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?

 

Debt Reduction/Modification....is it safe for you?

“Get out from under your credit card debt now!” “Reduce your debt over 60% and sleep better at night.” “Avoid bankruptcy!”

Don’t you believe a word of it!!!!! This is akin to borrowing from a high interest finance company. Well, I guess I might not go so far as completely telling you not to consider a debt reduction company at all since I don’t know your situation, but I am hoping the information I give you will help you determine whether or not this type of company can do more harm to you than good. I am sure there are consumers that feel these types of options have been helpful and those who have felt totally ripped off. In general these types of companies are VERY risky and can have a long term negative effect on your credit and your ability to get future credit regardless of what they claim.

As I investigate these companies from a potential customer point of view I have formed some common observations. See if these things fit within your hopes and dreams to reduce or eliminate your debt without paying it all back.

These companies typically lure you in by letting you know there is a “secret” credit card companies don’t want you to know. Come on. There is no secret. The secret is one you already know. If you are in trouble with your accounts you call them and try to work out a solution directly with them. The secret is, that with the economy today, most creditors in danger of losing money are willing to talk and to help.

Here’s what I have observed in these programs based on personal conversation with their counselors:

TYPE OF DEBT:
Only unsecured debt is eligible. Unsecured debts are those without assets such as a house, car, bank accounts or investments attached to them should you fail to pay them off. Ineligible debts then would be mortgages, car loans, federally backed financial obligations, and secured credit cards. The most common types of debt eligible for this type of program are unsecured credit cards, signature loans or lines of credit as well as debt from repossession or a debt forgiven.

MINIMUM DEBT:
Most debt consolidation companies don’t want to touch you unless you have a MINIMUM of $10,000 in unsecured debt. The reason? Their fees (revenue) are based on your balances. The higher the balances you have to work on, the higher the fees to the debt reduction company. These companies who charge fees to help you are “for-profit” companies.

FEE STRUCTURE:
Administrative Fees: Almost all of these companies will charge you an administrative fee anywhere from 10-15% of the total balance you want to work on. This is an up front fee payable over the first few months of your plan. For example, if you have about $20,000.00 in a combination of credit cards and small loans you would be charged anywhere from $2000.00 to $3000.00 over the first few months of the monthly payments they set for you. Keep in mind they get paid first before any negotiations on your behalf with your creditors. Fees first, debt payment last.

Monthly Service Fees: Every month you will be charged a separate fee for maintaining and servicing your account. The amounts range from $39.95 to $59.95 per month.

Savings Fee: At the end of the settlement, some companies may charge you another 10% of the savings (difference between what you originally owed and what your creditor agrees to take). Take the $20,000 example. The negotiator was able to secure an agreement to pay your creditor $10,000 in full showing a $10,000 savings to you or 50% of your original balance owed. The additional fee on the amount you saved would be another $1000 in cost to you.

PROCEDURE:

Information Gathering: Information on you is gathered by a counselor. At this time the
total debt is determined in your conversation. At times you may be pressed by your counselor about other debt that can be included. The more debt you want to negotiate, the higher the fees to the company who negotiates on your behalf. WARNING: When you first call these companies they may capture the incoming phone numbers so they can call you back and solicit should you decide not to go forward. Keep in mind also that debt leads (you) can be sold for a handsome sum to other companies offering debt programs.

Paperwork: When you contract with one of these companies you will have several forms to
sign. Most companies will set up a trust or an escrow account where your monthly payments will be deposited and held until you have enough to negotiate with. These trust or escrow account will not accrue interest for you. Others will have you set up your own savings account in the bank of your choice but they will want to be able to withdraw their fees through Electronic Funds Transfers from your account. The advantage of this is that at least while accumulating the funds you can draw interest on them. THE DEBT REDUCTION COMPANIES WILL GET THEIR FEES FIRST before any negotiation takes place on your account. FEES FIRST, NEGOTIATIONS LAST.

Approval for the program: Your information will be presented to an Oversight Board, Underwriters or whatever each company wants to call them. They will determine if you have the ability to make the monthly payments with success. It’s not the debt they are worried about; it’s the fees they want to collect from you.

Monthly Payments: Based on their guidelines and the total of all your debt, you may be
extended payments over 12, 24, 36, through 48 months with the median being 20-24 months. The debt reduction company will tell you to stop making any payments on your debts and make The monthly payments they have set up for you. They will tell you that no creditor will negotiate unless you are behind in payments. Some companies will deduct your Monthly Service Fee from these payments and some will directly charge your checking account as an outside expense. The administrative fee of 10-15% will be deducted from your account over the first 12 or so months depending on your terms. The balance of your payments after fees then goes toward your negotiation accumulation. If you have a company that also takes another percent of the amount they save you, that fee is generally deducted from the balance upon negotiation at the end.

Negotiation: At the end of your monthly payment agreement and not until then can this ompany attempt to negotiate on your behalf. BEWARE: During this time you are not paying anything on your debts and your creditors can still charge fees and interest as well as sue and garnish you. If this occurs, you have paid significantly more than what you owed in the first place. There is nothing about a debt reduction company that legally stops any kind of collection
efforts by your creditor.

Cancellation: If, at any time you cannot continue with this plan you are not obligated for
future fees if you notify your counselor in writing. You are also not entitled to a refund of any
fees that have already been collected as well. In addition, some may have cancellation fees that
I’ve seen as high as $299.00.


Let’s look at the possible financial side of this using $15,000 in unsecured debt. If you contract with Company A you are told that you can pay 20 payments of $502.05 over the next 20 months. That would be a total of $10041.00. From this amount you are assessed a 10% administrative fee of $1500.00 which will be paid to Company A over the first 10 months they withdraw from your escrow account. You are also paying a monthly service charge of $39.95. Over 20 months that would be a total of $799.00.

So far if you honor this agreement your debt looks like this:

Unsecured Debt $15000.00
Negotiate 50% $ -7500.00

Total debt owed $7500.00 You pay to creditor

Add ons:
Admin Fee $1500.00
Service Charge $799.00
Savings Fee 10%
of $7500.00 $ 750.00
__________
$3049.00 You pay to Debt reduction Co.
__________
Total Paid by you $10549.00

$10,549.00 is 70% of your total original debt. This is NOT the 50-60% reduction they claim. Now add to this the potential 18-35% interest rate and all the late fees the credit card companies may assess you and you haven’t saved a thing.

You can work up your own outcome with the information you get from the company of your choice but I will offer these observations for you to think about.

1. If you are behind in your payments you, yourself are in a position to call your creditor and see if you can make some modifications such as a reduced monthly interest rate for a time or a temporary change in the minimum monthly payments. With what is happening in the economy today they may jump at the chance. You may also save your credit report from too many 30,60,90 days lates accumulating on your account that could accumulate waiting for a debt reduction company to work on your behalf. You would be better off applying these payments to your debts on a monthly basis in good faith than hiring a debt reduction company. Most creditors will set up a budget plan with you if you prove you can honor it and make a sincere effort to make good on your debts.

2. Keep in mind that when going with a debt reduction company, there is virtually little contact with your creditor during the time you are sending payments for the time the company has set up for you. The company does not negotiate until it has the funds ready. During this time your balances may increase with fees your creditor can impose on you for non-payment even though in good faith you are putting away money to offer a settlement. Of course debt reduction companys do encourage you to pay more and finish faster but it doesn’t matter to them. During this time of no contact your creditors could increase your balances owed, harass and sue you. Then you are out the money you owe due to garnishment AND the fees you paid this company.

3. While debt reduction companies may NOT report that you are working with them to the credit bureaus, your creditors may directly report a write-off of the amount they negotiate and note that you worked with a debt reduction company in doing so. They also will report an increased debt due to interest and various charges. The hits to your credit report are serious and are not avoidable. Don’t believe a debt reduction company that says they can do anything positive with you credit report. It won’t happen and is not at all possible.

4. If you work up a rather large debt forgiveness with your creditors, they have, at their option, the ability to file a Debt Forgiveness Form 1099-C on you with the IRS. Come next year you will need to include that amount in your taxable income for the year. The only exception today is the mortgage program the federal government has exempted for those in mortgage trouble.

5. If you even remotely entertain this service make sure you research the company you are considering. Check for complains with the BBB and with various other consumer websites. The FTC website is loaded with careful cautions on these companies and has litigated against them.

6. If you are at the point where creditors will not work with you, you are ready to throw up your hands and give up, do NOT fall victim further. Look for totally non-profit debt management companies. They are out there. The trustworthy ones are totally non-profit. No fees. No obligations. They are funded by grants to help consumers for free. Look to your creditors and ask for their advice on debt counselors they trust and work with. Some of them will actually be very helpful. Look to your state’s attorney general or your state’s consumer division for advice on reputable companies if you can’t do this on your own.

7. Remember that credit is a major stressor in our lives. Work as hard as you can to correct your past mistakes, make a plan for the future and do your best. Like a diet, it takes hard work and discipline but you can do it.