FrontLine's "The Secret History of The Credit Card"

I found this news story put together by FrontLine and The New York Times.

It talks about some of the hostory of credit cards, but also many of the dirty little secrets of the credit industry.  If you are looking for some background, this is a good place to start.

http://www.pbs.org/wgbh/pages/frontline/shows/credit/

5 Rules of Great Credit Scores

We all want nice things. New cars, a big house, a 52 inch flat screen TV (oh yeah!), new skis, that Harley your have had your eye on. These are all things that are wonderful to have, and which we seldom want to wait for. However, we usually don’t have the cash available to just run out and buy these things, so where do we turn? That’s right, we get credit.

For some purchases, credit makes a lot of sense. I personally don’t ever expect to be able to buy a car with cash, much less a house. For those things, credit will act as an extension of my earning ability. In other words, it stretches my cash position out over many years, so I can afford things that I would not otherwise be able to buy. But the difference in what you will have to pay over time is really amazing.

If you have a poor credit score, you will have higher interest rates. This may not seem like a big deal, but let’s take a look at what that means for just one purchase. Let’s say you want to buy a house. Your credit scores aren’t that great. You can qualify for the house, but you will get an 8% interest rate. Your will finance $200,000.00 on your house. You payment ends up being $1,467.53 per month for 30 years.

Now, let’s say your neighbor across the street has good credit and gets the same model house. They get a 6% interest rate on their house. Not much of a difference, right? Just a measly 2% interest. So what is the big deal?

Well, the big deal is that your neighbor will pay much less than you will. Their payment for the same $200,000.00 house would be $1,199.10. That’s right; they will pay $268.43 a month less than you will. Ouch!

Ok, you say, no big deal. That is a lot of money, but in the long run does it really matter? Well, the long run is where it gets you. You see, if you make those payments for a year at the higher rate, you will pay an extra $3,221.14 compared to your neighbor. That’s a lot. Over 7 years, which is about how long the average person stays in a home, you will pay an extra $22,547.96. That’s right, you pay more than $22,000.00 for having a 2% higher rate!

The question, then, is what can you do about it? The first thing you should know is it is never too late to start. You need to monitor and manage your credit to make sure that your scores go up, or at least that they don’t go down. To accomplish that, just follow a few easy rules:

Rule Number 1: Make Your Payments ON TIME!

OK, this sounds easy, but this is the one that gets most people. A single late payment, noted as a 30 day late on your credit report, can drop your scores as much as 60 points. That is enough to seriously impact your interest rates, or even your ability to get credit. If you can make your payments on time, and keep doing so for a number of months, you will begin to see your scores move up.

Rule Number 2: Don’t Go Over Your Limit!

This is a bad thing. If you go over your limit, your creditor will note that on your credit report. Going over your limit shows that you are not responsible with your credit. Creditors want to see you use credit responsibly, and going over your limit shows them that you don’t know how much you are spending. While this won’t hurt your scores as much as a late or missed payment, it still hurts.

Rule Number 3: Only Get Credit When You Need It!

There are three reasons for this, but one of the most important reasons not to go out and get a bunch of credit is that every time someone checks your credit you, they will do a hard pull. Each hard pull will get about a 5 point deduction. After about 6 months, you will get those points back, but if you have, say, 5 new checks against your credit report, you will take a 30 point hit for a while, which can affect your rate. There are other things to consider here, but too many pulls is generally considered a bad thing to a potential creditor.

Rule Number 4: Keep Your Account Balances Low!

Your scores can go WAY down with high balances on your cards. For instance, I had a 44 point reduction in scores by going to a 90% overall utilization across all my cards (it was, um, a test! Right, a test! To see what would happen. Really…). The rule of thumb is to keep your balances below 30 percent of your limit. So, if you have a $1000.00 limit, you need to keep your balances below $300.00 ($1,000.00 X 30% = $300.00). Again, it is all about ‘responsible use’. Creditors want to see that you don’t have to have credit, and instead use it for convenience or for those big purchases.

Rule Number 5: Check Your Credit Report!

Your really need to know when something changes on your credit reports. If you haven’t checked recently, you should probably go do it. You can get it for free right here: https://www.annualcreditreport.com. If someone has stolen your identity, or a collections firm has decided to come after you for something that isn’t yours, the only way you may find out about it is to pull your credit report. You can get on free yearly, or pay for one more frequently than that. You can get your reports and scores from http://www.myfico.com/.

The most import thing you can do to build and keep good scores is to make a plan and following it NOW! Good credit scores are vital in today’s economy, and it is up to you to make them the best they can be.

How To Build Your Credit

If you are looking at establishing a credit history, you have an interesting challenge ahead of you. There is this dilemma, you see, that creditors want you to have credit before they wilol give you any. Why do they want this, you ask? Well, it is pretty simple, really. Creditors want to know that you can use credit responsibly.

If you are a young adult, and are going to college, credit is pretty easy to get. You will be getting applications in your books, in handouts as you walk past other students, and in the mail. All you have to do is sign, and you get a card. The credit card companies know that, as an average student, if you get in trouble mom or dad will bail you out. So you are a pretty safe bet.
After college, however, or if you choose not to go, you suddenly have to prove yourself. They want to know how much you make. How much you spend. Your waist size. The name of your neighbors cat. Where you were on June 16th, 1963 (I know, you probably weren’t born yet). They want to know how worthy you are of having one of their cards.

Here’s the deal: They want to know you understand the responsible use of credit. They WANT you to use their card, because then they earn interest. They DON’T want you to pay your card off all the time, because then they make less money. (They still make money on every transaction by charging a store to let you use your card.) So, economically, they are looking for 3 things:

1) You will have the ability to keep making payments.
2) You are unlikely to stop paying them.
3) You understand that credit is a tool, and not a way of life.

The majority of people who default on a credit card have several cards, and they are all maxed out. They originally got those cards as a way to extend their purchasing power instead of as a mechanism to keep from carrying cash. So, having too many cards, or having them maxed out, can make you look less desirable to a credit card company.

There seem to be a few key utilization limits that the credit card companies look for. Utilization is pretty easy to calculate. As an example, if you have a $1000.00 credit limit, and you have charged $600.00, you have a 60% utilization rate (600 / 1000 = .6, or 60%).
Utilization percentage break points are at around 60%, 40%, 30% and 10%. Your ‘best’ appearance to a creditor is under the 10% level, but under 30% is also a really good mark. Higher than 60% utilization is a key indicator that you aren’t managing you debt well.
Another thing they look for is if your debt is all in one card, with the rest at low balances. Creditors prefer to have your debt spread out across multiple cards rather than a single large amount. If you have taken advantage of a consolidation offer, prepare to have a lower credit score for a while.

Another thing to consider is how many cards you should get. Credit companies call having too many cards debt pyramiding, which is a condition in which you have so much credit if you maxed all the cards out you couldn’t pay them all off.

Let’s sum this up:

1) Keep low utilization amounts on all of your cards, preferably below 10% per card.
2) Spread debt across several cards, rather than running up a large amount on a single card.
3) Don’t get too many credit cards, as you will look like a bigger risk.

Regardless of your current situation, you have to have credit to build credit. So, consider taking out charge cards from retailers, or a secured card from a bank if you are having trouble getting credit.

Store cards, such as JC Penney, Macy’s and Target, are typically very expensive in terms of the interest rates. However, Target in particular has a reputation for giving people a chance to build credit. Their standard procedure seems to be to give a new customer a $200.00 limit, and then up the credit limit to $500.00 after 90 days.

Can’t get a store card? Go secured. For a secured card, you will give your bank a certain amount of money, say $500.00. They deposit that money into an account, and give you a credit card that is secured by that account. You can’t spend more than the $500.00, and the payments will come out automatically.

As your credit improves, a mix of credit can be helpful. You may want to look at a car loan, or a mortgage, to give you a nice rounded credit portfolio. Creditors like to see this instead of just a bunch of credit cards. Again, it is a responsible use of credit thing.

Remember, though, that taking on too much debt is dangerous to your financial health. No matter how tempting that cool new widget is, make sure you can afford the payments, especially if something like the loss of a job happens to you.

Why Collectors Are Buying Old Debt

It’s happening a lot now. An account you had forgotten about, from a different time in your life, suddenly shows up again as a Dunning Letter from a collection agency. You vaguely remember the address, and you are pretty sure you paid that off, but that was 15 years ago! It was your debt, but you don’t have records that far back. Why are they bugging you now?

The game has changed. There is old debt out there worth tens of billions of dollars that was believed to be un-collectable. In other words, the utility company didn’t know how to find you, so they never pursued the debt. This debt is very cheap to buy, and the fact is that a very small number of collections against it can generate large rewards for the collection agency, so they are willing to put in the time and effort to try to get a bbit of cash out of you.

Some collectors are unscrupulous (comes as a surprise, doesn’t it?), and don’t care who they collect from. They might add a negative to someone’s credit report even if they can’t verify the owner of the account. In that case, they are hoping the innocent victim will pay for a deletion of the account rather than take the time to fight it. In many cases, this is the cheapest way to go.
But again, why bother? Well, the original creditor wrote the debt off years ago. Now they see a way to make some cash back. So, they cell their debt for 3 or 4 cents on the dollar. Look at the benefit to the collector. They buy a million dollars worth of debt for, say, $40,000.00. Over a period of a month, they are able to bring in 10 percent, or a hundred thousand dollars. They make HUGE profits on a very few wins.

So, how do they prove the debt is yours? Well if the original creditor has a paper trail showing this is your debt (usually by a matching SSN), you are stuck. But often, they have no paper that proves the debt is yours. So, you can contest it, they can’t prove it, and by law they have to delete it from your credit report.

However, they often don’t delete it. They will change something, like the date reported, or the amount, but won’t delete the negative. And unless you act, they will have 7 years (in most states) that the debt will show up on your report.

What can you do? If this happens to you, the first thing to do is send a letter demanding proof. Not that they verify the debt, but that they prove it is yours. If they can’t prove it, you have a case against them.

The second thing is to call the original creditor and explain the situation. They may have simply made a mistake, and might be able to help you out.

Your next step is to dispute with a credit bureau. If you do that, the bureau has 30 days by law to respond, and if they get no proof they have to delete the data from their credit reports.

The point is, you need to do something. Check your reports, and take action against the bad. If you do that, your reports will improve, and you will save money over the long run.

The Top 5 Reasons To Check Your Credit Report

I check my credit scores and reports once a week. For a while, I checked daily, but that seemed a tad excessive. OK, maybe it was seriously paranoid. Alright, fine, I basically did nothing else. I went crazy. I wanted my reports CLEAN!

It’s true, I was in the process of cleaning my credit reports up. I spent a lot of time and a lot of effort learning how to get that done. And after I had reached my goals, I got kind of sick of it. Always trying to figure out what had changed, what was good, and what was bad. Not an easy task.

So, for a couple of months, I quit watching. Just let it go, pay your bills on time, and kind of relax. Then I got the letter…

Yep, Equifax wanted me to know that there had been a negative on my report. A collection agency had reported to my credit report for someone else’s utility bill in another state. I had never lived in that state, or gone by that name, but they accused me. So, I pulled my credit.
It wasn’t just one. I had three new negatives on my report. One, as I mentioned, wasn;t mine. The other two were. But, they were old! Also paid for, but that didn’t matter. One was a car loan I had paid in full 8 years earlier. The other was for a traffic ticket I actually contested in court. Since I had a copy of the car title, and could get a copy of the court record, those were easy to fix. They went away in a couple of months. But the other, the false claim, took 6 months and the threat of legal action before the collection agency would back off.

At the time it happened, it didn’t really matter. I was in good shape financially, and didn’t need to buy anything on credit. But what would it have been like if I was trying to buy a car, or a house? I wouldn’t have been able to. And, by the way, my credit scores went down by 110 points.

So, now I check once a week. If something shows up, I want to know about it. More than that has no purpose, and longer doesn’t give me the reaction time I need. But, it isn’t just about the invalid credit reporting. There are actually some really good other reasons as well:

1) It is an easy way to detect identity theft. If someone gets a hold of your SSN, in example, and opens a credit account, you will see it quickly and can get it cancelled before they do damage.

2) It is a great way to see who is checking you out. Any pull against your credit reports will show up as an inquiry. It is always nice to know that someone has done that illegally.

3) Your creditors may do something wrong. They have good intentions, but showing you as late, even once, can cause a 60 point drop in your scores.

4) Bad things could go away. If you have had late payments, collections, or defaults in the past, they will fall off over time. If you are actively working on the problems, they might go away much sooner. And THAT is a good feeling.

5) Because it is still kind of fun!

Credit is still kind of a big game to me. The rules are vague, and if you play hard you can win.
My recommendation? Buy into a service that let’s you check your credit, and use it. Over time, it can save you a ton of money, and a ton of time.