F-R-E-E, that spells free-
Credit report dot com, baby
Saw their ads on my TV
Thought about going but was too lazy
Now instead of looking fly and rollin’ phat
My legs are sticking to the vinyl and my posse’s getting
Laughed at
F-R-E-E, that spells free-
Credit report dot com, baby

Well, it turns out F-R-E-E doesn’t really spell free; it spells $14.95 a month for the Experian Triple Advantage credit monitoring program.  Erica Possin, a college student, took the ads to heart and went to Free CreditReport.com prior to buying a car.  She got her report and went on her merry way, only to realize months later that she, like thousands of other customers, was being charged a $14.95 a month recurring fee.  She tried to get a refund from Experian, the owner of the website, but was denied.  Now she’s suing as the lead plaintiff in a class action lawsuit.  This isn’t a first for Experian either; they’ve already settled one suit with the FTC over ConsumerInfo.com.

So the morale of this story?  Be careful, not everything advertized as F-R-E-E is actually free.  Should you check your credit periodically, absolutely, but keep in mind you can go to AnnualCreditReport.com for a free one, or if you’ve been denied credit you can also get a free copy of your report.  Protect yourself, but keep in mind it may cost you.

I’ve written about credit card debt several times in the past, but I figured today it would be nice to just consolidate things down to some practical, no nonsense advice on managing your credit cards.

• TAKE INVENTORY. How many credit cards do you have? What’s the balance and minimum monthly payment on each? What’s the total balance? If the total balance is higher than you can afford to pay off within two years, it’s time to step back and look at what you can do to reduce your overall credit card debt.

• NOT ALL CREDIT CARDS ARE THE SAME. What’s the interest rate on each card? Is there an annual fee? Does your card offer a grace period? You might be surprised to see how your credit cards differ. Are you getting the best deal possible?

• KEEP THE CARDS. After you’ve paid off the balance, keep the line of credit open. Typically speaking, closing credit card accounts isn’t always prudent. Lenders like to see available cash on your cards, also known as “room to buy.” If you have four unused credit cards with a total of $5,000 open on all of them, closing them may actually lower your credit score. You should also keep your oldest line of credit open because it lengthens your credit time line. That said, if the credit card company is charging some outrageous fees, like a non-usage fee, ditch it. AND, you have to control your spending. If you simply cannot resist the urge to run up more charges, close the account. A closed account will impact you less than high debt levels.

• GET ONE LOW-FEE OR LOWER-INTEREST CARD AND USE IT WISELY. Too many cards can equal too many shopping sprees and result in excessive debt. Transferring existing debt from your various credit cards to a new low-interest credit card can save you money on interest.

• MAKE THE LARGEST MONTHLY PAYMENT YOU CAN AFFORD. While it’s ideal to pay your balance in full each month, it’s not always possible. However, when you only pay the monthly minimum, you’re most likely paying the accrued interest only. Even if it’s only a few dollars, try to pay more than the monthly minimums.

• WATCH OUT FOR “TEASER” OFFERS. Your mailbox may be full of unsolicited credit card offers that promise low-interest rates or too-good-to-be-true rewards, but you need to read the fine print. You may find that after six months or so the issuer may double the low introductory rate or void your rewards program. When the rates go up, you may be paying a lot of money at a very high interest rate.

• ACT NOW. If you’re having trouble making your monthly payments, contact your creditors before they contact you. The worst thing you can do is ignore the problem hoping it will go away. Your creditors will be much more willing to work with you if you’re honest and make an effort to repay what you owe.

This can be seen as good or bad, depending on how you view the situation.  On one hand you might be in the camp that believes this is good because it will help rein in the out of control spending Americans are known for.  On the other hand if you’re a person with a thin credit file or less than perfect credit you’ll probably view this as a very bad thing because it eliminates the key way to build and improve credit—using credit cards wisely.

Bill Hardekopf, the founder of LowCards.com, explains “Credit is still tight, so issuers are not approving as many people with no credit or bad credit as they did 18 months ago when the economy was good.  It is a very big challenge for them.”  If you can’t open a card your score won’t increase, so don’t even think about getting a mortgage of decent car financing without credit, the American economy doesn’t work that way.

So what’s a college student, new immigrant, or a person with damaged credit to do?

First off, you’ll want to start with something small.  Don’t apply for a $5,000 credit line that you’re going to get turned down for, you’ll just end up hurting your credit with an inquiry on your credit file.  Instead start out with a store charge card, like a Sears or Kohl’s card, or a gas card from Texaco for example.  If you still get turned down, move on to the next step, a secured credit card.

Secured cards are credit cards backed by a cash deposit, so the cash deposit is collateral just like a car is the collateral on a car loan, or the home is the collateral on a mortgage.  You deposit a minimum amount of cash and the credit card issuing bank extends a credit limit for that amount.  The deposit doesn’t cover your expenditures on the account, it is only there if you default on your payments and is refunded to you if you close the account.  Otherwise, it’s just like a “normal” unsecured credit card.  Like with any card, you’ll want to use the card and if able pay it off each month to increase your score as quickly as possible, or if you’re unable to do that, at least make the minimum payment.  One of the nice benefits of these cards is they will frequently allow you to upgrade to an unsecured card after you have established a positive payment history with them, often for credit limits much higher than your original deposit.

In my experience, Orchard Bank and New Millennium Bank both offer secured cards with reasonable fees, report to all three bureaus, and will allow you to “upgrade” the cards after a certain amount of time.

Follow these steps, make your payments on time, don’t go overboard, and you’ll start to see your credit score grow.  If you have past mistakes on your report the growth will be far less dramatic than a person starting out with no credit, and you might require other kinds of assistance, but you’ll still see your credit score rising.  Before you know it you’ll be in the elite class of people with excellent credit, enjoying the benefits of lower interest rates, cheaper insurance, more flexible financing options, and greater financial freedom.

What your credit card company has to tell you

When they plan to increase your rate or other fees. Your credit card company must send you a notice 45 days before they can:

• increase your interest rate;
• change certain fees (such as annual fees, cash advance fees, and late fees) that apply to your account; or
• make other significant changes to the terms of your card.

If your credit card company is going to make changes to the terms of your card, it must give you the option to cancel the card before certain fee increases take effect. If you take that option, however, your credit card company may close your account and increase your monthly payment.

For example, they can require you to pay the balance off in five years, or they can double the percentage of your balance used to calculate your minimum payment (which will result in faster repayment than under the terms of your account).

The company does not have to send you a 45-day advance notice if:

• you have a variable rate tied to an index; if the index goes up, the company does not have to provide notice before your rate goes up;
• your introductory rate expires and reverts to the previously disclosed “go-to” rate;
• your rate increases because you are in a workout agreement and you haven’t made your payments as agreed.

How long it will take to pay off your balance. Your monthly credit card bill will include information on how long it will take you to pay off your balance if you only make minimum payments. It will also tell you how much you would need to pay each month in order to pay off your balance in three years. For example, suppose you owe $1,784.53 and your interest rate is 21.99%–your bill might look like this:

Late Payment Warning: If we do not receive your minimum payment by the date listed above, you may have to pay a $35 late fee and your APRs may be increased up to the Penalty APR of 28.99%.

Minimum Payment Warning: If you make only the minimum payment each period, you will pay more in interest and it will take you longer to pay off your balance. For example:

No interest rate increases for the first year. Your credit card company cannot increase your rate for the first 12 months after you open an account. There are some exceptions:

If your card has a variable interest rate tied to an index; your rate can go up whenever the index goes up.

• If there is an introductory rate, it must be in place for at least 6 months; after that your rate can revert to the “go-to” rate the company disclosed when you got the card.
• If you are more than 60 days late in paying your bill, your rate can go up.
• If you are in a workout agreement and you don’t make your payments as agreed, your rate can go up.

Increased rates apply only to new charges. If your credit card company does raise your interest rate after the first year, the new rate will apply only to new charges you make. If you have a balance, your old interest rate will apply to that balance.

Restrictions on over-the-limit transactions. You must tell your credit card company that you want it to allow transactions that will take you over your credit limit. Otherwise, if a transaction would take you over your limit, it may be turned down. If you do not opt-in to over-the-limit transactions and your credit card company allows one to go through, it cannot charge you an over-the-limit fee.

If you opt-in to allowing transactions that take you over your credit limit, your credit card company can impose only one fee per billing cycle. You can revoke your opt-in at any time.

Caps on high-fee cards. If your credit card company requires you to pay fees (such as an annual fee or application fee), those fees cannot total more than 25% of the initial credit limit. For example, if your initial credit limit is $500, the fees for the first year cannot be more than $125. This limit does not apply to penalty fees, such as penalties for late payments.

Protections for underage consumers. If you are under 21, you will need to show that you are able to make payments, or you will need a cosigner, in order to open a credit card account.

• If you are under age 21 and have a card with a cosigner and want an increase in the credit limit, your cosigner must agree in writing to the increase.

Changes to billing and payments

Standard payment dates and times. Your credit card company must mail or deliver your credit card bill at least 21 days before your payment is due. In addition:

• Your due date should be the same date each month (for example, your payment is always due on the 15th or always due on the last day of the month).

• The payment cut-off time cannot be earlier than 5 p.m. on the due date.

• If your payment due date is on a weekend or holiday (when the company does not process payments), you will have until the following business day to pay. (For example, if the due date is Sunday the 15th, your payment will be on time if it is received by Monday the 16th before 5 p.m.).

Payments directed to highest interest balances first. If you make more than the minimum payment on your credit card bill, your credit card company must apply the excess amount to the balance with the highest interest rate. There is an exception:

• If you made a purchase under a deferred interest plan (for example, “no interest if paid in full by March, 2012″), the credit card company may let you choose to apply extra amounts to the deferred interest balance before other balances. Otherwise, for two billing cycles prior to the end of the deferred interest period, the credit card company must apply your entire payment to the deferred interest rate balance first.

No two-cycle (double-cycle) billing. Credit card companies can only impose interest charges on balances in the current billing cycle.

Joan Jensen, president and CEO of The Central Credit Union of Illinois, shares some guidance on Credit Scores.

Each and every New Year we are greeted with the traditional onslaught of ads and commercials extolling the benefits of improving important numbers in our life, numbers commonly pertaining to weight and cholesterol. And while these are very important numbers, one of the most important numbers, Credit Score, is often left out of the conversation.

In today’s constantly evolving economic climate credit score, which can impact everything from loan rates to job prospects, is more important than ever before. Joan Jensen, president and CEO of The Central Credit Union of Illinois is here this morning to offer some insight into this critical number and guidance for building and maintaining a healthy credit score throughout the New Year.

Credit scores are used to help lenders determine the risk they are taking when loaning money. There are many different scoring models, but the most commonly used models are FICO scores. In addition to lending, the scores are also used for homeowner and auto insurance, employment, and renting an apartment. Your score will vary as the information on your credit report changes.

What Constitutes a Healthy Score?

At one time, and in some cases still, a score of 720 or more was considered “A tier”, however, in today’s rocky climate, many lenders now view a score of 760+ as the “A grade” score.

Can A Healthy Score Save Me Money?

Having “A” credit can save consumers big money. Loan rates for “A” credit borrowers may be two percentage points or more lower. This can add up to saving more than $86,000 on a 30-year fixed rate mortgage. Consumers with “A” credit will also save on auto loans, credit cards, and insurance.

Making Timely Payments is Important. It’s also important to avoid these pitfalls:

• Closing Credit Cards — Closing cards lowers your available credit and increases the credit utilization ratio (the amount you owe divided by your credit limit). It may also decrease the longevity of your accounts.
• Temporary Mortgage Modifications — many lenders will report you as paying less than originally agreed. This flags you as a higher risk borrower.
• Settling an account for less than the amount owed –Negotiating to pay less than the full principal balance has its drawbacks. This solution should be used only to avoid default, not to save a few dollars. The dollars you save may pale in comparison to the higher interest rates you could be charged on future loans.
• Applying frequently for new credit –makes you look needy for money and a risky borrower.
• Maintaining balances on credit cards–The old credit utilization rules have been downsized. Try to keep balances as low as possible–under 10 percent of the credit limit is ideal.
• Collection accounts–stay on your record for 7 years even if you pay them off. Make your payments on time to avoid going into collection.

Order A Free Report at annualcreditreport.com. You can order a free report from each of the three major bureaus annually. Remain cautious to signing up for any time-limited free offers that require you to opt out at the end. Forgetting to opt out could cost you.

To get your FICO score, you can obtain the score when you apply for a loan or your can pay to get your credit score. Getting your credit score before you apply for a loan can be a good idea –especially for a mortgage. Go to myfico.com to obtain your FICO credit score.

Myth #1: Checking your credit hurts your credit score.

Depends on what type of report is pulled. If you obtain a copy of your report on your own to review from the credit bureaus you will be doing a “soft inquiry” which does not affect your score. If you have a lender pull your credit than you are doing a “hard inquiry” which may negatively affect your score. One thing that I have seen happen frequently is a process called “shotgunning” your credit to potential lenders when you apply for financing on a car or mortgage—you apply for financing at a car dealership and they “shotgun” it to all the lenders that they work with who all check your credit, thus putting in some cases dozens of “hard inquiries” on your report simultaneously. Protect yourself and make sure you know what a company is going to do with a credit authorization form before you fill it out. My best advice for protecting yourself is to line up your own financing through your credit union before purchasing a big ticket item, that way you know exactly who pulls your credit and why.

Myth #2: The higher your income, the better your credit score.

Higher income can translate to buying power, but that doesn’t mean it translates to financing power. You could make $200k a year and still have terrible credit if you pay your bills late. I’ve seen it a thousand times. It almost seem like credit scores are inversely proportional to income because people in higher income brackets seem to be so caught up in the job of making the money that they don’t have time to keep their personal finances tidy.

Myth #3: Closing a credit card will boost your credit score.

All I can say here is NO. I see so many people who are confused by why their scores went down, rather than up, after they paid off their debts and closed their cards. Simply put, if you close your cards you destroy your “utilization ratio”, the comparison between your credit limits and how much of them you have used.
Consider this scenario. You have 3 credit cards with $1000.00 credit limits. All three have $500 balances. Your utilization ration is 50%. Now say one of the cards raises your rate and you decide to close it. So you transfer that $500 balance to your other two cards and close it. Now instead of having $3000.00 in credit with $1500 in balances, you now have $2000 of credit with $1500 in balances, increasing your utilization ratio from 50% to 70%. You want your utilization ratio as low as possible.

Myth #4: All creditors and lenders use the same credit score.

There are a variety of credit report types that give added weight to different aspects of your credit history. A mortgage enhanced report would allow your payment history on mortgages more strongly impact your credit score, while an auto enhanced report would give more power over your score to you payment history on automobiles. In addition to that complication, there is also the fact that there are three different major credit bureaus with their own scoring models.

If you know that your score with one bureau is higher than your score with another, is may behoove you to find out which report a lender looks at before applying for financing. Many banks only look at one bureau, use that to you advantage by finding the one that looks at the credit report that’s most favorable to you.

Myth #5: If you pay your bills on time you’re credit is fine and you don’t need to monitor it.

Fraud is rampant, and even more importantly creditors make mistakes. Just like you count your change after you pay for something with cash to make sure the cashier got it right, check your credit report regularly to make sure your credits got it right, and to make sure someone isn’t opening credit in your name.

Myth #6: Delinquent debts are removed from your credit report when paid off.

Sadly this is not true at all. Keep in mind a credit report is about your credit history, not just your current situation. That means the report is going to show that you missed a car payment 5 years ago just like it will show that you’re currently a month behind on your credit card payment.

Another myth directly related to this is that the negative items on your credit report come off after 7 years. The truth is, they often remain on credit reports far, far longer than that because bad debts gets moved around and update, and each time that happens the timer on the debt is reset. Should this happen? No, does it happen? Every single day. Unless you catch it and know how to fight it your scores will be negatively impacted far longer than 7 years.

In addition, many people don’t realize that the older a trade line is on your credit report, the less it affects you. So with that in mind, don’t be surprised if you pay off an old debt and your score goes down because you have reset the date of late activity on the account, making that old debt suddenly appear fresh again to scoring models.

Myth #7: Your checking and savings accounts in good standing will help your score.

Depository account information is not reported to credit bureaus… usually. Keep in mind if you have overdrafts that go to collections those can be reported or your credit report, but that’s typically rare.

Myth #8: Paying cash for everything will ensure a good credit score.

Completely untrue. You must have and use credit to have a credit score, and you must have ample credit used properly to have a good score. This is why a college student wanting to buy his first car usually needs mom and dad to cosign.

Myth #9: Library fines, unpaid parking tickets and utility bills don’t affect your credit score.

Any bill that is unpaid can end up with a collection company, so even if the original creditor doesn’t report to the credit bureaus that doesn’t mean the collection agency they pass it to when you fail to pay doesn’t.

Myth #10: Debit cards and pre-paid credit cards can help you build credit.

Your credit report reflects your management of debt, debit cards and pre-paid cards are not considered debt, you’re just drawing from a fund you’ve already set aside to be spent. To build credit you need a good mix of secured and unsecured debt, i.e. credit cards, car loans, mortgage loans, etc.

By the way, if you’re wondering why there’s a red griffon on the page, it’s because this is an article about myths… and griffons are mythological creatures.

The HAMP website provides the following description of their mandate and the tools they’ve been given to achieve them:

The Home Affordable Modification Program is designed to help as many as 3 to 4 million financially struggling homeowners avoid foreclosure by modifying loans to a level that is affordable for borrowers now and sustainable over the long term. The program provides clear and consistent loan modification guidelines that the entire mortgage industry can use.

Borrower eligibility is based on meeting specific criteria including:

1) borrower is delinquent on their mortgage or faces imminent risk of default
2) property is occupied as borrower’s primary residence
3) mortgage was originated on or before Jan. 1, 2009 and unpaid principal balance must be no greater than $729,750 for one-unit properties.

After determining a borrower’s eligibility, a servicer will take a series of steps to adjust the monthly mortgage payment to 31% of a borrower’s total pretax monthly income:
• First, reduce the interest rate to as low as 2%,
• Next, if necessary, extend the loan term to 40 years,
• Finally, if necessary, forbear (defer) a portion of the principal until the loan is paid off and waive interest on the deferred amount.
It all sounds pretty good if you’re in danger of losing your home. There are even built in incentives for banks to extend these loan medications to buyers so they’re not just taking a huge hit in the bottom line. As I wrote about in the previous blog on loan modification banks don’t seem as keen to extend these modifications as one might hope. Only a fraction of the 3-4 million the program was supposed to assist have been granted modifications, and to make matters worse, the people still jumping through hoops to get their loan mods are now discovering that their credit has been ruined.

The way the program is supposed to work, on paper at least, is you contact the bank that holds your mortgage note and let them know you’re in a hardship situation and either in danger of defaulting on your mortgage, or are already late. They are then supposed to negotiate a lower payment and interest rate, which you and the bank agree to, for a trial period while they investigate the hardship and create a more permanent arrangement on your loan. This is where things are falling apart though. While the banks drag their feet for months, requiring obscene amounts of documentation on your hardship, many times more than once, the payments at the reduced rate are being reported as late because they are less than the original mortgage payments. Want to ruin your credit? Have your mortgage reported late for a few months. Trust me, that’ll do the trick.

So the obvious counter to this is, at least you have a reduced mortgage rate so you can keep your home and stay afloat, that’s a good trade off for a lower credit score. That reasoning ignores the ramifications of the damage done to your credit. The fallout from your lower credit score has the ability to actually raise your monthly bills. When your credit scores drop 100 points, which has been widely reported by consumers in the HAMP program, you’ll see your interest rates skyrocket on your credit cards, leading to higher monthly payments and credit limit reductions or freezing, eliminating what may be your last safety net. In addition, unless you had an 850 credit score to start with, a 100 point credit score drop is going to eliminate your ability to obtain a traditional loan modification, will ruin the chance of getting any other type of loan, for instance a debt consolidation loan to take care of the high interest credit cards, and greatly increased interest rates on new purchases, such as automobiles. The increased credit card payments alone have been enough to push some people over the edge that they had been teetering on before the loan modification.

So if you’re considering HAMP assistance, inform yourself of the downsides before you start down that road. If you’re already carrying a large about of credit card debt the increase in interest and fees resulting from the program’s impact on your credit scores may more than offset the reduction in your mortgage payment. With anything, it’s best to know what you’re getting into—and be sure you’re doing your own research because the banks certainly aren’t going out of their way to educate the home owners seeking assistance on the ramifications of them dragging their feet for months while they decide if they’ll provide the loan modification.

So blogs about credit reports and mortgage lending, stories about credit cards and government action aside, I’d like to wish you all a very merry Christmas.  Huddled around your TV’s eating turkey while watching the big game, take a look around at your family, because that’s really what it’s all about.  Family, love, togetherness.  Everything else can wait for another day, but those special moments are all too fleeting and rare.

From our family to yours, National Credit Solutions wishes you and yours a happy holiday and a successful and fulfilling new year.

So, let’s do the math here.  You receive the card and decide that you’re going to pop over to the electronics store and get that shiny new Blu-ray player you’ve been eyeing, and a few movies to go with it.  It’s a deal because the player is currently on sale– $250, down from the normal $350.  So you get the player and a couple movies and put a cool $300.00 on the card, with a 79.9 percent interest rate.  No big deal though because the player was $100 off.

Actually…

With that interest rate if you pay $25.00 per month on the card you’ll have it paid off in 25 months, and will end up paying $322.34 in interest, as well as $150 in annual fees.    So your $300.00 purchase will set you back $772.34.  I should note here that I would have typically computed this based on the minimum monthly payment for the credit card, usually 2.5% of the balance, or $15.00, whichever is greater, but I couldn’t because the payment would be lower than the amount of interest being charged, meaning you’d be paying on the purchase until you die.

So why are they charging such an outrageous interest rate?  Simply put, they’re trying to find ways to make up for the money they anticipate losing when the Credit Card Reform Act goes into effect next year.  It’s going to limit the amount that credit card issuers can charge in annual fees, so they’re looking for new ways to make up the money.  This 79.9 percent interest rate card used to have a $250.00 credit limit and $256.00 in annual fees, but since the new law will limit annual fees to 25 percent of the credit limit (rather than over 100 percent like they were charging before) they had to find other places to turn a profit. Voilà, charge 79.9 percent interest.

You’re probably thinking this is a no brainer, just don’t get the card, and you’d be right.  But industry forecasters are predicting that this is the wave of the future for people with less than perfect credit.  Credit card issuers need to find ways to protect themselves with sub-prime lending, and this one of the first cards testing the limits of what people are willing to endure to reestablish credit.  What if this is all that’s left to people with subprime credit?

The truth of the matter is, there are many ways to increase your credit score without resorting to high interest cards like this.  Here at National Credit Solutions we have an excellent Client Services department that’s dedicated to helping our clients establish credit, and the best Research & Processing team in the nation working hard to remove negative items from the credit reports of our clients.  The two-pronged attack will raise your credit score safely, quickly, and permanently (assuming you follow our program and don’t add new negative items to your credit report.  We can put you firmly in the prime category so you never have to worry about cards with ridiculous fees or interest rates.