Jun 25, 2010

Dealing with Charge-offs: When is it too Late to Pay?


Scenario 1: Brenda has gotten behind on some of her bills, including a medical bill that she hasn’t been able to bring current for a few months. The doctor’s office has written off the debt, but when Brenda gets her tax refund she catches up on all of her bills, including the medical bill. She continues to make payments in a timely fashion going forward. Brenda sees her credit scores start to improve after a few months of payments, and is back on track.

Scenario 2: Stacy has fallen behind on some of her bills over the years, including some charge-offs. She gets a raise at her job, and starts paying off all of her bills, starting with the oldest ones first. Stacy is dismayed to find out that her credit scores have dropped significantly, despite the new ‘paid’ status on all of her old, previously-unpaid accounts. She is unable to open any new credit accounts, and despite having paid down her debts, she finds that her credit scores remain low for some time.

Both Brenda and Stacy paid their debts, so why did Brenda’s credit scores improve while Stacy’s got worse? The simple answer is: Time. Brenda’s debts were only a few months past-due, while Stacy’s debt was years past due. Because new negative information harms your credit scores, paying off a lot of old charge-offs can initially put your credit scores into a tailspin. Even though Brenda’s medical bill was written off after a few months, the relative newness of the negative information had already done its damage to her scores. Stacy’s old charge-offs, however, were impacting her credit scores much less before they were paid in full.

How late is too late to pay down a debt? Generally speaking, the closer a debt is to being dropped from your credit report, the less likely it is to help you if you pay it off now. That doesn’t mean you shouldn’t pay off the debt – but you may want to wait until the item has dropped from your credit report if you want to avoid damaging your credit scores. In general, any revolving debt that is a few months past due should be taken care of first. Open accounts take precedence over your old charge-offs.

If you do decide to pay on a charged-off account, make sure that you only pay the original creditor. While debt collectors may be the ones contacting you about the debt, not all debt collection agencies are reputable. If you pay off the original creditor, there is less chance that your good-faith payment will be mishandled. In some instances, very old debt may have been bought and sold by multiple debt collectors – paying the original creditor ensures that you have a verifiable means of proving that the debt has been satisfied.

Charge-offs can be tricky business. No one wants to leave a debt unpaid, but if a credit item is about to be removed from your credit report, it may be best to wait before you pay. If you do decide to pay sooner, contact the creditor directly and let them know that you’d like to work out an arrangement that will help minimize the impact to your credit scores. Make sure you check on your credit report again after the payment has cleared to be sure that it accurately reflects the status of the debt. The worst thing you can do is pay off a bill and have the payment go unreported, so always be vigilant and check your report regularly.

Posted in charge offs, credit report, credit scores | No Comments »



Jun 7, 2010

No More Overdraft Fees? You May Still Be Charged

With the new laws preventing overdraft fees on debit and credit cards, you may think that your fee worries are a thing of the past.  Unfortunately, that may not always be the case, especially if you often rent a vehicle or use the “pay at the pump” option at your local gas station.  Because of the way some rentals and gas purchases are charged, you could find yourself accumulating overdraft fees even if you haven’t opted in to accept them.

Some gas stations place a large hold on your credit or debit card – anywhere from $75-$100 – when you pay for gas at the pump, while others charge only a cursory $1 hold fee, regardless of how much you actually pump. In both cases, the actual charge isn’t posted until days later. If you go shopping in the meanwhile, your available balance will reflect the amount held by the gas station. If this is more than the amount that you actually spent, you’re safe. But if this amount is less, you can run into problems.

For example: You fill up your gas tank for a modest $50. The gas station, however, only puts a $1 hold on your card. You check your balance at the ATM day later, expecting an accurate statement, but in reality, the $50 has yet to post to your account. Thinking that you have more money available than is the case, you stay within the balance shown on the ATM statement, but overspend because the $50 you spent on gas doesn’t post until 2 days later. Your bank will likely charge you at least one overdraft fee when the gas purchase finally posts to your account, and you may be charged more than one overdraft fee if there are pending transactions at the store which were approved based upon the erroneous balance.

Another example: If you rent a car with your debit card, most companies place a hold on the card equal to the charge for renting the car. However, this hold often expires within a week, so if you rent the car for longer, the initial hold on your funds is released. When you check your balance several days later, it would appear that you have money to spend, when in reality the rental charge hasn’t gone through yet. When you take the car back, the company may not even charge your card until the end of the day’s processing, at which point it may be declined or (because of the previous hold) you may be charged overdraft fees retroactively.

These types of overdrafts can happen in any instance where a temporary hold is placed on your card. If the transaction is later declined and you avoid the bank fee, you can still expect to pay fees from the merchant, who will then be forced to track you down for payment. The only way to avoid this type of scenario is to keep track of which charges are pending and which have actually posted in your account. In short: you can’t trust the balance inquiry from the ATM to be accurate if you’ve recently made these types of purchases. Other ways to avoid the risk:

1. Don’t pay at the pump. Go inside and pay – when you pay inside the gas station, the charge typically reflects what you actually spent, rather than an arbitrary hold.

2. Keep track of the hold amount, and ask to pay in advance if possible. Some rental companies and hotels will allow you to pay the fees from your debit account up front. Keep in mind that if you rent the car or stay at the hotel for longer than the original agreement, a hold will still apply.

While banks can’t let you spend money you don’t have if you don’t opt into overdraft protection, the bottom line is that you still have to be wary in order to avoid a hit to your wallet and your credit. Take the time to confirm that the money is really there before you spend, and you’ll save yourself a lot of unnecessary fees.

Posted in credit cards, overdraft fees | No Comments »



May 23, 2010

Credit Card Tips: Can You Get Your Old Rate Back?

With so many credit card companies raising rates and lower and credit limits, it may seem impossible for you to negotiate for better terms. However, you might be able to get the credit card companies to see things your way if you have an excellent payment history. While these negotiation tips won’t necessarily work for everyone, if you already have a decent credit score and you’ve been a customer for several years, you may want to give it a try.

1. Be Informed – review the rates and balances on your other credit cards. Is this new limit or rate increase out of line with what other companies are offering? If so, you may have a stronger case when it’s time to negotiate. If you don’t have any other cards, do some research to find out the going interest rates for credit cards that are similar to the one you already have. What you shouldn’t do is apply for several new credit cards at once, as this will lower your scores.

2. Don’t Delay – contact the credit card company as soon as you find out that your rate or credit limit is being changed. Because of the new consumer protection laws, you should have 45 days to review these new terms. You’ll have more time to negotiate a more favorable outcome if you work with the credit card company from the beginning.

3. Speak with Management – in general, customer service representatives may not have the ability to alter the new terms on your card. Ask to speak with a manager, and then politely make your case. If you have been a good customer, and are otherwise creditworthy, speaking with a manager may be the only step you need to take.

4. Ask for a Compromise – you may be able to get your credit card company to reinstate your prior interest rate, or your prior credit limit but not both. Decide which one is most important to you and your current credit score. For instance, a low interest rate may be better for you if you have a large balance to pay off whereas a higher credit limit may be what you’re after if you carry a low balance and want to improve your available credit ratios.

5. Inquire about Other Options – sometimes credit card companies may be willing to offer your old rate on a different card that has fewer rewards or perks. If you are willing to switch, be sure to ask if this is an option. You may also be able to negotiate a more favorable rate if you are willing to open a secured credit card. However, if you open a new account to transfer the balance, be aware that your past credit history on the prior account will not be carried over to the new one.

You always have the option to cancel the card and pay off the balance underneath the old credit terms, a move which most credit card companies will want to avoid if you’ve been a good customer. Negotiating a more favorable rate can help you to keep your payments manageable while the account remains open to give your scores a boost. However, if the new rates are going to make it impossible for you to afford the payments, the best advice is to close the account. Missed payments will harm your credit far worse than a single closed account.

Posted in credit card companies, interest rates | No Comments »



May 8, 2010

Good Credit Basics: Establishing Good Credit

For young people just starting out, getting good credit often seems like a Catch-22 – you have to have good credit to get credit, and you need to get credit to establish good credit. While having a blank credit history does limit the types of credit you can reasonably expect to obtain initially, there are some simple ways to establish positive credit that almost anyone can employ.

Bank Accounts

An account at a bank or credit union is a good first step to establishing credit, if you handle the account responsibly. Overdrafts and bounced checks not only cost you money, they can cost you the ability to apply for credit down the line. However, a checking account in good standing can save you hundreds of dollars when compared to the fees charged by most check-cashing businesses.

When shopping for a bank or credit union, try to choose one that has few or no maintenance fees, and make sure that you will have an ATM available to check your balance or make withdrawals for free, as high ATM fees can wreak havoc on your budget. Take advantage of online bill-pay if your bank offers it for free – it’s a quick and low-hassle solution for keeping track of your expenses from month-to-month that will help you stay on top of your credit scores.

Secured Credit Cards

If you don’t qualify for an unsecured card with reasonable rates, a secured credit card is a great way to start out. Some banks or credit unions will place your deposit in a money market account or another interest-bearing account, which means that if you only charge what you can pay off each month, you can actually make money by using this method.

You want to avoid any card that charges high annual fees, or that has any other hidden costs. Additionally, you need to make purchases that you can pay off in full at the end of the month, without using more than 30% of the credit card’s available balance. Make sure you have the discipline to stick within your spending limits before you get the card – how you manage your bank account is a good indicator. If you can stay within the available funds in your bank account without going over, and actually have money left at the end of each month, you can probably handle your credit card with equal responsibility.

Shift a regular purchase such as gas, groceries, or a specific utility to the credit card, and use your budgeted funds to pay it off. This will prevent you from misusing the card by buying things you don’t need in the name of building your credit.

Student Loans

While taking out unnecessary student loans is ill-advised, a necessary student loan can be a real boost to your credit score. Generally seen as a type of ‘good’ debt, most banks and lenders look favorably upon student loan debt as long as you make payments on time, or have a qualified deferment or forbearance in place. Another benefit: the interest you pay on your loan is tax deductible – so you can claim it at the end of the year on your taxes.

Because there are so many payment options available for student loans, chances are good that you can find one that will fit your budget. If you start paying before you graduate, you have the added bonus of building up a solid repayment history that can assist you in obtaining additional credit after your graduation.

While no one action can guarantee good credit in the future, by making sure you establish your credit in a responsible and diverse way from the start, you can avoid the temptation to overspend on credit cards and instead focus on building a responsible financial plan that will both improve your credit scores and your financial outlook going forward.

Posted in credit unions, establish credit, secured credit cards, student loans | No Comments »



Apr 18, 2010

Credit and Identity Theft: Simple Ways to Protect Yourself

Maintaining good credit takes work. You have to keep track of multiple due dates to make sure you pay on time; you have to keep track of your spending to make sure you stay within reasonable limits. You have to maintain the right credit mix between cards, loans, and other types of debt, all the while making certain that you don’t overspend or overextend yourself in the process. It’s a delicate balancing act that can be wiped out in a flash if your identity is stolen. Unauthorized charges and bogus credit accounts can ruin your credit scores in the blink of an eye. Fortunately there are a few simple things you can do to make it more difficult for predators and con artists to steal your identity and your hard-earned credit score.

1. Get Rid of Pre-approved Offers. You may not be interested in getting a new pre-approved credit card, but identity thieves are. While you can shred these types of unsolicited offers for new credit, a better option may be to stop them altogether. You can opt out of pre-approved offers by going to optoutprescreen.com to stop the credit bureaus from sharing your credit information with other companies.

2. Leave the Pin Number at Home. Never write the pin number to your credit or debit cards on the card, and never store pin numbers in your wallet or purse. Commit the pin number to memory instead. Try to choose something that is easy for you to remember but hard for others to guess. Change your pin number periodically – every 3 to 6 months – and don’t use the same pin number for every card.

3. Beware of Phishing. Emails that ask for personal information may seem to come from legitimate companies. However, it’s rare for any company to solicit personal information or account updates through email. If you are in doubt, contact the company directly –don’t use the links provided in the email, as they may direct you to a site that will steal your information.

4. Consider a Credit Freeze. If you aren’t planning on opening any new accounts in the near future, you can institute a credit freeze by contacting the credit bureaus. While under the freeze, your account won’t be visible to any lenders without your explicit permission. If you are in the military, you can request a special type of credit freeze that will prevent new accounts being opened in your name while you are abroad. Freezing your credit file typically costs a nominal fee if you aren’t already a victim of identity theft, so be sure to weigh the costs before your commit.

5. Use Credit Monitoring. The major credit bureaus have different types of credit monitoring available if you want to be able to keep track of potentially fraudulent activity. You can also monitor your own credit if you stagger your free yearly credit report. Each bureau is required to provide one credit report per year (sometimes more, depending on your state). By staggering your requests, you can get an accurate snapshot of your credit every 4 months.

Making it difficult for criminals to access your personal information is one of the best defenses against identity theft. Restricting access to your credit, when combined with proactive monitoring, can significantly reduce the chances that you’ll be a victim of identity theft. If you do notice something out of the ordinary, report it right away – your liability is limited to only $50 in most cases, but only if you report the suspected identity theft right away.

Posted in credit bureaus, credit monitoring, identity theft | No Comments »



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