Credit/Debt Recovery

Correcting Lifehacker on credit scores

Lifehacker is a very good blog I visit frequently. They often cover credit and credit-reporting issues, but today they got something wrong.

Their post started with "You have the right to see your credit score once a year..." Not true, of course. You can see your credit report for free, but not your score. The commenters on the post were alert and immediately corrected this error, which hasn't been updated in the article itself yet.

In the article, Lifehacker links to annualcreditreport.com, which is the right place to get one's credit report for free, but should absolutely be avoided if you're looking for a credit score. the scores they try to tack on to your report for an additional fee at annualcreditreport.com are FAKO scores, and are useless. If you need your actual credit score (the one with a proven track record that lenders use), you have to go to myfico.com. Avoid buying your score directly from the credit bureaus if you want information of real value.

On the Credit CARD Act of 2009

It's been weeks since this credit card legislation was signed into law, and I haven't been completely sure what I wanted to add to the discussion. On the one hand the law is onerous and will have negative unintended consequences. It already has started having negative consequences, in fact. 

But on the other hand, the intended victim of this new law is the credit card industry, for which I have NO sympathy. So it's hard to really get worked up to rant against a law that puts them in the crosshairs.

The problem is, the law doesn't do the simple things it needed to do, and instead does a bunch of other meaningless things. What we needed out of credit card reform was strict contract enforcement. Creditors need to be compelled by law to abide by their signed contracts with consumers and not be able to change them at will. The new law still lets them revise the credit card agreements on the fly, and only requires that they provide 45 days notice to consumers before they change your terms. That's not good enough. 

Traditionally, the burden is entirely on the consumer. If you get a rate hike or other change in terms that is detrimental to you, you have to take action to cancel the account, by sending snail mail to an address buried in fine print in a seven-page revised credit card agreement. I've advocated that the burden be shifted toward the creditors, by requiring that they get a new signature from their borrowers whenever they revise a credit card agreement. If they can't get one, the account gets cancelled. That's as it should be. 

Instead of a law that protects consumers, we get one that punishes them. The provisions of the law that were intended to rein in credit card lenders are easily passed on to consumers in the form of higher fees, interest, no grace periods, and fewer rewards. In the end, the creditors will be making the same amount of money, because the people who still qualify for credit will be paying a lot more. 

Here's a brief summary of what the law does, if you're curious.

Articles on teaching your children about money

Here are a couple of short articles that offer some good advice for parents who want to help their children become more financially literate:

6 Guiding Principles to Teaching  Your Children About Money

One of the principles mentioned at the above link is establishing an allowance for your children. Here's another article that just deals with handling your kids' allowance:

5 Tips for Your Kids' Allowance

I'd also add that parents should repeat the best advice ever given by a parent to his child: "Neither a borrower nor a lender be." 

I get spam

I spent the morning going through old comments to this blog, and I was amazed at the proportion that is just spam. In the early days, it seemed like the posts were mostly legit, and then a few years in, spam skyrocketed. Then TypePad made some changes and the frequency of spam posts declined for a while.

Currently, and going back for six months or so, the ratio of spam to genuine comments is more than half. I think some genuine comments may have been lost in the process of filtering out all the junk. 

TypePad says they're actively working to filter out as much comment spam as possible, and I believe them. Yet still, the majority of the comments here are spam. At least these days they're thematically accurate; most of the spam I see now is credit-related, and not pharmaceuticals, poker, or pornography. 

At any rate, I don't post to the blog as frequently as I used to, so I don't check the back comments more than once per week or so. If you do leave a comment, I'll get to it eventually; if it never shows up, then it may have inadvertently been thrown out with the spam. 

Oh, and the email address I post here when I comment is an aol.com address, and that means it's 9 to 1 spam, so private correspondence at that address is very likely to be swept out with the trash. So apologies if I haven't responded to something sent via email. The email address I actually use only gets one unsolicited spam email every six months or so. I aim to keep it that way, so I'll never divulge it here. Just keep trying the .aol address if you're trying to send a comment. I check it every day and try to delete all the junk as it comes in.

Have to disagree with Suze on this one

Suze Orman has changed her long-standing advice to pay off high-interest debt first and instead focus on building an emergency fund. In this article, she's quoted as saying "I want you to only pay the minimum due on your credit card balance, and instead, make it your top priority to build as much of an emergency cash fund as you can."

I'm not sure paying the minimums is ever good advice. I understand that people need to be prepared for economic downturns, but I agree with Trent at The Simple Dollar that it's too late to prepare for the crisis we're in at the moment.

Of course you need to build your emergency savings fund, but now isn't the time to be saving every extra penny instead of using it to pay down debt. Holding cash is a kind of investment. And up until now, it's been a relatively stable one. So Suze's advice would have been better ten years ago. But now inflation is coming, and the last thing you want to do is stockpile money at the beginning of an inflationary trend. You'll get to sit there and watch your investment (the savings you've accumulated) become smaller and smaller as your dollars are worth less.

By this token, it's true that your debts are also going to be smaller. Buy a car today and over time your car payments will seem smaller because the money will be worth a little bit less every month. Still, I don't think you want to pay only the minimums. I wouldn't change my basic advice; pay off the debts first, while building a modest emergency fund. Once the debts are gone, then focus on beefing up your savings. 

Another thing Suze says in the article linked above is "The sad reality is that the credit card industry is taking actions to protect themselves with no regard to your needs or how good you have been in paying your bills on time." This is true, and it's all the more reason to stop doing business with them. Pay off the debts, shred the cards, and stop borrowing money from these people.

(Incidentally, it's worth thinking about what the credit card industry is trying to protect themselves from. There's a lesson here about unintended consequences that few will likely take to heart.)

2nd video from FTC

Here's another video from the FTC regarding AnnualCreditReport.com:

Where to get your truly free credit reports

Here's the FTC's new PSA about Annualcreditreport.com:

Not hilarious, but hopefully some people will get the message: freecreditreport.com isn't free. 

By the way, if you do go to AnnualCreditReport.com, DON'T order your credit score. Only get the free credit reports. If you buy your score there, you'll get a worthless FAKO score. For a real credit score, use myFICO.com. 

Bad solutions to real problems

Bernie Sanders, (S-VT), has proposed new legislation limiting consumer loan interest rates to 15% or less. This would include credit cards. 

He proposes this law in response to news that credit card companies are raising rates on all their customers, even the ones who haven't had any late payments. I've complained about that problem on this blog, and was the target of such an interest rate increase recently. 

If you didn't know me very well, you might think that I'd like this proposed bill, since I think these rate increases are a real problem. But this bill misses the mark. 

What credit card borrowers need is contract enforcement, not usury laws. I didn't mind paying 17% on a credit card that I agreed to use. When my rate got increased to 23%, I closed the card and transferred my balance (to a new card with 7.4% interest). I recognize that not everyone can easily get a new card with a better rate, so if the Senate wants to enact a law, they only need to require that credit card lenders honor their original contracts and not raise interest rates unless specifically laid-out circumstances are met (like missed payments leading to penalty rates). 

If creditors want to re-negotiate the original terms of a credit card agreement, they should have to close the account and get a new signed agreement from the borrower. The way it's done now, the credit card rate increases happen automatically unless the borrower objects in writing by sending snail mail to an address buried in fine print. The burden is entirely on the borrower, even when it's the creditor who wants to change the terms of the agreement. 

This new national usury law wouldn't necessarily solve the problem. Yes, it would prevent my rate from going from 17% to 23%. But creditors aren't going to give 15% rate cards to people who are higher risk. That means anyone with low income or marginal credit history would be without any options for credit. Typically, the law will backfire and hurt the poor people it claims to protect. And because this bill would hurt the credtors' bottom line so deeply, it's likely that my current 7.4% rate would shoot up to the 15% allowed by law. So it's hard to see who wins if a law like this one passes. Politicians who want to woo gullible voters, I suppose.

If Senator Sanders really wants to help credit card borrowers, all he needs to do is make sure the creditors abide by their original, signed contracts. Beyond that, it should be up to us whether we want to borrow from credit card companies at usurious rates. 

Peter Schiff on Credit Cards

If you don't know who Peter Schiff is, you might want to spend some time searching for him on YouTube. He was the one guy who was right about the economy, and he went on cable tv regularly warning people about the crisis well before anyone else saw the signs. 

He faced repeated ridicule in 2006 and 2007 when he went on television to debate these issues, but he is the only one whose views were borne out by the events that followed.

I set this up so readers will understand that what Schiff writes should be taken seriously. This weekend he wrote this column, about credit cards.

From the first paragraph:

Savings, not credit, is the lifeblood of a healthy economy. When not used properly credit can be like a cancer that sickens an otherwise healthy economy.

Read the rest and remember that anyone who suggests credit should be used as a substitute for income is setting you up for disaster. Schiff is right when he says "Americans should be saving for a rainy day, not adopting the attitude that if it rains I'll whip out my credit card."

VideoCreditScore.com will teach you about your credit scores

If you're interested in getting more information about your all-important FICO® credit score, check out VideoCreditScore.com.

The site is run by a former FICO® exec, and he's really great at boiling things down to the essential basics. This is the place to get the truth about credit scoring and what you need to know about it.

Interestingly, one of the myths he dispels about credit scoring is that paying off highest-interest credit cards first is good for your score. I hadn't actually heard of that myth, but he explains that in the short term, you should pay off the highest utilized cards first, rather than the ones with the highest interest rates. That makes sense, if you're aim is to improve your score. I personally counsel readers to pay off the highest interest rate cards first because that makes the most sense financially, but if you need to improve your credit score in the short term, try to pay down the most utilized cards first.

Check out the videos on his site for more information about this and other credit score related topics.