Strange Bedfellows--Oh the Debtor and the Lender Can be Friends

This post has been included in the Carnival of Debt Reduction hosted by the Financial Wellness Project. Visit the carnival for more information on getting your financial house in order.

One man likes to borrow now
The other likes to charge him, Wow!
But that's no reason why they can't be friends.

A bizarre coalition of consumer advocates and credit card lenders has asked the U.S. Comptroller of the Currency to change the rules and allow lenders to forgive up to 40% of the credit card debt of folks in serious trouble.

The coalition isn't asking for bailout money, although they do want to change the rules so that the forgiven debt wouldn't be taxable as income. The proposal is for a pilot program that could reach 50,000 people. The lenders could write off the debt. The borrowers would have to be receiving credit counseling and not otherwise eligible for existing credit card repayment programs.

Here's an example where I think it might help. In the summer, when Mr. Poorhouse was working part time because he hadn't been able to find a full time job, we talked to a credit counselor, who told us that we were not eligible for a repayment plan because our expenses exceeded our income. Obviously, entering into a repayment plan when you have negative cash flow isn't a good deal for anybody. The counselor suggested we try to improve our income or consider bankruptcy.

Luckily for us, Mr. Poorhouse and I have fixed our income problem. But it looked pretty bleak for a while there.

I have already heard people criticize this plan because it rewards the irresponsible. I think that's too simple.

I'd be interested in seeing how a pilot program would work.

Further reading from Credit Card Debt Law

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Prioritizing Debt: From Lowest Interest Rate to Highest? Say What?

Image by hankoss via FlickrYou and I know that the rational thing to do is to pay off your high-rate, non-deductible (i.e. non-mortgage) debt first. (Except you need to prioritize your mortgage payment before anything else so you can keep your house--but any EXTRA payments need to go to non-mortgage debt.)

Isn't it ironic that that's exactly the opposite of how credit card companies apply your payments? I was smart enough to avoid this particular trap, but it's easy to get snared in it.

Let's say you take a low-rate balance transfer offer, intending to pay off a higher rate card. Cool. Just don't ever use your new card to charge anything. Ever. Because if you do, they'll charge you a higher rate for purchases than for balance transfers. OK, that's fair, you think. But then they apply your payments to the lowest interest debt. So you are gaily wracking up new debt at a higher rate, and retiring the cheap debt. This policy is fairly universal among credit card issuers.

Good plan for the credit card company. Not a good plan for you. What tangled webs they weave when they practice to deceive. Can you say "Bait and Switch"?

CitiBank Wants Me to Pay Off My Debt

Image via WikipediaCiti sent me a letter yesterday offering me to participate in their Payment Partner plan. Here's the deal: agree to stop spending on your card for 4 months, and at the end of 4 months they give you 10% of any payments you make over the minimum balance due up to $550. At the end of the period, they also reduce your credit limit by the amount of the payments over the minimum balance.

Not a good deal for me, because I have very low "for life" interest rates of 2.99, 3.99, and 4.99 on this card, and I have too much other high rate debt that I'd rather pay off first for this to make sense. The spending freeze is no big deal because I've never charged anything to this card--I just used it for balance transfers from higher cards. And this is one card at least where I haven't missed payments or any other such nonsense.

According to some quick Googling, this offer from Citibank has been around for a couple of years. Some speculate that it is only extended to those with damaged credit as a way to get folks to voluntarily reduce their credit line, reducing Citi's risk. See the article below on the recent trend of credit card issuers of reducing credit limits.

I have to say, that in all of my credit mess, Citi has been the best to deal with. They don't have the dreaded universal default clause that jacks up your rate if you are late with payments to other creditors. They have had reasonable balance transfer rates. Yes, you pay lower rate balances off before higher rate balances, but some of these low rates are for the life of the balance. You just have to be careful not to incur any higher rate charges that would negate the advantage.

Further Reading:
Consumer Credit Limit Crackdown by Jessica Dickler, CNNmoney.com

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Debt Consolidation: Not the Right Answer for Us

This post has beeen included as part of the 83rd Carnival of Money Stories - Election Day Edition!" hosted by Simply Forties. Check out some of the experiences of others in this rock 'n roll money world.

A few days ago, I posted about the positive outcome that I think came from my conversation with the folks at Money Management International--the mortgage division.

I did not find the debt consolidation group to offer such a good deal. The same night I talked to the mortgage counselor, I went over the same financial details with the credit card folks. Now I've got a number of credit cards (too many). Some of them were just for low-rate balance transfers. Two of them I've used for spending. Two were for my business. Two of them were a big concern--high rates, late payments. The others, I was juggling more or less successfully. (Probably the wrong word.)

After going through the drill with the credit counselor, he suggested that they could lower my 30% rate to 15%, but the others would all stay the same or even increase. They would create a 5-year payment plan to pay off all the debts. I would pay MMI, and they would pay the lenders. And, oh yeah, it was going to cost me $40, that's 4-0, dollars a month.

Say what?

We got rid of cable or satellite TV, Tivo, our long distance plan. We've eliminated movies, eating out, music lessons, soccer, school lunches, new clothes. We've switched to a cheaper dog food, and haven't bought light bulbs for months.

"$40? I don't have $40 a month," I said, said I. I was disappointed, thinking about those 30% rates. "Can we just put some of the credit cards on the plan? Yes?"

Yes. That will be $15 a month. Cha-ching! I told them I had to think about it. So I thought about it. And I might have done it. But by that time my credit card company had come around (as I mentioned here) and lowered my rate to 10%

The moral of the story for me is that it's much better to negotiate with your creditors directly. $40 a month? Really?

The other thing to keep in mind when working with a credit counselor is that the credit card companies subsidize these organizations. If you follow the money, you will see that the settlement the counselor offers may be one that is not in your favor.

Polly's Pointers:

1. Try working with your creditors directly first.

2. If you do work with a credit counselor, make sure they are affiliated an organization such as the National Foundation for Credit Counseling.

3. Avoid paying someone to "repair your credit" or help you get out of debt.

I know that some of those organizations are served by my own Google Ads, and I wish I could tailor the ad services to screen them, but organizations that prey on the desperate and downtrodden are pathetic. Research the organization you are working with to make sure they are legitimate. Don't be afraid to talk to a number of people. You may even want to leverage your conversation with the original lender.

4. Debtor beware. Some of these places run out-and-out scams! They take your money, charge hefty fees, and never pay the creditors leaving desparate debtors worse off than before! Now here's the place in financial crisis where shame belongs.

Further Reading
Profit Possibilities by Elizabeth Warren, blogging at Credit Slips
Debt Relief Can Cause Headaches of Its Own

Closing Bank Accounts

I closed my consulting business and took a full-time job in March. Well, "closed" is kind of overstating the case. I emailed my past clients and then shut the door on my home office.

The problem: an outstanding business loan and loaded up credit card. I was a DBA or "doing business as" organization--no incorporation, no limited liability. So I am liable for the business debt personally. And that's OK, because I believe if I borrowed it, I should pay it back.

Only, there is no income to pay off that debt, so it has to come from current earnings.

So today I (figuratively) opened the office door and decided to close my business bank accounts. I had two: one for taxes and one for operations. Seemed like a good idea at the time--I'd sweep money into the tax account when I got a check from a client so that I could afford to pay my quarterly estimated tax payments. Except, I kept dipping into the tax account for operational expenses. My bad.

To do:
Close tax account. Check.
Close operations account. Not so fast.

You see it's linked to the business loan, which is, um, not current.

So Monday, it's on the phone to the business loan people to see if we can work something out.

Triple Play: Car Insurance, State DOR, Business Loan,

Image via Wikipedia I've been popular with the letter carrier recently. I got two more registered letters: one from my car insurance company, one from my state department of revenue.

And I followed up on them all. (Yay Polly!)

Out 1: The car insurance company wanted a certified check or money order for payment, but I had already sent an automatic payment through my bank. The very helpful rep suggested I try to cancel that payment and pay with a debit card from the same account to avoid the risk that they won't accept the payment and cancel my insurance. Seems like a good plan.

Out 2: The state was kindly informing me that they received my 2007 return and will be happy to levy my federal refund for taxes owed. Not a big deal, since there will be no refund. As a matter of fact, the IRS already absorbed my economic stimulus check. The state will have to get in line.

But, I did call and talked to a colleague of my previous contact at the State DOR (see back story). I explained that I had done everything requested of me but am still waiting for the forms for electronic payment for the payment plan we had negotiated. I live in fear they will levy my wages again. I do NOT want to go through that again. Success--he gave me the direct phone number of the woman I talked with a few months ago AND told me her hours.

Out 3: This poor collections guy from the bank where I have an outstanding business loan has been trying to reach me for months. I have called him back numerous times, but we never seem to be able to connect. (Plus I am not willing to give collectors or creditors my work number or my cell phone number, and I'm at work...a LOT.)

There's a long, and probably boring, story behind this business loan. I took it out as a line of credit when I opened my business to even out my cash flow. It's got a pretty good interest rate--lower than any of my credit cards. I used it as intended for years: borrowed against it, paid it down, borrowed again.

To pay taxes last year, I borrowed against it and ran it up again. Not to my limit, but enough that it became difficult to repay with no actual revenue coming into the business. At one point I had set up an automatic deduction to pay the balance from my business checking account. So, what begain to happen was that the payment would hit my checking account, which had nothing in it, and I got charged exhorbitant fees from the checking account for bounced checks. I was not on top of that.

Eventually, I would figure out what happened, make a transfer from my personal account to my business checking account, and then it would start all over again. After a few late payments, I guess the bank decided to run my credit report. They sent me a letter that they were closing my line of credit because my credit score had declined. That wasn't a big deal to me--I wasn't planning to borrow anything more--just trying to figure out how to pay it off.

So, they referred my account to collections, and this one individual would call me every month, and I would make good on the payment, or a couple of times, they just 'took' the money.

I wanted to close my business checking account because it doesn't make sense to be paying this loan out of an account...that never has any money in it. It's costing too much. My branch manager said I have to clear up the loan first before I close the account.

So, I finally actually got through to the collections guy today. And he was great. I told him the situation, and he said, "Well, Polly, it really doesn't look TOO bad."

I laughed, because from where I sit it looks awful.

He said, "Yeah, I don't have that kind of money lying around either, but I deal with people who owe hundreds of thousands of dollars who have closed their business, so in comparison, this isn't that bad." Yikes!

He suggested I fax a letter asking to have my overdue interest deferred until the end of the loan period so that he could refer me to the guys who can help me work out a reduced payment schedule. (I guess they won't talk to me if I'm behind schedule.)

I asked him if they had reported this loan to the credit bureaus, and he said they hadn't because he had kept me from ever going 30 days overdue by this trick with the checking account.

So, I'll write the letter, and keep the account open, and see whether the guys can help me.

I'll tell you, the journey is a lot easier when the voice on the other end of the phone isn't in a snit.

A good day.

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Barack Obama Takes on Deceptive Credit Card Practices

Image by Barack Obama via Flickr In a campaign speech in Chicago this summer Barack Obama outlined his Credit Card Bill of Rights and rating system to compare credit card companies. The proposal:

1. Ban unilateral changes to credit card agreements.
2. Ban rate changes on past debt.
3. Ban interest on transaction fees.

(Check at about 4:08 for the details).

"Don't get me wrong," he said, "We all have a responsibility to pay what we owe, but we have to ensure that the amount we're paying is fair."

Word.

Be Wary of Credit Card Tactics

It's too late for me, but do check out this article, The Evil Strategies of Credit Card Companies, which details some of the tactics credit cards companies use that get people into trouble. My problem was the increase in interest rates--not just for a late payment, but also if a problem with a completly different creditor shows up on your credit report. If it looks too good to be true....well, you know.

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Negotiating with Credit Card Companies

We've got a lot of credit card debt--much of it a holdover from my business--more about that in a later post.

Until my husband's job loss, we were handling it pretty well (I thought)--taking advantage low-rate introductory offers to pay off higher rate debt, and making far more than minimum payments.

BUT, then I mistakenly used the wrong credit card for a purchase and went over my limit by $9. My interest rate skyrocketed. I didn't notice, because I pay my bills by online bill paying through my bank so I don't forget one. My minimum payment shot up, and the scheduled online payment fell short. So, my interest rate went up again!

Now, my interest rate on this credit card is close to 30 percent, and I was no longer able to meet the payments. I missed one or two. When I belatedly discovered the interest rate I was paying, I called customer service to explain the situation and ask for a rate reduction. I had been succesful in the past getting rate reductions if I was occasionally late on a payment. Not this time.

The collection department started calling. I called the company several times to try to negotiate a rate reduction, to no avail. I was told that the only way to get a rate reduction was to contact a Consumer Credit Counseling Service (there are many) and work out a debt management plan. I did, and it wasn't a good solution for me (more on that in a later post).

Finally, last week, I got another in a series of phone calls from the credit card company. This time, the representative said that she noticed in my file that I had spoken to a number of individuals and had asked for a rate reduction or a payment plan, and that she was prepared to negotiate one for me. Then her computer went down, and we arranged to talk at a later time (this week.) I'll let you know how it goes.

Polly's Pointers:

1. Open your statements, even if you have automatic payments set up!

2. Keep communicating with your card issuer, even if one person says "no." Credit card companies have collections departments (whose job it is to get all the money now) and loss mitigation departments (whose job it is to get what they can from you).

3. Beware of low-rate credit card offers. They're great if you pay off all your bills on time, but if you get into unexpected trouble, they can be devastating. Read the fine print, and read it again when they send you notice of change in terms.

4. When transferring balances to a lower rate card, close the account of the higher-rate issuer. You don't want to have more open credit than you can afford. Do note, however, that a pattern of opening and closing accounts can make you less attractive to future lenders.

5. When closing a credit card account, make sure that the lender notes that the account was closed by the customer.

Further Reading:
Credit Card Companies Boosting Your Rate by Suze Orman
O% Balance Transfer Card Guide from Blueprint for Financial Security
Canceling a Credit Card by Gary Foreman

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