Consumer Credit Questions and Answers

Understanding Payday Loans

2010-10-20T15:27:00.002-04:00

If you look up “payday loans” on Google, the first few dozen hits are all websites offering online payday loans and cash advances. These companies advertise phrases like “instant lender decision” or “get your cash today!” They stress immediacy and convenience, but offer absolutely no information on what the structure of their loan is like, what interest is being applied to the loan or what the penalties are like for missing a payment.

The reason why the cost of this convenience is not advertised is because it is unbelievably high. Payday loans typically range from $100 to $1000 and cost from 380 – 790% APR (annual interest), depending on the length of the loan. The higher interest applies to the shortest-term loans. I think a lot of people wonder how companies can get away with such astronomical interest rates.

To answer this, you need to understand what a payday loans is. Essentially, it is a very short-term loan given to an individual to cover his or her expenses before the next paycheck. The amount of the loan plus interest is withdrawn from his/her checking account on a fixed date, when his/her next paycheck is posted. The individuals who are willing to accept such high rates are likely ones who do not have access to revolving credit and do not have available savings. When there is an urgent need for money and seemingly no accessible alternatives, people can feel pressured to accept what they can get. However, many consumers who find themselves in such a situation (where they do not have savings or revolving credit and are desperate for a loan) will not have the money to repay their loan by the agreed date. If this happens, additional financing fees are accrued. As a result, borrowers are forced to enter repeat borrowing cycles with the lender, which will lead to hundreds of dollars in additional debt accrued in a very short period of time. According to the Consumer Federation of America (CFA), consumers have an average of eight to thirteen loans per year at a single lender.

In the United States, the loan volume in the industry was estimated to be 30.3 billion in 2009, with $4.8 billion paid in loan fees. Of all loans, payday loans are by far the costliest, which is why it is very important to be aware of the alternatives available to you, even in a desperate situation:
• Work with your creditors to have more time for your payment, which will give you the time to apply for a personal loan at a bank
• Ask your employer about the possibility for an advance
• Obtain a line of credit from an FDIC approved lender
• Don’t be afraid to turn to friends and family

Understanding Secure Credit Cards

2010-10-06T11:50:00.003-04:00

Last week I was interviewed for a NY1 segment on secured credit cards, and I realized that a lot of people might not be aware of the conditions and responsibilities that come with opening a secured card, when they hear about it in the context of improving credit.
They are easy to qualify for, and they help establish a credit history that will ultimately help consumers get lower interest rates on their loans. What many people do not know is that they need to contact the issuer and request that their payment history is reported to the three major credit bureaus. Also, there are a lot of secured cards offered to consumers, and the competition among them should serve as a strong incentive to do your homework to find the best deal before signing an agreement.

Although secured cards work much like credit cards, you will be required to submit a substantial deposit, equal to 100-200% of your revolving credit line. It is usually $300-500, so initially the credit line on your card is very low. Depending on your agreement, your credit line might be extended either through additional deposits or because of good payment history. The agreement will also outline the fees and penalties you may be subject to, and it’s important to pay attention to these.

• Sign-up fee
• Monthly maintenance fee
• Annual membership fees range from $20-50
• Late payment fees
• Over limit fees
• Returned item charges
• High APRs, which vary from 10-20+%
• Charges on foreign purchases

Credit.com has a page on secured credit cards offered by major banks and can be a useful tool for comparing rates and fees: http://www.credit.com/products/credit_cards/secure.jsp
Generally, a priority in choosing a secured card should be a relatively low APR, in case you face unexpected hardship and cannot pay your balance off completely. I have seen many clients pay thousands of dollars in interest to credit card companies. Therefore, it might be worthwhile to pay an annual fee, but settle for a relatively low APR.

The biggest take-away here is that as a consumer, you have to be proactive about your personal finances. Be aware of the terms of your cards and always keep track of your expenses to build and maintain a good credit history, which will ultimately pay off when you apply for long-term car and home loans.

Consumer Credit Tips

2010-03-09T12:28:00.001-05:00

Whether you’re an established savvy Saver or still a work in progress, the benefits of good credit are far reaching and long lasting. Among other things, a solid credit profile and high credit score makes you less risky to lenders. Why it can even lower your interest rates on credit cards and home loans (and save you money). But how do you go about building good credit – and maintaining it for the rest of your life? It’s hard to believe, but there’s not all that much accurate, readily available information out there to help you figure it out. Luckily, there are just a few really important things you need to keep in mind to create, maintain and enjoy a solid credit profile.

In many ways, less is more. Having too much established credit can make you look too “leveraged” or overextended. It’s better to go for quality over quantity when building your credit profile. Establishing a credit card account with at least one major bank almost guarantees that your payment history will be reported to all 3 credit bureaus and establishes your credit “worthiness” to other creditors. When building credit, make sure to take these things into account: payment history, amounts owed, length of credit history, types of credit in use and newly established credit. All contribute to building a positive credit profile and credit FICO score.

Using credit responsibly. Assuming you’ve established a credit card account, it’s important that you manage that account responsibly. When making a purchase on a credit card, don’t just look at the minimum due each month. The truth is, a single purchase may take months, sometimes years, to repay. You don’t want to carry a balance each month, especially if you don’t have a great credit card rate in the first place.

Traps and pitfalls to avoid. One of the best ways to avoid credit card trouble is to be well informed and organized. Read through your monthly billing statements and review all the charges on your accounts. If you don’t understand the statement, call customer service and review the bill until it’s clear. And remember, the new CARD Act of 2009 means creditors will need to give you 45 days’ notice to raise interest rate changes on a card. This new disclosure will help prevent high interest charges on your account without your prior knowledge. You’ll have the right to “opt out” of a particular change and maintain the current rate. The tradeoff? You’ll need to close the account. Also, the new law means you’ll get lower rates reinstated after 6 consecutive months of timely payments.

Clearly, there’s a movement for increased consumer protection. And it starts by taking personal responsibility for your credit profile. If you haven’t started building one, get started. And take good care of it.

Debts to Pay Before Credit Cards

2009-12-10T12:29:00.016-05:00

In many of the previous articles I spoke on the many ways to remedy credit card debt effectively. It is also important to know what debts should take priority in terms of repayment prior to credit card repayment. Figuring out which debts to pay first can often be a very difficult question, as many creditors may be very proactive in collection procedures. A consumer might not receive as much attention with a late mortgage or car payment. Lets begin to take a look at the debts that need to be addressed prior to the credit card bills.

•Family Necessities – Food, essential medical expenses.

•Housing Related Bills – Mortgage payment, real estate taxes, insurance rent.

•Utilities – Con Ed, gas, oil, and electric bills.

•Car Payments – This is especially important if the car is the only method of getting to one’s place of employment. This would also include car insurance.

•Child Support – (if applicable) Non-payment can result in imprisonment.

•Income Tax Debt – Not paying could cause loss of refund or garnishment.

•Court Judgments – If a judgment has been ordered, it may be wise to make payment a priority, as the risk of seized property or wage garnishment could exist.

•Student Loans – Failure to pay could result in loss of tax refunds. I person may qualify for deferment or forbearance.

•Non-collateral loans – These accounts take on a lesser priority. Credit card debt, debt owed to professionals, open merchant accounts. Accounts still will go to collection agency for non-payment.

Secured debts should be first on the list to be paid. This is because the creditor can take the collateral used to satisfy the outstanding debt. (i.e. car, home.) Priority lists can be made for individual circumstances and situations. Obviously, every consumer's situation is unique but this information to be used as a general guideline to formulate the beginning of a debt repayment plan.

Understanding FICO Scores - New Credit

2009-09-11T14:55:00.003-04:00

Many aspects of a FICO score can be the balance of various pieces of consumer information. Opening a bunch of new accounts in a short period of time might put up a red flag to a creditor. How many new accounts you open in a given period of time is reviewed by the FICO scoring system. How long it has been since you opened a new account is also factored into the scoring model. Inquiries also impact the credit score. It is not a good idea to have too many third party inquiries generated on a credit report. It is a good idea to monitor your own credit reports. The inquiries generated by an individual do not adversely effect a credit score. However, inquiries generated by 3rd parties could lower a score, should those 3rd party inquiries become excessive.

Understanding FICO Scores - Types of Credit

2009-09-09T11:59:00.005-04:00

The FICO score is based on a mix of credit cards, retail accounts, installment loans, finance accounts, and mortgage loans. It is not necessary to have one of each account. It is also not a good idea to open accounts that you do not intend to use. The more you can diversify your accounts, the more helpful it will be to present a more balanced credit profile. The idea is to have a credit profile which is being used, but also has a healthy degree of diversification. Types of credit in use usually account for approximately 10% of the FICO score.

Understanding FICO Scores - Length of Credit History

2009-09-02T11:15:00.010-04:00

Approximately 15% of the FICO score is related to the overall length of time your accounts have been in use. In general, a longer credit history will increase your FICO score. It is still possible to have a decent FICO score without a long credit history if the rest of the credit report is in good standing. The calculation of the FICO score takes into account the age of your oldest account, newest account, and the average age of all your existing accounts. It is important to show some activity on your accounts as well.

Understanding FICO Scores - Amounts Owed

2009-08-18T13:11:00.001-04:00

Having credit card accounts and having balances on them does not necessarily make you a high-risk borrower. However, when a high percentage of available credit is used up the FICO score can be adversely effected. The general rule is to try to keep your balances under 30% of the total available limit of a credit card. For example, if one had a card with a 10K limit, a good idea would be keeping the balance under 3K. The amount owed on all accounts plays an important part in the scoring as well. Even when one pays their accounts off in full each month, the credit report usually reports the total balance shown on the last statement. The amount owed on all accounts and on different types of accounts is also a factor. Sometimes having a small balance on a card and managing it responsibly can have a stronger positive impact on a credit score then just closing out an account. If a large number of accounts are carrying balances, this could give the perception to a creditor that an individual is over-extended. Paying down mortgages and installment loans play a very important role in terms of credit scoring. The main idea here to understand is that having balances is not in itself a bad thing, but as one gets closer to the limit on the credit lines the scores tend to go down

Understanding FICO Scores - Payment History

2009-08-06T14:25:00.001-04:00

35% of your credit score will be based on your credit payment history. One of the most important factors a creditor will want to know is if you have paid your past credit accounts on time. It should be noted that if you have late payments in your payment history it does not automatically ruin a credit score.

An overall good picture can outweigh one or two late payments.

Remember when discussing payment history we are including more then just unsecured credit card accounts. Payment history would include car payments, mortgage payments, installment loans, etc.

Certain items that would be considered fairly serious would include public records, bankruptcies, foreclosures, wage attachments, judgments, child support payments, and collection accounts.

The specific details of when an account was late makes a large difference. For example an account 60 days late 2 years ago might not be as damaging as a mortgage payment that was late last month.

Often times it is possible to improve a credit report by having old and inaccurate items removed. We will talk about credit reports in future installments.

Understanding FICO Scores

2009-07-14T13:31:00.001-04:00

As creditors become more and more particular about a consumer's credit history, it is very important to understand how a FICO score is calculated.
A FICO score is the the scoring system that a credit score is based on. Over the next few installments, I will go into each part of how a FICO score is calculated and ways to improve that particular area of the score.

Solutions to Consumer Debt - Bankruptcy

2009-05-28T14:09:00.000-04:00

Bankruptcy should be the last alternative when trying to resolve credit and debt issues. Bankruptcy is the process where an individuals debt is either eliminated or reduced under supervision of the court. Pre-bankruptcy credit counseling (before filing) and post-filing debtors education are now mandatory requirements to the bankruptcy process. There are two main types of bankruptcy that are generally available to a consumers; Chapter 7 and Chapter 13.

Chapter 7 is a straight liquidation of one's debt. This is where all creditor debts are discharged through the bankruptcy. A chapter 7 bankruptcy is a process where the consumer petitions the court to take all assets unprotected by law or non-exempt to pay off one's debt. If the debt exceeds the assets the debts are forgiven. The idea here is to provide the consumer a clean slate to move forward and learn from past financial mistakes. Please note; Federal student loans, child support payments, alimony, and back taxes my not be discharged. Chapter 7 bankruptcy is reported on a consumer credit report for a period of 10 years.

Chapter 13 bankruptcy is often referred to as a wage earner plan. With this plan, debts are restructured by the court and the repayment plan is determined by the consumers income and expenses. Under chapter 13 a consumer is allowed to keep their home with usually 10-99% of the debt being repaid. Chapter 13 is reported on a consumer credit report for 7 years.

Although bankruptcy can carry a stigma for many consumers, it does liquidate outstanding debts. With the outstanding debts liquidated a consumer can rebuild credit and actually present reasonably well to a creditor in the future, especially if the consumer takes the necessary steps to build and maintain a new positive credit history. It is important to go through all options before filing for bankruptcy. A consumer may want to speak with a non-profit credit counselor and definitely consult with a lawyer prior to any definite decisions.

Solutions to Consumer Debt - Debt Settlement

2009-05-19T15:17:00.000-04:00

Debt Settlement is an area that seems to be receiving quite a bit of attention with consumers these days. Debt Settlement can be done by a consumer, but often times third party groups step in and negotiate an account on the client's behalf. It is important to note that it is not necessary for a consumer to use a third party debt settlement company to settle a debt. A debt settlement is achieved by negotiating with a creditors to reduce the balance owed on a particular account. Most accounts negotiated are with 3rd party collection groups. Most primary creditors do not negotiate too often with settlements, although there are exceptions. Working with a debt settlement company requires a bit of caution, as many fees are added for a service a consumer could actually do independently.

A debt settlement company may charge an initial fee, a monthly processing fee, and lastly a percentage of the debt saved. It is also important to mention that a consumer might be taxed as income on the portion of the debt excused. There are many methods to settling debt, but often times the most effective strategies are the most simple. The idea would be to start low and work your way up to an affordable payoff amount.

Usually, one can come to terms within several phone calls. If a person is uncomfortable negotiating, a friend or a lawyer could be used. I will open this installment to questions, but I think it is important to be very cautious when dealing with for-profit debt settlement groups. Debt settlement is an effective strategy to resolving past debts that have been placed in collection. Remember to keep a copy of the financial instrument you use for the settlement, and request a letter that outlines the settlement agreement. By keeping good records, one can follow up with the credit bureaus to improve a credit score.

Solutions to Consumer Debt - Debt Consolidation

2009-05-13T17:21:00.000-04:00

In our continuing series of solutions to consumer debt, we will now take a look at debt consolidation. Debt consolidation should only be considered when one can consolidate debt to a lower rate, and not take on any new financial hardship. It is often a mistake to try to consolidate unsecured debt with secured debt. Secured debt could be a line of credit attached to a home for example. The danger here would be the possible loss of an asset, in this example, a home. When one decides on debt consolidation, this usually means refinancing an existing mortgage. It is important to decide if you want to jeopardize the equity in your house if you are already paying back the principle balance of the home. Lastly, if the current value of a home is below what is owed, then refinancing is not an option. It is important if you are going to access a retirement fund for debt repayment, this needs to be carefully weighed out. In the worse case scenario of Bankruptcy, often times retirement accounts are protected. There are many sides when it comes to the correct way to consolidate, and if it makes good financial sense. A good way to get information is to speak with a non-profit credit counselor and do a full budget to determine your best options.

Solutions to Consumer Debt - Debt Management Plans

2009-05-12T14:03:00.000-04:00

Our next topic for solutions to consumer debt will be debt management plans aka "DMP" A DMP is structured through a third-party (usually a credit counseling agency) who would work with the creditors on the client's behalf to set up a plan to liquidate the client's debt usually with a time frame of under 5 years. In New York, a DMP may not extend beyond 60 months or 5 years. A DMP is the logical step a consumer would take if they were unable to obtain favorable terms with their creditors. A DMP administered through a non-profit credit counseling agency would be able to dramatically reduce interest rates, waive late fees, waive over-limit fees, and re-age or bring the accounts current. I would advise only to work with a non-profit agency who is licensed through your own State. In New York, credit counseling agencies are licensed through the NYS Banking Dept. Licensed agencies are listed at the NYSB website:

http://www.banking.state.ny.us/sibudget.htm

Until the time of this writing DMP's had a certain limitation - the minimum payment required. In the past the interest rate on a particular card could be lowered and fees waived, but the minimum required would still be approximately the same - in some cases, more then the consumer's original payment. What is different today is a new program which has been offered by the Top 10 creditors call Call to Action or "CTA."
This is a hardship program for consumers who cannot afford a standard DMP. Payments on a CTA program could be as low as 1.75% of the balance, with a portion of the overall debt being waived if it could not be liquidated in under 60 months. There are some qualifications for these programs; A client would need to show hardship through working out a budget with a credit counselor. In addition, a small monthly savings would need to be made by the consumer to ensure financial stability in the future. These monthly savings would be handled by the consumer, not the credit counseling agency.

As economic times grow tighter, more and more options for helping consumers resolve credit card debt are being offered to consumers by the credit card industry. If you have difficulty affording a DMP, you may want to ask your credit counselor if the agency provides any hardship programs.

Solutions to Consumer Debt - Self Help

2009-04-24T14:20:00.000-04:00

As mentioned previously, the first direction most consumers will go to is self help. The idea here is to handle credit card problems independently as an individual. One resource that many consumers use is the website http://www.bankrate.com/ This is a database of credit cards and consumer based products which can be of value when handling personal debt. One tool available on the Bankrate site, is the ability to find low-rate transfer offers. A consumer can often transfer a balance from a high interest card to a low interest card. Sometimes these transfers are for a limited time period, some extend the life of the debt. It is very important to read the terms carefully to make sure you understand all fees and conditions of the transfer offer.

Another avenue of self help can be borrowing funds from family or friends. The value of this method is often times family and friends will not charge interest on the borrowed funds. If interest is added to the borrowed amount often times it would be substantially less then going to an additional credit card. A benefit of going with a credit card transfer could be to further establish a positive paying history on a credit report.

Budgeting is an excellent tool for getting out of personal debt, but is often overlooked. I would highly recommend doing a budget to determine what expenses are adjustable and can be reduced. Should you need budget forms, they are available on the CACC website:

http://www.creditadvocates.org/Budget_Worksheets.pdf

Lastly, prior with going to a Consumer Credit Counseling Agency try calling the creditors first. Often times creditors have internal hardship programs, which can offer better terms for the individual if they qualify.

We will go over the remaining 4 solutions to consumer debt in our next installment of Consumer Credit Q & A.

5 solutions to consumer debt.

2009-04-13T12:38:00.000-04:00

I often meet with consumers who are very confused about what to do about
their credit card debt. Usually these consumers have been snowballed with all types of information, both true and false. What I will attempt to do here is break down the 5 possible solutions to credit card debt in a clear way that most consumers can understand. The 5 possible solutions include the following:

1. Self Help - Consumers attempt to repay their creditors simply by managing their cash flow.

2. Debt Management Plans - A credit counseling agency negotiates with the client's creditors on the client's behalf to set up a plan for paying off the debts.

3. Debt Consolidation - This should only be considered by consumers who can consolidate their debt with a lower interest rate, and not take on any new debt. Be careful trying to consolidate unsecured debt with secured debt, many times this can be a mistake.

4. Debt Settlement - The process where a debt settlement company negotiates with a consumer's creditors in order that the creditors will accept reduced payment in lieu of full payment. I would not recommend working with a debt settlement group, but handle this individually for many reasons.

5. Bankruptcy -This should be the last alternative to dealing with being overextended with credit card debt.

I will go into greater detail with each of these solutions over the next few days in order to provide a deeper understanding of these different debt reduction strategies.

Consumer Credit Questions and Answers

2009-04-01T13:46:00.000-04:00

I would like to give a quick hello to all that have found this blog. My name is Steven Burman. I have been working in the consumer credit industry since 1992. I currently serve as President to Credit Advocate Counseling Corp., a non-profit consumer credit counseling agency based in New York. I have been spending a good deal of my time putting financial literacy programs together with local public schools here in New York and helping consumers with debt management programs. I find it very personally rewarding helping people gain a sense of clarity to the many hurdles of consumer credit. The purpose of this blog is to provide realistic solutions to credit questions that many consumers have but do not have the resources available to find the answers to. I will provide information on many consumer credit topics, but feel free to ask questions and I will do my best to provide some answers if I can. Please visit my agency website as well www. creditadvocates.org for additional information. Thank you very much for taking the time to visit my blog!