California Debt Blog

The Great Bail Out Fraud

I received two emails today from clients asking about the credit card bail out that they read about on the internet or heard about on the radio. Apparently, some folks are advertising about how people who owe more than $10,000 in credit card debt can get relief.

Folks, there is no bail out. There is no government program. There are no secret laws that allow you to get out of debt. You do have options, but none of these options involve some special bail out. Your options:

1. Bankruptcy. You can file for bankruptcy, either a chapter 7 or a chapter 13. Your debts will be legally discharged this way.

2. Negotiation. You can negotiate with your creditors. You can either do it yourself or hire an attorney to do it for you.

3. Let them sue you. You can wait for the creditors or debt collectors to sue you and then you can either fight the case in court or settle at that point.

There is no silver bullet. There is no bail out. There is no free way out of this. You should avoid a debt counselor and talk to a licensed, competent attorney.

Removing an item from your credit report

A lot of people are doing a "New Year, New You" type program. You can buy new diet products or you can get a Bowflex on sale. But now is also a good time to review your credit report. As a reader of this blog, you understand how important it is to review your credit report regularly. Your credit report affects your interest rates, offers for credit and could impact your job.

When you get your credit report, there may be a mistake. Common mistakes include items that are not yours being reported, items not being reported properly and items that are just flat out wrong.

Get your credit report and review it carefully. If there is a mistake, you can either dispute this online with the credit reporting agencies (CRA) or you can report it in writing. I prefer to report it in writing. A simple letter with your name and social security number will do the trick. You list each account that is wrong and why it is wrong. For example "Account 1234 with NRS reports that I am delinquent when this account has been paid off." You list each account with the reason and send the letter off.

The credit bureaus will then investigate and send you a response in 45 to 60 days. All inaccurate information should be removed and you should see your credit score increase. Finally, you do not have to use a service that claims it will clean up your credit score. Only inaccurate information can be removed and anyone who claims to have a system to "fix your credit" is probably trying to just separate you for your money. 

Break the Payday Loan Cycle

I have had a few people calling me lately with the same issue: they took out a payday loan and they did not pay it back. Now, they are being harassed by a debt collector and they want to take out another payday loan to pay off the first one.

Do NOT do this. Ever. Stop. The problem with payday loans is the interest rate. It can be over 80%. This makes it difficult, if not impossible, to pay it off. By taking out a 2nd loan to pay off the first loan, you are putting yourself in a cycle. You will then take out a 3rd loan to pay off the 2nd loan. You have to break this cycle.

If you are being contacted by a debt collector, you should talk to an attorney. You may have other options like negotiating to stop interest rate charges or lowering the balance owed. But taking out a loan to pay off another loan is always bad business.

Bad credit mistakes

Yahoo Finance and Creditcards.com have a story on how bad your credit mistakes are. Here is their list of how bad things are on a scale of 1 to 10:

1. Using a card in a pinch: 2
2. Paying the minimum: 4
3. Balance transferring: 5
4. Too many cards: 6
5. Paying late: this is a 6
6. Maxing out a card: 7
7. Cash advance: 8
8. Missing a payment: 9
9. Debt settlement: 9.5.

The one thing missing from their list: cancelling your old cards with no balance. This is a 7.5. One of the big factors in your credit score is the length of time you have had credit. If you cancel an old card, this will have a negative effect on your credit.

Read the whole article for more from Creditcards.com on how to be responsible with your credit.

Credit Score Impact: Short Sale versus Foreclosure

People ask me about the difference between a short sale and a foreclosure as it impacts their credit score frequently. There are no hard and fast rules. It depends on your situation. However, here are some guidelines:

A short sale will drop a credit score about 100 to 150 points. It depends on where the person is starting from. Most banks will not give a new mortgage for 12 to 24 months.

A foreclosure will drop a credit score by 150 to 200 points. Again, it depends on where they start from. Most banks will not give a new mortgage for 3 to 5 years. It is going to be very bank dependent, but the smaller banks and credit unions are more likely to give a new loan to someone who has had a foreclosure.

The best thing to do after a short sale or a foreclosure is to start rebuilding his/her credit right away. The best way to do this is to take a credit card with a zero balance, buy something small ($50 to $100) each month and pay off the balance immediately. This will get the credit score going back up quicker.

Watch Your Credit Card Statements Closely

Bad news for consumers: credit card companies are closing cards and raising interest rates. The latest is Advanta announcing that they are closing accounts. From the press release: "the Company will shut down all credit card accounts to future use at that time."

In addition, Capital One has announced that it is reviewing all accounts and raising interest rates. Bank of America is also raising interest rates and closing accounts, in addition to cutting credit limits. American Express has been doing this for some time.

Your credit card company is entitled to do this. The credit card agreement states that the company can change the terms with 30 days notice. This includes closing your account, raising your interest rate and lowering your credit limit. Now is the time to shop around for a credit card, but do not voluntarily close your oldest card, as that will affect your FICO score.    

Debt Collector Posted on Myspace

Yes, a debt collector posted about someone's debt on Myspace. The collector decided it would be a good idea to post something on the debtor's Myspace page about the debt. This is a violation of the FDCPA. The only thing I can think that would be worse would be if a debt collector tried to friend someone on Facebook while knowing the defendant is represented by an attorney. But a debt collector would never do that, would they?

If you have a Myspace page, or a Facebook account or anything else online, you should monitor it. Debt collectors are trying to get more tech savvy and part of that is communicating via the internet and Web 2.0. You must make sure you are checking all of this to protect your privacy and keep debt collectors in line.   

FAQ: Should I pay a store credit card?

Q: I have a credit card with a store that is going out of business. I have read on the internet that I should stop paying my credit card. Is this true?

A: NO! Do not stop paying your credit card, unless you want your credit score to fall or you want to be sued - or both.

Store credit cards, such as Circuit City or Mervyns, are not owned by the store. Rather, a large bank, say Chase or Citibank, owns the card. Your payments are to that company. You do not pay Circuit City or Mervyns. So, when Circuit City shuts its doors, your credit card balance does not zero out. Rather, the money is still owed to Chase or Citibank.

If you stop paying your card, the bank will either send you to a collection agency, report you to the credit reporting agencies or sue you for the balance. And you still owe it. The store going out of business is not a defense to this case.

So, if you have a card with Circuit City, keep paying it until it is paid off!

Interest Rates Raised by Capital One

News out of the world of credit cards: Capital One has raised interest rates for almost 70% of its customers. Why? Because it can.

Yes, your credit card company can change your interest rate for any reason -or no reason at all. Capital One, in an effort to stay "competitive," has decided to raise its rates and convert fixed rate cards to variable rate cards tied to the LIBOR.

I spoke with a contact at Capital One who confirmed for me that they reviewed all of their customers and somewhere between 70 and 75% of all customers have been affected by this. Notices are being mailed out. Capital One is doing this in an effort to be more competitive with other credit card companies.

Some people may notice a small change as the LIBOR is currently down. But, for most people, this is going to be an increase of 4 to 7%. And as the economy comes out of the recession, the LIBOR will go up. This means that the rates will go even higher.

If you have a Capital One card, now  is the time to look around.

Avoid Predatory Lending and Mortgage Discrimination

The Seattle Office for Civil Rights just put out a newsletter with a great article to help you avoid becoming a victim of predatory lending or mortgage discrimination.

One of the highlights:

A recent study by the Department of Housing and Urban Development and the Urban Institute found that African American borrowers on average paid $415 more in closing costs in FHA-guaranteed mortgages than whites. The study also revealed Latino borrowers paid $365 more in closing costs.

Make sure you contact someone if you feel you have been discriminated against on your mortgage.