This is the 21st Century and things have changed a lot if you haven't noticed.  However, judging by the advice that I see being given by various professionals regarding credit, debt and other financial issues, you would think that all is as it always has been.  I suppose this is because it is hard to see into the future and easy to look back, so it is somewhat of a default to assume that things will always be as they were.  But they won't.

The rules have also changed when it comes to credit, and so, consumers must adapt to a new set of operating instructions. What does it take to gain access to more credit? How does outstanding debt affect my credit rating? What do the new laws really mean for me and my creditor? These questions and many more are becoming increasingly important to know, but this means throwing out what you may have thought to be true (680 is considered to be a good credit score….right? WRONG!) and uncovering not only the real truth, but your credit rights as well.

 In part two of our series on our S.O.S. member’s “most important issues - facing down the housing market, credit issues and debt worries”  we are tackling credit - what it means to have credit, how you rank in a world of numbers, and what you can do to use credit and the debt you carry, to your advantage.

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All the best,

Herb Kay

In a turbulent economy, having access to credit is vital – it’s also becoming increasingly difficult to obtain. One of the most common things I come across when answering “Ask Herb” questions, is the notion of paying off credit card debt in order to have access to more/different types of credit. The most important advice I can give to my readers when dealing with credit and personal debt is that you need to let go of the old notions of paying down debt before anything else.  First of all, many of us are under a mountain of debt so large that this is just wishful thinking and secondly, we are in the midst of a recession that is not only not over but is likely to get much, much worse. 

We are living through (and what later will be seen looking back) a major shift in how America does business. There are higher bars (think credit scores of 700+) for the same offers and even lower limits for those who have higher scores.  Below are some of the top concerns of my readers, you may even find yourself in here. So read carefully and consider the old adage: “the enemy of good is perfect” and realize that no one can be perfect in this climate, but when we arm ourselves with information that gives clear direction, success can happen.

1.       What is considered a “good” credit score? It used to be much lower, but now I feel like I don’t know where I stand. What is excellent? What is poor? In today’s world that sort of depends on who is issuing credit –take buying a car, for example.  A score over 620 was once considered “fair” and can still currently get you a loan with GMAC on a new American car, but at a higher rate than in the past – probably at least 1-2% higher. In fact, 620 is now on the very edge of poor.  Below that is very poor and good luck.  A score of 680-699 is ok, but still considered “subprime”, with a financing APR range of 5-8.9%. 700-719 would likely qualify you for financing of 2.9-3.9%. A 720-759 is better and would get you a 1.9% rate, and anything over 760 is excellent, essentially guaranteeing you a 0% offer, if that is part of the dealership’s promotion. Although, it is still possible to get those super-low rates at 700 and above, it’s just rare.

2.       I thought I didn’t have poor credit, but I can’t seem to get another card to balance transfer. Why will no one extend me credit with a 650 rating? Because credit issuers are very jumpy and 650 is a below average credit rating and considered by most to be very poor. Aside from those teaser rates for new purchases, balance transfers, or a 6-month introductory phase, the BEST rates out there on a new credit card are around 7-7.9% and you will need a very good credit score to even qualify for those rates. If they extended credit to a 650 score, you are looking at 19-20% right off the bat – with no mistakes or late payments. For every $10,000 in debt, that is $1200 in extra payments per year – in interest alone! So I would use The S.O.S. Credit Recovery Guide to help you get a copy of your credit report from all three major ratings agencies to see why you are rated that low and if there is a way to fix it.  There almost always is!

3.       How will new regulation affect my credit: limits, usage, availability, and ability to secure new credit? It is going to make it a lot harder to get credit of any kind.  This is classic government interference in the free market for what seems like good reasons and good intentions but leads to unintended consequences.  By making it impossible or at least much more difficult for creditors to treat good customers better than bad ones, the result will be less credit for everyone because the losses they would have to endure by issuing credit to lower rated risks would not be offset by higher interest as they have done in the past.  Interest rates are how lenders discriminate and price their product, its why one person pays three times as much than another person – for the same exact same thing. When creditors are forced to treat everyone the same, the result is less for everyone in general.

Another effect of the tightening regulations is the tightening of credit limits and that there seems to be no recourse for creditors who lower your credit limits (even on responsible card holders). Credit issuers are not required by law to inform you when your limits are lowered. This means that if you have a card with a $5000 limit and a $1000 balance, and your creditor lowers you credit limit to $1200 – you are carrying almost 100% of the credit extended and that can wreak havoc on your score – dropping it by nearly 20 points! Of course, other creditors will likely follow suit and start lowing rates on their cards to you and the effect can be paralyzing. I provide a letter in The S.O.S. System that can be used to limit this, and keep it happening to you!

4.       Why are banks not extending credit to some of their best customers? Simple, all the new financial regulations that are coming out even as I write this are so onerous and heinous that it makes it too difficult for many banks and lenders to comply.  Heck, they don’t even have a clear idea of what the rules will end up being so for now don’t expect any easy credit. 

5.       Would you pay off/down a car loan or a credit card first, if push came to shove? Which debt has more bearing on your credit? They both bear heavily on your credit, but you should pay down the highest interest debt first -regardless of what it is for.  So if you have one of those low interest rate car loans as an example, you would be crazy to pay it off early! Instead, focus on higher interest credit card debt, which will almost certainly be the case.

I could on and on, but here is one more point I want to make today: Inflation is coming a big way and you can use it if you're smart.  Simply, the government is printing trillions of dollars that are nothing more than paper.  There is no gold, silver, or anything else backing up our currency.  So far we have all accepted this and things seem stable monetarily speaking, but one day soon there will be a mass realization that it is all just paper.  Then it will be "Katy bar the door" as inflation goes wild.  This will be good news for people in debt as your debts are in old dollars and as time goes by and the money loses value, you can use the cheaper inflated dollars to retiree the debt.  In the meanwhile it is all about not losing ground, improve your finances using S.O.S. and building money reserves as much as possible, and then wait to cash in.  Don't worry; you don't have long to wait!

Q. We had two property investments go severely underwater and go through short sale.  We also are working to negotiate settlements with a couple credit cards due to increased APR's.  What affect would the settlement of credit card debt have on our credit in comparison to the non-payments, short sale of two properties?  It seems that the credit card settlement would have a negligible impact in comparison?  If a settlement is agreed upon with a credit card, are there ways to negotiate with them to minimize that effect on the credit - in other words do they have control over what/how they report dependent on the amount of the settlement?   

All great questions!  First off, in the online component of The S.O.S. System (your membership) there is a letter that you can send to any creditor that, in effect, forbids them to share your credit information with anyone else. For many, this letter is also a way to stop many credit card and unsolicited marketing material from being sent to them, but it has another effect – limiting the information that is shared with tertiary financial groups. Your credit could be severely affected by real estate snafus with the simple fact that your bank is likely sharing information (which is legal, by the way) with your creditors, about the fact that you have had two short sales in your recent history. The reason that you may have never heard of this is because banks and lenders try and talk people out of what they call “third party marketing” when you sign loan documents, but it is entirely to your advantage.

Now moving on to settlement - there is no hard and fast rule.  Some cards like Visa or Mastercard will negotiate down the balance and others like AMEX and Discover will likely file a lawsuit the minute you try.  Instead of trying to negotiate down, and since I don't know your complete financial history and income this is only a suggestion, (feel free to follow up with me with more detail) but try working out a reduced payment plan for the whole balance. It sounds like you haven’t stopped making payments on your credit cards, so most creditors won’t even begin the negotiation process with you until you are at least 3 months delinquent……I realize it doesn’t make a whole lot of sense, but that is just how it works. The reason we are different from Debt Negotiation companies or Debt Settlement firms is because the first thing they tell you to do is to stop making the payments on your credit cards (if you haven’t already) and start by paying them to negotiate. The trouble is, the money you save by not making those payments should go towards building up cash to offer a settlement, but instead the settlement companies take that as payment, all the while, allowing your payments to pile up, interest to compound and fees to run amuck! This makes it difficult, if not impossible, to keep up with the agreement to the settlement company and all you’re left with are fees and interest and payments – to the creditor and now, the settlement firm!  I teach you what to do when if you choose to negotiate, but keep in mind, on your credit report any settled trade lines will show as a charge-off – including the amount owed and the amount you paid (settled). Having a charge-off will most certainly disqualify you from certain loans, for example, most mortgages have a stipulation that to qualify for a new loan, you CAN NOT have any charge-offs on your credit report within the last 24 months.

To answer your question on which would be worse, not making payments on your credit cards would very bad, but the actual charge-off on the trade line would have a greater impact right away. The company that you settle with is not required to offer you the option to settle with no charge-off, but if you agree to a higher settlement, many will give you this option – if you ask.  It’s case by case, and could impact future opportunities in a big way.