Beware 'Credit Repair' Scams

Here's what to look out for when you're checking firms online

By ILYCE GUNK Tribune Media Services

Every day, thousands of people type the words "credit repair" into Internet search engines. Thousands more type in phrases like "bad credit" or "bad credit repair."

Figuring out how to repair credit is on the minds of home buyers, sellers and owners who've realized that having stellar credit provides financial options that simply aren't available to those with low scores.

Unfortunately, some of the Web sites that come up in a search for "credit repair" can do more harm than good. They're scams.
The typical credit repair scam works in one of a couple of different ways.

There is the promise that your credit history will be wiped clean. And you'll be asked for a large payment upfront, sometimes as much as $1,000 to $1,500.

In one typical scam, the credit repair organization will tell you that you'll get a new Social Security number. Since the Social Security number is new, it won't have any blemishes on it and your credit will be perfect.

Unfortunately, the Social Security Administration (SSA) almost never gives out new Social Security numbers - even to people who have legitimately had their number stolen and used over and over again.

Another common scam is to dispute all of the negative information on your credit history.

A credit reporting bureau must investigate all disputes within 30 days. If the bureau can confirm the negative information, it stays on your report. If it can't confirm it, the information is pulled off your credit history.

But here's the key: While the information is being disputed, it temporarily disappears from your credit history. So, your credit history looks perfect, even though it isn't. At the end of the 30 days, the credit repair company will dispute all of the charges again.

7 Steps to Take After Bankruptcy

Many bankruptcy attorneys like to call a Chapter 7 bankruptcy a "fresh start" bankruptcy. In a way, it is a fresh start -- you do get to eliminate a great deal of debt.

However, the reality of being bankrupt is not fresh at all. "Bankrupt" is a word with a strong negative connotation. It's often unfair, but there is a widespread perception that if you've gone bankrupt, you've done something wrong.

The truth is that you will need to start working immediately to truly have a positive, healthy life after bankruptcy. Follow these seven steps to give yourself a true fresh start:

1. Reaffirm your car debt.
If you own a car and are still making payments, make sure you sign a reaffirmation agreement with the car lender. A reaffirmation means that you intend to keep the vehicle and continue making payments. If you fail to make payments, your car can be repossessed and sold (with you liable for any deficiency). Signing this agreement is an act of good faith and will give you more leeway with your lender.

Remember: Do not reaffirm the debt if you intend to surrender the vehicle. You will be financially liable for the balance and will not have a car to show for it.

2. Establish new credit lines.
You need to re-establish credit as soon as possible. Most traditional banks and credit card companies will probably not approve you. However, some banks will allow you to deposit money into a savings account and issue a credit card attached to that account. This is called a secured credit card. Another possibility is a passport loan. This is when you deposit money into a savings account, borrow that money and pay the interest each month.

Neither of these options is great; they are, however, crucial. You see, you will have to do something like this eventually in order to be eligible for a credit card with a traditional bank. Getting started early is far, far better for you in the long term.

3. Clean up your credit report.
Make sure all three credit bureaus -- Equifax, Experian and TransUnion -- show that your debts have been "discharged in bankruptcy."

This is important because you want the trade lines (accounts) to accurately reflect that they have been eliminated.

4. Never co-sign for anyone.
If you have just filed bankruptcy you will not be able to eliminate debt in a Chapter 7 for eight years. Therefore, any co-signed loan that goes bad will very likely result in a judgment against you.

The risk is simply not worth the reward. You may not receive an option to co-sign for a few years after filing, but when the option becomes available, you must avoid it.

5. Never intentionally carry a credit card balance.
I know, this feels almost impossible. However, in a world where many of us live paycheck to paycheck, the extra money used to pay credit card balances is often the straw that breaks the camel's back. Remember, 85% to 90% of all bankruptcy filers do so because of incurring costs from loss of employment, illness or divorce. If you don't have a balance, should something terrible happen, you will have the financial cushion to help you cope.

It's not your imagination -- there is a squeeze on the middle class. MSN Money's Liz Pulliam Weston explains how it's possible for anyone to get in the middle class -- and stay there.
It's a tough habit to get into, but paying your balances each month is a great way to save money and provide for yourself in case of emergency. If you are faced with a balance, do everything in your power to stop using the card and pay on the balance until paid off.

6. Have a story prepared.
Some people are deadbeats. Some people ran up their credit cards to support a drug habit. You need to make sure others understand that you are not one of these people, that you have legitimate reasons for filing. You want to have a specific reason -- to be stated in less than 20 seconds -- that says why you filed bankruptcy.

More often than not, you will find people more willing to work with you when you have been honest, they see in your face your remorse and they understand that your reason for filing was something out of your control.

7. Stay positive.
Even if you tend to be a negative person, you need to believe that you can get on with life and recover from bankruptcy. I have seen people who are so psychologically devastated after filing bankruptcy that they do not re-establish their credit for years. The result is that it takes them five to 10 years to begin improving their credit score when it only needs to take two years. Please avoid the ostrich approach to life after bankruptcy in which you stick your head in the sand and hope things work out. You must take the aggressive approach, knowing that you will encounter rejection but eventually find success. If you work hard and start immediately, you will soon reach a point where your credit will be strong.

This article was reported and written by Justin Harelik for Bankrate.com.

Thought for Today...

Paycheck Pressure

by Shella Deni, Elizabeth Flech - AP

As the U.S. economy slows, wages can't keep up with inflation, which means less spending power for already troubled consumers. According to the Bureau of Labor Statistics, inflation-adjusted weekly wages in the past four months fell for about 80 percent of workers in non-managerial production and services jobs.

From November through January consumer prices, excluding food and energy, rose at an annual rate of 3.1 percent, according to the Labor Department-higher than the Federal Reserve's unofficial comfort zone of 1 percent to 2 percent. Costs for medical care, education, clothing, and airline fares are dropping, while oil, wheat, soybeans and corn futures have been trading near all-time highs. A Tuesday report showed wholesale inflation for goods bought by producers jumped by 1 percent in January, more than double the increase economists were expecting.

The rise in prices is "a sustained hit on consumers' real incomes and, hence, on their ability to spend on other goods and services," writes High Frequency Economics chief U.S. economist Ian Shepherdson.

For the Federal Reserve, concerns about the sluggish health of the economy have overtaken worries about soaring prices. The central bank cut interest rates five times in the past five months. Lower interest rates typically contribute to inflation, and the Fed recently raised its inflation expectations for the year. Economists anticipate another rate cut at the bank's March 18 meeting.

Consumer spending, which is closely finked to job security and expectations of healthy wage growth, is the single most Important contributor to U.S. gross domestic product and constitutes more than two-thirds of the nation's output, notes National Retail Federation chief economist Rosalind Wells. "Average workers have been faced with erosion in their spending power,· she notes, which is bad for the broader economy and for already struggling retailers.

A Tuesday conference Board Consumer Confidence Index reading dropped to 75 for February, far below a projected reading of 83. Bear Steams economist John Ryding notes the survey indicated a sharp drop in consumers' assessment of labor market conditions in the month. The decline in consumer confidence, including the drop in consumers' assessment of the labor market, has a recession- like feel to it: he writes.

FICO 08 - Understanding the “New” Credit Scores

FICO 08 is coming! FICO 08 is coming! Ready or not, the method which credit bureaus use to determine credit scores is about to change.

Fair Isaac and Co. is introducing FICO 08, an improved scoring model designed to help lenders make a more accurate assessment of risk when accessing applicants. In light of increasing levels of delinquencies, as well as declining recovery values (the amount a lender is able to recover after a reposed vehicle is sold at auction), lenders have been looking for a better model to predict the likelihood of a loan default. According to Fair Isaac, FICO 08 should help lenders reduce their default rates by 5-15%

The fundamental elements that FICO evaluates in computing a credit score will remain largely look and feel the same. Lenders and creditors will continue to look at:

• Payment history: Has the consumer consistently paid their accounts on time in accordance with the terms of their loan or credit arrangement?
• Available credit: What is the total amount of credit currently available to the consumer?
• Credit utilization: How much of the total credit available is currently being used?
• Credit balances: What is the total of current and delinquent account balances?
• Depth of credit: How long is the person’s credit history and what is the mix of credit types?
• Recent credit: How many recently opened credit accounts and credit inquiries are on file?

What will change is how the new scoring system views these elements. FICO 08 will more finely “slice and dice” information, and will do a better job separating the good risks from the bad ones, particularly with regard to subprime borrowers. By dividing the population into 12 segments (8 for “good” credit and 4 for “bad”) instead of the current 10, FICO 08 hopes to make the scoring system more accurate, and lower the risk of assigning a consumer to the wrong segment.

Additionally, FICO 08 will better identify young or thin credit files, who may now have high scores even though they have relatively few accounts, many recently opened. Consumers actively seeking new credit will be more easily identified, allowing creditors to more accurately gauge the potential risk in granting too many new accounts at once.

The major differences will be in how FICO 08 looks at credit files. More points will be given to consumers who maintain a variety of credit, such as a credit card or revolving account, as well as an installment loan or mortgage. This, accord to Fair Isaac, shows that the consumer can manage multiple payments on different kinds of accounts. Additionally, FICO 08 will penalize borrowers who use a high percentage of their available credit. Accounts at or near their limits will generate a lower score for consumers.

The way that FICO 08 will treat delinquent credit will be different as well. It will be harder on “repeat offenders”, those consumers who are consistently delinquent on their accounts, as opposed to those with only an occasional slip up. Consumers who have a number of accounts currently past due will be viewed harsher than a consumer with only one account delinquent, with other accounts current or up to date. A consumer with only one derogatory or delinquent account won’t be dinged as hard as someone who has a number of accounts past due, and in fact, may generate a higher score for a consumer in arrears in one account who also has a number of accounts in good standing. However, FICO 08 will draw a greater distinction for serious delinquencies over 90 days late. Multiple delinquent accounts could significantly lower a consumer’s score.

Perhaps the most significant change coming is that FICO 08 will no longer consider “authorized users” in computing a credit score. This is in response to curtail the use of “credit sharing”, where a creditor with a low score is added to an account of a non-related consumer in an effort to boost the first consumer’s score. In effect, authorized users with no credit history of their own could see their credit score disappear.

Consumers who are accessed as a “lower” risk under FICO 08 may start to get better terms from creditors. A consumer deemed to be a “higher” risk under the new scoring system may find less than favorable terms, or may find it tougher to even get credit. Consumers who occasionally mess up, have a good mix of credit types, with a single delinquent account may actually see their credit scores rise, while consumers who consistently mess up, have balances at or near their credit limits, are 90 days late on multiple accounts or have authorized user accounts in their file, may see their credit scores drop. Additionally, FICO 08 will not “ding” a credit score for multiple related credit inquiries. A consumer shopping for a mortgage or an auto loan who applies to multiple lenders will not see their score drop because of the inquiries.

SO, when will FICO 08 come into play? Experian is expected to begin using the FICO 08 in the first quarter of 2008, while TransUnion believes they will be ready by the second quarter of 2008. At this time, Equifax has declined to offer FICO 08 due to litigation regarding “VantageScore”, which is a joint venture, started by all three bureaus in 2006, to compete with Fair Isaac's FICO scoring system. The lawsuit, filed by Fair Isaac, is based on unfair and anti-competitive practices which are meant to harm the FICO brand. The legal action has caused Equifax’s relationship with Fair Isaac to remain "strained" until the lawsuit is resolved, says David Rubinger, Equifax spokesman, as quoted in the December 19th, 2007 edition of the Wall Street Journal,

Regardless of when FICO 08 is implemented, consumers may not see a significant difference in their scores. According to Tom Quinn, Vice President of Global Scoring Solutions for Fair Isaac, as quoted in the December 19th, 2007 edition of the Wall Street Journal, "Overall, more consumers will see their FICO scores go up slightly than will see their scores drop."

Why it's a great time to buy a car

This is when your credit record matters. You have great scores? Car loans are cheap, and carmakers are eager to deal. Bad scores? You'll pay and pay.

By Liz Pulliam Weston - MSN Money

If you plan to get a car loan this year, you'll find a tale of two markets:

Folks with untarnished credit will find good rates, eager lenders and some amazing deals as increasingly desperate car manufacturers try to revive sagging sales.

Folks with troubled credit will find higher rates, increased scrutiny and warier lenders, but they won't face anything like the trouble they'd experience if they were shopping for a mortgage.

As the credit crunch has spread through lending markets, some pundits have proposed that auto loans could be the scene of the next subprime implosion. The idea is that loose lending standards combined with increasingly strapped borrowers could lead to a spike in defaults and a crackdown by lenders, making it tougher for consumers -- especially those with troubled credit -- to get new loans.

That's certainly what's happened among mortgage and home equity lenders, as I wrote in "A homebuyer's market? Hardly" and "Lenders cut off the home-equity tap."

And you don't have to look far for ominous signs in auto lending. Until now, auto lenders moved vehicles off the dealer lots by:

- Stretching out loan terms. As I wrote in "The real reason you're broke," more than 80% of car loans are for terms longer than four years. The average loan term has grown from just under 55 months in 1990 to more than 64 months today. Longer loans allow consumers to buy more-expensive cars but virtually ensure that they pay more interest and stay "underwater" on the loan (owing more than the vehicle is worth) for years.

- Approving bigger loans. The average amount financed in December was $29,062, up 20% from the 2005 average of $24,133. Median household incomes barely grew at all during the same period.

- Encouraging "upside down" owners to roll negative equity into new loans. Haven't finished paying off your last car? No problem. Dealerships are so eager to sell you another one, they encourage you to roll your debt into a new loan, putting you further upside down. Roughly one out of four -- 26.3% -- cars that are financed include debt rolled over from a previous vehicle, according to vehicle research site Edmunds.com. In February, Edmunds said, the average amount of negative equity in these deals was $4,369. These loans cost consumers more because interest rates are higher to reflect the fact that a good chunk of the loan is unsecured. They also put lenders at risk because whatever they cleared from a repossession wouldn't repay the loan.

- Reaching out to borrowers with more-troubled credit. To make more loans, auto lending experts say, mainstream lenders began approving loans for people with increasingly blotched credit reports. Interest rates for these folks were often 10 percentage points higher, or more, than for those with good credit to reflect the extra risks of default.

It's bad but not that bad

In an economic slowdown, you'd expect all these factors to contribute to a higher default rate. And they have.

Standard & Poor's reported in January that delinquencies on auto loans sold to investors were climbing across the board, including on loans made to people with the best credit. (Loans made to folks with so-called prime credit, defined in the auto industry as FICO scores of 680 and above, represent about 70% of all auto loans.)

The number of prime loans that were more than 30 days overdue was up 18%, Standard & Poor's analysts said, and had exceeded the previous high reached in 2001, during a recession.
The numbers could get worse, the analysts warned, because of the housing mess. Prime borrowers were more likely than subprime ones to be homeowners and thus affected by mortgages with resetting payments.

Scary, right? Except the higher delinquency rate the analysts are warning about is 2.06%, compared with 1.75% on earlier loans.

Delinquency rates for loans made to folks with "nonprime" credit (FICO scores of 620 to 680) are still under 5%, while 30-day delinquencies for subprime credit (FICOs under 620) are under 8%, S&P figures show. Higher than in the past, yes, but still below 2001 rates.

Although some industry experts are predicting more defaults and repossessions this year, "it's still peanuts," said Ralph Ebersole, the director of automotive consulting for Cars.com. "It's not like things were in the last real recession, in '91 and '92."

Aim is not just to finance but to sell

Even if defaults do skyrocket, it's hard to imagine the auto lending market seizing up the way the mortgage market has. Auto lending differs from mortgage lending in many ways: The amounts at risk are much lower, for one thing, and the bulk of loans are made by lenders that have a vested interest in encouraging sales.

These lenders, called captive finance companies, are arms of the car manufacturers: GMAC, Ford Motor Credit, American Honda Finance, Toyota Motor Credit, etc.

"If they're not flexible enough to lend to people," said Jesse Toprak, the director of pricing and market analysis at Edmunds.com, "they're not fulfilling their function, which is to help the dealerships sell cars."

As delinquencies have increased, lenders -- captive and otherwise -- have focused more attention on snaring good-credit customers with low rates. They're still making loans to people with less-than-perfect credit, Toprak said, but their rates tend to be higher than in the past, and they may require more money down.

What lenders offer, though, can vary from moment to moment, with the captive lenders being the most erratic, Toprak said.

"One month, as long as you qualify for any financing, you'll get the 0% rate," Toprak said. "The next month, only (the best) credit gets the 0% rate. Everybody else has to pay the regular rate."

So how can you make sure you get the best possible deal? Here's your game plan:

- Polish your credit scores. The better your scores, the better the deals. The fastest way to boost your FICOs is to pay down credit card balances, pay bills on time and dispute any serious errors to get them off your credit reports. You're entitled to one free copy of each of your three credit reports from Annualcreditreport.com; scores derived from those reports aren't free, but you can purchase FICO scores for all three bureaus from MyFico.com.

- Do your homework. Research cars and current incentives, such as low-rate financing, cash back or leasing deals, using sites such as MSN Autos, Edmunds.com, Cars.com and Consumer Reports. (Consumer Reports offers unlimited new-car reports, which include detailed pricing information and reviews, for $39.) And here's my take: Although manufacturers are offering some eye-popping deals on leases right now, keep in mind that buying and keeping your car for 10 years or more makes the most financial sense. Only people who are saving enough for retirement and for their kids' college educations, who have fat emergency funds and who still have money to burn should consider leasing as an alternative to buying a new car every three or four years.

-Figure out what you can really afford. No car is a bargain if it upends your financial life. My take: Don't finance a car for longer than four years, try to put 20% down to make sure you always have some equity in the vehicle, and be wary of payments that eat up more than 10% of your gross income.

- Get approved elsewhere for the loan. Credit unions, banks and online sites such as E-Loan typically offer the best rates. (You can compare rates nationwide here.) Applying for a loan doesn't mean you have to take the money, Toprak said, but it does lock in a rate that you can then take to a dealership. "You're getting an idea of your market value," he said.

- Ask the dealership to beat the rate. You'll want to first negotiate all other aspects of the deal, including the price of the car and the value of your trade-in. Only then do you bring out your lender's rate and ask the dealership to do better. The dealership often has access to "a slightly better wholesale rate" that could knock a quarter of a percentage point off your rate. If so, you can take the dealer financing; if not, go to the lender that has already approved you and get a cashier's check to buy the car.

Liz Pulliam Weston's new book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.
Published March 6, 2008

Entering the Repossession Lane

Default rate soars on auto loans in pattern likened to mortgage crisis

By Jenn Abelson, Globe Staff March 7, 2008

When lenders sent a tow truck to repossess his silver 2001 Lincoln LS last month, Myles Chilcot eagerly handed over the keys.

Last year, Chilcot, 21, bought the $15,000 car - a sweet ride with tinted windows and custom chrome rims, and a loan with $370 monthly payments that he could not afford on his $12 hourly wage at Home Depot. By the fall, facing mounting credit-card debt, student loans, and rent, he stopped paying the car bills.

"I ran around smiling for 20 minutes when they took the car away," Chilcot said. "It was a relief."

It is also an increasingly common story as more Americans, under growing economic pressure, are deciding to surrender their rides rather than the roofs over their heads: The rate of auto-loan defaults recently reached a 10-year high of 3.4 percent. And one local auction company saw repossessions nearly triple last month compared with a year ago.

As with the subprime-loan crisis that has caused waves of home foreclosures, trouble has been brewing with car loans for years. As the economy boomed, lenders made it easy for shoppers to buy cars they couldn't afford by stretching their loan payments to five or six years, which more than doubled the total of Americans' auto-loan balances over the past decade to $772 billion from $282 billion in 1998. As with home buyers, lenders relaxed standards for car buyers such as Chilcot, who had blemished credit and put no money down.

With oil prices skyrocketing and the economy in a downturn, consumers are looking to downsize to cheaper, more fuel-efficient models, and reduce their payments. And many - even those with good credit and lower interest rates - are finding they can't afford to sell their vehicles because they have more left to pay off than their cars are worth. Lenders, meanwhile, are writing off billions of dollars in defaulted loans, and some analysts worry this could escalate to a foreclosure crisis on wheels.

"The suddenness with which we saw repossessions hit the market at the beginning of the year has been unusual and appears to reflect not only the general economic slowdown, but some spillover from the mortgage crisis," said Tom Kontos, chief economist at Adesa Inc., which runs 58 car auctions across North America. "With folks getting resets on adjustable-rate mortgages, it forces many people to decide whether to default on their home loan or default on their car loan. When they have that kind of choice, predictably, they gravitate toward defaulting on car loan."

Nationwide, repossessions are up about 15 percent so far this year, Kontos said. At North Shore Auto Auction in Ipswich, repossessions almost tripled in February to 125 vehicles, with gas-guzzling sport utility vehicles, pickup trucks, and vans being turned over more quickly than cars at a rate of two to one. As homeowners get squeezed by rising mortgage payments, contractors are also feeling the pinch as people cut back on home-improvement projects, leading to a glut of repossessed pickups, according to Frank Iovanella, president of North Shore Auto Auction.

For two years, Carole Beausoleil, 58, of Southbridge has been trying to get rid of a black pickup, a 2003 Chevy Silverado the family bought in 2004. Beausoleil says the family was pressured by the dealer into costly add-ons the members quickly regretted, such as LoJack and an extended warranty. These services added thousands to the $21,900 sticker price and pushed up the monthly car bill to $465.

Beausoleil fell behind on payments in 2006 and debated allowing the lender to repossess the car. She reconsidered because she didn't want to ruin her credit and her husband needed the vehicle for work. Instead, they tried to downsize to a less expensive, more fuel-efficient model. But they have been unable to because they owe $13,000, and lenders told Beausoleil the truck's value has shrunk to $10,000.

"We got swindled and overpriced. It was a mistake, and now it's too late," Beausoleil said.
Beausoleil, who is trying to pay off other debts, including overdue credit card, gas, and electric bills, says she plans to use the anticipated federal tax rebate this spring to help make up the $3,000 difference so the family can finally get rid of the truck.

Lenders, meanwhile, are cracking down. GMAC Financial Services, the country's largest auto-finance operator, recently tightened its underwriting standards to authorize fewer subprime loans and also increased its collection force to work with customers who are late on auto payments. During the last two quarters of 2007, the riskiest subprime borrowers had interest rates of about 15 percent for their auto loans, while borrowers with top credit ratings carried car loans with 5.7 percent interest rates, according to J.D. Power and Associates' Power Information Network, a market research firm.

Jack Tracey, executive director of the National Automobile Finance Association, the trade group that represents subprime lenders, said, "The nonprime auto-financing industry is very important for the economy because it provides many economically disadvantaged consumers with the ability to own a car and have the ability to hold a job where they need to commute to work."

But the most recent data available from a member survey showed that delinquencies on subprime loans jumped to 11.6 percent, up from 6.8 percent.

"Just as in the subprime mortgage industry, car dealers have been giving consumers with less-than-prime credit ratings car loans with rates and payments they can't afford," said Yvonne Rosmarin, a consumer-protection lawyer in Arlington.

Some industry analysts do not expect the problems within the auto industry to reach the crisis level of the mortgage industry. Lenders can more quickly recover, in many cases, because vehicle repossessions can occur within 90 days after a loan is past due, while home foreclosures can take up to a year. Still, some lenders, like Eastern Bank, which have seen an increase in repossessions, are taking a hit at auction, getting at least 10 percent less than last year for larger vehicles.

That means the problems for consumers may not end when their repossessed cars are towed away. They still may owe money if the lender sells the car for less than the balance owed. Moreover, the repossession typically stays on consumers' credit reports for up to seven years.
Chilcot, who recently had his car repossessed, had initially intended to purchase an $8,000 Nissan Altima, but he couldn't get a loan to cover the vehicle because it had too many miles. He knew he had bad credit, so when a loan offer was approved instead for the $15,000 Lincoln, Chilcot seized on what he thought was a good deal - even though it came with a 18-percent interest rate.

Since his car was taken away, Chilcot has started walking to work at his new job - as a car salesman at a dealership in Plymouth.

When asked whether he tries to caution people against buying a car they can't afford based on his recent experience, Chilcot chuckled: "Not really. You become pretty shameless pretty quick when the paycheck comes."

Jenn Abelson can be reached at abelson@globe.com.