Category: Consumer Debt

Most college students have credit cards these days, and may be more likely to pile up lots of debt than most other consumers.

That’s why it’s important for parents to teach their kids about good credit habits that they have learned through years of trial and error. According to the consumer advice website Mint Life, there are a number of ways college students can get a credit card, such as having their parent co-sign for one, or by becoming an authorized user on a parent’s card.

The site says that a better way to go about giving a student a credit card is to have them open a checking account with a debit card, which ensures that they only spend money they have on-hand. The same is true of prepaid cards, which can serve as training wheels until the student is ready for their own card.

However, if a parent thinks their child is responsible enough, they should consider letting them have a regular credit card so they can start building a good credit history.

Many consumers have had their credit hurt badly by the financial crisis, but some are now trying to climb out of the hole.

Fortunately, there are a number of steps to ease the process, especially for those who have faced foreclosure. According to the Epoch Times, there are several steps tofixing their financial situation. The first step is to simply find professionals with great credentials to help them through the process, which can be confusing to almost anyone. The second step is to begin consolidating debt by negotiating monthly payments or lowering balances, with the professional’s help.

The third step, the Times says, is for the consumer to seek credit counseling to help improve their score. Credit counselors help teach consumers how to properly budget so payments are made on time. The fourth step is loan modification, which can help lower rates, but will lower the consumer’s credit score.

According to the Tampa Tribune, courts in Florida are even offering foreclosure mediation to help reduce a backlog of foreclosure cases. Mediations such as these will help homeowners avoid going to court with their lenders.

Some consumers may think they have a way to help them get out from under their credit card debt, but not every strategy is guaranteed to work, and in some cases, these moves can have an effect on their credit report.

Some consumers, for example, might think it’s a good idea to call their lender and ask for a lower rate on their credit card. While this can be a perfectly good way to make life a little easier, a report from Bankrate says it can also backfire. Asking for a new rate will cause a card company to check a consumer’s credit report, so it helps if the consumer has done so first and knows that it is free of any harmful discrepancies.

However, not every strategy has a negative effect. Some consumers may choose to close credit card accounts with perfect payment histories. Doing so won’t shorten their credit history immediately, though, as such accounts stay on a credit report for up to 10 years.

According to a report from Scripps News, positive information will remain on a credit report indefinitely as long as the account is open. Negative information is deleted seven years after the last delinquency.

Those that were a bit wary of credit counseling can now enter into the process with greater confidence.

A new report – jointly published by the Federal Reserve Bank of Chicago, the Ohio State University and the office of the Indiana Comptroller of the Currency – found a direct correlation between credit counseling and a decrease in mortgage defaults.

The study looked at 211 borrowers who worked with the Indianapolis Neighborhood Housing Partnership, a nonprofit company that assists borrowers with low incomes and questionable credit histories, from 2005 to 2007. The INHP taught these borrowers the basics of household budgeting, savings, repairing their credit and buying homes.

The study compared the default rate for the INHP-counseled borrowers to 16,677 other low-income borrowers who got mortgage loans in the same county. INHP’s clients had an average annual income that was half that of the others studied, and an average credit score of 614. The INHP group also borrowed considerably less than the other subjects, an average of $69,900 compared to $108,000. Every one of those that received credit counseling also took a 30-year fixed-rate mortgage, compared to only 81 percent of the other group.

Despite all those obstacles, the study found that only 3.8 percent of INHP-counseled borrowers defaulted on their loans, while the larger population defaulted at a rate of 6.3 percent.

The study therefore concluded that the effects of credit counseling are strongest among those households that appear the least creditworthy judging by income and credit score. Further, the report also found that fraud is far less likely among those that go through credit counselors because of how long the borrowers have spent learning about the process, and as a result, may be more disciplined and frugal with their money.

According to a report in the Indianapolis Business Journal, the fed will use the study to help it consider policy decisions regarding whether it will encourage credit counseling across the country, or to crack down on lenders who try to exploit low-income borrowers.

"People who get in trouble are terrified of conflicts with their lender, so they don’t get in touch until it’s too late," Gene Amromin, a senior financial economist with the Fed, told the paper. "INHP knows exactly what happens to each low-income individual. They’re doing what any good portfolio lender should do."

There may be some consumers that have outstanding debts of small amounts that are in collection, and some of them could be from several years ago. But just because these debts are small and old doesn’t mean they’re not doing damage to a consumer’s credit score.

The question some consumers may have is whether paying them off will restart the seven-year period for which they will appear on a credit report. Fortunately, according to a report from television station WPTV in West Palm Beach, that is not the case. The Fair Credit Reporting Act says that most negative items must be removed from a person’s credit report seven years after the first date of uninterrupted delinquency. Therefore, making payments on the account, or paying it off entirely, does not affect the time the item can be reported on a credit report.

A report from PBS said that paying off old debts almost always improves a person’s credit score. Of course, if the payments are made late, they have already had a considerable negative impact on the score.

Some homeowners who have fallen on hard times may have considered defaulting on their mortgages on purpose, but many companies have vowed to prevent borrowers that do so from getting a new home loan.

Fannie Mae recently announced that it will do the same, locking out borrowers from gettinga home loan for seven years after a strategic default, according to the Wall Street Journal. Strategic defaults often happen when a homeowner who has the ability to pay for the home or doesn’t complete a foreclosure-alternative in good faith. This is often because the value of their home has slipped below what they owe on it.

The Journal says that 24 percent of homes across the country fall into this category. These "underwater homes" tend to be found in areas of high concentration. The report also cited a Morgan Stanley study that said 12 percent of defaults in February were strategic.

Defaults and foreclosures can torpedo a credit score, and will stay on a credit report for up to seven years, the report said.

In May, Freddie Mac expressed similar concerns over strategic defaults, saying that those who do it risk undermining their own neighborhoods by driving down property values.

It seems that the reason debt across the U.S. has fallen in the last few months is not that consumers are spending less money, but rather that they are defaulting on what they owe.

Debt across the U.S., including everything from mortgages to credit card debt, was at 122 percent of the annual disposable income at the end of March, according to a new report in the Wall Street Journal. While that number is better than it was before (it reached 131 percent in the first quarter of 2008), economists would like to see that number closer to a more reasonable level, around 100 percent.

Since that peak in 2008, lenders have written off roughly $210 billion in mortgage and consumer loans as uncollectible, the Journal said. Meanwhile, investors lost at least the same amount, but more likely well over it, on loans banks sold as securities, meaning the total loss was over $400 billion. But, the paper said, the decrease in household debts over the same time was only $372 billion.

An ABC News report said that it was unlikely the new credit card laws would help consumers out of their debt.

One dollar is not necessarily the same as another, according to a recent report from financial website Smart Money. When the value of the currency changes, its effect on consumers trying to reduce debt can be quite serious.

"As the price of everything from automobiles to airfare falls, so goes the value of assets already purchased. That means debtors will be paying a higher price against assets that are losing value," reports Smart Money.

Experts told the website that rate cuts could vary widely based on a number of factors, from a particular credit card issuer’s willingness to take on financial risk to the movement of other economic indicators.

A number of options are available to U.S. consumers looking to find some form of debt management relief in the wake of the down economy, but other experts have warned that debtors should be careful in selecting a firm to work with, as some debt consolidation companies have tarnished the reputation of the many honest brokers operating in this market sector.

American prospective homebuyers were relatively thin on the ground in the previous week, as the Mortgage Bankers Association weekly survey found that mortgage applications dipped during the second week of June.

This caused most mortgage loan interest rates to fall, with the rate for 30-year fixed-rate loans falling to 4.81 percent from 4.83 percent from the week before. The average rate for 15-year fixed-rate mortgages, on the other hand, rose to 4.26 percent from its previous weekly level of 4.24.

Michael Fratantoni, the MBA’s vice president of research and economics, said that "purchase and refinance applications dropped this week, even after an adjustment for the Memorial Day holiday. Purchase applications are now 35 percent below their level of four weeks ago, as homebuyers have not yet returned to the market following the expiration of the homebuyer tax credit at the end of April."

Consumer advocacy blog Consumerist commented on the study’s findings, pointing out that the last time mortgage rates were this low, the Spice Girls were among the most popular musical acts in the world.

Across several fronts, the U.S. government has recently moved to increase its oversight of the debt consolidation industry, according to a recent report from USA Today. The newspaper reports that legislators, regulators and consumer advocates have all said that they are interested in helping to clean up the business sector.

Critics say that the practice of charging up-front fees for some debt consolidation services can actually make it harder for consumers to reduce debt by cutting into the amount of money they can put into paying down their obligations, USA Today reports. The Federal Trade Commission and New York Senator Charles Schumer have both expressed an interest in curbing this practice, according to the paper.

There were some success stories, however, from the industry as it is currently regulated included in the USA Today report, including one Texas woman whose unemployment-related credit card debts were eventually settled for roughly half of their outstanding balances.

Experts say that, as the economy continues to improve, fewer U.S. consumers will have need of such services. However, financially healthy Americans could help the recovery happen even faster.