AmEx Artificially Deflates Credit Scores

As you may recall from previous posts, 30% of your credit score is based on your debt ratio. The Big Three credit reporting agencies – that's Experian, TransUnion, and Equifax - use special software to calculate this ratio.

We've already discussed the Sneaky Credit Industry Trick where some credit card companies do not report the actual credit limit, which causes the software to use the highest reported balance as the "credit limit," biasing debt utilization calculations against the consumer. This was one way to artificially deflate their customers' credit scores, making them unattractive to their competitors.

According to SmartMoney, American Express is among a number of credit card companies that are now employing another Sneaky Credit Industry Trick: chasing balances. Consumers are reporting that as they pay down their credit card balances, the credit card company is penalizing them by lowering their available credit limit.

They tell the story of Trent Charlton, who paid off more than $8,000 in credit card debt in the last six months, with the goal of paying off an additional $10,000 in the coming weeks.

Six months ago, Charlton paid his American Express credit-card balance down to $14,000, AmEx decreased his limit from $20,000 to $14,300. Another payment several weeks ago brought his balance down to $10,000 — AmEx then cut his limit to $10,300. AmEx has also slashed the $2,000 limit on a card he rarely uses down to $500, barely above his $300 balance. And the limit on his GE Money Card (issued by General Electric Money Bank) where he owes $7,000, was recently cut from $15,000 to $7,500.

With an increasing number of delinquencies, credit card companies are doing everything they can to tighten lending standards and reduce the risk of default. CNN's latest statistics show the percentage of people who are late on their credit card payments is the highest it's been in three years.

Looking at the subprime crisis and weakening economy, this would be a logical rationale - except they are not targeting just high-risk customers. Lenders now are including customers that - not that long ago - would have been considered good customers, even considering factors such as where the customer lives (ie: in an area of high foreclosures) or where he or she works (mortgage companies, construction-related businesses and home builders).

Trent's credit score SHOULD have increased significantly based on his repayments. His original credit limit was $20,000. After paying the balance down to $10,000, he should have a 50% debt utilization ratio. Instead, by dropping his credit limit to $10,300, the scoring algorithm calculates his debt utilization ratio to nearly 100% - making him a "bad" candidate for credit.

The same goes for the GE Money credit line. With a credit limit of $15,000, his debt ratio SHOULD be just under 47% after paying down his balance to $7,000. Instead, by dropping his limit to $7,500, his debt ratio is over 93%.

According to Craig Watts of Fair Isaac (the company that created the FICO score), if your credit utilization is 50% or more of your credit limit, "you are doing some real damage to your credit score." And when the new FICO scoring model is released in May, "if you have a utilization of over 50%, you'll be penalized even more heavily."

Clearly, the system is flawed as it is not accurately representing the borrower's willingness or ability to pay. And with such high debt ratio calculations, other lenders will probably think twice before issuing Trent more credit - keeping him locked in with American Express and GE Money Bank until his debt is completely paid off.

A Credit Check for the Lunch Lady

Current and prospective school employees in Bentonville, Arkansas, may soon find their credit histories under the spotlight if a proposed policy requiring every district employee or applicant who handles money or uses a credit card to consent to a personal credit check is passed.

That includes everyone from top executives managing the district's budget to the cafeteria manager to "department heads who reserve conference and hotel rooms with district credit cards, bookkeepers, all employees who process paychecks and perhaps even district employees who volunteer in their off-hours to work at school concession stands."

It's becoming more common for employers to run credit checks on prospective employees. There is the belief that a person's credit history can indicate how he or she handles money, which translates into how he or she would handle the company's money. In this situation, the policy would also apply to existing employees.

But credit scores can be negatively impacted in a number of ways that may not necessarily show willingness or ability to pay, or indicate that the person would misuse their position to steal or embezzle funds. If they recently applied for credit, if they have fully paid off an old collection account, if they are young and haven't established a lengthy credit history, or if they use a credit card from a company that doesn't report their actual credit limit, their score will be lower. Identity theft victims may not even be aware that their credit file has been hijacked until an employer runs a check.

According to The Morning News, committee members questioned whether someone with an unfavorable credit score still could be hired or allowed to continue working for the district. Steve Potts, the executive director of Human Resources, confirmed that credit scores would be part of the hiring process and would also be considered when allowing an employee to continue in a job.

Superintendent Gary Compton stated he believed that by conducting credit checks, administrators might more easily spot mishandling of taxpayer money, or those prone to do so.

But your Credit Mama believes that credit scores are an increasingly unreliable predictor of future performance - that is clearly apparent with the current subprime meltdown. Eight out of 10 credit reports contain errors. Imagine if your work product was only correct 20% of the time! Yet our society is using this seriously flawed data to make major decisions that impact our lives.

The Bentonville School Board Policy Committee is due to review this measure at next month's meeting.

Experian Sues LifeLock

Experian is really mad at Todd Davis.

You may not know Todd Davis, but you probably have seen his Social Security number plastered all over magazines, newspapers, television - even wrapped around public buses. (457-55-5462)

Davis is the CEO of LifeLock, a company that focuses on identity theft prevention. Their advertising has been hugely successful, with 700,000 customers each paying $10 per month for the service.

The service essentially consists of continuous fraud alerts being placed on your credit report, to be renewed automatically every 90 days. LifeLock's services also include stopping junk mail and the mailing of pre-approved credit card offers, and a copy of their credit report. The company offers a $1 million guarantee that it will help restore customers’ credit reports if they suffer an identity theft.

Experian says that LifeLock's practices are costing them "millions of dollars." Some of this is due to the thousands of calls funneling through various phone banks from LifeLock, resulting in "excessive phone charges." And, since the credit bureaus make a lot of money by selling consumer data to potential creditors, fraud alerts drastically limit their revenue capabilities.

The Lawsuit

Experian contends that the placing of continuous fraud alerts is illegal - that the Fair Credit Reporting Act only allows the consumer or a person acting on behalf of the consumer to place fraud alerts - and that LifeLock is intentionally deceiving the bureaus by posing as customers.

Experian also says that the fraud alerts can only be placed when the consumer believes that fraudulent activities are imminent, and not just for anyone who wants one.

Pot, Meet Kettle

Experian is bent out of shape that LifeLock would charge consumers a fee to do what they can do legally for free. For example:

• You can call any of the Big 3 credit bureaus to request an initial fraud alert if you suspect that you have been, or are about to be, a victim of identity theft. Once the alert is in place, potential creditors must use "reasonable policies and procedures" to verify your identity before issuing credit in your name. You do not need to call each of the three credit bureaus - they are required to report this to the other bureaus.
• In addition, when you place an initial fraud alert on your credit report, you can order one free credit report from each of the three nationwide consumer reporting agencies. You also can request that only the last four digits of your Social Security number appear on your credit report. You also can order a free credit report from annualcreditreport.com.
• You can stop junk mail and remove yourself from pre-screened offers by visiting http://www.optoutprescreen.com/ or call toll-free to 1-888-567-8688. You can choose to opt-out of offers for five years or permanently. (You also can add yourself back onto the list.)

Experian really has no room to talk, having been the target of criticism that it charges customers for a service that is free through its freecreditreport.com site. The FTC has expressed concern that the site could be confused with annualcreditreport.com, which is the only site mandated by federal law that permits consumers to obtain a credit report for free each year.

With credit monitoring as the centerpiece of Experian's freecreditreport.com service, it's easy to see why Experian is attacking its new competitor.

The Truth Is....

Experian, no stranger to misleading and deceptive advertising, also claims that LifeLock is engaging in misrepresenting the effectiveness of its service. In one ad, LifeLock says, "You’ll find out how to lock down your identity, making it virtually impossible for identity thieves to wreak havoc on your good name."

Fraud alerts, however, don't prevent fraud from happening. It simply makes it harder for identity thieves to open up credit in your name. If an identity thief already has your credit card or Social Security number, a fraud alert won't stop the misuse of those items. Even Davis admitted in an interview that if an undocumented worker is using your Social Security number to obtain employment (a very common form of identity theft), there isn't much that LifeLock can do to stop it.

Is Your Grocer A Crook?

Beyond the legal issues Experian is jawing about, the hot issue seems to be whether LifeLock is a scam for charging consumers to do things they can do themselves for free, or if they simply are providing a convenience at a low monthly cost. LifeLock customers appear to be happy with the service. Yes, you can do these things for free. LifeLock clearly states this on their Web site. But every day, we pay for convenience. After all, you could grow your own food - does this make your grocer a crook?

More and more, people are finding that dealing with the Big 3 is a time-wasting hassle. If you don't want to pay for the service, you've now got the tools to do it yourself. If you want someone else to do it for you, $10 a month is not unreasonable.

One thing to be aware of: Experian states in its lawsuit that LifeLock uses annualcreditreport.com to order the customer's credit report. Customers who are unaware of this practice may try to use their once-a-year benefit and get turned down because LifeLock has already tapped the free report for the year.

Debit Card Traps - Part II

Susan, a good friend of mine, recently called me in tears. She and her family had planned a getaway to Disney World for a long holiday weekend - the first "vacation" they had taken in years. The kids had already planned out which rides they were going to go on, and Susan and her husband were eager to get away from it all for a few days.

Always the conscientious one, Susan made it a point to pay her bills online the evening before heading off for vacation. She booked her hotel online as well, using her debit card. But on the second day of the vacation, she was shocked to learn that her checking account was overdrawn, and that overdraft fees were piling up daily.

Susan learned that the hotel had put a "hold" on her debit card for the entire amount of the hotel bill - effectively blocking all of her available funds in her bank account. This caused her other bill payments to be returned for insufficient funds, adding more fees to the total. And, she had no access to the money in her bank account for purchases until the hold was lifted - after her stay was over.

Whether reserving a hotel room, renting a car, starting a tab at a bar or even purchasing gas, many retailers are using holds to ensure patrons pay their bills. While these holds are usually lifted within five business days or less, being unable to access the funds in your account due to these types of blocks can be stressful and expensive.

The lesson? If you are traveling, use a credit card to reserve hotel rooms, rent cars or make dinner reservations at restaurants. If you must use your debit card at places such as a gas station pump, enter in your PIN number - doing so eliminates the hold.

Debit Card Traps - Part I

According to a recent article in Reader's Digest, debit cards have replaced credit cards as the "plastic of choice," with debit cards used for 33 percent of in-store transactions compared to 19 percent with credit cards. That number is expected to jump to more than 50 percent in the next three years.

The increase in the use of debit cards has translated into an increase in debit card fraud. In 2007, hundreds of visitors to a national chain restaurant in Sioux City, Iowa, learned that thieves had stolen their debit card numbers by swiping them through a "skimmer" device, and made cloned cards. These cloned cards were then used to make purchases in California and Mexico. This came on the heels of the massive data breach reported by TJX Companies.

One of the biggest misconceptions about debit cards is that they offer the same protection against fraud as credit cards... probably because they both have the familiar Visa or Mastercard logo stamped on the front of the card.

When you make a purchase with a credit card, and the service or product is not delivered or is not what was promised, you can dispute the charge with your credit card company. Under the terms of the federal Fair Credit Billing Act, the credit card company must remove the charge while it investigates your dispute.

There is no such grace period with debit cards. Once the money is pulled out of your account, it's gone - and under the terms of the Electronic Fund Transfer Act, the issuer of your debit card is not legally required to investigate or help you with your dispute.

While federal law generally limits your liability on both credit and debit cards to $50 provided you report the crime within two days of receiving your statement, recouping your cash is not a sure thing. And if you fail to notice the suspicious activity right away, you may be liable for up to $500 or more.

How to Protect Yourself

• Don't ever hand over your debit card at a place where they process the card out of your sight, such as a restaurant.
• Don't use debit cards for online purchases or big-ticket items.
• If a store's card reader prompts for your PIN, override the sale by pressing Credit/Other or ask the cashier to process the transaction as credit.
• Gas stations are notorious for being "hot spots" for skimming. If you must use a debit card at a gas station, use your PIN and don't let the card out of your hand.
• Take advantage of your bank's online banking system and check your statements frequently.

Help! The Collectors Won't Stop Calling Me!

Not that long ago, collection tactics were horrifyingly sleazy. Collection agencies would focus on collecting money by humilating the debtor, from sending postcards in the mail or printing information on the outside of envelopes regarding the debt, to printing names of debtors in large publications, to harassing employers, friends, neighbors and family members about the debtor. Abusive practices also included calling at all hours of the day and night, threats of lawsuit or bodily harm, depositing of post-dated checks, and threatening to report a financed vehicle as "stolen" because of a few missed payments.

The passage of the Fair Debt Collection Practices Act (FDCPA) has put regulations in place to govern the behavior of debt collectors. But harassment is still part of debt collection. Collectors assume that most people don't know their rights, and persist in harassing and making false threats.

One Pittsburgh woman reported that a collector called her 5-year-old daughter and told her that she'd better get her "deadbeat mommy to pay her credit card bills." Another woman's young daughter was tricked into giving the collector her mother's work number. One man's supervisor was constantly called out of important meetings to deal with collectors calling to let her know of his debt and demand payment.

You CAN stop the harassing calls. Under the FDCPA, you are allowed to tell the debt collector to stop calling you or contacting you. There is no law that says you must communicate with a debt collector on the phone. If you hang up on them, and they continue to call you, they are in violation of the FDCPA.

What to do:

1. In any phone conversation with a debt collector, ask for and write down the name of the agency, the caller and the phone number. Keep a log of contacts, recording the date and time of the call, the collector's name and agency, and a summary of the conversation.

2. Insist on specific information about the debt. Tell the collector you will not discuss the debt until you receive the documents and review them. That is the law -- within five days after you are first contacted, the collector must send you a written notice detailing the amount of money you owe, the name of the creditor and what action you should take if you believe you do not owe the money. If after a validation request under the FDCPA, the creditor refuses to cooperate, then the creditor may not legally collect the debt.

3. Do not give out any personal information, such as Social Security Number, the name of your employer, or banking information.

4. There is no reason you need to acknowledge that you owe the money! This is very important if the debt is old. By acknowledging the debt, you may actually extend the time the creditor can sue on it. All states have statutes of limitations on debt collecting. Few states are more than six years. Many are less. You can extend this limitation by acknowledge the debt or even by making a partial payment!

4. Tell the debt collector that you prefer to communicate with them in writing. Debt collectors would rather call because they are hoping that you are ignorant of the laws, and they can say whatever they want without any record of what was said. Do not put up with harassment or verbal abuse.

5. If they are calling you at work, advise the collector that your employer does not permit you to receive these calls.

6. Follow up with a cease-and-desist letter to the debt collector, stating that the debt collector is to cease further communication with you. Send it certified mail, return receipt requested.

7. The debt collector may contact you one more time, but only by mail, to tell you that further efforts to collect the debt are terminated, that certain actions may be taken by the debt collector, or that the debt collector is definitely going to take certain actions.

8. Debt collectors may NOT contact you at unreasonable times; harass, oppress or abuse you; threaten violence or harm; use obscene language; or repeatedly annoy you by phone. They cannot make false statements, such as implying they are attorneys or government representatives, or claim that you will be arrested if you don't pay your debt. They also cannot collect an amount greater than your debt, unless state law permits.

9. If you believe you don't owe the money - the collector is in error, the debt is so old that the statute of limitations has run out, or you have been a victim of identity theft - send the collection agency a letter stating that you do not owe the debt. You must do so within 30 days after receiving written notice. But if the collector sends you proof that you owe the money, he can resume contacting you.

10. If you believe a debt collector has violated the law, you have the right to sue him in state or federal court within one year of the date of the violation.

11. Report problems with debt collectors to your state attorney general's office and the Federal Trade Commission.

CapOne and BOA Credit Card Ripoff

If you have a Capital One or Bank of America credit card, you may be in for a surprise when your monthly bill arrives.

Hundreds of thousands of credit card holders - many of whom have never missed a credit card payment and were in good standing - have been informed that their interest rates will be doubled - some to as much as 28 percent - without any explanation of the increase.

The big banks have been sending notices to consumers advising them of this change over the past month. In fine print, Bank of America has offered customers the option of not using their cards any longer and paying off their existing debt at the current interest rate - but in order to take advantage of this option, customers must "opt out" of the change by writing to Bank of America. There is no opt-out telephone number, nor does Bank of America provide a form or a return envelope. And consumers don't have much time to respond. Letters received in late January had deadline dates of Feb. 19 or Feb. 29. Those who threw away the notice thinking it was junk mail or who fail to respond by the due dates will see their rates automatically rise on existing and new balances.

It's a legal - but sneaky - trick, as many of the big credit card issuers have provisions in the fine print that they can raise rates for any reason at any time. And with losses piling up in the subprime mortgage sector and increasing credit card chargeoffs, it's an easy way for banks to generate revenue.

But most people don't have a secret stockpile of money laying around that they can use to pay off their credit card balances - which means that once again, the credit card companies will win big at their customers' expense.

All this is happening despite the continued cuts in the Federal funds rate, which influences the interest that consumers pay for credit cards, home equity lines and car loans. The rate was reduced this year by 1.25 percentage points and currently stands at 3 percent.

Look for continued legislative efforts this year by Congress to curb these unfriendly practices.

Rep. Maloney Introduces Credit Cardholders' Bill of Rights

The wave of legislation designed to protect consumers from unfair credit practices continues in the House of Representatives. Yesterday, Rep. Carolyn Maloney (D-NY) introduced the "Credit Cardholders' Bill of Rights Act of 2008" (H.R. 5244), which aims to amend the Truth in Lending Act and abolish predatory lending practices and abuses.

The Bill of Rights includes provisions that:

• protect cardholders against arbitrary interest rate increases (such as universal default and "any time any reason" price hikes) and require a 45-day notice of any interest rate increases
• prevent cardholders who pay on time from being unfairly penalized (eliminating double-cycle billing and fees on interest-only balances)
• protect cardholders from due date gimmicks (requiring card companies to mail statements 25 days before the due date - 14 days is the current minimum - and prohibits charging late fees if provided with proof of mailing the bill within 7 days of the due date)
• shield cardholders from misleading terms (such as "fixed rate" vs. "prime rate")
• empower cardholders to set limits on their credit (creating a self-selected credit limit that cannot be exceeded, thereby eliminating over-the-limit fees)
• require card companies to fairly credit and allocate payments (many card companies require that payments be allocated to lower interest rate balances first)
• prohibit card companies from imposing excessive fees on cardholders (limits the number of over-the-limit fees to 3)
• prevent card companies from giving subprime credit cards to people who can't afford them (requiring that fees for subprime cards whose total fixed fees over a year exceed 25% of the credit limit be paid upfront before the card is issued)
• require Congress to provide better oversight of the credit card industry (improves data collection on industry profits and fees, and provide an annual accounting to Congress)
• contain NO rate caps, fee setting or price controls (a concession to the card companies)

Maloney, who chairs the House Financial Institutions and Consumer Credit Subcommittee, said, "A credit card agreement is supposed to be a contract, but in recent years cardholders have lost the ability to say no to unfair interest rates hikes and fees." The bill "levels the playing field between card companies and cardholders while fostering fair competition and free market values. It sets no rate caps, fees or price controls, nor does it dictate any business models to card companies."

How to Choose a Credit Repair Company

Dear Credit Mama,

I've been trying for several years now to fix my credit. I have tried contacting the three credit bureaus over and over about inaccuracies on my credit report, but they keep telling me that they have "verified" the information and then do nothing to correct it. This has cost me the ability to refinance my home (which has just adjusted up by 2%) and has made my credit card interest rates jump, too. At this point, there are so many mistakes on my report that I am afraid to even apply for any credit because I don't want to be embarrassed when the clerk tells me I don't qualify for a store credit card.

I have been looking into having a professional company repair my credit, but there seems to be a lot of conflicting information online. Can you give me some advice on how to choose a credit repair company?

Sincerely, Sue


Dear Sue,

As you've already experienced, trying to fix the errors on your credit report can be a daunting and frustrating task. While there have been changes in legislation that should provide greater protection for consumers, the credit system does not operate the same way as our criminal system... that is, with credit, you are guilty until you find a way to prove your innocence.

What most people do not understand is that credit bureaus are NOT government agencies. They are for-profit, multimillion dollar corporations that gather and sell your private personal information to creditors, insurers, employers, landlords, telemarking companies and mailing list companies. Those with lower credit scores statistically apply more frequently for credit, which generates more revenues for credit bureaus. So if you feel they don't have your best interests in mind by refusing to correct credit-score-lowering mistakes, you are probably right.

That said, there are some good credit repair companies with a proven track record of legitimately helping people like you. And they are not all law firms, nor are they required to be (contrary to what some firms are advertising). Here's what you should look for when choosing a credit repair company:

• The company needs to follow the provisions in the Credit Repair Organizations Act, which was implemented by the government to protect consumers from scam artists.

• The company is not allowed to charge you in advance. They must provide a service before billing you. Look for a company that will do an evaluation and audit of your credit report before taking your money.

• The company must tell you upfront what the costs are for its services. Be wary of endless "low monthly payments." In the end, you will usually pay as much or more than a company that charges a fixed fee for a year. Think about it: what is the incentive for a law firm or company to finish your credit restoration as quickly possible if they only charge a small amount each month? And do you really think a lawyer is sitting at a computer spending hours each month to repair your credit for $40? I can't name one legitimate lawyer who charges less than $75/hour for legal services. Also look for hidden add-ons - for example, charging extra for different types of disputes, charging for each dispute individually, or adding fees for sending letters by certified mail.

• The total cost for credit repair services generally ranges between $600-800, even for firms that tout low monthly fees. You may pay a set-up fee and low monthly fee of $50, but in order to take advantage of their money-back guarantee, in most cases you need to be a customer for a minimum of one year. $50/month x 12 months = $600 (not including the set-up fee).

• Any guarantee must be clear and it must be in writing. Many firms will tout a money-back guarantee but hide how they will reimburse you if they don't perform as expected. Most require that you remain a customer for a minimum of one year before you can apply for any refund. Because credit repair can be difficult and time-consuming, this is a fair policy... but the company should say so upfront.

• Avoid companies that advise you to dispute all of the information in your report. Disputing all of the information in your report may cause the bureaus to tag your disputes as frivolous. You want a company that understands how to interpret credit reports and provides a strong strategy for what items to dispute and how best to do it.

• It goes without saying that creating a new credit identity by obtaining a federal employer identification number to use instead of a Social Security number is illegal. Run, don't walk, away from a credit repair company that suggests this tactic.

• The credit repair company should tell you what you can and can't do legally for free. You CAN fix your own credit, just like you can fix your own car transmission. If you have the time and knowledge, your Credit Mama encourages you to do so. Credit bureaus are required by law to investigate disputes and remove or correct inaccurate or unverifiable information. However, they are also legally allowed to ignore disputes under a variety of conditions. If you've had difficulty getting the bureaus to respond, or simply want the help of an expert, hiring a credit repair company may be the right decision for you.

Credit & Predatory Lending: Hillary's Plan

Did you know:

• Americans have a record $940 billion in revolving debt, and the average person carries up to nine different credit cards. (Federal Reserve, 2007)
• The average family carries thousands in credit card debt; over 10% of credit card users carry a balance of $10,000 or more. (Fair Isaac, 2007)
• Low-income credit card holders pay (on average) the highest starting interest rates - and are more than twice as likely to pay penalty interest rates than those with the highest incomes. (Demos, 2007)

With the current economic pressures causing rising foreclosure rates due to resetting mortgages and increasing costs for essentials - food, health care, education and energy- credit health is becoming a hot election issue.

On the heels of Barack Obama's Five Star Plan, Hillary Clinton unveiled a Fair Credit for Families Agenda, which seeks to address predatory lending and expand access to fair credit. The plan includes measures to:

• Impose a 30% cap on annual interest rates for credit cards and work toward a lower cap. (A GAO survey found that up to 25% of credit cards issued by banks charged penalty rates over 30%.)
• Prevent credit card companies from unfairly increasing interest rates or charging interest in unfair or unreasonable ways, such as universal default clauses, applying new interest rates to old transactions, and collecting interest on late penalties. Credit card companies would have to apply payments to the portion of the outstanding balance with the highest interest rate, and only be allowed to collect interest on the unpaid portion of the previous month's bill (for example, if you pay off a $500 balance, you should not have to pay interest on that $500 balance the following month).
• Require that credit card companies provide clear, easy-to-understand information about credit card terms and fees. In 2006, the credit card industry collected $97 billion in interest charges and $18 billion in penalty fees. (CardTrak, 2008)
• Create a new Financial Product Safety Commission to police credit products in the wake of declining regulation for credit card companies and banks.
• Crack down on abusive payday lenders and refund anticipation loan providers, many of whom charge excessive fees.

Your Credit Mama is not here to stump for any political candidate. But she does urge you, her family of readers, to look at your own credit situation and hold your elected leaders - whoever they are - accountable for making sure all Americans have fair access to credit on reasonable terms.