You’ve no doubt heard the advice many times: “Check your credit reports at least once a year to make sure they are accurate.” It’s good, solid advice worth heeding. But what happens when your credit information gets mixed up with someone else’s – and you can’t seem to separate it? Or worse yet, if you check your credit reports and find no problems, but still get turned down for credit due to negative information?

The phenomenon is called “mixed files,” and it can be very difficult to straighten out.

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To learn more, I spoke with Jill Riepenhoff, a reporter for the Columbus Dispatch. Along with her colleague Mike Wagner, she recently conducted an in-depth investigation into credit report complaints. Following is an edited excerpt from my interview with Riepenhoff on Talk Credit Radio:

Who’s Complaining?

This project had really organic beginnings for us though. A colleague of ours in the newsroom has had a long-time problem since 1994 trying to correct her credit report. She has been mixed with somebody who has a similar name and it’s just year after year of frustration. When I heard this, I thought, “That is crazy. That doesn’t happen.”

The first thing that I did was go to the Ohio Attorney General’s consumer website and I just put in the search terms of the big three credit reporting agencies. Immediately, I saw hundreds of complaints, and I thought there’s probably something here. So that was really how this began, it was just a personal story from someone in our newsroom, and wondering whether it was an isolated case.

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We sent public record requests to the Attorney General of all 50 states and then we also did a Freedom of Information Act request at the Federal Trade Commission which was the full regulator of the credit reporting agencies until last July when the new Consumer Financial Protection Bureau took over.

From the AGs, we were able to get complaints from about half the states. The others either wanted to charge us too much money or they weren’t public records. A couple of states just completely ignored us.

Ignored and Frustrated

The number one theme that jumped out right off the bat was that these consumers, by the time that they were contacting the AG’s office or the FTC, their concern was long ignored by the credit reporting agencies. Whatever the issue was, they could not get it corrected nor could they get anyone on the telephone at the credit reporting agency to help them.

I must say that these complaints (at least the ones from the FTC) were unverified. We don’t know what happened. We can’t say with 100% certainty that this was a legitimate complaint. But when you read the narratives of these, you just knew that there was something in there. Elderly people that were complaining because they didn’t know how to use a computer, they wanted to get their credit reports, they couldn’t get anybody on the phone to help them navigate the system. That’s a credible narrative in my mind.

Mixed and Mismatched

(To understand how this happens), I kind of picture it a little bit like a library. It’s not like there is a report that they picked out of the file cabinets that says “Jill Riepenhoff.” What they do, is when a creditor orders a report it kind of searches through all the library shelves and looks in all the books and finds all the ones that look like they belong to Jill Riepenhoff.

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Well when I order my credit report, they’re pulling the books, if you will, that have my exact name, my exact address, my exact Social Security number, my exact date of birth, and typically they ask something about my account information: what’s your mortgage payments or who’s your car loan with or something like that. So, when the computer goes to pull the books off the shelf, they’re only finding those accounts that exactly match the needed information.

When creditors do that, they have much looser standards. They don’t have to ask for all that information, they can pull off the shelf based on a partial Social Security number or a partial name. So, like, we found situations where it was close enough. Myra could easily include information from somebody named Maria, for example. So the computers go in and pull all those books that look kind of close enough. Then, boom! You have a mixed report because you have Maria and Myra on the same report now. But that consumer won’t see that because it’s only going to pull the things that exactly match.

Your Worst Nightmare

One of the stories that we highlight in the series is the woman who went to buy a car in Colorado. And the week before she went to buy the car, she checked her credit report to make sure everything was in order. It was fine, she had a wonderful credit score. She even paid for the score to make sure that everything was above board.

She goes into the dealership. She even goes on her lunch break, thinking this is going to take that little amount of time. The next thing she knows, she’s practically in custody in the car dealership because when the car dealership ran her credit report, the matching formula used said was on a terrorist watch list from the federal government.

It took her about six years (to straighten it out) and she had to file a lawsuit in order to make the damage go away. On her own, she could not convince the credit reporting agency that she was not the international drug trafficker who the alert was up against.

Learn More

To listen to the full interview with Riepenhoff: Download the interview here; play the interview online here; or get the podcast on iTunes.

Learn how to correct mistakes on your credit report here.

Image: Omad, via Flickr

Continuing declines in the housing market in some parts of the country have left many homes still “underwater” across America. While these homes may not be physically floating in water, their owners no doubt feel like they are drowning in debt. One reader writes:

My first mortgage is paid.  I took out a line of credit on this house for $81,700 in 2007. I am 72 years old and retired.  I have since moved out of state.  I would like to sell this house, but the homes in this area are only selling for $40,000 – $45,000. I cannot afford to pay the difference. What are my choices?

I am sure you are well aware that you are not the only person in this situation! It’s unfortunately quite common. According to CoreLogic, just over 11 million homes — about one in five homes with a mortgage — are in negative equity, meaning mortgage balances are greater than the value of the home.

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Before we look at your options, there are a couple of things you need to think about here.

First, it’s important to realize that when you paid off your first mortgage, the lender that holds the home equity loan moved into first lien position. So even though this loan may have originally been taken out as a second mortgage, it is no longer a second mortgage. The reason that is important is that sometimes when a homeowner is underwater on both a first and second mortgage, the second lienholder is more willing to negotiate because it knows that in order to foreclose it has to pay off the first mortgage. That doesn’t sound like it’s the case here.

One thing you need to do before you can make a decision about this house is to meet with a tax advisor with experience in issues related to 1099-Cs. If you are able to get out from under this loan without paying the full balance, the IRS will consider any cancelled debt taxable income. You’ll owe taxes on it unless you can show that you qualify for an exception or exclusion, such as the insolvency exclusion, or the Mortgage Debt Forgiveness Relief Act (which is currently slated to expire at the end of 2012 unless Congress extends it). This is vitally important because you don’t want to end up in a situation where you owe the IRS a big tax bill you can’t pay.

[Related Article: A Slew of Tax Tips to Clean Up Your 1099-C Mess]

With that information in mind, you can consider:

A short sale. This is a sale of your home in which the lender allows you to sell the home for less than what you owe. If you are able to sell your home this way you want to get an attorney to look over the agreement to make sure you aren’t on the hook for any deficiency balance.

Walking away and letting the home go into foreclosure. This can be risky because the lender may decide to sue for any balance left after the home is eventually sold. But it is a popular option in some cases.

Filing for bankruptcy. This may allow you to put this home behind you and avoid taxes on any cancelled debt. An attorney can help you figure out the pros and cons of this approach.

[Learn More Here: Underwater On Your Home: Your Six Options]

You may have some tough decisions to make here, but getting advice from experienced professionals who are helping other homeowners in similar situations should help you decide which approach is right for you.

If it seems like everyone’s talking about credit scores these days, it’s probably not your imagination. Consumers appear to be getting smarter about credit scores. At least that’s what the results of a survey of 1000 consumers by the Consumer Federation of America (CFA) and VantageScore Solutions show. Compared to a year ago, a larger percentage of consumers correctly answered a variety of questions about credit scores. But there were a few key concepts that tripped up many respondents.

[Related Article: What's a Credit Score? Really.]

Most of those surveyed did well on the basics. They knew that:

• Mortgage lenders and credit card issuers use credit scores (94 percent and 90 percent correct respectively). And many other service providers also use these scores — landlords, home insurers, and cell phone companies (73 percent, 71 percent, and 66 percent correct respectively).
• The three main credit bureaus — Experian, Equifax, and TransUnion — collect the information on which credit scores are frequently based (75 percent correct) and that it is very important for consumers to review their credit reports with those agencies to learn if they are accurate. (82 percent correct).
• Consumers have more than one generic credit score (78 percent).
• The following types of information influence scores: missed payments, personal bankruptcy, and high credit card balances (94 percent, 90 percent, and 89 percent correct respectively). And that making all loan payments on time, keeping credit card balances under 25 percent of credit limits, and not opening several credit card accounts at the same time help raise a low score or maintain a high one (97 percent, 85 percent, and 83 percent correct respectively).

[Credit Score Tool: Get your free credit score and report card from Credit.com]

So What’s The Problem?

CFA’s Executive Director Stephen Brobeck said he has “have never seen such improvement from one year to the next,” in the organization’s consumer knowledge surveys. But there was still some basic information about credit scores that many didn’t understand. In particular, consumers didn’t seem to grasp how expensive poor credit scores can be. For example, fewer than one in three were aware that, on a $20,000, 60-month auto loan, a borrower with a low credit score is likely to pay at least $5,000 more than a borrower with a high credit score.

While credit scores don’t take factors like age, marital status or race into account, just over half thought a person’s age (56 percent) and marital status (54 percent) are factors used to calculate credit scores, and 21 percent incorrectly believe that ethnic origin is a factor.

Consumers are also confused about how inquiries affect credit scores. Just 9 percent correctly knew that “multiple inquiries during a 1-2 week window” will not lower scores. In reality, when it comes to FICO scores, recent inquiries within a short period of time for mortgage, auto or student loans don’t affect scores, and going back in time, multiple inquiries for the same type of loan in those categories are treated as a single inquiry. The exact time period varies, depending on which scoring model is used. Similarly, multiple inquiries within a 1-2 week window won’t lower VantageScore scores.

The Smartest Consumers Know Their Scores

Checking one’s credit scores apparently does help cut through the confusion; those who had seen their scores recently were more likely to correctly answer the survey questions. But fewer than half of those surveyed (42 percent) had received at least one of their credit scores during the past year. Of those who did see their scores, the top sources were a website (49 percent) and a mortgage lender (45 percent).

Consumers can test their credit score savvy at CreditScoreQuiz.org and CreditScoreQuiz.org/Espanol.

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Image: Amy the Nurse, via Flickr

What can you do if someone is not exactly using your information to commit identity theft, but has hijacked some of your personal information? Is there such a thing as “sort-of identity theft”—or is that like being “half pregnant?” A reader wrote us with that dilemma:

What if someone is intentionally using your phone number and/or address on credit applications, documentations, etc. to avoid creditors?

I have sorted things out with the major card companies, collectors, and others that this is not me, but every 3-4 months calls start coming in again as more credit is issued to this person who does not pay. My credit report is fine. One card company told me to contact the FTC who told me they could not do anything as I have not been damaged (other than my time) over what she is doing.

I have had the same phone number for 15 years and do not want to change it. What this person keeps doing is wrong. Any advice?

So maybe this isn’t a clear-cut case of identity theft since the thief apparently hasn’t tried to use your Social Security number or credit information to get loans. But still, using your phone number and address on credit applications is a type of fraud. While your credit information may not be currently mixed up with this person’s, there’s a chance that could happen in the future if she doesn’t stop.

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Victor Searcy, Director of Fraud Operations for Identity Theft 911, warns: “It is very difficult to stop this kind of thing.” But he does have suggestions for what you can do.

For Both Phone and Mail

Start a file where you keep copies of correspondence, notes from phone calls with creditors etc.  Gather as much information as you can about the perpetrator such as name, real address or phone number, etc.

For Mail

File an identity theft report with the Postal Service. You could also file a police report, but Searcy thinks that at this point notifying USPS will be just as effective.

[Related Article: The Global Payments Breach and Your Credit Score]

For Phone Calls

When creditors or collectors call, let them know you have filed an identity fraud report and instruct them to stop calling you. If the calls persist, change your phone number to an unlisted number you only give out to those you know. True, it will be a hassle, but it may be the only way to stop the calls.

“I have seen some people deal with this for months and years before finally giving in, so I would do it before I got too aggravated,” says Searcy.

Just be forewarned: Collectors may use “skip-tracing” services to find delinquent debtors and your new phone number could show up as being associated with your address. That’s why you want to use an unlisted number and only give it out to people you know.

There is still another option you might consider. Find out whether the company that provides your phone service offers a call screening feature. With that service, calls will only go through if the caller identifies himself and you accept the call. Automated calls rarely make it past that stage.

[Featured Products: Research and compare Identity theft protection plans at Credit.com]

Image: Neil McIntosh, via Flickr

You probably have it in your head that your credit report is “good” or “bad.” But with credit reports, beauty is in the eye of the beholder. The credit report itself is just a compilation of facts about your financial habits and it is, in fact, judgment-free.

It’s up to lenders, insurance companies or others that review your credit reports to evaluate that information, and they usually do that with the help of credit scores. Of course the information used to calculate your credit score is found in your credit report. So you don’t really want to see one without the other! (It just so happens you can do all of this—get an overview and explanation of your credit report and see your credit scores—using Credit.com’s Credit Report Card. It’s free.)

There’s a popular misconception that your credit report is a computer file sitting at a credit reporting agency being periodically updated. But it doesn’t quite work that way.  When someone requests your report, the credit reporting agency’s computers go to work, compiling information that matches your identifying information into a report that can be scored or provided to the lender, insurance agency or other company that purchased it.

[Related Article: What's a Credit Score? Really.]

Experian has described it this way: You may have all the ingredients you need in your kitchen to make a particular dish, but until you put those ingredients together, the dish doesn’t exist.

There are three main companies that compile and sell credit reports nationwide: Equifax, Experian and TransUnion. They don’t share information with each other, and the data each one collects and reports may be different as a result. That’s why it’s a good idea to review your reports with each of these agencies. You can get them once a year at AnnualCreditReport.com and you may be entitled to extra free copies under federal law. (Our Credit Report Card and the accompanying scores are based on your credit report data and essentially translates the information in the raw credit file into something more user friendly.) And if you’re planning on trying to build better credit, you might consider subscribing to a credit monitoring service that provides additional features.

What’s In Your Credit Report?

There are four main categories of information in your credit report: personal information, account information, public record information and inquiries.

Personal information includes the items used to help identify accounts that are yours when your report is compiled:

• Your current and former names (if you’ve married or divorced and changed your name, for example)
• Your Social Security number
• Current and former addresses and variations
• Employment information

What to look for here: Don’t be surprised if you see out-of-date employment information. Lenders don’t usually rely on that data. But do investigate if you see addresses that are clearly wrong – in another state, for example – or variations of your name you don’t recognize. They could mean your credit information is getting mixed up with that of someone else, or they could be a sign of identity theft.

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Account information (a.k.a. “tradelines”): This is the meat of your credit report and usually is the most detailed and longest section of your credit report. It may include:

• Credit cards, department store cards, gas company cards
• Vehicle loans or leases; RV and boat loans
• Mortgages and home equity loans
• Consumer finance company accounts
• Credit union credit cards or loans

Each individual account will list details such as:

• Lender name and account number
• Date the account was opened and closed (if applicable)
• Original and current balance
• Monthly payment amount
• Payment history
• Current status (paid as agreed, 30 days late, etc.)

What to look for here: Remember when we said that credit reports are compiled when requested? That means that your credit report includes the latest information reported by your lenders. If your lender hasn’t reported that you paid your balance off yet, for example, the last balance reported will show up here. It may take up to 30 days for your current balance to be reported. (And by then, it may have changed again!)

Also remember that some accounts, like medical bills, are only likely to show up on your credit reports if they have been turned over to collections. And since reporting accounts is voluntary, you may not see all of your loans on your report.

Public Record Information includes items that are part of the public record, which means they have been recorded with a court. This section can also contain collection accounts, even though those are not part of the public record. What you’ll find here:

• Civil judgments (criminal information is not reported on standard consumer reports)
• Bankruptcies
• Federal, state and county property and tax liens
• Collection accounts

What to look for here: Make sure dates and balances are reported correctly. Dates are especially important because they determine when these items will come off your credit reports. And while paying a collection account may be the right thing to do, and may help you avoid being sued for a debt, it won’t likely boost your credit scores.

[Featured Products: Compare credit score, report, and monitoring plans at Credit.com]

Inquiries note when someone has obtained your credit information. There is nothing that indicates whether you were approved or rejected for credit at that time. Some inquiries can affect your credit scores, but not all do. Soft inquiries usually aren’t seen by anyone else but you, and they usually won’t affect your credit scores. These include:

• Consumer inquiries, which indicate that you’ve requested your own credit information.
• Promotional inquiries, usually for prescreened credit cards. Tip: You can remove your name from these marketing lists by calling 1-888-5OPT-OUT.
• Account review inquiries created when your current lenders request your credit information.
• Employment or insurance-related inquiries

Mortgage, auto and student loan inquiries within a recent time period (usually 30 or 45 days, depending on which scoring model is used) are ignored. And going back in time, inquiries of these types that occur in a short period of time are usually grouped together.

What to look for here: Look into inquiries from companies whose names you don’t recognize. While it’s possible that they could be from companies you’ve done business with (if they report under a different company name), they could also indicate fraud.

Next Steps

Once you’ve reviewed your credit report carefully, your next steps will be to:

1. Dispute mistakes and
2. Get your credit score to understand how lenders may view the information in your reports.

Image: seniorliving.org, via Flickr

The recently enacted JOBS Act (Jumpstart Our Business Startups) is a either terrific boost for small businesses looking to raise money, or an invitation to investor fraud, depending on whom you ask about it. To learn more about the potential upside of this legislation, I interviewed small-business attorney Garrett Sutton. He is a Rich Dad adviser, founder of CorporateDirect.com, and the author of five books, including his most recent title, Start Your Own Corporation. (Disclosure: Garrett and I are co-authors of the e-book Business Credit Success: Get on the Financing Fast Track.) Here is an edited excerpt from our interview:

Gerri: Can you fill me in on what the JOBS Act means for entrepreneurs who are looking to raise money for their companies?

Garrett: The JOBS Act is a significant development in fundraising for entrepreneurs. Basically what it does is it loosens the previously very tight restrictions on fundraising in several important ways.

In the past, you may have tried to raise money with a Regulation-D, Rule-506 offering. That’s a private placement where you don’t have to register with the federal government or your state government, so it’s a fairly flexible way to raise money. But you were hamstrung by the fact you couldn’t advertise this offering. It could only go to people that you knew, people you had a pre-existing relationship with such as friends, family or colleagues. So you really couldn’t get the offering out there to a large number of people.

Well, what the JOBS Act does is allow accredited investors, which I’ll define in a second, to to receive advertisements for these private placement offerings. That’s great because previously, these accredited investors couldn’t be reached by any sort of advertising.

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An accredited investor is someone who has either $1 million in net worth exclusive of their home, so $1 million on top of the price of their home. Or, they’ve earned $200,000 a year for the past 3 years, or $300,000 a year if they’re married.

So if you a have $1 million in net worth, or you’re earning a significant amount of income, the Securities and Exchange Commission says look, these people are sophisticated, they can take care of themselves. Our job is to protect widows and orphans. If someone has $1 million in net worth and a high-level of income, they can make their own decisions.

Gerri: Some of the criticisms I’ve seen about this particular act in this area was that it would open the door to a lot of fraud for unsophisticated investors.

Garrett: Yes, we’re going to talk about crowdfunding next, and there is that risk on the crowdfunding side, because with crowdfunding, anyone can invest. You don’t have to be an accredited investor. And so there is sort of a fraud issue that you have to worry about there, but they’re putting in some restrictions that hopefully will minimize that. (Crowdfunding allows companies to raise money from a large number of people over the Internet.) So on the Rule-506 side, you can raise as much money as you want, and you can advertise the offering but it has to come from accredited investors.

Gerri: What do you think is going to happen, in terms of those small businesses who want to raise money? Are they going to have to find companies to advertise for them to these accredited investors? Wouldn’t it be hard to find them yourself?

Garrett: Yes, and the SEC has 90 days to come out with rules on how the Rule-506 side is going to work. On the crowdfunding side, you can raise up to $1 million from anyone and you can advertise it on the Internet. But, you have to go through certain SEC-approved portals and the job of these portals is to make sure that the people offering the securities over the Internet are not fraudsters.

[Featured Products: Research and compare loans at Credit.com]

Now, will some bad apples slip through? Absolutely. I don’t know how you’re going to stop that. Most commentators I’ve talked to have said, “Look, we need to have capital formation. We need to allow people to be able to invest in these startups. We’re going to give up a little bit of, there’s going to be some fraud in the system because of this, because we’re loosening it up. Some fraudsters are going to slip through. But in order to get capital formation and job creation going, we’re willing to let a little of that in to help entrepreneurs get their projects funded.”

Gerri: So, if you’re someone with a small business or starting a small business, when can you reasonably expect this option to be available?

Garrett: On the crowdfunding side the SEC has nine months to put it together and I’m certain they could get extensions if it’s not quite right. But, the industry is moving pretty quickly to work with the SEC to establish these portals. They’re going to be establishing protocols for who can invest, what type of information has to be provided and that sort of thing. So, I would say in the next year, Gerri, you’re going to be seeing this crowdfunding starting to happen.

Gerri: So 2013 is probably the year of crowdfunding. Do you see this replacing the need to establish business credit?

Garrett: No, actually I think it’s going to accelerate the need for business credit if people are able to go out and raise money. They still need to have good business credit as they continue with their business. So, this may help some businesses get off the ground but at the same time, they’re still going to need to establish business credit as they move forward in their entrepreneurial ventures.

Want to listen to the complete unedited interview with Garrett Sutton discussing the JOBS Act? Download the interview here; or play the interview online; or listen to or download it from iTunes.

Most negative information can stay on your credit reports for no more than seven years, or ten years in the case of certain types of bankruptcy. Then why is an old collection account still appearing on a reader’s credit reports more than a decade after he stopped paying? Truth is, some debts can haunt you for years to come:

I stopped paying a credit card debt in the middle or end of 2000. In the fall of 2006 a collection agency bought the debt.   I was living in another state and did not realize that a judgment was passed until a year or so later.  It is now may 2012, and this is still on my credit report, more than 11 years later.  What about the 7 years from the date that payment stopped?

[Credit Check Tool: Try Credit.com's Free Credit Report Card]

This reader is correct in his basic understanding of how long collection accounts can be reported. Specifically, under the Fair Credit Reporting Act, collection accounts must be removed from credit reports seven years and 180 days after the consumer fell behind on payments on the original account that was later turned over to collections. That’s true whether the debt has been paid or not.

But in this case, it sounds like our reader is not talking about a collection account that’s on his credit report. He’s talking about a judgment, which is a different animal with its own reporting period. The collection agency took him to court, and since he didn’t respond, obtained a deficiency judgment against him. Here is what the Fair Credit Reporting Act says about how when judgments must be removed from credit reports:

Civil suits, civil judgments, and records of arrest that from date of entry, antedate the report by more than seven years or until the governing statute of limitations has expired, whichever is the longer period.

[Related Article: Collection Agency Out of Business, But Still on Credit Reports]

In plain English that means that a judgment can be reported for up to seven years from the date the judgment was entered by the court. But here is the kicker: if you don’t pay it off or settle it, it may be reported until the statute of limitations has expired. In most states, that’s ten to twenty years! And since unpaid judgments can often be renewed, theoretically at least, an unpaid judgment can remain on your credit reports indefinitely.

This very long reporting period is one good reason to settle up on a judgment. But there’s another good reason to pay it off. In most states, judgment creditors have collection powers than creditors without judgments don’t have. That may include the ability to garnish wages or seize property, such as bank accounts.

Like most debts, judgments can often be settled for less than the full balance. Our reader shouldn’t hesitate to negotiate if he can’t pay the full balance. Of course, if he does strike a deal, he should get it in writing before he pays.

[Featured Products: Compare credit score, report, and monitoring plans at Credit.com]

Image: Neil Conway, via Flickr

Are you scraping by, just barely able to make your student loan payments? Or maybe you’re making the payments, but worried you’ll be in debt forever? Make sure you haven’t overlooked one of the best repayment options out there. Lauren Asher, an expert on student loans and the president of The Institute for College Access & Success, an independent non-profit organization that works to make higher education more available and more affordable for people of all backgrounds, calls it the “best kept secret” in the student loan world.

Okay, so maybe it’s not totally a secret, but many eligible borrowers aren’t taking advantage of the Income-Based Repayment program, so it deserves all the attention it can get.

I recently interviewed Asher on my radio show, Talk Credit Radio. Here is an edited excerpt from that interview:

Gerri: Can we start off by discussing the trends in student loan debt?

Lauren: Student loan debt is touching more and more people’s lives every year. A generation ago, less than half of people who graduated from 4-year colleges had student loans. Now it’s at least two-thirds. And for the class of 2010, which is the most recent data we have, the average debt for those borrowers was more than $25,000.

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Gerri:  What about default and repayment rates? Are people having trouble paying back their student loans?

Lauren: Default rates have gone up recently although they’ve come down from a high a couple of decades ago. They do sometimes reflect changes in the economy. Certainly it’s harder to pay off your student loans when it’s harder to find good-paying jobs. But what’s important to know is not just how much you owe, but what kinds of loans you have that can really affect your options for repayment.

If you have several student loans, there are actually a lot of good ways to keep those payments under control even in tough times. But you need to know what those options are and how they work before you get into real trouble. One of those options is the Income-Based Repayment Program.

Gerri:  Tell us about the IBR program and the benefits.

Lauren: Income-Based Repayment is the best kept secret in this whole student loan debate. It has been around since July 2009. It’s available to students with federal loans. So that includes Stafford loans and Grad Plus as well as federal Consolidation Loans.

If you have direct loans or what was used to be called “guaranteed” or “federal family education program loan,” whether you have had them for many years or just finished school, you can qualify for IBR if you’re earning relatively little compared to what you owe.

[Related Article: Student Loan Default Realities]

A good rule of thumb is, if you owe as much as you earn in a year, you probably qualify. But, there’s a calculator on our site—IBRinfo.org—and also a link to the department site and their calculator to help them figure it out. So the nice thing is that, once you qualify, your payment each year is adjusted based on your earnings and family size.

If you earn less than 150% of the poverty line for your family size, your required payment is zero. You remain in good standing, you’re not delinquent, you’re not in default. And those payments—even if they’re as low as zero—count towards either 25 years of forgiveness, meaning after you’ve made affordable payments for 25 years in IBR if you still owe anything it’s forgiven. Or if you work for a public or non-profit employer and you had a direct loan, you could get forgiveness in as soon as 10 years in IBR.

IBR provides two things. One, it provides you the assurance that your payment will be fair and manageable based on what you actually earn. The other thing it does is give you a light at the end of the tunnel. Repayments will not go on forever.

Even if you hit a patch where you can’t even cover your interest and your IBR payments are very low, eventually if you haven’t been able to pay it all off, it will go away and you can move on with saving for retirement, paying for your kid’s education and the other things you need to do.

[Student Loans: Research and compare options for student loans at Credit.com]

The Best Kept Secret In Student Loans (cont.) »

Image: Katie Tegtmeyer, via Flickr

Gerri: President Obama recently initiated some changes to the program, calling it “Pay As You Earn.” Can you talk about those changes?

Lauren: Right now what’s available for all borrowers—past, present and future—is the income-based repayment program that went into effect in 2009. There are two improvements that will be available in the future. One is called, “Pay As You Earn.” It was announced last October and it’s still not finalized, but it will go into effect in time for people who are in school now to benefit within a couple of years. It covers people who borrowed at least one loan in 2008 or later, and one in 2012 or later.

So for current students, a good way to think about it is that it will make IBR more generous. It will make the payment cap and the maximum payment you have to make even lower, and it will forgive any remaining debt after 20, rather than 25 years. Those same terms will apply with borrowers who took out their first loan during or after 2014. So all new borrowers starting in 2014 will have access to a more generous version of IBR. But IBR right now is still pretty generous and can really help people stay out of delinquency and default.

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Gerri:  What about borrowers who have some loans that are maybe years, or even decades, old that they’re still trying to cope with. What options do they have?

Lauren: If a borrower is not in default they could have access to income-based repayment. They just have to meet the basic debt-to-income criteria. The nice thing about income-based repayment or IBR is that it applies to those past, present and future borrowers of federal student loans.

Gerri:  What if you’re in default? Are you eligible for IBR?

Lauren: You’re not eligible for IBR if you’re in default and it takes nine months of non-payment to default on the federal student loan. Hopefully, more people will find out about IBR and use it before they reach that point because once you do default on a loan, the consequences are quite severe.

Gerri:  I interviewed a woman who had student loan debt cancelled and then ended up with a big tax bill as a result of the cancellation of debt income. What about with IBR? If you have student loans forgiven at the end will you have to pay taxes on the forgiven amount?

Lauren: Under current law, it would be taxable. However, we worked very hard and have a lot of support in Congress fixing this problem. I’m confident we’ll get it long before anyone qualifies for forgiveness under IBR. Public service loan forgiveness, if your debt is forgiven, is not taxable.

[Related Articles: 8 Ways to Ease the Student Loan Burden]

Gerri: How long does it typically take to get approved for IBR?

Lauren: We have heard everything, from a couple of weeks to three months. And there have been some instances of lost paperwork. It’s really important for borrowers to speak up and, if they are having any problems, file a complaint with the Consumer Financial Protection Bureau because they will track and help figure out where the problems are.

Overall, though, we know that more than 630,000 people are now enrolled in IBR and the pace is picking up. So even if it takes a little while, just keep in touch with your servicer and make sure you’ve got all your paperwork in, keep copies of everything that you submit and when you sent it and you should be alright.

Learn More: 

Listen to the entire interview with Lauren Asher, including tips for borrowers with private or parent student loans:

Listen to the interview online here.

Or download the interview here.

You can also listen or download the podcast on iTunes.

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What happens when a negative item on your credit reports is from a company that is no longer around? That’s what one of our readers wants to know. She asks:

A collection agency is listed on my credit report several times. I went online trying to find a way to contact them to make payments but the Better Business Bureau says they are no longer in business. Given that they are no longer around, is there a way to get the credit bureaus to remove the information from my credit reports?

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You’re likely in luck here, at least as far as your credit reports go. Under the Fair Credit Reporting Act, you have the right to dispute an item on your credit report(s) if you believe it is inaccurate or incomplete. The credit reporting agencies (CRAs) generally have thirty days to investigate your dispute and either confirm the information with the source, or remove it from your reports. While the law doesn’t specifically state that you can dispute an account because the company furnishing the information is defunct, the fact that you can’t pay these accounts and get the balances updated to zero seems like a reasonable reason for challenging them. Since the company is out of business, it’s not going to respond to a request for reinvestigation from a CRA, and the collection accounts will likely end up being removed from your reports.

I’d recommend you:

1. Make sure you have fairly recent copies of your credit reports from all three major credit reporting agencies: Equifax, Experian and TransUnion.
2. Dispute these accounts in writing with each of the CRAs that are reporting them. I’d suggest you do it in writing rather than online because you’ll have better records of your disputes. Send your dispute letters by certified mail.

[Related Article: Tax Help: How to Dispute A 1099-C Form]

Chances are the CRAs will respond by telling you the information has been removed. If not, then you’ll have to challenge the findings of their “investigation,” but I really doubt it will come to that. Keep copies of your credit reports, and all the correspondence involved, indefinitely.

Also keep in mind this debt may be bought by another collection agency, so it may not be the last time you hear about it. By law, collection accounts may only be reported for seven and a half years from the date you first fell behind with the original creditor. That’s true, regardless of whether you pay them or not.

If you do hear from a new collection agency about this debt, you’ll find our infographic, What to Do if A Debt Collector Calls, handy.

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Image: Jasoon, via Flickr

Congresswoman Virginia Foxx’s recent comments about how she has “little tolerance for people who tell me that they graduate with $200,000 of debt or even $80,000 of debt because there’s no reason for that” added fuel to an already raging fire over the affordability of a higher education, and what—if anything—the government should be doing about the roughly one trillion dollars in outstanding student loan debt.

Putting politics aside, is she completely out of touch with the reality of the cost of a higher education today? Or is it possible to graduate debt-free—even if you (or your parents) haven’t socked away enough, or if you don’t earn a coveted free ride to the school of your choice?

I put out a query looking for stories from students or (their) parents who have recently—or will soon—graduate without college debt. I only got three responses, but each shared some common advice that may give prospective students (and their parents) hope that it is possible to earn a four year degree and not owe half your paycheck to student loan lenders when you’re done.

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Drink Less, Work More and Don’t Buy Into Hype

Zac Bissonnette, the author of How to Be Richer, Smarter, and Better Looking Than Your Parents was graduated from the University of Massachusetts Amherst in 2011. He has no student loan debt.

His number one piece of advice? “Don’t fall for all the hype about how it’s so important where you go to school,” he says. “When you look at the real horror stories (about student loan debt) it’s usually people who bought into the scam that one school is better than another.”

“There are two sets of schools you should go to,” he insists. “Either one of the most elite schools in America or your state public school.” The top schools have large endowments and generous financial assistance, he explains, while in-state public schools offer “just about any major you need,” and are affordable. “The average cost is around $250/week including room and board,” he notes.

And stop focusing on the rankings of the “best” schools, which he believes get far too much attention. “Maybe one in five HR people are going to know the rankings of schools. Employers don’t read that. Unless you have kids in college, you don’t read that,” he says.

[Related Article: Romney, Obama Both Support Student Loan Interest Freeze]

Bissonnette also encourages students to work during school. “The average college student is drunk about 15 hours a week,” he says, and he’s not joking. At least some of that time could be spent working. He brushes off the idea that working will hurt a student’s grades. “Students who work more than 40 hours a week graduate on average with the same GPA as those who don’t work at all.”

And there’s another trap he says students should be careful not to fall into. The first year financial aid package may be quite generous, but once a student is enrolled, they’re hooked and each year, costs can go up/financial aid can go down. By the senior year, the student may find himself or herself taking on a lot more debt than planned.

Bissonnette is as blunt as Foxx at times: “There’s a lot of borrowing for college that doesn’t need to be happening,” he insists. But he quickly adds that he does have a lot of sympathy for students with massive student loan balances they have no shot at repaying. He believes it’s a rare 17-year-old student who is prepared to go against the advice of guidance counselors, his or her parents, and everyone else who is saying an education at a particular school is a good investment.

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Compromise—Or Join the Army »

Image: CUNY Academic Commons, via Flickr

Compromise—Or Join the Army

Neal Frankle, financial planner and blogger at WealthPilgrim.com

Neal Frankle, a financial planner and blogger at WealthPilgrim.com says students need to do four things to minimize college debt:

1. Pick the right school.

2. Pick the right major.

3. Get involved at school.

4. Learn how to budget.

He has two daughters in college right now, and neither of them will graduate next year with any debt. While he did save for their educations from “the day they were born,” that savings fund took a hit a few years ago. “I have less for them than I had planned because of the market downturn, but they are doing fine. They work during the summer,” he says.

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Frankle is also a big believer in avoiding the hype of a very expensive school. His middle daughter was accepted into NYU and the Berkeley School of Music, both of which cost $60,000 a year.  ”She wanted to study the music business and Berkeley was #1,” he says. But he knew there was a school “right down the street that’s #2 and it’s $20,000 a year.” Turns out, though, that she really wanted to go away to school, so they compromised on an in-state school not too close to home where Frankle says she’s very involved in the school, and getting a world class education.

His eldest daughter joined the Israeli Army, which is paying for her college education. “I am completely serious,” says Frankle. “That’s another strategy—join the Army.” Frankle also believes going to a community college for two years before going to a four-year university can be a good strategy. “Would you rather live at home (and go to a community college) for a couple of years, or be forced to live at home until you’re forty because you’re saddled with a lot of debt?” he asks.

[Related Article: The Next Bubble: Is It Time to Cap College Tuition?]

He points out that most people don’t end up working in the field in which they got their degree, which makes the idea of going to a particular school because it offers a special major or program a gamble. He advises students to seriously consider what their goal is before they go to college. “Hopefully part of it would be to make a living when you graduate,” he says. “That being said, you should study something that will help you achieve that.” Some may learn they don’t need to go to college after all.

Frankle, who says he talked a lot with his daughters about their college choices and what those choices would cost them, has also insisted they learn how to budget and manage their own money. He likes the You Need a Budget software. His youngest daughter gets a fixed amount of money she has to use each month to pay for tuition, as well as all of her other expenses. “If she doesn’t have tuition money, she doesn’t go to school next year,” he says.

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Dig Deep, Cut Back and Get Creative »

Dig Deep, Cut Back and Get Creative

Andrew Schrage, co-owner of MoneyCrashers Personal Finance

Andrew Schrage, co-owner of MoneyCrashers Personal Finance, earned his degree from Brown University in 2008. He has no student loan debt. He says he used a variety of strategies to “make my debt-free graduation possible.” In his own words, these strategies included:

1. Work Through High School

During my freshman year of high school, I started multiple side businesses of my own. I bought candy wholesale and resold it to friends. I cut grass in the summertime, raked leaves in the fall, and shoveled snow in the winter. I performed additional services on an as-needed basis, such as gutter-cleaning, shrub trimming, and wedding.

I was able to keep up with all of this while staying on top of my classwork, and I invested most of my earnings in CDs, using a layered approach. I got this idea from my parents: I staggered the opening of the individual CDs so that I always had at least some access to my money at any one point in time. It also allowed me to take advantage of better rates when when they became available. This generated a significant portion of income when it came time to pay for school.

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2. Dig Deep to Earn Financial Aid

I visited my school’s financial aid office and got as much advice as possible regarding grants and scholarships. I followed this up with some Internet research, looking for any program I might qualify for based on my age, ethnicity, gender, religion, and so forth. I exhausted all of these possibilities before I even considered student loans.

3. Choose an Affordable School

While I didn’t do it personally, a great option is to attend a community college for the first two years of your education. All of your credits will transfer, and you will save a lot of money by taking core classes at a fraction of the cost of a university. You should also attend summer sessions, which often reduce tuition expenses.

4. Cut Back on School Expenses

There are many ways to cut back on standard expenses while attending college. First of all, I always purchased my textbooks used, and resold them online when I was finished. For entertainment, I kept it simple. Excessive bar-hopping was replaced by free on-campus sporting events, affordable concerts and campus events, and a movie every now and then—and I kept myself on a strict entertainment budget. Although I did use credit cards during college, I never carried a balance and never used them to finance my education. I used the best available cash-back rewards credit cards to increase the savings.

[Related Article: Millenials Struggling With Massive Debt Load]

5. Utilize Alternative Financing Options

I was also able to get a loan from my parents to help pay for school. The interest rate was awesome, and I paid this off as quickly as I could.

6. Generate Income

In addition to working while in school and reselling textbooks, I also sold whatever else I could find to generate cash. This included old digital cameras and unused Christmas gifts, among other things, using Amazon as my selling platform.

Ultimately, rather than viewing student loan debt as a way of life and putting off dealing with it until you graduate, you should focus on minimizing and eliminating it as soon as possible.

Have you managed to complete college in the past few years without taking on massive amounts of debt? We’d love to hear how you did it. Feel free to share your strategies in the comments section below.

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When a clerk at Target told Annette Tierney her she could save 5% on her purchases by opening a Target REDcard debit card, it was a no-brainer. “Every time we go in there we get a cart full of stuff,” she explains. “We usually spend $250 to $500.”

It also seemed simple enough—the store’s debit card is set up to draw from a customer’s existing checking account.  She was shocked, though, when her application for the card was declined.

Since she and her husband avoid debt and have “great credit,” her first thought that was that perhaps they had been victims of identity theft. But when she called the customer service number provided, she was told her application was declined due to a lack of check writing history with Target. She told the representative that she uses a bank debit card when she shops at Target, but the representative wouldn’t budge. She was told she’d have to first establish a check writing history with Target to be considered for the card.

[Free Resource: Check your credit for free before applying for a credit card]

Tierney’s situation raises the question: Can you get turned down for a debit card? On the surface, it would seem that the answer would be “no,” or at least not likely, since the card is only used to access the money you already have in your bank account. But, in fact, you can be turned down for a debit card, though the reason is most often due to prior checking account problems.

That’s what Rosalie Zamora found out when her application to open a Target REDcard debit card was declined.  “I received a ‘regret’ notice indicating that there was some negative reporting from a reporting agency called ‘Certegy’,” she said in an email to Credit.com. Certegy provides check authorization and guarantee services to merchants and businesses nationwide, and is considered a specialty consumer reporting agency under federal law.

[Related article: How to Get Your Free Reports from Specialty Consumer Reporting Agencies]

Zamora called Certegy and was told there was no negative information on file for her. She was then referred to another consumer reporting agency, Telecheck, which found an unpaid debt from “ACCS Bad Check Restitution.” When she called that company, she found out that her information had been mixed up with that of someone who previously bounced a check:

I was sent 3 letters of apology stating that a clerk at a store keyed in a driver’s license number incorrectly for someone cashing a $50 dollar check a few years ago that bounced. That driver’s license (number) ended up being mine and went on my record. They say that they have unlinked my driver’s license to that case and I should be good to go now.

Tierney, on the other hand, still doesn’t understand why she can’t get the card. The debit card application states that “Target may gather any information considered necessary and appropriate, including consumer reports,” however it makes no specific mention of requiring consumers to have a check-writing history at the store.

“They didn’t (admit) it was a ridiculous excuse,” she fumed.

She’s since sent email complaints to members of Target’s executive board. I shared with her that I was surprised by her story because I opened a Target REDcard debit card last year and, to my knowledge, I have never written a check at Target.

Target officials declined to comment for this story.

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Tierney speculates that Target would rather have her sign up for its credit card than the debit card. “I feel like they are using this great advertising campaign, but I feel like what they really want is for people to use their credit card. They want to push American consumers deeper and deeper into debt. That’s just my theory,” she says.

And even though Zamora’s check-writing history has been cleared, she didn’t appeal the decision with Target. “Forget it,” she says. “I’m done with Target. Although it’s not their fault, this issue left a bad taste in my mouth.”

[Related Article: Target REDcards Give You a 5% Discount: But At What Cost?]

Image: Mr. T in DC, via Flickr

If you are in debt and struggling to get out, there are six very dangerous words that may affect your financial future in significant ways. If you hear these words, put up your guard, and question carefully whether they are true.

Before I tell you what those words are, let me first state that I am not a bankruptcy attorney or credit counselor, and I don’t run a debt relief firm. I consider myself first and foremost an educator, and my goal for the last twenty+ years has always been to try my best to provide consumers with reliable answers to their credit questions. The method they choose to resolve their debt problems makes no difference to me personally.

With that out of the way, here are those six dangerous words:

“Bankruptcy should be your last resort.”

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By taking these words to heart, many consumers have caused themselves needless heartache and enormous financial pain. Yet, these words are perpetuated by the news media, financial advisors, and creditors every day. (I am sure I’ve said them myself!) Sometimes those stating this “fact” are well-meaning in their advice, but at other times they have their own agenda that may be at odds with you getting the help you need.

Here are the some of the possible repercussions of taking these words to heart:

1. Your health will suffer. I can’t tell you how many people I’ve spoken with have become physically ill due to their financial difficulties. They don’t sleep, their stress levels are sky high, and they often suffer from depression. Some turn to alcohol, overeat, or find other unhealthy ways to self-medicate. Ironically, when people are under financial stress, they may also be unable to pay for the medical care they need, which only makes the problem worse. If that sounds like you, consulting a bankruptcy attorney can help. Even if you decide not to file, it will allow you to put some of your “what-if” questions to rest. Questions like, “What if I can’t pay the mortgage/credit cards/car payment? What can they do to me?” deserve an expert answer.

2. You will make expensive, and sometimes irreversible, financial mistakes. Nothing is as heartbreaking as talking with someone nearing retirement age who has cashed out their retirement savings to make payments on credit cards, only to find they have to file for bankruptcy anyway. Or to hear from someone who kept paying on an unaffordable mortgage while essential expenses, like medication or the car payment, went unpaid. These mistakes may only compound the problem and make it last a lot longer.

[Related Article: 7 Tips to Rebuild Your Credit Score After Bankruptcy]

3. You will be easily misled. You’ll likely spend a lot of time on the internet researching your options. Or, less likely, you may talk to friends or relatives. And you’ll probably get some bad or misleading advice in the process. You might think, for example, that you can’t file for bankruptcy because you make too much money. But bankruptcy laws are very specific to your state and your situation. Only an attorney can tell you how they apply to you.

4. You will remain stuck where you are. When writing my latest book, Reduce Debt, Reduce Stress, I interviewed a couple of people who filed for bankruptcy and described that as a turning point in their lives. (Yes, I also interviewed people who didn’t go that route.) After they filed, they were able to take stock of their lives and made important changes they couldn’t have made while they were still on the treadmill. They are now leading much happier, successful and productive lives. Sometimes bankruptcy, like a serious illness, is a wake-up call. The bankruptcy code is there for a reason—to give consumers a fresh start.

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The decision to file is not an easy one to make. It’s certainly not one to be taken lightly. And it is important that you consider all your options for resolving your debts. You may have other options, such as credit counseling or negotiating with creditors, that can allow you to resolve your debts and avoid filing.

But even if you think bankruptcy is your last choice for dealing with your financial problems, you shouldn’t put off talking with an attorney until the last minute.

Image: red hand records, via Flickr

“Do you know your credit score?”

It’s a question you probably hear from time to time, and if you don’t know the answer, it can feel unsettling. It feels like people are talking about you, you don’t know what they are saying, but you know it could be bad. It’s like the worst part of high school.

But the reality is that it’s kind of a trick question. You don’t have just one credit score. It’s not like the SATs in that way. Most people have dozens of credit scores and they are used by different organizations for different reasons. This doesn’t mean that they aren’t important, rather, the credit scoring system is more nuanced and while you should know where you stand overall, and be aware of your credit scores, it’s important to keep it all in perspective.

(Credit.com includes a credit score in its free Credit Report Card, which provides users with an easy to understand overview of their credit standing. But we take it a step further and put your score into context. That’s what this article is all about: helping you understand how credit scores and credit in general really works.)

Why so many scores?

According to some estimates, the average American has somewhere around 35 credit scores, and they are used for a variety of different reasons. Most are designed to predict risk, and they are generally calculated based on data from one or more of the three major credit bureaus (Experian, Transunion and Equifax), but the purposes of the different  scores may vary.

Broadly speaking , these types of credit scores are available:

Generic scores are designed to predict how consumers may repay a variety of different loans.

Industry scores are created to predict performance on certain types of loans. For example, there are scores specifically tailored to predict risk of missed payment an auto loans.

Custom scores are developed on a lender’s customer base and predict the likelihood of a consumer not paying as agreed with that particular lender.  They are “customized” for the lender’s own specific customer base and purposes. Your credit card issuer, for example, would generate a custom score on your profile, yet would never share it with other entities.

Educational scores are created to show consumers how their credit standing compares to other consumers.  The score that you’ll find in our free Credit Report Card is an example of an educational score, because it is used to educate you, the consumer, and not used by a lender to evaluate your creditworthiness.

Is one type of score better than the other? Not necessarily. Let’s suppose an auto lender purchases an auto industry specific credit score based on information in your Equifax credit file at the very same time that a credit card company requests one to evaluate you for a credit line increase. And at the same time, you order your own score because you are thinking about shopping for a new credit card.

The number that each of these two lenders—and you—get may be different. That’s because the auto lender is ordering a score tailored to predict how likely you are to pay back an auto loan.  The credit card company may be using a custom score to evaluate how likely you are to repay the credit card you want from that bank. And your educational score may be designed to help you understand the strengths and weaknesses of the information in your credit reports, as well as how those compare to others. The same data is being used in all three cases, but the scores are different.

[Related Article: 8 Credit Score Myths Debunked]

How Does FICO Fit In?

We’ve all heard the term FICO Score tossed around, but a lot of people are confused when it comes to what the company actually does. Let’s start by explaining what FICO isn’t.

FICO is not one of the major credit bureaus (Equifax, Transunion and Experian), which means that FICO does not actually gather data about individuals. Rather, the FICO mathematical formulas are applied against the data from the credit reporting agencies to calculate a score. Their claim to fame is the formula, NOT the information that gets plugged into it. FICO scores are the most widely used credit scores, but they aren’t the only game in town. VantageScore was created by the credit reporting agencies to offer lenders an alternative to the FICO formula. In addition, each bureau has its own proprietary scoring models.

For competitive and legal reasons, the various credit scoring models may operate on different scales. For example, here are the ranges for a few popular credit scoring models:

• FICO: 300-850
• VantageScore: 501-990
• Experian Plus Score: 330-830

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What Do the Scores Actually Take into Consideration?

Now that you know there are a variety of credit scores, you might be thinking, “Why should I even bother trying to keep tabs on this stuff? I’ll never be able to keep it all straight.”

In one sense, you’re right. You’ll never be able to monitor ALL of your credit scores, but the fact of the matter is that there’s no practical reason to do that anyway. Almost all of the credit scores out there look at the same pieces of information, they just may evaluate them a bit differently. In the end, if you take advantage of an educational credit score you’ll be able to monitor the various ups and downs of your credit.

It’s most important that you are mindful of the basic factors that go into every scoring model (all of which you can track using Credit.com’s Free Credit Report Card):

• Payment history
• Debt (balances, available credit and the ratios between them)
• Seriously negative information
• Length of credit history
• New accounts

[Related Article: The Bad Stuff is Off My Credit Reports - So Why Didn't My Scores Go Up?]

That means the main things you can do to build, maintain or even improve your credit scores are similar, no matter which scoring model will be used. Those are:

Use credit. Credit scores can’t be calculated from nothing.  The score needs to see a minimum amount of established credit and recent activity on your credit to be generated.

Pay your bills on time.  By reviewing your credit reports, you’ll know which lenders report to the credit reporting agencies, and you can be extra careful about paying them on time, every time. Keep in mind that some lenders only report negative information. That means that even a lender who doesn’t report positive payment history may report if you fall behind.

Try to stay out of trouble. Tax liens, judgments, foreclosure, collections and bankruptcy are likely to result in a credit score drop, no matter which model is being used to generate a score.  If you can’t avoid these kinds of problems, try to find a way to resolve them so you can shift your attention to rebuilding your credit.

Keep debt levels (especially on credit cards) low, if possible. FICO has said that consumers with the best scores tend to use, on average, 10% of the available credit on their credit cards. When you do charge items on your cards, feel free to pay off the balances in full each month. That’s won’t hurt your credit scores, and can save you money on interest charges.

Shop carefully for new credit. While a single inquiry into your credit or a new account won’t ruin your credit scores, they can have an impact. That’s especially true if you apply for multiple credit cards in a short period of time, for example, or open a bunch of new accounts at once. As FICO representatives are fond of saying, “Be a credit grazer, not a credit gorger.”

A recent FICO survey finds that lenders are predicting fewer delinquencies on mortgages, small business loans, autos and credit cards. If those predictions prove to be accurate, then consumers’ credit scores may also continue to improve.

The survey, conducted for FICO by the Professional Risk Managers’ International Association (PRMIA), found fewer lenders expecting a rise in delinquencies on home loans, car loans, and small business loans than at any time since FICO launched its survey in early 2010.

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Payment history makes up about a third of credit score calculation. So if fewer consumers are paying late, it stands to reason that their credit scores could benefit as well. “What we should expect to see is a small upward movement in the credit score distribution,” says Andrew Jennings, Chief Analytics Officer at FICO. “If delinquencies fall, therefore people are making more payments on time that should translate into better health of the credit population.”

In the earlier days of the recession, FICO reported that “lenders saw a sizeable increase in the number of consumers who scored in the lowest (300-499) and the highest (800-850) segments of the FICO® Score range.” But FICO reported a reversal in that trend after 2008, noting that “consumer scores have moved away from the tails of the distribution curve, and 2.8 million* more consumers have scored in the 550-649 range.”

Of course, it takes more than a drop in delinquencies for credit scores to improve. Negative information can remain on consumers’ credit reports for seven years in most cases. As it gets older, it often has less of an impact on credit scores, but it does factor into credit score calculations. Still, even those consumers have been through very difficult financial problems can begin the process of rebuilding their credit once their situation is stabilized. And paying bills on time is the first step.

It Takes Credit To Get Credit

A current on-time payment history is essential to building strong credit. For those borrowers who are ready to get back in the game, the good news is that lenders are making credit more available. “The sentiment that comes out of the survey is that in particular in credit card and auto lending…supply will be there,” observes Jennings. The key, of course, will be for consumers to borrow cautiously so that new loans don’t create future late payments.

[Featured Products: Compare credit score, report, and monitoring plans at Credit.com]

Nothing can be more frustrating to someone who is trying to build or rebuild their credit than to discover that the loan payments they are making don’t help. A reader asks whether there is anything he can do to force lenders to report all of his on-time payments to the major credit reporting agencies.

I have good credit. My score I believe is around 600, mainly because I have NO credit. I’ve recently gotten a bank loan back in May 2011. I made ten payments, then refinanced and got another small loan added to the first. I thought they were reporting this to the credit agencies but after a year I tried to get a credit card and was turned down.

I was surprised and asked for my credit reports. There was no mention of my loan or the on time payments. I’ve been trying to get this straightened out. I’ve written all three agencies, faxed, called and spoken to agents, sent a letter from the bank stating the facts and showing the dates I took out the loan, and history, as well as I had paid ON TIME every payment.  My history of on-time payments and the existence of the loan isn’t on my credit report.

My credit score dropped lower. What can I do? Where can I turn for help? — “Louis”

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A: It sounds like you’re learning from the good old School of Hard Knocks some important lessons on how the credit reporting and scoring systems work. Once you understand the process better, however, you’ll be able to use it to build stronger credit.

First, you don’t have “good” credit if you have a credit score of around 600. You may not have any late payments on your reports, but ask you’ve learned, it’s pretty hard to have strong credit scores without current credit references reports on a regular basis on your credit reports. In fact, consumers with few or no accounts reported may have credit scores similar to people who have bad credit.

But you seem to grasp that, which is why you decided to get a bank loan to build credit. Unfortunately, your mistake was taking out a loan with a lender that sounds like it wasn’t set up to automatically report your payments to the credit reporting agencies each month.

[Related Article: The Impact of Alternative Credit Reporting Agencies]

For a lender or other type of business to be able to report payment information to the CRAs, it must first apply, go through a screening process, and then get approved to do so. It must be set up to handle any disputes customers may have over the information that’s reported. And it will have to comply with credit reporting industry standards for transmitting information to the CRAs.

This is a completely voluntary system: no lender is required to report. In addition, some lenders (or “furnishers” as they are called under federal law) only report negative information. It’s unusual for a bank or credit union of any decent size not to be set up to report, but it doesn’t sound like your bank is. Or at least it’s not set up to report the kind of loan that you have.

For that reason, trying to fight this battle is probably going to be a further exercise in futility. The CRAs aren’t required to add an account provided by the lender in a credit letter. They are only required by law to investigate disputes of information already on your credit reports. If the account isn’t being reported, it technically can’t be disputed.

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In addition, unless the lender is set up to provide account information on a regular basis to the CRAs (usually electronically or in a similar way), it probably won’t help your scores much to have this information added on a one-time basis.

Instead of getting a bank loan from a bank that doesn’t report to the major CRAs, you’re better off getting a secured card that does report to all three. Your payment history will appear on your credit reports and, over time, your scores will begin to reflect this positive information.

I understand this is frustrating to have to essentially start this process all over again, but the sooner you get started, the sooner you’ll be able to build better credit.

Image: Images of Money, via Flickr.com

Homeowners who obtain low down payment mortgage loans are often required to pay monthly premiums for mortgage insurance (MI). Mortgage insurance helps protects lenders in case borrowers default by reimbursing some of the lender’s loss. But homeowners who purchase MI may not understand that if they lose their homes to foreclosure, the insurer may come looking to them to reimburse its losses.

“Basically, MI companies cover the lender’s loss during foreclosure.  Since they cover this loss, they later are trying to seek reimbursement from the homeowner.  The homeowner essentially owes the MI company money rather than the foreclosing lender,” explains Troy Doucet, an attorney with Doucet & Associates, LLC and author of 23 Legal Defenses to Foreclosure.

But Doucet isn’t convinced that this is clearly disclosed to homeowners when they obtain mortgages and agree to pay for MI, and he’s been representing clients challenging claims by mortgage insurance companies.  He says private mortgage insurance companies, Fannie Mae and Freddie Mac, and even the federal government (for FHA and VA loans) are going after homeowners for these losses.

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“I’d frame it this way,” he says. ”A mortgage insurance company shouldn’t be able to collect against a borrower any more than her auto insurance company could collect against her after paying an auto claim on her behalf.”

“This is a poorly understood area,” agrees R. Wilson Freyermuth, a law professor with the University of Missouri. But he believes it’s “misunderstood by consumers.” They think, “I am paying this and I must be paying it for my own benefit. But private mortgage insurance is really insuring the lender and not the borrower. When the private insurer has to pay off the lender because it suffered a loss, that loss will typically be passed on to the borrower.”

Subrogation is the basic principal behind these transactions. Subrogation is defined as:

the act of subrogating; specifically : the assumption by a third party (as a second creditor or an insurance company) of another’s legal right to collect a debt or damages. (Mirriam Webster dictionary)

In other words, the right to collect is subrogated to, or assumed by, a third party, often an insurance company.

[Related Article: Underwater On Your Home? Your Six Options]

Using an auto insurance example, Freyermuth poses a hypothetical scenario:

“Suppose I have a policy with State Farm. You are driving drunk and run into me, and you are uninsured. State Farm pays me off. They become subrogated and can come after you to the same extent that I could have.”  Then why don’t auto insurance companies routinely go after their customers when they have to pay claims?  He explains: “My (own) insurance company can’t (generally) subrogate a claim back against me.”

In the case of mortgage insurance, the insurance is for the benefit of the mortgage company, not the borrower. That’s why a borrower who pays the mortgage insurance premium may be pursued for payment by the mortgage insurer after a claim is paid.

If It Happens To You

What happens if you’ve lost your home and are now being hounded by a mortgage insurer, Fannie or Freddie, or a governmental agency?

“Before taking any course of action, the best advice I can offer is to contact your lender and then consult a real estate attorney regarding your rights,” says Andrew Schrage, co-owner of Money Crashers Personal Finance. He adds, “If you end up owing money, just be sure that you aren’t paying twice. If your original lender received money by filing a PMI claim and later sells your mortgage, there are situations where you won’t have to pay this amount to the new lender.”

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Getting good legal advice is essential, agrees Doucet, who says, “People jump out of the frying pan and into the fire” when they walk away from or lose their homes. Whether or not the insurer or guarantor can pursue the borrower depends on a number of factors including whether the loan is a recourse or non-recourse loan, as well as whether the statute of limitations for collecting on deficiencies has already passed. If a mortgage insurer is threatening a lawsuit, or has already obtained a judgment against the borrower, it may make sense to talk with a bankruptcy attorney.

As the losses to lenders and insurers pile up, homeowners may find that those mortgage insurance premiums they’ve been paying will be used to collect from them.

Image: Krystian Olszanski, via Flickr.com

We’ve been warning consumers about fake overseas payday loan collection scams for a few years now. So it can be disheartening when we hear stories, like this one that was posted last week on our blog:

I received a recorded call at work that said I had written a bad check and would be served court papers…that day. The message then left a phone number to call to try to “settle” or arrange a payment plan. I got really scared and called the number. The lady said…they are middle man to recover past due pay day loans.

I don’t think I owe this debt, but I was so shaken that I did pay them a $50 payment, and set up a payment plan of $200 a month to pay a total of $960.00. She sent me an email receipt but it does not look legitimate to me. Their logo is weird, there is no address, and no website. She said it’s a loan with quick cash. I tried to google quick cash and nothing comes up.

I don’t want to keep paying them if this is a scam, and I guess the worst that could happen is to be served or have my check garnished? I just don’t like the fact that they are calling my work place. Should I call them back and ask them for their address, business license and for the original paperwork for the debt owed? I am not sure if this is a real collection agency. Please help!

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Bogus collectors scare consumers into paying debts they either don’t owe, or paid off long ago. Because they have so much information about the consumer—details such as Social Security numbers, work addresses, and/or bank account numbers—the victim often pays up thinking it must be legit. And because these operations are often based overseas, it can be difficult, if not impossible, for regulators to stop them.

Another One Bites the Dust

That’s why it’s especially sweet to hear news like this released last week by the FTC, which reported:

A U.S. district court has halted an operation that the agency alleges collected phantom payday loan debts that consumers either didn’t owe to the defendants or didn’t owe at all. The defendants’ scheme involved more than 2.7 million calls to at least 600,000 different phone numbers nationwide, according to the FTC. In less than two years, they fraudulently collected more than $5.2 million from consumers, many of whom were strapped for cash and thought the money they were paying would be applied to loans they owed, according to FTC documents filed with the court.

[Related Articles: Read more stories about payday loan scams]

According to the FTC, representatives of the company would pretend to be American law enforcement agents, using names like “Officer Mike Johnson.” Or they would claim to be calling from fake government agencies like the “Federal Crime Unit of the Department of Justice.” In reality, the callers would be placing calls from India. They would often wear their victims down with repeated calls and threats. One woman was told her children would be taken away if she didn’t pay.

The case, Federal Trade Commission, Plaintiff, v. Broadway Global Master Inc., also doing business as BGM, In-Arabia Solutions Inc., and Kirit Patel, Defendants, was filed in the United States District Court for the Eastern District of California.

In the public announcement, the FTC thanked the Better Business Bureau for its assistance in this case. And guess what that means? Complaints from consumers who were getting these calls helped to stop the operation. So if you are getting threatening calls like this, don’t be afraid to report them to the Federal Trade Commission and the Better Business Bureau. While the FTC may not be able to help you personally, they may be able to go after companies that generate multiple complaints from consumers.

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Don’t Be a Debt Collection Scam Victim

Keep in mind that legitimate debt collectors are required under federal law to:

1. Send written confirmation of a debt within three days of initial contact and, if the consumer disputes or questions the debt, to verify it.
2. Stop calling debtors at work if they tell them to stop.
3. Avoid threatening consumers with legal action they cannot take or don’t intend to take. Debt collectors generally can’t have debtors arrested for failing to pay debts.

[Related Article: Protect Your Identity: Watch Out for Online Loan Scams]

NOTE: The Commission files a complaint when it has reason to believe that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the defendant has actually violated the law.

As though finding the money to pay for college weren’t difficult enough, trying to compare the costs of colleges and financial aid offers can be a daunting challenge for students and parents.

“Colleges are notorious for producing very confusing and/or misleading financial aid offers,” says Lynn O’Shaughnessy, author of The College Solution book and blog. “So people are at the mercy of colleges and they often don’t know if an award letter is a good one or not.”

O’Shaughnessy has featured several misleading financial aid offers on her site, pointing out shortcomings such as one school that failed to include living expenses – in New York City, no less – and another that included non-need-based-aid loans in its calculations, making it appear as though the school was providing more aid than it was.

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But that may change, thanks to initiatives by the Consumer Financial Protection Bureau (CFPB) to help students understand the cost of colleges they may be attending. The CFPB has released a new sample financial aid comparison shopper, and is soliciting public feedback. The tool estimates how much students will have to borrow based on average financial aid awards for the schools in their comprehensive database. Then it estimates the monthly payments based on a 10 year student loan. Check out the CFPB’s Financial Aid Comparison Shopper here.

I used it to evaluate the cost of two private schools my now middle-school daughter thinks she may want to attend someday.  I also included Harvard to see how it compared. Very quickly the tool made the calculation, and the results also included the average cost of a four-year private university and four-year in-state public university. While the latter was the least expensive option, it didn’t beat Harvard by much. For all schools, the estimated debt burden was “high.”

It was all more than a little scary.

[Related Story: Cancelled Student Loan Debt Creates Tax Nightmare]

Students who have received actual financial aid offers can take the tool one step further and enter the amount of financial aid they have been awarded to get a more detailed comparison, including average graduation and retention rates as well as the average federal student loan default rate for each school they are checking out.

“It’s a good tool with a few rough edges. For example, it would be better if the comparisons were side by side,” says FinAid.org’s Mark Kantrowitz. But that’s precisely the type of feedback the CFPB is soliciting in this beta release of the tool. FinAid offers a detailed award comparison tool that requires students to fill out all the information themselves.

O’Shaughnessy also observed that the CFPB tool only estimates costs based on one year of school, and she would like any tool that is adopted to include a calculation of total student loan debt and subsequent payments based on all four years of college. “A lot of people will think of these loans insolation,” she points out. “They don’t think about the other three years. What are the payments for those loans?”

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Beyond that, we think that CFPB might consider displaying total loan amounts and accrued interest over the life of the loan. The tool might also allow users to adjust the term of the loan with a slider, and recalculate the results.

In addition to the financial aid tool, earlier, the CFPB released a financial aid shopping sheet and asked for feedback, calling it an “example” and not a “proposal.” The Department of Education plans to develop a model form for presenting student aid offers.

Will the CFPB tool really be able to help parents and students understand what they are signing up for when they take on student loans? Try it out and let them (and us) know what you think.

Image: Terren in Virginia, via Flickr

I have a confession: I have not completed my 2011 tax return. Yes, “Ms. Personal Finance Expert” is procrastinating. I have a pretty good excuse: some of the information I need to file won’t be available for a few more months, but the truth is that this is my most dreaded personal finance chore, and I often file an extension.

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If you’re like me, and putting off finishing your taxes until the last minute, you can at least be thankful that we have until April 17th this year to file. That gives us a little more time to dig up possible deductions. To help you (and me) get our taxes done on time, and get the maximum refund possible, I turned to Lisa Greene-Lewis, a CPA and the Turbotax Blog Manager for advice. She has 15 years of experience in tax preparation, she helps a lot of people through the blog, and she shared her advice in an interview on Talk Credit Radio last week.

Here are some last minute tax tips, excerpted and edited from our interview:

Lisa:    You still have time. It just amazes me how many people think they don’t have time or they think, “I’m going to owe money,” so I don’t want to file. According to IRS, 28% wait to file until these last weeks and they’re surprised to find that they do end up getting a refund. You can go online and e-File and you’ll be guided through 350 legitimate tax deductions and credits.

E-filing is easy, you can use any tax software and you can go online and you’ll be guided through your tax return. And then it prompts you whether or not you want to e-File or paper file and it electronically transmits your information to the IRS securely, based on what you input into the tax return.

[Related Story: 1099-C: The Worst Tax Mess of the Year?]

It will also let you know if there are any errors in your input. It syncs up with the IRS and lets you know if there are any type of errors that you put in incorrectly; Social Security number or anything like that. And there is no fee for e-Filing. It is free.

Gerri: What if you still need more time?

If you need more time you can file an extension. You can file that online and it’s free as well. People just have to keep in mind that it is only an extension of time to file, it is not an extension of time to pay. So you will incur interest and penalties [if you can't pay what you owe].

Gerri: What if you discover you owe money and you can’t pay it?

Lisa: If you don’t have enough money to pay, there are other options. You can do an installment agreement. They’ve increased the eligible amount. You (can use an installment agreement) if you have tax liability up to $50,000 as long as your income is under $100,000.

I suggest you file your taxes, pay what you can – even if it’s a small amount – and then request the installment agreement. They are understanding that people are struggling and as long as you’re acting in good faith, trying to send a little amount or even just sending in your tax return, they will work out something with you.

[Related Article: What To Do If You Can't Pay Your Taxes]

Gerri: Any suggestions for last minute deductions?

Lisa: There are some deductions that you can actually get right up to the deadline. One of my favorite ones is the IRA contribution. You have until April 17th to contribute to your IRA. You can contribute $5,000 and an additional $1,000 if you’re 50 and over. You can do that and still get a deduction on your 2011 tax return.

In addition to that, many people don’t even know about the Saver’s Credit, that goes hand in hand with your contribution to an IRA. The Saver’s Credit is available to lower income families who make contributions to their IRA. You’re able to get a $1,000 tax credit and $2,000 if you’re married filing jointly. Many people miss that one.

Gerri: What about charitable donations?

Lisa: (Taxpayers) don’t realize you can deduct mileage for volunteer work; the travel to get to the charitable institution. People often miss that. They think about the tangible things that they donate, they don’t think about that mileage.

[Tax Help: More guidance, deductions, and returns with H&R Block]

Gerri: Any last words for procrastinators like me?

Lisa: There’s no reason to procrastinate. After all, you don’t want to miss out on your refund. We will have our tax experts available to answer your questions all the way up until the deadline. We want everybody to be able to complete their tax returns.

To listen to the entire interview with Lisa simply right click on the link below to download it or open and play it on your computer. It is also available to download for free in iTunes.

Podcast: Last Minute Tax Saving Strategies

Image: Tax Credits, via Flickr

In 2006, “Anne” and her husband negotiated a settlement on credit card debt of $7,500 with one of the country’s biggest banks for roughly $2,900, wiping out just over $4,500 in debt. But just recently, the couple received a 1099-C from the credit card issuer reporting $16,000 in cancelled debt for the 2011 tax year. Both the amount and the dates are wrong, contends Anne (which is not her real name). Even though she has a copy of the settlement letter from the bank spelling out the terms of their agreement six years ago, a bank representative refuses to correct the 1099-C, stating that her husband had a separate credit card debt that triggered the form. Anne says that’s not true. “What can I do,” she asks?

Her story raises and important issue: what are taxpayer’s rights when lenders send 1099-C forms that are in dispute?

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Start by trying to get the company that issued the 1099-c to correct it, advises Scott Tufts, a board certified tax lawyer with the Tufts Law Firm in Maitland, Florida. “The smartest move is to go to the source, even through the bureaucracy of the company. Document your reason for disagreement with the form,” he advises.

But as Anne’s story illustrates, getting through bank bureaucracy doesn’t always work. She said that after the bank representative  refused to help, she told him she would be hiring an attorney to help her. “He ‘transferred’ me to another department, and the phone disconnected!” she told us in an email.

[Tax Help: Get step-by-step help and maximize your return with TurboTax]

“What the IRS tells you to do is to call the bank to get it corrected but if you’ve ever talked to the bank, you know how far that’s going to go,” says Edward Zoller, a CPA and partner with the tax practice of Thomas, Zollars and Lynch in Arizona. “It’s kind of a mess,” he warns.

Cancelled Debt Isn’t Always Cancelled

I’ve written a series of articles about 1099-Cs and 1099-As, but to recap, these forms are used by lenders report cancellation of debt (COD) income to the IRS. The IRS generally considers cancelled debt to be income and it’s up to taxpayers who receive these forms to either include that amount in their income when filling out their tax returns, or demonstrate to the IRS why the amount should be partially or completely excluded.

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The term “cancelled debt” in itself may be misleading. While these forms are sent to consumers who have negotiated settlements on debts for less than the full balance, or who have negotiated short sales on their homes, the IRS also requires that lenders notify them when there has been no significant collection activity on a debt for 36 months. The creditor may still decide to try to collect the debt at a later date, even though a 1099-C has been sent.

Problems arise when the amount reported on one of these forms is disputed. IRS instructions for Form 982, and Publication 4681 which details instructions for filling out that form, make no mention of what taxpayers should do if they believe the 1099-C they received is inaccurate.

The problem, explains Zoller, is that “the IRS locks onto the 1099 and they get blinders on, and assume it’s correct.” But he also insists that if taxpayers “cooperate with the IRS and they raise a legitimate doubt about a 1099-C, explain the situation and provide some documentation, then the burden shifts over to the IRS.”  Zoller points to several Tax Court cases where taxpayers have prevailed in COD income disputes.

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Both Tufts and Zoller advise taxpayers to include the amount of the 1099-C on their returns, even if they think it is wrong. Otherwise, the automated programs that the IRS uses to match information on returns to information received from lenders and employers may pick up the discrepancy and signal a problem to the IRS. ”Report (the amount on the form) and then attach an explanation and back it off,” suggests Zoller.

In Anne’s case, she has written proof that creditor agreed to settle the debt in 2006. The 1099-C should have been sent for that tax year. The fact that the lender did not send one until the 2011 was not her doing. Because three years has passed since that tax return was filed, she should not have to amend her tax return from 2006 to include that income. Proving that to the IRS may be difficult, though, and will likely require Anne and her husband to hire a tax professional to help them.

[Tax Help: Get step-by-step help and maximize your return with TurboTax]

What about taxpayers who defaulted on debts and never reached a settlement with creditors? It can be difficult to establish when the debt was cancelled or forgiven. In those cases, the IRS says creditors must send 1099-Cs after as many as three years of no collection activity. But it’s hard for a taxpayer to prove what happened in those intervening years.

Zoller teaches continuing education classes for tax professionals, and says these forms are creating complicated problems for tax professionals as they try to sort things out for their clients. He noted that his classes on this topic normally attract 30-35 attendees, “but this year we had 150 and had to reschedule another 110.”

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Complaining May Get You Nowhere

Can you report a creditor who sends a flawed 1099-C and refuses to correct it with the IRS? You can try, but “the IRS probably doesn’t care much,” Zoller says. He suggests taxpayers instead complain to their elected officials in Washington.

Tufts, on the other hand, maintains that taxpayers may be able to take action against a company that issues an incorrect 1099-C and refuses to correct it. He says that’s especially true if there appears to be fraudulent intent.

The biggest lesson in all of this? Keep documentation of any settlements with creditors, short sales, foreclosures, or even defaulted debts for as long as possible. You never know when they may come back to haunt you. And if they do, get help from a tax professional.

Confused about how to deal with a 1099-C? Read: 1099-C In the Mail? How to Avoid Taxes on Cancelled Debt