Managing Debt: Steps in the Right Direction Melanie C. Hardie, MA, CFP, AFC, LADC 1
Objectives Prepare you to address most debt related challenges common when engaging with pro-bono clients Go over the Types of Debt, and their Management Options Mortgages and Home-Equity Loans/Lines-of-Credit Credit Cards Personal Loans and Lines-of-Credit Student Loans Medical Bills Collections Payday and Title Loans Address which Community and Web Resources to use 2
Debt Management Options & Resources Consolidation, is it a myth? Credit implications of debt options =? 3
The Many Sources of Debt And their options for resolution 4
Mortgages & Home-equity loans/lines-of-credit Contacting the lender(s) HUD and Making Home Affordable programs www.makinghomeaffordable.gov 5
Credit Cards Contacting the lender or creditor Consumer Credit Counseling Services (CCCS) www.nfcc.org/firststep/locator.cfm 6
Personal Loans and Lines-of-credit Contacting the lender or creditor 7
Student Loans Contacting the lender or creditor Deferment and Forbearance options Dept. of Education for loan consolidation Private student loan options 8
Medical Bills Contacting the lender or creditor Current status of medical collection 9
Collections Contacting the collector in writing Fair Debt Collections Practices Act 10
Payday and Title Loans What are Payday loans? What are Title loans? Contacting the lender or creditor 11
12 Other Resources & Appendix
Community & Web Resources Download List Directly www.fpamn.org/wordpress/wp- content/uploads/2013/07/client- Resource-Website-Links.pdf Browse FPA Website Future updates will be current on the Pro-Bono Resources Page 13
Appendix: Credit Management FPA Newsletter ProBono Article for July, 2014 Credit Management Written by: Melanie Hardie, CFP Credit means a lot of things. When I hear a client use the word credit it s a trigger for me to ask for more information about what credit area is the client referring to. It could mean the client has credit report issues, it may be the client is wanting help understanding credit reporting and credit scoring, or that they have credit/debt problems. Today, credit has become more important than ever. It s a part of our financial lives, employment reviews, insurance considerations, and even impacts our relationship decisions. When a client has credit problems, it can be overwhelming for them because they don t know where to start or how to go about addressing their credit concerns. These are important topics for the financial planner to have a basic understanding about. In this article, my goal is to provide an overview of credit report management topics and strategies for working with clients. 14 The first step is to review their credit reports from all 3 of the national Credit Reporting Agencies (CRA) to see what s on showing on their credit histories. The 3 national credit bureaus are: Experian, Equifax, and Trans Union. Under the Fair and Accurate Credit Reporting Act, consumers can get 1 free credit report per year from each CRA using the Annual Credit Request Service: www.annualcreditreport.com to view the reports online or they can get a mail request form by calling 1-877-322-8228 to receive a paper copy. Consumers should also review their credit reports (and scores, discussed later), 3-6 months prior to a major credit financing application and on an annual basis using this free service. ( continued )
Appendix: Article Continued A credit report has 3 parts: demographic information; account records; and inquiries & public record. The account record section is where all creditors report payment and balance activity and if there are legal actions that have been taken by or against the consumer (foreclosure, bankruptcy, or judgments), they would be reported under public record. Under the Fair Credit Reporting Act, all account information is reported for 7 years from the date of last activity so active credit accounts are reported for as long as they re active and then for 7 years after they are paid and/or closed. Public record is reported for 10 years and if the balance is still owed on a judgment, it can be redocketed by the court of issue for another 10 years. So judgments need to be paid and showing a zero balance from the court for them to drop-off the credit history after 10 years. The account record section of the credit reports is the heart of the credit history. The consumer will want to list all accounts that show a balance owing and any negative notations for those accounts being reported (late payments, delinquency, charge-off) by a creditor. Unfortunately, errors are a common occurrence on credit reports and consumers have the right to dispute errors they find on their credit history in writing to the CRA showing the error(s). There are online dispute forms at the websites for each of the CRAs and the consumer providing the CRA with an explanation and any documents to support the dispute will aid the CRA in their investigation. The CRAs are required to investigate and respond to consumer disputes within 45 days. Another unfortunate aspect to credit reporting is that the CRAs don t communicate with each other, except when there is a fraud alert. So, if you find the same error on all 3 credit reports, the consumer will need to complete a dispute form with all 3 CRAs. If the disputed item(s) are found to be erroneous, the CRA will remove them and send a corrected credit report to the consumer and any credit application inquiries recorded by that CRA in the prior 60 days. ( continued ) 15
Appendix: Article Continued Having the opportunity to correct errors is the main reason to review credit reports in advance of major financing applications. Once the errors are disputed and corrected, then consumers need to begin addressing the negative accounts showing on their credit history: unpaid outstanding balances, collections, and judgments. I encourage clients to make a list of unpaid accounts and deal with these creditors or collectors one-at-a-time. The consumer needs to be organized and keep separate folders for each negative account, keep records of phone contacts, get payment or settlement agreements in writing prior to sending the agreed to payment(s), and be consistent in following through with agreed to payment(s). I encourage keeping copies of everything and sending payments via certified mail-return receipt requested; it s roughly $5 at the post office but there will proof the payment was sent and the return receipt card will be proof the payment was received. If a debt collection goes into court, the most accepted proof of payment(s) being sent and received is the US Postal Service return receipt card. After errors are removed and negative accounts are showing zero balances, then time and good credit activity will begin to rebuild the consumer s credit rating. Remember all account information is reported for 7 years from the date of last activity, so the outstanding accounts once paid will still show on the consumer s credit history for 7 years, but with a zero balance owed they are less negative for credit scoring purposes. There are no quick fixes in credit management or rebuilding and credit repair services typically charge fees ($300+) to flood the CRAs with dispute of everything on the consumers credit reports. This can cause problems if good credit information is removed as part of the flooded disputes and chaotic CRA investigations. ( continued ) 16
Appendix: Article Continued Speaking of credit scoring, this topic is presently fraught with problems for consumers, as I ll explain below, and there are NO free credit scores. We pay for them one way or another. The Federal credit laws have not yet given the consumer free access to their credit scores or adopted a uniform credit scoring system. The cost can range from $10- $20 for a score based on each credit report and remember there are 3 CRAs. Originally, credit scoring was created by the Fair Issac Company (FICO) of Minneapolis as a tool for lenders to have a numeric representation of the consumers credit worthiness. FICO scores range from 350-850, the higher the score the better. If you want to learn more about the FICO scores, you can go to their website: www.myfico.com and use the learn about credit scores tab across the top. I do not advocate paying for any of the services or resources the Fair Issac Company advertises and sells on their website, but the educational information available is excellent. The 3 CRAs realized that Fair Issac Company was making a lot of money using their consumer credit histories to generate a score for lenders and consumers. So, each of the 3 CRAs and created their own credit scoring system (Beacon score, Advantage score, etc.) loosely based on the same factors as the FICO formula. But these different credit scores they are not using the exact same scoring factors or the same scoring number ranges. Consumers are hearing about the importance of their credit scores in qualifying for credit and getting lower interest rates, but there isn t a uniform scoring system to know what the consumer is getting or to be able to effectively compare their credit scores. The consumer may be looking at the credit scores they pay for from each of the 3 CRAs and they are not all using the same scoring system and it s likely the lender is still using the FICO scores as the most established and reliable but consumers don t know for sure which credit scores their lender is using either. ( continued ) 17
Appendix: Article Continued The current state of credit scoring is very frustrating and confusing for financial professionals and consumers alike. If the consumer can get the potential future lender to disclose which credit scoring system(s) they re reviewing, then the consumer can in advance of applying for credit, pay for those credit scores to see what the score(s) fall on the corresponding number range for that score and have the opportunity to fix errors and clear old debts to have an improved credit score in the future. It can take 3-12 months for errors and zero balances to have a positive impact on credit scores, so ultimately it takes time and good credit practices that includes credit monitoring to build up a good credit score and credit history. As an example of how to apply this information, here s a client story: A young couple wanted to buy a house and wanted their credit fixed right away. I gave them the bad news that once credit goes bad, it s a slow credit rebuilding process. I cautioned them about credit repair services that flood or dispute everything on their credit histories to the Credit Reporting Agencies (CRA), and explained that errors and some of both their good and bad credit activity drops off because the CRA s aren t able to verify all disputed items within the 45 day dispute investigation timeframe. Once the legitimate bad credit items are verified by the CRA, they reappear on their credit reports again and ultimately there s very little positive credit gain for the fees paid to the credit repair service. Instead, we discussed them doing it themselves by pulling their free credit reports through the Annual Credit Request Service for all 3 credit bureaus for each of them..continued 18
Appendix: Article Continued We learned they had a few small credit cards that were charged-off, both had old unpaid cellular phone bills and utilities and all these accounts were being reported in collections. I explained that the mortgage approval process requires credit scrutiny by underwriters and they wouldn t be approved with outstanding debts that are unpaid and not in verifiable payment plans. We began working on a budget to focus on managing their cash-flow to identify what resources they have available to pay off these outstanding debts and collections. I coached them about contacting the creditors/collectors for each outstanding account, one-at-a-time and negotiating payment or settlement plans. I explained the importance of the clients keeping an accurate paper trail, maintaining control and record of payments, and getting everything from the creditor/collector in writing. Once their outstanding debts were paid, we discussed good credit practices for their ongoing credit accounts and building up their savings for the down payment and closing costs for purchasing a home. I encouraged them to enroll in first-time homebuyer classes through HUD or their State or County Housing agencies to learn about the complex home buying and mortgage processes. 19