Brent’s Credit and Debt blog

I talk to many people who are on a credit hunt.  They have decided that they are going to build a huge pile of credit cards, and have lines of credit approaching our national debt!

But when is more credit actually too much credit?  Creditors look at your credit, and start to wonder if you are doing what is called ‘debt pyramiding’.

When you apply for a LOT of credit, especially if you try to get it fast with a lot of applications in a short time, a big red flag is raised with a creditor.  While having a large line of credit available with a low balance might help your scores a very small amount, your creditors look at things in a slightly different light.

Creditors have noticed patterns of credit usage over time.  They know that a person that gets a lot of credit quickly may be tempted to SPEND a lot of credit quickly.  Or, you may be on the verge of financial trouble, and you are stocking up on credit lines so you can live off of credit.

When a person is trying to pyramid their debt, that can mean that they are going to by things on one card, and use a different card to make payments.  The interest starts to add up, and soon you can’t keep up with the minimum payments, much less the amount you actually owe.

If you have established credit, one of the best things you can do is manage that credit well, and let it age.  Trying to get additional credit may hurt your ability to get credit, and denials can hurt your score.

Apply for credit slowly.  Get a card, or a loan, and make sure you have no problems with it.  Use it wisely.  In 6 to 8 months, get another and go through the same process.

Recently, credit card companies have become real sticklers about your credit line.  In fact, they are often reducing your credit limits, as you can see in my blog entry Why Did My Credit Card Company Reduce My Credit Limit?

If you are a good customer, however, shouldn’t you be able to get your limits raised?  If you have made your payments on time, and kept your balance below your limit, your credit issuer should consider you a good source of credit, right?

Well, not any more.  Becky, who had the problem with her JC Penney card in the blog post above, just got a letter from GE Money bank.  GE Money Bank wrote to let Becky know that she would not be getting a credit line increase.  She hadn’t asked for an increase, but they thought they should tell her she couldn’t have one anyway.

Becky has been making her minimum payments, hasn’t been using the card, and hasn’t been late on a payment.  Her balance isn’t shrinking much because she is making the minimum, but that is what you are supposed to do, right?

Nope.  Now, you have to pay aggressively.  It seems that the credit card companies don’t want to see you carry a high balance any more.  That is just too risky.  They want their money paid back quickly so they can make sure your account doesn’t turn into another default on their books.

Here is what GE Money Bank said about Becky’s account:

1)      Average percentage of credit limit used on this account over most recent 3 months.

2)      Number of months this account has been open.

3)      Percentage of times payment greater than amount due over last 12 months for this account.

4)      Low ratio of payments to amount due over last 6 months on this account.

What does this mean?  Let’s take them in order:

1)      Average percentage of credit limit used on this account over most recent 3 months.

Here, they are saying her current balance is too high.  She needs to drop the balance of the account.

2)      Number of months this account has been open

The account history isn’t long enough for the creditor to feel comfortable.  Becky has had the card for about 18 months (she got it before Christmas 2007).  They apparently want more of a credit history than she can offer.

3)      Percentage of times payment greater than amount due over last 12 months for this account.

Becky has been making minimum payments to prove she will always pay on time and that she is a good credit consumer.  Apparently, giving a creditor a lot of interest isn’t enough.  She needs to pay more on her account than the minimum every month to prove she has the means to pay the card off faster.

4)  Low ratio of payments to amount due over last 6 months on this account.

As with number 3, they want more money.  How much is enough?  Well, 4% is about what they charge as a minimum.  I would suggest 10% as a good starting point, and you can pay a bit more or less depending on your personal financial situation.  Of course, you can always call your individual creditor and see if they will give you a percentage to follow.

As with anything else, the rules change over time.  You need to pay a bit more now than the minimum required, and you need to keep your balance lower, in order to have a good credit standing with a creditor.  Unless you do this, your chances of getting a higher credit limit are greatly reduced.

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.

When you are looking to rebuild your credit, you have to ask yourself a few questions:

• Have I solved the problems that gave me bad credit to begin with?

• Am I willing to make sure I don’t go down the wrong path again?

• Have I taken care of the debts I already incurred?

• What is my reason for wanting great credit scores?

I talk to a lot of people that are in the credit repair game for the wrong reason.  They are looking for MORE credit, a new car, a new house, or the ability to carry that shiny gold card.  However, they have yet to fix the problem that got them in trouble in the first place.

You need to take stock of your situation.  If you are using credit to extend your ability to spend, you will end up right back in the same bad place you were in before.

Credit was designed as a convenience for people who didn’t want to carry cash.  Later, it became an emergency measure in case something happened that you couldn’t cover with cash.  However, these days credit has become a luxury item.  We overspend, and comfort ourselves that we only have to make a small payment to cover what we buy.

Well, the truth is that those small payments add up.  Over time, small purchases here and there can force you into very large monthly payments that can actually destroy your financial position!

There are a group of people, referred to as the ‘FICO High Achievers’.  These are people with credit scores above an 800 (out of a possible 850).  It is a rarified goal, and one that very few ever achieve.  These people have access to loans, to better interest rates, to lower insurance scores, and generally don’t have the same kinds of credit problems that the rest of us have.  Why?  The use credit as a tool, instead of as a lifestyle enhancement.

I spoke to my banker.  He told me that the people that he serves that have the wealthiest appearance, such as big houses, luxury cars, and luxurious ‘stuff’ in their homes, are typically the farthest in debt.  They are using credit to support a lifestyle they can’t afford, and it catches them in the end.

At the same time he told me that people who learn how to manage their money when they are young are the most likely to be financially successful.  They live well, instead of extravagantly.  The spend money wisely, and use credit only when they are making a large purchase that cash won’t cover.  They don’t buy on impulse, and are less likely to have a 4 dollar coffee in their hands than they are a cup of coffee from the coffee maker on their desk.  These are the people that manage their money, and are more likely to be credit ‘High Achievers’.

You have to make a choice.  You can repair your credit, and go back to the lifestyle that caused the problems in the first place, or you can fix the problems and live better in the long run.

Whatever you choose, I wish you luck in living with credit!

I see a lot of ads for ’30 Day Credit Repair’ or ‘Credit Repair Fast’. The ads are on the radio, on the internet, and I wouldn’t be surprised if they show up in your mail box.

Can they really fix your credit in 30 days?

Well, the honest answer is yes, and no. (I know, the answer sucks, but it is real.)

You can make changes to your credit in 30 days. Things like aged accounts, old accounts without validation, and possibly even a few good will adjustments can be yours in a short time. Those items will absolutely help your scores.

However, there are things on your report that are tough to crack. Changing information, getting rid of collections, and trying to make bad items look better all take time. You have to be willing to do the work to make things as good as possible. If you try to take shortcuts, like hiring a law firm that specializes in credit repair, you will likely end up with a credit report that is clean, and has nothing useful on it at all.

A great credit report requires several things:

• A history of using credit responsibly.

• Maintaining lower balances on your credit cards.

• Making payments on time.

• A good mix of credit.

• Not trying to get credit too fast.

If you can achieve these things, you will have great credit.  It is more about understanding how to use credit as a part of your lifestyle than a ‘quick fix’.Credit repair takes diligence, time, and a consistent effort. If you put the effort in, you can improve your scores and have a credit report that will get you ahead in life, instead of leaving you where you are.

The most important thing you can do is start working on your credit today!

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/

You may have heard of ‘junk’ categories before.

You can find junk bonds, junk dealers, and junker cars.  The term means the same thing:  an item of low or poor value.

Well, now we have junk debt.  Junk debt is debt that is either uncollectible through ‘normal’ means, or debt of very low value.

I’ll give you an example:

I got a letter 2 days ago from a law firm.  They claim I owe $40.00 from a parking ticket 7 years ago.

Think about it.  They paid about a buck to send the letter.  They probably bought the debt for about $8.00.  So, they stand to make about $30.00 if they can collect the whole thing.

But they have 2 problems.  First, the statute of limitations in my state is 6 years.  So they can’t sue me.  Second, they will have to prove it is mine, and that I didn’t pay it.  Both of these are tough to get past if you know how to deal with the debt collector.

Low margins.  Old debt.  No legal recourse.  Seriously, this is junk.

So why do they buy it?  Well, many people look at these old accounts, and settle for much less.  A $20.00 payment is a huge profit for the collector, and costs less than the movie you buy when you are checking out of Wal Mart.

That one happened to be cheap.  But how about bigger ticket items?

Utility companies, library fines, parking tickets, local taxes – all these things are being sold as junk debt.  Many of the accounts are decades old, and they are virtually un-provable.  The firms that buy these accounts have a hard time collecting, but almost all of what they collect is profit. Many people just go ahead and pay when they get the bill, just so it ‘won’t show up on their credit report’.

Why do I care?  These debts can be reported to the credit bureaus.  If the old debt is reported, it will affect your credit scores negatively.  As someone who is concerned about credit, you need to avoid this at all costs.

If you are notified you owe an old debt, you need to contest the debt.  Make sure the debt is actually yours, and don’t settle with what the collection company tells you.

Remember, these can end up on your credit report, but usually they are so old they can’t stick.  You can get them cleaned up, and get rid of them, with out paying, but you need to understand how to clean those credit reports up.  Make sure you do the research and understand how to fix the problem.  Or, just read my book!

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…