A True Credit Tale of Two Sons

      As parents, we go through life holding our breaths, gritting our teeth and wincing now and again during our children’s most formative years. We can read endless parenting articles…10 Scientific Tips for Raising Your Children, 7 Secrets to a Happy Child, How to Raise Children-A 10-point guide to domestic bliss….and we can harshly judge ourselves when our children make the kinds of decisions that we warned them about. Well, this one is simple.  Let me tell you about the tale of two men with very different credit outcomes, much of it based on what they were or were not taught by their, in both cases, very loving parents.

     Thirty-seven year old Mark was a salesman who was single.  He’d sell anything he could get his hands on. Unfortunately he was a salesman who had a hard time staying with one company for very long.  Mark’s parents were extremely hard working people before retirement and it paid off.  They had managed to put enough away to buy a wonderful cabin in Northern Wisconsin that was their second home in the summer months. It was a home to which they hoped to one day retire. But they also had re-refinanced their main home about five years ago to help Mark out of some debt problems he had gotten himself into and couldn’t handle. Mark had over extended himself with some very high credit card balances, bought a house that he talked his Mother into co-signing and promptly lost his job of six months again.  So Mark’s Mom and Dad decided that they would refinance their home, to bail Mark out of his debt mess, once again.

     Mark eventually found another sales job but after five months he was back to his old habits. Instead of paying off his debts and relieving his Mother from her part in his mortgage, Mark continued to spend everything he had.  He put nothing away for an emergency fund. A friend once asked him what he did with his money and why he didn’t have any saved, Mark laughed and said, “I spent half my money on booze and women, the rest I just wasted.” Of course, he found himself, once again, unemployed, behind on his credit cards and was now being hounded by collection agencies and law firms threatening to sue.

     Instead of finally taking responsibility for his predicament, Mark criticized “the system” as not being fair to him. Today, he went to his bank and wanted to see what he could do. His credit reflected a mid score of 485.  He was again behind on his mortgage which not only showed up as owing on his Mother’s credit report but also spoiled her pristine historic credit record with late payments and a possible foreclosure looming. Mark has no idea what a credit score even was or what their purpose was. Further he couldn’t understand why the family banker couldn’t help him out like his parents have been able to do.

     Mark’s parents also went to their banker to determine how they could get money to help out their son, yet again. Their banker, while intensely sympathetic to this great couple, was sad at his inability to allow them a new refinance note. The parents, who were now drawing social security payments for their retirement and trying to desperately keep their dream cabin, were concerned that their son was defaulting on a loan his Mother had co-signed.  In addition, the banker explained, the debt/income ratio was way out of whack due to the numerous and increasing loans they had been taking out to help their son time after time and the added fact that the Mother had debt from not only one but two mortgages that her credit report showed she was responsible for. There was no way this couple could continue to help their son and protect themselves with another loan. When the banker asked them if they considered selling their beloved asset, their cabin, he could see the tears in their eyes. 

     Korey was a 24 year old man who was working while he was attending school to finish up his bachelors’ degree. Korey’s parents were divorced. When in high school, he moved in with his Mother and four siblings.  Korey’s Mom rented their home until one day an investor came by and offered a contract for deed to her until she had a year’s worth of payments and a down payment to purchase their house herself. In order to obtain a mortgage on her own she understood that she had to have a stellar credit reputation and know how to save money. She knew that additional debt would count negatively against her ability to qualify for a mortgage. That meant there wasn’t extra money for Korey to socialize so, from an early age, Korey worked at part-time jobs as he was going through high school to help out and have his own money. He managed to play high level sports, go to school and still work part-time for equipment and other small necessities. As she did with all of her children, while Korey attended high school and college, Korey’s Mom taught Korey how to handle his money and the value of good credit.

     Korey witnessed his Mother’s struggles and was encouraged by his Mother to pull his financial weight to manage his own finances. His Mother taught him about student loans, personal debt and eventually Korey was able to build his own credit early on. When it came time for Korey to buy a car, the people at the local credit union, having worked with his Mother and siblings, was willing to take a chance on him. 

     During the summers Korey worked several jobs just to pay his debts off early. This way, he proved himself to his Mom and his lenders. At the age of twenty-four, wanting to buy a car from a friend, he applied for a loan and the loan officer about fell off his chair when his credit score came back at 710 which was highly unusual for someone his age. The only debts he had were a few student loans and this car loan. Because of this limited debt, he also had a substantial savings account to help him through the months he worked fewer hours while attending school. Korey’s goal is to become debt free so he never has to make payments again.

     According to MYFICO, a credit scoring company, the average credit score for 18-24 year olds is 638 and the average credit score for 25-34 year olds is 652. Scores typically don’t average above 710 until age 55+ where there has been more history and greater careful credit decisions with experience. Experian, another credit scoring expert said in their study that people in the 18-39 year old groups had the greatest number of late/missed payments.  However, this does not have to be the norm and, for people such as Korey and those who learn financial responsibility at an early age, the trend can be beaten.

     As a parent, the moral of this story is a choice between enabling vs empowering.  Neither stands to define who loves their child more. But, one of these parenting choices clearly serves to teach the young valuable financial lessons and serves to develop wealth building far earlier in life so that when it comes to retirement we can rest easy as parents that our children have a sound and secure future. Debt is a form of bondage and helplessness. Not exactly what we want for our children or ourselves for that matter.  Wealth without debt is personal power. Now that is something for which we strive in our own lives and for our children. Which will you be doing?

 

What Happened to Companies Doing Their Jobs When It Comes To Your Credit? Another reason to stay on top of your credit reports!

     If you think managing your credit and your finances is easy, guess again. And if you think that people you have credit with will automatically report correct information on you, you might be mistaken. MOST of the time your creditors are pretty good but you need to stay vigilant and here’s a great example.

 There are typically three trade lines that credit scoring models like to see to maximize your credit score. Revolving accounts which are your credit cards, unsecured notes from financial institutions and store credit cards with changing monthly payments account for about 30% of your credit score. The other two trade lines are important to your credit score too but not to the extent of revolving trade lines. They are: installment notes which are usually secured by some asset with a fixed monthly payment and mortgages which are also secured by your home with fixed monthly payments over the life of the loan or a fixed period of time. It is a mortgage line that we will talk about today and why it is important to keep tabs on what your mortgage company is reporting about you.  Keep in mind that a maximum high credit score is more likely when you have a all three trade lines of credit; revolving, installment and mortgage.

We had a client pull all three credit reports because we discovered previously that his mortgage company had suddenly stopped updating his mortgage information, balances, payments and payment status over the last six months.  This interestingly coincided with their work on a loan modification for him.  When the modification was approved, the monthly update reporting to the credit bureaus stopped. His information was old and balances higher than they currently were. The client tried to call his mortgage company to ask them to get this updated, found he was only able to speak to their outsourced customer service department and was told he would have to write a letter to their “Research Department”.  So he did that and got no reply.  When we looked at his new reports we found that indeed, the information had been updated on two of the credit bureaus, Experian & Equifax but the Trans Union report did not have the mortgage lines listed.  Trans Union’s report indicated that his score would benefit by having a mortgage but he DID have a mortgage, it just was not showing up therefore his credit score was not maximized and lower than it would have been with the mortgage information.

 TRANS UNION SIDE:Two phone calls to Trans Union yielded the same information.  They told us that for some reason, when the mortgage company reported their information, (yes Trans Union could see it in their file on the client) the mortgage company itself had highlighted the account for suppressing to any outside request for the report.  In other words, if a creditor was to run our client’s Trans Union credit report, the mortgage information would not be included and his score would reflect that..  According to Trans Union that is only a command the credit reporter controls when they send in information.

 MORTGAGE COMPANY SIDE: When calling the mortgage company’s over-seas customer service, we were told that the mortgage company would not suppress anything and only reports the balance and the status of the account.  After a final call to the mortgage company’s customer service line and arguing with very nice customer service reps who read from scripts, we decided the only thing we could do was to fax the “Research Department”as suggested and tell them that apparently someone who was updating our client’s files after letting the ball drop for six months had possibly had forgotten to “unsuppress” the information they reported with Trans Union.

THE MIDDLE: Our client was in the middle of all this trying to get his mortgage company to correct its apparent mistake while the credit reporting agency insisted it was not their doing and only the mortgage company could fix the problem.  Trans Union did suggest having the mortgage company call their Trans Union sales rep to determine the problem, so that is what we requested the mortgage company do in our fax.  If there is anything to be learned from this, it is to be on top of your credit reports and the information in them, hold your creditors accountable for the information that is or isn’t in your file or showing up on your report, don’t be afraid to ask help from the credit bureau in question and be ready to be persistent until resolved because most likely you will be managing two companies who merely point the finger at one another instead of digging into the problem.  You are the owner of your own information so make sure it is right and accurate.  Don’t take no for an answer and follow up.  If we hadn’t pulled this report and noticed the discrepancy or talked to both sides, this situation would have never been resolved.  The consequence of not finding this issue could be the difference on paying higher interest rates or even approval from a potential creditor since the mortgage lines were suppressed from the report and the score.

Financial Spring Cleaning - What to Keep and What to Throw

     It’s that time of year, springtime, when the air is fresh and we’re inspired to clean off the winter grime and dust both inside and outside of our homes. In addition to cleaning your home it might be a good time to clean your files and office although doing this after the first of the year is always a good time as well. If you’ve procrastinated like a majority of the US population, springtime is as good a time as any. You’ve already filed your taxes and you are on your way through a new year.

     
     Whether you keep paper copies or electronic files, the clutter you don’t need should be dealt with, but how do we know what to get rid of? How long do we need to keep our financial records?  What should we keep and what can we throw (shred) or delete?  The chart below is one you should keep in your home/office to use every year when it comes time to purge your paperwork. We’ve listed the type of record, length of time you should keep your original paper/electronic copies and why you should keep them.  Again we encourage you to keep this printable handy list in your office or files for future reference when the time for spring cleaning comes again.
      
     For those of you who are computer savvy and receiving electronic files to save on your computer, this would also apply to how long you should store these files. A quick word to the electronic and online consumers, make sure you either back up frequently using an external hard drive or using any one of the many safe online/cloud back-up services that are available. Services such as i-Cloud, Carbonite, Crashplan, Mozy, Backblaze etc are all affordable, good choices and can be an invaluable investment should you find yourself the victim of a vicious virus, hacker attempt or computer crash. Just remember, the more files you keep, the more space is used for storage. In some cases the more space you use can cost you more money for storage, so all the more reason to purge your files. And if you absolutely feel you must keep old files, save them on a zip drive or an SD disk but also remember that technology changes and after a while you may need to transfer that old storage to newer media.

     For those of you who keep paper everything, the potential for identity theft can be significant if you throw whole pieces of paper with personal and private information in the general garbage for ‘dumpster divers’ to find. To protect yourself, you can shred your paper copies with an affordable shredder purchased from any office supply store. Another option is that some of your banks, credit unions and even local city governments sponsor “Shred It” days throughout the year where a reputable document company will be present to shred your boxes of paper for you confidentially. 

          

     Once you have your financial records under control you might find an office under all that discarded paperwork and relief that you’ve avoided being submitted for the next episode of Hoarders! For an interesting look at how to de-clutter your office and your computer check out Jason Fitzpatrick’s “The End-All Guide to Getting Out From Under Your Office Crap”

 

     For a  printable version of this chart click here.

 

   

Record Type	Length of time to keep	Why
TAXES Returns and all applicable receipts	Seven years	You have three years to claim a refund which is measured from the original deadline of the return. There is also a three year deadline from the original filing deadline if you have made a mistake and decide that you need to amend your return.  You may only amend a return no longer than three years old from the tax date it was due to claim a refund. The IRS has three years from your filing date to audit your return if it thinks you may have made honest mistakes. The IRS may also challenge a return as old as six years if it believes you under reported your gross income by 25% or more. If you fail to file or file a fraudulent return, the IRS can go back indefinitely.
IRA CONTRIBUTIONS	Indefinitely	If you have made non-deductible contributions to an IRA you pay tax on those contributions in the year you contribute on IRS Form 8606. Keep your records to prove you actually already paid taxes on this through the years so that when it comes time to start withdrawing your IRA you have the proof to show the IRS you already paid taxes.
RETIREMENT/SAVINGS PLAN STATEMENTS	From one year to retirement	You probably receive quarterly statements from your retirement and savings accounts..  At the end of the year, make sure the quarterly statements added together match your annual statement.  Then, keep only your annual statements and shred the quarterlies until you start withdrawing your retirement.
BANK RECORDS	From one year to permanently	If you receive your checks back and they apply to your tax deductions, pull them out of the statements and keep them. (Refer to Taxes section)  Reconcile your bank accounts and destroy the statements after 10 years if there is no monetary/tax significance.
Record Type	Length of time to keep	Why
BROKERAGE STATEMENTS	Until you sell your securities and they are reported on tax forms	You need to keep purchase and sales information to determine whether you have capital gains or losses at tax time.
BILLS/INSURANCE DOCUMENTS	From one year to permanently	Once a year go through all your bills.  Many are not needed anymore.  Make sure all payments have been traced to your bank statement and then shred.  However, larger ticket items such as jewelry, rugs, appliances, antiques, cars, collectibles, furniture, computers, home improvement should be kept to prove value in case of loss or selling to another party.  The large ticket items are also kept for insurance purposes.
CREDIT CARD RECEIPTS/STATEMENTS	45 days to seven years	Keep your receipts until they appear on your monthly statements then shred.  If the statements have tax deductions then keep them for 7 seven years.
PAYCHECK STUBS	One year	Each year you are given a W-2 at the end of the year for tax filing.  This should match the last stub “year-to-date” columns.  If the last paycheck for the year does not match your W-2, call your employer for a reason.  They may have one or a mistake was made in which they will owe you a W-2C (Corrected W-2) which you will use for the tax filing.
HOUSE/CONDO RECORDS	At least 6 years to permanently	Keep all records of any improvements and purchases such as remodeling, additions and installations.  All receipts from expenses buying and selling your house, commissions and legal fees should be kept as well.  The reason you want to keep a accumulation of all costs associated with the buying and improvement of your home will help reduce any capital gains when you sell you house.  These expenses are added to the value of the home and subtracted against the sale proceeds for tax purposes.
Financial Spring Cleaning – What to Keep and What to Throw Copyright 2013  Consumerwarfare.com

 

For a printable version of this chart click here.

  

Wouldn’t it be nice to be debt free and have a great credit score? - STEP 1

          Of course it would. However, there are reasons we still need a good credit score.  A good credit score isn’t just used for loans anymore. Did you know, when you apply for a job many employers use our credit record in their background checks? Insurance companies base the rates they charge not just on your driving record but also on your credit score and finally creditors determine whether or not they will allow you a checking account or approve you for loans. How many of us have the cash we need to purchase our own home with no mortgage?  How many of us even have the cash to purchase a new car or even a used car, for that matter with a large chunk of cash. For the newly married young couple to the consumers hoping to downsize to a smaller home, to the young person buying their first car to get to work to the family who needs a larger vehicle or home it seems that credit is the only option.

          One of the most important, if not the very most important things you want to focus on in your financial life is obtaining the best credit scores you can and keeping them. Why? For starters, some very good reasons were cited above.  For our purposes here, take for example, that credit scores will determine whether or not you can get credit in the first place and it may be the difference between paying 15% or 3.5% on a loan, 7% or 3.25% on a mortgage, and 24.9% or 6.9% on a credit card.  Over time, the difference in interest rates that you pay will either cost or save you a lot of money, money that you can keep in your pocket.

             As a consumer you have to put your best financial foot forward and this means making the highest credit score possible a priority in your financial management toolbox. But does this mean that you have to go into debt to achieve a high credit score and dishonor your commitment to become or remain debt free?  If you have established a credit score and just need to improve it, no. If you have no credit score and need to establish one, perhaps. Just as there are no two people who are exactly the same, it’s almost the same with credit histories. Your situation is unique to you and how to get a credit score or improve one is entirely dependent on whom you are in regard to your money management traits.

            The first step towards the goal of achieving the best credit score possible is to either: 1) determine whether or not you have a credit file; or 2) find out what is currently in your credit files.  Every year the federal government says you are entitled to one free report from each of the three credit reporting agencies; Experian, Equifax and Trans Union.  The following article from the federal government: http://www.consumer.ftc.gov/articles/0155-free-credit-reports will be helpful in determining what you need to do, what information you will need and the pitfalls of imposter sites that you need to avoid.  If you haven’t already done this, do it now. If you have no credit file you will not be able to get any report. This will mean that you will need to go to the next step which will help you determine how to establish credit.  If you do have a credit file it costs nothing to get the report but for an added $7.95 or so on each of these sites you can get your current score based on the free report.  Credit scores are NEVER free because they are sales information owned by the individual credit bureaus. This is the information Experian, Equifax and Trans Union sells to potential lenders and marketers. This is how the credit bureaus make their money to stay in business. The purchase of your credit score by potential employers, insurance companies, banks and other creditors makes your credit score and your credit history a necessary investment by you for your financial management and financial well being. It is every bit as important for your financial life as your medical records are for your physical health.   To be continued…..

Questions and comments welcome.

Garnishments, Levys and other Legal Issues to Your Bank

     Wells Fargo just increased their fees for being forced to attach to a consumer's bank account should the bank receive a Garnishment, Levy, Writ or any other legal document to freeze a consumer's funds due to some sort of debt.  This could mean a levy from any taxing agency, garnishments for past Child Support, taxes due, court ordered payments or restitution, collection debts that have been won through Court Order etc.  While so many people panic and are surprised when they see that their funds have disappeared from their account, in reality it could have all be avoided. 

    The point of this blog is really not to admonish a consumer about getting into this situation in the first place but to forewarn him/her about how costly the banks are now making these issues.  Wells Fargo says that "effective April 1, 2013, the Legal Process Fee which include levy, writ, garnishment and any other legal document that requires funds to be attached will be $125 each."   This was noted in everyone's February 2013 statement. 

     Now think about the fact that maybe an account was attached by the bank for a certain amount but the consumer didn't have enough collected funds to cover the amount requested.  The legal process can be submitted time and time agaion until the full amount of funds are recovered through the bank and that fee will apply each time the request is executed by the creditor.  At a $125 per request, you could have your funds eaten up in no time.

The Case for being Your Own Accountant

“I never balance my checkbook”. “I just pay what they tell me to.” “I don’t have time to be so precise about my statements.” These are all just excuses to be lazy with your money. Did Donald Trump or Warren Buffet make money because they didn’t care if their creditors upheld their end of their agreements or didn’t hire auditors to ensure accuracy for their income and expenses year to year? I doubt it. In their case a mistake could cost them millions but in today’s world a mistake for any one of us could costs us more in lost money than we can afford.

One client found out after several months that the agreed upon interest rate for his credit card was never changed. There were two credit cards available from his financial institution. The first, a $2000 credit limit would give him a 12.99% interest rate for all unpaid balances while the second program allowed a $5000 balance and a 9.99% interest rate. He was approved for the lower program and used that over the last 5 years. This year he applied for and was granted an increased credit limit of $5000 which would drop his interest rate to 9.99%. He’d been busy the last few months and was behind putting his statement activity in his Quicken ™ personal financial software. When he finally gathered his statements, he found that his finance charges were way out of line. He saw that for several months the interest rate stayed at 12.99% and was not changed according to his agreement. He called the financial institution and asked about the mistake. The finance company admitted that the interest did not change as it should and finance charges would be credited on the next statement.

Had this client not paid attention to his own situation no one would have caught this oversight of being overcharged in fees. This would be an unfortunate waste of money. It’s kind of like having a hole in your pocket and losing it along the way. While the monthly amount of a 3 percentage points may seem insignificant to some, simplistically over the course of a year he could have cost himself roughly $150.00 more in finance charge than he should have been paying. Think of what having an extra $150.00 could do for you.

Situations like this occur all the time only with much larger consequences. Just look at the mortgage and foreclosure fiasco. How many poor consumers were led blindly to accept foreclosure when, in some instances, proper legal procedures were not followed? Then there are many cases of unauthorized or duplicate charges in one’s checking account, identity theft issues, fraudulent applications, misappriopriation of loan payments and charges and the list goes on. People make mistakes. Computers are only as smart as those who program them and they mistakes. Sometimes these mistakes are made knowingly and some are not. If no one is left to examine the results frequently, costly errors go unchecked. Nothing is infallible and being a responsible consumer means being aware that banks, credit card companies, mortgage banks, credit bureaus and any company that involves our money and our information must be checked by the very customers who use them.

Copyright 2010
Consumerwarfare.com

Inquiry Dropped Credit Score by Another 5 Points

It’s not much but it adds up! When a creditor or solicitor looks at your credit there are a number of codes that they must fill out to request your credit report. Those codes indicate to the credit bureau why a company is looking at your credit. If used correctly, those codes are designed to indicate whether a consumer is actively seeking credit, more credit, employment, insurance etc. or simply being used to solicit and offer credit. The codes, developed by the credit bureaus themselves help score your creditworthiness.

Typically there are two types of credit inquiries you see on your report depending on the code the creditor uses when they request your credit. One, often referred to as a “hard pull” counts against your credit score. Hard inquiries are supposed to indicate that you are actively seeking credit. These are the inquiries that will start to reduce your score about 5 points each after 3-4 inquiries in a year. The other type of inquiry, often referred to as “soft pulls” should be those that are requested to make financial offers, make solicitations and used for marketing and informational purposes only. These are generally not known by the consumer. These will not count against your credit score according to the credit bureaus.

Fair Isaac Corporation on MyFICO.com, home of the most used FICO score says, “…only inquiries that count toward your FICO score are the ones that result from your applications for new credit.” Well that is not always entirely true. In my case, my second mortgage company pulled my credit but I had not initiated any further credit from them nor had any issues with paying my account. I found that their inquiry dropped my score by at least 5 points and was classified on my report as an inquiry that impacted my credit score. The mortgage company was simply doing a random review but I was docked points as though I was seeking more credit. What happened is that the mortgage company filled out a form and selected a purpose code for them to pull my credit when submitting their request to the credit bureau. Here’s the problem. The type of inquiry selected rests entirely with the accuracy of the code selected by the creditor and at times the integrity of the code selected is subject to personal choice and human judgment. In this case, I wrote to the mortgage company and said they had harmed my score by their inquiry and to please remove it since I believed their pulling my report “ to only review” was misleading the scoring model into determining I was seeking more credit.

They wrote back saying , “Please note that as servicer of your loan, we are authorized to perform inquiries on your credit report. However, pursuant to your request, we have submitted an update with the credit bureaus to remove credit inquiry (if any) made by us on your loan. “

They were right, the Fair Credit Reporting Act allows them to review my credit at anytime. It is the scoring models of the credit bureaus that determine why my credit is being reviewed and whether or not my score will be harmed from such an inquiry. We are at the mercy of whatever code a creditor selects to get the report. It’s highly unlikely the creditor knows which code will harm a score and which won’t normany even care or think about it. Some creditors may just standardize their selection for all their credit inquiries where requests for information are harmful despite whether or not the consumer asked for credit.

While your score may not lower significantly at first, it is nonetheless a lower score and even 5 points can mean the difference in the interest rate you get on any credit you borrow. Your solution? Be diligent and make sure any inquiries that show up on your report are legitimately there because you asked for credit. If not, contact your company directly and ask them to remove the inquiry or recode the inquiry because they mislead other potential creditors into thinking you are seeking credit when you are not. Disputing inquiries with the bureaus themselves will rarely change your report as it is the creditor that leads the bureaus to classify the inquiry as they do.


Copyright
Consumerwarfare.com
October 4, 2010