John Ulzheimer

Credit Crisis: Facts & Advice

The Federal Reserve Rate Cut Probably Won't Make It To Your Bottom Line

December 23rd, 2008

Last week the Federal Reserve Bank cut the benchmark Federal Funds rate essentially to zero percent. The move is meant to entice lenders to lend money to consumers looking to borrow. And while the move was widely applauded by everyone from Wall Street to the personal finance sector, this credit expert doesn't see how the move will really help your bottom line much, if it helps at all.

First, mortgage rates are not tied to the Federal Funds rate. In fact, mortgage rates have fluctuated up and down all year long despite the fact that the Federal Reserve has cut its rate numerous times over the same time frame. This downward move in fund rates and the rise and fall of mortgage interest rates shows that there is no strong correlation between the two. The only exception is the rate on a home equity line of credit or HELOC, which is typically tied to some extent to the Fed Funds rate. Those with HELOCs will see that their January monthly payment is lower than their December monthly payment.

Second, auto lending interest rates have remained very reasonable most of the year, staying in the six to seven percent range for those with the best credit. And while there seems to be a correlation between the rates, you can't ignore the fact that there's a third party to the auto lending equation known as a captive lender who makes the Federal Funds rate largely irrelevant to those with decent credit. Captive lenders are the manufacturer's lending arm, and they'll lend money to consumers that are looking to buy one of their car brands.

Toyota Motor Credit, Ford Motor Credit, Nissan Motor Acceptance, GMAC, and Honda Finance are all examples of captive finance organizations. In almost all cases, the captive will easily win a price war over a bank, credit union, or finance company that does auto lending. In fact, in this “can't sell cars” environment, it's not unusual to see these companies offer rates as low as zero percent to those with the best credit. The point is that unless you consider the difference between eight percent and seven and a half percent to be overly meaningful, what the Fed did last week was not terribly relevant. Having said that, given the glut of inventory and potentially free money from captive lenders, it's clearly a fantastic time to buy a car if you really need one.

Third, you should not expect your credit card rates or payments to go down, even if you have a variable interest rate credit card. Credit card issuers are hemorrhaging money right now and will likely be doing so for the next year. It's not in their best interest to lower interest rates and further exasperate their financial woes. And besides, those cardholders who properly manage their credit cards focus less on interest rates because they pay off their balances each month.

So while the rate cut is always a welcome move by the Federal Reserve, it's not as profound as some people would have you think. The best move borrowers can make is to improve their credit and credit scores so they earn better interest rates and don't have to wait for lenders to do them any favors. After all, lenders aren't in the favor-granting mood right now.

Credit Crisis: Facts & Advice

Thinking of Suing Your Lender? Think Again.

December 18th, 2008

On Tuesday we reported that experts are predicting an increase in consumer credit lawsuits in 2009. In part two of my interview I spoke with Bruce Field, a consumer expert credit witness about how to decide whether or not you have a case.

Ulzheimer: Mr. Field, how does a consumer go about deciding whether or not to sue their lender?

Field: The first thing is for the consumer to honestly ask themselves whether or not they have truly been wronged or damaged or are they just angry at the lender's actions? Closing an account, lowering a credit limit, pulling a credit report, or assigning an account to a collector are all perfectly legal and common practices, as long as the lender follows the correct process. In some cases the cardholder doesn't understand their cardholder agreement and misinterprets a lender's actions as being illegal when it is not.

Ulzheimer: Can you speak a bit about the lender reporting requirements?

Field: Basically, lenders are responsible for reporting correct and accurate information to the credit bureaus. Further, in the case that a consumer discovers an error on their report and disputes it, the Fair Credit Reporting Act (FCRA) provides a window of 30 days for the lender to either correct the information or verify its accuracy. Most lenders do an excellent job of reporting or correcting information. In the case of a pending mortgage, information can often be corrected very quickly.

Ulzheimer: Give me a few examples of actions that can get lenders in trouble.

Field: Even though most lenders do an excellent job, some do not and they actually violate the rules set out in the FCRA. Negligent credit reporting is a very common example. If a consumer has never missed a payment but the lender reports to the credit bureaus that they have and refuses to correct the error when disputed, that is an example of negligent credit reporting. Another example is if a credit bureau fails to maintain the maximum possible accuracy of a consumer's credit report data and then sells that misleading credit report to a lender. This example impacts both the consumer and the lender who wants your business, but is forced to make a decision based on inaccurate information. These are actions that may cause litigation.

Ulzheimer: How much does it cost to file a lawsuit against a lender and what are the realistic chances of success?

Field: Filing a lawsuit should not be done without significant thought and research. You should prepare for a long, drawn out and expensive battle against a company who has insurance against such lawsuits. I know of cases that have cost the plaintiff consumer over $100,000. Remember, many corporations have the money and resources to defend themselves regardless of expense. So, you really want to know if you have a legitimate case before spending too much money on a lawsuit. Additionally, you will need to determine if you have sufficient documentation to prove your claim.

Ulzheimer: What are some of the ways you can tell if you have a case?

Field: My advice is to have your Attorney employ the services of a credit expert as quickly as possible. With a thorough knowledge of the industry and FCRA requirements, the expert can provide sound input on whether or not any violations or damages have actually occurred. If so, you have the basis to move forward. If not, you can find out that you do not have a claim before you've expended too much time and money.

Ulzheimer: The expert can also help you determine how the error occurred, correct?

Field: Correct. It is important to know if the damages were the result of actions by the lender or the credit bureau. While you may be upset with your lender, it very well could be that the lender reported the information correctly and the credit bureau mishandled the data on your credit report.

Ulzheimer: What can lenders do to avoid being sued by their customers for credit lawsuits?

Field: Simple. As mentioned, they should fully comply with the FCRA and institute procedures to ensure that they never report inaccurate information to the credit bureaus.

Ulzheimer: Are consumers too litigious when it comes to consumer credit?

Field: I do not think so. In fact, while there are frivolous claims that get filed unnecessarily, there are also consumers who have a legitimate case who do not realize it. Consumers have a limited set of protocols to follow to get incorrect credit data corrected. You find an error on your credit report and then you challenge that information with the lender or the credit bureau. That's about it. If they can't get the lender or credit bureau to correct the mistakes then they have two choices; they can live with the errors for seven years or they can litigate. Unfortunately, this is sometimes a consumer's last recourse to try to get a damaging error corrected.

If you have any questions or comments, please feel free to contact me at askjohn@credit.com.

Credit Crisis: Facts & Advice

Consumer Credit Lawsuits Expected to Increase in 2009

December 16th, 2008

Laticia Wilkins was surprised to see the minimum payment on her credit card had increased $250, which is a 150% increase over what she had been paying. This type of treatment is normally reserved for cardholders who have missed payments or charged over their preset spending limits. In Ms. Wilkins' case, she had never missed a payment and hadn't spent close to even half of her credit limit.

She is among the growing number of cardholders who have seen their terms change for the worse as more and more credit card issuers are battening down the hatches for what many have predicted, will be a rough 2009. As many cardholders have seen their credit limits decreased and minimum payments increased, they've also seen their credit scores plummet. This has led some industry watchdogs to predict an increase in consumer credit litigation next year.

According to Dean Binder, a consumer credit expert witness, the number of consumer lawsuit filings is expected to increase in 2009. "We expect to see more consumers or class action attorneys filing lawsuits next year because of the sweeping actions taken by lenders to mitigate their credit risk this year." The action that has the most profound negative impact to a consumer's credit score is the decrease in credit limits. "If your credit limits have been reduced but your balances have not been reduced equally, your scores can go down significantly in some cases", says Binder.

The issue at question is the ubiquitous credit card "usage" percentage, more commonly referred to as "revolving utilization." This is the ratio of your credit card debt to your credit limits on your open credit card accounts. If you carry a modest balance of $1,000 on a credit card with a $10,000 limit then your usage percentage is a painless 10%. However, if the credit card issuer decides to lower your credit limit to $2,000 and your balance remains the same then your percentage increases to a damaging 50%. "There are millions of consumers who now have lower credit scores and have no idea why", says Binder.

Their only alternative is to either lower their balances on their credit cards in an amount equal to the credit limit reduction - or open a new credit card with a limit equal to the limit that was lost.

If you have any questions or comments, please feel free to contact me at askjohn@credit.com.

Credit Crisis: Facts & Advice

No Interest, No Payments... No Good

December 11th, 2008

How does this sound? You buy $5,000 worth of furniture and you don't have to pay interest for three years. And you don't even have to make any principal payments during that time either. Does this offer sound too good to be true? Of course it is.

The ever popular no interest and no payments deals are bad news all around for a couple of reasons:

1. Damage to your credit scores.
   If you take advantage of one of these in-store offers you will likely damage your credit scores. In most cases it's easy to identify why an action has damaged your credit, but not in this case. Lower credit limits, non-changing balances, a new retail account, a new finance company account and a new inquiry are all reasons why taking on store credit can lower your scores.
2. The interest might be retroactive.
   Read the fine print on your agreement and you may see that unless you pay off the balance in full before the payments are required, your interest could have accrued all the way back to the date when the account was opened. This means three years of interest now hits the balance on the account and that $5,000 bedroom set will now cost you $7,200—depending on the interest rate. And if the account is a credit card account, add the fact that your balance just exceeded the credit limit and now you owe over limit fees as well.
3. Whatever you purchased is outdated already.
   By the time you begin making your payments there's a good chance that whatever you bought will be outdated and you'll probably be ready for something new. This is much more likely in the event that you purchased electronic equipment such as a flat panel television or a stereo. And while you would have had to make payments on it anyway, there's something demoralizing about seeing that three-year-old balance for a television that you've relegated to your guest room.

Just a few things to think about before you decide to go with a no interest/no payment financing option.

If you have any questions or comments, please feel free to contact me at askjohn@credit.com.

Credit Crisis: Facts & Advice

FreeCreditReport.com spends $19 million on advertising during third quarter

December 9th, 2008

Experian's popular and controversial subsidiary, FreeCreditReport.com, spent $19 million on advertising in the past quarter according to a report at SmartMoney.com. We all know the jingles; several down on their luck Joe-sixpacks working at fast food restaurants and driving clunker cars because of attacks to their identity. FreeCreditReport.com, along with many other websites, has built a very successful business giving away credit reports. But how can free be profitable?

The fact of the matter is that this kind of "free offer" isn't free. It's "conditionally" free. The condition in most cases is that you can't get your free credit report until handing over your credit card number and agreeing to a free trial of a credit monitoring service. And if you don't cancel your membership you'll soon start seeing charges on your credit card.

This is commonly referred to as the "negative option model." The credit monitoring service is provided automatically soon after you claim your free credit report. You have to proactively cancel the service in order to avoid continuous billing. To add confusion, the charges may show up on your credit card statement with an alias name different than the company name.

Not to say that monitoring services have no value. Credit monitoring can be an excellent way to keep track of credit report changes and to watch for signs of identity theft. It is usually recommended for someone preparing for a major loan or who has reason to believe they may be a victim of identity theft.

Whether or not you find a credit monitoring service valuable is not the issue. The question is whether or not you should be automatically registered for such a product through a confusing free credit report deal.

As with most things in life, remember that there's no such thing as a free lunch.

If you have any questions or comments about credit repair then please feel free to contact me at askjohn@credit.com.

Credit Crisis: Facts & Advice

The Chronology of Score Damaging Events When Opening a Retail Store Card

December 4th, 2008

Earlier this week I talked about how retail store credit cards are less than the most consumer friendly credit cards. I promised to explain exactly how these cards can lower your scores. Follow the chain of events and you'll see why.

1. When you apply for a card at the register to save your 10% you give the card issuer permission to pull your credit report. This leaves an inquiry behind and it's the most damaging type. The inquiry will remain on your report for 24 months and can damage your score for 12.
2. Within 30-45 days the new account will show up on your credit reports. This new account will lessen the average age of the accounts on your credit reports. Doesn't sound like a big deal, right? It might not be a big deal for someone who has decades of credit history but, if you've got younger credit then this is a very big problem.
3. The account on your reports has a very low credit limit and probably already has a balance. This isn't helping your credit card usage percentage.
4. The new account is a revolving account. If this leads to an unhealthy proportion of account ‘types' on your reports this can lower your scores just like everything else I've mentioned above.

All this to save 10% off your purchases. I'd strongly suggest thinking twice this holiday season before you open a new account at the register this year.

If you have any questions or comments about credit repair then please feel free to contact me at askjohn@credit.com.

Credit Crisis: Facts & Advice

Retail Store Credit Cards... Buyer Beware

December 2nd, 2008

On CNBC last week I was very critical of retail store credit cards. Here's a summary of my comments, http://www.cnbc.com/id/27915019

They smell like sub-prime credit cards and here are several things that I find objectionable about them:

1. The credit limits are always very low. This is problematic due to the fact that even modest purchases can lead to lower credit scores because you're using up a high percentage of the credit limit. Only over time will you see your limits increased to a reasonable amount in line with your credit worthiness.
2. The interest rates are always very high regardless of your credit scores. My lowest FICO® score is 809 and all of the interest rates on my retail store cards are in the 20s. They don't follow the same underwriting rules that the traditional credit card issuers follow.
3. You are limited to using it at their stores, only. We all know this so I'm just restating the obvious. A Macy's card can only be used at Macy's so if you like a shirt at the Gap then you have to figure out some other way to pay for it. That's not efficiency, that's restrictive.
4. Opening a retail store card will almost always lead to a lower score. I'm going to dig into this more for Thursday's article so I'll leave it at that and invite you back Friday to read why.
5. You're all treated like high risk, subprime borrowers. Since credit clearly isn't a primary factor in deciding who gets retail cards the companies who issue them have to treat everyone like they're non-prime. That's a very conservative and, frankly, lazy way to grant credit. They're more interested in getting you in the store where they make their real money... on the margin of the product.

My suggestion is to leave the retail store cards alone. You can make the same purchases using a Visa, MasterCard, Discover or American Express card. And, you can use them almost anywhere at better interest rates, with less damage to your credit scores. How can that not be a more effective use of credit cards?

If you have any questions or comments about credit repair then please feel free to contact me at askjohn@credit.com.

Credit Crisis: Facts & Advice

Black Friday?

November 27th, 2008

Black Friday is generally recognized as the day after Thanksgiving. It's called "black" Friday because of the enormous amount of money being spent by consumers. The retailers are supposed to be "in the black", which means they've had a profitable day and hence the term. The term dates back to the 1960's. Of course it has taken on a very different meaning this year and retailers are not going to be seeing the same amount of action at the register as in years past. Oh, there will be the usual madness on Nov 28th but it won't result in long lasting shopping momentum. And, while this is bad news for retailers it's not terribly bad news for you. Here's why:

1. You are likely to open fewer new accounts at the mall this year — This is good news. Fewer new accounts mean fewer credit inquiries, fewer new accounts and less new debt. This is all good news for your credit reports, credit scores and bottom line. Which means...
2. You'll enter 2009 with better credit scores — This is more important than in the 17 years I've been a part of the credit industry. Normally people cruise through December and into a new year not really thinking about their credit scores. And then when January rolls around we all want to lose weight, do a better job of controlling our tempers and improve our credit. We should be thankful that we're going to spend less this holiday season. And finally...
3. Maybe now we get some much needed perspective — Entering 2009 many of us see our investments down 40%, our professional futures in flux and our goal of retiring at 65 in serious jeopardy. Now is the time to be thankful for the good things that aren't affected by the economy; the joy of spending time with our families, our health, and our ability to be resilient.

Stay strong, we'll get through this.

If you have any questions or comments then please feel free to contact me at askjohn@credit.com.

Credit Crisis: Facts & Advice

What you do in December will bleed into January

November 25th, 2008

For those of us who choose to charge holiday gifts this year, you'll have your own Christmas gift that lasts long into January. Your gift, of course, will be credit card debt. The balances you incur over the next 5 weeks will take 30 days to appear on your credit reports.

The reason it takes so long to show up is because of a widely forgiven deficiency in the credit reporting system whereby all of the information that's reported by your lenders is based on the charges made during the previous month's billing cycle. Let's walk through the chronology of events that takes place when you charge something. I think you'll find it to be enlightening.

1. You purchase an item and slide your credit card through the charging machine. At this point you know that you've bought something.
2. Before your purchase is approved the credit card issuer has to approve the transaction. Once they do so, now they know that you've bought something and incurred debt on that card.
3. You drive off with your tank full, shopping cart full, or grocery bags full. And at this point the merchant knows you've bought something.

So by now everyone that's a part of the transaction is fully aware that a purchase has been completed. That is, of course, except the credit bureaus. They won't hear about it until your credit card issuer sends them their monthly credit bureau update tapes. That can take up to 30 days.

So when you finish up with your holiday shopping you might want to keep this in mind especially if you are going to try and finance anything in January. Once those new balances hit your credit files your credit scores will likely be lower.

If you have any questions or comments then please feel free to contact me at askjohn@credit.com.

Credit Crisis: Facts & Advice

Do you have a CLUE?

November 20th, 2008

No, I'm not asking if you have a clue in a condescending way. I'm asking if you have a CLUE report. The CLUE report is essentially the equivalent of your credit report but in the insurance world.

So what is a CLUE report and why should you care?

1. What does CLUE stand for? CLUE stands for Comprehensive Loss Underwriting Exchange. The last word, exchange, is the key. It's an exchange of information between multiple insurance companies.
2. What is a CLUE report? It's a product sold to insurance providers by a company called ChoicePoint, which is based in Georgia. ChoicePoint is now owned by LexisNexis.
3. What's on a CLUE report? The report contains your insurance claim history. Any claims filed with an insurance company who contributes data to ChoicePoint in the past 7 years will be on your reports. If you haven't filed a claim in the past 7 years or you use an insurance company that does not report to ChoicePoint, then you won't have a CLUE report.
4. How do insurance companies use them? Insurance companies buy these reports to determine a variety of things. First, whether or not they're going to approve your applications for home or auto insurance. And second, the premiums you'll be paying.
5. Does it come with a score? Of course it does. It's called an insurance credit bureau score. The score is called CP Attract. The CP stands for ChoicePoint.
6. Can I get copies of these reports? Yes, you can get a free copy of your CLUE reports once per year just like you can get your credit reports for free once per year. You can claim them at ChoicePoint's website which is www.choicetrust.com. And remember, you may not have a report if you haven't filed a claim in the past 7 years.
7. What about getting my insurance scores? The insurance scores are available, but you'll have to pay for them. The cost is $12.95 for your auto insurance score and $12.95 for your homeowner insurance score. An Equifax credit report will be included with your scores.

If you have any questions or comments then please feel free to contact me at askjohn@credit.com.

Credit Crisis: Facts & Advice

The Credit Bureau's So Called Investigations

November 18th, 2008

Recently on CNBC.com I discussed the process taken by the credit bureaus to investigate data on your credit reports. In fact, it's one of our rights. We are fully allowed to dispute information on our credit reports if we feel it is inaccurate, misleading or outdated. This process is free. The problem, as many see it, is in the world of credit bureau investigations free doesn't get you much.

These are the reasons why their process called "re-investigation" is a little mislabeled:

1. Your credit data doesn't belong to you — Don't shoot the messenger but the information in their systems does not belong to you. It belongs to the lenders and anyone else who furnished the data. When it comes to arguing about the validity of the information, the credit bureaus will always take the side of the data furnisher.
2. You are not the customer — Consumers cost the credit bureaus money every time you reach out to them for any reason. If you claim your free reports without buying something, you cost them. Every time you dispute something on your reports, you cost them because they have to do their investigation work. The credit bureaus refer to their call centers as "cost centers" because they lose money maintaining them. That's why you don't get anything close to world-class treatment.
3. They don't want to talk to anyone, including you — Federal and state laws require that they allow you to communicate with them. Otherwise, you'd likely find it impossible unless you want to buy something.
4. The "re-investigation" really isn't anything more than confirmation — The bureaus simply contact the lender, collection agency or other source of the data and ask them if what they already have on file is correct. There is no person with a magnifying glass looking through records. It's hard to fathom it being called an investigation.
5. You'd do better on your own — If you dispute something with the bureaus and it comes back as being "verified as reported" then stop wasting your time with them. If it's really inaccurate (and you're not a credit repair clinic) you should contact the lender and discuss with them directly. They have the same legal obligations as the bureaus do to correct errors. Hey, you'll actually be able to talk to someone.

If you have any questions or comments then please feel free to contact me at askjohn@credit.com.

Credit Crisis: Facts & Advice

The Perfect Credit Report?

November 6th, 2008

Yes, it does exist and I talked about some of the attributes of the perfect credit report on CNBC last week. Here's the video…

Here are just a few of the necessary ingredients to that perfect credit report, which will result in an off the chart, fantastic credit score. You'll notice that nothing below has anything to do with paying your bills on time. My guess is that you already know that so why waste your time with it?

1. You need some aging — Not YOU, but your credit report. You actually earn more points in your FICO® score by having a very old credit report. In fact, the older the better. This means you should never ever try to get old, good accounts removed. It also means that when you open a bunch of new accounts in a short period of time, it can immediately lower the average age of the accounts on your report.
2. Account diversity — Credit use is a very good thing. So good, in fact, that you should not avoid using credit as a strategy to improve your scores. Credit scoring models love to see that you've been able to responsibly manage many different types of accounts.
3. Avoid too many inquiries — One or two inquires isn't going to kill your scores but it's always the best practice to apply for credit only when you really need it. Those who excessively apply for credit pay the price.
4. Learn the difference between installment debt and revolving debt — Installment debt means fixed payment amounts for a fixed period of time, like an auto loan. Revolving means a different balance each month and a different payment each month. Installment debt is traditionally lower risk debt because it's normally secured with an asset, like the car. Revolving debt, like your credit cards, is generally not secured and is higher risk debt. As such, your credit report is going to look a whole lot better if it has little revolving debt.

If you have any questions or comments about credit repair then please feel free to contact me at askjohn@credit.com.

Credit Crisis: Facts & Advice

Are You Ready for New Credit Score Requirements?

November 4th, 2008

Last week on CNBC's On The Money I had a conversation with Carmen Wong Ulrich about what people should focus on now that credit scores will become even more important than they've ever been. Here's the video...

The point here is very simple. While you are probably focused on your job, your home and your investments, it's not a good time to be ignoring your credit. Focus on the following and you'll reap the benefits of great credit:

1. If your scores aren't at least 750 at each of the credit reporting agencies, then you're not considered the credit "elite." Focus on WHY your scores aren't higher and address the issues. Is it debt? Is it late payments? Is it inquiries? Is it a combination of these things?
2. Ensure that your credit reports are 100% accurate. Don't forget that you have the right to see all of your credit reports for free. Claim them at www.annualcreditreport.com
3. Get your credit card debt to less than 10% of your credit limits. That means that if you have a card with a $10,000 limit then your balance shouldn't exceed $1,000.
4. Don't be tempted to use your credit reports as discount coupons at the mall this holiday season. I write about this in my book, You're Nothing But a Number. The amount of money you can lose by saving a few bucks at the mall is staggering. Don't do it!!

If you have any questions or comments about credit repair then please feel free to contact me at askjohn@credit.com.

Credit Crisis: Facts & Advice

Credit Repair Smackdown: The FTC's Operation Clean Sweep

October 30th, 2008

If any of you have been tempted to use a credit repair company because of poor credit reports or scores then you're going to want to think twice after you read this. Last week the Federal Trade Commission announced Operation Clean Sweep where they essentially put 36 credit repair companies out of business.

I was on CNBC last week and we discussed what Clean Sweep accomplished. You can view the video here:

Long story short, unless you live in GA then it's not illegal to operate a credit repair company. In fact, it's perfectly legal IF you follow the rules of the federal Credit Repair Organizations Act (CROA for short) or its state equivalent. The FTC or state agencies pursued three-dozen companies and chose to take action against them not because they were in the credit repair business but because they were breaking the law by how they operated. Here are the requirements to legally operate a credit repair company...

1. You cannot market that you have the ability to get accurate but negative information removed from a credit report in exchange for a fee. That's illegal.
2. You cannot charge the consumer anything until the services have been fully rendered. That means if the credit repair company charges you an up front "set up fee", that's illegal.
3. The credit repair company must disclose to you that you have the ability to challenge information on your credit reports on your own at no cost. If you don't receive this information then they're breaking the law.
4. The credit repair company must give you a documented 3-day cooling off period during which you have the right to cancel their service contract with no cost or further obligation. If you don't receive this information then they're breaking the law.

Of all the examples the most egregious was the following example. I'll call them Company A (you can read all about them at the FTC website). Company A sent representatives to speak at live seminars, mostly seminars for real estate investors. They would sell their ability to get negative info removed because of their so-called insider relationships with lenders who were willing to work with them to have information removed. The fee for these services…$3,000 and up.

If you have any questions or comments about credit repair then please feel free to contact me at askjohn@credit.com

Credit Crisis: Facts & Advice

Is Anyone Out There Lending Money?

October 28th, 2008

If you've been hiding on Mars for the past 12 months then you probably don't know what's happening in the credit world right now. Alternatively, if you spend too much time watching TV, surfing the web, listening to the radio or reading the newspaper then you probably think that all lenders have decided to hang "Out of Business" signs on their front doors. So what's the deal? Have lenders really stopped lending money?

Nothing could be further from the truth. In fact, not only are there plenty of lenders lending money right now but there are many lenders who are in very good shape, financially. Nobody is denying that the credit world is a mess but it's not Armageddon, not yet anyways. Here are just a few examples in case you need to borrow a few bucks.

1. USAA — Not only are these guys in good shape but they're happy to tell you about it. I recently opened a credit card with them and while on the phone with one of their representatives they tried to cross sell me an auto loan (up to $50K) and a HELOC (home equity line of credit).

When I asked them how they avoided the problems that the rest of the industry seems to be having they were quick to point out that they have basically no exposure to non-prime mortgages. The drawback to USAA is I believe you have to have some sort of military relationship to use their banking services, although that might not be 100% correct.

2. Credit Unions — Credit unions are member owned versus banks, which are owned by shareholders or private owners. Banks are profit driven where credit unions are not so much. Banks were more willing to dive into the deep end of the pool and give people with horrible credit and no verifiable income hundreds of thousands of dollars to buy overvalued homes. Credit unions were not in a big hurry to make the same mistake.

So if you're in the market for a loan can I suggest you join a credit union or talk to USAA to see if you meet their respective membership criteria. And, as always, if you know of a lender who has hung out the "borrowers not wanted" sign then please let me know. I can be reached at askjohn@credit.com

Credit Crisis: Facts & Advice

Should I Sell My Jewelry to Help Make Ends Meet?

October 23rd, 2008

Last week I had an extremely frightening conversation with a friend of mine who is in the jewelry business. His name is Neil Saunders and he owns and operates Neil Saunders Diamonds and Fine Jewelry. I dropped by to pick up an appraisal for a ring my wife owns and while there I asked Neil about "gold buying" services.

You know these guys. They advertise on late night television, offering to send you "cash now for your unwanted gold." I'm not sure if you've seen the price for an ounce of gold lately but trust me, there is no such thing as "unwanted gold." The ascending price of gold has lead to an increased number of companies and individuals who are trying to profit from desperate consumers who are willing to fire sell rings, coins, bracelets, necklaces and anything else they have made of gold.

Basically the trend he is seeing is that not only are people trying to offload gold but they're also trying to offload other jewelry and anything else of value. The most memorable example was this one...

A man came to him and wanted to sell a watch and some diamonds. Now we're not talking about a Seiko here. We're talking about a certain Girard-Perregaux watch, which means nothing to me but apparently it comes with a $50,000 price tag. Couple that with the diamonds and the retail price of the total comes to roughly $100,000. Long story short, the man walked out of Neil's office with an undisclosed amount of money not even close to half of the retail value. Unfortunately desperate times call for desperate measures.

After doing a little research into these gold buying services and bouncing my experience off of Neil, it looks like these guys aren't all bad, but also aren't all good. They won't tell you how much they're going to give you for your piece and they won't even tell you how much they are willing to pay per each gram of your gold. They also won't tell you if they're going to resell your piece of jewelry or if they're going to refine the gold, melt it down and then dispose of it. Bottom line... they won't tell you a lot. That's not normally good news for you, the seller.

So the answer to whether or not you should sell your jewelry is "Sure, you can sell your jewelry to make ends meet. But you're going to be better off if you deal with a trusted jeweler rather than the guys who advertise on late night television." If you've sold gold or any other valuables to make ends meet, we want to hear your story. You can reach me at askjohn@credit.com.

 

Credit Crisis: Facts & Advice

Can Anyone Else Help Us?

October 21st, 2008

Given the current credit environment and all of its problems, it occurred to me that there's an easy way to make a significant positive step in the healing process of our real estate market. Do any of these make sense to you too?

1. Fair Isaac — These are the folks who invented the FICO® credit scoring system. Last week, in the below article, I wrote about how the FICO score penalizes you for short selling your home just as much as a foreclosure. This isn't acting as a disincentive to short selling BUT it would be a nice gesture if the good people at Fair Isaac were to help out a little and retrofit their existing scoring models so not to penalize consumers for short selling.

This is going to be easier said than done for a couple of reasons. First, lenders can't report these loans as being sold short. They can only report them as being settled. There's no way to distinguish between a short sale settlement and a typical settlement, say, of a credit card debt. So while this is a good idea, it's going to be tough to do. Having said that, how many people settle mortgage loans? Seems like the only situation where there's a settlement on a mortgage loan is when there's a short sale.

2. Credit Bureaus — The credit bureaus can also easily choose to create a new status code for an account that has been sold short. This would make it very easy for a lender to clearly identify the disposition of the mortgage loan as being sold short. This opens up option #1 above and, frankly, is not difficult for the credit bureaus to do this.

My guess is that the bureaus either have already heard this before or are hopefully working on this solution. I'll check and get back to you.

3. Mortgage Lenders — At the end of the day the credit reporting process is completely voluntary. This means lenders can choose to NOT report a loan as being sold short or settled. I'm not advocating this because I've always been supportive of full and accurate reporting, and I still am. But we're in a tough spot and a very large percentage of people who are having to short sell their homes are doing so because their lender didn't do their part to fully disclose the "adjusting" nature of the loan. In this case it seems, at the very least, fair.

If you have any other suggestions on how to heal our wounded mortgage environment, we want to hear from you. You can reach me at askjohn@credit.com.

 

Credit Crisis: Facts & Advice

What's better for your scores, short selling or foreclosure?

October 16th, 2008

I started in the credit business in 1991 (Equifax) and up until early 2008 I had never been asked a single question about short selling a home. Since then I've been asked about short selling what seems like several hundred times. Let's address short selling; what is it, why would you do it, and how will it impact your credit reports and scores?

Short sale: A short sale is a deal cut with your current mortgage lender where they'll take less than the full loan amount to consider the mortgage satisfied and paid in full. For example, you owe $300,000 on a home and find a buyer will to give you $250,000. If the lender allows you to sell it for $50,000 less than you owe, it's been sold short.

Why short sell: Today when property values are going the wrong direction we find ourselves upside-down on the most expensive investment we'll ever make. We live with it (or at the very least have come to tolerate it) when we are upside-down on our car loans. But when we're throwing mortgage payments down the drain for the foreseeable future, some of us need to get out and get out now. Short selling offers hope for those in that situation.

What does a short sale look like on a credit report: There is no standard way to report a short sale. I've seen it reported as a "settlement" or "Account settled for less than full amount." Regardless, they both mean the same things to your FICO scores.

So what does it mean to my FICO scores? A short sale has the same damaging impact as a foreclosure. Let me repeat that because I know you just took a double take. When you short sell a home, it is reported as a settlement. And a settlement is just as damaging as a foreclosure to your scores. This means for the next seven years your scores are going to be lower because of the short sale. Of course this could easily be addressed by compelling lenders to NOT report short sales as foreclosures but simply show the loan paid in full.

We're here to help you in these tough times. As always, if you need to reach me you can do so at askjohn@credit.com.

 

Credit Crisis: Facts & Advice

Should I draw down my home equity line of credit?

October 14th, 2008

I did an interview with the Denver Post last week and the topic was whether or not it's a good idea to draw money from a home equity line of credit (or HELOC) as a safety net even if you don't immediately need it. Just to illustrate how fast things can change in this crazy credit world, last week I was modestly supportive of the strategy, which some people refer to as arbitrage. This week, in fact as of today, I'm more supportive. Follow me...

The Hypothesis: Because some lenders are suspending home equity lines due to the reduced value of real estate it's a good idea to go ahead and draw down the line. This way you'll have the cash on hand and avoid any problems caused by your lender closing the account without you knowing about it.

The Facts: On October 8th the Federal Reserve lowered the Fed funds rate to 1.5%, which means rates for Home Equity Lines of Credit will likely be lower than 5%. I have one and my rate is now 4.25%.

With a little research on the interest rates being offered by some banks and credit unions for money market accounts and CDs you'll find that many are paying approximately 4.25%. And, if you go to Treasurydirect.gov you'll see that I-Bonds are earning 4.8% and are liquid after 12 months.

The Opportunity: Assuming your HELOC hasn't been suspended, it might be worth considering a full draw of the funds. Tossing the funds into a money-market account or a CD may net out what you'll pay in interest, plus there may be a tax deduction that further tilts the deal in your favor.

The Sting: Your credit report will now show a fully maxed out HELOC, which isn't going to help your credit scores. It won't kill them, but it won't help them. And, now you have more debt tied to your home, which means you'll have to sell your house for the full value of your primary mortgage, your HELOC and whatever commission you pay a real estate agent. That's going to be hard to do right now. And you never know when the rates are going to move against you so be prepared to pay off your HELOC at a moment's notice.

We're here to help you in these tough times. As always, if you need to reach me you can do so at askjohn@credit.com.

 

Credit Crisis: Facts & Advice Vol. 1

October 6th, 2008

By far the most common question we're getting here at Credit.com is, "what will the credit environment look like after the credit crunch ends?"

Here's what we know so far:

1. Banks are either failing, merging or being acquired in record numbers.
2. Access to new credit is more difficult today than in the recent history of personal finance.
3. Lenders are making it more difficult to qualify by raising their minimum credit scoring requirements.
4. Lenders are also reducing their exposure or "risk" by reducing credit limits, closing down accounts, raising interest rates or suspending home equity lines of credit.

Here's what you should do right now:

1. Don't panic. Nothing compounds a bad situation more quickly than making bad financial decisions.
2. Be sure that your bank or credit union is either FDIC (bank) or NCUA (credit union) insured.
3. Make absolutely certain that your credit reports are accurate and up to date. Do so by reviewing them for free at www.annualcreditreport.com.
4. If you already have good credit, then it might not be a bad idea to open a new credit card. The access to capital and added flexibility and options are nice things to have right now. I just opened up a high-limit credit card without any problems, so I know it's still possible.

It's time to circle the wagons my friends. I'll be here helping you out as we ride through this historical financial meltdown. As always, if you need to reach me you can do so at askjohn@credit.com