Brent’s Credit and Debt blog

When you have a credit card, there are times you may slip up and charge a bit too much.  You think ‘Well, it is just a couple of bucks.  I’ll make a payment and everything will be fine’.  But is it fine?  Really?

No, no, no!  Going over your limit is a serious ding on your credit scores!  By exceeding your limit, you may trigger an alert at your credit card company in which they start to evaluate your account for potential problems.  They might raise your credit rate, which costs you more money.  They could reduce your credit limit, which means you will be WAY over your limit.  They might charge you fees (in fact, most do), which can really add up fast.  Worst of all, they may report your account to the credit bureaus!

One little indiscretion like this shouldn’t make a difference, right?  Well, it does.  The way creditors view things, one little problem with one account may mean a bigger overall problem.  In fact, one late payment means you are much more likely to have more late payments in the next 90 days!  In the same vein, one problem with a credit limit typically means you will have more problems.

You can fix this.  If you are getting anywhere NEAR your limit, stop using your card.  Check your balance online on a regular basis and make sure you have room to buy the things you need.  And if you have a debit card, use it first!  Living on a cash basis will help you reduce your dependency on credit and start to live within your means.

I found an interesting article today on MSNBC about a $38.00 cup of coffee.

Banks are increasingly covering overdrafts, and charging a large fee for the ‘privilege’ of not having a bounce on your account.

Now, personally, I would rather not be able to pay for something than have to eat a $34.00 fee from my bank.  But the banks don’t always give you that option.

Take a look at the article and let me know what you think.

http://www.msnbc.msn.com/id/29879567/

In Tip 2, I discuss the danger in assigning your legal rights to someone else with a power of attorney.

I have posted a video series to the MyCredEd YouTube channel discussing how you can protect your credit during divorce.  Remember, your divorce will be over soon, but the effects of a credit problem can last years longer!

You can view the Tip 2 video here: 

Remember to ask your questions about credit and debt in the form to the right.  I will answer via blog or video as soon as I can!

When you fill out the form, your question goes straight to my email inbox.  I am an email addict, so I will see it quickly.  If I put your question into a video, or answer it in a blog, I will send you and email back to let you know the answer is ready.

I hate those letters.  I used to get them a lot.  They tell me that I have been denied, yet again, for the credit card that I wanted.

It was my fault.  My credit scores were terrible.  I couldn’t really blame the companies that I applied with.  I had a bankruptcy, and late payments, and car repossession, and a foreclosure, and over limits, and things like that.  But I am a really nice guy, and I have a job!

They don’t care.

As far as a creditor is concerned, I am a set of numbers.  I have a score, and a few ratings, and a number of payments that were late 30, 60, or 90 days.  All they care about is those numbers, and the dates those numbers occurred.

But, I was trying to rebuild my credit!  I had learned about credit, and become responsible.  My payments were on time, I paid more than I had to, and I NEVER went over my limit!  It’s true, I didn’t really need any more credit, but I wanted more to build my scores with.

What to do?  Well, I decided to go with the personal touch.

I took that denial letter, and I called them!  I called GE Credit.  The customer service person that I talked to was very pleasant, listened to my explanation, and told me he couldn’t help.  He invited me to write a letter to explain my case, and promised they would review it.

I wrote down the address, thanked him for his time, and wrote a letter.  I explained what had happened in my life, what I had learned, and how I was moving forward to improve my credit situation.  I sent the letter, and waited.

A couple of weeks later, I had a new card!  They liked my letter enough to give me a line.  $500.00 to start, but it WAS a start.

That credit will stay with me for a long time.  I use the card very little, but it is a big part of my credit-building toolbox.  And all it took was a 5 minute phone call, and a single letter.  And 27 cents for a stamp (oh, the good old days of cheap postage).

If you get a denial letter, show them you are a serious credit consumer with a plan.  Let them know that you recognize your failures, and have a plan for success.  You may not get the result you want, but on the other hand they may just award you that card of your dreams.

Just don’t expect an unlimited credit line from Amex.  It isn’t going to happen.  Yet.

This is an article from bankrate.com showing that the average consumer is now making the minimum payments on their credit cards.

I will be adding a post after this one discussing the impact of making the minimum payments.

This might be worth taking a look:

http://www.bankrate.com/brm/news/debt/20050503a1.asp

I found this news story put together by FrontLine and The New York Times.

It talks about some of the history of credit cards, but also many of the dirty little secrets of the credit industry.  If you are looking for some background, this is a good place to start.

You can see it here…

<!–[if gte mso 9]> Normal 0 false false false MicrosoftInternetExplorer4 <![endif]–><!–[if gte mso 9]> <![endif]–> Becky has a JC Penney card, issued by GE Money Bank. She has never been late (she showed me her payment history online), and is well below her credit limit of $400.00. A few days ago, right after she made a large payment and paid the card off, she got a letter telling her that her credit limit would be reduced to $100.00 or her current credit limit, whichever was greater.

Now, fortunately for Becky, she had just paid off the card. Or maybe that was unfortunate. She now has a $100.00 limit on her JCP card. From the standpoint of her ability to spend, she doesn’t really care. She has worked hard to be able to live on a cash basis. However, from a total credit line standpoint, this really hurt her.

Part of your credit score is determined by your total credit used divided by your total limit. If your limit is decreased, your scores might fall, as your percentages rise. Since Becky is working on rebuilding credit, having this kind of a change might adversely impact her scores.

So why did JCP do this? Well, there is an easy answer. They are trying to weather the financial storm. They are taking clients who might be a risk and reducing their credit limits. How do they determine risk? Well, as is normal with their practice, they look at credit history, ability to pay, and how much credit a person has. If they find a situation that might cause a potential problem, they are within their rights to reduce the rate.

In Becky’s case, she had recently applied for, and been approved for, a new credit card with a $1500.00 limit. This was because she had taken care of her credit, and never missed a payment. However, that new card ended up being a big red flag for JCP. At some point, a creditor will look at your available limits, calculate the max payment you might have to make if you maxed out all of your cards, and then decide if they think you will be able to pay things back. If your creditors think you can’t pay back what you use on your cards, they may reduce your limits!

How can you combat this? Well, Becky called in and talked to a JCP credit service person. They told her that ALL accounts had their credit limits reduced! I can’t verify this, but in talking to 4 other people that have JCP cards, they all got similar letters. Of course, the people I spend time with talking about credit have all had some credit problems in the past, so they might not be indicative of the normal treatment of a customer by JCP. Becky was told she couldn’t get her limit raised.

What are your options? Well, you really have two. You can either live with the decision, or you can pay your account off and cancel it. Personally, I think canceling your card is a bad idea. First, it hurts your credit aging, and second, it reduces your total available credit by the credit limit on your card.

When you have a limit lowered, immediately start paying the balance down to improve your debt ratios. When you get it paid down, just stuff it in your sock drawer and leave it there for emergencies.

Your creditors can do damage to your scores, but you can recover quickly from a credit limit being lowered by a creditor. Make sure, if your limit is lowered, that you contact the creditor to find out why, and see if they will reconsider. But, unless you have a really good reason to do so, don’t close those cards as that can hurt your scores more than the reduced credit limit.

Often, when you are starting out to build or rebuild credit, you will have a very difficult time getting a credit card. The creditors look at you and see that you are too large a risk to work with. When that happens, you can either keep trying different creditors, or you can try to get a secured credit card or secured loan through your credit union or bank.

There are really two types of credit available. ‘Secured’ credit means that the lender holds something of value so that if you default, they can get their money back. ‘Unsecured’ means that the lender is taking a bigger chance, and will have nothing they can take from you if you default. Because they have less recourse, a lender will typically charge a higher interest rate for an unsecured loan than for a secured loan. This is why a car loan often has a lower interest rate than a credit card; if you stop paying for the car, they take it back.

Getting a secured loan still requires a credit check. When I got mine, Wells Fargo would give me a secured loan, but not a secured credit card. They apparently considered one line of credit enough, and wanted me to prove myself after my bankruptcy. I got a $500.00 secured loan. Here is how that worked:

I game them $500.00 in cash to open a new savings account.

They gave me a secured loan for $500.00, which meant they game me a $500.00 check.

For the next 12 months, about $48.00 per month came out of my checking account to pay off the loan.

At the end of the loan, I got my $500.00 back.

You can see how the process works. Wells Fargo protected themselves by keeping $500.00 of my money, while they gave me a $500.00 loan. It cost them nothing, and in fact they made interest over the next year on my money!

What I ended up with was 12 entries on my credit report that showed on time payments, at all three credit bureaus. My scores went up a LOT (along with other work I was doing), and I ended up coming out ahead of the game.

I ended up with a line of credit for $500.00. What I should have done was go back when it was over to get a $1,000.00 loan, and then a $2,000.00 loan. I should have kept adding money to the loan to get a much higher line of credit open, and I should have kept making payments for as long as the loan was open.

If you are looking for a secured loan or credit card, I would suggest using your bank or credit union as a first stop. If you have a balance in your account, they are likely to work with you. After that, try Orchard bank or Capital One for a secured credit card.

To learn more about how to fix your credit and keep it clean, get my e-book ‘Credit Cleanup’ by clicking the link. ‘Credit Cleanup’ will walk you through how to repair your credit, and tell you how to keep your credit clean.

To get a copy of my FREE e-Book ‘The Top Ten Ways You Can Wreck Your Credit’, just click the link. You will be taken to a page where you can get more information about downloading the e-book. This book tells you what you should avoid doing concerning your credit, and what negative impacts can occur if you treat your credit wrong.

When you sign a credit card agreement, you are agreeing to an ‘open-ended’ line of credit. What does this mean, and how does it affect you?

Honestly, there is nothing to worry about here. If you think about the types of credit, there are really only two types that will affect most people. The first is credit card debt, and the second is something like a car loan or mortgage. If you think about it, the differences are pretty easy to spot:

With a traditional, or ‘close-ended’ (or fixed term) loan, like a car loan, you will have a payment schedule. Every month you will pay the same amount based on what you borrowed, the interest rate, and the number of months you have agreed to make payments in order to pay the car off. There is no variation in the payments. If you miss a payment, you owe that payment plus the next one as a lump sum. If you end up needing to change the terms of the loan, you will need to sign paperwork with your lender agreeing to what the new terms are. In many cases, these loans are secured by an asset

Let’s look at a credit card account as a contrast to a traditional loan. There is no way you, or your lender, can know exactly how much you will spend, or how much you will pay, on your card. Because there is no set payment schedule, and no amount that you will consistently owe, there is no way to calculate a payment persistently across the life of the loan. In addition, the length of time you will borrow the money is also unknown. Because these are all unknown variables, these types of loans are called ‘open-ended’.

Each state has its own rules for the statute of limitation for an open-ended loan vs. a traditional loan. Other than that, from a collection or legal standpoint, there really isn’t a lot of difference.

To get a copy of my FREE e-Book ‘The Top Ten Ways You Can Wreck Your Credit’, just click the link. You will be taken to a page where you can get more information about downloading the e-book. This book tells you what you should avoid doing concerning your credit, and what negative impacts can occur if you treat your credit wrong.

OK, your bankruptcy has been filed.  You might have a discharge, or might be on a payment plan.  Either way, you need to start RIGHT NOW to build your credit back up. I personally made a mistake. 

After my bankruptcy, I waited 2 years to get started on rebuilding my credit.  I thought you HAD to wait, and that no one would give you a card, or a car loan, or any other kind of credit.  I was wrong. 

The truth is that there are 2 primary kinds of credit, and those exist in 2 brackets.  Let me explain this a bit. 

Loans come in 2 varieties.  You can have secured debt, like a car loan or a mortgage, or you can have unsecured debt, such as a credit card or signature loan.  When you buy a car, the bank holds the title to the vehicle.  If you default on the loan, they get the car back so they can sell it to someone else.  For a home mortgage, the mortgage company holds the deed to the property.  As long as you have a mortgage, you don’t own a home, you are buying one.   

Credit cards are different.  When you buy something with a credit card, it is yours.  Even if the credit card company tried to come after what you bought, you could have sold it, or thrown it away.  And since many people use credit cards for food and gas, it can be pretty hard for your credit card company to come after your digested food.  Although you may feel like giving it to them… 

But I digress.  The question at hand is how to get credit after bankruptcy.  We are going to get there in a minute, but first let’s look at how to keep credit during a bankruptcy. 

When you declare a bankruptcy, you do NOT have to include all of your debts as part of the filing.  You are including the debts you want to get rid of.  As an example, when I filed, I had a zero balance Kohl’s card that I didn’t even consider.  So, I kept it.  Kohl’s left my interest rate and credit limit alone, and I was able to use the card.  My Sears card, with a high balance, was closed by Sears.  I understand that.  They didn’t want someone that wouldn’t pay off their debt to be one of their customers. So, at the end of my bankruptcy, I had a Kohl’s card. 

If you have a very low balance card, or a zero balance card that you think you can keep, it would be a great idea to do so.  Even if you have a card with a higher balance, it make be a good idea to call the credit card company and see if they will work out a payment plan with you and let you keep the card.  They might be willing to do this if you explain the situation. 

Now, how about after bankruptcy?  Well, you have a couple of options.  First, if you have a credit union that you bank with, check there first.  They are often lenient and may give you a real credit card.  If they do give you one, make sure that they report to all 3 credit bureaus.  You want your on-time payments to show up on your credit report. 

If that doesn’t work, there are a couple of things to try.  First, go to Orchard Bank (http://www.orchardbank.com/) and Household Bank (http://www.householdbank.com/).  They deal in the sub-prime debt market, meaning they will take a chance on you.  If you have a reasonable income, they might be willing to do business with you.  They offer both secured and unsecured cards, so you can try for either.

Which brings us to secured credit.  There are really just a couple of kinds of secured credit that you should be interested in at this point.  The first is a secured credit card, and the second is a secured loan.  The idea behind these credit programs is simple:  you put up the money, and the bank takes no risk.  Let’s say, as an example, that you choose to open a secured loan.  You take $500.00 to the bank, and they open a new, special account for you just for this loan.  You deposit your $500.00 in the secured loan account.  The bank then ‘loans’ you $500.00!  You make regular payments of less than $50.00 per month for a year, and you have paid off your secured loan.  If for some reason you default, the bank still has your money.  What this does is give the bank a way to earn interest risk free.  But, it also allows you to establish credit. 

A secured credit card works in much the same way.  You deposit your $500.00 in your special account, and the bank gives you a $500.00 line of credit on a card.  Then, you can make purchases up to $500.00.  You make regular payments, and build your credit.  If you default, the bank already has their money, so again this is a no-risk deal for them. 

After a period of time, your scores will start to go up with regular payments.  But remember, just one negative will crush your score again, so don’t be late!

To get a copy of my FREE e-Book ‘The Top Ten Ways You Can Wreck Your Credit’, just click the link.  You will be taken to a page where you can get more information about downloading the e-book.  This book tells you what you should avoid doing concerning your credit, and what negative impacts can occur if you treat your credit wrong.