Dear Liz: I watched 60 Minutes last night regarding the 3 credit bureaus and was amazed at what I learned. I was hoping to spend time trying to repair our credit score, but according to the report last evening, it sounds like a total waste of time as the three credit bureaus basically are not accountable to anyone and they very rarely take action in your defense. Was this a one-sided view?
Answer: The credit bureaus would tell you yes, but the answer is way more complicated than that.
The show reported that 40 million Americans have errors on their credit reports. That’s about one in five U.S. adults covered by the credit bureau industry. About half (one in 10) have errors serious enough to hurt their credit scores.
(Update: A Federal Trade Commission report released today said one in four had at least one “potentially material error” on at least one of their three credit reports and that one in 20 consumers had significant errors on their credit reports that could cause them to pay more loans.)
That’s a pretty high error rate, but an even bigger problem is that the process to fix mistakes is almost completely automated and structured to favor the data provider (the banks, lenders and others supplying information) over the consumer. Here’s how the Ohio attorney general described it:
“The federal law says that if you believe that there is a mistake, you can go to them and they have an obligation to do a reasonable investigation. They’re not doing a reasonable investigation. They’re not doing an investigation at all.”
The show interviewed former bureau employees in Chile who confirmed what others have reported: that their jobs were to assign two-digit codes to the complaints. That’s it. Then the complaints are forwarded to the lenders and other data providers for response.
People can and do get errors fixed if the data provider acknowledges the error or simply fails to respond to the credit bureaus’ queries. If the data provider continues to insist it’s right, however, it’s pretty tough (if not impossible) to get the bureaus to step in.
That’s how people get caught in seemingly endless cycles of disputing mistakes only to have them reappear, or never disappear, from their reports.
The credit bureaus, which apparently turned down opportunities to respond on camera, now point to a study by the Policy and Economic Research Council that found 95% of consumers were satisfied with the outcome of their disputes. The study was paid for by a grant from the Consumer Data Industry Association, which represents the credit bureaus.
It’s not exactly pointless try to fix errors. The FTC report said four out of five people who dispute errors get results. You should still try, and you may well find it’s possible, but you should plan to be tenacious if your initial efforts are rebuffed. (You should get your free credit reports directly from www.annualcreditreport.com. Don’t go to other, lookalike sites, some of which are owned by the credit bureaus but that aren’t the federally-mandated site that gets you your free reports.)
You should also support efforts by regulators and consumer advocates to require the credit bureaus to put a more responsive system in place.
Dear Liz: My boyfriend is deployed. I have his power of attorney, and during his deployment I have paid off all of his credit card debt. The accounts now need to be closed because they are ones that were acquired with his former wife. I know you say that it will hurt his credit to close accounts, but I’d rather close them because they’re tied to his ex.
Answer: If the former wife is a joint account holder on the cards, they should have been closed and the balances transferred to other credit cards in his name only before the divorce was final. The credit score dings from closing accounts and opening new ones pale compared with the potential damage a vengeful, or neglectful, former spouse could do with those cards. She could have run up big balances or tried to wrest control of the accounts and then failed to pay them, ruining his credit scores.
If your boyfriend has several other open credit cards, you could simply close these. If he doesn’t, you might talk to the credit card companies about closing these cards and simultaneously opening new ones in his name only. This might be tricky to do while he’s deployed, however, even with a power of attorney. Another option is to simply open a new card for him online before closing the others.
Dear Liz: My homeowners insurance just went up 25%. I’ve made no claims and made no changes. I want to get quotes from other providers, but I’m afraid I’m going to get some type of “teaser” rate. I tried changing companies a few years ago and the rate was good, but when it came time for the renewal, they doubled the price! Again, I made no changes nor had any claims. So, now I want to change, but I’m afraid of falling into the same trap. Any suggestions?
Answer: You can’t assume you’re locking in a low rate for life when you buy homeowners insurance. Companies that want to expand their market share may lower their prices awhile to lure customers away from their competitors, then raise premiums when their claims costs go up or they simply want to cut their risk.
The company’s reputation for customer service should be at least as important a factor as price in your decision-making. Check the complaint surveys that many state insurance departments maintain on their websites to see which companies have the best (and worst) reputations.
One way to reduce your homeowner premium is to increase your deductible. Raising the amount you pay out of pocket from $250 to $1,000 can lower your premiums 25%. You should be paying small damages out of pocket anyway, since filing small claims can cause your rates to rise.
You also should shop around every few years, even if a company doesn’t dramatically raise your rates, to make sure you’re getting a decent deal. But again, chasing the lowest-cost insurance could be only a short-term win — an insurer that charges slightly more could be the more stable, and consumer-friendly, choice.
Dear Liz: It has been almost one year since my domestic partner passed away, and our home of 43 years is fully paid for. I am ready to sell. The house is structurally in good shape but needs upgrades and a backyard redo. I have heard that painting both inside and out is a plus, but I’m concerned that any other improvements, such as flooring, would be my taste and not the buyer’s. Is it a wise idea to indicate that any major improvements be deducted from escrow funds?
Answer: You’re smart not to take on any major remodeling just before you sell, since few home improvements come anywhere close to paying for themselves. The fix-ups that typically do return more than they cost include painting, deep cleaning, trimming and freshening your landscaping, and de-cluttering. Consider storing half or more of your possessions. You’ll have to pack them up anyway to move, and getting them out of the way now will make your house look bigger.
Talk to your real estate agent about the advisability of replacing your floors. If yours are quite worn, the investment may pay for itself. Otherwise, a cleaning may be enough. You don’t have to offer to pay for the next owner’s improvements. Just price the home appropriately to reflect the fact that it needs updates.
Dear Liz: I’m 22 and a graduate student with only one year left before I enter the “real world.” I have four credit cards — one store card, two Visa cards and one MasterCard — only one of which carries a balance. I want to make the best decisions regarding my financial health. Which would be better for my credit: closing the account that’s the oldest (opened when I was 18) but that will no longer be used because of its small credit limit and high interest rate, or leaving the line open?
Answer: Closing accounts can’t help your credit scores and may hurt them. If you had a long credit history and many accounts, the impact of closing a low-limit account shouldn’t be that great. With such a short history and relatively few accounts, though, you could be doing unnecessary damage to your scores.
The best thing you can do for your financial health, now and in the future, is to pay off your credit card balance. Credit cards should be used as a convenience, not as a way to live beyond your means. Resolve to charge no more than you can pay off in full each and every month. You’ll save yourself a fortune in interest and help protect yourself against bankruptcy.
Dear Liz: How deep in debt must a person get before he or she is able to get a mortgage on a home? My grandson, age 26, has been steadily employed by the same company for nearly six years. He rents a place he can afford, buys used cars for cash, has a nice savings account and basically avoids debt by not buying things he can’t afford with cash. Now he would like to begin investing in a home. When applying, however, all he hears is that because he doesn’t have a credit rating, he can’t get a loan. Does he really have to create debt in order to get a loan?
Answer: The idea that you have to be in debt to have a good credit score is a persistent and destructive myth. It’s just as wrong as the idea that all you have to do to have good scores is manage your finances responsibly.
To have good credit scores, you must have and use credit accounts. This does not mean you have to be in debt or carry credit card balances. Simply using a couple of credit cards lightly but regularly and paying them off in full is enough to build good scores over time.
Your grandson may need to start by getting a secured card, which offers a line of credit equal to the amount of cash the applicant deposits at the issuing bank. Websites such as NerdWallet, CreditCards.com, CardRatings.com and LowCards.com highlight current secured card deals.
He also could consider “piggybacking” onto someone else’s good credit by being added as an authorized user to that person’s credit card. In some cases, the other person’s history with the card can be imported to your grandson’s credit bureau files. The person considering adding your grandson should check with the issuer to see whether such an import is possible.
Dear Liz: You recently suggested an insurance salesman be reported to state regulators because he suggested a reader stop funding a 401(k) and instead fund an insurance contract with after-tax dollars. You were way out of line. It’s very likely tax rates will be going up, so it may make sense to trade a tax benefit now for a better one in the future.
Answer: You might have a valid point if the reader were wealthy enough to be funding a life insurance policy or annuity in addition to his 401(k) contributions. Wealthier people are already facing higher tax rates, and they are more likely to be in the same bracket, or perhaps even a higher one, when they retire.
The fact that the insurance salesman suggested the reader redirect his retirement contributions to the insurance contract indicates the reader didn’t have the cash flow to do both. So it’s still quite likely that the reader will drop into a lower tax bracket in retirement, in which case he’s given up a valuable tax break now for a less valuable one in the future.
A red flag should go up anytime an insurance salesperson recommends you stop funding a tax-deductible retirement plan or that you tap home equity to buy whatever he or she is selling. That indicates the product was designed for someone wealthier than you. At the very least, you should run the purchase past a fee-only financial planner — someone who doesn’t earn commissions on product sales — to make sure you’re getting the whole story.
I only noticed the difference after I swiped my card and was about to press the key to start the pump. I checked the station’s signage, and noticed the display advertising the “cash” price was a lot bigger than the one showing the “credit” price.
Technically, California has a law that’s supposed to prevent surcharges for plastic. But as my buddy David Lazarus has pointed out in his column, Section 1748.1 of the California Civil Code has some big fat loopholes. Gas stations get away with double pricing because they’re supposedly offering a discount for cash, not a surcharge for plastic.
Now that retailers elsewhere in the country can add surcharges to Visa and MasterCard transactions, the question is: will they?
Those of us who love our credit card rewards programs—including the rewards card ninjas I highlighted in my column this week—hope the answer is no. It wouldn’t take much of a surcharge to wipe out the value most people get from their rewards cards.
Brian Kelly, the founder of The Points Guy, says retailers who add surcharges could be shooting themselves in the foot.
“High-end consumers love their rewards,” Kelly said. Retailers who don’t add surcharges will have a competitive advantage, which could make attempts to impose the fees short-lived.
I know that I’ll vote with my feet. Once I noticed I was about to pay $4.09 cents a gallon, rather than the $3.89 I expected, I hung up the nozzle. I didn’t have to drive far to find a Mobil station that charged $3.89, cash or credit. Guess where I’ll be gassing up in the future?
Dear Liz: I paid all of my old collection accounts except for two, which now are beyond the statute of limitations. I would like to find the best way to negotiate with the collection agencies without getting sued. Even though the original delinquency was over four years ago, the agencies are reporting these every month as current debt, which is really hurting my credit score. My intent is to offer a lump-sum settlement amount if they will remove the report from my credit file with the bureaus, or alternately in return for a “paid” notation on my report file. However, I cannot afford to pay the amount they say I owe.
Answer: If the collection agencies are simply reporting your debts each month with a correct “date of last activity” — usually the date you stopped paying the original creditor — your credit scores aren’t being hurt anew each month. If the agencies are reporting a new date of last activity each month, however, they are illegally re-aging your debts. You can dispute this illegal reporting with the credit bureaus and directly with the collection agencies. If the errors aren’t corrected, you can file a complaint with the Consumer Financial Protection Bureau, which took over regulation of the major credit bureaus last year.
Filing disputes is not something you’d want to do if the debts are still within the statute of limitations, said Michael Bovee, president of Consumers Recovery Network, which specializes in debt settlement. You wouldn’t want to draw attention to yourself or your debts. But you run little risk in filing a dispute now since the debts are too old for the collectors to file a legitimate lawsuit.
Bovee said that simply contacting the agencies about the debts shouldn’t restart the statute of limitations, but debt expert Gerri Detweiler of Credit.com advised caution.
“It may be well worth it to consult a consumer law attorney,” Detweiler said. “Otherwise [you] may reset the clock on these debts and owe the entire amount plus interest.”
You can get referrals to consumer law attorneys at the National Assn. of Consumer Advocates, http://www.naca.net.
You don’t have to pay the reported debts in full to reach a settlement, Bovee and Detweiler agreed. Often the totals reported are inflated by interest and fees, and the collection agencies probably paid only pennies on the dollar to buy this debt.
Start by saying you have only so much money to work with and offer 20% to 30% of what the agency says you owe.
“A realistic expectation for negotiating a debt this old would be to settle the account for 50% or less than the current balance owed,” Bovee said. “If they raise objections, there is no problem in mentioning that you are aware that the debt is past the statute of limitations for you to be sued, but that you are just trying to do the right thing.”
Don’t say you’re trying to improve your credit, since that gives the collector leverage over you, Bovee said.
You can negotiate to have the collections deleted from your credit reports, but the original delinquencies and charge-offs will remain and will continue to affect your credit scores until they pass the seven-year mark.
Dear Liz: I think you missed one of the possibilities when a reader wrote to you about a pitch he received from an insurance salesman. The salesman wanted the reader to stop funding his 401(k) and instead invest in a contract that would guarantee his principal but cap his returns in any given year. You thought the salesman was pitching an equity indexed annuity, but it’s possible he was promoting an indexed universal life policy, which would offer the same guarantees of principal and offer tax-free loans.
Answer: You may be correct — in which case the product being pitched is just as unlikely to be a good fit for the 61-year-old reader as an equity indexed annuity.
Cash-value life insurance policies typically have high expenses and make sense only when there’s a permanent need for life insurance. If the reader doesn’t have people who are financially dependent on him, he may not need life insurance at all.
Furthermore, the “lapse rate” for cash-value life insurance policies tends to be high, which means many people stop paying the costly premiums long before they accumulate any cash value that can be tapped.
Before you invest in any annuity or life insurance product, get an independent second opinion. One way is to run the product past a fee-only financial planner, who should be able to analyze the product and advise you of options that may be a better fit for your situation. If you just want a detailed analysis of the policy itself, you can pay $100 to EvaluateLifeInsurance.org, which is run by former state insurance commissioner James Hunt.