Credit/Debt Recovery

Reading the fine print

On the heels of yesterday's rant, I got a credit card offer that is so loaded with fees it's comical.

It's for a Mastercard from Premier Bank. The APR is 9.9% (Which I've said is the threshold of acceptable) and the penalty rates are 19.9%.

Good news first; I can't find anything about universal default anywhere on the disclosures. I have to conclude that they don't do this.

The card has a minimum credit limit of $250 to start.

Bad news:
There's an arbitration clause. That means when they jerk you around with fees for services you never requested and grant you unwanted credit limit increases (for a $25 fee each time), you can't sue them. You have to enter into arbitration if there's any dispute related to your account. This includes class actions, which this credit card company is begging for. The arbitration clause applies to the credit card company as well, except when it comes to collection activities on your account. They still get to sue you then.

Also, they disclose in the fine print that they fully intend to share your name and address with marketing companies and "persons or entities related to the bank by common ownership or corporate control," whatever that means.

Now, let's look at fees.

To start the account, one would pay the following fees:
Annual fee: $48
Account set up fee: $29
Program fee: $95
Participation fee: $72
That's $244 so far.

Optional fees:
Order a 2nd credit card, that's another $20 fee.
Monthly account maintenance fee of $3.
Internet access fee of $3.95
Late fees: $25
Overlimit fee: $25
Credit limit increase fee: $25 (assessed automatically every 6 months, at which time you have 30 days to request in writing that they refund the fee and return your credit limit to where it was)

I wouldn't recommend this card to my worst enemy.

So, is this credit card company EVIL?

No. They're heartless. They're not capable of evil, because they're not a person, they're a corporation. Corporations aren't people, despite our legal system's extension of civil rights to them. Their goal is to take as much of your money as possible while providing the least possible benefit to you that you will allow.

Understand that, and keep these companies as far from you as you can. Don't anthropomorphize them. Giving them characteristics like "evil" buys into the mentality that corporations are like people and therefore deserving of the same rights as you and me, and that's flawed thinking. Thinking of them as monsters doesn't get you anywhere. Recognize your role in the marketing transaction and ignore their attempts to make you their debtor.

The lesson here is: 1.)Read the fine print. If they are anything like this creditor, don't do business with them. 2.) Shred any unsolicited credit card offers you get. Ditto to any checks from credit card companies that constitute a loan you have to repay (that is, the only check I'd cash from a credit card company is a refund check... not that you'll see those very often). 3.) Opt out. The only reason I still get these offers is I haven't opted out deliberately; partly for the sake of this blog, partly to keep me aware of the practices of the credit industry. I honestly wouldn't have believed some of the fees on this credit card if I hadn't seen the application myself.

OPT OUT of pre-screened credit offers by calling 1.888.567.8688. Please do it today if you haven't already.

Interesting Film

I recently watched "Brainwashing 101," a short film hosted by academicbias.com.

One of the things I found interesting was an interview with an economics major who says he's been assigned Marx, but never assigned Hayek, Mises, or Friedman. It occurs to me the that the pervasive influence of Marxism/Marxian Economics on college economics departments is responsible for a lot of misconceptions I keep seeing in the media.

For one thing, the Labor Theory of Value is widely accepted in our society, even though it's completely wrong.

(Don't want to start a flamewar with that, but I'm right. Even my fellow former Bobcat Kate Bingaman, who may disagree with me politically here, would have to agree that LTV doesn't apply to her. She can grab an old piece of paper and a broken crayon from my trash and create a work of art with it in a few minutes. Does that mean that piece of art is worthless? No. Stephen King and I might spend the same amount of time and effort writing books, but should a publisher pay me the same thing they pay him? No. The amount of labor that goes into creating something has nothing to do with its value.)

I've said here that I don't like to get into heady economic theory or politics if I can help it; I prefer to stick to information that can help consumers make sense of their debt and the large industry that has sprung up to help them deal with it.

So what's my point here? The price for something isn't determined by the amount of labor that went into it, or the cost of production. The price for goods are determined by what people will pay. "Brainwashing 101" confirms that you won't hear that theory in college classrooms around the country, so a whole generation of Americans accepts Marxian theory without realizing they're getting it wrong.

Great works of art are worth more than anything I produced as an art minor in college, because people are willing to pay more for them. Your credit card fees and interest rates are where they are because the market will bear them.

The point is, we can't get better interest rates and lower fees by calling the credit card companies greedy. Of course they're greedy. Their greed is the only reason they loan us money in the first place. If we want to show creditors that they have gone too far with their universal default policies and excessive fees, we have to show them that the market won't bear it. We have to take our business elsewhere. I'm saying we should stop using credit cards that gouge us. Stop charging! Find new cards with better terms and transfer your balances.

If we all toughen up and resolve to live without credit, lenders will have to change the way they do business in a way that benefits us. That's the only way for consumers to win. "Consumer advocates" can continue to blame creditors for all the debt in the world and blame credit card marketing for the rising bankruptcy rate, but pointing the finger isn't helping anyone beat their debt or avoid falling prey to abusive fees and punitive interest rates. We have to change, people. All of us.

RYCAKOYD at the Brooklyn Library

I can't believe it's almost Fall and I'm just now discovering this. The book Thom Fox & I wrote, Repair Your Credit and Knock Out Your Debt made the "New Year's Resolution Reading List" of the Brooklyn Public Library. (And 8 out of 10 copies are checked out right now! Woot!)

I'm pleased that this may help more people learn to manage their money better and improve their credit without committing fraud or cheating the system. And hopefully, reading the book will help those people avoid needing a credit counselor, debt settlement negotiator, or bankruptcy attorney. That's the 2nd goal.

AOL fined for customer service practices.... what it has to do with credit

AOL has agreed to pay a fine and change its customer service practices, according to this story. If you've seen that my email address is Shaxpeer@aolDOTcom, then you know I'm a subscriber, and yeah, I've had my share of problems with them over the years, like a lot of their customers.

The problem here is that AOL makes it next to impossible to unsubscribe from their service. You have to get very lucky to find their 800 number in the first place, then endure unrelenting attempts by their phone reps to get you to reconsider cancelling (apparently they gave bonuses in the "tens of thousands" of dollars to reps who had a high rate of retention in such cases).

Now these practices have bitten them with a 1.25 million dollar fine and yeah, a)it's yet another B.S. Eliot "Vote Spitzer for Governor" Spitzer lawsuit against a big business and b)1.25 million dollars is less than negligible for AOL, but this is part of a larger movement to end deceptive and unfair business practices by large companies.

Now, what's this have to do with the subject of this blog? I received a call from my credit card company recently, asking if I wanted to sign up for their credit protection plan. Working in the industry as I do, I know that credit protection plans are completely worthless, despite anything your credit card company tells you. There is no reason to sign up for credit protection plans. Don't do it. Ever. If you have one, call and cancel now. Do it now!

Now, I decided to use myself as an experiment for the sake of this blog, and I agreed to the credit protection plan. After one month, I called to cancel. I told the rep I had seen numerous complaints online about the service, including complaints about how difficult it was to cancel the service.

I wish I'd recorded the call. The guy simply would not let me cancel. He kept slicing of bits and pieces of the service here and there, reducing the price of the plan, but simply wouldn't entertain the thought of letting me actually cancel. It was worse than I could have imaged it would be. I finally gave up and got off the phone.

So I'm just going to pay off the balance and cancel the card. And when I call to cancel, I'm going to tell them exactly why; because of the way they handle their credit protection plan. (The truth is, I figured that once I signed up for the service, I'd never be able to get rid of it anyway. Even if I managed to successfully cancel, that service has a disturbing tendency to just show back up on one's account later with this particular CC company. And since that card is 16.99% APR and I know I can do better, I planned to get a card from someone else anyway.)

So let's see if Eliot "Mr. Ambition" Spitzer sues this credit card company for the same violations as AOL. We'll see. This particular CC company is the biggest campaign contributor in Washington, so I doubt we'll see that kind of action against them. But I can always blog about them and expose their shenanegans.

And remember this: YOU DO NOT NEED A CREDIT PROTECTION PLAN. Even if you do run into a situation where you could use something like this, the company will get out of paying it anyway. It's just like insurance: their job is to avoid paying claims. I looked over the contract pretty closely, and they've left themselves all the loopholes they need to dodge their responsibility. Get to a point where you are paying your balances off in full every month and this won't even be an issue for you.

Counseling vs. Settlements vs Consolidation vs Bankruptcy

Yestday I said I'd compare these 4 primary methods of debt recovery. My analysis is generalized, and may even be off the mark; we'll see what feedback I get. Of course there are specific examples of people who may enter into credit counseling and come out worse off in terms of their credit rating, but I maintain that will always be because the client had too many late or missed payments and not because of the Debt Management Plan itself.

Negative Impact on One's Credit
Bankruptcy -Extremely high
Debt Settlements - Moderately high
Credit Counseling - Low to none
Debt Consolidation - Low to none

Cost To the Consumer
Bankruptcy - Lowest
Debt Settlements - Low
Credit Counseling - High
Debt Consolidation - High

Seeing a trend here? The more of your original debt you pay off, the more it costs you and the better your credit looks afterward. There's nothing complicated about it, really. It's sad that so many in this industry have to lie and create straw men out of the methods they don't employ. The truth is, any of these methods could be right for a given consumer. It takes an honest debt recovery professional to tell a consumer the right solution for them.

This category is most important to me:
Financial literacy/Money Management education offered
Credit Counseling - High
Debt Settlements - Little to none
Debt Consolidation - None
Bankruptcy - None

I know there are debt settlement operators who probably do offer some financial literacy help, but in my experience there aren't that many; and the ones who have crowed the loudest about all of their financial education offerings have really had very little to offer in the first place.

Now, after BK reform, that category may look like this:
Financial literacy/Money Management education offered
Bankruptcy - Very High
Credit Counseling - High
Debt Settlements - Little to none
Debt Consolidation - None

That's the one big reason I supported bankruptcy reform. We'll see how it works out later this fall.

Shills

I found a large credit/debt services blog that's basically a clearinghouse for professional debt negotiators and counselors to post thinly veiled ads for their own services under the guise of offering debt advice to consumers.

I think it's disingenuous of them, especially the non-profit debt help types, to offer misleading information to consumers to boost their own business.

One blog post in particular got my goat, because it said so many things that directly contradict reality.

Of Consumer Credit Counseling, they said "using this service can have negative effects on your credit that last up to 10 years." Even the harshest critics of credit counseling can't say this and remain intellectually honest. I've said here repeatedly that your FICO score will not be affected by participation in a Debt Management Plan. DMP graduates may have credit problems, but that's because they had credit problems going in to the DMP. Paying off the debts involved in a DMP goes a long way toward correcting those credit problems, and if one successfully completes a DMP, there's NO WAY there will be negative effects that lat 10 years. That part's just a lie.

Now, I worked for a credit counselor, and I'm not ashamed to say I support them 100%. But I don't feel it's necessary to lie to consumers to help drum up business. I've always said, there are enough people in genuine need of credit counseling services that there's no reason for CCAs to recruit people who don't need the help. I've also said (and the CCA I worked for has always practiced this) that no one debt solution is right for every consumer. Some will benefit from a DMP, some from Settlements, and others may just need to file Bankruptcy. This blog post that got me upset was written by a debt settlement operator who suggests settlements are the only worthwhile option.

Moving on, he writes of Debt Consolitation Loans: "this may sound like a good solution; however, it can damage your credit and cause you to pay back far more than if you had selected a debt settlement or debt arbitration program." This is CRAZY. A debt consolidation loan can damage your credit, but a debt settlement won't? The truth is, consolidation loans are a great way to pay off debt if you can get them. Of all the debt recovery options, a consolidation loan will damage your credit the least.

They have their downsides, of course. If you wipe out your unsecured debt with a consolidation loan (and, say, shift it to your mortgage loan) and then run up more credit card debt, you can be in serious trouble. If you're not prepared to be disciplined about borrowing, you can end up losing your home. If you can get by without borrowing (and I'm convinced that with some commitment, any consumer can) then a consolidation loan can be the best option.

The truth is, credit counselors and debt settlement negotiators hate the home refinancing wave. It's severely hurt them, as the option to refi has allowed countless consumers to get out of debt without needing the services of the debt recovery industry. For many of those consumers, the story ends there, happily. But some of them (it's not clear to me how many) will find themselves knee-deep in debt once again, and without the refi option to bail them out a second time. They will have to consider other solutions the next time around. (And they'd better learn to manage their finances better and get off the cycle of debt.)

He also says it's not a good idea to exchange unsecured debts for secured debts. That's essentially what one is doing with most consolidation loans. But really, why shouldn't one do this? Because of bankruptcy. Unsecured debts can be wiped out in BK if it comes to that. Secured debts won't, generally, without surrendering the collateral. Bankruptcy is to be avoided, right? Well all say that in this industry. So what's wrong with converting unsecured debts? Anyhow, he correctly identifies bankruptcy as "an absolute last resort." One thing we can agree on.

Finally, he offers the golden cadillac: Debt Settlements. "Debt Settlement is fast becoming the only true option to financial recovery!" Give me a break. This is the ad copy he writes in a supposed blog post.

DS is a good option for some consumers. It certainly costs far less than any other option, except for bankruptcy. It also hurts your credit more than any other option except for bankruptcy. Consumers can make a resoned decision about how much credit damage they are willing to take in exchange for massive savings on one's debts. There's nothing wrong with that, but let's be honest about it. And there are some debt settlement operators out there who are honest; if you can find one to give you good advice, they can help you find out which option is right for you.

I'm going to try to compare these services over the next week and give some honest perspective of the pros and cons of each.

NYTimes on the "Rush to Bankruptcy"

This post at Donald Luskin's blog exposes a NYTimes article about BK reform.

I am not really in favor of the new bankruptcy law, but found a New York Times story today -- "Debtors in Rush to Bankruptcy as Change Nears" -- odd. I find it odd because none of the people in the story whose financial info is revealed actually make more than the median income, and thus they would not be materially affected by the new law changes in October. It seems either the fact the bill screws the middle class isn't good enough for the Times so they have to make it seem like it screws the lower class as well or the reporter was too stupid to know that the people in the article who were "rushing to file" were rushing for no reason. (Bryan Arledge)

The thing that jumps out at me in the article is the suggestion that BK attorneys are surprised by the rise in filings. Everyone in the industry saw this coming, so I don't know where they're getting that.

Also bear in mind my last post here. Yeah, BK filings are up, but are they as high as was predicted? I guess the only thing that proves is economists don't know where anything's going until well after it gets there.

Bankruptcy rates not as high as expected

This article says that while bankruptcy rates in Arizona are higher than previous years, they're not as high as expected in the wake of the BAPCPA of 2005.

There was a double-digit increase in BK filings the month after BAPCPA was signed, but it's come down from that, rather than rise as most experts predicted.

What's up, Arizona? Don't you know we're all DOOOOOMMMED? The sky is falling! The sky is falling! BK, BK! File now!

Ahem. The article does say something important about the home refinancing wave; namely, that if you refinanced your way out of debt, you're DOOOOOOOOMMMMED! Well, they don't put it that way exactly, but that's the gist. And it's all that blasted BAPCPA's fault.

Why Universal Default Must Be Stopped

Here's a story that shows the worst-case scenario for universal default. A consumer's creditors lost one of her payments and reported her as late, which dinged her credit score and earned her a higher interest rate from one of her other creditors.

These days, creditors seem to have a hair-trigger on your interest rates. Congress is poised to stop the odious universal default practice with the proposed "Consumer Credit Card Protection Act of 2005."

The linked article offers some advice I like: close the account. If your rate is jacked unfairly by a creditor, transfer the balance and close the account. That'll teach 'em.

Compulsive Shopper?

Saw this article about compulsive shopping referenced over at Obsessive Consumption. (Happy Birthday, Kate!)

You might think I would weigh in on compulsive shopping as a matter of debt recovery, but I think it's a waste of time, for various reasons:

1. Compulsive shopping isn't a financial issue; it's a behavior problem. This is a serious disorder that requires the treatment of a professional counselor. No amount of budgeting advice will make a compulsive shopping problem go away.

2. True compulsive shoppers are rare. Really. Way more rare than the media suggests, and certainly more rare than the CNN.com article would have us believe. (8% of the US population? I don't think so.)

3. I'm not sure I buy it (no pun intended). Yeah, there are some truly sick people who shop too much as part of some honest-to-god disorder, but most people who shop too much are just that: people who shop too much.

We just live in a society with lots of leisure time, a strong economy, and lots of stuff to buy. (Just like we live in a country with an overabundance of food and remote controls... thus we have an obesity epidemic. Doesn't mean all of us big people are compulsive eaters.)

Look at the warning signs CNN offers:

1. You get a rush from shopping.
2. You buy items you don't need.
3. You keep purchases secret.
4. You buy with money earmarked for bills.
5. You feel guilty and ashamed.

I've done four of the five things on that list. But trust me, I'm no compulsive shopper.

Compulsive shopping is a serious matter for those few individuals who truly suffer from it; but almost all excessive shopping is impulsive, not compulsive.

There's a better analysis of "spending personalities" here along with a quiz that can help you assess your own spending habits.