Credit Counseling's Debt Management Plan May Hurt Credit Scores

Jan 1, 2011 Candice Gillingwater

A Reputable Credit Counselor Helps You Manage Debt - Mikecco

If you’re struggling to pay off your creditors and get out of debt, credit counseling may seem like a viable solution. Consumers are continually bombarded with ads for nonprofit credit counseling agencies on television, in magazines, newspapers and on the radio. Even the federal government recommends credit counseling as a debt management solution. Unfortunately, while a qualified counselor may help you escape your debts, your credit score could suffer in the process.

How Debt Management Plans Work

After a credit counselor reviews your debts and income, you will be enrolled in the company’s program via a debt management plan. Agreeing to a debt management plan gives the credit counseling agency the right to accept payments from you on a periodic basis and distribute those payments to your creditors. Debt management programs reduce your total debt load in one of the following ways:

• Debt settlement
• Reduced interest rates
• Reduced fees
• Lower payments

Credit Counseling Does Not Directly Affect Your Credit Score

A common misconception about credit counseling is that it damages your credit rating. In reality, credit counseling itself is not responsible for any damage your credit score may incur by enrolling in a debt management program. While some creditors will update your credit report to reflect the fact that you are paying your debts via a credit counseling program, others will not. Regardless of whether your participation in the program appears on your credit report, this fact does not in any way impact your FICO scores.

See: How Debt Management and Credit Counseling Affects Credit Score

Debt Management Plans and Debt Settlement

Although your participation in a credit counseling program does not impact your credit scores, the methods credit counseling agencies use when negotiating your debts can hurt your credit.

Debt settlement, for example, is a particular danger. Unless your creditor agrees to report the settled debt as “paid in full” rather than “settled,” your credit score will drop as soon as you settle the debt. This is because the credit scoring system serves as a risk indicator for lenders. Settling a debt for less than you originally agreed upon indicates that you will be likely to do so again in the future – making you a higher lending risk and adversely impacting your credit score. Settling a debt with a third-party creditor, such as a collection agency, however, does not have the same negative credit impact.

Missed Payments Impact FICO Scores

No law requires your creditors to cooperate with a credit counseling agency. Because of this, a credit counseling agency you have authorized to manage your account payments for you via a debt management plan may withhold payments from your creditors and allow your account to fall into default.

Once a debt you owe falls into default, the company will be more open to negotiating a favorable payment plan simply to receive payment. The downside to this is that your payment history significantly impacts your FICO scores. Each missed payment further damages your credit rating – even if, due to your enrollment in a debt management plan, you are not aware that your payments aren’t arriving at their intended destination.

Reputable Credit Counseling Programs

You can avoid the damaging consequences of some debt management plans by choosing a reputable credit counseling agency and asking the right questions beforehand. Some questions you may want to pose to your credit counselor are:

• How do you negotiate with my creditors?
• When do you send payments to my creditors?
• Do you ever withhold payments?
• Is debt settlement a goal of this program?

Obtaining the credit counseling agency’s guidelines and regulations in writing before signing a contract helps you avoid signing up for a service that may reduce your debts but decimate your credit scores in the process. The Federal Trade Commission recommends that all consumers considering credit counseling contact the National Foundation for Credit Counseling for a list of licensed professionals in their area.

See: Government Approved Pre-Bankruptcy Credit Counseling Services

Sources:

Federal Trade Commission: Knee Deep in Debt

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  A Reputable Credit Counselor Helps You Manage Debt - Mikecco

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  A Debt Management Plan Can Lower Credit Scores - Ambrozio

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  Watch Out for Credit Counseling's High Fees - TALUDA

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But I Have a Zero Balance! Residual Interest on Credit Cards

Dec 16, 2010 Evan Dicken

Credit card debt is a growing problem in America. Last year, the Obama administration passed sweeping reforms that limited various fees, and required banks to be more upfront about payment schedules and interest. One factor that was not addressed in the 2009 Credit Card Act was the interest rate structure itself. Additionally, many consumers remain unfamiliar with the methods banks use to calculate interest on their credit balance. This information is no "magic bullet" for debt relief. However, a basic of how credit card interest "works" is a fundamental step towards planning for financial independence.

One of the most common credit card misunderstandings involves Residual Interest. Residual Interest occurs when a cardholder who usually carries a balance from month to month pays off the entire amount in full. Unfortunately, just because the balance has been reduced to zero does not mean that there are no more interest charges to pay. Many consumers are surprised the month after paying down a large balance by a letter from the bank saying that they still owe several hundred dollars (or more) in interest. If left unpaid, residual interest can even form a new balance on the card which can in turn create more interest, restarting the cycle of debt.

Residual charges are a function of how most banks assess interest rates. Although charges are compiled monthly, they are actually assessed daily. Basically, at the end of the billing cycle the bank takes the balance the account held at the close of every business day, adds them together, divides them by the amount of days in the cycle, and then assesses interest on each day to produce a monthly bill. The simplest way to represent this is:

(D1 + D2 + D3…) x (APR/365) = Interest Charge

D = Balance at the close of a particular day

APR = Annual percentage rate on a credit card

365 = The number of days in the year (remember the 'A' in APR stands for 'Annual.')

Because most consumers get a bill at the end of the month, they assume the charges are monthly, when in reality the bank only does the math at the end of the month. Since charges accrue daily, even if a consumer pays his or her balance down to zero he or she is still responsible for the interest that accrued for that portion of the billing cycle that he or she carried the balance. These leftover daily charges are what are known as "Residual Interest." If it sounds a bit confusing, that's because it is. Let's plug some numbers into our formula to represent a normal billing cycle.

For simplicity's sake, let us say the cycle is only five days long and the interest rate is 20%. The customer carried a $10,000 balance from last month. On day one $200 in purchases are made, on day two $300 are made, day three $100, day four nothing, and day five $400. So the customer's balance would look like this:

Initial = $10,000

D1 = $10,200

D2 = $10,500

D3 = $10,600

D4 = $10,600

D5 = $11,000

So our formula would be:

(10,200 + 10,500 + 10,600 +10,600 + 11,000) x (.20/365)

52,900 x .000548 = $28.98

$28.98 may seem like a small amount of interest on over $10,000, but remember that our imaginary billing cycle is only five days long. If the customer made no more purchases for the rest of the month and we assume a normal billing cycle of around 30 days, the interest actually charged would be around $175.00!

Now that we understand how interest is assessed, it's time to tackle residual finance charges. The example above assumes that the consumer is making no payments on the card during the billing cycle, but what if he or she pays off the balance in full mid-way through the cycle? Let's increase the number of days in the cycle to 30, and say that the customer pays off the total balance on day six. So our balance would look like:

D1 = $10,200

D2 = $10,500

D3 = $10,600

D4 = $10,600

D5 = $11,000

D6 = $0

D7 = $0

Etc.

…and our formula would be:

(10,200 + 10,500 + 10,600 +10,600 + 11,000 + 0 + 0 + 0 etc.) x (.20/365)

52,900 x .000548 = $28.98

Since the interest is charged daily, the customer is still responsible for those five days in the billing cycle that he or she carried the balance, even though it was paid in full on day six. No interest is charged from the day the balance was paid onward, but the customer is still going to get a bill for $28.98 for the first five days when he or she did have a balance. That is a residual interest charge.

There is no way to avoid residual interest except to pay your bill, in full, on the day that it is calculated. This is not possible through traditional mail (as it takes several days for the credit card bill to reach a consumer's home…several days you are being charged interest), but can be done online if a consumer is aware of his or her cycle dates, or sets up some sort of direct payment.

Fees and interest charges represent the credit card companies' largest single source of income. Some are inescapable, but the vast majority can be lessened or avoided entirely by simply understanding how and when they are assessed, and making sure that you do not run afoul of any credit card pitfalls.

Copyright Evan Dicken. Contact the author to obtain permission for republication.

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Guaranteed Ways to Obtain a Free Credit Report Once a Year

Nov 25, 2010 Asa Ghaffar

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Every U.S. citizen has a legal entitlement to a free credit report once a year from Experian, Equifax and TransUnion. Whether you decide to get them all at once or request one every 4-months, the choice is entirely yours. Just remember that each credit reference agency holds totally unique information.

Never work on the assumption that correcting the information held by Experian will resolve any issues with the data held by TransUnion or Equifax because it won't. After you've got your credit reports for free, carefully check what information is held about you.

Why we Need a Free Credit Report Once a Year from Experian, Equifax & TransUnion

Your free instant credit report enables you to identify any fraudulent attempts to obtain credit. If you don't recognize the source of a credit check, you're able to make further enquiries. It may be that your identification has got into the wrong hands and urgent action needs to be taken. More likely, the lender or issuer uses a different name or third party to credit check you.

A free credit history report also enables you to see any credit report errors. Many American citizens are surprised at how much inaccurate data's held about them. You're legally entitled to get these errors corrected personally or with the help of a credit repair attorney. For example, if you've filed for chapter 7 bankruptcy, you'll want to know why a credit agreement that was included in your bankruptcy agreement continues to show as active.

Before you apply for credit, you're able to correct any inaccuracies and maximize your chances of a successful mortgage, credit card or loan application. Lenders can't tell whether you have bad credit or bad data; the onus is firmly on you to remedy any mistakes. Always allow sufficient time for credit reference agencies to correct any issues as this won't happen overnight.

How to Obtain Your Totally Free Credit Report Online, by Post or by Phone

The Federal Trade Commission (FTC) has only authorized one company to provide your completely free credit report and that is AnnualCreditReport.com. be weary of any company who claims that they are also authorized by the FTC because they won't be. Depending upon your personal preference, you can order your free credit report once a year in one of three ways:

• Visit AnnualCreditReport.com and make your request online.
• Telephone (877) 322-8228.
• There's a form at the back of the annual credit report request brochure. Just complete and send it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

Obtaining Your Free Instant Credit Report & Credit Score Online

Most people are dismayed to discover that, although they're entitled a free credit report once a year, they cannot see their credit score for free. The Fair Credit Reporting Act makes no provision for providing you with a free credit score which can be a potential issue if you're planning to apply for credit in the near future.

However, once you've got your free credit history report, there's nothing to stop you from signing-up to a 7-day trial offer. You can then see your credit score and cancel the trial before it comes to an end. That way your credit card won't be billed and you've got the information you need.

Sources

"Your access to free credit reports." Federal Trade Commission (FTC).

Copyright Asa Ghaffar. Contact the author to obtain permission for republication.

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  Get Your Free Credit Report Once a Year - Image by hefty191

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  Apply for a Free Instant Credit Report - Image by marydawn_md

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  Credit Reports for Free Online - Image by dharma-putra

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New Credit Card Interest Rate Law Loophole Benefits Companies

Nov 24, 2010 Carmen Sofia Grant

Variable Rate Cards are Not Protected by new Law - Rotorhead

Credit card issuers will not be allowed to increase interest rates on credit cards without permission. If they want to increase the rate on a credit card rate, they have to give 45 days notice. At that time, if the cardholder chooses not to deny the increase, then the account will be closed. This new law was intended to provide extra protection for consumers, but credit card issuers are good at attempting to make back revenue.

Variable Rate Cards are not Protected by the new Credit Card Laws

One way that credit card companies are finding ways to keep revenue coming in is by changing fixed rate cards to variable rate cards, or by only offering variable rate cards. There is no protection under the new CARD act of 2009 for cards with variable rates. Variable rate cards are exempt from the new law, and card issuers have been quick to use this loophole to their advantage. Most cards are now variable rate cards, since card issuers know that they will be exempt from the new law. Pay attention when opening a new account and make sure that it is not pegged to a fluctuating rate, like the prime rate, which is the most common.

Advance Notice for Increasing Credit Card Rates

If a card issuer decides to increase the credit card rate, the cardholder has 45 days to decide whether or not to accept. If the cardholder says no, then the company will cancel the card and the person will have 5 years to pay off the balance. However, putting a time limit on the debt will increase the monthly minimum, sometimes by two to three times the original payment. This is because the cardholders take the total debt owed and divide it by 60 months (or 5 years). For some people it might make more sense to accept a rate hike and then power pay the balance at a later date when higher payments can be tackled better.

Increasing Rates Might not be Permanent

If a card holder cannot afford to have the card canceled, and has to accept the rate hike, they are not completely out of options. They can call back 6 months after the increase and ask them to lower it. Credit card companies will listen sometimes, especially if cardholder has been on time with payments and just happened to be late on one six months back, for example.

Always remember that there are options when dealing with credit, and they should be weighed wisely before making any decisions with credit cards.

TLE101

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No Credit History Credit Cards

Nov 19, 2010 Crissi Enger

No credit history credit cards are available for people that are just starting out to develop their credit or for people that are trying to reestablish their credit history. Some banks and credit card companies will still give a credit card to people that have never had any, the terms are different with each card and all terms, conditions and fees should be read carefully before choosing a card. However, these cards can be a great way to start to build or rebuild credit.

Green Dot Prepaid Mastercard

There is no credit check with this card, since it is a prepaid Mastercard. Activation is free when done online and ATM withdrawals can be free at the 15,000 participating ATM's. They also offer:

• Free online bill pay.
• Free direct deposit to the card.
• No fees on US purchases.
• There are never over draft or penalty fees.
• No minimum balance is required.
• No APR on purchases.

There is no monthly maintenance fee, as long as 30 purchases have been made in the month. Plus, they are offering $10 with direct deposit.

Vision Premier Visa Prepaid Card

This is another prepaid card, this time by Visa that also requires no credit checks and there is no interest on purchases. Purchases are unlimited, there is ?restrictions on the number of purchases made each month. This is for both pin purchases and signature purchases. They also offer:

• Customer service is always free.
• Free direct deposit.
• Free online bill pay.
• Text and email alerts available and are free as well.

Account Now Prepaid Mastercard

This is a regular Mastercard and a credit check is required. However, they guarantee all applicants are approved after the ID verification. There is no activation fee with this card.? The other features are:

• Receive a $25 cash bonus with direct deposit.
• No over draft fees.
• No minimum balance required.
• Free bill pay.
• Free direct deposit.
• The option of choosing a prepaid Mastercard and not requiring a credit check.

Wired Plastic Prepaid Visa

With Wired there is no credit check, bank account required or income verification.? The card is easy to load whenever necessary at their 100,000 retail locations available. They also offer:

• Free direct deposit.
• No over draft fees.
• Free bill pay services.
• Free mobile alerts.
• Free online access to the account.
• There is also a free rewards program. 1 point is received for every dollar spent.

Centennial Secured Credit Card

The Centennial card is a regular credit card that is secured by a deposit that is made. The initial deposit is $200. The deposit is held in a FDIC insured account and there is no credit history needed for the card.? All credit use will be reported monthly to the three major credit bureaus to build or rebuild a credit history. This is not a prepaid card, there is instead the one security deposit that is made.

Mango Prepaid Mastercard

T?his is a prepaid Mastercard, so there is no credit check, income verification or bank account required. Cash can be loaded when ever necessary at numerous locations and there is no activation fee either. The other features are:

• Free direct deposit.
• Unlimited free purchases.
• Free online account management.
• Free mobile phone account management.
• Send money with a mobile phone.
• There is no monthly service fee when $500 or more is loaded onto the card.

Ready Debit Platinum Prepaid Visa

This is a prepaid Visa so there is no credit check or income verification. No bank account is required also. They do also offer a free credit builder program and free score tracker credit score service as well. The other features are:

• Free customer service 24 hours a day, 7 days a week.
• No over draft fees.
• No minimum balance required.
• Free mobile banking.
• Free text alert service.
• Unlimited purchases, no fees.
• Free direct deposit.
• Free online bill pay.
• Checks received and free check writing too.

Copyright Crissi Enger. Contact the author to obtain permission for republication.

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How to Get Your Free TransUnion Credit Report Online

Nov 1, 2010 Asa Ghaffar

Order Your Free TransUnion Credit Report Online - Image by marydawn_md

The data held about us by credit reference agencies isn't always as accurate as we'd like it to be. Part of the process of improving our credit worthiness is requesting a free TransUnion credit report online. In fact, we must verify that the data contained in all 3 credit reports.

Each time we make an application for a loan, mortgage or credit card, a search is recorded with Experian, Equifax and TransUnion for a period of 24 months. Creditors are unable to distinguish between bad credit and bad data so the onus is on you to correct any problems.

Our Legal Entitlement to a Free Yearly Credit Report

Under the Fair Credit Reporting Act, each American citizen is entitled by law to a totally free credit report from TransUnion once each year. You're also entitled to the same information from the other two credit reference agencies, Experian and Equifax. This can be requested at the same time.

Who Offers a Free TransUnion Credit Report Online?

The Federal Trade Commission (FTC) stated that there's: "Only one website is authorized to fill orders for the free annual credit report you are entitled to under law — annualcreditreport.com. Other websites that claim to offer “free credit reports,” “free credit scores,” or “free credit monitoring” are not part of the legally mandated free annual credit report program."

How to Get Your Official Free Credit Report from TransUnion

• Go to AnnualCreditReport.com and request a free TransUnion credit report online.
• Telephone (877) 322-8228.
• Write to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

Why Do We Need All 3 Credit Reports from TransUnion, Equifax & TransUnion?

• The information held by each credit reference agency is unique so verifying that the information help by one agency isn't sufficient. If the data's inaccurate, we must get this corrected.
• We're concerned that we may have been the victim of a fraud. Unless we check for relevant credit searches and applications, we have no way of verifying this.
• We want a copy of our free TransUnion credit report because we intend to refinance or apply for new credit. It's important that any errors are corrected before making an application.

How Do We Get a Totally Free Credit Report & Credit Score?

Although the law entitles you to a free TransUnion credit report, it doesn't "yet" entitle you to see your credit score. If you need this information because you intend to apply for credit, there are two ways that you can easily get hold of this information.

You've either got to pay to see your credit score or take advantage of a free 7-day trial offer. If you do choose the latter option, be sure to cancel it before the trial reaches a conclusion. If you don't, a month's subscription will be taken from your registered credit card.

Articles on Using Your Completely Free Credit Report to Fix Credit Problems:

Sources

"Your access to free credit reports." Federal Trade Commission (FTC).

Copyright Asa Ghaffar. Contact the author to obtain permission for republication.

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  How to Get All 3 Credit Reports - Image by dharma-putra

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  Receive a Totally Free Credit Report - Image by realestateadvocate

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  Get Your Truly Free Credit Report - Image by pristine216

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  Ordering Your Official Free Credit Report - Image by nizsha16181

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Order Your Completely Free Yearly Credit Report Online

Nov 1, 2010 Asa Ghaffar

Order Your Free Yearly Credit Report - Image by Free Yearly Credit Report

If you're about to apply for a new credit card, mortgage or car loan, you're no doubt wondering what information credit reference agencies hold about you. Rather than paying a company a fee for this information, you can get your free yearly credit report online or sent to you via post.

The Fair and Accurate Credit Transactions Act gives each American citizen the right to all 3 credit reports from Experian, Equifax and TransUnion once every 12 months. You're also entitled to a completely free credit report in other circumstances, such as personal identity theft.

How to Get Your Free Yearly Credit Report Online

The only FTC authorized provider of truly free credit reports is AnnualCreditReport.com. You can either visit their website, call (877) 322-8228 or request it by post. Their address is Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281

Although you're entitled to a totally free credit report, you aren't "yet" entitled to see your credit score. This may change in the future, but there are currently only two ways to get this information. You can either pay for this information or you can take advantage of a 7-day trial offer and then cancel it.

Making the Most of Your Official Free Credit Report

While most of us prefer to request a copy of all 3 credit reports at the same time, others prefer to request one from each agency every 4 months. Although it's certainly not a perfect strategy, it does allow you to keep an eye on your financial affairs without costing you any money.

Be aware that the information that each credit reference agency holds is completely unique. Don't work on the false assumption that correcting the information with one agency will correct all three because it won't. If there are errors on your report, you'll need to correct them individually.

Using Your Official Free Credit Report to Correct Errors

You may have always believed that the information credit reference agencies hold is completely accurate, but this isn't the case. Before applying for credit, the onus is on you to correct any mistakes. You can either do this yourself or through a credit repair attorney.

Scrutinize your free yearly credit report online for information that is erroneous. You needn't worry about old addresses or obsolete employment data, but do look closely for credit applications that you've never made or debts that appear to have been incorrectly settled. You are entitled to correct any errors by notifying the credit reference agency that holds bad data. Always include a copy of any relevant supporting information.

Articles on Using Your Completely Free Credit Report to Fix Credit Problems:

Sources

"Your access to free credit reports." Federal Trade Commission (FTC).

Copyright Asa Ghaffar. Contact the author to obtain permission for republication.

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  Order Your Free Yearly Credit Report - Image by Free Yearly Credit Report

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  Completely Free Credit Report Online - Image by rojas897

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  All 3 Credit Reports for Free - Image by marydawn_md

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  Your Truly Free Credit Report - Image by dodik22

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