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/

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.

How Does A Debt Collector Find Me?

Debt collectors are a smart group of people. They know if they want to find you so they can collect from you, they are going to need to get creative.
You see, the average debtor is a fairly mobile person. They open an account, and when they move they never send a new address to their creditor. So, the creditor has an old address, phone number, and other information.

Trust me, this doesn’t even slow a collector down! They will be hot on the trail of a debtor just as soon as they buy the debt. And they have a bunch of tools at their disposal. Unlike a few years ago when the collector only had information from the original creditor and perhaps a credit report, they now have a huge amount of information at their fingertips through the modern marvel, the Internet.

While a collection agency has many ways to track you down, here are a few that work really well for them:

1) Public records – It’s true, they can see what you do. If you buy a house, or file taxes, or open a business, they will know of it quickly. A typical collections agency will do a monthly sweep of all accounts through a computer process, and will see what data is available during that sweep. If, as an example, you buy a new house, they will see that and have your new address. Bingo, they got you! Interestingly, even 1099 information for a business is online, so that can be checked to see if you own a business. There are many other pieces of information they can check, but this is a great starting point for them.

2) Lexis / Nexis – Lexis, and other firms, provide information about pretty much everyone to you if you can pay for it. They have current and previous addresses, phones, job information, family information, and probably even your blood type. A few years from now they will probably keep a piece of your DNA! Collectors pay less than $30.00 per month for unlimited service, and they do take advantage of the service whenever they can. A lot of information comes back in a very short amount of time, and they can find you quickly.

3) Skip Tracing – This refers to hiring an outside vendor to find information about a debtor. A skip tracer will do all the leg work for you, and come back with a summary report telling you where a debtor is. If the first skip tracing firm is unsuccessful, they may use another to search again. This is highly cost effective, and highly automated.

4) Calling people you know – This is vicious, but it really works. Lexis, and other vendors, have a list that they call “nearby’s”. Let’s say you had a house at 123 Elm. They know who lives in 122 Elm, 124 Elm, and other surrounding houses. They have the names and phone numbers for each of those homes. So, the collector will call, and try to get a forwarding address, or a new phone number, or any other information they can get. They will also call relatives, friends, and anyone else that is shown to be an associate of the debtor.

5)) TransUnion – A fairly new TransUnion service will allow you set a watch on a credit file, and if a new entry comes in, say from a new credit card company with whom the debtor has opened the account, TransUnion will determine the address for the account and send it to the collectors. This is a great way to track people down, but may have some legal privacy flaws before everything works out.

This is just a few of the ways collectors can find you. They have a bunch of additional tricks up their sleeves, and more than likely they WILL find you. So, how do you hide? You can’t, unless you can find a way to hide your personal information from every source on the Internet. Instead, you just have to be prepared for the worst, and make sure you can deal with the collectors if they finally do call.

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.