Suze Orman, Financial Guru
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Managing Debt

The Fair Debt Collection Practices Act (FDCPA) was passed to protect customers from being shaken down by collection companies. This act restricts the tactics they may use. Please note: The FDCPA applies to outside collection agencies, the ones that most credit card companies hire after their own attempts have failed, and not to the collection department within the card company or other lender. 
 

What are collection agencies not allowed to do?

As a result of the FDCPA, collectors cannot phone your home so often as to harass you. They cannot call before 8 A.M. or after 9 P.M. They cannot threaten you or use obscene language. They cannot call you directly if they know you are being represented by an attorney, and they cannot call you at work if they know your employer prohibits such calls. They cannot call your friends, your neighbors, or the people you work with and reveal your financial situation. 
 

Can a collection agency obtain information on my whereabouts from government records, such as Social Security records or my tax returns?

No, a collection agency cannot make use of government records. But an original creditor can gather information from a state motor vehicle department about registration of a car, from your voter registration records, from the post office, or from a utility company or a bank, in order to locate you. 
 

My collection agency does everything it is not supposed to do. Can I sue?

Yes, you can sue a collection agency, but a better first step might be to use the provisions of the FDCP to warn your collection agency that it is acting in defiance of the law. What you should do is write a letter telling the collection agency to stay away from you, to leave you alone, and to cease all communications with you. In this letter, inform the collection agency that under provision 15 of the U.S. Code, section 1692c, this letter constitutes your formal notice to stop all future communications with you except for the reasons specifically set forth in the federal law. 
 

I have written a letter like the one above, but I am still being harassed. What can I do?

Contact the Federal Trade Commission and register a formal complaint. If you can prove continued harassment, the collection agency is open to a lawsuit - one you could win if you have the proper documentation or proof. There have been several successful suits against collectors where the consumer won in court. 
 

Do I have any other legal resource against a collection agency?

If you think that the collection agency may be behaving in a way that you suspect is illegal, write a letter to the Federal Trade Commission: Consumer Response Center, Room 130-A, Federal Trade Commission, 600 Pennsylvania Ave. N.W., Washington, D.C. 20580. Include in your letter as many details as possible. Send a copy to your state attorney's office, your local consumer protection office, or both. You might also consider sending a copy to the legal department of the credit company that started the ball rolling in the first place. If this fails contact the American Collectors Association, at P.O. Box 39106, Minneapolis, MN 55439. It's members agree to conduct their business in a professional manner.

Here are the corporate addresses of the five largest charge and credit card companies: 

American Express Office of the President
American Express Tower World Financial Center
New York, NY 10285-3130 

Diners Club 8725
West Sahara Avenue
The Lakes, NV 89117

Discover Cardmember Services
2500 Lake Cook
Road Riverwoods, IL 60015  

MasterCard International Public Relations
888 Seventh Avenue
New York, NY 10106

Visa Consumer Relations
P.O. Box 8999
San Francisco, CA 94128

The Association of Independent Consumer Credit Counseling Agencies

www.aiccca.org/
The Association of Independent Consumer Credit Counseling Agencies (AICCCA) is the largest national association representing non-profit credit counseling companies. Our members provide consumer credit counseling, debt management, housing counseling, bankruptcy counseling, and financial education services. All AICCCA members adhere to strict high-quality service standards. Our standards ensure that consumers with problem debt will receive expert help from experienced organizations they can trust.

 

National Foundation for Credit Counseling
(800) 388-2227
www.nfcc.org
As the nation's largest financial counseling organization, the NFCC Member Agency Network includes more than 700 community-based offices located in all 50 states and Puerto Rico. More than three million consumers annually receive financial counseling and education from NFCC Member Agencies in person, over the phone, or online. To locate an NFCC Member Agency in your area call 800-388-2227. Para ayuda en Español Ilama al 800-682-9832.

 

Debtors Anonymous
Debtors Anonymous General Services
P.O. Box 920888
Needham, MA 02492-0009

Debtors Anonymous is a 12 step spiritual self-help fellowship, modeled upon Alcoholics Anonymous. For information about the DA program and groups in your area, contact the General Service Office, 781-453-2743 (all calls are confidential) or www.debtorsanonymous.org.

I have received so many letters from people who have been denied lower interest rate cards and want to know what is the next step. Credit card companies, banks, mortgage lenders, credit unions.and many others buy information about you through credit bureaus. They use a procedure called "scoring" applicants when deciding whether to approve or deny credit. Leaving the issues of the scoring process aside, here is what you need to know about what your credit report contains and how to fix incorrect information. 

You are entitled to get a copy of your credit file free if you have been denied credit from the bureau that reported the information--and I recommend that you check your credit status from time to time anyway, in order to make sure that it is accurate. If you've been denied credit, you must apply for your file this within 60 days of the denial. There are other ways to obtain a copy of your credit report free, by taking advantage of offers that come in the mail all the time, for example. I recently received a credit card offer to join a credit club. They offer one month free and then you pay a yearly fee. The terms stated that you could cancel after the first month. I signed up to receive the first month, and then I cancelled. It cost me a stamp and a phone call. 

The information that is contained on a credit file is your full name (and any previous names), Social Security number, telephone number, current address, employment history, marriages, divorces, lawsuits, liens, bankruptcy information and most importantly your credit history. It will list the names of your creditors, type of account, when it was opened, your payment history for the previous 24-36 months, your credit limit and current balance. It will also state who is paying the account - whether it is you, a collection agency, or another type of service like the Consumer Credit Counseling Service. If you are disputing a charge, this too will appear in your file. Also it will list the names of people or companies that have requested your file within the last six months (two years if the information was given to an employer or potential employer). 

Upon receiving the file, go over all the information to see if everything is accurate. Make a list of everything that is incorrect, out-of-date, or misleading. In particular look for mistakes in your name, address or phone number, Social Security number, missing or outdated employment information. You'll also want to look for: bankruptcies that are more than ten years old; any negative information about you that is more than seven years old, credit inquiries older than two years, credit accounts that are not yours, lawsuits you were not involved in, incorrect account histories (especially late payments when you've paid on time), a missing notation when you've disputed a charge on a credit card bill; closed accounts incorrectly listed as open; and any account that is not listed as "closed by consumer" because it looks as if it was closed by the creditor. 

Once you've made the list you can use the "Request for Reinvestigation" form that should have come with your credit report. If you did not receive the form, just write a letter and request one. List each incorrect item and explain exactly what is wrong. Be sure to make a copy of the letter before sending it back. The reinvestigation is free in every state except New Mexico, where it costs $5. 

Once the credit bureau receives your reinvestigation request, it must get back to you within a reasonable time. That usually means 30 days although many bureaus will get back to you within 10 days. This is an easy process for them, since they are all linked up by computers. If you have found errors--and don't be surprised if you do--you might be concerned that the other credit bureaus might also have this misinformation on your credit rating. It might be a good idea to obtain copies of these reports as well, and go through the same process with the other credit bureaus.  

If you don't hear from them within the deadline send a follow-up letter. And to really grab their attention send a copy of your second letter to the Federal Trade Commission (6th & Pennsylvania Ave NW, Washington, DC 20580, main office). 

If you are right, or if the creditor who provided the information can no longer verify it, the credit bureau must remove the information from your file. Many times the bureaus will remove items without reinvestigating it if the item is more bother than it's worth. 

If you feel something is wrongfully in your file and you want to explain a particular entry you are entitled to add a 100-word statement to your file. Be very careful though because the bureau is required to put down only a summary of what you wrote. So be concise and extremely clear. You can also add positive things to your file, for example, accounts that you've paid on time. Just ask in writing that they be added to your report. 

Finally, if you feel the bureau is not abiding by the laws or has treated you unfairly, you can send your complaint to the Federal Trade Commission. Be sure to send a copy of this correspondence to the bureau about which you are complaining. If a credit bureau insists on reporting out-of-date or inaccurate information, or if you've paid them an unreasonable amount (anything over $50, or the limits set in your state), writing to the FTC can put an end to it. 

For further information about repairing credit, I recommend Rebuild Your Credit - Nolo's Law Form Kit, and Money Troubles by Attorney Robin Leonard, also from Nolo Press.

With credit-card debt at epidemic proportions in this country--among the rich, among the poor--you must have seen television programs about getting out of debt, and you must have read dozens of articles explaining how to do it. I offer a step-by-step plan for getting out of debt in The 9 Steps to Financial Freedom, and there are other books available that cover the subject well, too. In short, there is plenty of help available to show you how to do get out of debt, you already know why you must get out of debt, and now I want you to take the actions that will enable you to reach that goal. Millions of people have done it, and so can you--but only if you raise it to a top priority and keep your vow to yourself to do it. 

Having covered the topic at length in my Nine Steps Book, I am only going to summarize it here, because if you need to pay off debts, you need to know everything you can. However, here are ten important points to keep in mind:

  1. If you are in credit card trouble, you must cut up all of your credit cards now, with the possible exception of one card for emergencies; do not carry this card in your wallet, however.
  2. You must pay more than the minimum payment every month, as much more as you possibly can. If you owe a credit card company $5000 at 18 percent interest and all you do is pay the minimum each month it will take you over 30 years to pay it off.
  3. You must pay off the credit card with the highest interest rate first, and the rest in descending order.
  4. You must negotiate for yourself the best interest rates, even if it means switching credit cards every six months.
  5. You must understand everything about how your credit card works--all fees, how the company charges you, all about the so-called grace period, everything.
  6. You must honor all your debts equally--whether it's the money you owe Visa, or the money you owe your brother.
  7. After you pay off one credit card, you must apply the money you have been paying that particular company to paying off another credit card.
  8. If you doubt that you can do this yourself, you must get in touch with a wonderful nonprofit agency known as the Consumer Credit Counseling Service; they can be reached by calling 1-800-388-2227. They will help you organize and consolidate your debt.
  9. You must never let this happen again.
  10. After your debts have all been paid off, you are to apply the money you were paying all those months toward creating your future.

Here are the addresses, phone numbers, and websites of the big three credit bureaus, as well as the address of the Federal Trade Commission.

Equifax (formerly CBI/Equifax)
P.O. Box 740241
Atlanta, GA 30374-0241
(800) 685-1111
(800) 997-2493 for residents of Colorado, Georgia, Maryland, Massachusetts, New Jersey, or Vermont
www.equifax.com/

 
Experian (formerly TRW Information Systems, Inc.)
P.O. Box 2104
Allen, TX 75013-2104
(888) 397-3742
(888) EXPERIAN
www.experian.com


Trans Union Corporation Consumer Disclosure Center
P.O. Box 2000
Chester, PA 19022
(800) 888-4213 (to order a copy of your credit report)
(800) 916-8800 (to ask a question about your credit report)
www.tuc.com


Federal Trade Commission, Main Office
6th Street & Pennsylvania Avenue
NW Washington, DC 20580
www.ftc.gov

After years of delays, the credit industry finally agreed to give consumers access to their personal "credit scores." This is important, because lenders use credit scores to determine who to give credit to and at what rates. Knowing your credit score can be empowering-if it's low you can take steps to improve your credit worthiness and if it's high you may be able to use it as leverage when shopping for a loan.  

Usually referred to as a FICO score (named for Fair, Isaac and Company, the business that develops the most widely used credit scoring formulas), your credit score is simply a numeric summary of your credit history compiled by the three major credit bureaus-Equifax, Trans Union, and Experian. Using mathematical models developed from the behavior patterns of millions of borrowers, credit bureaus assess the likely risk of a extending you credit or lending you a sum of money. The formula looks at such things as your outstanding balances, total available credit, late payments, and the age of your accounts. The more traits you share with people who have proven to be good credit risks, the higher your score. 

FICO scores range from 300 to 850 points-the higher the score, the lower the predicted risk to creditors. Because every lender has a different model of what's acceptable, so there is no standard scale. As a general guideline, the median FICO score (half of consumers score above, half score below) is about 725. To qualify for the best loan rates, borrowers generally need scores above 760. Consumers with scores below about 620 will pay significantly higher rates and fees to obtain a loan.

Keep in mind that lenders look at many things when making a credit decision, including your income, how long you have worked at your present job, and the kind of credit you are requesting. Since they factor in additional information and sometimes consider special circumstances, lenders may give you credit even if your score is low, and may refuse you even though your score is high. Still, your credit score counts heavily in your ability to get credit on good terms. 
 

What the FICO Score Measures

The five main categories of information that the FICO score evaluates, along with their approximate weightings, are:

  • Payment history (35%)-Aside from extreme events, like bankruptcy or tax liens, late payments have the greatest negative impact on your score. Recency and frequency of late payments count too. In other words, even though a 60-day late payment is not as risky as a 90-day late payment in and of itself, a 60-day late payment made just a month ago will count more than a 90-day late payment from five years ago.
  • Outstanding balances (30%)-Evaluation of your total balances in relation to your total available credit on revolving accounts is one of the most important factors in the FICO score. Owing a great deal of money on many accounts or "maxing out" on various credit cards can indicate that a person is overextended, and is more likely to make some payments late or not at all.
  • Length of credit history (15%)-Your score takes into account how long your credit accounts have been established in general, how long specific credit accounts have been established, and how long it has been since you used certain accounts.
  • New Credit (10%)-Research shows that opening several credit accounts in a short period of time does represent greater risk-especially for people who do not have a long-established credit history. Multiple requests will reduce your score because it looks like you are either trying to get a high amount of credit (possibly because of a cash flow problem) or that you are being rejected by lenders and having to apply elsewhere.
  • Types of credit (10%)-The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Your score takes into account what kinds of credit accounts you have, and how many of each. The score also looks at the total number of accounts you have.
     

Forewarned is Forearmed

Early numbers show that many consumers recognize the relationship between their credit score and their purchasing power. Craig Watts, consumer affairs manager for Fair Isaac Corporation, reports that there were 40 million unique visits to www.equifax.com and www.myfico.com. (where you can order your score, plus your credit history, for $15.95). Based on e-mail messages Fair, Isaac has received from consumers visiting the site, it looks like many customers obtaining their scores are in the early stages of hunting for a mortgage or auto loan. Some have indicated that they plan to use their scores as leverage with prospective lenders.  

Rick Harper, director of National Foundation for Credit Counseling (formerly known as Consumer Credit Counseling Service) of San Francisco, agrees that awareness of scores empowers consumers in general, and is particularly important for hopeful homebuyers. "The more the public understands scores, the more confident they can feel about the home-buying process and the less likely they are to become victims of predatory lending. Know your score before shopping for a loan and ask prospective lenders what the minimum acceptable score for the very best rate is. Armed with this information, the consumer can shop around for loan terms more effectively." 

While scores may be particularly important to homebuyers and other borrowers, they should be of interest to all consumers. Even if you don't plan to borrow money, you may find yourself in a situation where you need credit-perhaps to take advantage of an opportunity or to get through an emergency. And it's not just lenders who look at your credit history to make decisions. Some employers, insurers, and landlords also refer to credit reports when qualifying applicants. 

Knowing where you stand allows you to build an action plan to improve your credit record. Consumers with a good credit history and, accordingly, a high credit score, have many more options available for achieving their financial goals. And isn't that what financial freedom is all about? 
 

How to Improve Your Credit Worthiness

Your credit score is a "snapshot" of how risky you appear to be at any particular point in time. The snapshot changes as new information is added to your bank and credit bureau files. That's good news for consumers with less-than-perfect credit: Even if you've mishandled credit in the past, you can gradually improve your credit worthiness by handling credit more responsibly now and in the future. 

The best and fastest ways to improve your credit worthiness are to pay all bills on time, pay any delinquent bills, and lower your total credit card debt.

  • No matter how many cards you carry, it's a good idea to keep the ratio of outstanding balance to total available credit as low as possible. Credit scores look at how much of your available credit you've used. When you're close to the limit, you look out of control. From a score-lowering perspective, debt reduction should start with the cards on which you're closest to your credit limit (though from the point of view of shrinking the overall amount of your debt, it's best to pay off your highest-interest-rate cards first; see ASK SUZE on DEBT, pages 78-85, or THE ROAD TO WEALTH, Pages 27-32.) Be aware, however, that paying off a collection account or a judgment will not remove it from your credit report. It will stay on your report for seven years.
  • Research shows that consumers with longer credit histories have a lower risk of default than those with shorter credit histories. However, even people who have not been using credit for a long time may get high scores, depending on how the rest of the credit report looks.
  • Don't close unused credit cards as a short-term strategy. In fact, owing a fixed amount but having fewer open accounts may lower your score. Conversely, don't open a number of new credit cards that you don't need, just to increase your available credit. This approach could backfire and actually lower your score.
  • Every time someone requests your credit report from a credit bureau, an "inquiry" notation is made in your file. Too many inquiries on your credit report can signal looking for new credit and may lower your score. You should apply for credit only when you need it and wait before applying for more. FICO scores can usually identify "rate shopping" in the mortgage- and auto-lending environment, so that you are not penalized with multiple inquiries related to one credit transaction. To be safe, it is a good idea to do your rate shopping for a given loan within a short period of time. (Note that if you order your credit report from a credit reporting agency to check it for accuracy, it will not affect your score, as it is not an indication that you are seeking new credit.)
  • Someone with no credit cards tends to be a higher risk than someone who has managed credit cards responsibly. Still, it is not necessary to have one of every type of account, and it is not a good idea to open credit accounts you don't intend to use.
  • You don't improve your credit worthiness by carrying balances forward from month to month (as opposed to paying each bill in full), but lenders may be more likely to offer credit to people who carry balances because they have a history of paying interest on their accounts.
  • If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor. (To find a credit counselor near you, call the National Foundation for Credit Counseling at 800-388-2227 or look for them on the Web at www.nfcc.org.)
     

How to Get Your FICO Score

You can get all three FICO scores and credit reports at www.myfico.com. You can also try to get your score by asking a lender you've submitted a loan application with; some will reveal it and some won't. 
 

Correcting Errors

Consumer organizations advise people to review their credit report every year or two, particularly before making a large purchase like a house or a car. This makes it possible to correct any inaccuracies before applying for credit and/or to catch any fraudulent activity using your identity. If your score seems surprisingly low, check for inaccuracies in the credit report that generated the score. 

If you do find errors in your credit report, contact the credit reporting agencies directly: 

Equifax
(800) 685-1111
www.equifax.com
 

Experian
(888) 397-3742
www.experian.com
 

Trans Union
(800) 916-8800
www.transunion.com

For information on Perkins, Stafford, and PLUS loans, contact: 

U.S. Department of Education
400 Maryland Avenue
SW Washington, DC 20202-0498
(800) USA-LEARN
www.ed.gov 
 

To report harassment by debt collectors, contact the Deputy Director of Debt Collections at (202) 708-4766. If harassment continues, call the Policy Development Division of the Loan Branch of the Department of Education, (202) 708-8242.

Visit the DMAchoice web site for information on getting your name removed from mailing and e-mailing lists

Kiplinger Credit Calculator
www.kiplinger.com/tools/index.html 
 

CNN and Money Magazine Debt Calculator
http://cgi.money.cnn.com/tools
 

CreditCalc Wizard
www.zilchworks.com/cgi-bin/calc/cardcalc.pl 
 

Bankrate.com Credit Card Calculator
http://aol1.bankrate.com/aol/calc/MinPayment.asp?nav=cc&page=calc_home

Check out how much interest you'll shell out over the life of the debt by using this calculator.

Keep till warranty expires or can no longer return or exchange

  • Sales Receipts (Unless needed for tax purposes and then keep for 3 years)
     

What to keep for 1 month

  • ATM Printouts (When you balance your checkbook each month throw out the ATM receipts)
     

What to keep for 1 year

  • Paycheck Stubs (You can get rid of once you have compared to your W2 & annual social security statement)
  • Utility Bills (You can throw out after one year, unless you're using these as a deduction like a home office --then you need to keep them for 3 years after you've filed that tax return)
  • Cancelled Checks (Unless needed for tax purposes and then you need to keep for 3 years)
  • Credit Card Receipts (Unless needed for tax purposes and then you need to keep for 3 years)
  • Bank Statements (Unless needed for tax purposes and then you need to keep for 3 years)
  • Quarterly Investment Statements (Hold on to until you get your annual statement)
     

What to keep for 3 years

  • Income Tax Returns (Please keep in mind that you can be audited by the IRS for no reason up to three years after you filed a tax return. If you omit 25% of your gross income that goes up to 6 years and if you don't file a tax return at all, there is no statute of limitations.)
  • Medical Bills and Cancelled Insurance Policies
  • Records of Selling a House (Documentation for Capital Gains Tax)
  • Records of Selling a Stock (Documentation for Capital Gains Tax)
  • Receipts, Cancelled Checks and other Documents that Support Income or a Deduction on your Tax Return (Keep 3 years from the date the return was filed or 2 years from the date the tax was paid -- which ever is later)
  • Annual Investment Statement (Hold onto 3 years after you sell your investment.)
     

What to keep for 7 years

  • Records of Satisfied Loans
     

What to hold while active

  • Contracts
  • Insurance Documents
  • Stock Certificates
  • Property Records
  • Stock Records
  • Records of Pensions and Retirement Plans
  • Property Tax Records Disputed Bills (Keep the bill until the dispute is resolved)
  • Home Improvement Records (Hold for at least 3 years after the due date for the tax return that includes the income or loss on the asset when it's sold)
     

Keep Forever

  • Marriage Licenses
  • Birth Certificates
  • Wills
  • Adoption Papers
  • Death Certificates
  • Records of Paid Mortgages

* These documents should be kept in a very safe place, like a safety deposit box.

At holiday time, we tend to show our love for one another by getting pudgy in the waistline because of too many slices of turkey and pumpkin pie and slim in the wallet because of all the expensive gifts we buy for each other, usually on credit. The sad part is that in the last 35 days of the year, we can easily undo all the hard work and discipline of the first 330 days. In January, many of us have to go on a diet to lose weight. And while trying to lose weight, we have to put our legitimate expenses on a diet, too, while we try to find money to pay the bills that come due for the gifts. Ironically, most times our loved ones won't even remember the presents we gave them by the time we're finished paying for them. 

My thought for you is this. In the same way that you're very aware of the results of eating all that turkey and stuffing, pie and fruitcake, this year please approach your shopping with the same kind of awareness of results. Why not make this a holiday season that truly creates more financial and spiritual freedom for you and your loved ones? When you gather during Thanksgiving, try discussing what you as a group could give as a gift to the world at large. Let your efforts show your love for yourselves and each other as a unit, and the love you have for all. Consider: Instead of buying each other gifts, what if you each gave $10 to a charity under your family name? Or decided that instead of spending money in stores you'll write letters telling each other how you feel about each other? What a fine way to teach real values to your children, and to celebrate the fullness of life without the "January effect" of bloated bills and depleted finances. 
 

Christmas and Chanukah

Recently I have gotten letters from people whose children are asking to be given money for the holidays. If you decide to give your children money, consider it a perfect opportunity to pass along some lessons about money, too. Here are two things you might consider doing.

  • When you give your child--let's say your daughter--money, try giving her the amount you decide on in bills that are all the same denomination--all five- or ten-dollar bills. On each bill, place a little sticky note that says something about how you feel about her, so that in the future she will have great memories of money. Even if the money goes quickly--which you know it probably will--she'll always remember the love that came with it.
  • If you are going to give your child money, let her choose the amount she will get. Here's how to do it. On a table, place (for example) 55 one-dollar bills, six ten-dollar bills, one fifty-dollar bill and a bowl containing $75 dollars worth of quarters. Do not tell her how much money is in any of the piles; ask her to choose just by looking, not by counting or touching. I think it could be fascinating to see what she does--how much do you want to bet that she won't choose the quarters?

    Now, if you decide to do this, you may wonder: How will you handle it if she chooses one of the smaller amounts? Will she feel badly, or feel that you have tricked her? She won't, not if you talk to her about what this gift of money means. The real gift is not in the amount of money you give her, but in the lessons that can be learned from our money. Money is there to teach us as well as provide for us.

    The point here is that a little bit of money--a quarter, for example--can add up to a whole lot more if it is seen clearly and treated rightly. If you can show your children that their perceptions about money and the actions they take based on their perceptions are what dictate how much money they have in their lives--well, that will be the best Chanukah or Christmas present you can give.

For this is a basic truth: Wealth comes from our own choices and our own actions, and we all have the ability to choose and to act. Before we can choose well, however, we need to become aware of why we make the choices that we do. The gift here is a chance for your child to examine WHY she chose the pile she chose. What lesson can she learn from that? And how can she apply her new self-knowledge in other aspects of her life? What a wonderful question to ponder. 

If you guide your child through this little exercise in gift giving with love, you'll show her that the truest gift is not money itself but knowing why we do the things we do. Wow.  

Happy holidays.

Dear Suze, 

I've had a really hard time with my money. I owe a considerable sum to credit card companies, and I haven't made any payments in about five years. My credit report says my accounts are "charged off," and everyone has stopped calling me. But will they make me pay up someday? How long will all this stay on my credit report? 

I do have some money in an IRA. Another question: If I claim bankruptcy, will the credit card companies take the money in my IRA? The truth is, I still have no money to pay the bills, but I don't want to live with this forever. 

-Worried 
 

Dear Worried, 

The fact that your creditors have stopped calling doesn't mean you're out of the woods-not yet. Here is the problem. Credit card companies are selling their old, "charged-off" accounts to collection agencies for pennies on the dollar. The collection agencies then resume collection efforts, figuring that some consumers will pay up and that they, the agencies, will make a profit. All of this is perfectly legal. 

Just so you know: A charged-off account is an outstanding balance that the lender considers a business loss. How long it takes before the lender declares the account a loss varies from creditor to creditor, but this typically happens after several months of attempting to collect the money. Once an account has been charged off, the lender may sell it to a collection agency-and this can happen right away or much later on. At the time the account is charged off, the creditor usually stops the clock on interest charges, but the collection agency may add fees of its own. On your credit report, this kind of debt is designated as R9 for "revolving credit charge-off" or I9 for "installment credit charge-off." 

Here are your rights:

  • To clear your credit report:
    If any of your accounts were charged off more than seven years ago, the damaging information on that account should have been erased from your credit bureau file, and a collection agency cannot reenter the information. This process take place under a federal law, called the Fair Credit Reporting Act (FCRA), that regulates the actions of all creditors and credit reporting agencies. The law is designed to protect consumers, creditors, and credit reporting agencies. The FCRA enforces the seven-year limit; specifically, it says that information in a consumer's file concerning accounts that have been charged off or placed for collection must be completely erased after seven years from the date of last activity; last activity generally means the date the creditor charged off the account. On the copy of your report look at the date of last activity. Has it been seven years from that date? If so, write to the credit bureau and tell it to remove the account from your file. Each one of your accounts is probably different. For many of them, that seven-year limit may not be far away. Making a new payment now would merely create new activity in your account and start the seven-year cycle over. Be very careful about doing this.
  • To deal with bill collectors:
    When it comes to collection efforts, each state has its own statute of limitations governing how long a debt is considered legally collectible. In general, the limit is about four to five years from date of your last payment. If a creditor waits beyond the time limit set by the statute of limitations to sue you, the case can be thrown out of court. To find out about the statute of limitations in your state, contact the Office of the State Attorney General. If you know that your debt has expired under this statute of limitations and a collection agency happens to call you, do this: Explain to the agency that you will pay only if you are taken to court and a judgment is obtained against you; otherwise, you have no intention to pay what you believe to be a legally uncollectible debt. The key here is to put your argument in writing, adding a clear demand that the agency stop contacting you. The Federal Fair Debt Collection Practices Act, another federal law, declares that if the state-regulated limitation period is up, the agency may not contact you again once it receives your letter-except to say there will be no further contact. If the state statute of limitations hasn't yet run out, paying something on your charged-off accounts will not help clear up your credit report and may start the collection agencies' clock ticking anew, so once again, think hard before you do this. Only time will repair your credit report-specifically, the seven years it takes until the credit bureau must, by law, remove the debt notation.
  • To find out whether or not your IRA is in jeopardy from a creditor or a collection agency:
    As far as I know, the ability of creditors to come after your retirement accounts largely depends on your state. All states have their quirks when it comes to placing limits on debt collectors and/or collection during bankruptcy. In recent years a number of state courts have given IRAs and SEPs protection against garnishment, but many have not; so once again, you must call the Office of your State Attorney General and ask what the law is in your state. The only federal protection there is comes into play only if your retirement savings are part of an employer-related plan. Years ago, the U.S. Supreme Court decided that a federal pension law called ERISA shields retirement-plan benefits from creditors in bankruptcy, no matter where the bankruptcy takes place. But some local federal courts have interpreted this to mean that in order for pension benefits to be federally protected, three requirements must be satisfied:
    1. the retirement plan must be subject to ERISA;
    2. it must be tax-qualified under certain IRS rules; and
    3. it must contain a written "anti-alienation" provision. Most employer-sponsored plans meet these requirements, but plans covering only the owner-meaning you, my friend-are not considered ERISA plans. So, if you ever enter bankruptcy, the benefits of your IRA, Keogh, or SEP IRA may fall outside the protection of this Supreme Court ruling.
  • If you feel you want to pay the balances due:
    So at last we come to the heart of the question: What, exactly, do you want to do about your debt, my friend? Even if the card companies and collection agencies never again call you, will you feel better about yourself if you pay or don't pay the outstanding sum? As you ponder this, remember: You must not do anything that renders you powerless. An essential law of money-that power attracts money and that being powerless repels it-is the crucial point for you. If you'd feel less powerful by letting the time go by and seeing if you can get away with not paying, then you should call a lawyer and find out what she can do to help you settle the outstanding balance. if you feel just fine about letting this debt expire unpaid and believe that you can make it through to the five- to seven-year state and federal endgame that's almost here, then consider placing all of your money in a safety deposit box and sitting it out. Either way, check your state laws to know what you're up against.

Do you feel as though the less in-person contact you have with your bank, the more costly it is becoming to keep your money there? If so, you're right: Banks are saddling customers with more monthly fees than ever, reports the National Public Interest Research Group, and this trend is only on the rise. But before you shell out a cool $190 this year on checking-account charges-the average per customer, nationwide-read these tips on how to avoid them.

  • Start by studying your monthly bank statement. It may seem like a no-brainer, but countless Americans don't take the time to familiarize themselves with the gamut of additional charges out there, such as ATM fees ($1-$1.50), check-writing fees, monthly service charges ($3-$12), NSF (non-sufficient fund) fees ($25-$30 per check), ATM replacement card fees, and the rather sneaky "currency conversion" fee, which (in New York State, for example) adds 2 percent to each debit transaction made overseas, in addition to a $1.50-$5 surcharge. And while you're looking at your statement, watch out for errors.
  • Compare the deal you're getting. To learn how your bank's charges stack up, contact your state's PIRG or visit Web sites such as www.bankrate.com that publish semi-annual checking reports as well as post top deals across the country. If your bank's fees are considerably higher than other banks', it may be time to take your business elsewhere.
  • Shop for bargains. You can still find good deals if you are willing to do some digging. Although free-checking accounts are now scarce, they aren't impossible to come by, and are more readily available to customers who do all their business with one bank or who establish direct-deposit with that bank. "Because interest rates are so low right now, non-interest bearing checking accounts are the wiser way to go right now," says Daniel Ray, Editor of bankrate.com. These accounts generally have fewer requirements and lower monthly service fees, averaging $6.21 opposed to $10.77 on interest-paying accounts.
  • Know your own banking habits. If you frequent ATM machines like they're going out of style, seek out a larger institution with branches on practically every corner to avoid incurring massive "outside-the-system" ATM fees, but be aware of the downside-you may have to pay more for the convenience. Or if you have yet to shake a bad checking-bouncing habit, invest in overdraft protection to eliminate steep, and numerous, NSF fees. Better yet, look for banks that offer "linked relationships" with checking and saving accounts, which allow you to draw into your savings to cover the check floats and overdraft.
  • Consider a credit union. Credit unions may present fewer options, such as smaller ATM networks, but what they do offer is generally a better deal than at banks. They have lower service fees (if any) on checking accounts and lower required minimum balances. Contact Credit Union National Association at www.cuna.org to find out if you qualify to join one of these member-owned institutions. In some instances, it boils down to location: Residents of Los Angeles County, California's East Bay Area, and the Florida Keys automatically qualify.
  • Bank Online. Join over 12 million who'd rather go on-line than stand in one. According to the March 2001 bankrate.com semi-annual pricing study, despite their dip in average yields, internet accounts are still offering better checking deals, with lower monthly service charges and NSF fees. 46 percent of online accounts don't have any service charges at all, reports bankrate.com, versus 7.1% of those offline. One of its favorites: Presidential Online Bank (880-383-6266), with a 6% interest-earning yield and monthly fees and NSF averaging $5 and $15 respectively. How is this possible? Online banks can afford to make money on the spread, as they don't have the same number of tellers, employees, and overhead as the physical commercial giants. Plus, if you pay your bills online, you'll save on stamps and save as much as $25 for a box of checks.

Once you've found the bank that best suits your needs, it's time to fire your banker. Steer clear of any headaches that may ensue from navigating this transition by opening your new account before closing the old one (even if it is a strain to maintain minimum balances on both). Also, switch your direct-deposit to your new account at least one month prior to using it to pay bills, and temporarily halt all automatic debit payments (such as mortgages or car loans) until the changeover is completed. Finally, save all your records of both accounts during this time period, and watch carefully for fees and penalties. Request that your new bank eliminate any fees that may have resulted from this transition; most likely, it will want please its new customer. 
 

ATM Fees are Money Machines-for the Banks

Bankrate.com estimates that Americans will drop a whopping $2.2 billion in ATM charges this year. What many of us fail to recognize is that, when we swipe our cards carelessly through one of those dinky cash dispensers at a local convenient store, our own banks, as well the ATM dispensing the cash, are charging as much as $2.00 per transaction. How can you cut back on these fees? Limit your ATM visits to those machines in your bank's own network, and withdraw larger amounts each time to avoid limited transaction fees (such as Chase's $1 fee for every transaction in excess of 40 transactions per month.) Also, when you pay with your ATM card at "point of sale" locations, ask for cash back; it's a free service. Be on the lookout for free ATMs in your neighborhood, as credit unions and smaller banks form "no surcharge" alliances. The Co-op Network is a fine resource.

Make a Few Simple Changes and Earn More

By Monica Steinisch 

The Federal Reserve has cut interest rates nine times this year (the last time was on October 2), and many of us are watching as the interest we receive on our passbook savings accounts dwindles to almost nothing. As of October 11, in fact, banks nationwide were paying an average interest rate of just 1.09 percent on passbook accounts—far below the inflation rate—and some banks have been paying less than that. Meanwhile, the cautious among us are keeping more of our money out of the stock market and putting it in interest-bearing investments, so collecting every penny of interest available to us is as important as it's ever been. 

Even before interest rates plunged, American savers were missing out on some of their rightful interest income. Last year, the Consumer Federation of America (CFA), a Washington, D.C.—based nonprofit consumer advocacy organization, quantified our loss. It commissioned a study of Federal Reserve Board data on American saving habits that showed that, as a nation, we are leaving up to $50 billion in potential interest payments on the table every year. Why? Too often, we are depositing our money in low-yielding savings vehicles, such as passbook or statement savings accounts. 

As surprising as it may be to learn that savers-including low- and moderate-income savers who can't afford to walk away from earnings—are missing out on such a huge amount of interest income, the findings of the study are actually quite encouraging. That's because they show that the most common barriers to saving money in higher-yielding accounts are easily overcome. 
 

Obstacles to Higher Yields

Why are savers letting interest income slip through their fingers? In another survey, CFA uncovered some of the reasons. For one, millions of savers are badly informed about the features and yields of different savings options. They also lack awareness of the dramatically positive effect that even a single point increase in interest can have on their savings over time. Finally, they make their choices out of habit and not with an eye to getting the best returns. 

In short, too many of us think that the interest we can earn on modest savings balances is not significant enough to warrant the time and energy we'd need to research alternatives and shift our money to new accounts. Clearly, many of us have not witnessed the magic of compound interest. 
 

How Do You Rate?

According to the Consumer Federation of America, American savers are missing out on higher interest rates because of a few widely shared misconceptions. Do you share them? To find out, answer the following questions.

  • 57% of savers do not know the interest rate being paid on their savings accounts, making it virtually impossible to recognize a higher-yielding product. Do you know the interest rate being paid on your accounts?
  • 30% of savers think there is little difference in the interest rate paid on a passbook savings account vs. a certificate of deposit (CD). do you know the difference? (Correct answer: A typical CD can offer a rate as much as 2 to 3 percentage points higher.)
  • 46% of savers said not wanting to "tie up their money" is a reason for not shifting funds from traditional savings accounts to CDs. Do you know what the minimum term is on a bank CD? (Correct answer: three months. Does that surprise you?)
  • Many Americans are unaware that many higher-yielding savings alternatives are insured or guaranteed by the U.S. government. Did you know that CDs are insured?
  • Many savers prefer to keep their money at a local bank or credit union-even at low interest rates-with 80 percent citing convenience as a basis for their choice and 59 percent saying that access to live tellers is crucial. Do you realize that you can increase your interest earnings simply by choosing a higher-yielding product offered by your local bank (CDs or bonds, for example) or by moving your money from a bank to a credit union?

 

How Much Are You Losing?

While a $50 billion national loss of interest sounds impressive, it may not be convincing to you if you don't think that a few more percentage points will brighten your financial future. To get a handle on what higher yields mean for you and your family, consider these very real numbers: 

Value of monthly deposits of $100 at various interest rates, compounded monthly, over varying periods of time 

Rate/Time period

1 year

5 years

10 years

20 years

30 years

1%

$1,206

$6,150

$12,615

$26,556

$41,963

3%

$1,217

$6,465

$13,974

$32,830

$58,274

5%

$1,228

$6,801

$15,528

$41,103

$83,226

 

The figures don't lie—interest rates matter. In fact, rate of return and length of time are the two critical factors in making your savings grow for future wealth. That means: Get an early start on saving and keep shopping around for the best returns. 
 

Where to Find Higher Rates

Today, it's easier than ever to track down higher yields. The Internet lets you rate-shop right from your computer. And with phone, mail, and electronic funds transfer, there's no reason to be bound by geography when it comes to opening and maintaining an account. Although many Web sites offer rate information, www.bankrate.com is probably the single best source of information for the smart saver (or borrower; see "The Savvy Borrower" elsewhere in this issue of the newsletter). Every week it surveys nearly 4,800 financial institutions in 50 states to provide consumers with up-to-date rate information. Visitors can search by product, geographic area, or simply "highest yields." Please check it out for specific examples of the higher-yielding options below, and also look at "Certificates of Deposit/Money Market Funds" on page 7 of this issue of the newsletter. 

Where then, will you find higher yields than you can get from the traditional savings accounts offered by your bank? 
 

Money Market Accounts: MMAs offer rates that, while not the highest in the land, are often twice as high as those on savings accounts. Although there may be penalties for slipping below minimum balance requirements or for exceeding monthly withdrawal limits, there are no time restrictions: You can withdraw your money at any time, without penalty. Money market accounts usually offer check-writing privileges. As of October 12, the average rate on money market accounts nationwide was 2.47 percent. 
 

Money Market Mutual Funds: Money market funds are low-risk mutual funds that usually offer a higher yield than savings account or money market accounts. What makes them low risk is that they invest in cash-like instruments such as Treasury notes and bonds. Although they're not insured or guaranteed, they're extremely safe. Drawbacks include having to make a higher initial deposit (this can sometimes be avoided by setting up a monthly direct deposit of $50 or $100). Before investing in a money market fund, you'll need to read the fund prospectus, which will give you information on fees, features, and requirements. 
 

Certificates of Deposit: CDs can be purchased in a variety of maturities, generally from three months to five years, and, at many institutions, for as little as $250. They pay significantly more interest than traditional savings accounts and money market accounts. Average rates as of 10/12: 3-month CD: 2.52 percent; 1-year CD: 3.07 percent; 3-year CD: 3.83 percent. 


U.S. Treasury Bills and Savings Bonds:
The U.S. government provides a number of ways for you to improve your return without putting your savings at risk. Series EE or I Savings Bonds can be purchased in eight denominations (ranging from as low as $50 to as high as $10,000) from most banking institutions or (better yet) with no commissions or fees directly from the U.S. Treasury at http://www.publicdebt.treas.gov/. Though Savings Bonds have a very long maturity (up to 30 years), they can be redeemed anytime after the first six months with only a three-month interest penalty (there is no penalty after a bond is held five years). Series EE savings bond rates (currently 4.5%) are competitive with CDs and money market accounts (Series I bonds, which are adjusted for inflation, pay a higher rate, currently 5.92%). And there's another advantage: Interest earned on the bonds is not subject to state or local taxation, and federal taxes are deferred until the bonds are cashed. (For more on Savings Bonds, please see The Road to Wealth, pages 429-33, or the ASK SUZE book on Stocks and Bonds, pages 119-25.) 

Treasury Bills, or T-Bills, are a short-term investment, available in maturities of 4 weeks (just introduced in July), 13 weeks, or 26 weeks. The minimum investment is $1,000. Like EE Savings Bonds, they are bought at less than face, or "par," value and mature at par. The difference between the purchase price and the face value is the interest you earn. While rate shoppers might find equivalent rates at some banks, banks can't offer the tax advantages of T-Bills, which are state and local income tax-free, just like Savings Bonds are; however, they report interest on an annual basis, so they are not federal income tax-deferred. (For more on Treasury Bills, please see The Road to Wealth, pages 428-29, or the ASK SUZE book on Stocks and Bonds, pages 105-107.). You can buy T-Bills from your bank or a broker or you can purchase 13-week and 26-week T-Bills at an auction conducted by the Department of the Treasury (http///www.publicdebt.treas.gov/of/ofaucrt.htm). (Four-week T-Bills are not available direct through auction.) 
 

Rates

Savings Bonds (as of October 12)

EE Savings Bonds -- 4.5%

I Bonds -- 5.92% 

(Interest rates on these bonds is adjusted semiannually, on May 1 and November 1.)

Treasury Bills (as of October 5)

4-week T-Bill - 2.20%

13-week T-Bill - 2.21%

26-week T-Bill -2.20% 

(To monitor interest rates on T-Bills, visit the treasury's statistical release site (http://www.federalreserve.gov/releases/h15/current), which is updated every Monday.) 
 

Credit Unions: According to the August survey of credit unions, banks and thrifts conducted for Bankrate.com, your can find some of the best rates on savings products at credit unions. In checking the averages, Bankrate.com found that the average credit union yield for a one-year CD was almost a full percentage point higher than that offered by banks, and nearly a half-percent better than what thrifts are offering. Average yield rates for money market accounts at credit unions was nearly 1.25 percent better than what banks offer, and more than a half-percent better than the thrift average. In a nutshell, credit union members have an edge when it comes to higher yields. 
 

What About Safety? 

If you're reluctant to move your money to higher-yielding accounts because you're worried about easy access or safety, don't be. Like traditional passbook accounts, money market accounts and CDs are insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration. And U.S. Savings Bonds are fully guaranteed by the federal government. 
 

Concerned about Early Withdrawals?

There are penalties for early withdrawal from CDs and savings bonds, but they're typically only several months' lost interest. And consider the ways you can avoid having to withdraw your money early. You can keep a small emergency fund in a money market account. Or you can "ladder" your higher-yielding investments so that you've got a CD or bond coming due as often as every month. For example, if you have $1,000 in savings, you could put $250 into a different 3-month CD every month for four months; that way, you would never have to wait longer than a month to gain access to part of your money. The same is possible with savings bonds. Money market accounts give you instant access to your cash. 
 

Upping the Bottom Line for Savers

There are lots of ways to structure your savings so that you earn higher yields while keeping your money safe and available. Depending on your situation, a combination of options may meet your needs best. While some savers worry about investing in a product or institution they are unfamiliar with, the biggest danger to their financial well being may be apathy. As Daniel Ray, editor-in-chief of Bankrate.com, says, "Passbook savings accounts are passé. If you haven't checked your interest rates lately, you're throwing your money away."

Thinking of borrowing money in the next few weeks or months? You may be surprised to find that not all interest charges rise and fall together. To be a savvy borrower, you need to go where interest rates are going down. 

Most of you know that the Federal Reserve Board has slashed interest rates dramatically this year. But what, if anything, does that mean for you? For those of you who plan to borrow, here are some money-saving thoughts: 

If you plan to take out a fixed-rate mortgage in the next few months, you should be aware that for a long time fixed mortgage rates were pretty much stuck in a holding pattern (at about 7 percent) despite nine Fed rate cuts in a year. The reason? Long-term mortgage rates follow changes in long-term bond yields, not changes in short-term rates, which follow the federal funds rate. But now fixed mortgage rates are coming down. As of October 8 the average 30-year fixed mortgage rate had dropped to just 6.16 percent, according to Bankrate.com. When you remember that 30-year mortgages were going for more than 8.5 percent in the beginning of 2000, that's a pretty favorable rate. So consider locking in a low-rate long-term mortgage now. Rates have a fair chance of rising if the economy improves and bond yields climb.  

If you're considering an adjustable-rate mortgage, you're in even better shape (For a full description of adjustable-rate mortgages, or ARMs see the ROAD TO WEALTH, pp 156-158 or the ASK SUZE Book on Owning a Home). ARM rates have responded to the Fed's rate cuts. Why? ARMs tend to follow changes in short-term rates, such as the yields on short-term Treasury bills and notes, and these do track the federal funds rate. When fed fund rates are low, as they are now, ARMs are terrific for people who plan to live in a house for only two or three years. If you're one of these, you might want to consider finalizing an ARM. But those planning to live in their homes for longer than three years should probably look to lock in a low fixed rate, since there's a good chance your ARM rate will rise in future years. 

Home equity loan rates tend to follow fed funds rates, too, though rates on longer-term home equity loans-with terms of 10 years or 15 years, for instance-are more like long-term fixed-rate mortgage rates. Because market rates change within a few days of a Fed cut, you may start seeing even lower short-term rates if the Fed announces another cut later in the fall. So the next few weeks and months may be a good time to lock in a low home equity loan rate. In fact, in this interest-rate environment, a home equity loan may be a better choice than a home equity line of credit. Why? Because instead of paying a variable interest rate, as you do with a home equity line of credit, with a home equity loan you will be locking in a low interest rate for the life of the loan. 

If you use variable-rate credit cards, your interest rate is indirectly tied to federal reserve rates and you should be benefiting from Fed decreases. If, however, you have a fixed-rate card or have already hit the minimum annual percentage rate allowed on your variable-rate card, consider transferring your balance to another low, variable-rate card for a better deal. A new variable-rate card may be an even better bargain should the Fed cut rates again.  

About auto loans, there's good news and there's better news. Even with the drops in interest rates, few banks and finance companies can match the excellent financing deals available from finance companies affiliated with auto manufacturers, who are rolling out great deals in an attempt to bolster flagging auto sales. If you're buying a new car, don't ignore dealer financing. If you have a current car loan, you may want to consider refinancing; as of October 8, the average 48-month new car loan had fallen to just 7.6 percent from 8.1 percent in late July. Over the course of two years of payments, the difference would save you about $340 in interest on a $25,000 car.

A statute of limitation is the length of time someone can bring a legal suit against you.

Click here to view a state-by-state list of Statue of Limititations

Statute of Limititation for unpaid Credit Card bills: If you fall behind in your credit card payments, the card issuer can sue you for payment. The start date for the statute of limitations is the date of your last payment. For example, if your last payment was on January 10, 2003, and the statute of limitation in your state for credit card debt is seven years, your card issuer has until January 10, 2010 to sue you to recover the unpaid debt.

Please note: That some states consider credit card agreements to be an oral contract,other states consider it a written contract, and some states have specific laws pertaining to credit card lawsuits. If you have unpaid credit card debt and are concerned about your legal rights, a lawyer can brief you on the specific laws for your state.

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