Consumer Credit, Debt, and Bankruptcy Blog

Pay-in-4 Plans

Credit reports will soon include “buy now, pay later” plans, also called pay-in-4 plans, because most of these plans charge debit or credit cards in 4 equal installments, typically every 2 weeks, but allow the shopper to take the product home after the 1^st payment. Most of these purchases are small, such as for clothing. A few companies offering these services include Afterpay, Klarna, and Affirm.

These plans may offer a good way of establishing credit for people with little or no credit history or for people with bad credit trying to improve their credit score. Starting in 2022, credit reports will eventually include both positive and negative information, on-time payments, defaults, when the plan was opened, the scheduled payments, and how much the consumer actually paid.

Fannie Mae to Consider Rent Payments to Assess Creditworthiness

The Federal National Mortgage Association (Fannie Mae) was created by the federal government to help low- and middle-income people to buy homes. To further that interest, Fannie Mae is changing the standard for who qualifies for a loan by allowing people to use their record of rent payments to establish creditworthiness. Because landlords do not regularly report to credit bureaus about rent payments, the borrower must allow Fannie Mae to access their bank accounts that were used to make the rent payments.

Fannie Mae estimates that 17% of the people who haven’t owned a home in the previous 3 years, and would not have qualified otherwise, will now qualify under the new standard. This will help roughly 20% of Americans who, according to the Consumer Financial Protection Bureau, have no or limited credit histories.

Source: FHFA Announces Inclusion of Rental Payment History in Fannie Mae’s Underwriting Process

Consumer Trap: Deferred Interest on Retail Credit Cards

Deferred interest is a new retail marketing gimmick by almost half of retail credit card issuers, promoted with special marketing terms such as special financing or same as cash if paid in full. It is a 0% or low rate if the balance is paid in full by the end of the promotional period. If the balance is not paid in full by that time, then interest will be charged retroactively on all purchases made during the promotional period. Even a single dollar remaining on the balance after the promotional period ends can lead to significant charges of interest. Considering that many retail credit cards charge a high interest rate — often 20% or more — the addition of deferred interest can hugely increase the bill.

By contrast, many promotions of 0% from reputable credit card companies do not charge interest retroactively. Instead, if the balance is not paid in full at the end of the promotional period, then interest only accrues on the balance thenceforth.

Some Notes on Credit Bureaus

• Although not used to calculate credit scores, other information in credit files is sometimes used by lenders, such as employment history and previous addresses. People who change jobs or homes frequently are generally considered poor credit risks.
• Mistakes often arise in credit reports because lenders often use limited information, such as a partial name or Social Security number, about the borrower when reporting to the credit bureaus, and sometimes the limited information may apply to others.
• Identity thieves often mar the credit profile of innocent victims, because lenders do not do enough to verify the identity of the person applying for credit in someone else's name.
• When a consumer sends information to the credit bureaus to support any dispute that they have or the information contained in their credit files, the documents are not often passed to the right people who would make the final decision as to whether the dispute is an error. Consequently, many disputes remain unresolved.
• Although it would seem natural, one thing that a consumer should never do is go directly to the lender before filing a dispute with the credit bureau, since doing so will eliminate the right to go to court. Congress wrote the law this way because they feared that allowing lawsuits against lenders would cause many lenders to stop providing information to the credit bureaus, which would reduce the value of the credit files to other lenders and to the credit industry generally. Although credit bureaus generally have between 30 and 45 days to respond to any disputes with their own findings, court cases can take many years, maybe even longer than the disputed information can be retained by the credit bureau anyway, since credit bureaus cannot retain any negative information, except chapter 7 bankruptcies, for longer than 7 years.

Debt Buying Practices

A new study published by the Federal Trade Commission sheds some light on the debt buying industry:

• Debt collectors usually buy their debt from the creditors, paying an average of about $.04 per dollar of debt.
• At least 71% of the total amount of debt bought was credit card debt.
• Older debt sells for significantly less than newer debt, with the price of debt older than 15 years being nil.
• Debt buyers usually received the information required for validation notices, including the name of the original creditor and the debt amount. They also received additional information that they usually did not provide to consumers, such the original creditor's account number, date of last payment, and charge-off date.
• Debt buyers rarely received any dispute history — whether the consumer had disputed the debt and whether the disputed debt was verified.
• Generally, about 3.2% of the purchased debt had been disputed by consumers.
• Only about 51.3% of the purchased debt was verified by the buyers of the debt. Older debt was less likely to be verified. The Fair Debt Collection Practices Act (FDCPA) prohibits debt collectors from attempting to recover unverified disputed debt, although, inexplicably, they are still allowed to sell it to other debt buyers.
• Debt buyers usually only receive a data file with information about the debts. They rarely obtain related documents substantiating the debts, nor did they receive account statements or the contract terms of the account.
• The sellers of debt almost always stipulate in their contracts to the debt buyers that the information provided is not guaranteed to be accurate and the information is sold "as is."
• Debt buyers are generally giving a limited amount of time, usually 6 months to 3 years, to request additional information on specific accounts. However, the number of accounts for which they can get additional information at no additional charge is usually limited to about 10% to 25% of the number of debts in the portfolio. If the original buyers resold the debt to other debt collectors, then the secondary buyers generally had to request additional documents by going through the original debt buyers.
• Most of the purchased debt was generally within the statute of limitations that permits them to attempt to legally collect the debt. The statute of limitations for collecting on credit card debt in most states is between 3 and 6 years. Nonetheless, some debt collectors did attempt to collect debt that was older than the statute of limitations.
• Inside the Dark, Lucrative World of Consumer Debt Collection - NYTimes.com - A good article about how the business is actually conducted.

New FTC restrictions on Debt Settlement Companies

New Restrictions on Debt Settlement Companies:

• Takes effect Fall 2010.
• Prohibited from charging a fee before they settle or reduce a customer's credit card debt.
• Required to keep customer's money in independent accounts for repaying debts.
• Must disclose:
  • how long the settlement will take.
  • potential negative outcomes.
  • total cost of the settlement.
• The FTC restrictions apply mostly to debt settlement companies that solicit business by telephone. Hence, companies using online or direct consumer marketing in person are not covered.

Note: In almost every case, it is better for debtors to file for bankruptcy under Chapter 7 or Chapter 13 than to use a debt settlement company. Bankruptcy offers many benefits that a debt settlement company cannot provide, including re-establishing your credit sooner. A debt settlement company offers no advantage over bankruptcy, but costs the debtor considerably more money. To learn more, see Bankruptcy — Table Of Contents.

New Rules for Credit Card Issuers

New rules regulating credit card issuers were approved by the Federal Reserve, the Office of Thrift Supervision, and the National Credit Union Administration. The following rules take effect in July, 2010:

• Interest rates can only be increased for new credit cards and on new purchases; a higher rate cannot be applied to old balances.
• Credit card issuers cannot apply all payments to balances with the lowest interest rates first.
• Customers must be given a 45-day notice for any changes to the terms of the account rather than the 15-day notice currently required.

Rules Aim to Protect Credit Card Users

Company Credit Cards can Hurt Authorized Users' Credit Scores if Paid Late

Company Cards Can Hurt Credit - WSJ.com

Many people, as authorized users, have company credit cards to pay for business expenses. Sometimes the people pay the monthly bills themselves, and sometimes, especially for smaller businesses, the company pays the bill. However, an authorized user's credit score can suffer if the card payment is late, even if the company pays the bill.