Loans & Credit Articles

Article / Updated 05-12-2022

If you talk with others or read articles or books about prepaying your mortgage, you’ll come across those who think that paying off your mortgage early is the world’s greatest money-saving device. You’ll also find that some people consider it the most colossal mistake a mortgage holder can make. The reality is often somewhere between these two extremes. Everyone has pros and cons to weigh when they decide whether prepaying a mortgage makes sense. In some cases, the pros stand head and shoulders over the cons. For other people, the drawbacks tower over the advantages. At the crux of the decision is the fact that you’re paying interest on the borrowed mortgage money, but if you use your savings to pay down the loan balance, you won’t then have that money working for you earning an investment return. More importantly, what happens if that rainy day comes along and you need those handy cash reserves? Interest savings: The benefit of paying off your mortgage early Mortgage prepayment advocates focus on how much interest you won’t be charged. On a $100,000, 30-year mortgage at 7.5 percent interest, if you pay just an extra $100 of principal per month, you shorten the loan’s term significantly. Prepayment cheerleaders argue that you’ll save approximately $56,000 over the life of the loan. It’s true that by making larger-than-required payments each month, you avoid paying some interest to the lender. In the preceding example, in fact, you’ll pay off your loan nearly ten years faster than required. But that’s only part of the story. Read on for more. Quantifying the missed opportunity to invest those extra payments When you mail an additional $100 monthly to your lender, you miss the opportunity to invest that money into something that could provide you with a return greater than the cost of the mortgage interest. Have you heard of the stock market, for example? Over the past two centuries, the U.S. stock market has produced an annual rate of return of about 9 percent. Thus, if instead of prepaying your mortgage, you put that $100 into some good stocks and earn 9 percent per year, you end up with more money over the long term than if you had prepaid your mortgage (assuming that your mortgage interest rate is below 9 percent). Conversely, if instead of paying down your mortgage more rapidly, you put your extra cash in your bank savings account, you earn little interest. Because you’re surely paying more interest on your mortgage, you lose money with this investment strategy, although you make bankers happy. If you’re contemplating paying down your mortgage more aggressively than required or investing your extra cash, consider what rate of return you can reasonably expect from investing your money and compare that expected return to the interest rate you’re paying on your mortgage. As a first step, this simple comparison can help you begin to understand whether you’re better off paying down your mortgage or investing the money elsewhere. Over the long term, growth investments, such as stocks, investment real estate, and investing in small business, have provided higher returns than the current cost of mortgage money. Taxes matter but less than you think In most cases, all of your mortgage interest is deductible on both your federal and state income tax returns. Thus, if you’re paying, say, a 6 percent annual interest rate on your mortgage, after deducting that interest cost on your federal and state income tax returns, perhaps the mortgage is really costing you only about 4 percent on an after-tax basis. For most people, approximately one-third of the total interest cost of a mortgage is offset by their reduced income tax from writing off the mortgage interest on their federal and state income tax returns. However, don’t think that you can simply compare this relatively low after-tax mortgage cost of, say, 4 percent to the expected return on most investments. The flaw with that logic is that the return on most investments, such as stocks, is ultimately taxable. So, to be fair, if you’re going to examine the after-tax cost of your mortgage, you should be comparing that with the after-tax return on your investments. Alternatively, you could simplify matters for yourself and get a ballpark answer just by comparing the pretax mortgage cost to your expected pretax investment return. (Technically speaking, this comparison isn’t as precise as the after-tax analysis because income tax considerations generally don’t exactly equally reduce the cost of the mortgage and the investment return.)

Cheat Sheet / Updated 04-18-2022

You've probably heard a lot about reverse mortgages, as they are a popular, safe, simple way to supplement seniors' retirement incomes. Before you get started, you need to understand the benefits and disadvantages of getting a reverse mortgage. If you decide a reverse mortgage may be the right answer for you, follow some planning tips to help make the loan process easier.

Cheat Sheet / Updated 04-15-2022

Going through the process of filing personal bankruptcy isn't fun, but it’s sometimes necessary and can be a huge relief. Filing for personal bankruptcy means you have to answer some tough questions about your finances, consider your situation in light of the new bankruptcy law, figure out which bills to continue paying, and probably deal with debt collectors.

Cheat Sheet / Updated 02-15-2022

If you own or want to own real estate, you need to understand mortgages. Unfortunately, for most of us, the mortgage field is jammed with jargon and fraught with fiscal pitfalls. For typical homeowners, the monthly mortgage payment is either their largest or, after income taxes, second-largest expense item. When you’re shopping for a mortgage, you could easily waste many hours and suffer financial losses by not getting the best loan possible. With the tips below, you can strive to become as knowledgeable as possible before you commit to a particular mortgage.

Article / Updated 10-21-2021

The federal Truth in Lending Act makes it easy to compare credit card offers, because it requires credit card companies to provide written information about the credit card terms. Do a comparison of credit cards fees, rates, APRs, and balance calculation methods before you accept even a preapproved credit card. Here are some of the terms of credit that creditors must provide: Annual percentage rate (APR): This is the cost of the credit expressed as an annual rate. Pay close attention to a card’s default APR — the rate you end up paying if you make a payment late (or pay some other creditor late), you exceed your credit limit, or your credit score drops below a certain amount. Your APR could triple depending on the terms of the credit offer! Balance calculation method: When you carry a balance on your credit card, the credit card company figures out how much interest to add to that balance by using one of several different methods. Some methods cost you more in interest than others. The least expensive balance calculation methods are adjusted balance and average daily balance excluding new purchases. The most expensive are two-cycle average daily balance including new purchases and two-cycle average daily balance excluding new purchases. Fees: Credit card fees can be really costly, so look for cards that have few and low fees. Examples of common fees include an annual or membership fee, a late fee, a bounced check fee, a fee for exceeding your credit card limit, and a balance transfer fee. Believe it or not, some cards charge you a fee every time you use them or because you don’t use them often enough! Grace period: This is the amount of time you have to pay the full amount of your card balance after the end of the last billing cycle before you’re charged interest on the balance. The longer the grace period, the better; a 25-day grace period is probably the best you’ll do. Some cards have no grace period; avoid them if you expect to carry a balance on your credit card. Periodic rate: This is the rate of interest you’re charged each day on your card’s outstanding balance. If you expect that you may carry a balance on your credit card, get the lowest rate you can. The rate may be fixed or variable, but even a fixed rate isn’t truly fixed because a creditor can raise it at any time after it gives you 15 days notice. Also, pay attention to the interest rates that apply to balance transfers, cash advances, and other transactions you may make with a credit card. These rates won’t be the same as the periodic rate.

Cheat Sheet / Updated 10-21-2021

Repairing your credit and keeping it in good standing is easier if you know what’s in your credit reports. Get a free copy of each of your credit reports every year and promptly correct any errors. Improving your credit also involves understanding how your credit score is calculated and how you can increase your score. If your credit is in trouble because you’re overextended or behind on payments, you have strategies at your disposal to help you get back on track.

Article / Updated 03-24-2021

The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 focuses on your protections from credit card industry practices that have been deemed to be either unfair or just plain tricky. Among the key protections are easier-to-understand terms, fewer retroactive interest rate increases on existing card balances, more time to pay your monthly bills, more notice of changes to your credit card terms, and the right to opt out of many changes in terms on your accounts. Here’s a list of the top protections that consumers are due: No more bait and switch: Card issuers can’t hike interest rates on existing balances except under certain conditions. Consequently, interest rates on new card charges can’t change in the first year, major terms of the agreement can’t change overnight, and you get 45 days’ advance notice of any big changes. No more universal default: You may have heard of people having their rates raised on one card when they have a problem with another one (known as universal default). This practice has been severely curtailed. Card issuers may use universal default only on future credit card balances that exist at the time of the default, and they must give you at least 45 days’ notice of the change. You now have time to change cards, get other financing, or pay off the balance. Limits on interest rate increases: Card issuers may raise your interest rate on existing balances only if: The rate was part of a promotional period that ended. The index used to set your variable interest rate rises. You’re at the end of a hardship or special payment agreement. You have late payments of 60 days or more. Credit-granting restrictions for young adults: Creditors can’t give credit cards to young adults with no income. People under 21 must show that they have enough income to repay the card debt or have a cosigner who does. Additionally, credit card companies must stay at least 1,000 feet away from colleges if they offer incentives to entice students to apply for credit cards. No more signing up for credit cards to get free pizza and T-shirts your first day on campus! Be very careful about cosigning for anyone, including your kids. If one of your kids misses a payment for any reason, that missed payment not only damages his or her credit, but also hurts your credit as well (not to mention your relationship). Instead of cosigning for your kids, add them as authorized users on your account. You don’t even have to hand over a credit card or allow them to spend money. This way, you’re helping them build positive credit while remaining in control of their credit (and yours!). Alternatively, get your kids prepaid cards (only one per kid) that you can add to as they need funds. If you want to help them build credit and savings, help them set up secured credit card accounts with your bank or credit union — that can help them save money and build credit at the same time. Just be sure they understand that abusing a secured credit card can wipe out their savings and their credit history just as quickly. Graceful grace periods: Card issuers must give you “a reasonable amount of time” (at least 21 days after the bill is mailed) to pay monthly bills. More time to get your payment in should result in fewer late fees. No tricky due dates or times: Card issuers can no longer set early-morning deadlines (before the mail is delivered) for payments. Cutoff times must be 5 p.m. or later on the date due, and due dates can’t be on a weekend, a holiday, or a day when the card issuer is closed for business. Payments applied fairly: If you owe money at different rates on the same card (many cards have different rates for regular purchases versus cash advances and balance transfers), payments over the minimum due must go to the balance with the highest interest rate first. Consequently, your payment will reduce more of your balance faster. Easy on the over-limit fees: Card issuers can’t charge you over-limit fees without your permission. If you opt out or say no, transactions exceeding your credit limit are rejected. Opting out of over-limit fees is a good idea. If you decide to opt in, though, no fees can be larger than the amount of the overage. For example, going $10 over your limit can’t incur a fee of $39; the limit is $10. Better just to say no to those fees and face the potential embarrassment of having your card declined if you go over the limit. No double-dealing double-cycle billing: Interest on outstanding balances must end in the billing month in which you pay off the balance. For example, your statement runs from June 1 to June 30, but the payment is due on July 20. The interest from June 30 to the payment due date of July 20 can no longer be charged if you pay off the balance in full, even though the card issuer didn’t get your payment until July 20. Disclosing how making minimum payments can keep you mired in debt: Card issuers must indicate how long paying off the entire balance will take if you make only the minimum monthly payment. They must also indicate how much you need to pay each month to pay off a balance in 36 months, including interest. Seeing the high cost of minimum payments enables you to make better-informed decisions about how you pay for the use of credit. Restricted late fees: Late fees are limited to $25 unless you’re late more than once in a six-month period. Your late payment is not reported to the credit bureau until your account is a full 30 days past due. This restriction results in fewer and lower fees charged to your account and gives you time to resolve issues before they hit your credit report. Right to opt out of changes: Card issuers must give you advance notice of changes to the terms of use for your credit cards. You now have the right to reject many significant changes in terms to your credit card accounts. If you opt out of some changes, you may be required to close your account and pay off any balance under the old terms and conditions. Although the CARD Act provides a lot of consumer protections, it’s not all-encompassing. It doesn’t cover business and corporate accounts or interest rates on future purchases. Cards with variable or floating interest rates (which includes most cards) are subject to interest rate increases as the prime rate goes up. And a card issuer can still close your account or lower your limit without warning. If you believe that a card issuer has violated any of the provisions of the CARD Act, contact customer service and ask for an explanation or a rebate. If you disagree with the answer, you can contact the Federal Trade Commission, your state’s attorney general or consumer protection department, or the Consumer Financial Protection Bureau’s Consumer Response Center.

Article / Updated 03-24-2021

It has been said that a person can’t be too good-looking or have too many friends. This has never been truer than in the world of credit — at least the part about friends. The world of credit can be complex, unforgiving, and very expensive! The credit-granting, credit-reporting, and credit-scoring industries have become increasingly complex and powerful to the point where they are used for everything from issuing credit cards to getting jobs. Consumer advocates recognized that we need effective ways to keep errors, both yours and theirs, from seriously complicating your life. The result is a series of laws, protections, and agencies whose purpose is to keep the credit game honest and give consumers a fair opportunity to access the American financial system. These protections may not always work as you’d like, but if they didn’t exist, you’d be at the mercy of big business, and that’s no place you want to be. In this article, we cover the top ten legal protection resources you have to guide you in dealing with the world of consumer credit. The Fair Debt Collection Practices Act Being protected is especially important when a debt collector comes a-calling. The Fair Debt Collection Practices Act (FDCPA) limits debt collectors’ activities and spells out your rights. Highlights include: Prohibiting collectors from abusing you, being unfair, and trying to trick you into paying. Applying the law to most personal debts, including credit cards, auto loans, medical debts, and debts secured by your home. Defining when and where a debt can be collected — for example, between 8 a.m. and 9 p.m., or not at work. Requiring a validation notice that specifies how much you owe and what you should do if the debt isn’t yours or has been paid already. Allowing you to just say no. If you don’t want to hear from a collector, you can write to the collection agency and demand that it not contact you again. Doing so doesn’t satisfy a legitimate debt, but it ends collector contact. It may, however, begin legal contact to sue you for the debt. Giving you the right to sue for breach of the rules. You have a year to bring action for violations. The Bankruptcy Abuse Prevention and Consumer Protection Act The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) revised the process of getting a fresh start when you are overwhelmed by debt. The major provisions in this law include Mandatory credit counseling before filing Stricter eligibility for Chapter 7 filing to encourage Chapter 13 Fewer debts discharged and fewer state exemptions Tax returns and proof of income required for means test Mandatory five-year Chapter 13 plan if over your state’s median income Mandatory financial management education after filing Time between Chapter 7 filings increased to eight years Bankruptcy was designed to give you the ultimate protection of the courts from your creditors. The process can be as effective as it is damaging to your credit, and you should use it with great care, and only if you’ve already considered less-damaging courses of action. In some states, you can file your own bankruptcy petition (called pro se); in others, you need an attorney. Regardless, we recommend that you use an attorney who does this for a living. A poorly thought out or executed bankruptcy can leave you with unresolved debts and deprive you of the opportunity to use this protection again for several years. A good bankruptcy attorney will spend a significant amount of time with you to compare bankruptcy with other possible ways of handling financial problems. Your lawyer Lawyers often get a bad rap, but if you want an effective weapon in providing consumer protection, you need look no further. Whether your issue is a debt collector, a retailer who won’t step up to resolve a problem, or a contract with unsuspected gotcha clauses, a knowledgeable and persistent attorney is hard to beat. Yes, we know, lawyers are expensive, but there are times when only the best will do. Using a second-rate attorney is like showing up at a gunfight with the second-fastest gunslinger. Better not to show up at all! Here are some points to consider when looking for a consumer attorney: Nothing is better than a referral from a satisfied friend, colleague, or relative. Ask someone in whom you have confidence. You may get a great referral or a solution you hadn’t thought of. Look for someone who does a lot of what you need. Like picking a heart surgeon, you want lots of experience here. If you already have a lawyer, ask for a specialist recommendation. Check your local American Bar Association affiliate or attorney association. They often maintain lawyer referral services. Look for someone your gut says you can work with. Is the lawyer concerned about you and your problem? Always interview more than one attorney. This situation is important. Don’t be deterred by hourly rates. A good attorney who charges more can be a bargain if you get resolution quickly and permanently. Get all agreements in writing to avoid miscommunication. Be sure to read the agreement before you sign it, and ask about anything that’s not clear to you. Coronavirus Aid, Relief, and Economic Security (CARES) Act In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help minimize the impact of the COVID-19 pandemic. The CARES Act provides a number of important financial safeguards intended to last until the crisis is over or for a set period of time afterward. Given Congress’s penchant for keeping laws on the books long after originally intended, and because no one at this time can tell when or if the crisis will be resolved, here are some relevant highlights of the CARES Act: Protections for renters: If you rent in federally subsidized housing or are renting from an owner who has a federally or government-sponsored enterprise (GSE)–backed mortgage (for example, Federal Housing Administration [FHA], Veterans Affairs [VA], U.S. Department of Agriculture [USDA], Fannie Mae, or Freddie Mac), the CARES Act may provide for a suspension or moratorium on evictions. Protections for homeowners: If you have a federally or GSE-backed mortgage and had a hardship caused by COVID-19, you have the right to request and obtain a forbearance extension for up to another 180 days (for a total of up to 360 days), without additional fees, penalties, or additional interest (beyond scheduled amounts). The law prohibits GSE lenders and servicers from beginning or finalizing a judicial or nonjudicial foreclosure or sale against you. Protections for those with student loans: You get automatic suspension of principal and interest payments on federally held student loans through September 30, 2020. And what’s more, suspended payments count toward any student loan forgiveness program, as long as all other requirements of the loan forgiveness program are met. Lenders must report any current loans on which they offer forbearance to the credit bureaus as being current as long as the terms of the agreement are observed. Although not part of the law, the three main credit bureaus are allowing free weekly credit reports at least through April 2021. Statute of limitations laws This protection is worthy of Perry Mason: “I object, Your Honor, for this charge is too old.” Well, maybe Perry didn’t say exactly that, but he’d be happy to see that each state has a law called a statute of limitations (SOL) that sets a limit on how long a debt collector can sue you in court, depending on the type of loan you allegedly owe. This is only fair, because after several years, who keeps all those receipts and slips of paper? Either hurry up and sue or forget about it! This protection isn’t automatic; you have to ask for it. What do you need to know and do? Read on. If a debt is past the SOL, the creditor can’t successfully sue you in court to collect it. But you must show up and prove that the debt is too old. Credit reports show a delinquency for seven years. This has nothing to do with the time a debt is collectible. The period used to figure how old your debt is starts when you miss a payment and never make another one. A payment may restart the SOL clock, depending on the state in which you live. Your state attorney general Every state has an attorney general. All attorneys general have at least one thing in common: One of their primary responsibilities is to enforce their states’ consumer protection laws. Every state has a consumer protection statute prohibiting deceptive acts and practices. These statutes include laws that address specific industries or practices. For example, many FACT Act protections, especially for credit reporting, have stricter state regulations, giving you more rights and a local resource for help. State attorneys general love to go after abuses and illegalities in the marketplace, including deceptive trade practices, telemarketing and internet fraud, fake charities, ID theft, and false or misleading advertising. It’s good press for them and good protection for you. Generally, these public officials have a low tolerance for financial shenanigans. So, if you think you’re being abused, taken advantage of, or scammed in a credit or personal finance transaction, this is the office to call. I’ve had good luck working with the consumer protection sections of several state attorneys general. If you decide to ask them for help, we suggest that you be organized and to the point, and have the pertinent information at hand. Attorneys general are no-nonsense law enforcement officials who appreciate you calling for their help but not wasting their time. The Consumer Financial Protection Bureau Reforming our financial system isn’t easy, and the Feds know it, so they formed a new agency — the Consumer Financial Protection Bureau, or CFPB — to carry on the fight of protecting you long after the ink dried on the Dodd-Frank Wall Street Reform and Consumer Protection Act (the legislation that created the CFPB). Not since J. Edgar Hoover headed up the FBI has a federal agency had such far-reaching powers. The CFPB sets rules for payday lenders, credit card issuers, and all the players in between. Here are the major protections this agency delivers: Need information? Use the question-and-answer service for inquiries about mortgages, student loans, debt collections, credit reports, and more. Have a complaint? Let ‘em have it. Bank accounts, credit cards, credit reporting, debt collections, money transfers, mortgages, student loans, and consumer loans are among the topics you can get help with. You complain, and the CFPB forwards your beef to the company and works to get an answer. It reviews the response and shares it with other agencies to identify patterns of abuse and write better regulations. It also sends you e-mail updates and has a secure consumer portal that you can use to track your complaint and give feedback about company responses to help the CFPB prioritize complaints. Just like the Dragnet guys: dum-ta-dum dum! It requires anyone who issues credit or prepaid cards to give you better, more easily understandable terms-and-cost disclosures. If you have to sign it, you should be able to understand it. The CPFB assures that paperwork is understandable. It helps set rules on transaction fees for interchange activity, like on your Visa or MasterCard. It closely regulates consumer credit counseling, debt settlement, and debt collectors to keep you from being victimized. The Credit Card Accountability, Responsibility, and Disclosure Act Fed up with tricky terms, excessive penalties, fees, and unfair banking practices, Congress enacted the Credit Card Accountability, Responsibility, and Disclosure Act (CARD Act) to give you a fair playing field in the area of credit cards. Here are your major protections: Credit card companies can’t raise card interest rates except under specific circumstances, such as at the end of a promotional rate, or when a variable interest rate index to which your card is tied rises, or if you’re 60 days late on a payment. Also, double cycle interest billing, which used your average daily balance for the current and previous billing cycles to charge you more, is no longer allowed. If your rate or terms change, you get 45 days’ notice to plan what to do. You can opt out of changes you don’t like. Doing so may cause your account to be closed, but you can pay off the debt under the old terms. Card companies can’t issue cards to people under 21 who have no income. This sounds like a no-brainer, but for years creditors had been giving students credit despite their having no income to repay their charges. Creditors must give you at least 21 days after a bill is mailed to make your payment. The due date can’t be before the mail is delivered or on a weekend, a holiday, or a day when the creditor is closed for business. If you’re late, fees are limited to a maximum of $25. All payment amounts above the minimum payment due must be applied to the balance with the highest interest rate, not the lowest. If you exceed your credit limit, the card company must ask you whether you want that transaction to be processed and incur an over-limit fee. Saying “no thank you” results in the purchase being denied but also saves you the over-limit fee. Even if you say yes, the fee can’t exceed the amount by which you exceed the credit limit. So if you exceed your limit by $10, the fee can’t be more than $10. The Fair and Accurate Credit Transactions Act Fairness is something you can hope for in your dealings with the credit bureaus and those other consumer-reporting bureaus that are increasingly in the news. But before the protections afforded in the Fair and Accurate Credit Transactions Act (FACT Act or FACTA) became effective, fairness was strictly in the eye of the beholder. And the beholder wasn’t you! Congress acted to end a number of perceived and real abuses. Congress understood that the nation’s banking system was becoming increasingly dependent on credit reporting, that inaccurate reports resulted in unfair and inefficient banking, and that you have a right to privacy. The result is that you now have more control over what’s said about you in credit bureau files and who can access your information. You also have the right to dispute errors or out-of-date information and to get a free copy of your credit report from each bureau every year. Not bad for the crowd from Washington, D.C.! Here are your main protections: You must be told about any negative action taken as a result of information contained in your credit report, and you must be given free access to the same information. If the interest rate on your favorite credit card goes up, for example, you get to see a copy of the report that contains the data that led to that increase. You can find out what information is in your personal file. No more secrets! It’s your information and your file, so you can look at it. You can get a free copy of your credit report at least every 12 months if you ask for one. You can also get a free report whenever you’re the object of identity theft or fraud, you’re on public assistance, or you’re unemployed but expect to apply for employment within 60 days. You have the right to know your credit score. This score used to be as big a secret as what was in your bureau files. Score watching has become a favorite pastime for many and a profitable business for others. The data in your file must be accurate, verifiable, and current. If data is incorrect or too old, you need only to ask, and it will be verified or removed pronto. Only those who have a legitimate business purpose can see your file, and you can stop everyone from accessing your file without your express permission if you like. Usually only creditors, insurers, employers, landlords, and others with whom you do business get to see what’s in your file. You can slam the door on everyone with a credit freeze. The Federal Trade Commission The Federal Trade Commission (FTC) is the alter ego of the Bureau of Consumer Protection (BCP). Although it doesn’t deal with individual consumer complaints, it does protect consumers by accumulating and analyzing complaints and then taking industry-wide action to address issues that you bring to it. Some examples of BCP protections are your ability to get a free annual credit report, the National Do Not Call Registry to block unwanted telemarketing calls, and appliance disclosure stickers that show the energy costs of home appliances, to name just a few. The BCP looks out for unfair, deceptive, or fraudulent practices in the marketplace. It investigates and sues companies and people who violate the law. It also develops rules to protect you and requires businesses to give you better disclosure of your costs, rights, and dispute-resolution options. It also collects complaints about consumer fraud and identity theft and makes them available to law enforcement agencies across the country. Of the bureau’s seven divisions, here are the five that you may find useful: Advertising practices: Enforces truth-in-advertising laws. If an offer seems too good to be true and it is, complain to the FTC. Financial practices: Protects you from deceptive and unfair practices in the financial services industry, including predatory or discriminatory lending practices, deceptive or unfair loan servicing and debt collection, and fraudulent credit counseling and debt settlement companies. Marketing practices: Responds to internet, telecommunications, and direct-mail fraud; spam; fraudulent work-at-home schemes; and violations of the Do Not Call provisions of the Telemarketing Sales Rule. Privacy and identity protection: Protects your financial privacy, investigates data breaches, helps consumers whose identities have been stolen, and implements laws and regulations for the credit reporting industry, including the FACT Act. Enforcement: Sues to address issues on these practices. Your complaint, comment, or inquiry may help identify a pattern of violations requiring law enforcement action, but the FTC doesn’t resolve individual consumer disputes.

Article / Updated 03-24-2021

For most people, a house is more than just a building you live in. It’s a place you worked hard to earn, plan a life, grow a family, and make memories. It’s a home. Sometimes those dreams don’t come true, and that mortgage can become unsustainable. But misinformation, stress, and denial can make it hard to accept the writing on the wall when you’re in trouble with your mortgage. Learn what you can do before you damage your credit irreparably. Lenders may take a soft approach to early mortgage delinquencies, hoping you can get back on track. Unfortunately, when you can’t get back on track, they can take a hard line on foreclosures. If you owe a past-due balance on a credit card, you’ll get phone calls and letters that feel like harassment. Mortgage holders aren’t nearly as aggressive when you’re late on your payments. After all, they have security for their loan: your home. To them, that dwelling you live in is collateral that can be sold to recoup their losses. This article outlines ten things you need to know and do after you realize you aren’t going to be able to pay back the mortgage but before you leave or are asked to leave your home. Know when you’re in trouble You aren’t in trouble if you owe more than the value of your home. You aren’t in trouble if your roof leaks and you can’t afford to fix it (although that may be an early warning sign). You may be in trouble if you can’t pay your real estate taxes, but chances are, your unpaid taxes won’t result in the bank calling. But you are definitely in trouble if you are late on your mortgage payments and have a feeling you’re on the edge of a cliff and at any moment could fall off and into the foreclosure abyss. If you’re late on a single payment, you can probably just catch up. There may be a late fee, a hike in interest rate, or a penalty. At that point, it’s financially advantageous for your lender to say, “Thank you, but this fee is a reminder to not be late again.” On the other hand, if you’ve fallen several months behind, your mortgage lender might say, “No thank you!” Why would they do that? It’s complicated, but basically, here’s how it works: Because most mortgages are packaged into securities and sold in bulk to investors, the default terms for all the mortgages in the “package” must be spelled out in great detail and generally be the same. The result is a rigid set of rules that were made up in advance and have very little flexibility when applied. It’s not that your lender is an unfeeling automaton. As people, they do care. But legal agreements and contracts spell out what they must do. If you’re more than 90 days late and you try to make a payment or even two, there is an excellent chance that your money will be refused and returned to you. You may need to make up all your payments at once to get any payment applied to your mortgage. A day late is indeed a dollar short when it comes to home mortgages. To further complicate matters as only bankers and lawyers can, the 90-day payment cliff does not include your grace period (typically 15 days). If you’re late on your mortgage, it’s vital that you open and answer your mail. The notices you receive generally offer good information about your options. The sooner you seek help, the more options you’ll have to save your home. Know how your state’s laws treat foreclosures Every state has its own foreclosure laws. It is important to know how your state’s laws work so that you don’t inadvertently cross a line or miss an important date. You can find summaries of the laws for all states at www.foreclosurelaw.org. The following sections outline a few critical differences. Nonrecourse or recourse If your lender is foreclosing on your mortgage, whether you live in a “recourse” state or a “nonrecourse” state makes a big difference. In general, if you live in a nonrecourse state, you can’t be held liable for any deficiency between the amount you owe and the amount your home sells for in the foreclosure. If you live in a recourse state, the lender may get a deficiency judgment against you in court. For example, if you owe $200,000 on your mortgage but your home nets only $150,000 at the foreclosure sale, the deficiency is $50,000. You would then be responsible for paying that “deficiency” of $50,000. But knowing which states are nonrecourse states isn’t enough. Some states define certain loans as nonrecourse if, for example, they were used only to purchase a home; but, if part of the proceeds of the loan were used for some other purpose, like paying off credit card debt, they define it as recourse. Other states limit the amount of the deficiency to the fair value of the property versus the sale price. Still other states have a one-action limit. For example, New York makes lenders choose between the acts of foreclosing on the property and suing to collect the debt. Consult a housing counselor certified by the U.S. Department of Housing and Urban Development (HUD) or an attorney to get definitive information about the rules for your state. State nonrecourse rules don’t apply to the IRS. If you lived in your home for less than two years, you may not qualify for the $250,000 individual home sale exclusion, so you may have a capital gain or phantom income from a foreclosure. See your tax professional for advice. Judicial or nonjudicial It is important to know whether your state handles foreclosures on a judicial or nonjudicial basis. If you live in a nonjudicial foreclosure state, your lender does not have to go to court in order to foreclose on your home. This means that the foreclosure can proceed more quickly. In judicial states, foreclosures go through a court. These are called judicial foreclosures and may take longer to finalize. The nonjudicial states include Alabama, Alaska, Arizona, Arkansas, California, Colorado, District of Columbia (sometimes), Georgia, Idaho, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico (sometimes), North Carolina, Oklahoma (unless the homeowner requests a judicial foreclosure), Oregon, Rhode Island, South Dakota (unless the homeowner requests a judicial foreclosure), Tennessee, Texas, Utah, Virginia, Washington, West Virginia, and Wyoming. Time is your enemy in a nonjudicial state. Lenders are required to give very little notice of foreclosure sales, and once the foreclosure process begins, you may have no further options. Decide whether to stay or go This decision used to be a no-brainer. It was a matter of pride. People would do everything they could to keep their house. The stigma of losing the roof over your head was a big one. Today, though, the decision is often less about emotion and more about the math. Faced with seemingly unrecoverable deficits, some homeowners crunch the numbers and decide to save time, money, and stress by letting the foreclosure process run its course. Some move out, and others stay until the home sells to a new owner or the bank forces them to leave. The following sections describe your options. Walking away Strategic default is a new term in the language of mortgages. When the housing bubble burst in 2008, some properties went so far underwater (more is owed than the home is worth) that it seemed that it would take years or even decades for the home to regain the value of its mortgage — or it never would. Some borrowers choose to stop making payments, even if they can afford to make them, because they see their house as just another investment, and a bad one at that. Walking away is known as a strategic default. Potential drawbacks to strategic default include deficiency judgments, significant credit score damage, problems buying or renting in the future, the personal impact of a major life failure, and to a much lesser degree these days, stigma in the eyes of others. Working with the lender to exit A more lender-friendly version of a strategic default is the deed-in-lieu of foreclosure option. Rather than go through a long and expensive foreclosure process in order to obtain title, the lender agrees to accept the deed to the property. This option may also incur a deficiency judgment for the difference between the fair market value of the property and the total debt owed. You’ll still see damage to your credit scores and possibly a “deed-in-lieu” notation on your credit reports. Another option in this category is a short sale, which involves selling your home for less than what you owe. If you choose this option, you may be subject to a deficiency judgment, depending on the terms you work out with your lender and the laws in your state. A short sale will have an equally serious effect on your credit scores, but don’t look for the term short sale on your credit report. It’s an unofficial phrase that was created to more gently describe settling your loan, and your lender will report the mortgage as “settled.” In March 2013, Fannie Mae and Freddie Mac began letting some borrowers who are current on their payments give up their underwater properties and cancel the debt under their Mortgage Release and Standard Deed-in-Lieu of Foreclosure programs. If this option is of interest to you and you have a Freddie Mac mortgage, the website has more information. If you have a Fannie Mae mortgage, go to its website for more info. Staying the course If you decide to do all you can to stay in your home, several courses of action are open to you. The major ones include the following: FHA Short Refinance: If you owe more than your home is worth and you want to refinance, the lender can reduce the amount you owe on your first mortgage to no more than 97.75 percent of your home’s current market value. Loan modification/refinancing: The two main types are the Home Affordable Modification Program (HAMP) for Freddie Mac and Fannie Mae mortgages and conventional refinancing for others. A conventional mortgage servicer or lender may modify your loan to make it more affordable, but each one has its own programs and guidelines. Speak to your servicer about HAMP. If your loan is owned or guaranteed by Freddie or Fannie and you are ineligible for conventional refinancing, HAMP can change the type of your loan from adjustable to fixed, to a longer fixed term, or to a lower interest rate and can add past-due payments to the principal balance to be repaid over the full mortgage term. HUD Foreclosure Avoidance Counseling: HUD offers free counseling to anyone who may be faced with foreclosure. They may be able to help you find alternatives to losing your home, or help with special loan programs to modify or refinance your mortgage or reduce your monthly payments to help you keep your house. Find a HUD counselor near you. Assistance because of a natural or declared disaster: Hurricanes, fires, earthquakes, tornadoes, volcanoes, and global pandemics can put lots of people in situations beyond their control. During times of disaster, federal and state governments, lenders, and credit reporting agencies may offer special relief programs. If you’ve been affected by a disaster, check with your lender about payment accommodations, such as forbearance or deferment, to help you maintain your mortgage payments through a period that is beyond your control. Tighten your spending to stay in your home Whether your financial life has a ding or two or is upside-down, tightening your budget can help you free up sorely needed cash and get back in control of your situation. If you don’t have a budget, now is the perfect time to make one. Making a budget is basic but effective. Begin by listing all your expenses and then list your income. Look carefully at both sides of the equation, make some cuts to expenses, and look for ways to add to your take-home pay (like reducing your tax withholding) or increase your income with a part time job. For example, if the bank forecloses, you’ll lose your cable TV anyway. Cutting cable now may give you the extra cash that helps keep you in your home. Technically it’s not a spending cut, but you can also try to sell some stuff to raise cash for a mortgage payment. We’ve all seen the “Cash for gold!” signs. Selling old and unused gold or jewelry is something you may want to consider. Having a yard or garage sale, downsizing to one car, and selling your violin should also be on your list. You get the idea. Lightening your load of stuff may buy you the time you need to catch up. Prioritize your spending to build cash No matter what you choose to do in the event of a mortgage crisis, you’re going to need some cash. It may be to pay an arrearage. It may be to come up with first and last month’s rent and a damage deposit on a new apartment. Either way, you need to tighten your budget (or create one; see the preceding section). Yes, this step is basic, but as with everything in life, you have to start at the beginning. As described in the preceding section, list all your expenses and then list your income. Take a look at both sides of the equation and determine where you can make changes — by cutting expenses and/or increasing income. Car repossessions can happen within weeks — not months — of missing a payment. So, if you need your car to get to work, keeping up on your car payment is critically important. If you can’t make your mortgage payment, it’s important to save as much of the money you’re not sending to your lender as possible. If your payment is $1,000 and you can only scrape together $800, don’t spend it on something else. Put the money aside to help ease your transition into a new place. Want some help with creating a spending plan? Try a nonprofit consumer credit counseling agency member of the National Foundation for Credit Counseling. Organizations like Operation Hope also offer money management programs. There may be a Hope Inside center near you. Lessen the damage to your credit In a nutshell, if you stiff your mortgage lender with a loss in the form of a short sale or foreclosure, your credit will take a much bigger hit than if you come to an agreement to repay or forgive any deficiency. For a person with decent credit and a FICO score in the 720 range, the difference in credit score deduction between a short sale with a deficiency and one without can be more than 50 points. Know who to call You know that you have the right to remain silent, and remaining silent can be wise in some situations, but not when you’re facing a mortgage crisis. If you’re behind on your payments, your lender will communicate with you by mail. The worst thing you can do is to remain silent, which could leave the bank no other option than to take legal action. The best thing you can do is to open your mail and speak to your mortgage servicer at once. I also strongly recommend that you contact an independent HUD-approved mortgage counselor or your state housing agency. Avoid foreclosure-prevention companies like the plague they are. The best help is easy to find and available for free. Beware of scams It’s easy to forget a lifetime of wisdom when the pressure is on and you are desperate for a solution. Knowing that you’re vulnerable during a mortgage crisis, scammers will try to charge you money or even trick you into signing your deed over to them. Keep in mind that not everyone out there wants to help you; many just want to help themselves. Here are some tips to avoid being scammed: Never pay a fee in advance. The best help is free. Never believe someone who guarantees that they can stop your foreclosure. Be wary of anyone who contacts you and offers to help. Always get a second opinion from a person or an organization you trust. Never hand your mortgage money over to anyone other than your mortgage servicer. Beef up your credit As soon as you default on your mortgage, your credit scores will take a nosedive. You likely won’t be able to qualify for new accounts for quite a long time. Now is the time to take steps to improve your credit as much as possible so you can be in a position to move forward. Pay down as much debt as you can, especially on your credit cards. If you’re not making the mortgage payments, put the money toward your credit card balances. Lower credit card balances will help you bump up your scores and reduce your debt burden after the foreclosure proceedings have completed. Try not to take on any more debt. Any purchases you make should be essentials. It’s why having a budget it so important. Digging yourself deeper into debt when you can’t pay what you already owe will only make things worse. Take advantage of other new tools that can help bolster your credit scores, as well. Having things like your on-time cellphone, utility and video streaming payments added can help bolster your credit scores. Services like Experian Boost can be worth looking into. Just be sure you understand what you’re signing up for. Although these kinds of services are free from a cash point of view, you’ll likely get marketing offers to tempt you to open your wallet. Be prepared to say no thank you. You may sign up for alternative scoring systems like UltraFICO, that incorporate information not included in credit reports. Lenders may consider that information in addition to the traditional scores to approve your application. If you lose your house, you may find yourself renting. Studies have shown that doing so almost always helps build your credit. Talk to your landlord about having your positive rent payments reported or sign up with a rent payment service yourself. Here are a few options: ClearNow eRentPayment PayYourRent Rent Track You should know that there may be a nominal fee for these services to report your rent payments, so compare their offers to find the one that’s right for your situation. Consult an attorney You have rights and you have legal options. Only an attorney can give you sound legal advice, so before your mortgage crisis gets too far along, spend the money to get a competent assessment of where you stand and what the law can do to help. For example, a bankruptcy filing can stop a foreclosure in its tracks — probably not forever, but maybe long enough. A Chapter 7 or 13 bankruptcy may be a way to reduce other debt or the amount of your mortgage that exceeds the value of your home. It may be enough to get you back on track with your mortgage payments. Also, not all mortgage documents are properly drawn and executed. Have a lawyer review your files to see if they are unenforceable or flawed in any way. Bankruptcy is a last resort. It’s the most serious financial decision you can make related to your debts. It’s there for a reason, but that reason is that there is no other financial option. A good lawyer who does a lot of foreclosure-prevention work can sometimes work minor miracles, maybe even delaying foreclosure for years, which can help you begin to build your savings account to pay for your next move, or maybe even keep your house.

Article / Updated 03-24-2021

Every time you use or abuse your credit, it has an effect on your credit score. The impact varies with the type of action. Positive actions, like paying bills on time, raise your score and lower your risk in the eyes of a lender, insurer, or landlord. Negative actions do the opposite and, depending on what the damaging action was, could be a big deal or a minor and temporary inconvenience. What factors impact your credit score? Payment history, credit utilization ratio, age of credit history, your credit mix, and new credit inquiries. For example, items in the “small drop” category in the following figure are minimal and can be offset quickly with other positive actions or even the passage of time. Think of them as small meteors that harmlessly burn up in the Earth’s atmosphere. The major and maximum impact items are more like dinosaur-killer meteors! This figure helps illustrate the recovery time for five different impacts to your credit score. Turn small purchases into big credit Because a lot of your credit score is based on using credit and making payments on time, I recommend using small purchases to get back into good standing quickly. Why does making small purchases work so well? Because each item costs less, so more purchases are reported to the credit bureaus faster. My rule is that if it costs more than $10, charge it (and pay it off each month). Major bank cards certainly report your activity to the credit bureaus. Some store cards may report to only one bureau, or they may not report at all. To find out whether your credit card purchases are being reported and scored, call your card’s customer service number and ask. If your score is less than stellar, don’t despair. Practicing good credit habits will raise your score over time. Scoring models look at how much of your limit you use. The more you use above a certain percentage, the higher the risk they believe you to be. To maximize your credit score, spread purchases over more than one card to keep your balance on each card as small a percentage of your maximum limit as possible There is no magic number, but staying under 20 percent to 30 percent of your maximum limit or less is a good goal. Say you have two cards, one with a $10,000 limit and one with a $20,000 limit. Simply charge twice as much on the higher-limit card to maximize your score. When your balance exceeds 20 percent of your limit, you begin to lose points. So, even if you’re making lots of small purchases, do your best to either pay off the balance each month or keep it under 20 percent utilization. This is one of the fastest ways to see improvement to your credit score. Pick up some extra points on your credit score by following a simple plan: Always pay on time. Your payment history makes up the largest chunk of your credit score. Reduce your debt load. Only use credit to the extent that you can pay it off every month or keep your total balance below 20 percent of your credit limit. Check your credit report for errors. You can get free credit reports from the credit bureaus by requesting it online or calling 877-322-8228. Send a dispute letter to the relevant credit bureau if you find mistakes. Keep your old accounts. Long credit history indicates stability. Be patient. It may feel like credit mistakes will haunt you forever, but your payment history from the past two years is more important than your payment history prior to that. Are you less concerned about your score than about paying down your balances? Some experts suggest that you pay down balances based on the interest rate (that is, pay them in descending order starting with the highest interest rate) to save money on overall payments. Others say that paying off smaller accounts first gives you a feeling of accomplishment, and therefore, you’re more likely to achieve your overall goal. My suggestion is that you choose the approach you find more satisfying. Just be sure that you make the choice; don’t let the first bill that shows up get the extra payment by chance. Make a list of each credit card, its balance, and its credit limit. Then allocate your payments to reduce your percentage of credit used to 45 percent or less of the limit on as many accounts as possible. Doing so creates some great positive data in your credit report. This approach not only enables you to regain control of your accounts but also helps you maximize your credit score, because accounts that exceed 50 percent of the limit count more heavily against you. When all your cards are at 45 percent of your limit or below, you may want to allocate more money to the highest-interest-rate cards. If you don’t have a major bank credit card, you may want to try a secured card. You can get one without a fee if you shop around. A secured card differs from a regular Visa or MasterCard in that you maintain a balance in a savings account equal to your credit limit (some cards may allow you more credit than you have on deposit) to guarantee your payment. Secured-card activity is reported just as any other credit card activity is reported, and it affects your credit score in the same way, so it can be a great option if you’re trying to build credit. You can find great card comparisons at Bankrate or creditcards.com. The latter has two sections to help you find the right card depending on your circumstance. One section is helpful for those with bad or damaged credit. The other section is for those who have little or no experience with credit or who need to start a U.S. credit history (credit from overseas doesn’t follow you). Generally, in a typical credit market, if you make all your payments on time for a year you should have enough of a positive payment history to get an unsecured credit card. Maximize your credit score with major expenditures Big-ticket creditors — those that specialize in expensive products or services — typically report to the credit bureaus. The reason is simple: They have a lot more to lose if they lend based on inaccurate information, so they want to see as complete and accurate a file as possible. Examples of big-ticket items that may enhance credit activity are home mortgages, cars, boats, student loans, furniture, and appliances. Major credit purchases may give your credit score a boost for two reasons: A major purchase is more likely to be in the form of a secured installment loan. Secured means that you pledge collateral on the item you purchase as security for the loan. If you default on the loan, the lender repossesses the security you pledged — in other words, you don’t get to keep the item you purchased. Adding secured credit to the other types of credit you use, such as revolving credit (cards), helps raise your credit score. You make the same payment each month. When it comes to credit scoring, making set monthly payments enables the people who figure your score to discover more about your creditworthiness. Making a set monthly payment is a measure of your stability. This is different from paying on a credit card, where you can vary your payments depending on your cash flow. Adhering to a regular payment schedule also indicates that you can handle a higher limit than you may have on a store, gas, or credit card account.