Paying Off Debts Does Not Erase Them

One of the more common misconceptions in the world of credit reporting is that once an item is closed or paid in full, it is removed from your credit files.  This is, of course, incorrect.  Paying off an installment loan, selling a car or home, closing a credit card, paying off a collection, and satisfying a judgment or a tax lien are all ways to exhaust their balance and your obligation to the lender.  And in every case above, your credit reports should reflect the fact that the obligation has been satisfied.  But in most cases the reporting of the item will continue long after the balance has been satisfied.

This is actually good news in most cases.  You don't want good account information to come off of your credit reports.  Old car loans, old mortgages, old credit cards – these are the types of accounts you want on your credit reports.  They serve several purposes.  First, they help to show that you have a long and old history of properly managing several types of loan obligations.  And second, they help to offset any negative impact "bad" items may be having on your credit reputation.

The next time you take a look at your credit reports, grab a highlighter.  Now, strike through every single obligation that has been satisfied.  What most of you will be left with is an empty highlighter and a very short and young credit history, and that's not a good thing.  In fact, credit scoring systems reward you for having a lot of old and positive credit obligations.  This is why you should never argue with the credit reporting agencies about removing old good accounts;  that would be shooting yourself in the foot.

Of course, this cuts two ways.  When you pay off collections or satisfy any of the other possible negative credit obligations, that doesn't mean they will be removed.  Again, the credit reporting agencies are well within their rights to maintain that information as long as it's accurate and isn't older than its prescribed reporting statute of limitations, which in most cases is 7 years, but there are exceptions.  Bankruptcies, for example, can stay on longer than 7 years.

So if you don't want something on your credit report, it's easier to simply avoid the obligations altogether rather than attempting to get it removed simply by paying it.  This is applicable more so to things like collections and late payments.  Those are easier to avoid than they are to remove once they're on your files.  But please, stop trying to get those old car loans off of your credit reports.  Once they're gone, they're gone permanently.

 

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

What Will the DOJ Lawsuit Do for You?

Retailers are no doubt popping open the champagne to celebrate the Department of Justice’s settlement of a lawsuit challenging rules that American Express, MasterCard and Visa have in place to ”prevent merchants from offering consumers discounts, rewards and information about card costs, ultimately resulting in consumers paying more for their purchases.”

Merchants have been complaining for years that the fees they pay the credit card companies every time they accept a credit card are too high. These interchange fees amounted to about $35 billion last year. Merchants have filed numerous lawsuits alleging “price fixing,” among other things, over the years, and there have been various attempts to regulate the industry through legislation. For the most part they have been unsuccessful, though the “Walmart case” and the recent “Durbin Amendment” in the Wall Street Reform legislation both opened the door to lower debit card transaction fees. But the rules for credit card purchases remained pretty much untouched.

This settlement changes that. According to a DOJ press release, the proposed settlement requires MasterCard and Visa to allow their merchants to:

• Offer consumers an immediate discount or rebate or a free or discounted product or service for using a particular credit card network, low-cost card within that network or other form of payment;

• Express a preference for the use of a particular credit card network, low-cost card within that network or other form of payment;

• Promote a particular credit card network, low-cost card within that network or other form of payment through posted information or other communications to consumers; and

• Communicate to consumers the cost incurred by the merchant when a consumer uses a particular credit card network, type of card within that network, or other form of payment.

So what does this really mean for consumers? We don’t know yet, but I see a number of possible outcomes:

Lower Prices at the Cash Register

Merchants have long maintained that interchange fees are a “hidden tax” on consumers, and that if they were lower, they could pass along the savings by lowering prices. Of course, the savings could also be used to bolster balance sheets and increase shareholder value. However, it is possible you’ll start seeing promotions, discounts or rewards from merchants who want to encourage consumers to use particular cards.

I am not getting too worked up over this yet. The reason businesses accept cards in the first place is that they want to make sure as many customers as possible can buy their products and services. That won’t change. And pinpointing certain cards for discounts may not be as easy as it sounds. As a paper by the Kansas City Fed pointed out, "In reality, merchants do not know their own fee level of a particular transaction due to the complex interchange/merchant fee structures."

Merchants will have to walk a fine line between encouraging the behavior they want from customers without driving away business.

Higher Rates and Fees

The industry has warned that lower interchange will result in higher costs to consumers. That, too, remains to be seen. In a report for the Minneapolis Fed, James M. Lyon noted that after interchange fees were lowered in other countries, some consumers experienced higher annual fees (in Australia and Spain), shorter grace periods and less generous rewards programs (in Australia). He also noted, though, that when interchange fees were lowered in the U.K. “both annual fees and introductory rates remain relatively low.”

This one does concern me. Keep in mind that this action is coming on top of the CARD Act, and on the heels of the so-called Durbin Amendment that will lower interchange fees on debit cards. Card issuers and the card companies have already seen some of their most lucrative revenue streams slow down or dry up, so it’s not a stretch to imagine this will put further pressure on them to come up with other ways to make up for that lost income.

Reduced Rewards Programs

Convenience users, those who pay their bills in full each month, are largely subsidized by interchange revenue, a portion of makes its way back to card issuers. That’s why card issuers try so hard to get their customers to use their cards often. More purchases mean more interchange revenue. So it’s not a stretch to conclude that lower interchange revenue could make these cards less profitable, and possibly less attractive to card issuers, which in turn could mean higher fees. Keep in mind that issuers are not allowed to charge inactivity fees – including annual fees for consumers who don’t reach a certain spending threshold. So issuers will have to either focus on incentives that drive volume larger for these cards, or consider other pricing structures.

Wider Acceptance

When I shop at Sam’s Club, I have to either used a PIN based debit card, cash or a Discover Card. Could this change mean wider acceptance among discount clubs like Sam’s – or smaller retailers – who have shied away from accepting credit cards in the past? It’s conjecture on my part, but since I am speculating anyway, I might as well throw this possible outcome into the mix.

There is no question that something had to give here. Business owners have a legitimate reason to revel in this victory. But for consumers, whether this will ultimately prove to be a boon is less clear.

Photo credit: iStockphoto

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights.

Circumstances that Entitle You to a Free Credit Report

Thanks to federal law, everyone in the U.S is entitled to a free copy of their credit reports once per year from every credit-reporting agency. These freebies can be claimed at www.annualcreditreport.com.

According to the Consumer Data Industry Association, over 150,000,000 free credit reports have been claimed from this site since its inception in 2003. But did you know there are many more opportunities for you to claim free copies of your credit reports, which pre-date the annual freebie requirement?

The following is a list of other reasons why you’d be entitled to additional free credit reports. These credit reports must be claimed at each credit bureau directly, not via the annualcreditreport.com site. Because of state law – the free annual credit report requirement is a federal requirement, as stated above. But if you live in Georgia, Colorado, Maine, Maryland, Massachusetts, New Jersey or Vermont, state law allows for one additional free credit report (2 if you live in Georgia).

Because You’re on Welfare – You are entitled to a free credit report once per any 12-month period if you are on welfare assistance.

Because You’ve Been a Victim of Fraud – If you believe your credit report contains erroneous information because you’ve been the victim of fraud, then you are entitled to a free credit report during any 12-month period.

Because You’ve Received a Notice of Adverse Action – If you’ve been denied (or adversely approved) because of your credit then you are always entitled to a free copy of your report. And by July 2011, you’ll also get to see your credit score as part of the adverse action disclosure.

Because You’re Seeking Employment – You are always entitled to a free credit report if you’re unemployed and are actively, or will soon be, seeking employment.

Because You’ve Placed a Fraud Alert on Your Credit File – If you’ve been the victim of fraud you can place an alert on your credit file. When you place this alert you can also request a free copy of your credit file.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

The Latest Verdict on the American Dream

It's no surprise that consumers are skeptical about whether buying home is a safe investment in the midst of the mortgage crisis, and a recent survey by Fannie Mae released this month confirms that. But while the American Dream has faded, it's not yet dead.

An overwhelming majority – 83 percent – believed in 2003 that homeownership was safe. That dropped to 70 percent in January 2010. In June of this year it dropped again to 67 percent, the lowest level of confidence ever recorded according the report.

The popularity of homeownership is even lower among potential first-time buyers. Among renters surveyed, 54 percent believe that buying a home is safe.

Growing uncertainty about the risks of homeownership may be slowing purchases. Even though 70 percent of respondents believe that low prices and interest rates make this a good time to buy a home, 33 percent said they’re more likely to rent than to buy a house, up from 30 percent in January. With only 70 percent of respondents believing that the economy is on the right track, one-fifth of all renters surveyed said they recently delayed plans to buy a home.

Among renters who say they would rather buy, 63 percent said they plan to buy a home in the future. That represents a four-percent drop since January.

Such reluctance means that more families “are paying down debt and putting their financial house in order,” Douglas Duncan, Fannie Mae’s chief economist, told the Wall Street Journal. Just over a quarter of current homeowners said they have significantly reduced their mortgage debt over the past year.

The report was not entirely a downer. Consumer confidence may be resurging – 70 percent of respondents said that now is a good time to buy, up from 64 percent in the beginning of the year. And 84 percent agreed that buying makes more financial sense than renting.

But many people doubt their ability to take advantage of the market. Just over half of homeowners said it would be more difficult for them to obtain a mortgage today. Seven in ten believe it will be even harder for future generations to get loans.

Attitudes may be changing slightly toward people who walk away from their homes. Only ten percent of survey takers believe that it’s acceptable to stop making payments on an underwater mortgage. That’s up from eight percent in January.

Photo credit: http://www.flickr.com/photos/billjacobus1/125058134/

 

Chris Maag is a freelance journalist for publications including The New York Times, TIME magazine and Popular Mechanics. He graduated with honors from the Columbia University Graduate School of Journalism, and has worked as a staff writer for daily newspapers, monthly magazines, alt weeklies and websites. Maag writes about people with big dreams set on little stages, including a teenage girl who races jet-powered tractors, and people who make millions of dollars impersonating Barack Obama.

Your Electric Bill: Read it and Reap (the Savings)

If you were listening to Stephanie Penn Spear give a presentation about saving power right now, she would ask you this question: “How many kilowatt hours of electricity do you use in your home each month?” Typically, Stephanie says, she sees only one or two hands. (That’s okay. Mine wasn’t one of them, either.)

What Stephanie instructs during her talks at schools and organizations throughout Ohio is, basically, don’t just pay your electric bill, read it.

“What you’re going to find is that your electricity bill is extremely easy to read and very informative,” says Stephanie.

Last year, she launched an alternative energy consulting firm, Expedite Renewable Energy, which assists companies who want to explore solar or wind turbine energy sources. Her newsletter, EcoWatch Journal, has a readership of more than 100,000 including online.

Three years ago, Stephanie decided to see how much power she was using.

A quick scan of her electric bill revealed her average monthly usage of 750 kW per hour per month. (She dug the dandy little bar chart that provided a graphic depiction of the year’s usage, too.) Researching the monthly numbers for a 2,000-square-foot home such as hers, she found the average was between 850 and 1200 kW hours. Stephanie, being Stephanie, wanted to do even better.

A quick assessment led to several changes: She plugged her television and office equipment into power strips that turn on or off as necessary, instead of leaving everything in standby mode, which still draws power from the grid. When at her computer, she only turned on her printer or speakers when she was actually using them. Same with lights. She bought an Energy Saver washer and dryer set. She converted her incandescent bulbs into contact fluorescent bulbs.

Stephanie looked forward to getting her bill to see the reductions. She ended up cutting her total usage by more than half to 320 kW hours, which resulted in a $40 monthly savings.

She also figured out an ingenious way to get kids to buy in. She tells students to assure their parents that they can save them a lot of money every month on one condition: they have to commit the first money saved to buying an iPod or video game or tickets to see a Paramore concert (or whatev) within reason. After enough money is saved to pay the child’s “consulting fee,” the parents fully enjoy the savings for themselves.

Now the valiant among you will volunteer to teach this lesson. In return, you will receive a fourfold reward: Save power. Shorten your carbon footprint. Save money. Surprise (and edify) your kids.

Christopher Johnston has written for American Theatre, Cleveland, Continental, Crain’s Cleveland Business, Editor & Publisher, The Plain Dealer, Progressive Architecture and Urban Design, and Scientific American, among other publications. He is currently writing a biography of Frederick C. Crawford, founding chairman of TRW Inc. As an avocation, he is a playwright and director, and this December, his play APORKALYPSE! will premier at convergence-continuum theatre in Cleveland.

Infographic: Where Your Mortgage Goes After You Sign Your Name

 

Most homeowners have their story – often a harrowing one – on the grueling process of getting a mortgage.  For them, the story's over once they sign the papers and get the money.  But that's just the beginning of a sometimes long and winding journey for the mortgage.

Today, Credit.com (with thanks to Loans by CreditLoan.com) takes a look at the many hands a mortgage passes through once the ink on the borrower's signature dries.

Also, we take a look at the federal government's failing Home Affordable Modification Program (HAMP), which was meant to “support a recovery in the housing market,” and “help up to 3 to 4 million at-risk homeowners avoid foreclosure,” according to the U.S. Treasury Department [pdf], by allowing borrowers to re-negotiate the balance on their mortgage, and lower their monthly payments.  The Wall Street Journal reports that "Overall, around half of the 1.3 million borrowers put in trial modifications since June 2009 have had their modifications canceled."

New Debt Relief Rules Take Effect Sept 27, 2010

Starting Monday, you may not hear as many of those annoying ads promising you can “settle debts for pennies on the dollar,” or pitching a “government bailout program” for consumers with credit card debt.

That’s when the FTC’s new “Debt Relief Rule” goes into effect. Here are the key protections it offers:

Upfront Disclosures

Proposed Fees must be disclosed along with refund policies. Guestimates or ranges (“as little as”) don’t count. Instead, the proposed fees must be must be based on results the firm expects to get based on experiences with that consumer’s individual creditors.

Estimated Time Frame: Debtors must be given a good faith estimate describing how long it is likely to take to settle their debts based on their debts, and their ability to save money to settle.

Savings Required: Firms must estimate how much money prospective clients will have to save up in order to settle. Again, this has to be based on what kinds of settlements creditors are actually accepting. 

The Downside: Consumers must be given warnings that include the likely damage to their credit reports, the potential risk of lawsuits, and possible tax consequences.

Truthful Advertising

This is the part that should stop those misleading ads. Claims about how much money consumers can save must be based on the firm’s actual experience with all clients, not just the “best” examples. That means they have to include clients who dropped out when calculating success rates. And firms must subtract out fees from promised savings.
 
Dedicated Savings Accounts

With settlement, consumers typically stop paying their debts, then put that money into a savings account. If the debt relief company directs clients to save money in a “dedicated account,” those accounts must be maintained at an insured financial institution (for example, an FDIC-insured bank); clients must have total control over the money and the ability to withdraw it at any time, and the debt relief company can’t receive or pay referral fees from or to the company that administers the account.

Upfront fees will be banned October 27, 2010.

You'll find more details in our Consumer Guide to FTC Rules, and you can use our revised guide, Fourteen Questions to Ask a Debt Settlement Company to help you choose a debt negotiation company.

I am no so naïve as to think that this will weed out all the bad actors. After all, fourteen years ago this month the President signed the Credit Repair Organizations Act to stop fraudulent credit repair schemes, yet state and federal regulators are still cracking down on credit repair scams.

But this isn’t a bad starting point at all. 

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights.

Consumers, a New Watchdog has Arrived

Within hours of going to work at the White House, Elizabeth Warren put Wall Street on notice.

“The time for hiding tricks and traps in the fine print is over,” she wrote in a blog post. “People ought to be able to read their credit card and mortgage contracts and know the deal. They shouldn't learn about an unfair rule or practice only when it bites them.”

Last week President Obama named Warren as his special adviser in charge of the Consumer Financial Protection Bureau, a new federal agency inside the Federal Reserve with power to mandate better disclosure and more consumer-friendly products from banks, credit card companies and payday lenders.

The fact that Warren was named special assistant, instead of director of the bureau, points to the controversy that surrounds her. In no less a public forum than the Wall Street Journal editorial page, she has accused big banks of selling “deceptive mortgages for more than a decade” and perpetuating a “massive looting from middle-class families.”

Such frank talk made Warren a darling of liberals and consumer advocates. But it enraged Republicans and bank leaders. It also repelled powerful Democrats including Chris Dodd, chairman of the Senate Banking Committee. Fearing a prolonged fight over her nomination to become director, the Obama administration opted instead to name her to an advisory role that does not require Senate confirmation.

In her first public appearance as special advisor, Warren announced the bureau would create a standard, simplified mortgage disclosure form, which federal regulators have for years tried – and failed – to accomplish.

 

Chris Maag is a freelance journalist for publications including The New York Times, TIME magazine and Popular Mechanics. He graduated with honors from the Columbia University Graduate School of Journalism, and has worked as a staff writer for daily newspapers, monthly magazines, alt weeklies and websites. Maag writes about people with big dreams set on little stages, including a teenage girl who races jet-powered tractors, and people who make millions of dollars impersonating Barack Obama.

Recession is Over ... if You Want It?

We’ve heard of “jobless recoveries.” Now the U.S. is stuck in a job-killing recovery.

The Great Recession of 2007 ended in June 2009, according to a group of experts. But in the 15 months since then, the U.S. economy shed another 329,000 jobs. That leaves many Americans doubting the news.

“Is anyone really buying this?” one reader commented on the Los Angeles Times website in response to the news. “The recession is over? Yeah, right.”

The announcement comes from the National Bureau of Economic Research, a nonprofit group that is the Federal government’s official source for reporting macroeconomic trends including Gross Domestic Product.

When calculating a recession’s end date, the bureau considers things like industrial production and total economic output, both of which began a slow rebound in June 2009. The study does not consider unemployment, which remains at 9.6 percent.

Nor does the announcement mean that the economy regained the strength it had before the downturn began. Robert Hall, an economics professor at Stanford University who served on the committee, tracked online reactions to the report.

“At least half of them excoriate us for saying that the recession is over,” Hall told the L.A. Times. “But we are only saying that things started to get better in June 2009, not that times are good.”

Like many Americans, committee members agreed that this just doesn’t feel like a recovery.

“What’s really unique about this recession is the amount of unemployment in combination with the slowness of the recovery,” Robert J. Gordon, an economist at Northwestern University, told The New York Times. “That’s just not happened before.”

 

Chris Maag is a freelance journalist for publications including The New York Times, TIME magazine and Popular Mechanics. He graduated with honors from the Columbia University Graduate School of Journalism, and has worked as a staff writer for daily newspapers, monthly magazines, alt weeklies and websites. Maag writes about people with big dreams set on little stages, including a teenage girl who races jet-powered tractors, and people who make millions of dollars impersonating Barack Obama.

How Becoming a Stoic Can Make You Happy

Merriam-Webster defines a Stoic as "a member of a school of philosophy founded by Zeno of Citium about 300 b.c. holding that the wise man should be free from passion, unmoved by joy or grief, and submissive to natural law."

After reading A Guide to the Good Life: The Ancient Art of Stoic Joy, by William B. Irvine, I would say that this definition, while sort-of correct, really misses the point of Stoicism. Irvine makes a convincing case that the ancient Stoics, far from being humorless individuals who silently suffered a life of privation and discomfort, were actually curious scholars and experimenters who sought to optimize their appreciation of life. Not only that, says Irvine, there's a lot that we moderns can learn from the Stoics about living a joyful life.

Irvine, a professor of philosophy at Wright State University in Dayton, Ohio, writes that Stoicism was one of many competing philosophies (such as the Cynics and the Epicureans) that ran schools to teach a "philosophy of life" to students in ancient Greece and Rome. The Stoics were interested in leading a life of "tranquility," meaning a life free of "anger, anxiety, fear, grief, and envy." To achieve such a life the Stoics developed, in the words of historian Paul Veyne, a "paradoxical recipe for happiness," that included the practice of "negative visualization." By frequently and vividly imagining worst-case scenarios -- the death of a child, financial catastrophe, ruined health -- the Stoics believed you would learn to appreciate what you have, and curb your insatiable appetite for more material goods, social status, and other objects of desire.

Reading the book, I had no trouble understanding how negative visualization could be an effective antidote against "hedonic adaptation." By imagining ourselves to be homeless, for instance, we can reset our desire for a more luxurious home and once again appreciate the roof over our head that we started taking for granted shortly after moving in.

Irvine has taken the ancient philosophy of Stoicism and turned it into a modern day self help book. I dislike most self help books for being superficial and unrealistic, but I found Irvine's to be beneficial for two reasons. One, it tells the history of Stoic philosophy in an exciting and engaging way, and two, the advice for living as a Stoic makes a lot of sense. Irvine's explanations of how the early Stoics dealt with insults, grief, lust, jealousy, anger, the desire for fame and fortune, aging, and death show that these problems are timeless, and the Stoics's methods for dealing with them are equally timeless.

Mark Frauenfelder – Editor-in-chief of MAKE magazine and the founder of the popular Boing Boing weblog, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online.