F-R-E-E, that spells free-
Credit report dot com, baby
Saw their ads on my TV
Thought about going but was too lazy
Now instead of looking fly and rollin’ phat
My legs are sticking to the vinyl and my posse’s getting
Laughed at
F-R-E-E, that spells free-
Credit report dot com, baby

Well, it turns out F-R-E-E doesn’t really spell free; it spells $14.95 a month for the Experian Triple Advantage credit monitoring program.  Erica Possin, a college student, took the ads to heart and went to Free CreditReport.com prior to buying a car.  She got her report and went on her merry way, only to realize months later that she, like thousands of other customers, was being charged a $14.95 a month recurring fee.  She tried to get a refund from Experian, the owner of the website, but was denied.  Now she’s suing as the lead plaintiff in a class action lawsuit.  This isn’t a first for Experian either; they’ve already settled one suit with the FTC over ConsumerInfo.com.

So the morale of this story?  Be careful, not everything advertized as F-R-E-E is actually free.  Should you check your credit periodically, absolutely, but keep in mind you can go to AnnualCreditReport.com for a free one, or if you’ve been denied credit you can also get a free copy of your report.  Protect yourself, but keep in mind it may cost you.

What your credit card company has to tell you

When they plan to increase your rate or other fees. Your credit card company must send you a notice 45 days before they can:

• increase your interest rate;
• change certain fees (such as annual fees, cash advance fees, and late fees) that apply to your account; or
• make other significant changes to the terms of your card.

If your credit card company is going to make changes to the terms of your card, it must give you the option to cancel the card before certain fee increases take effect. If you take that option, however, your credit card company may close your account and increase your monthly payment.

For example, they can require you to pay the balance off in five years, or they can double the percentage of your balance used to calculate your minimum payment (which will result in faster repayment than under the terms of your account).

The company does not have to send you a 45-day advance notice if:

• you have a variable rate tied to an index; if the index goes up, the company does not have to provide notice before your rate goes up;
• your introductory rate expires and reverts to the previously disclosed “go-to” rate;
• your rate increases because you are in a workout agreement and you haven’t made your payments as agreed.

How long it will take to pay off your balance. Your monthly credit card bill will include information on how long it will take you to pay off your balance if you only make minimum payments. It will also tell you how much you would need to pay each month in order to pay off your balance in three years. For example, suppose you owe $1,784.53 and your interest rate is 21.99%–your bill might look like this:

Late Payment Warning: If we do not receive your minimum payment by the date listed above, you may have to pay a $35 late fee and your APRs may be increased up to the Penalty APR of 28.99%.

Minimum Payment Warning: If you make only the minimum payment each period, you will pay more in interest and it will take you longer to pay off your balance. For example:

No interest rate increases for the first year. Your credit card company cannot increase your rate for the first 12 months after you open an account. There are some exceptions:

If your card has a variable interest rate tied to an index; your rate can go up whenever the index goes up.

• If there is an introductory rate, it must be in place for at least 6 months; after that your rate can revert to the “go-to” rate the company disclosed when you got the card.
• If you are more than 60 days late in paying your bill, your rate can go up.
• If you are in a workout agreement and you don’t make your payments as agreed, your rate can go up.

Increased rates apply only to new charges. If your credit card company does raise your interest rate after the first year, the new rate will apply only to new charges you make. If you have a balance, your old interest rate will apply to that balance.

Restrictions on over-the-limit transactions. You must tell your credit card company that you want it to allow transactions that will take you over your credit limit. Otherwise, if a transaction would take you over your limit, it may be turned down. If you do not opt-in to over-the-limit transactions and your credit card company allows one to go through, it cannot charge you an over-the-limit fee.

If you opt-in to allowing transactions that take you over your credit limit, your credit card company can impose only one fee per billing cycle. You can revoke your opt-in at any time.

Caps on high-fee cards. If your credit card company requires you to pay fees (such as an annual fee or application fee), those fees cannot total more than 25% of the initial credit limit. For example, if your initial credit limit is $500, the fees for the first year cannot be more than $125. This limit does not apply to penalty fees, such as penalties for late payments.

Protections for underage consumers. If you are under 21, you will need to show that you are able to make payments, or you will need a cosigner, in order to open a credit card account.

• If you are under age 21 and have a card with a cosigner and want an increase in the credit limit, your cosigner must agree in writing to the increase.

Changes to billing and payments

Standard payment dates and times. Your credit card company must mail or deliver your credit card bill at least 21 days before your payment is due. In addition:

• Your due date should be the same date each month (for example, your payment is always due on the 15th or always due on the last day of the month).

• The payment cut-off time cannot be earlier than 5 p.m. on the due date.

• If your payment due date is on a weekend or holiday (when the company does not process payments), you will have until the following business day to pay. (For example, if the due date is Sunday the 15th, your payment will be on time if it is received by Monday the 16th before 5 p.m.).

Payments directed to highest interest balances first. If you make more than the minimum payment on your credit card bill, your credit card company must apply the excess amount to the balance with the highest interest rate. There is an exception:

• If you made a purchase under a deferred interest plan (for example, “no interest if paid in full by March, 2012″), the credit card company may let you choose to apply extra amounts to the deferred interest balance before other balances. Otherwise, for two billing cycles prior to the end of the deferred interest period, the credit card company must apply your entire payment to the deferred interest rate balance first.

No two-cycle (double-cycle) billing. Credit card companies can only impose interest charges on balances in the current billing cycle.

The HAMP website provides the following description of their mandate and the tools they’ve been given to achieve them:

The Home Affordable Modification Program is designed to help as many as 3 to 4 million financially struggling homeowners avoid foreclosure by modifying loans to a level that is affordable for borrowers now and sustainable over the long term. The program provides clear and consistent loan modification guidelines that the entire mortgage industry can use.

Borrower eligibility is based on meeting specific criteria including:

1) borrower is delinquent on their mortgage or faces imminent risk of default
2) property is occupied as borrower’s primary residence
3) mortgage was originated on or before Jan. 1, 2009 and unpaid principal balance must be no greater than $729,750 for one-unit properties.

After determining a borrower’s eligibility, a servicer will take a series of steps to adjust the monthly mortgage payment to 31% of a borrower’s total pretax monthly income:
• First, reduce the interest rate to as low as 2%,
• Next, if necessary, extend the loan term to 40 years,
• Finally, if necessary, forbear (defer) a portion of the principal until the loan is paid off and waive interest on the deferred amount.
It all sounds pretty good if you’re in danger of losing your home. There are even built in incentives for banks to extend these loan medications to buyers so they’re not just taking a huge hit in the bottom line. As I wrote about in the previous blog on loan modification banks don’t seem as keen to extend these modifications as one might hope. Only a fraction of the 3-4 million the program was supposed to assist have been granted modifications, and to make matters worse, the people still jumping through hoops to get their loan mods are now discovering that their credit has been ruined.

The way the program is supposed to work, on paper at least, is you contact the bank that holds your mortgage note and let them know you’re in a hardship situation and either in danger of defaulting on your mortgage, or are already late. They are then supposed to negotiate a lower payment and interest rate, which you and the bank agree to, for a trial period while they investigate the hardship and create a more permanent arrangement on your loan. This is where things are falling apart though. While the banks drag their feet for months, requiring obscene amounts of documentation on your hardship, many times more than once, the payments at the reduced rate are being reported as late because they are less than the original mortgage payments. Want to ruin your credit? Have your mortgage reported late for a few months. Trust me, that’ll do the trick.

So the obvious counter to this is, at least you have a reduced mortgage rate so you can keep your home and stay afloat, that’s a good trade off for a lower credit score. That reasoning ignores the ramifications of the damage done to your credit. The fallout from your lower credit score has the ability to actually raise your monthly bills. When your credit scores drop 100 points, which has been widely reported by consumers in the HAMP program, you’ll see your interest rates skyrocket on your credit cards, leading to higher monthly payments and credit limit reductions or freezing, eliminating what may be your last safety net. In addition, unless you had an 850 credit score to start with, a 100 point credit score drop is going to eliminate your ability to obtain a traditional loan modification, will ruin the chance of getting any other type of loan, for instance a debt consolidation loan to take care of the high interest credit cards, and greatly increased interest rates on new purchases, such as automobiles. The increased credit card payments alone have been enough to push some people over the edge that they had been teetering on before the loan modification.

So if you’re considering HAMP assistance, inform yourself of the downsides before you start down that road. If you’re already carrying a large about of credit card debt the increase in interest and fees resulting from the program’s impact on your credit scores may more than offset the reduction in your mortgage payment. With anything, it’s best to know what you’re getting into—and be sure you’re doing your own research because the banks certainly aren’t going out of their way to educate the home owners seeking assistance on the ramifications of them dragging their feet for months while they decide if they’ll provide the loan modification.

While this might be great for a first time home buyer, the FHA has a government mandate requiring the agency to maintain certain reserves to back defaulted mortgages, reserves they no longer have as the number of loans they back has exploded.  Because of this the FHA is under a lot of pressure to change their lending standards, increasing borrower requirements to limit the number of mortgages they back.

The HUD secretary yesterday outlined a series of steps the agency has planned to meet the reserve requirements, while still making sure FHA loans are accessible and safe.  The 5 steps outlined are below.

• More money down: The FHA’s low down-payment requirement—of just 3.5 percent—is one of the main reasons that agency-guaranteed loans have become so popular. Home loans without FHA backing can come with down payments anywhere from 10 to 20 percent, depending on the market, borrower, and other factors. But the FHA’s deteriorating balance sheet has triggered calls for the agency to force borrowers to put more cash down.  Legislation has been introduced by Rep. Scott Garrett, a New Jersey Republican, to boost the minimum down payment to 5 percent. The HUD secretary indicated that the agency is considering higher down-payment requirements. “We have made the decision to exercise our authority to increase the upfront cash that a borrower has to bring to the table in an FHA-backed loan—to make sure that FHA borrowers have more ’skin in the game’ and a stronger equity position in their loans.”  No word though on how large the potential increase may be though, but details have been promised for January.  Experts estimate the 3.75 – 4% range.  So if you get an FHA loan for a $150k house after the changes go through, you’ll need at least $5,625 for a down payment instead of $4,500.

• Higher fees: The HUD secretary also suggested increasing the insurance premiums changed by the agency would inflate their dwindling cash reserves to the mandated levels.  This requires Congress to raise the premiums though, because they’re already at the maximum allowed by law.

• Better credit: The agency will, perhaps temporarily, increase the minimum credit score for new borrowers.  Right now it’s at 500, but it’s pretty irrelevant because they’re merely backing the loans, the actual lenders have much higher standards.  Experts seems to think we’ll see the requirements shoot up to at least 650 though.

So what does all this mean?  It means fewer FHA backed loans, and the ones they do back will be more stable than the ones they’re currently backing.  So if you’re on the edge with your credit and down payment savings, move fast before standards change, or else start working on getting that credit score  higher and saving up more money for a down payment.

What does this mean for the average consumer? It means the banks are loaning money again. Credit demand has been increasing as faith in the stability of the economy has increased, so a higher credit index score means more of those loans are getting funded. More demand for credit plus more credit getting granted equals a way out of the economic mire we’ve been in for the past 18 months or so.

It’s my strongly held personal opinion that this trend must, and will, continue as the New Year rolls around, based on personal observations of credit trends and industry reports. This is excellent news for all of us. But keep in mind, loan requirements, while relaxed compared to last year, are still much higher than before the economic downturn began, so it’s more important than ever to have your credit in shape.

If you’d like to view the report yourself, it can be found here.

By Liz Pulliam Weston

One of the questions I’m asked most often about credit scores is exactly how much certain actions affect people’s scores.

Until now, the best I could do was say, “It depends.” That’s because the company that created the leading credit score, the FICO, has been wary about releasing specifics.

Fortunately, that just changed. At my request and for the first time, the company (also known as FICO) has released details about how specific actions, from maxing out a credit card to filing for bankruptcy, can affect people with different credit scores.

I asked the company to compute the results of those actions for two examples: a person with a 780 score, which is an excellent score on the 300-to-850 FICO scale, and someone with a 680 score. The results:

The results are given in a range because FICO is still a little nervous about revealing too much about its proprietary scoring. But the range is fairly tight, and we can clearly see the disparate impacts of the different actions.

A guide, not a guarantee

Before we go further, I have to make this clear: Your mileage may vary.

People with the same credit score can have very different credit profiles: more or fewer accounts, a different mix of accounts, a longer or shorter credit history, use of more or less of their available credit, etc.

Because of those differences, the same action — maxing out a card, say — can have different effects on people with the same score, depending on the details of their individual credit profiles.

For the sake of this exercise, FICO assumed both people had several active major credit cards as well as a mortgage, a car loan and student loans.

The person with the 780 score:

• Has at least 10 credit accounts in total and a 15-year credit history.
• Uses 15% to 25% of her credit card limits.
• Has no late payments on her credit reports.
• Has no collection accounts or other major negatives.

The person with the 680 score:

• Has six credit accounts and an eight-year credit history.
• Uses 40% to 50% of her credit card limits.
• Was 90 days late on an account two years ago.
• Was 30 days late on another account one year ago.

Here’s what you need to know about each action and the effect it had:

Maxing out a credit card

Using 100% of your limit on any credit card puts you at risk of over-limit fees. It also takes a bite out of your credit score.

Our person with the 680 score might lose 10 to 30 points from this one action, while the 780 scorer could shed 25 to 45 points.

The difference points up an important fact: The higher your score, the more points you tend to lose from “bad” actions. That’s because the scoring formula is sensitive to any sign you’re getting in over your head. Maxing out a credit card is considered one of those signs.

You also should know that it typically doesn’t matter to the formula if you carry a balance or pay off that maxed-out card as soon as you get your statement. What’s usually reported to the credit bureaus is the balance on your last statement. Even if you pay the debt in full before the due date, the maxed-out card will hurt your score.

Skipping a payment

Mailing a payment a few days late normally won’t hurt your score, although you may incur late fees and trigger higher interest rates. The big hurt comes when you miss a payment cycle entirely.

A 30-day-late report would shave 60 to 80 points from our lower-scoring person and 90 to 110 points from our higher scorer. In other words, one lapse of attention could plunge the 680-scorer into subprime credit territory, and our 780-scorer could find credit much harder to get and more expensive.

This is why it’s so important to set up automatic payments to ensure your bills get paid on time, all the time. With credit cards, you can set up automatic payments that take the minimum payment out of your checking account to ward against a late payment. You can always make a second payment that reduces your debt or pays it off entirely. You can sign up for automatic payments on the Web site of your card issuer.

Settling a credit card debt

All the advertisements about “settling your debt for pennies on the dollar” make debt settlement sound like a great solution. But failing to pay what you owe a creditor will take a serious toll on your score.

The 680 scorer would lose 45 to 65 points with this maneuver, while the 780 scorer would shed 105 to 125 points.

Our scenario assumed that our borrowers would miss one payment before settling the debt with their credit card companies. In reality, debt settlement negotiations can drag on much longer, with each missed payment taking another chunk out of your score.

Settling a debt with a collection agency would hurt less, probably much less, because the FICO formula is set up to weigh more heavily what the original creditor says about you than what a collection agency reports. But if our borrowers were settling with a collection agency instead, their scores would be lower to begin with, because they would have collection accounts on their records.

Also, you should know that the amount of debt your creditor “forgives” in a debt settlement solution is typically added to your taxable income. So you may save some money by settling a debt, but you’ll give some of it back to Uncle Sam in higher taxes.

Losing a property to foreclosure

Foreclosure deals a severe blow to your credit score: 85 to 105 points for our person with the 680 score and 140 to 160 points for the one with the 780 score.

Foreclosures have implications for your future ability to get a mortgage as well. Although your score may start to improve as soon as the house is gone, mortgage lenders may not be willing to extend you another home loan until two to four years have elapsed.

In an attempt to protect their credit, many people attempt short sales, selling their houses for less than what’s owed, with the lenders’ permission. Unfortunately, these transactions, even if successful, are often reported as settlements. And a settlement, as you’ve seen, is pretty bad for credit scores. To lenders, a short sale isn’t quite as bad as a foreclosure, though, and it may be easier to get another mortgage once you’ve rebuilt your credit.

Filing for bankruptcy

FICO spokesman Craig Watts once called bankruptcy the nuclear bomb of credit actions. Filing for bankruptcy would shave 130 to 150 points from the 680 score and 220 to 240 points from the 780 score.

This is different from the other black marks, where the higher scorer was still left with better numbers than the lower scorer. In this case, both would wind up near the bottom of the credit barrel. Getting new credit, particularly in the current credit-crunch environment, would be extremely tough.

Sometimes, of course, bankruptcy is the best of bad options. But if you can’t pay your bills, you should at least explore the other possibilities: forbearance, credit counseling or even debt settlement.

Finally, if you have any of these five black marks on your record, remember two things: The impact on your score may differ from what’s shown above, and regardless of how many points you lost, you can rebuild your FICO score over time.

You can start by using a free FICO score estimator, such as this one at Bankrate.com, or MSN Money’s credit score estimator, which similarly models a score on Experian’s 330-to-830 range, to see where you stand.

Or you can sign up for free credit scores from sites such as Quizzle, Credit.com and Credit Karma, which use the actual information on file about you with the credit bureaus. But the scores you get still may not be the ones lenders actually see.

Or you can buy your Equifax or TransUnion FICO score from MyFICO.com. (Experian no longer sells FICO scores to consumers, although it continues to sell the scores to lenders.) With paid scores, you’ll get specific advice about how to improve your numbers. In general, when you’re trying to build a credit score, you should:

• Pay your bills on time, all the time.
• Reduce your credit utilization; below 30% is good, below 10% is better.
• Have a mix of credit on your reports, including installment loans (mortgages, auto loans and personal loans) and revolving accounts (credit cards and lines of credit).
• Refrain from closing accounts.
• Apply for new credit sparingly.

Treasury Secretary Timothy F. Geithner, speaking at a small-business financing forum at the Treasury Department, called on banks to “get back to the business of lending.”

The Treasury Department released a report earlier this week showing that many of the banks that received government aid in the form of stimulus money earlier this year continue to tighten credit. Loan originations in September fell 6 percent at Bank of America and 14 percent at Wells Fargo compared with the August.

Geithner went on to state that when banks rein in their lending it is the small businesses that are hurt the most since they rely on banks for 90% of their lending, versus large corporations that only get 30% of their loans from banks. “Banks bear some responsibility for the extent of the damage caused by the crisis, you carry a substantial obligation to help our communities get back on their feet.” he told the banking representatives.

The Making Work Pay tax credit, part of the $787 billion economic stimulus package was passed earlier this year, reduced the amount of income tax withheld from taxpayer’s paychecks by up to $400 for individuals or $800 for couples.  The idea was that people with more money would, get this, buy more.

The problem though, announced in a report on Monday, was that the Federal Tax Tables used to determine the correct withholdings failed to take into account situations like taxpayers with two jobs, families where both spouses work, or taxpayers with Social Security income still in the workplace (the people who probably need their full refund the most).

The Inspector General of the Treasury Department in charge of tax administration estimated that over 10% of 2009 filers would owe additional taxes due to the complex and convoluted Making Work Pay credit.  To make matters worse, 65,000 of those people might also face penalties from the IRS for underpaying their taxes.

If you’re worried that you might be one of the Americans affected by this, visit the IRS withholding calculator.

The law provides an $8,000 tax credit for first-time homebuyers, and $6,500 for homebuyers who have owned their current home for at least 5 years. Contracts must be in place by May 1st, 2010 to qualify.

The bill, approved 331-92, will force credit card companies to meet the terms of the new rules at once unless they agree to stop increasing interest rates and fees.

The bills chances in the Senate are weak; where several Senators worry that a short deadline would hurt the industry and limit the availability of already scare credit.

All the same, Wall Street seemed to take notice of the House’s vote, sending bank stocks tumbling in the last hour of trading today immediately following the House vote

Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee, was quoting as saying “This is both real and a lesson to them”. Many feel this is a warning to the banks to back off their predatory practices.

The Credit Card Reform Act was signed into law earlier this year and was designed to protect consumers by regulating interest rate increases, the issuance of cards to people under 21, and the way information and what information is presented in communications from lenders. The downside was many in the Senate felt the rules were too harsh, so the banks were given 9 months to prepare for the changes. Instead they used the 9 months to wring consumers dry while it was still legal. Recent studies have shove that interest rates have risen by 20% in the past year on average. It seems odd that the banks argued that they needed months to enact the new rules, but have the business agility to enact rate increases and credit limit reductions almost instantaneously.