Suzy is the poster child for predatory lending victims.
As her business — and money — dried up during this recession she used credit cards to tide her over. Which is like inviting the wolf in for dinner. The big banks (Capital One, Citibank, American Express, Discover, etc.) charmed her with low interest offers, then ratcheted them up to 28 percent and 30 percent — even as they charged penalty fees only a crook could love (there are no legal limits on interest rates or fees; Citibank made sure of that years ago). Now, without a job, she is considering bankruptcy.
As we consider her options, recall the Wisdom of Solomon: those with common sense and honesty lose.
1. Cancel at least some cards. Loser!
A company called FICO gives a credit score to everyone who borrows. That number, calculated by computer, is between 300 and 850 (“free” credit reports are nearly useless because they don’t include your FICO score). Financial institutions use FICO scores to figure debt-worthiness; credit card companies use low FICO scores to justify higher interest.
Suppose you have six cards, each with a $10,000 limit, and you owe $15,000. Your debt ratio is 25 percent ($15,000 divided by $60,000). If you cancel 3, your limit becomes $30,000; your debt ratio becomes 50 percent. — and your FICO score tanks. (Believe it or not, some companies “forget” to report your credit limit to FICO, further dropping your score. So the 3 cards might show a $20,000 limit, giving you a 75 percent debt ratio. Most banks prefer 15 percent).
2. Pay the minimum. Loser! Say you owe $15,000 and pay the minimum of $350 a month. Clearing the $15,000 will take 23.75 years and cost you $99,750.00.
3. Pay the highest-interest cards first and forget the others for a while. Loser! The other cards will go into default and your FICO score will still tank.
4. Call and negotiate before you miss payments. Loser! Most credit-card companies won’t even talk to you until you miss payments (and your FICO score tanks), allowing them to (all together now): raise interest and penalties!
What to do? Suzy called a community banker friend. He referred her to Solomon.
That would be Solomon, a credit specialist.
“The best thing is to pay off your cards,” he says, “and not need a guy like me. I can only get involved if you’ve missed payments and can’t pay what you owe.”
Then he describes a scenario even Rod Serling couldn’t imagine.
Say she owes $100,000 to CitiCard or CapitalOne, etc., and has missed payments. They may negotiate it down to, say, $85,000. But because the $100,000 debt is still on their books, they’d send her a 1099 (IRS form) for what they forgave, so she’d owe taxes on $15,000, even if that were all interest and penalties.
Say she doesn’t negotiate or pay for months. They might hire a collection agency for 50 percent of anything they collect. After 18 calls a day she caves and negotiates to pay $60,0000. The agency keeps its $30,000, but she’ll owe tax on $40,000 because of the original $100,000.
But say she doesn’t cave. They sell her account to another collection agency for 5 cents on the dollar (yes, they actually do that) and now she negotiates to pay just $40,000. Because they purchased and now own the account for $5,000, it is no longer valued by the IRS at $100,000. So she owes no tax on the $60,000 she didn’t pay. Then, because the debt is settled, FICO gives her a great score.
You can hum the “Twilight Zone” theme now.
Solomon is quick to warn about scam artists, especially on the Web. “Never pay for this kind of help in advance,” he says. “And,” he notes, “it’s simple in concept, but tricky in practice.” In other words, let a professional do it.
The big banks have marketed credit cards irresponsibly for years in the hope, the HOPE, that their customers would NOT pay on time, so they could justify usurious interest and fees. That’s predatory lending, folks. And what do you do with predators? Stay away or call an animal-control expert, like Solomon.
As her business — and money — dried up during this recession she used credit cards to tide her over. Which is like inviting the wolf in for dinner. The big banks (Capital One, Citibank, American Express, Discover, etc.) charmed her with low interest offers, then ratcheted them up to 28 percent and 30 percent — even as they charged penalty fees only a crook could love (there are no legal limits on interest rates or fees; Citibank made sure of that years ago). Now, without a job, she is considering bankruptcy.
As we consider her options, recall the Wisdom of Solomon: those with common sense and honesty lose.
1. Cancel at least some cards. Loser!
A company called FICO gives a credit score to everyone who borrows. That number, calculated by computer, is between 300 and 850 (“free” credit reports are nearly useless because they don’t include your FICO score). Financial institutions use FICO scores to figure debt-worthiness; credit card companies use low FICO scores to justify higher interest.
Suppose you have six cards, each with a $10,000 limit, and you owe $15,000. Your debt ratio is 25 percent ($15,000 divided by $60,000). If you cancel 3, your limit becomes $30,000; your debt ratio becomes 50 percent. — and your FICO score tanks. (Believe it or not, some companies “forget” to report your credit limit to FICO, further dropping your score. So the 3 cards might show a $20,000 limit, giving you a 75 percent debt ratio. Most banks prefer 15 percent).
2. Pay the minimum. Loser! Say you owe $15,000 and pay the minimum of $350 a month. Clearing the $15,000 will take 23.75 years and cost you $99,750.00.
3. Pay the highest-interest cards first and forget the others for a while. Loser! The other cards will go into default and your FICO score will still tank.
4. Call and negotiate before you miss payments. Loser! Most credit-card companies won’t even talk to you until you miss payments (and your FICO score tanks), allowing them to (all together now): raise interest and penalties!
What to do? Suzy called a community banker friend. He referred her to Solomon.
That would be Solomon, a credit specialist.
“The best thing is to pay off your cards,” he says, “and not need a guy like me. I can only get involved if you’ve missed payments and can’t pay what you owe.”
Then he describes a scenario even Rod Serling couldn’t imagine.
Say she owes $100,000 to CitiCard or CapitalOne, etc., and has missed payments. They may negotiate it down to, say, $85,000. But because the $100,000 debt is still on their books, they’d send her a 1099 (IRS form) for what they forgave, so she’d owe taxes on $15,000, even if that were all interest and penalties.
Say she doesn’t negotiate or pay for months. They might hire a collection agency for 50 percent of anything they collect. After 18 calls a day she caves and negotiates to pay $60,0000. The agency keeps its $30,000, but she’ll owe tax on $40,000 because of the original $100,000.
But say she doesn’t cave. They sell her account to another collection agency for 5 cents on the dollar (yes, they actually do that) and now she negotiates to pay just $40,000. Because they purchased and now own the account for $5,000, it is no longer valued by the IRS at $100,000. So she owes no tax on the $60,000 she didn’t pay. Then, because the debt is settled, FICO gives her a great score.
You can hum the “Twilight Zone” theme now.
Solomon is quick to warn about scam artists, especially on the Web. “Never pay for this kind of help in advance,” he says. “And,” he notes, “it’s simple in concept, but tricky in practice.” In other words, let a professional do it.
The big banks have marketed credit cards irresponsibly for years in the hope, the HOPE, that their customers would NOT pay on time, so they could justify usurious interest and fees. That’s predatory lending, folks. And what do you do with predators? Stay away or call an animal-control expert, like Solomon.
