011

    The Durbin Amendment to the Dodd-Frank Act includes a new debit interchange fee rule that has banks, retailers, consumers, and members of congress embroiled in a heated argument.

    If finalized, the rule would limit the fees banks charge retailers every time a consumer swipes a debit card. Right now the average fee per transaction is 44 cents. If enacted, fees would be capped at 7 to 12 cents.

    This represents a considerable loss in revenue for the big banks. According to a March 16 Fox News column written by Stephen Clark, banks collected about $16 billion dollars in debit card swipe fees in 2009. This was an average of 44 cents on each of 38 billion retail transactions, valued at $1.45 trillion.

    Right now the banks, and senators such as Jon Tester (Dem., Montana) are arguing that this move will increase costs for consumers. Thus, Jon Tester and a bipartisan group of U.S. senators has introduced new legislation to delay implementation. They want to put any reduction in debit card swipe fees on hold for two years while several government agencies conduct a year long study and analyze the results.

    Senator Richard Durbin (Dem., Illinois) disagrees. He stated that if Tester’s bill is passed, it will be the equivalent of giving the big banks a $1.3 Billion per month bailout. Merchants and retailers agree, stating that lower debit card swipe fees would result in savings that could be passed along to the consumer in lower prices.

    There are few consumers who would stand up and argue that the banks need to make more money, but some consumers are in favor of the Tester bill because they know that the banks will respond in ways that consumers will not appreciate.

    One way or another, the banks will collect. Industry representatives have stated that the debit card swipe fees allow banks to provide consumers with free services, such as checking accounts. If the Fed limits what they can collect from merchants, they’ll be forced to pass their costs on to consumers.

    How will they do it? Some banks, such as Chase, are considering a plan to limit debit card purchases to $50 or $100 per transaction. This could effectively push consumers to use credit cards rather than debit cards for large purchases. Banks would benefit because credit cards are exempt from the proposed new limits on swipe fees. And of course, using a credit card carries the potential of incurring interest.

    In addition, Chase has already begun testing new fees. In Northern Wisconsin, they’re testing a $3 monthly fee for debit cards, and in Atlanta they’re testing a $15 monthly fee on basic checking accounts. Several banks have already hiked the minimum balances required to maintain free checking accounts and have discontinued rewards points on debit cards.

    Public comment on this rule closed on February 22 and the Fed has until April 21 to finalize the decision to put the new rule into effect. If passed, it will be effective on July 21.

    We’ll let you know the decision…


    New Fed Rule Makes it Harder For Stay-at-home Parents to Build Credit

    Wednesday, March 23rd, 2011

    Because “Life is what happens when you’re making other plans,” it’s important for every individual to have credit in his or her own name.

    You may use credit only as half of a married couple, and you may never need to use your own personal credit. But since things like illness, death, and divorce have a way of changing things, it’s best to have it, just in case.

    If you don’t have a credit card in your own name right now, get one before October 1, 2011.

    That’s when the new Fed rule goes into effect – making it impossible for anyone without their own source of income to obtain a credit card.

    The new rule was announced on March 18, and the credit card companies have until October 1 to come into compliance. However, some of them implemented the rule  immediately, so you may have to shop around.

    According to the rule, credit card companies will not be allowed to consider “total household income” when determining whether a new applicant qualifies for a credit card. Thus, if you’re a stay-at-home mom or dad, or if you’re a college student with no income, you’ll be denied.

    The new rule states that the card issuer must consider the applicant’s independent ability to make the payments, regardless of the consumer’s age.

    According to the Fed, this rule is simply a clarification of the guidelines set forth in the CARD Act of 2009. However, that act’s authors say that this rule goes beyond the scope and intent of the Act.

    Opponents of the rule say that the Fed has just undermined more than a generation of progress made since the passage of the Equal Credit Opportunity Act of 1974 – and has put abused, divorced, or widowed homemakers at serious risk.

    Supporters advise the stay-at-home parent to get a joint account with their spouse, or to become an authorized signer on the spouse’s account. This would hardly  be useful for a woman escaping an abuse situation – since that abusive spouse could simply close the account. In addition, many widows have found themselves with no available credit after the death of a spouse.

    Thus, the social impact of this ruling is significant and is opening up new avenues of debate. In addition to undermining the financial safety of a non-working spouse, opponents say that the Fed has effectively said that the parent who “keeps the home fires burning” has no value.

    Those who praise the rule seem to be of the “Big Brother” mindset – saying that this rule will protect consumers from having credit they can’t afford to repay, will prevent impulse buying with instant credit in retail stores, and will protect working spouses from liability for accounts they don’t know about.

    Although the rule was put into effect quietly, I think we can expect to hear more about it.

    How the rule will be applied in community property states, where a spouse has legal claim to half of all money coming into the marriage, remains to be seen.

    Meanwhile, be safe. If you don’t have any credit in your own name, find a bank that has not yet put the new rule into effect, and get your own credit card before October 1.

    Looking Back at The Credit CARD Act of 2009

    Monday, March 7th, 2011

    A year has passed since the final provisions of the CARD Act went into effect on February 22, 2010, and industry experts are looking back to see if it had its intended effects.

    In many ways it did, but it also had some unintended and less than positive effects.

    First, the good news. While some credit card holders still don’t understand what they’re paying for credit, the “Schumer Box disclosures” have made it clear to most. If consumers read their credit card statements, they’ll see how much interest they’re paying, what it will cost if they make only minimum payments, and what they’ll save by increasing their payments.

    Since credit card issuers can no longer raise rates on existing balances unless the card holder is 60 days late with a payment, consumers are naturally paying less interest. We’re also getting at least some warning before seeing rate hikes on future purchases.

    Banks aren’t particularly happy with the changes, but are working to find ways to add some costs and fees that weren’t covered under the CARD Act. Bank of America issued a statement stating that the CARD Act had a $20.3 billion adverse impact on their credit card operations.

    Meanwhile, what happened in the months preceding the final implementation of the Credit CARD Act had unintended and adverse consequences for credit card holders – and for the real estate industry.

    In the course of the year prior to implementation of the law, 15% of credit card accounts saw rate increases. Some of these increases were drastic, and thus raised monthly minimum payments beyond what card holders were able to pay.

    In addition, credit card issuers slashed credit lines. Many consumers reported having their formerly high credit lines slashed to less than their outstanding balances – triggering over-limit fees.

    What did this have to do with the real estate industry?

    These actions reduced credit scores for thousands of consumers at a time when mortgage lenders were tightening their requirements, demanding higher credit scores. .

    Because 30% of a credit score is based on the consumer’s ratio of credit used to credit available, credit scores tumbled. Where some had remained comfortably under 30% of credit use, their credit reports suddenly showed that they were using 100% of their available credit.

    Other reports show that today’s consumers are using less credit, paying down credit card balances, and slowly regaining their credit scores – and that’s a good thing. But these moves did put a dent in the number of consumers who have been able to take advantage of today’s low mortgage interest rates.

    More Credit Card Use – A Bad Sign or a Good Sign for Texas Cities?

    Monday, March 7th, 2011

    When Experian released their year-end report on cities whose residents carry the highest credit card balances, three Texas cities made the top ten list for 2010.

    In fact, San Antonio, with an average of $5,177, topped the list at #1. Dallas came in at #5, with an average of $4,935, and Austin made #8, with an average credit card balance of $4,791.

    The national average was $4,384, putting San Antonio at 21% above average.

    At the same time, El Paso residents reduced their credit card balances by about 14%.

    At first glance, one might think that residents in cities with the highest year end balances had the worst cash flow. Perhaps their credit card balances are high because they didn’t have the cash for Christmas gifts and celebrations.

    But other analysts have the opposite view, and our research shows they might be right.

    That view is that consumers who feel confident in their ability to pay off debt are likely to use credit more freely.

    This attitude falls in line with what we learned about the unemployment statistics as the year 2010 came to a close. While the U.S. as a whole was showing about a 10% unemployment rate, many Texans were faring better. Here’s the December 2010 statistics:

    San Antonio:   7.3%

    Dallas:             7.9%

    Austin:                        6.8%

    Meanwhile, El Paso stayed with the country as a whole, with unemployment at 10%.

    Some Texas consumers who were interviewed said that they use their credit cards freely but pay the bill in full each month. That’s good money management on their part, but could still have a negative impact on their credit scores.

    Any time a consumer uses more than 30% of his or her available credit, scores will be negatively affected – and it doesn’t matter if the balance is paid in full each month. Credit card issuers report only the balance at the end of the billing period, and don’t show that the previous month’s balance was paid in full.

    Thus, a consumer with a $2,000 credit line who charges and pays off $1,500 in purchases each month is hurting his or her credit scores.

    One way to avoid this credit hit is to go on line and pay the monthly balance each month before the monthly statement is generated. This isn’t easy, since credit card issuers aren’t constant with their closing dates. However, it would be a worthwhile practice for consumers who are attempting to build credit scores in anticipation of a home purchase. Either that, or never use more than 30% of available credit at any one time.

    Disclaimer: This information has been compiled and provided by as an informational service to the public. While our goal is to provide information that will help consumers to manage their credit and debt, this information should not be considered legal advice. Such advice must be specific to the various circumstances of each person's situation, and the general information provided on these pages should not be used as a substitute for the advice of competent legal counsel.