Credit/Debt Recovery

Quite a weekend

I don't know if I've mentioned it on the blog before, but I currently live in Omaha, Nebraska. Ours one of the thousands of households that was without power all weekend. 

It wasn't the end of the world. Everybody on our street helped each other clear away downed trees and branches, a neighbor loaned us his chainsaw, and people held impromptu barbecues to use up food before it spoiled. I admit I missed having air conditioning in late June, but otherwise it wasn't that awful. 

So this show and this movie and every story or novel like it proved to be rubbish, at least for 3 days in Omaha. Maybe if the outage had gone on another week we all would have turned into cannibals or something. I doubt it, though. Electricity is a wondrous thing, but mankind lived without it for millennia, and there are still plenty of people, even in America, who can remember living without it in their lifetimes.

Anyway, these are the kinds of situations where a credit card can be a life-saver. Depending on where you live, you never know when you're going to get hit by a tornado, hurricane, blizzard, earthquake, etc. Nothing beats a well-established emergency fund, but a credit card can be a good substitute. I tell a lot of people to cut up their credit cards, but ultimately the best thing is to have the discipline to have a card and only use it when absolutely necessary. 

A look back at an old post

I've been neglecting the blog lately (sorry) and I don't really have anything new to report here, but I wanted to drag out an old post that presaged the country's current housing woes in some ways.

I was thinking about this post because of an email I got from a reader that's stuck with me. He said:

The logic goes: Homeowners make good citizens. Bull! That's like saying that standing in a garage makes you a car. Good citizens make good homeowners!

I think no one can argue with that logic now.

In the end, homeownership was great for me; it changed my life for the better in a lot of ways, but I barely got through those first six months, and I'm supposed to be an expert at this stuff. 

I know "We bought a car" isn't an exclamation point-worthy sentence, and may not seem like much of a title for a blog post, but it is a momentous occasion for me.

I've never been able to successfully negotiate a new car purchase before. In the past, car salesmen (they have all been men so far in my experience) have tried the typical tricks, the four-squaring, hidden fees, outright deceptions, etc. that I just can't abide. I've always stormed out of the dealership in disgust and ended up buying a used car, preferably from an elderly relative.

In one case, I stormed off the lot, drove to a different dealership, told the salesman about all the shady tactics the last guy just pulled and that I finally couldn't take it any more and just left. The salesman said "I can't believe they let you walk off the lot," and then proceeded to attempt the same shady tactics.

It's ego, I think. That guy just figured he was so much better than the other salesman that I'd roll over for him where I'd put up a fight before. 

All this is ironic because I've taught car-buying workshops in the past. I know too much about how the car sales game is played, and it's made it tough for me to hold my nose and go through with the purchase. Anyone who attended any of my seminars probably wasn't as hard-headed as I am about it, but hopefully my advice saved them some money all the same.

Anyhow, this time around I'm married, my wife had her heart set on a new car, and storming off the lot in a huff wasn't an option. 

I ended up going to FightingChance.com. For $40, I got a package that helped me negotiate the best price for the car I wanted while avoiding sales negotiations and other hassles common to auto buying. In the end, the price we got was below invoice, $500 below the next lowest offer, $2,200 under MSRP, and $1,011 under the average price across the 12 dealers I contacted.

My wife is thrilled with her new car, I'm thrilled that we didn't get ripped off on the price, and we barely had to deal with salesmen at all. (The only pressure was to buy an overpriced extended warranty, which we politely but firmly declined.)

If you're buying a new car, I highly recommend Fighting Chance. You'll almost definitely save way more money than their program costs. 

If you're buying a used car, Fighting Chance won't help you much. In that case, I highly recommend Remar Sutton's book, Don't Get Taken Every Time. For around $12, you'll learn how to save hundreds or even thousands on your next car purchase. You'll also learn too much for comfort when it comes to the auto sales industry. 

Here's an article that talks about legislators' increasing desire to strip nonprofit status away from any institution that collects fees for its services (including nonprofit hospitals). 

This conflict has been brewing for a long time regarding nonprofit credit counseling. Opponents argue that credit counseling is suspect because it gets contributions from creditors. Others point to the fees it charges of clients. There's no viable third way for a credit counseling agency to keep the doors open. Some of the larger agencies have already seen IRS revocations of their 501(c)3 status. It looks like it's not just credit counselors but hospitals, day care centers, group homes, retirement centers, and more that are facing these attacks. 

For my part, I don't see any special reason universities deserve non-profit status any more than hospitals, credit counselors, or other charities. (That is to say, I think they should all remain nonprofit together, and if you revoke the nonprofit status of credit counselors and day care centers, you might as well revoke that of churches and colleges.)

Richard Nikoley popped in to the comments recently to announce Provanta's new web site: www.provanta.com.

I really, really like it. At first, it's a novel idea to have a corporate site that is essentially a blog. It's a smart (and inexpensive) way for a company to set up their web presence that says a lot about the company. For one thing, when the home page is dedicated to frequent messages from the company to the public, you know right away that you're dealing with people who are not afraid to communicate with you and give you more information. It's a brilliant choice for a debt settlement negotiation company; when clients are handing their money over to a third party, they want to know how things are going.

And after reading most of the site, it's not just the fact that it's a blog that is impressive, it's the content of the posts. I don't know else where you're going to find this much honesty on a debt settlement negotiator's site, or on any corporate web site.

It doesn't seem like Provanta negotiates settlements radically differently from anyone else in the industry, but they do it with such integrity that I couldn't recommend another settlement negotiator. What I mean is this; the things Provanta is communicating from their blog are true across the entire debt recovery industry, but a lot of lesser debt settlement companies wouldn't be this straight with you. If you're interested in debt settlements, give Provanta's blog a read.

You'll be seeing the phrase "credit crunch" where ever you look for months to come. It's a phrase carefully coined to make a sudden infusion of common sense in lending look like a bad thing.

The crunch just means lenders are going to stop handing out credit to people who haven't demonstrated that they can handle it. Call it a "crunch" if you want, but it's the way the lending business should have been run all along.

It used to be, until activists stepped in and convinced the government to intervene, forcing lenders to extend credit more broadly.

This is analogous to the biofuel mess Mark Steyn writes about (and linked to by Tom Blumer of BizzyBlog). Environmentalists pressured government to require more use of biofuels, which is backfiring in a big way.

Ditto lending. When you require lenders to engage in subprime lending, don't be surprised when the whole thing backfires. Here's Caroline Baum with more on this.

John Gruber's Daring Fireball blog links to Paul Graham advising startup companies to "Be good."

Gruber's summary of Graham resonates:

His argument, more or less, if that if you use “do what’s best for the users” as your rule of thumb for any decision, you’re more likely to grow into a successful business. He even makes the case that was true for Microsoft during their years of phenomenal growth.

How I wish credit card companies would think the same way with regard to their debtors. I think that sums up the difference between me and other critics of the credit card companies. I want people to have access to credit, and I want creditors to apply Paul Graham's advice to their own industry and be successful. The business of lending isn't evil; it's the way the Bank of Americas of the world go about it. I just hate when creditors resort to coercion and fraud to make a few extra bucks.

The kind of behavior I'm talking about is what Bob Sullivan calls "Gotcha Capitalism." Except it's not really capitalism. Translate "users" in the quote above to "customers" and you've got a near-perfect description of real capitalism (the evils committed by credit card companies aren't capitalism, despite what journalists or social studies teachers say).

I've blogged about Prosper.com a few times in the past (here and here are a couple of examples).

My basic take on the whole thing was that the "feel-good" borrower-lender relationships being promoted would give way to traditional numbers-based lending. That is, a reliable credit score will beat out a compelling sob story every time.

And that's what seems to have happened. Prosper lenders I know started in good faith trying to help borrowers in need, and these days they just look at credit ratings and ignore the personal narratives and borrower profiles altogether.

I see Richard Nikoley is eyeing the peer-to-peer lending industry as well. He's started accounts with Prosper and Lending Club, and not surprisingly, has started out with a clear head. From his blog:

I'm not interested in people's stories, only their credit grade, debt ratios, and so on -- all the classic criteria.

I know Richard to be firmly grounded in reality, so of course he's not just going to lend to the person with the best narrative. He's going to use proven criteria. The bottom line is, the credit scoring system we have works pretty well. It's not perfect, or else there'd be no need for books by me about repairing your credit. But credit reporting and scoring are not about to be replaced by personal narratives.

Though maybe traditional creditors will give way to more peer-to-peer lenders. I'd like that. While I don't think creditors are evil for using traditional credit reporting, their treatment of their debtors is less than virtuous. I don't expect individuals lending with peer-to-peer websites to completely negate their lending agreements and change fees, terms and interest rates in violation of their signed contracts. We'll leave that sort of thing to Bank of America and the other lenders who aren't on this list.

I look forward to seeing what else Richard has to say about peer to peer lending, and yes, my curiousity is piqued about Zazingo.

I've been way too busy for blogging lately, but I wanted to check in just to assure everyone I'm alive.

Here's a story I saw on Drudge that I think everyone should see:
Russian doomsday cult calls credit cards satanic
I didn't know Bank of America gave out credit cards in Russia.

There's a dearth of material online advising consumers about life after a Debt Management Plan. That's not a terrible thing; the fact is, living on a DMP for 2-5 years teaches you a lot about personal money management. There's not a lot educators like me can add that will top the experience of living without access to credit for the duration of a plan.

Still, I think we should try to sum up some of the things DMP graduates can expect.

First, there's your credit rating. If you had a history of making late payments going into your DMP, you may have some damage to your score that you may need to work on. The DMP itself will have no effect on your score, so if your payment history prior to credit counseling was solid, you'll now find yourself with a high credit score and without any debt.

That can be a dangerous thing. If you're fresh out of a DMP, your credit score is good, and your debts are paid off, there can be a great temptation to run out and get a new card and max it out. Don't think that you should buy yourself some big-ticket item on credit as a reward for completing your DMP. Your reward is having no debt, period. If you've spent years diligently working to pay down your debts, spend a few more months working to save for the next big purchase you need to make.

That's not to say you should use no credit- it's important to have one credit card and use it responsibly. Just for the sake of your credit, get a low-limit card and use it regularly, making sure you pay it off every month. I usually suggest using the card for gas and nothing else. Then you have a regular history of using your card with out running up so much debt in one month that you can't afford to pay it all off.

If your credit was wrecked going into the DMP, it's not likely to have gotten much better (though it certainly will not have gotten any worse). If you don't qualify for a credit card, save up enough money for a secured card. You won't need more than $500 for this purpose, and then you can get a $250 secured card. Talk to your credit union or bank about their secured credit card products.

Another thing I would ask any DMP graduate to consider is to "stay on the DMP." That is, continue to live on the same tight budget (you survived for the years you were on the plan, right?), and continue to gather your DMP payment. Except instead of sending that DMP payment toward your debts, start putting it toward your retirement. I think this is a crucial thing that credit counselors don't stress enough. When I write about needing to get out of the financial failure business and into the financial success business, that's what I mean. The typical DMP payment would roughly add up to the allowable IRA contribution limit over the course of a year. In addition to building retirement savings, you get a tax advantage that you didn't get when making DMP payments. If your total DMP payments added up to more than $4,000 per year (or whatever your IRA contribution limit is), then you'll have a little bit extra for other expenses.

If you did have a high DMP payment and you have more than the allowable IRA contribution limit, consider using some of that money to make an extra house payment. And if you're not a homeowner yet, then that should be your next savings goal. Save that extra money toward a large down payment.

Whatever you do, don't take the money you were sending to your creditors every month and waste it. Consider a 529 plan for your kids' education, or some other worthy goal. Going on a DMP and working to become debt free was a smart move. When your DMP is complete, don't suddenly get stupid.

We bought a car!

I know "We bought a car" isn't an exclamation point-worthy sentence, and may not seem like much of a title for a blog post, but it is a momentous occasion for me.

I've never been able to successfully negotiate a new car purchase before. In the past, car salesmen (they have all been men so far in my experience) have tried the typical tricks, the four-squaring, hidden fees, outright deceptions, etc. that I just can't abide. I've always stormed out of the dealership in disgust and ended up buying a used car, preferably from an elderly relative.

In one case, I stormed off the lot, drove to a different dealership, told the salesman about all the shady tactics the last guy just pulled and that I finally couldn't take it any more and just left. The salesman said "I can't believe they let you walk off the lot," and then proceeded to attempt the same shady tactics.

It's ego, I think. That guy just figured he was so much better than the other salesman that I'd roll over for him where I'd put up a fight before. 

All this is ironic because I've taught car-buying workshops in the past. I know too much about how the car sales game is played, and it's made it tough for me to hold my nose and go through with the purchase. Anyone who attended any of my seminars probably wasn't as hard-headed as I am about it, but hopefully my advice saved them some money all the same.

Anyhow, this time around I'm married, my wife had her heart set on a new car, and storming off the lot in a huff wasn't an option. 

I ended up going to FightingChance.com. For $40, I got a package that helped me negotiate the best price for the car I wanted while avoiding sales negotiations and other hassles common to auto buying. In the end, the price we got was below invoice, $500 below the next lowest offer, $2,200 under MSRP, and $1,011 under the average price across the 12 dealers I contacted.

My wife is thrilled with her new car, I'm thrilled that we didn't get ripped off on the price, and we barely had to deal with salesmen at all. (The only pressure was to buy an overpriced extended warranty, which we politely but firmly declined.)

If you're buying a new car, I highly recommend Fighting Chance. You'll almost definitely save way more money than their program costs. 

If you're buying a used car, Fighting Chance won't help you much. In that case, I highly recommend Remar Sutton's book, Don't Get Taken Every Time. For around $12, you'll learn how to save hundreds or even thousands on your next car purchase. You'll also learn too much for comfort when it comes to the auto sales industry. 

Preview of the coming fight over nonprofit status

Here's an article that talks about legislators' increasing desire to strip nonprofit status away from any institution that collects fees for its services (including nonprofit hospitals). 

This conflict has been brewing for a long time regarding nonprofit credit counseling. Opponents argue that credit counseling is suspect because it gets contributions from creditors. Others point to the fees it charges of clients. There's no viable third way for a credit counseling agency to keep the doors open. Some of the larger agencies have already seen IRS revocations of their 501(c)3 status. It looks like it's not just credit counselors but hospitals, day care centers, group homes, retirement centers, and more that are facing these attacks. 

For my part, I don't see any special reason universities deserve non-profit status any more than hospitals, credit counselors, or other charities. (That is to say, I think they should all remain nonprofit together, and if you revoke the nonprofit status of credit counselors and day care centers, you might as well revoke that of churches and colleges.)

Provanta's new site

Richard Nikoley popped in to the comments recently to announce Provanta's new web site: www.provanta.com.

I really, really like it. At first, it's a novel idea to have a corporate site that is essentially a blog. It's a smart (and inexpensive) way for a company to set up their web presence that says a lot about the company. For one thing, when the home page is dedicated to frequent messages from the company to the public, you know right away that you're dealing with people who are not afraid to communicate with you and give you more information. It's a brilliant choice for a debt settlement negotiation company; when clients are handing their money over to a third party, they want to know how things are going.

And after reading most of the site, it's not just the fact that it's a blog that is impressive, it's the content of the posts. I don't know else where you're going to find this much honesty on a debt settlement negotiator's site, or on any corporate web site.

It doesn't seem like Provanta negotiates settlements radically differently from anyone else in the industry, but they do it with such integrity that I couldn't recommend another settlement negotiator. What I mean is this; the things Provanta is communicating from their blog are true across the entire debt recovery industry, but a lot of lesser debt settlement companies wouldn't be this straight with you. If you're interested in debt settlements, give Provanta's blog a read.

Credit crunch stuff

You'll be seeing the phrase "credit crunch" where ever you look for months to come. It's a phrase carefully coined to make a sudden infusion of common sense in lending look like a bad thing.

The crunch just means lenders are going to stop handing out credit to people who haven't demonstrated that they can handle it. Call it a "crunch" if you want, but it's the way the lending business should have been run all along.

It used to be, until activists stepped in and convinced the government to intervene, forcing lenders to extend credit more broadly.

This is analogous to the biofuel mess Mark Steyn writes about (and linked to by Tom Blumer of BizzyBlog). Environmentalists pressured government to require more use of biofuels, which is backfiring in a big way.

Ditto lending. When you require lenders to engage in subprime lending, don't be surprised when the whole thing backfires. Here's Caroline Baum with more on this.

Being good

John Gruber's Daring Fireball blog links to Paul Graham advising startup companies to "Be good."

Gruber's summary of Graham resonates:

His argument, more or less, if that if you use “do what’s best for the users” as your rule of thumb for any decision, you’re more likely to grow into a successful business. He even makes the case that was true for Microsoft during their years of phenomenal growth.

How I wish credit card companies would think the same way with regard to their debtors. I think that sums up the difference between me and other critics of the credit card companies. I want people to have access to credit, and I want creditors to apply Paul Graham's advice to their own industry and be successful. The business of lending isn't evil; it's the way the Bank of Americas of the world go about it. I just hate when creditors resort to coercion and fraud to make a few extra bucks.

The kind of behavior I'm talking about is what Bob Sullivan calls "Gotcha Capitalism." Except it's not really capitalism. Translate "users" in the quote above to "customers" and you've got a near-perfect description of real capitalism (the evils committed by credit card companies aren't capitalism, despite what journalists or social studies teachers say).

Internet lending

I've blogged about Prosper.com a few times in the past (here and here are a couple of examples).

My basic take on the whole thing was that the "feel-good" borrower-lender relationships being promoted would give way to traditional numbers-based lending. That is, a reliable credit score will beat out a compelling sob story every time.

And that's what seems to have happened. Prosper lenders I know started in good faith trying to help borrowers in need, and these days they just look at credit ratings and ignore the personal narratives and borrower profiles altogether.

I see Richard Nikoley is eyeing the peer-to-peer lending industry as well. He's started accounts with Prosper and Lending Club, and not surprisingly, has started out with a clear head. From his blog:

I'm not interested in people's stories, only their credit grade, debt ratios, and so on -- all the classic criteria.

I know Richard to be firmly grounded in reality, so of course he's not just going to lend to the person with the best narrative. He's going to use proven criteria. The bottom line is, the credit scoring system we have works pretty well. It's not perfect, or else there'd be no need for books by me about repairing your credit. But credit reporting and scoring are not about to be replaced by personal narratives.

Though maybe traditional creditors will give way to more peer-to-peer lenders. I'd like that. While I don't think creditors are evil for using traditional credit reporting, their treatment of their debtors is less than virtuous. I don't expect individuals lending with peer-to-peer websites to completely negate their lending agreements and change fees, terms and interest rates in violation of their signed contracts. We'll leave that sort of thing to Bank of America and the other lenders who aren't on this list.

I look forward to seeing what else Richard has to say about peer to peer lending, and yes, my curiousity is piqued about Zazingo.

Checking in

I've been way too busy for blogging lately, but I wanted to check in just to assure everyone I'm alive.

Here's a story I saw on Drudge that I think everyone should see:
Russian doomsday cult calls credit cards satanic
I didn't know Bank of America gave out credit cards in Russia.

Life after the DMP

There's a dearth of material online advising consumers about life after a Debt Management Plan. That's not a terrible thing; the fact is, living on a DMP for 2-5 years teaches you a lot about personal money management. There's not a lot educators like me can add that will top the experience of living without access to credit for the duration of a plan.

Still, I think we should try to sum up some of the things DMP graduates can expect.

First, there's your credit rating. If you had a history of making late payments going into your DMP, you may have some damage to your score that you may need to work on. The DMP itself will have no effect on your score, so if your payment history prior to credit counseling was solid, you'll now find yourself with a high credit score and without any debt.

That can be a dangerous thing. If you're fresh out of a DMP, your credit score is good, and your debts are paid off, there can be a great temptation to run out and get a new card and max it out. Don't think that you should buy yourself some big-ticket item on credit as a reward for completing your DMP. Your reward is having no debt, period. If you've spent years diligently working to pay down your debts, spend a few more months working to save for the next big purchase you need to make.

That's not to say you should use no credit- it's important to have one credit card and use it responsibly. Just for the sake of your credit, get a low-limit card and use it regularly, making sure you pay it off every month. I usually suggest using the card for gas and nothing else. Then you have a regular history of using your card with out running up so much debt in one month that you can't afford to pay it all off.

If your credit was wrecked going into the DMP, it's not likely to have gotten much better (though it certainly will not have gotten any worse). If you don't qualify for a credit card, save up enough money for a secured card. You won't need more than $500 for this purpose, and then you can get a $250 secured card. Talk to your credit union or bank about their secured credit card products.

Another thing I would ask any DMP graduate to consider is to "stay on the DMP." That is, continue to live on the same tight budget (you survived for the years you were on the plan, right?), and continue to gather your DMP payment. Except instead of sending that DMP payment toward your debts, start putting it toward your retirement. I think this is a crucial thing that credit counselors don't stress enough. When I write about needing to get out of the financial failure business and into the financial success business, that's what I mean. The typical DMP payment would roughly add up to the allowable IRA contribution limit over the course of a year. In addition to building retirement savings, you get a tax advantage that you didn't get when making DMP payments. If your total DMP payments added up to more than $4,000 per year (or whatever your IRA contribution limit is), then you'll have a little bit extra for other expenses.

If you did have a high DMP payment and you have more than the allowable IRA contribution limit, consider using some of that money to make an extra house payment. And if you're not a homeowner yet, then that should be your next savings goal. Save that extra money toward a large down payment.

Whatever you do, don't take the money you were sending to your creditors every month and waste it. Consider a 529 plan for your kids' education, or some other worthy goal. Going on a DMP and working to become debt free was a smart move. When your DMP is complete, don't suddenly get stupid.