Individuals See Higher Rates,
Harsher Terms on Credit Cards
And Other Consumer Loans

By JANE J. KIM
August 22, 2007

It’s not just mortgages. As it gets tougher to land a home loan, some people are also finding it harder and more expensive to get other types of consumer credit.

Some lenders, such as USAA, are nudging up credit-score requirements across their auto loans, credit cards and personal loans. Bank of America Corp. and Capital One Financial Corp. recently raised fees and interest rates for some of their credit-card customers. And this month, Citigroup Inc.’s CitiFinancial Auto started charging higher auto-loan rates for borrowers with less-than-perfect credit.

TIGHTER CREDIT

• Some lenders are raising fees and tightening credit on credit cards and auto loans.
• Lenders are likely to make it harder for borrowers with weaker credit in markets hit by a housing downturn.
• Watch your credit card mailings for any changes in terms and conditions. You may be able to opt out of the new terms.

All this comes as lenders continue to tighten guidelines on mortgages and home-equity loans and lines of credit as investors back away from subprime loans and other perceived credit risks. For the most part, lenders say the changes aren’t directly tied to the mortgage mess, but reflect concerns about an economic slowdown and uncertainty about interest rates. Still, some lenders are becoming more cautious about extending credit in weaker housing markets and to people who may have exposure to certain riskier mortgages.

"In the past few months, we’ve been tightening up our credit underwriting standards and raising our score cutoffs slightly," says Barbara Johnson, vice president of USAA Federal Savings Bank, referring to the bank’s credit cards, auto loans and personal loans. The bank has also scaled back credit-line increases in its credit-card business. "We used to offer frequent, automated line increases, and now, we’ve pulled back on that a little bit," she says.

A spokesman for J.P. Morgan Chase & Co.’s Chase says the company has been tightening up credit guidelines across some consumer products, such as home-equity and auto loans, mainly among customers with weak credit who live in markets that have been hurt by a decline in home prices.

Lenders aren’t tightening credit standards nationwide. That’s why the average interest rates on many types of consumer loans haven’t changed much since the beginning of the year. Rates on variable-rate credit cards, five-year new car loans and personal loans are averaging 13.9%, 7.8% and 14.5%, respectively, roughly the same as they were in January, according to Bankrate.com.

Card issuers can afford to be more selective about whom they extend credit to and by how much because more consumers — increasingly locked out of home-equity loans and lines of credit — are using their credit cards more. This month, for example, the Federal Reserve said consumer credit rose at an annual rate of 6.5% in June to a record $2.459 trillion, the second straight sizable gain. The increase was led by an 8.4% rate of increase for revolving credit, the category that includes credit-card debt.

Doug Eddings, a 35-year-old small-business owner in Portland, Ore., says three of his credit-card issuers all took steps in recent weeks to tighten his credit, either by raising his interest rate, halving his available credit or freezing his accounts. First, he received a notice from Chase in June, notifying him that it was going to raise the interest rate on his Chase Amazon card to 29% from 17%. Soon after, another lender, HSBC Holdings PLC’s HSBC North America, dropped his $5,000 credit line on his Best Buy store card to $2,105 — just $5 above his current balance.

"When I called them up, they didn’t have an answer for me but said it was something in my credit file," says Mr. Eddings, who had recently used the card to buy a refrigerator for his new home.

He also got hit with a "financial review" this month from American Express Co., which froze his accounts until he could send in additional tax forms from the IRS for them to look at. Although Mr. Eddings, who has a high credit score, says he hasn’t been late on any payments, he recently requested a credit-line increase on his Delta SkyMiles card, which American Express raised to $15,000 from $5,000.

In addition, he took out an interest-only mortgage this past spring through a local broker to buy a new home. His mortgage was originally offered through American Home Mortgage Investment Corp., which filed for bankruptcy-court protection earlier this month, and was then sold to Countrywide Financial Corp. "I don’t know if it has anything to do with the mortgage industry, but it does seem coincidental," Mr. Eddings says.

Economists are increasingly worried that the credit crunch in the mortgage market could spread further into other types of consumer loans. The Federal Reserve’s quarterly survey of senior loan officers, released last week, showed a small increase in the number of banks that have tightened credit standards for consumer loans (excluding credit cards) over the past three months.

This week’s drop in short-term Treasury bill yields is yet another symptom of the turmoil that’s roiling the credit markets, since it signals that investors are fleeing to the safest assets available. "If this turns out to be a blip on the radar — one to two weeks, even a month — then it will probably only have a modest impact" on lenders’ credit standards, says Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Conn. "But if we see these sorts of conditions continue for months and months, then it probably will start to have an impact on the way that lenders see risk in the consumer-credit arena."

Industry consultants say there are signs that card issuers are already becoming more cautious. Average credit-card approval rates across the industry have dropped by five percentage points to 35% over the past year, while credit lines for subprime borrowers have fallen to an average of $1,000 from $1,250 a year ago, according to Robert Hammer, chief executive of R.K. Hammer, a bank-card advisory firm.

Issuers have also cut back on direct-mail offers to new customers. In the second quarter, such offers were down 6% from the first quarter, continuing a decline that began at the end of last year, according to Mintel International Group Ltd.’s Mintel Comperemedia unit, a direct-mail market-research firm. Meanwhile, credit-card and consumer news Web sites such as CardRatings.com, Credit.com and ConsumerAffairs.com say they are getting more complaints from consumers who have seen their credit lines fall or interest rates jump.

Nationally, credit-card delinquencies are relatively low at 4% and haven’t risen significantly in the past three years. However, in certain markets, especially those that have been hit hard by a decline in home values, delinquencies have spiked higher. In Fort Myers, Fla.; Port St. Lucie, Fla.; and Stockton, Calif., for example, delinquencies have jumped about two percentage points in the past year to as high as 5%, according to an analysis by Equifax Inc. and Moody’s Economy.com.

"If [lenders] see a household start to go late on payments, they’re going to be much quicker to respond," says Mark Zandi, chief economist at Economy.com. "They may reduce the size of the credit line or may raise the interest rate. They’re responding much more quickly to any signs of stress."

Patti Powell, a 49-year-old child-care provider, got a notice from Barclays PLC’s Juniper Bank last month telling her that her account, which she had for several years, was being closed. The Lovington, N.M., resident says she wasn’t late on any payments and mailed in more than the minimum payments each month. But in recent months, she started to use the card more, and her total balance had climbed to about 80% of her available $3,000 credit line, from about 22% previously. In a separate move last year, American Express dropped the credit lines on two of her cards, she adds.

For their part, lenders say they are monitoring the credit environment carefully. A Citigroup spokesman says the bank is "constantly adjusting our underwriting standards to best reflect market conditions, updates to our risk models and a variety of other factors," while a Bank of America spokeswoman says it hasn’t seen "significant issues or had to significantly change our underwriting standards" in the current environment. Chase, meanwhile, is "thinking hard about the loan qualifications for people," says spokesman Tom Kelly, who adds that "most consumers can still get credit at a fair rate."

For consumers, it’s a good idea to look out for any change in terms and conditions from the issuers. Although issuers can change rates and fees at any time, many will allow customers to opt out of those changes and pay off any balances under existing terms — although they will typically have to close their accounts. In recent months, Capital One, for example, changed many of its fixed interest rates to higher variable rates, while Bank of America implemented a new monthly minimum finance charge of $1.50 on former MBNA credit-card customers this past spring to bring charges in line with its existing customers’ fees.

Meanwhile, Discover Financial Services recently raised the higher end of its interest-rate range to 18.99% from 17.99% and began charging higher minimum payments for certain customers who used over 90% of the available credit on balance-transfer offers.

Another victim of the trend toward tightening credit: once-generous introductory credit-card offers. "We’ve seen the length of the introductory periods diminish on certain offers and more lenders offering introductory rates ranging from 2.9% and 6.9% instead of 0% financing offers," says Curtis Arnold, founder of CardRatings.com.

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The total number of U.S. bankruptcies filed during the first six months of 2007 increased 48.23 percent over the same period in 2006 in all bankruptcy court districts, according to data released today by the Administrative Office of the U.S. Courts. Total filings reached 404,090 during the first half of the calendar year of 2007 (January 1-June 30), compared to 272,604 cases filed over the same period in 2006. Filings by individuals or households with consumer debt increased 48.34 percent to 391,105 for the six-month period ending June 30, 2007, from the 2006 first-half total of 263,660. The overall percentage of consumers filing for chapter 13 protection fell slightly from 41.15 percent during the first half of 2006 (January 1-June 30) to 38.35 percent over the same period in 2007. Conversely, the first-half 2007 percentage of chapter 7 consumer filers increased to 61.58 percent from the 58.76 percent recorded in the first half of 2006. Business filings for the six-month period ending June 30, 2007, totaled 12,985, representing a 45.18 percent increase over the first-half 2006 total of 8,944. Chapter 7 liquidations increased to 8,404 in the first half of 2007, a 65.21 percent increase over the 5,087 business chapter 7 filings during the same period in 2006. Chapter 11 reorganizations also rose from 2,370 in the first half of 2006 to 2,713 in the same period of 2007, a 14.47 percent increase.

With the home-mortgage crunch roiling stock markets, economists are beginning to worry about America’s credit-card debt.

By Susanna Schrobsdorff
Newsweek
Updated: 4:03 p.m. ET Aug 9, 2007

Kristin Schantz, a 26-year-old manager for a human-resources company in Kenosha, Wis., got some unpleasant news in the mail last week. In a form letter, Capital One told her the interest rate on her credit card was about to almost double—she’d been bumped up from a fixed 8.9 percent rate to a "variable rate that equals the prime rate plus 6.9 percent"—or about 15.8 percent. Schantz, who says she’s “never late with payments,” is irate. The letter blamed rising interest rates across the economy for the decision.

Schantz isn’t the only American who has lately received Capital One’s letter. Blogs are teeming with postings from people complaining about sudden rate increases by the company. In a statement to NEWSWEEK, the McLean, Va.-based Capital One acknowledged that it had raised rates for “some” customers, citing “business and economic factors (a core one being rising interest rates)” and changes in the lending market.

For now, consumers can dump Capital One and move their balances to other credit cards with better rates—as Schantz has done. But because Capital One is the largest independent issuer of credit cards, its move may signal that similar rate increases are on the way from other credit-card providers. “It could definitely be a harbinger of things to come,” says Aaron Smith, a senior economist at Moody’s Economy.com. “They may have assumed more risk than other companies—but I would be very surprised if it was an isolated move.”

That raises an important question: is Cap One’s rate increase the start of a widening credit squeeze? If so, it would be a direct result of the home-mortgage crunch, currently roiling financial markets worldwide. “We’re not in the same world as we were five or six months ago,” says Keith Leggett, senior economist at the American Bankers Association. “There is a growing risk aversion among market participants.”

As home prices across the United States have stagnated or fallen and consumers have tapped out the equity in their homes, banks have gotten more cautious about lending and have tightened their standards for new mortgages and home-equity loans. As a result, more Americans are shifting debt onto credit cards. This week, the Federal Reserve said non-real estate consumer-credit usage rose at about twice the rate than economists had predicted for June. And revolving credit usage (which includes credit-card debt) was up by 8.7 percent at an annual rate for the month. That boost helped bring total consumer credit, both revolving and not revolving (like auto loans), to a record $2.459 trillion.

Meanwhile, continued concerns about a credit crunch in the stock markets may be putting pressure on credit-card companies to tighten standards and raise rates. (Wall Street fell sharply again on Thursday after a French bank said it was freezing three funds that invested in U.S. subprime mortgages because it was unable to properly value their assets.) The market “has changed the psychology of the situation,” says Smith. “Now they’re saying, ‘Oh my gosh, we’re going to get into the same trouble these mortgage companies are getting into, we’d better tighten standards too’.” He predicts that evidence of tightening—and a resulting increase in consumer interest rates—could show up as soon as next week, when the Federal Reserve releases its quarterly survey of loan officers.

A credit-card squeeze carries real risks for the U.S. economy overall. “The shift from home-equity borrowing to credit cards is quite costly,” says Smith. Not only are mortgage interest rates about half that of credit-card interest rates, but the interest paid on credit cards isn’t tax-deductible. Smith believes that already-strapped households with little or no savings to rely on will be faced with increased financial obligations that will eventually lead to slower growth in consumer spending. And with consumer spending accounting for about 72 percent of gross domestic product, any slowdown could have a big impact.

Americans are so tapped out financially that they may not be able to stop using plastic no matter how high rates get, says Christian Weller, an economist and senior fellow at the Center for American Progess. “I think credit-card usage could still go up even if rates go up,” says Weller. “The credit market right now is like a balloon that’s being squeezed on the mortgage side and expanding on the credit cards side,” he says.

Weller says he’s concerned that credit-card debt has risen dramatically over the past few months, even as growth in consumer spending has slowed. This, he says, is a sign that credit-card borrowing is being used to close a widening household budget gap—that cards are being used to fund housing, transportation and medical care. “I believe what we’re seeing is that consumers are borrowing out of necessity—we’re not talking about a flat-screen TV or iPods here.”

For customers who need access to credit but get knocked out of the prime credit-card market due to tightening standards, the only alternative to meet their expenses may be the subprime credit- card market, says Ellen Cannon, assistant managing editor at the financial research group Bankrate.com. And that could put them even deeper into trouble, she says. “What happens with the subprimes is that they’ll give you a $200 credit limit and then they charge you $59 initiation fee and an annual fee of $45. So by signing up, you can be $150 in the hole and your interest rate is 32 percent. It’s highway robbery.”

How long will it take Americans to dig themselves out of their credit hole? Years. “Debt will increase and consumption will weaken in the next year,” says Smith. “But there will come a point when people will either have maxed out their credit or they’ll see their credit rating starting to suffer, and that’s when many of them will decide to get their household balance sheets back in order—probably by sometime in early 2009.” Smith warns, however, that reversing a borrowing trend is “a slow process.” And that’s something anyone who’s ever tried to pay down a big credit-card bill knows firsthand.

http://www.msnbc.msn.com/id/20201030/site/newsweek/page/0/

By Justin Harelik, Esq.
Bankrate.com

If you practice good financial habits and are willing to take some difficult steps, you will be able to repair your credit, and yes, you will be able to buy a car.

Here is a strategy that I teach my clients so that they can re-establish their credit and start positive, successful lives after bankruptcy.

Rebuilding credit

1. Join the Life After Bankruptcy Web site: Stephen Snyder started this company after he filed bankruptcy. It is informative and a valuable resource as your begin your financial life again.
www.lifeafterbankruptcy.com

2. Get credit: Make a list of, at most, 10 local banks and then call each one, tell them that you have filed bankruptcy, received your discharge and would like to apply for new credit. Ask if they could qualify you for an unsecured credit card. If not, ask if they can give you a secured credit card in which you put $500 into a savings account and have a credit card with a $500 limit.

3. Verify that the account will be reported to the credit agencies: The way to do this is to ask the company which credit agencies will report the credit line: Experian, Equifax and/or TransUnion. Then check your three credit reports two months later to verify.

4. Use it: Every month, use the card (even if only for one purchase) and pay the balance in full. If you need to carry a balance then try not to use the card again until the balance is paid in full.

5. Get more credit: Repeat the steps above until you have three credit cards that you can use and pay off each month.

Doing this will re-establish your credit history quickly and raise your score. Once a year, you can pull your own credit report to check and see how you’re doing.

Also, at any point in the process, you can buy a car. You may have to do a little detective work to find a lender, but it can be done.

Make a list of, at most, 10 car sellers in your area. Call each one and tell them that you have a discharge notice from your bankruptcy and that you would like to know if they give car loans after a bankruptcy. Make sure you get a firm "yes" or "no" before taking an application.

Make two copies of the discharge letter that you receive from the bankruptcy court. The discharge letter is that document that indicates you are free of debt. Keep a copy of this letter in your car’s glove compartment. This is necessary to show all future lenders that your bankruptcy case was discharged, making you eligible for post-bankruptcy loans. The other letter you should keep with your other bankruptcy files in a safe place.

Finally, remember that if your financial distress (like that of most people) was due to illness, divorce or loss of employment then you have nothing to be ashamed about. The bankruptcy laws are here to protect you while you get back on your feet. Follow the plan above and you will be able to repair your credit and buy a car — and faster than you might think.

Justin Harelik is a practicing attorney in Los Angeles.

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By Aleksandra Todorova
SmartMoney.com

The decision of whether to file for bankruptcy protection is not an easy one. Among the numerous concerns, one that is typically front and center is the worry that your credit rating will be so damaged that securing a loan – even at a lousy rate – will be darn near impossible.

But here’s some surprising news: In many cases, the damage done to one’s credit score isn’t nearly as bad as expected. Over the long run, obtaining a score high enough to make you eligible for very competitive rates isn’t out of the question.

The Agenda: Debt

Part of the reason why your score isn’t likely to suffer all that much is that most folks seriously struggling with debt aren’t exactly maintaining a top-notch score to begin with. "In virtually every instance, the consumer will already have repayment problems such as late payments, very high balances, charged-off accounts or collection accounts," says Rod Griffin, a spokesman for Experian, one of the three major credit bureaus.

In light of this, some consumers may even see a slight boost in their credit scores after filing bankruptcy, according to John Ulzheimer, president of Credit.com Educational Services, a consumer credit education group. Why? To start with, your credit report is largely wiped clean when you declare bankruptcy. Your high balances are removed as are any late payments or records of unpaid debts. Instead, the accounts included in the bankruptcy will be marked as "Included in Chapter 7 Bankruptcy" or "Included in Chapter 13 Wage Earner Plan," depending on which type of bankruptcy you filed. Both types of bankruptcy affect your credit score in the same way, according to Ulzheimer. Granted, you aren’t likely to see a big jump – but if you’ve just been scraping by, your score isn’t likely to fall much further.

That said, a bankruptcy could help your score over the long term, as well. Here’s why: When calculating scores, the formulas developed by Fair Isaac (the company that calculates the most widely used credit score, known as the FICO score) are set up to grade someone’s credit standing as compared with that of consumers in a similar financial position. To do that, Fair Isaac divides consumers into 10 groups, using what it calls "score cards." It then ranks the consumers in each group based on the others in the group. One of these score cards is bankruptcy filers. (For competitive reasons, Fair Isaac doesn’t release what constitutes all 10 groups.)

In other words, when you file bankruptcy your score is determined based on how you do compared with other bankruptcy filers, explains Fair Isaac spokesman Craig Watts. The reason? Fair Isaac has found this to predict credit risk better. "It’s a much fairer comparison," he says. "You’re not compared with people with rosy, perfect reports."

As a result, credit scores can run the gamut among bankruptcy filers.
"In that population, you’ll find some consumers who have very good FICO scores, some who have very bad FICO scores, and in between," Watts says.
(Fair Isaac doesn’t have statistics on the average FICO score for bankruptcy filers.) Granted, you won’t be able to bring your score up to the perfect 850 as long as your bankruptcy stays in your report, but with good credit management after filing, a score in the 700s isn’t impossible.

Then again, your credit score alone shouldn’t affect whether or not you decide to file bankruptcy. "You have to be realistic about your ability to get back on your feet financially," says credit expert Gerri Detweiler, author of "The Ultimate Credit Handbook."

That said, if your debt payments are crushing you, bankruptcy will give you a much-needed fresh start. And with a few clever credit repair strategies, your score could be back in the 700s within two or three years.

Bouncing Back

Here’s how to raise your credit score as quickly as possible after declaring bankruptcy:

1. Damage control

Make sure all the accounts you included in your bankruptcy are listed as such, and show $0 balances if you filed Chapter 7, says Detweiler. If a creditor continues to report the account as delinquent – which they shouldn’t – your credit score would suffer.

2. Get new credit cards

That’s the most important step in your bankruptcy recovery, Detweiler says. If you can’t get approved for an unsecured credit card, start out with a secured card. With a secured card, you will make a deposit with the credit-card issuer, which will in essence be your credit limit.
Typically, after a year to 18 months of on-time payments, you could "graduate" to a regular, unsecured credit card.

3. Piggyback

If you have a trusted friend or relative, ask them to make you an authorized user on one of their credit cards. Your bankruptcy won’t affect your friend’s credit, but you’ll automatically get the account history for that card in your report.

4. Bigger loans

What about auto loans and mortgages? You can start shopping for auto loans as soon as a few months out of bankruptcy, says Steven Snyder, author of the book "Credit After Bankruptcy." Traditional banks are likely to turn you down, but the financing folks at the dealership may be more lenient, especially if they’re in a bind to meet sales quotas.
Mortgage lenders will want to see at least two years of good credit behavior, according to Snyder.

For more on credit repair after bankruptcy, click here www.lifeafterbankruptcy.com

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With the housing market in decline, financial predators are finding different ways to take advantage of people who fall behind on their payments, the New York Times reported. The schemes take various forms and often involve promises to distressed homeowners of cash up-front, free monthly rent and a chance to retain their houses in the long run. But in the process, someone else takes over the deed, borrows as much as possible against the value of the house and pockets the cash while the homeowners still end up losing their homes. There are no nationwide numbers on this common fraud, known as equity stripping, but it has turned up in almost every state. Seven states have passed laws to try to stop it. Still, with foreclosure rates rising rapidly, it will be a growing problem, consumer advocates say. “Conditions now are perfect for these scams,” said Lauren K. Saunders, managing attorney at the National Consumer Law Center in Washington, D.C. “We are at the end of a period of rising real estate prices, so a lot of people have equity in their homes. But we also have a foreclosure crisis.” Victims are becoming more plentiful as homeowners fall behind on payments and find that they cannot refinance, with mortgage rates rising. The Mortgage Bankers Association recently disclosed that nearly 19 percent of all loans to less-creditworthy consumers, or 1.1 million mortgages, were either delinquent by more than 30 days or in foreclosure. This is up from 17.9 percent last year.

Despite the growing popularity of debit cards, many consumer groups recommend limiting their use — or not using them at all — because they may not have the same liability protections as credit cards, the Wall Street Journal reported. "More and more consumers are using debit cards over cash and checks because it is convenient," says Nancy Krattli, vice president of consumer debit products at Visa International’s Visa USA. In 2006, she says, $459 billion was spent on Visa consumer debit cards, 11.9 percent more than in 2005. The cards are particularly popular with people aged 18 to 25; an April poll from Visa found that 76 percent of this age group "never leaves home without a payment card, and one-third rarely carries cash." With a debit card, the liability varies. The loss could be limited to $50 if a cardholder notifies the financial institution within two business days after learning of the loss or the theft of the card or PIN number. Beyond the 48 hours, the cardholder could lose as much as $500. The loss could be even higher if the cardholder doesn’t report it within 60 days after receiving a financial statement listing the fraudulent transactions.

Many of these ‘too-good-to-be-true’ offers are run by con artists

By Herb Weisbaum

How’d you like to lower your monthly credit card and loan payments — guaranteed? It’s an offer that sounds mighty appealing to anyone struggling to pay their bills. A growing number of companies across the country claim they can do this by either lowering your interest rate or reducing the amount you owe.

But beware! Some of these debt relief programs are scams run by con artists who can’t deliver on their promises. If you fall for their pitch, you could lose hundreds of dollars in fees and find yourself in worse financial shape. You’ll owe just as much as when you started, plus have additional late fees and other penalties to pay.

Carol in North Carolina was willing to share her personal horror story with me as long as I did not use her last name. It started with a phone call from a debt management company. The representative told Carol she could get her creditors to lower their interest rates. This would let Carol pay off her credit card, mortgage and car loan debt three to five times faster.

“She specifically told me that I would save at least $2,500 in a very short time and would likely save much more,” Carol states in her declaration to the Federal Trade Commission.

Carol was skeptical, especially when she heard the price was $499. But the salesperson assured Carol she would see lower interest rates within the first 30 days of the program and that these savings would more than cover the fee.

“She spoke with such confidence and zeal that I was moved to tears,” Carol says. “I was thrilled and full of hope to know that I would finally be able to pay off my debts.”

But it didn’t turn out that way. Despite repeated attempts, Carol’s “financial consultants” could not lower the rates on any of her credit cards. The company will not refund Carol’s $499 fee as promised. The Federal Trade Commission has sued the firm.

A widespread problem

In the last few years, the Federal Trade Commission has sued more than dozen debt relief companies. “They simply lie to consumers,” says the FTC’s Alice Hrdy.

FTC ad IRS investigators have also found some counseling services that claim to be non-profit when they are actually a for-profit company. The non-profit pitch can make a potential client feel confident about signing up for the service. “They’re preying on the consumer’s trust,” Hrdy says.
Some of the bad apples in this industry mislead people about their charges. “They either say there are no fees involved or just a small fee,” Hrdy explains. Sometimes, they don’t mention fees at all.
Bruce, who lives near Seattle, signed up with a company that promised to lower his interest rates. He was told to send them a check for $265.

“It was my clear understanding that money was going to pay off my credit card bills,” Bruce told me. It turned out to be a “referral fee” to find him a company that would supposedly help him.

“It was a nasty experience,” Bruce says. “They basically stole my money.”

Warning: Debt settlement programs

Some companies now claim they can negotiate a one-time settlement with all of your creditors that will reduce your principal by as much as 50 to 70 percent. By doing this, they say, your monthly payments will drop dramatically.

“That is virtually impossible under any circumstances,” says Travis Plunkett, Legislative Director of the Consumer Federation of America. That’s why CFA warns consumers not to use debt settlement programs. “They are promising something they can’t deliver,” Plunkett says.

Credit counselors — a better option

Charles Helms, president of Consumer Counseling Northwest, sees a lot of people who have been burned by these phony debt relief programs. “It’s horrible,” he says. Because most of them have a large up-front fee, they’ll take anyone who can pay.

“Their goal is to get you to sign up, not to successfully complete the program,” Helms says. “So here’s someone who is financially damaged to begin with and then these companies just go out and take the last of their resources and kill any hope they have of getting out of that situation.”

With a legitimate credit counselor, there is no right answer for everyone. They sit down with you and give you a free and objective assessment of your financial situation. At Credit Counseling Northwest, they saw 6,000 people last year and found that debt management was the right option for only 19 percent of them. The rest were given a plan to work things out on their own.

With a customized consolidated payment plan you should be able to pay off your credit card debt in 3 to 5 years. You write the counseling agency one check each month and they pay all your creditors.

Do your homework

Facing mounting bills can be frightening, but getting debt relief is not a decision that should be based on hearing a radio commercial or getting a sales call. You want to find an organization that will design a debt relief plan specifically for you.

Shop around. Compare a couple of services and get a feel for how they operate. The credit counselor should spend at least 20 to 30 minutes with you in order to get a complete picture of your finances. If they don’t do that, you’re not really getting any counseling.

Ask a lot of questions and get those answers in writing. Find out about the fees. The Consumer Federation of America says you shouldn’t pay more than $50 for the set-up fee and no more than a $25 monthly maintenance fee. If the agency is vague or reluctant to talk about fees, go someplace else.

Don’t rely on names or the claim of a non-profit status. Check them out with the Better Business Bureau or your local consumer protection office.

By doing your homework you should be able to find a service that doesn’t over-charge or over-promise.

© 2007 MSNBC Interactive
URL: http://www.msnbc.msn.com/id/18155301/

Average Credit Statistics

As a company that helps the nation’s largest banks and financial institutions assess credit risk, Fair Isaac is often asked to describe the credit use of a typical consumer. In researching the answer, Fair Isaac discovered that consumers vary immensely in what types of credit they use and how they use it.

By analyzing a representative national sample of millions of consumer credit profiles, Fair Isaac was able to survey the panorama of credit activity across the U.S. The following statistics reflect the average use of credit by today’s consumers.

Number of Credit Obligations
On average, today’s consumer has a total of 13 credit obligations on record at a credit bureau. These include credit cards (such as department store charge cards, gas cards, or bank cards) and installment loans (auto loans, mortgage loans, student loans, etc.). Not included are savings and checking accounts (typically not reported to a credit bureau). Of these 13 credit obligations, 9 are likely to be credit cards and 4 are likely to be installment loans.

Past Payment Performance
On average, today’s consumers are paying their bills on time. Less than half of all consumers have ever been reported as 30 or more days late on a payment. Only 3 out of 10 have ever been 60 or more days overdue on any credit obligation. 77% of all consumers have never had a loan or account that was 90+ days overdue, and less than 20% have ever had a loan or account closed by the lender due to default.

Credit Utilization
About 40% of credit card holders carry a balance of less than $1,000. About 15% are far less conservative in their use of credit cards and have total card balances in excess of $10,000. When we look at the total of all credit obligations combined (except mortgage loans), 48% of consumers carry less than $5,000 of debt. This includes all credit cards, lines of credit, and loans-everything but mortgages. Nearly 37% carry more than $10,000 of non-mortgage-related debt as reported to the credit bureaus.

Total Available Credit
The typical consumer has access to approximately $19,000 on all credit cards combined. More than half of all people with credit cards are using less than 30% of their total credit card limit. Just over 1 in 7 are using 80% or more of their credit card limit.

Length of Credit History
The average consumer’s oldest obligation is 14 years old, indicating that he or she has been managing credit for some time. In fact, we found that 1 out of 4 consumers had credit histories of 20 years or longer. Only 1 in 20 consumers had credit histories shorter than 2 years.

Inquiries
When someone applies for a loan or a new credit card account – in short, any time one applies for credit and a lender requests a copy of the credit report – this request is noted as an “inquiry” in the applicant’s credit file. The average consumer has had only one inquiry on his or her accounts within the past year. Fewer than 6% had four or more inquiries resulting from a search for new credit.

http://www.myfico.com/CreditEducation/AverageStats.aspx

You Are Pre-Approved–8 Billion Times

By Elizabeth Warren

In 2005, Congress gave the credit industry what it wanted: tighter bankruptcy laws. In 2006, the credit industry responded: It mailed out 8 billion credit card solicitations –up 30% from 2005. It looks like if Congress will make it tougher to go bankrupt, then lenders will try harder to get people to borrow.

With about 110 million households in the US, that’s about 73 card offers per household. If the average card offers is about $5,000 in pre-approved credit, that’s about $365,000 in offers for every American household–or about $1000 a day, every day of the year.

By comparison, median household income is about $46,000, or about $127 a day. It wouldn’t be unreasonable to speculate that many families are offered about seven times their annual incomes in credit card debt. Of course, the mailings are the only offers that are counted. There are solitications in the malls, on college campuses, and stuck in magazines. They are on television, radio and the internet. I find credit card solitications in the bottom of the plastic bag every time I buy something at a nearby college bookstore.

8 billion credit card offers. Think of the postage. The paper. The possibilities. And think how profitable credit card lending must be to make it worthwhile to mail out 8 billion solicitations when the response rate is less than 0.3%.

Credit card companies are riding high–more lending and less worry that families in trouble will file for bankruptcy. Thanks to their friends in Washington, life is good.

http://www.tpmcafe.com/user/26/recent