Why They Want You to Have Bad Credit
By Jim Booth
HOW MUCH DOES DAMAGED CREDIT COST YOU?
Example 1. $25,000 Auto Loan 5 Years (60 Months)
Perfect Credit- Rate=10% Payment = $531.18 Cost of Bad Credit= $0.00
Fair Credit- Rate=14% Payment = $581.71 Cost of Bad Credit= $3031.18
Poor Credit- Rate=20% Payment = $662.35 Cost of Bad Credit= $7870.82
BAD CREDIT AUTO LOANS ARE NOTHING COMPARED TO MORTGAGE LOANS
Example 2. Mortgage Loan $100,000 30 Years (360 Months)
Perfect Credit- Rate 6% Payment $599.66 Cost of Bad Credit $0.00
Fair Credit- Rate 9% Payment $804.83 Cost of Bad Credit $73,861.12
Poor Credit- Rate 14% Payment $1028.62 Cost of Bad Credit $154,425.60
HOW LONG IT TAKES TO REPAY A LOAN
Example 3. $500 Credit card balance at minimum payment of $10 per month
Interest rate 16% Number of months to payoff debt 83. Interest you will pay over time $329.42
Interest rate 19% Number of months to payoff debt 94. Interest you will pay over time $431.08
Interest rate 21% Number of months to payoff debt 120. Interest you will pay over time $698.50
Interest rate 23% Number of months to payoff debt 168. Interest you will pay over time $1,174.36
WHY THE CREDIT REPORTING AGENCIES WANT YOU TO HAVE BAD CREDIT
The Credit Reporting Agencies (CRA’s) want you to have negative and derogatory items on your credit report because the worse your credit is, the more money they make.
Credit scores called FICO scores (FICO stands for Fair Isaac Company, the company that developed the credit scoring model) are between 300 and 850. There is no credit score below 300.
Let’s say that you are applying for a car loan and you have a FICO score of 825. This is considered to be excellent credit that presents no risk to the lender. The lender will pull one credit report from each of the CRA’s for about $4 each. Each credit reporting agency, Equifax, Experian and Trans Union will send your credit information to the lender and each CRA will make four dollars. You will get your car loan immediately.
Now let’s say that your credit score is only 525. The dealer will start looking for lenders who will make a loan to someone with a risky, low credit score. The lower the FICO score, the riskier the loan becomes and the harder it is to get. The dealer may have to try as many as 20 lenders to find one who will make the loan. Each of the 20 lenders will pull your credit reports and pay $4 each, so each of the Credit Reporting Agencies will now make $80. They make $4 if you have good credit and they can make as much as $80 if you have bad credit. Do they want you to have bad credit? You bet they do.
They gather and report information about everyone they can and sell that information to potential creditors. They get their information from creditors, public records, criminal records, hearsay and anywhere else they can. The worse it is for you, the better it is for them. It is in their best interest for you to have bad credit.
Experts estimate that 79% of the adult public has at least one false, misleading, inaccurate, negative item on their credit report.
Information Supplied by Creditors
Creditors can inadvertently transpose a social security number or account number on your file and send false information to one or more CRA’s. The CRA’s computer database will simply list it under your name and payment history. There are no checks or safeguards in place to verify the accuracy of the information being recorded and distributed about you.
Information Supplied by Criminal Records
Criminal records stay on your credit report for life. There is no expiration time limit as there is for bankruptcy, foreclosure, late pays, charge-off’s etc. The reason criminal records are permanently kept in credit reports, is because they expose mistakes you have made and speak about your judgment and character and whether you are a responsible individual.
Information Supplied by Public Records.
Public records can cause misinformation to appear on your credit report. If the house you live in has ever been in foreclosure, even if you were not the owner at the time of the action, your name may be associated with the foreclosure. Will the Credit Reporting Agencies volunteer to remove this false information from your credit report? Absolutely not.
You have to prove to them that it was not you. It is in the Credit Reporting Agencies’ best interest for negative and derogatory information to be on your credit report. It is up to YOU to monitor the information that they sell and distribute about you.
If you have a fairly common name, it is quite likely that someone else’s credit information is mixed with yours. You could be paying increased payments and higher interest for someone else’s mistakes. If your name is Smith and you live on Main Street, you had better be keeping an eye on your credit reports.
Mistakes on tax records and false information supplied by public officials can show up on your credit report.
For example: If you go to the public bankruptcy records on the PACER website and search for the last name “Smith” in the state of Utah, you will find over 5,500 listings and many of those names will be exactly the same. Some will be in or near the same geographical area. This can result in bad credit for these people whether they actually have justifiable derogatory credit, criminal or public information. They will be cross linked with someone else and the victims will never know until they are denied credit.
They may have you listed as having lived at an address you never occupied. That incorrect address may have a name listed which is similar to yours. Nevertheless, someone else’s bad credit information can show up on your credit report.
Again, if you have a common name, the CRA may have listed false information about you. It is a good idea to look up your name in the telephone book, on Google, anywho.com and similar people search websites to see just how common your name is in your state, county city, town and zip code. The more names you find which are similar to yours, the closer you need to look at your credit report.
The CRA’s often ignore a middle initial. For example: If you are John J. Smith in Capitol Heights, MD. 20743 and there is a John A, Smith in the same 20743 zip code, you may be subject to someone else’s bad credit.
COMMON MISTAKES MADE BY CRA’s
Account you didn’t open, showing identity theft
Debt(s) discharged in bankruptcy, but still showing a balance
Wrong name, wrong address(es) or wrong account numbers, wrong Social Security (SSID)#
Never late, but shown as late
Paid and closed account shown as open and unpaid
Unauthorized inquiries with no permissible purpose
The “Big Three” CRA’s have victimized many consumers with false credit reports. These cases include mixed credit files, identity theft cases, re-aged collections, public records mixed, and numerous other reporting ills.
One-quarter of all credit reports contain errors serious enough to result in people being denied credit, access to favorable loan rates, and-in some cases-jobs, according to a report issued Thursday by a consumer group.
The group, the U.S. Public Interest Research Group (PIRG), criticized “the big credit bureaus and big business” for tolerating “big mistakes in credit reports.”
“Those mistakes ruin the financial reputations of hardworking Americans,” said Ed Mierzwinski, PIRG’s consumer program director.
• Credit files are updated 4.5 billion times each month by the Credit Reporting Agencies and mistakes happen
• Twenty-five percent (25%) of the credit reports contained errors serious enough to result in the denial of credit
• Seventy-nine percent (79%) of the credit reports contained mistakes of some kind
• Fifty-four percent (54%) of the credit reports contained personal demographic identifying information that was misspelled, long-outdated, belonged to a stranger, or was otherwise incorrect
• Thirty percent (30%) of the credit reports contained credit accounts that had been closed by the consumer but incorrectly remained listed as open and unpaid.
Where to get your free credit reports[http://www.annualcreditreports.com]
Beware of many of the advertised “free credit reports” with a catchy tune that you hear on the radio and TV. In many cases all you get is a “Tri-Merge” report that is almost useless. You will get tons of email spam soon after.
Will Pulling My Own Credit Report Lower My Credit Score?
No, getting your own report is considered a “soft” inquiry because you are not applying for credit. Applying for an auto loan, credit card or mortgage is a “hard” inquiry and becomes part of your credit history.
Look at your reports very closely and check for wrong addresses, wrong Social Security Number (SSID) wrong account numbers, closed accounts that are showing as open and any other mistakes. Verify that all accounts listed are yours. Look for unauthorized inquiries into your credit that have no permissible purpose. Those need to be removed from your credit report.
If you find errors, do not use their “convenient online dispute” process. This speeds up the debt verification process for them. Any disputes you make are to be done only by certified mail.
WHAT CAN BAD CREDIT AFFECT?
A poor credit rating can affect auto loans, mortgage loans, credit card rates, automobile and other forms of insurance rates, your employment and other aspects of daily life.
BEWARE OF JUNK DEBT BUYERS
Junk Debt Buyers (or JDB’s) will buy an old debt from many years ago for pennies on the dollar and attempt to collect the full amount of the debt from you. They will buy debt from a creditor that was charged off as many as 20 years ago or longer, that is no longer even listed on your credit report. Junk Debt Buyers are scavengers and bottom feeders. They will call and try to intimidate, harass and embarrass you in an attempt to collect that debt. They will send you threatening letters known in the industry as “dunning letters.”
There are several important points to remember concerning Junk Debt Buyers.
1. In most cases, if the Statute of Limitations has passed and you cannot be sued for the debt, no matter what the collection agent tells you on the phone or in a letter. If you are sued, an expired Statute of Limitations is the best defense.
2. Debt reporting and the Statute of Limitations are based on the Date of Last Activity (DOLA). If you make a payment toward this debt, the Statute of Limitations is violated and this debt can be placed on your credit report, where it will remain for seven years, and you can be sued for this debt. Never make any payments on an old debt that is outside the Statute of Limitations.
3. Junk Debt Buyers will deliberately re-age your debt, falsely reporting to the CRA’s that
there has been activity on the account, thus re-setting the date of last activity. Make them prove it.
Statute of Limitations on Debts
The Statute of Limitations for credit purposes limits the amount of time that you can be sued for a debt. There are two important locations for the Statute of Limitations. The first is the state you live in and the second is the state where the creditor is located. The application you signed to apply for the credit may have a Choice of Law clause which names the state where the creditor is located as the state where the Statute of Limitation applies. If there is no such clause or your state law does not allow such clauses, then the Statute of Limitations applies in your state.
Oral Contract: You agree to pay money loaned to you by someone, but this contract or agreement is verbal (i.e., no written contract, “handshake agreement”). Remember a verbal contract is legal, but much more difficult to prove in court. Unless an oral debt was recorded or made in front of witnesses who are able and willing to testify, I wouldn’t worry about being sued.
Written Contract: You agree to pay on a loan under the terms written in a document, which you and your debtor have signed.
Promissory Note: You agree to pay on a loan by way of a written contract, just like the written contract. The big difference between a promissory note and a regular written contract is that the scheduled payments and interest on the loan also is spelled out in the promissory note. A mortgage is a good example of a promissory note.
Open-ended Accounts: Are revolving lines of credit with varying balances. The best example is a credit card account. Note: a credit card is ALWAYS an open account. This was established under the Truth-in-Lending Act:
When does the Statute of Limitations begin?
It begins six months after you made the last payment or the DOLA (Date of Last Activity) on the account.
Many people will be intimidated by collection agents threatening legal action and make payments even after the Statute of Limitations has expired. This is the worst thing they could do.
• The date of the payment updates the DOLA, violates the Statute of Limitations and will reset the clock at the Credit Reporting Agencies. Items can stay on your credit report for 7 years. If it is year 6 and you make a payment, this late account will now stay on your credit report for another 7 years!
• Do not agree to pay for items which have been discharged in bankruptcy, regardless of what a collection agent may say.
Know the Statute of Limitations for YOUR state and keep a copy of your credit application so you know what the creditors rights are. Do not be intimidated by collection agents. Here is what the Federal Trade Commission says about Time Barred Debts
WHAT IF THE STATUTE OF LIMITATIONS HAS NOT EXPIRED?
If you are in danger of being sued and collection agents are calling, you may still have options.
1. Dispute the debt. Make them prove that the debt exists. If they cannot prove it exists within 30 days, the tables have turned in your favor.
2. Try to work only with THE ORIGINAL CREDITOR. If you decide to make payments, ask the original creditor to pull the debt from the collection agency and pay the original creditor directly. This does not always work but sometimes it does.
3. Whether you work with the collection agency or the original creditor, do not pay anything unless you get any agreements you have made in writing.
4. Pay nothing to anyone, unless you get in writing, that the collection agency or original creditor will update the Credit Reporting Agencies to show payment on the account. In many cases you can pay them in full and they will not report that fact to the CRA’s and the account will remain listed as open and unpaid for the next 7 years even though you paid the debt in full. It is up to you to make sure it is reported correctly.
DEALING WITH COLLECTION AGENCIES
First, if they call you, DO NOT ACKNOWLEDGE THE DEBT or even admit there is any debt. Tell them that you don’t have a clue as to what they are talking about.
Second, tell the caller that you do not discuss your personal financial information with strangers over the phone and that if they have anything to say to you, it must be by U.S. Mail. Then, hang up. Do not give them you current address or address of a relative or friend.
If and when you get a letter from the collection agency, immediately return a letter to them telling them to:
1. Cease and Desist any and all telephone communications with you.
2. Cease and Desist any and all attempts to collect this unknown debt, and that
3. This letter serves as notice that any and all future phone calls made to you by them will be recorded and that no further notice will be given. This letter is to be sent CMRRR (Certified Mail Return Receipt Requested)
4. Make a copy of this letter and keep the CMRRR slips for your records.
A CERTIFIED MAIL TRICK
Many collection agencies will refuse to sign for certified mail in an attempt to get around the law. Here is a trick I use to get my clients free from the phone and mail harassment.
Send the Cease and Desist letter in a box and send it by Fed Ex, signature required. They will not suspect that there is a letter inside the box, especially if you put something in the box to give it some weight. Once they sign for the package, the legal requirements to be considered as delivered and in their possession, have been met.
If their harassment continues once you are in possession of the signed delivery receipt, you can sue them under The Fair Debt Collection Practices Act.
CAN I REPAIR MY OWN CREDIT?
“Credit Repair” is a relative term. There is no magic wand that anyone can wave over your credit report and take you from a 500 credit score to an 850. You can have untrue, out-dated information, incorrect addresses, wrong account numbers, closed accounts shown as open, etc. removed from your credit reports if you are persistent, methodical and have the time to do it. It will take you a good amount of time and effort and the Credit Reporting Agencies are quite reluctant to remove negative and derogatory information. They will present you with many road blocks so you must be persistent.
If you choose to have a company which specializes in credit services work on your credit, be careful of their claims. If they want you to apply for different identification or tax ID numbers, be advised that you can be prosecuted for this activity.
Any company which guarantees that all negative items will be removed are not being truthful. Some companies will dispute all negative items listed on your credit report and your credit will go up until the items are verified, usually within 30 days and then your credit will go right back to where it was before you started. Bankruptcy and foreclosure can sometimes be removed if they cannot be verified but they usually are verified rather quickly.
A good credit services company will closely examine your credit reports from all three major credit bureaus and begin the process of using the existing federal laws to force the credit reporting agencies to remove items which do not belong there.
If you do not have the time or if you do not wish to confront the agencies, then hire a professional to go to bat for you. You have nothing to lose and everything to gain as long as the company you hire is reputable.
Jim Booth has worked with hundreds of homeowners in foreclosure, helping them back on the road to good credit. He is Vice President of the Maryland Association of Professional Foreclosure Consultants and President and CEO of The Credit Mechanic. You can reach Jim at firstname.lastname@example.org.