Never before have so many been allowed to make so much about your life so public. Roy Green shares important money advice as he reports on the new dangers of credit card use.
Money Advice: How to Keep a Clean Credit Report
Almost everyone lives on the verge of bankruptcy. Our average savings is about a fourth of what a typical family saves in Japan. The cash reserves typically total two weeks' living expenses, the mind frame for most Americans being that the cushion for emergencies equals the cash-advance limits on their credit cards.
Not surprisingly then, over 20 percent of all complaints to the Federal Trade Commission this decade have involved credit bureaus. They make a computer error, or you have a dispute with a store about a credit card purchase, and bang! you can be denied credit, a job, a mortgage — even the 900 numbers won't take your calls. Everyone needs to know how to get his or her secret hidden file, how to understand it, and how to correct any errors now, before the credit hits the fan.
It's no secret that each of us should review our credit reports annually. Everyone you ask can tell a horror story of some mistake that caused grief and prevented someone from getting a mortgage, consumer credit, or a job. What is a secret is that the credit reporting industry now has evolved (or devolved) to the point of simplifying our entire financial worthiness to a single number. There are a few well-guarded, veiled, unknown pitfalls/situations/conditions that could get you in trouble and cause your numerical value to dig for cover. And the stakes of the game have been raised; it is time to be more than a vigilante in protecting your credit virtue — you must become a credit warrior.
Spies vs. Spies
There is a secret file on each of us about our entire credit history that is readily available to the friendly guys in the corporate shark tank every day at the push of a button. This file records each payment on every mortgage, auto loan, and credit card, as well as disputes, defaults, bankruptcy, etc. It is as if photos of you financially naked are posted on the corporate locker room wall.
The first new threat is that it is easier to access your credit information than ever before, and the information is accessed more often, by more people, for more reasons than you could possible imagine. You know how much junk mail you get? Well chances are that for every letter there has been one or more credit inquiries from curious strangers who want to review your private history and send you their pitch. Therefore, if there is a mistake or problem on your report, everyone knows about it but you. That would be kind of like spinach between your teeth at a dinner party.
The second new threat is that your whole credit history will soon be summarized in a single number called the Credit Score. If there is a single flaw on your report, there won't be an explanation, just an arbitrary judgment. That would be like someone considering you as a possible soul mate on the basis of your participation in a swimsuit competition. I would rather be a monk.
I suppose the Credit Score was inevitable in this time of searching for simple answers to complex questions. The popularity of Rush Limbaugh and Pat Buchanan is an indicator of how simple answers, even if they are wrong, are hungered for in a world so full of complexity.
As you can imagine, the simple credit score is designed to help the creditors of the world make snap judgments about your worthiness. A low score (i.e. 300 to 400) results in automatic rejection of department store credit cards, higher insurance costs, and higher mortgage rates or denial. A higher score of 600 to 800 results in a deluge of offers of gold Visa cards as well as automatic acceptance of all credit applications.
What is perverse is that paying your bills on time in full does not necessarily get you a high score, in fact it may hurt you.
To get a low score is quite easy of course, though perhaps not fair, even if you have never been in credit trouble. You think that just because you don't have much debt or too many credit cards and you are never late, you are in good shape? Well, guess what?
- If you have saved and paid for your large purchases with cash or have too few credit cards, or just an American Express green card (or you have a limited credit history), that is one strike against you.
- If you have too many credit cards, too high a credit limit, too many debts, an unresolved dispute, or you have missed a few payments, that is strike two.
Are they harsh or what?
To add insult to injury, if you have paid your bills on time and have been rewarded with a higher credit limit that remains unused, your mortgage company becomes concerned because you could then conceivably get another mortgage. Usage and repayment history simply don't matter because you might just go loco tomorrow. A page torn from Brave NewWorld if I've ever read one.
In the future, your numerical value will be used to determine what rate you pay for home and auto insurance as well as the interest rates on your mortgage and credit cards. I was stunned to see that my life insurance company had requested my credit report when I completed my application. What does this mean? Better credit means you live longer?
Here is how they think: get ready to cringe. If you are Mother Teresa and work for a charity at low pay (or are a teacher) and you live by your means, you are officially "SOC," or "S$%@ out of Credit," and will have to pay more for insurance and mortgage interest.
Other Credit Card Land Mines
- Getting your car repossessed. If you owe $3,000 on your car and it is repossessed and sold for $500, you still owe $2,500. This gets very ugly.
- Taking out cash advances. You are not only charged a fee for the service, but the interest begins the day you receive the money, and typically that interest rate hovers in the high teens. Try to use cash advances for ransom money only.
- Joining a health club with a multiple-year contract. Some clubs target younger, more vulnerable consumers and get them to sign three-year contracts, knowing they won't read the fine print, and who has to bail them out? Their parents.
- Getting suckered by bill consolidation offers. At first glance it makes a lot of sense. The fine print may reveal that the interest rate is higher, the payments are stretched out over more years than the Bronze Age, and the offending credit cards are intact and still tempting abuse.
- Check-in-the-mail offers. With your name on it, all you have to do is go cash it and have fun. It is like an unsolicited gift from heaven, until you discover that they charge near the legal limit of 33 percent.
- Payday loans and finance company loans. You might as well wear a sign that says "Knuckle-dragging Neanderthal-type enforcer wanted to break my kneecaps." Somehow they can bend the laws and chart up to 15 percent every two weeks.
- Notice from the credit card company: "You have been a good little debtor and it's Christmas so you don't have to make a payment this month." Isn't that special? What is not told is that the interest expense is still building as you prolong and delay the agony.
Bambi Meets Godzilla: Predatory Practices of the Creditors
These common practices reveal the ruthless predatory nature of the credit world. Here is proof that there is evil in the world. When confronted, the response is, "It is all spelled out in the fine print, you should have read before you signed on the dotted line."
Credit cards for kids. College kids are bombarded with credit card offers, all they have to do is sign on and they have an immediate multiple-thousand-dollar limit. What 18-year-old has self-control enough to handle that? It is done with the full knowledge that the kids will spend up to the limit and get in trouble, and the parents will bail them out.
Credit cards for people who already have too many credit cards and too much debt. More free cards are sent to the consumer because the companies know that he is a credit-aholic and can't control himself. But someone, someday, after the battle is over, will bail him out.
Bait and switch. Transfer your balances to a new credit card at a new low rate of 9 percent. The fine print does reveal that the rate will bounce back up to the industry average of 19 percent after six months, but who reads that?
Credit doctors. You got a problem on your credit report? No problem, we will correct all mistakes—for an arm and a leg. If you take the time you could write the letters and solve the mistakes yourself. Some credit doctors, for a huge fee, will completely alter your credit reports by borrowing someone else's credit history and inserting it into your own. This is "60 Minutes" kind of stuff that happens every day, and even if it worked, it would be very, very illegal.
The Darth Vader of the credit card galaxy is American Express. If you do not pay the entire balance within the 30-day period, they are notoriously merciless about staining your credit report. As a bonus, customers (or "members" as they are referred to without a scintilla of irony) who have been paying every bill, on time, every month for ten years and then miss a payment will soon see that their credit report only lists the late payment, not the dutiful decade of consistency. Technically, you see, their typical card (not to be confused with the Amex Optima which is much like a Visa card) is not a credit card but a charge card, and Amex is therefore under no obligation to report good payment history, only bad. Such an investment choice seems to me not unlike flying a jet with no landing gear, but what did P. T. Barnum say about suckers?
Bad reports are supposed to remain on your record only for seven years (regardless of whether they're Amex, Visa, or Monkey Wards), but beware, that means seven years from the last activity on the account. This means that if you've a two-year-old debt with a credit card company and then make arrangements to pay uplike a good citizen, the late payment history will stay on the report seven years from the day you send the check. It's gratifying to be so rewarded for being honest. Then if you dispute it with the collection agency, bang, you have another blotch that won't go away for years.
By the way, if you are a woman with children, and there is any chance you will get a divorce in the near future, brace yourself now. What typically happens is after the divorce you may get the house, but you also get the mortgage payments. You may get the kids, but you also get their bills, and you may not get child support and alimony on time or at all. Single women with children get the brunt of the punishment for our societal sins of living on the edge.
Consumer credit has changed modern life as much as fire changed the lives of our ancestors. There are a lot of similarities: too little and you suffer unnecessarily, too much and you get burned. The key to credit happiness is to watch the fire constantly, don't let it incinerate the house, and keep your arsonistic buying habits in check.
Request your credit report every year, then work like a Trojan (the old warrior kind, not the new stretchy kind) to clean up any errors. You can consult the Consumer Credit Counseling Service (they are wonderful) for the nearest center, or you can call the agencies directly for a report which may cost you eight dollars.
TRW (aka Experian) 888-397-3742
Trans Union 877-322-8228
Insulate yourself against the inevitable financial roller coaster of life by spending less and living more simply, within your means. You do not have to adopt the Unabomber "explode the world back to the Stone Age" philosophy or join the Freeman "print your own currency" cult. Simple steps like converting your mortgage to a 15-year payoff, saving 10 percent, having a budget, paying off your debt on time will work wonders.
Limit your credit card ownership to three. Do not use American Express for anything you will not pay off immediately. Use the cards prudently, as if your future credit depended on it.
Brace for the worst, hope for the best, especially if you are a single mother.
If you struggle with credit cards, cut them up and get a debit card. It is a direct withdrawal from your checking account. If you don't have the money, you can't buy the item.
Dead Man Charging
When I went into Consumer Credit Counseling Service to receive my Equifax and Trans Union credit reports, I asked Cindy, my assigned counselor, what was the strangest mistake ever reported among the universally error-prone reports. "Well, according to Trans Union, this guy that I had just printed the report out for had died four years earlier, but was still current with all his bills and had a very desirable R-1 rating. Among the mortgage and credit card data was a section on how that social security number had been used in paying a death benefits claim.
"Either this guy was a scam artist of the lowest degree, or there had been some minor clerical error that was going to stop any future loan application dead in its track (pun intended). That in itself was not that big a deal; but it was also noted by the special ***Hawk-Alert*** that this guy's current address is a check-cashing service. That is much worse than being dead," deadpanned Cindy.
"Tell me more. Who was this pathetic unfortunate loser?" I inquired. "You should know, it is your report we're talking about here. I have never seen a real dead man walking, much less a dead man charging," she chortled.
Well, isn't that special? Not only was I dead and residing in a check-cashing service, but I also had a $110,000 mortgage, Citibank Gold Visa, lumberyard account, and gas card that were all news to me.
After a few letters, the Trans Union Credit Report mistakes were cleared up. Buoyed with my success, I tackled the Equifax mistakes that included the mystery hardware store account and the nonexistent but still late cellular phone bill.
Finally, I attacked the TRW woolly mammoth. TRW had me down for "You are obligated to repay this joint account mortgage with a balance of $59,000." The problem here was that I had sold that house five years earlier, and the meathead who had assumed the loan considered the payment schedule an optional deadline, and his consistent tardiness was staining my credit reports.
There is an old Nordic myth told by grandmothers to their granddaughters warning the young women that whomever they make love with leaves a tattoo-like imprint on their soul. I think it is similar with credit. Whomever you borrow money from leaves a scar on your credit report forever.