Consumer Watchdog, Credit Cards, News

Holiday 2015 Store Credit Card & Deferred Interest Study

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The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

This holiday season, the offer of free 0% financing is once again being aggressively pushed by retailers and credit card companies across the country, with MagnifyMoney finding over 50% of store credit cards offering promotional financing this holiday season. According to the CFPB, deferred interest purchases increased 21% from 2010 until 2013.

MagnifyMoney conducted a study of the offers being promoted in December by store credit cards of the top 100 American retailers as defined by the National Retail Federation. The results show widespread use of these potentially confusing and expensive offers.

Study of Holiday 2015 store credit card offers finds predatory tactics

  • 38% of the top 100 American retailers offer store credit cards, with some offering several via multiple brands.
  • 52% of store credit cards this holiday are offering promotional financing to new customers. Others periodically offer financing to existing customers, hoping to snag those with balances in a payment hierarchy trap, making the prevalence even higher.
  • 87% of store cards with promotional offers use deferred interest. The average interest rate on these cards, 24.8%, is nearly 2x the average credit card interest rate.
  • 72% of retailers with cards charge all consumers a high interest rate, regardless of their credit score. The average interest rate for these credit cards is a shocking 25.07%.
  • Dell and Zales have the worst rates for customers hit by deferred interest – up to 29.99% for Dell’s personal credit line, and 28.99% for Zales’ credit card.

The deals remain common because:

  • They work well. Consumers respond to 0% marketing offers, regardless of the potential traps or the true cost.
  • They are highly profitable. It is hard to lose money with interest rates this high.
  • They remain perfectly legal. However, the Consumer Financial Protection Bureau has called deferred interest offers “the most glaring exception to the general post-CARD Act trend toward upfront credit card pricing.”

There is nothing more powerful than “free.” Behavioral economists and credit card executives agree that marketing a product as “free” or “0% interest” is the best way to get consumers to buy. But very few things in life are truly free, especially when they are given to you by a company whose objective is to make a profit.

While the 0% financing can be a good deal for many, it can turn out to be an incredibly expensive debt trap for people who use a deferred interest offer and do not pay their balance in full before the end of the promotional period. These consumers will be hit with a retroactive interest charge at some of the highest interest rates on the market. And with most traditional 0% credit cards avoiding deferred interest, consumers may incorrectly think store cards have the same favorable terms.

Behavioral Economics Insight:

  • Dan Ariely conducted a fascinating experiment demonstrating the power of “free.” He offered two chocolates to people: a Lindt Truffle and a Hershey Kiss. Lindt cost 26 cents, and Hershey cost 1 cent. 40 percent of the people bought the Hershey Kiss. Then he reduced the cost of both items by 1 cent. Lindt became 25 cents, and Hershey became free. 90 percent of people took Hershey, even though the relative price difference remained the same. People overwhelmingly gravitate towards “free” offers!

Credit Card Management Insight

  • Nick Clements marketed credit cards to consumers for nearly 15 years. He once conducted a direct mail test. One group of customers was offered 0% for 6 months. In the fine print, you would see that there was a 4% fee and a go-to interest rate of 18.99%. The other customers were offered a flat interest rate of 6% for the life of the balance. The vast majority of people took the 0% offer, even though it was more expensive than the 6% offer. As Nick commented, “if you put 0% in front of something, people take it. They think it is free and just grab it. But, unlike Ariely’s Hershey Kiss, credit card companies expect something in return. And they will get it.”

Deferred Interest Explained

It is common for credit card issuers to offer a promotional rate (usually 0%) to encourage people to apply for a credit card or transfer a balance to it. Customers who apply for these products will be charged the promotional rate during the promotional term. At the end of the promotional period, any remaining balance will be assessed interest at the standard rate. In other words, the credit card companies are waiving interest during the promotional period.

Deferred interest offers are very different, and are very common with private label store cards. A typical deferred interest offer would be “0% interest for x months.” During the deferred interest period specified in the offer, the consumer is not required to make interest payments. If he or she pays off the balance in full during the promotional period, no interest will ever be charged. However, if the balance is not paid in full during the promotional period, interest will be retroactively charged at the standard purchase rate. It will be like the customer never had a promotional offer at all. What makes these offers even worse is that the interest rates charged on store credit cards are exceptionally high.

  • According to the Federal Reserve, the average interest rate on revolving credit in the United States is 13.93%.
  • According to MagnifyMoney’s analysis of the Top 100 American Retailers, the average Purchase Interest Rate on a store card with a deferred interest offer is 24.8%. That is 1.8 times the average interest rate.

Here is a simple mathematical example to show the impact of a deferred interest charge. Imagine a customer borrows $2,000 on a deferred interest offer. The standard purchase rate is 24.8%. He makes the minimum monthly payment during the promotional period. During the first 12 months, he will have “avoided” $469.61 of interest charges. In month 13, the full $469.61 would be added to his balance. At the end of his promotional period:

  • His balance will have increased from the original $2,000 borrowed to $2,174 – despite making payments of $227.
  • His monthly payment will increase from $17.91 in month 12 to $68.77 in month 13. This is a 2.8x increase in his payment, and has the risk of creating a payment shock.

Stores Offering Deferred Interest During the 2015 Holidays

According to a study of the top 100 American retailers conducted by MagnifyMoney, 42% of store credit cards are currently marketing deferred interest offers to new customers. Below are the details of these offers, ranked from the highest APR (worst) to the lowest:

2015-Deferred-Interest-Study-Graphic-updated

Note: Dell does not offer a store credit card, but does offer a revolving line of credit that functions like store credit cards.

Payment Hierarchy And Existing Customers

When you make a payment to your credit card company, the allocation of that payment is not straight-forward. Typically, the total customer balance is grouped into categories. For example, there is a purchase balance, which includes all purchases made. There is a cash advance balance, which includes all cash advance transactions made. And there would be a promotional balance, which would include any promotional offer. Each balance is subject to a different interest rate (the purchase rate, the cash advance rate, etc.)

The CARD Act required credit card companies to apply payments in excess of the minimum due to balances with the highest interest rate first. (There is an exemption: credit card companies can waive this requirement for deferred interest products. But they are not required to do so.) This rule is usually customer friendly, because it attacks high interest rate debt first and saves the borrower money. However, for a deferred interest offer, the payment hierarchy can become a debt trap.

Here is a simple example. A customer has:

  • A $2,000 balance
  • $1,500 of that balance is from purchases, at a 25% interest rate
  • $500 is on a deferred interest promotional offer at 0%
  • The minimum payment is $51.25, of which $31.25 is interest on the $1,500 purchase balance

When the customer makes a $51.25 payment:

  • $31.25 goes towards interest
  • The remaining $20 will go towards the balance with the highest interest rate. That is the purchase balance of $1,500.
  • If the borrower makes a bigger payment, the increased amount would continue to go towards the purchase balance. The 0% deferred interest balance will not decrease.

In other words, the borrower would have to pay off the full $1,500 of purchase balances before he would even be able to begin paying down the $500 promotional balance. Credit card executives would call this a “shielded balance,” and it is highly likely the customer would get hit with a retroactive interest charge.

When Using Deferred Interest Makes Sense

A deferred interest offer can be a good deal when used properly. It only makes sense if you can afford to pay off the entire balance (including any previous purchases) during the promotional period. If you pay off the entire balance during the promotional period, you will have been able to borrow for free.

Just remember that applying for a new store credit card will hit your credit score. A single credit inquiry will not be particularly meaningful (usually about five points). However, if you plan on applying for a mortgage or car loan in the next few months, you should avoid applying for a store card.

Tips For Consumers: Alternatives To Deferred Interest Offers

If you need to borrow money to make a purchase, there are significantly cheaper alternatives.

  • Consider opening a new credit card with a 0% introductory purchase interest rate. In particular, you should ensure that the interest is waived, not deferred. You can find credit cards that waive interest for up to 21 months here.
  • If you have already made a purchase and are worried about the expiration of the deferred interest offer, consider a balance transfer. You can find the best balance transfer offers here.
  • Alternatively, you might want to consider a personal loan from a new marketplace lender. You can shop around for the best interest rate without harming your credit score here.  

Thoughts From Our Founder: “This Practice Needs To Stop.”

Nick Clements, the Co-Founder of MagnifyMoney, spent nearly 15 years in consumer banking and credit cards. Most recently, he ran the largest credit card issuer in the UK. Here are his thoughts on the practice:

Deferred interest represents one of the worst practices of the credit card industry today. I can’t believe I still see these offers in 2015. While savvy consumers are able to obtain an incredible deal, people who lack the knowledge are tricked into a complicated product that isn’t as “free” as it seems. The product advertises 0% interest. But a person can make the minimum payment and see their balance go up. Because of complicated minimum payment rules, a borrower can easily get trapped in debt without realizing how the trap has even been designed. These offers prey on people who understand them the least.

Any time you find a product or practice that makes all of its money from a very small percentage ill-informed customers, you know you have a problem. Negative amortization, balance shielding and retroactive interest charges at sky-high rates regardless of credit score are practices that belong in the 90s. Issuers who make these offers are racing against time. Either the CFPB will make rules to stop it, or the Silicon Valley marketplace lenders will create a transparent alternatives. In the short term, this deception will continue to generate big earnings. But in the long term, I expect deferred interest offers will eventually disappear. As they should.

Shame on big brands like Apple that continue to profit from this deceptive product.

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Consumer Watchdog, Featured, News

Overdraft ‘Protection’ is a Lie

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The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Young woman taking money from ATM

You wake up the day before payday to alerts from your mobile banking app saying your account has been overdrafted. How could this be? After all, you had $50 in your account last time you checked. So you start backtracking.

Dinner was only $45, right? You should have $5 to spare. Then you check your account and realize your $30 gym membership conveniently posted to your account this morning. Rather than declining the charge due to insufficient funds, your bank allowed the transaction to post — and charged you $35 for the favor.

This is an example of how banks have turned so-called overdraft protection and insufficient fund fees into a multi-billion-dollar cash cow.

According to a new analysis by Pew Research Center, more than 40% of 50 banks studied order transactions in a way that maximizes overdraft fees. The practice is called “high to low processing,” in which the bank posts transactions from largest to smallest rather than posting them chronologically. This can make customers more susceptible to incurring multiple overdraft fees on the same day.

The fees have effectively allowed banks to profit off of some of their most financially vulnerable consumers: those who keep low account balances and are thus at higher risk of overdrafting. Only 18% of checking account holders are responsible for 91% of overdraft and insufficient funds fee (NSF) fees according to research from the Consumer Financial Protection Bureau.

Pew’s analysis found most heavy overdrafters — those who pay $100 or more in overdraft and NSF fees annually — earn less than $50,000 per year. One-quarter of these account holders pay up to a week’s worth of wages in overdraft fees each year.

In 2015, 628 banks with more than $1 billion in assets reported a total of $11.16 billion — about 8% of total net income — of revenue from consumer overdraft and NSF fees according to the Consumer Financial Protection Bureau. That’s more than two-thirds of all consumer deposit account fee revenues.

figure3

Overdraft Protection: The Ultimate Catch-22

When you are enrolled in overdraft protection, you give the bank authority to approve charges when you don’t have enough to cover the full amount in your account. The bank will approve the transaction, then charge you a predetermined flat rate fee — typically around $32 — for allowing your purchase to go through.

That’s why overdraft protection is something of a catch-22. On the one hand, it saves you from the embarrassment of a declined card at point of sale. On the other, it is one of the most expensive ways to borrow money for what are typically small purchases.

Let’s go back to the payday example from before.

If you had not realized right away you overdrafted your account, you might have thought you still had $5 in the bank, just enough for a cup of coffee. Your debit card would have been approved for the $3 coffee thanks to overdraft protection — and you would have been hit with yet another $35 overdraft fee, twice in the same day. Effectively, you just borrowed $3 for a fee of $35 — an annual percentage rate of over 1,000%.

Here’s how the math works out (in this example, we assume the person banks with Bank of America, which carries an overdraft fee of $35):

Original balance: $50

Dinner: $50 – $45 = $5

Gym fee: $5 – $30 = -$25

Overdraft fee for gym membership: -$25 – $35 = -$60

Coffee: $-60 – $3 = -$63

Overdraft fee for coffee: $-63 – $35 = -$98

At the end of the day, you would be left with a negative balance of -$98.

Some institutions limit the number of times you can be hit with overdraft fees in a single day. Bank of America, for example, limits overdraft fees to four times a day. Some banks will allow you to link your checking account with another account to pull funds from when you overdraft, but will then charge you for an overdraft protection transfer fee, which is typically lower than a full overdraft fee. Even if your bank doesn’t approve the overdraft and your purchase is declined, you could still get charged an insufficient funds fee, which will usually be equal to the overdraft fee.

Overdraft fees can quickly spiral out of control if the person cannot afford to pay back the bank and bring their balance back in the black. If you maintain a negative account balance for about five days, you are charged on average $20 for what’s called an extended overdraft fee. More than half of the banks Pew studied said they charge an extended overdraft fee.

It’s important to make sure to take care of overdrafted accounts. Excessive overdraft fees could lead to a closed account or loss of check-writing privileges. It could also become difficult for you to open accounts with other banks if your bank reports your behavior to ChexSystems. ChexSystems keeps a record of your banking history similarly to how the credit bureaus keep track of your credit history.

In a worst-case scenario, excessive overdraft fees could damage your credit score as well. If your bank decides to write off your unpaid account and send it to collections, it can show up on your credit report. At that point, your accidental overdraft could seriously damage your credit score.

How to Avoid an Overdraft Fee

Don’t “opt in”

You can’t be charged an overdraft fee if you don’t sign up for the program, but beware: your bank can still charge you an insufficient funds fee.

Choose “no” when presented the opportunity to opt in to a debit card-based overdraft protection program. Don’t miss this step as it can be easily overlooked as part of the process. It may be in the form of a question asked by your banker or a pre-checked box when you enroll in online banking.

Link your accounts

If you are worried about getting denied at a point of sale and are okay with a fee to automatically transfer your own money, you can link your debit card checking account to another account for overdraft protection. This lets the bank pull the money from the account that you’re linked to to cover new transactions. Banks typically charge a median $5 fee for this service.

Track your balance

Keep your eye on your balance to avoid overdraft and NSF fees altogether. If your bank offers them, you can set up banking alerts so that you’ll be notified when your account goes into the negatives and balance it out before you’re charged a fee. You can use a budget-tracking app like Mint that sends you overdraft and fee notifications as well, although they may not come in time to help you.

You should also go over any automatic payments that you have set up and record and set reminders for them so that you won’t have any surprise withdrawals from your account.

Call your bank

If you don’t overdraft your bank account often, you have a better chance of getting the fee reversed. Because banks make most of their money from a small percentage of accounts that are regularly overdrafted, bank agents usually have more flexibility to reverse the charge for those who don’t overdraft as much. If you make a mistake, and don’t do it often, it’s worth a call to ask the bank to reverse the charge.

Best Banks with Low Overdraft Fees

There is no bank account that truly offers no overdraft fees. However, you can find a bank that either doesn’t allow you to overdraw your account at all or doesn’t excessively fine you for overdrawing your account.

Ally Bank is one of the better banks when it comes to overdraft penalties. So long as you link a savings account to your checking account, the bank will transfer funds from savings when you make a purchase larger than your available balance. And it doesn’t charge a fee for that transfer. However, you will be fined $9 per day if you don’t have enough money in your savings to cover the charge. And they will continue to charge you $9 per day until you make your checking account whole again.

Bank of Internet’s Rewards Checking account has no overdraft or insufficient funds fee, but they will decline the charge if you don’t have enough to cover it in your account. The bank also gives you the option to link an account for overdraft protection with no fee for the transfer, or create a line of credit that can be used to cover overdrafts. If you decide to use the line of credit you will be charged interest on the overdraft balance until you pay it off, but there is no fixed overdraft fee.

MagnifyMoney has a full list of best account options for overdraft fees. In addition, you can use the checking account comparison tool to rank accounts based on overdraft fees and other options.

At the very least, opt out of overdraft protection to avoid getting hit with fees each time your card is declined.

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Consumer Watchdog, Pay Down My Debt

5 Steps to Take When Your Car is Repossessed

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The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

car_lg

For the most part, you will know ahead of time when a car repossession is on the horizon. But, even when you have an inkling your car is about to get taken away, walking outside to find it missing is upsetting.

A car repo can jeopardize your mobility long-term. And if you don’t have access to public transportation or a friend to give you a lift, having no car to get to and from work could mean you’ll lose your job, which triggers other financial issues. If your car has been repossessed (or it’s a possibility it will happen soon) here’s what you need to know and the options for getting it back.

Step 1: Take a Record of Any Property Damage

There are laws in place to protect you when a repo company comes for the car. They can’t disturb the peace, use excessive force, damage your property or cause you harm in the process.

If you believe the repossession happened aggressively, you may have a case for reimbursement of damage or the return of your car. The repo agency may also get hit with a penalty for their actions. Take photos of the damage as a backup and get a second opinion from an attorney.

You should also have a record of what the car looks like and any damages before it’s repossessed. Otherwise, could turn into a bit of a “he said, she said” debate.

Step 2: Find Out Why Your Car Was Taken

Technically, a car isn’t “yours” until you pay off the car note. If you default, in most states the company financing your car has the right to take it back without warning you. The same applies if you’re leasing a car. Miss a few payments and the lessor can take back the property.

When a repo occurs, contact the creditor as soon as possible. Unlike when a contractor tows your car for minor offenses like unpaid parking tickets, after a repo, your car doesn’t wait patiently on a lot until you bring your bills current. The car can be sold to recover the financial loss.

Fortunately, many states require that you’re notified of the pending auction or sale of your vehicle beforehand, so you have a reasonable time to act. Ahead of the sale, you may be able to reinstate the auto loan, pay off the loan entirely or buy the car back. We’ll talk about each option for reclaiming your car in the next section.

Besides defaulting on a loan, in some states, your car may be repossessed when your insurance lapses. If you’ve stopped paying your car insurance, find out from your creditor or DMV if that’s the reason your car is missing and ask what the penalties are for not keeping insurance.

Step 3: Explore Options to Reclaim the Car

The rules for getting your car back when your payments are in default vary by state and contract, but according to the Federal Trade Commission, there are generally three options to discuss:

Reinstate Your Auto Loan: This will probably be the most affordable and less cumbersome option if it’s available to you. Reinstating the loan is when you pay the amount you’re behind plus all of the fees associated with the repossession including towing and storage to get it back.

Redeem Your Car: Redeeming the car means paying off the entire balance of the loan to get your car back. Going this route may not be feasible or smart if your car is worth less than you owe. Besides the entire loan amount, you’re also on the hook for the repossession fees.

Buy Your Car Back: Again, this option may not be possible if you’re having a hard time just making car payments. When you get the date and time of the auction your car will be in, you can attend and try to buy it back.

Step 4: Decide if You Can Afford to Get the Car Back

After going through each of your options, you may find you’re not financially stable enough to retrieve your car. Even in the best case scenario of reinstating your loan, you’ll need to have the means to make regular payments and maintain the car. If you can’t handle it, you may have to let the car go. There are some financial implications when giving up on the car as well.

When a creditor sells your car, it has to make a reasonable effort to get a fair market price for it. If the fair market price is less than how much you owe, you can be sued for deficiency; the difference between how much you owe and how much the car sells for.

Fortunately, if the car sells for more than what you owe, you also get to pocket the difference. You should get a notification of whatever you owe or if money is owed to you. Follow up on the resale yourself if you don’t. Unpaid deficiency can end up in collections.

Lastly, if you plan to wash your hands of the car loan, you could be in a deep financial hole all the way around and in the process of filing bankruptcy. If so, you may be able to include the car in the agreement and get it back. In this case, contact the attorney handling your bankruptcy right away.

Step 5: Get Your Belongings

Regardless of how you intend to resolve the repossession, you’re entitled to all of your belongings in the car. Whoever has your car should make a reasonable effort to protect your belongings from damage and theft. It’s a good practice to not leave any valuables in the car if you’re on the verge of repossession to avoid theft or damage.

Often, you’ll be contacted with the location where you can pick your stuff up. If you find anything missing or damaged, take notes. You may be able to reduce your deficiency bill with proof that you experienced property loss.

Final Word: Act early

If you know making future car payments is going to be a struggle, you’ll benefit the most from acting early to avoid the costs of repossession. Here are a few steps you may be able to take:

  • Negotiate: If you’re going through a temporary hardship, you may be able to work out a short-term deal of reduced or excused late auto payments. You won’t know unless you ask. Be sure to get any form of agreement in writing.
  • Sell your car: Selling a car with a lien can be difficult, but not impossible. You have the best shot at selling if the car is worth more than you owe. Once sold use public transportation or a carpool for the time being.
  • Refinance the loan: You may be able to refinance to a lesser monthly payment before things go south. Keep in mind, refinancing may come with processing fees and other costs, so you need to factor them into the equation.
  • Surrender the car yourself: If you’re already in default and know the repossession is coming, you can give up the car on your own terms. No dramatic car tow scene necessary and you can clear the car of your belongings. Then if you decide to redeem your car or reinstate the loan, you won’t have to pay some of the repossession fees.

Having your car repossessed is scary, but even when you hit rock bottom, there are solutions. If you put aside the emotions and think logically, you can recover. Your best move is to prevent it and keep the lines of communication open with the company servicing your auto loan.
If it’s too late for that, your main choices (depending on your contract and state) are to bring the loan back current and fork up repossession costs, pay-off the loan, buy the car back or give up the car entirely.

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College Students and Recent Grads, Consumer Watchdog, Pay Down My Debt

Collection Fees on Student Loans You Never Knew Could Happen

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Debt collections_lg

If you’ve ever been through federal student loan entrance counseling, then you know that failing to make payments on federal student loans can have serious consequences. If you fall behind on your required monthly payments after you graduate, the Department of Education may take steps like garnishing your wages before they ever reach your bank account, withholding your tax refund, or even suing you.

But did you know that failing to pay back your federal student loans could also make you liable for collection fees?

If you have federally-financed student loans that are in default—which in most cases means that you haven’t made payments for 270 days—the federal government may refer your account to a collection agency. What may come as a surprise is that these collection agencies typically charge fees or commissions, and these fees can be added to the balance that you owe.

Though the fees vary depending on the agency and the type of loan you have, they can exceed 15% of your total balance, and can even reach up to 40% of your total balance in the case of Perkins loans. This means that if your current loan balance is $20,000, you could suddenly have between $3,000 and $8,000 in fees added to your account.

Ouch.

So how can I avoid having to deal with a collection agency?

Avoid default: The best way to avoid collection fees is to ensure that your student loan does not go into default. If you are struggling to make your monthly payments, contact the Department of Education right away to explain your situation and figure out a plan. For example, you may be able to reduce your required monthly payment amount through an income-driven repayment plan. You can find more information about how to apply for income-driven repayment here.

Check into deferment or forbearance: Depending on your situation, you may also be eligible for loan deferment or forbearance. You should look into applying for deferment or forbearance if you have returned to school, if you have an illness or financial hardship that affects your ability to make payments, or if you have recently served in the military. More information about loan deferment and forbearance is available here.

Heed warnings: If you do fail to make your required monthly payments, your loans will become delinquent and you will receive warnings from the Department of Education. Do not ignore these warnings. If you ignore them, your loans will go into default after 270 days and may be referred to a collection agency.

Monitor your credit: Additionally, if you have missed any payments on your student loans, be sure to check your credit score and get a credit report. If your credit score has been brought down by one or more missed payments, you can try writing a letter of goodwill to your loan servicer explaining your situation and politely requesting that they remove the missed payment from your credit report. You can find more information on how to write a letter of goodwill here.

But what if my loans have already been sent to a collection agency?

Take action immediately: If you receive a notice from a collection agency, this means your loans have gone into default. It is critical that you respond to the agency immediately to work out a plan for repayment. If you enter into a repayment agreement within 60 days, you will not be charged collection fees.

Try to pay back in full: If you are able to pay the full amount back, pay it immediately. This may not be an option for many people, but it is the fastest way to get your loans out of default.

Set up a rehabilitation plan: If you cannot pay the full amount, work with the collection agency to create a repayment plan—known in this case as a rehabilitation plan—that is manageable based on your current income. If the agency suggests a monthly payment amount that you feel is unmanageable, let them know that you need a lower amount, and send them documentation of your current income as proof.

Don’t miss a payment: Follow through on the rehabilitation plan! If you fail to make the payments you have agreed to, collection fees will be added to your account.

Ensure default status gets removed: After you have made nine on-time monthly payments according to the terms of your rehabilitation plan, your loan will be removed from default status. A loan can only be rehabilitated once.

Resources to help you

  • How to make a payment to a collection agency here.
  • 7 things to know if you have debt in collections here.
  • The Department of Education has a page about student loan default here.
  • The Department of Education’s page about getting out of student loan default is here.
  • The Department of Education provides contact information for the collection agencies it works with here.

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Consumer Watchdog

Don’t Make Payments via iTunes Gift Cards. It’s a Scam.

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The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

iTunes Gift Cards

Thanks to the Federal Trade Commission, we’re more aware of money wiring schemes. We know to send emails from long lost relatives requesting a wire transfer directly to spam. And to ignore mail from companies promising us a huge cash prize after we pay a “small fee” through money wire. What they really plan to do is get their hands on that small fee and then disappear.

Unfortunately, whenever we catch on to a scam, career criminals become more resourceful. The newest way to scam people out of cash is through iTunes gift card.

How iTunes Gift Card Scams Work

The reason con artists like to request money wires is it allows you to send money far away. It’s also difficult to recover money once it’s wired. A credit card payment, on the other hand, may be trackable or even reversible.

Sending money through iTunes gift card presents the same opportunity as a wire transfer. It’s difficult to track where the cash goes after the gift card is drained. If you find out later you’ve been scammed for money, the chances that you’ll get the money back that was on the card are slim.

Here’s how the scam works: Someone will ask you to buy an iTunes gift card, then tell you to give them the serial number on the card. Once they have the serial number, they either drain the cash on the card or sell the card online.

A scammer may ask you to use an iTunes gift card to give them money for various reasons, including some of the same reasons that are common with wire transfers, like:

  • Assisting a relative or friend in need
  • Repaying an old debt
  • Pay for an item being sold online
  • Paying a fee to accept a prize
  • Paying back taxes

The Scam to Look Out for Growing in Popularity

At the beginning of this year, the Treasury Inspector General for Tax Administration (TIGTA) reported that since October 2013 over 5,000 people have fallen victim to IRS phone scams and paid out over $26.5 million as a result.

One popular IRS phone scam is when someone impersonating an IRS or Treasury agent threatens arrest, deportation, and other consequences if you don’t pay up.

What’s one way they ask you to pay a phony tax bill? You guessed. iTunes gift card.

Since ignoring a valid tax bill can result in wage garnishment and even jail time, we’re all hyper-vigilant of any correspondence from the IRS. But, if someone calls to demand a tax payment with an iTunes gift card, something is wrong.

When the IRS wants to get your money for real, they will not resort to threatening you over the phone for payment right away. You get an opportunity to appeal. They will never ask you to pay through iTunes gift card. If you’re uncertain of a request for payment, go to the IRS contact website and reach out to the agency directly.

What to Do If You Get a Request for iTunes Gift Card

Crooks are good at what they do. They know the buttons to press to get a victim to fall for the con. If someone’s living paycheck to paycheck, a prize scam is going to look mighty enticing. If someone’s petrified of going to prison, they may be more inclined to pay these “taxes” to avoid the slammer.

Don’t act off impulse when any gift card is in the equation. iTunes gift cards should only be used to make iTunes and App Store purchases. Apple has even addressed this problem on the website.

According to the Apple gift card page:

“iTunes Gift Cards are solely for the purchase of goods and services on the iTunes Store and App Store. Should you receive a request for payment using iTunes Gift Cards outside of iTunes and the App Store, please report it at ftc.gov/complaint.”

4 Safer Ways to Pay or Get Paid

One way to avoid the iTunes gift card scam and any other scam that involves a money transfer is never sending cash to someone you don’t know. When circumstances come up where you need to exchange money for personal or business use, there are better avenues to do so than iTunes gift cards, here are a few:

1.PayPal

Signing up for a PayPal account is free, but there are some fees for certain transactions. Here’s the fee schedule for sending money:

Sending Money Domestically

  • From your PayPal balance or bank account – Free
  • From your debit or credit card – Flat fee of $0.30 plus 2.9%

Sending Money Internationally

  • From your PayPal balance or bank account – 0% to 2%
  • From your debit or credit card – 2.9% to 5.99% plus a fixed fee based on the payment currency

If you sell a product or service through PayPal, there’s a 2.9% + $0.30 fee per transaction for the seller (and an even higher fee for international transactions). Buying from a merchant with PayPal is always free.

2.Venmo

Do you casually exchange money with family and friends? Venmo is part of PayPal and a solution for small, quick transactions between people who know each other. It’s particularly useful on the go, when dividing a restaurant bill for instance. No more getting stuck with the bill!

Download and sign up for the account for free. Then add money to your Venmo account balance or link your Venmo account to your bank account, debit or credit card. Data security is always a concern when adding your financial information to any online account. Venmo uses data encryption and secure servers.

Sending money with a debit card is free for major banks. Debit card transactions from some smaller banks may have a 3% fee. All payments through credit card cost 3% as well. Credit cards may also incur a fee.

3.Square Cash

You can use Square Cash for personal and business use. If you’re using the app to send and receive money from family and friends with your bank account, you can do so for free. You will pay a fee if you have to send money through credit card and that fee is 3%.

Using Square Cash for business isn’t free, and you’ll have to note that you plan to accept payment in exchange for products and services when you set up an account. The processing fee for businesses is 2.75% per payment received.

4.Google Wallet

Google Wallet works similar to each other system we discussed above. You can download the app for free on your iPhone or Android. To send money, you just need either the email or phone number of whoever the money is going to. Google Wallet also comes with 24/7 fraud monitoring which is unique. Sending and receiving money with Google Wallet is free.

Always Report a Scam

If you encounter anyone requesting iTunes gift cards for payment, run for the hills. And make sure to report it. You reporting a scammer may prevent someone less suspecting from falling for the same person’s con.

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Consumer Watchdog, Credit Cards

Warning: Even the Best Small Business Credit Cards Do This

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The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Best Small Business Credit Cards

If you have a small business, you might be tempted to open a small business credit card. When used properly, small business credit cards can provide you with free working capital, rewards and the ability to manage the expenses of you and your employees more easily. However, there are real risks that you need to consider.

  • You are personally liable: when you apply for a small business credit card, you are signing a credit application that makes you personally liable for any spending that happens on that card. If your company fails to reimburse you or goes bankrupt, you will still be held responsible for making payments and should expect collection activity from your credit card issuer.
  • Your personal credit report and credit score can be impacted: with most cards, the balance will not appear on your credit report so long as you are current. However, if you miss payments, many major credit card issuers will report the balance and delinquency to your credit report. And if the credit card issuer ever sells your debt to a collection agency, you can expect a collection item to hit your personal report as well.
  • Your interest rate can be increased on your existing balance: In 2009, the CARD Act was passed. The legislation made it very difficult for credit card issuers to increase rates on existing balances. However, the law only applied to consumer cards: the interest rate on your small business account can increase at any time. If you want to use your small business credit card to borrow, you will not have certainty regarding the interest rate.
  • If you give cards to your employees, you are likely personally liable. Many small business credit cards give you the option of adding credit cards for your employees. Usually that means you are adding an “authorized user” who will have the same charging privileges as you. It is like adding your husband or wife as an authorized user to your personal credit card. If your employee goes crazy at the local bar or books a flight to Tahiti, you are personally liable for the charges.
  • CARD Act protections do not extend to small business credit cards. In addition to the limitations on price increases mentioned above, none of the other CARD Act protections apply to small business credit cards. I will explain all of those protections in more detail later.

Small business credit cards can still be a great tool (I use one). Just make sure you understand the risks and the alternatives. In general, a small business card can be an excellent deal if you earn points and pay your balance in full and on time, accruing no interest. In addition, the cards can be a useful way to fund very short-term borrowing needs. However, if you need to borrow a larger amount over a longer period of time, an installment loan with a fixed interest rate from a marketplace lender or local bank would likely be a better option.

If you are shopping for a loan, you can read more about the best small business loans

I will now explain each of the potential risks in more detail below:

Personal Liability

If you have a small business and need to borrow money, you will likely need to take provide a personal guarantee, which means you would be held personally liable for repayment of the debt. This risk is not unique to small business credit cards. If you take an SBA loan, borrow from a marketplace lender or go to your local bank, you will likely need to provide a personal guarantee.  You really need to think twice before borrowing. If your business needs working capital to fund orders, make sure you pay close attention to the credit-worthiness of your customers before taking on too much debt to fund their orders. And you also need to be very honest with yourself if your business is in financial difficulty. It might be surprisingly easy to borrow money, even when your business is struggling. But if your business ultimately fails, you don’t want to create unnecessary debt that will follow you even after your business is closed.

Personal Credit Report

Most small business credit cards will not report to consumer credit reporting agencies so long as your account is current. This is important, because you do not want the balance on your small business credit card to appear as personal debt. However, if you stop paying your small business credit card (and default), you can expect the negative information to end up on your personal credit report.

Many major credit card issuers will start reporting to your personal credit report as soon as you are seriously delinquent. In general, once you are 60 days past due you can expect the negative information to hit your report. The reporting will have a big negative impact on your score. Delinquencies of 60 days or more can easily take 100 points or more from a credit score.

Even if your small business credit card does not report to the credit bureau, a default can still appear on your report. Typically, credit card companies will write off the debt at 180 days past due and sell the debt to collection agencies. At that point, the collection agency registers a collection item on your credit report. And, along the way, you could also have a legal judgment.

In a best case scenario, the debt does not appear on your report. But if you miss your payments, you can expect big derogatory marks to hit your score, in addition to the collections activity.

Your Interest Rate Can Increase

If you miss a payment, even by just one day, you should expect a big increase in the interest rate on your existing balance. Even worse, your rate could be increased even while you are current. For example, if you max out your credit card you could appear riskier to the bank. Because you appear risky, the bank could increase your interest rate.

This could have a big impact. Imagine you have a $15,000 balance at a 15% interest rate. If the rate increases to 25%, you could see an increased monthly interest charge of $125. Your debt could cost you an extra $1,500 a year with no warning and no possibility to avoid the interest rate increase.

If you need to borrow money, you should consider a term loan from a marketplace lender or your community bank. With a term loan, you can get a fixed interest rate. For example, Funding Circle offers loans with an APR as low as 5.49% and LendingClub offers an APR as low as 7.77%. When you take a term loan, you are at least locking in the cost of your borrowing.

Before the CARD Act, the credit card industry was guilty of outrageous interest rate increases, especially using the vague language of “universal default.” That is why the CARD Act made such interest rate increases impossible. Unfortunately, small businesses never received that same protection and need to proceed with caution.

Note: you can use a personal credit card for business expenses. Because you are personally liable for the debt regardless, this could be a good option. The benefit is that the interest rate cannot be increased on your debt so long as you are current. (Remember that most interest rates are variable – so the rate could increase as the Prime rate increases, but you would not see an increase for punitive reasons). The risk is that you would be putting that balance on your personal credit report, which could impact your credit score and your ability to qualify for products like mortgages, because the underwriters would treat that debt as personal debt. If you want to find a consumer credit card, you can read our Best Credit Card Guide.

Employee Cards Can Make You Liable

Often you might want to give credit cards to employees so that they can make business purchases. Most credit card issuers will allow you to give supplementary credit cards to employees. There are two big benefits to this service. First, you can earn points or miles on purchases made by your employees. Second, you have complete visibility of the money being spent by your employees.

But there is a big risk. By giving a card to your employee, you are giving them access to your credit limit. It is just like a supplementary card that you give to your husband or wife. If your employee decides to have a big night out at a bar or a flight to Tahiti, you will be personally liable for the charges. Just be very careful before you agree to an arrangement like this.

Other CARD Act Protections

There were a number of consumer protections provided by the CARD Act that do not apply to small business cards. These include:

  • Penalty Fee Restrictions: penalty fees have to be “reasonable and proportional” to the relevant violation of account terms. In general, penalty fees for consumers should be restricted to $25 for a first late payment and $35 for each subsequent late payment.
  • Overlimit Fee Opt-In: issuers can only charge an overlimit fee if the customer opts in to overdraft protection.
  • Payment timing: Payments must be due on the same day of every month, reducing the risk of confusion.
  • Payment Allocation: When the payment amount exceeds the minimum due, issuers generally need to apply the amount above the minimum due to the balances with the highest interest rates first.
  • Monthly Statements: The statement needs to show how long it would take, and how much it would cost, to pay off the debt if only the minimum due is made. In addition, the statement needs to show the payment required in order to pay off the balance in three years.
  • Ability to pay: Card issuers cannot open a credit card or increase a credit line unless the ability of the consumer to repay is taken into account.

All of the protections listed above are required for consumer credit cards, but are not required for small business cards.

In many cases, credit card issuers have decided voluntarily to provide some of these protections to consumers. However, it is important to understand that these protections, when provided, are at the discretion of the bank and can be removed.

Small Business Credit Cards Can Still Provide A Valuable Service

When used properly, a small business credit card can still provide excellent value. Here are some of the benefits:

  • Small business credit cards can be a great way to manage discretionary expenses, particularly when combined with services like Expensify and integrated with QuickBooks. T&E, travel and other expenses can quickly get out of hand, and creating electronic records of every transaction can help the budgeting and management process.
  • A small business credit card is a free line of credit if you pay the balance in full and on time every month. In effect, you are being given a free working capital line of credit. For example, if you use Google AdWords to acquire customers, you can get 20 – 25 days (depending upon the length of the grace period) before you have to pay the bill. This can be very helpful for cash management purposes.
  • For short-term borrowing needs (for example, 30 days), a small business credit card could be the least bad option. Imagine you need to borrow $15,000 for 2 months until you get paid for a job. At an 18% interest rate, it would cost you about $450 of interest to borrow the money for two months. That is a lot cheaper than most merchant advance businesses, which have interest rates well above 40%.
  • You have the potential to earn rewards. It is easy to earn at least 2% on your spending, which can be serious money depending upon the spending needs of your business.
  • The debt associated with your small business will not appear on your personal credit report so long as you remain current, which can help keep your credit score up.
  • One of the greatest accounting risks faced by small businesses is that they co-mingle their personal and business accounts. By using a separate card, you can ensure you don’t mix up your personal and business expenses.

Just remember – if you have a longer term borrowing need, it is better to go through the process of applying for a term loan. Although the process will take a bit longer, you should be able to get a much lower, fixed interest rate.

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Consumer Watchdog, News

Learn How to Spot a Student Loan Scam

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Spot a Student Loan Scam

We all know that scammers live amongst us. They’re trying to find out our personal information to gain access to our bank accounts, our health care, our savings … and increasingly scammers are targeting student loans, as well.

Often these scammers tend to rear their ugly heads when someone with a student loan is making changes to his or her current plan, like consolidation, lowering payments or trying to have debt removed. It’s a scary prospect (adding one more thing to be on the lookout for when it comes to identity theft), but with a little extra attention you should be able to spot the warning signs of a scammer. Here are a couple big things to be on the lookout for:

Scam Sign No. 1: They make too-good-to-be-true promises

What it looks like: As with other things in life, often a promise that sounds too good to be true is too good to be true. Remember that federal loans typically can’t be forgiven unless there are certain circumstances for which you qualify. In other words, if a company promises to make your debt go bye-bye without even knowing whether or not you qualify for debt forgiveness, more likely than not it is a scam.

Scam Sign No. 2: Their logo or name seems oddly familiar

What it looks like: If the company you’re dealing with has a name that’s almost but not quite the same as a well-known debt relief/student loan servicing company, that’s a big red flag. Always check with the Better Business Bureau for reviews of any company before working with them, since many scammers may try to use the likeliness of well-known companies to lure confused people in.

Scam Sign No. 3: They ask for fees up front

What it looks like: Advice or counseling as it relates to student loan debt relief shouldn’t come with a charge, and you should never pay anything up front before a company has even done anything to help you out. If the company you’re dealing with asks you to pay before anything has even been done, stop working with that company immediately.

Check out this piece for three more ways to spot a student loan scam so you don’t fall victim.

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College Students and Recent Grads, Consumer Watchdog, News

6 Ways to Spot a Student Loan Scam

Advertiser Disclosure

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Student Loan

Student loan debt has taken a staggering shape, with almost $1.3 trillion in outstanding debt at last count, according to the Consumer Financial Protection Bureau. In fact, the average 2015 college grad left school with more than $35,000 in student loans.

With that much debt hanging over their heads, it’s no wonder student loan borrowers are being targeted by an increasing number of scammers. “Problems with student loan servicing can leave distressed borrowers without the tools to help avoid default,” says a CFPB spokesperson. “Student debt relief scams prey on these consumers, charging upfront fees while promising to enroll borrowers in free federal consumer protections.”

In Illinois, for the first time, student loan scams are now in the top 10 consumer scams in the state. “Students who are saddled with crushing debt and who have been misled from achieving their goals submit regular complaints to my office,” Attorney General Madigan said in a press release.

Many borrowers run into scams when they try to consolidate loans, get lower payments or even have debt canceled. To protect yourself, it pays to know which tactics are on the shady side. Here are a few warning signs:

1. They push you to pay big up-front fees

You shouldn’t have to pay to get student loan advice or counseling, and you definitely shouldn’t owe fees before a debt relief company provides any help. The CFPB recently took action to stop one company, Student Aid Institute, Inc. which was doing just that. Fees for loan services should be reasonable and come after services rendered.

2. They claim they can make your debt disappear

A debt relief company can’t make your federal loans go away, either with loan forgiveness or debt cancellation. In most cases, federal loans can’t be discharged unless there are special circumstances—you’re permanently disabled, for instance, or you work in a teaching job or other public service profession that results in loan forgiveness after several years.

3. They say they can shrink your payments significantly

This may be possible, but you can do it, too, by working directly with your loan holder. Various federal loan repayment plans are available, although you must be eligible for them. The Department of Education offers this handy Repayment Estimator that allows you to explore your options.

4. They’re imitating another company—or the government

Take a close look at the name and logo of the firm. If it seems very similar to another well-known student loan company you know, or they seem affiliated with the federal government, do your homework. Try searching the Internet and the Better Business Bureau for complaints and reviews. In 2014, the CFPB took action against Irvine Web Works, which ran the websites StudentLoanProcessing.us and StudentLoanProcessing.org, claiming among other things that the company implied that it was affiliated with the Department of Education.

5. They ask for a third party authorization

This kind of agreement—along with a power of attorney (which you also shouldn’t sign)—gives the debt relief company permission to deal with your student loan servicer on your behalf. That’s a bad idea, especially if they suggest that you pay them instead of your student loan servicer.

6. They ask for your Federal Student Aid PIN

If a company asks for this piece of information, proceed with caution. Giving it away is like giving away your signature, which means a company can do things on your behalf with your student loans. A legitimate company shouldn’t need this info to work with you. 

If you’re in trouble and need some basic information on paying off your student loans, start with the CFPB’s site on repaying student debt.

Have a complaint about a private lender or scammer? You can file that, too.

TAGS:

Consumer Watchdog, Eliminating Fees

What the New DOL Fiduciary Rule Means For You

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The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Geeting advice on future investments

Over the past several months, everyone from politicians to personal finance gurus have been weighing in on what the U.S. Department of Labor’s new fiduciary rule will actually mean for the financial industry and consumers. Six years in the making, Department of Labor Secretary Tom Perez finally made announcements about the final version of the long-awaited rule at the Center for American Progress last past week.

Aimed at saving consumers billions of dollars in fees in their retirement accounts, the Department of Labor’s new fiduciary rule will require financial advisers to act in your best interest. However, the final rule includes a number of modifications, including several concessions to the brokerage industry, from the original version proposed six years ago. Here’s what you need to know about these new rules and how they may affect your money.

What is a Fiduciary?

So what exactly is a fiduciary? According to the Certified Financial Planner (CFP) Board, the fiduciary standard requires that financial advisers act solely in your best interest when offering personalized financial advice. This means advisers can’t put personal profits over your needs.

Currently, most advisers are only held to the U.S. Securities and Exchange Commission’s suitability standard when handling your investments. This looser standard allows advisers to recommend suitable products, based on your personal situation. These suitable products may include funds with higher fees — with revenue sharing and commissions lining their own pockets —  which may not reflect your best possible options.

What is Changing Exactly?

Affecting an estimated $14 trillion in retirement savings, the Department of Labor’s new fiduciary rule is meant to help you receive investment advice that will aid your nest egg’s ability to grow. Many investors have been pushed toward products with high fees that quickly eat away at profits.

All financial professionals providing retirement advice will soon be required to act as fiduciaries that must act in your best interest. This applies to all financial products you may find in a tax-advantaged retirement accounts. Because IRAs offer fewer protections than employment-based plans, the Department is concerned about “conflicts of interest” from brokers, insurance agents, registered investment advisers, or other financial advisers you may turn to for advice.

Despite these new protections, the Department of Labor also made some key concessions. Previously, brokers were required to provide explicit disclosures about the costs of products to their clients. This included one, five, and ten year projections. However, this requirement has been eliminated. After heavy pushback from the industry, the Department of Labor also agreed to allow the use of proprietary products.

Additionally, the Department of Labor has pushed the deadline for full implementation of their new rules. Firms must be compliant with several provisions by April 2017 and fully compliant by January 1, 2018. Although the rules have been finalized, a court challenge is still possible.

Despite all of these concessions, the Department of Labor’s highest official insists the integrity of their rule is still in place.

Exceptions You Should Know About

Although advisers working with retirement investments will no longer be able to accept compensation or payments that create a conflict of interest, there’s an exception many brokers will likely pursue.

Firms will be allowed to continue their previous compensation arrangements if they commit to a best interest contract (BIC), adopt anti-conflict policies, disclose any conflicts of interest, direct consumers to a website that explains how they make money, and only charge “reasonable compensation.” The best interest contract will soon be easier for firms and advisers to use because it can be presented at the same time as other required paperwork.

How These New Rules Might Affect Your Investment Options

Although these new rules don’t call out specific investment products as bad options, it’s expected advisers may direct you to lower-cost products, like index funds, more regularly. New York Times also predicts the new regulations may also accelerate the movement toward more fee-based relationships. They also suggest complex investments like variable annuities may soon fall out of favor.

What Will the Larger Impact of These Changes Be?

Backed by extensive academic research, the Department of Labor’s analysis suggests IRA holders receiving conflicted investment advice can expect their investments to underperform by an average of one-half to one percentage point per year over the next 20 years. Once their new rules are in place, they are anticipating retirement funds will shift to lower cost investments, savings consumers billions of dollars.

What You Can Do To Protect Yourself

Although these new rules are a positive step for consumers, it’s important to remember there are still a wide variety of financial professionals out there. And the quality of the advice you receive can vary greatly based on their level of education, experience, and credentials. In order to find someone who is equipped to handle your unique financial situation, you will still need to do your homework.

You may want to start by looking for a fee-only financial planner. Due to the nature of how they are compensated, fee-only financial planners operate without an inherent conflict of interest. They are paid a fee for the services they provide and they don’t earn commissions from product sales.

Once you’ve narrowed down your options you’ll want to ask about their credentials, what types of clients they work with, what types of services they offer, while carefully checking their background and references. Like any professional working relationship, you’ll want to feel comfortable with someone you are receiving financial advice from, so it’s important to make sure your personalities and priorities are aligned. Remember, no one cares more about your money than you do. That’s why it’s essential to carefully vet anyone who is working with you to secure a healthier financial future.

TAGS:

Consumer Watchdog, Pay Down My Debt

When Late Payments Hurt Your Credit and How Long it Lasts

Advertiser Disclosure

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Very Upset Woman Holding Her Many Credit Cards.

When you borrow money—whether it is to buy a car, refinance other debt, continue your education, purchase plane tickets, pay medical bills, or go shopping—you sign a contract that outlines the rules of how and when you’ll repay the money. But what happens when you miss a payment or can’t repay the loan?

1. What Happens When You’re Late on a Payment? 

If you miss a payment on your loan, the lender will likely contact you to ask you to make a payment, and it may charge you a late payment fee. Unless the lender gives you a grace period, the credit reporting agencies will also be notified that you were late with a payment, and this information will be added to your credit report. Usually, late payments are not reported to a credit reporting agency until you are at least 30 days past due. If you continue to not make payments, the lender may send your account to either an internal or third-party collections agency.

The collections agency will try to get you to make a payment, and it may take more severe measures. Missing payments on an auto loan can lead to the car being repossessed, along with additional fees and expenses. Defaulting on a mortgage can result in the lender foreclosing on the house, although this process can’t begin until the borrower is 120 days delinquent.

Unsecured debts don’t involve a physical object lenders can take away, but they do have the option of suing you. If they win a court judgment against you, they can collect the debt by garnishing—taking money out of—your paycheck or taking money directly from your bank accounts.

2. When Is the Date of First Default?

The day you miss a payment is the date of first delinquency, but the point at which your unpaid loan goes from delinquent to default depends on the contract and where you live. “Generally, after a missed payment there is a grace period, during which there may be fees,” says Lisa Stifler, a senior policy counsel at the Center for Responsible Lending. “Then it goes into default after some time.” For example, for credit cards the date of first default is usually 180 days after a missed payment.

[7 Things You Need to Know if You Have Debt in Collections]

3. How Does Missing Payments Affect Your Credit?

Missing loan payments can affect your credit multiple times over. Late payments are reported to the credit reporting agencies when you’re 30, 60, 90, 120, 150, and 180 days late. Some lenders may charge-off the loan at that point; writing it off their books because they assume you won’t repay it.

The charge-off is a new negative mark on your credit. When the debt is sent or sold to a collections agency, that’s another mark and a new collections account appears on your report. If you continue not to pay and the collections agency wins a judgment against you, yet another negative mark is created. All these negative marks can remain on your credit report and negatively affect your credit for years to come.

  • Late payments remain on your credit report for seven years from the date of first delinquency. If you bring the account current, the series of missed payments will be deleted seven years from the date of the first missed payment.
  • Collections remain for seven years from the date of first default with the original lender, which in total may be seven-and-a-half years after your first missed payments.
  • Judgments remain on your credit report for seven years from the ruling, which could be years after the late payment.
  • Repossessions and foreclosures, charge-offs, and settlements remain for seven years from the date of first default.
  • Chapter 7, 11 and 12 bankruptcies remain for ten years from the filing date. Chapter 13 bankruptcies remain for seven years from the filing date.

These negative marks remain on your credit regardless of whether or not you settle the account. The date of first default cannot be changed by you, a lender or a collections agency.

4. What Is the Statute of Limitations for Debt?

Those who are worried about getting sued for their unpaid debt may look to the statute of limitations (SOL) for relief. States impose a SOL that dictates how long a lender or collections agency has to sue the borrower for the debt. The SOL usually ranges from three to ten years and varies by state and the type of debt. Which state’s laws apply to your loan can depend on where you lived when you took out the loan, where you live now, or what’s in the contract.

It’s important to note that even after the statute of limitations has passed and the debt becomes time-barred, you still owe the money. The lender, or a collections agency, can try to collect the money from you directly, even if they can’t get a judgment against you. In some cases, you might still be sued for time-barred debt, and you could lose if you don’t show up in court to present the SOL as a defense.

[How to Make a Payment to a Collections Agency Without Getting Ripped Off]

5. Can You Reset the Statute of Limitations?

Those with an old debt are sometimes hesitant to make a payment or speak with a collections agency for fear of resetting the statute of limitations. In many states, the statute of limitations for some debts may reset if the borrower acknowledges the debt or makes a payment of any amount. This could be a reason not to engage with a debt collector.

On the other hand, it is a myth that speaking with a debt collector or making a payment resets the timer for the negative marks falling off your credit report. Those timelines have a particular start point and cannot be reset.

6. What Should You Do If You Can’t Make a Payment?

If you’re going to miss a payment, call the lender before you do so. Explain the situation and tell them when you can make a payment or how much you can afford to pay now. You can try to get late payment fees waived, although it’s a good idea not to make a habit of this.

When you can’t afford or choose not to make payments, the debt goes into default, followed by collections. Your options may change, but an open line of communication can still be critical. The collections agency may be willing to work out an alternative payment plan or settle the debt if you can pay a portion of the amount owed.

 

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