

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. — _From "A Declaration of Principles Jointly Adopted by a Committee of the American Bar Association and a Committee of Publishers"_

Smashwords Edition: ISBN 9781301717590

Copyright © 2013 by Daniel K. Berman

_All rights reserved._ No part of this publication may be reproduced, distributed or transmitted in any form or by any means—including photocopying, recording or other electronic or mechanical methods—without the prior written permission of the author, except in case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law.

For permission requests, please email the author at Info@USCreditSecrets.org.

Berman, Daniel K. _How to Get Started Improving Your Credit: The Inside Information You Need to Avoid Costly Mistakes and Do Things Right the First Time_

Subject categories: Business & Economics, Personal Finance, Budgeting, Money Management, Consumer Credit, Credit Reports, Credit Repair, Reference, Self-Help

To you, the consumer
_  
_

_It's no exaggeration to say your credit score can change your life. This single number can determine whether you get a job or own a home. It affects how much you pay for insurance. It influences how much you pay when you borrow, which determines how long it will take to become debt-free._

_—Stacy Johnson (MoneyTalksNews.com)_
Table of Contents

  * Introduction
  * Chapter 1 How the Credit System Works
  *     * Top 10 Credit Myths Debunked
    * Influence of Credit on Traditional Borrowing
    * Influence of Credit Beyond Borrowing
    * Current Trends Relating to Consumer Credit
    * Credit Reports
    * Insider Scores and Affiliate Sharing
    * Credit Bureaus
    * FICOs versus FAKOs
    * Key Laws Relating to U.S. Consumer Credit
    * Answering Arguments Against the Use of Credit
    * Chapter 1 in a Nutshell
  * Chapter 2 How to Obtain and Understand Your Credit Reports and Credit Scores
  *     * How to Obtain Your Genuine FICO Scores
    * Investigative Consumer Reports
    * The Effect of Credit Scores on Insurance
    * Specialty Consumer Reporting Agencies
    * Chapter 2 in a Nutshell
  * Chapter 3 Ten Areas You May Want to Know More About
  *     * 1. Bankruptcy
    * 2. Credit and Marriage
    * 3. Credit and Divorce
    * 4. Credit Counseling
    * 5. Debt Collection
    * 6. Debt Consolidation
    * 7. Debt Settlement Companies
    * 8. Foreclosure
    * 9. Home Loans
    * 10. Identity Theft
    * Chapter 3 in a Nutshell
  * Conclusion
  * About the Author
  * Consulting Option
  * Other Titles in the US Credit Secrets Series
  * Authors' Resources

# Introduction

KNOWLEDGEABLE INDIVIDUALS AGREE, without exception: Your personal credit is critical to your financial success. Yet, if you're like most people, you don't have sufficient command of your personal data to effectively take charge of the situation and ensure that the system that hosts your credit profiles and scores is working _for_ you, rather than _against_ you.

Regardless of whether you believe that you have good credit or something less than that, it's almost a certainty either that there are errors in your records or at the very least, your profiles and scores could be improved upon, for your financial benefit.

The best way to get started improving your credit is a three-step process that involves (1) learning the basics and key points about the U.S. credit system, (2) obtaining copies of your credit reports and scores and (3) making sense of the data, after which you'll be ready for what comes next.

It is the objective of this book to walk you through this three-step process, in a way that is both easy and entertaining. You learn important inside information that the banks and credit bureaus don't want you to know, the best way to get your credit reports and scores for free and different options for getting free help, to understand your personal credit information.

The main danger relating to all the misinformation about credit improvement—and there certainly is a heap of misinformation out there on this subject, in case you're not aware of that already—is not the time you lose by going about it the wrong way, even though that's certainly a significant downside. The main danger is the long-term damage that can be done by following bad advice.

There is a good way and a bad way of accessing your free annual credit reports, just as there are good ways and bad ways of obtaining your credit "scores" (either genuine FICO scores or what amount to phony FICO scores, whose promoters are very adept at fooling you well enough to successfully separate you from your money, even though they don't give you what you think you paid for).

If you end up accessing your reports the wrong way, as will be explained below, that could end up disadvantaging you for years to come. It is the purpose here to provide you with the inside information you need to avoid costly mistakes and do things right the first time. While the first chapter offers you the core knowledge about the U.S. credit system, the second chapter shows you the best ways to access your reports and scores.

A bonus chapter gives you overviews, insights and quick tips on ten areas relating to personal credit that consumers typically have the most questions about: bankruptcy, credit and divorce, credit and marriage, credit counseling, debt collection, debt consolidation, debt settlement companies, foreclosure, home loans and identity theft. Think of these as "cheat sheets" for getting a running start on whatever topics are of particular interest to you.

A word to the wise: Though you can certainly skip over the background information in chapter one, you will be better equipped for success if you take the time to acquire the foundational knowledge in this area. It's important to know the basics about credit bureaus and credit reports, for example, as well as how to distinguish between genuine FICO scores and their imposter counterparts (sometimes called FAKOs).

This book is based on the fundamental premise that there is a positive correlation between good established credit and a better quality of life, financially. Credit improvement, which begins with accessing your data the right way, is a process designed to get you into this better place, to live a more enjoyable, fulfilling life.

Let's list some of the advantages of good credit, by way of overview:

  * Credit offers both safety and convenience, as you don't have to carry around cash or a checkbook.
  * Credit offers security because you are limited to responsibility for the first $50 of fraudulent charges in the event your card is lost or stolen (and typically, in my experience, the bank will not hold you responsible for even that first $50).
  * Credit also offers security in terms of substandard service or merchandise, which can be returned and easily charged back, unlike the situation you encounter when you pay with cash (and also offers leverage with regard to money-back satisfaction guarantees, which merchants are sometimes prone to disregard).
  * The judicious use of credit helps build a good credit history, which in turn gives the consumer access to financing at better rates (most people are not in a position to pay cash for their homes), resulting in savings of tens of thousands of dollars during the course of a lifetime.
  * Credit, when used intelligently, can be leveraged to generate substantial cash savings and rewards.

With all these benefits at stake, there can be only one valid reason to pass up on all of them: Those who are not capable of handling credit responsibly are indeed better off refraining from its use. For such individuals, the benefits of using credit are certainly outweighed by the potential dangers. For others, for everyone else, this is not the case.

Only someone capable of living off the land as a hermit in a remote area, never paying for rent, utilities or phone service—someone who will never need a car, insurance or health care—could truly "opt out" of the credit system, as some have advocated. For everyone else, opting out is not really an option. It is for this vast majority that the books in the _US Credit Secrets_ series, including this one, have been written.

As long as you're willing to take the relatively minimal amount of time required to understand and implement the methodologies described here, you will be successful. The rewards of success are both tangible and intangible, psychological as well as monetary. It's hard to put a price on the intangible and psychological but the monetary rewards of good credit easily translate into thousands of dollars during an average consumer's lifetime.

As a simple and dramatic example, consider the fact that the difference between a credit score of 579 as opposed to 760 in the context of a 30-year fixed loan for 80 percent of the value of a property that sold for $300,000 could translate into some $300,000 in additional interest over the life of the loan. Repeat: a cumulative savings in interest of $300,000!

That's only one item, albeit a large one, of many—and some readers will have home mortgages in much larger amounts, with correspondingly higher potential savings in interest.

With that in mind, congratulations on your decision to make one of the best investments of your life: the relatively minimal time that you devote toward learning the material in this book and taking the suggested actions, which can potentially save you many thousands of dollars in the years ahead, as you enjoy a better quality of life.

# Chapter 1  
How the Credit System Works

_If you or I as individuals had done what the major banks have done—in terms of fraud, misrepresentation and other illegal activities—we would be in handcuffs. The financial institutions are at the most faced with relatively minor fines, which they look upon as simply the cost of doing business._

_—Former New York Attorney General Eliot Spitzer 1_

What New York's former attorney general and governor said about the banks applies just as well to the credit bureaus. According to SmartMoney.com, "Consumer advocates estimate that bureaus pay just $25 million a year in court fines, a minor expense for the $7 billion industry."

When the U.S. Government Accountability Office (GAO) conducted a "secret shopper" survey of banks in 2008, it found that 22 percent of all financial institutions failed to provide prospective customers access to detailed bank fee disclosures, in clear violation of the Truth and Savings Act.

A subsequent "secret shopper" survey by the U.S. PIRG (Public Interest Research Group) in 2011 found that the percentage of financial institutions that failed to comply with the Truth and Savings Act, by refusing to provide fee disclosures upon request, was actually 62 percent on the first request and 45 percent on the second request.

To a large extent, the U.S. Congress has been bought by the financial services industry, with more than a million dollars spent annually for each and every member of Congress, the equivalent of nearly $1.5 million each day, in political contributions to lobby in favor of banking interests, at the expense of consumers, to defeat Wall Street reform. In the words of Illinois Senator Dick Durbin, "The banks... frankly own the place."

Whenever there's a hearing relating to Congressional oversight of the credit or financial services industry, the room is packed with attorneys, lobbyists and others representing the banks and credit bureaus. Within this sea of corporate soldiers sits a handful of vastly outnumbered consumer advocates, endeavoring to do the best they can, in the face of great odds. To make the jobs of these consumer advocates even more challenging, the banking committees are usually dominated by members from the states where the banks and credit card companies are concentrated. These states (Delaware and South Dakota, for example) attract banks and credit card companies by offering favorable tax laws and no limits on interest rates.

The global financial crisis—the worldwide meltdown—that began in 2008 is closely connected with the U.S. consumer credit system. The excesses and irresponsible behavior that led to the crisis are mirrored in similar excesses and irresponsible behavior on the part of banks, collection agencies, credit bureaus and credit card companies in the context of consumer credit, detailed throughout this book.

**_The basic structure and dynamics of the U.S. consumer credit system, from the perspective of personal credit, can be explained in simple terms._** Throughout your life as a consumer, you engage in various financial transactions. You apply for and make use of credit. You rent or buy a residence. You have scrapes with creditors, who may sometimes claim you owe them money when you believe you actually don't. The records of many if not most of these activities in your life as a consumer make their way onto your files at consumer reporting agencies.

Various types of scores are developed, based on the material in your files. Potential creditors, employers, insurers and others then access these files and scores, to determine whether to extend you credit, hire you or insure you—and, if so, under what terms and conditions. Those, in a nutshell, are the basics as to how the system works. The details will be covered in the pages that follow.

## Top 10 Credit Myths Debunked

Many popular misconceptions about consumer credit can hinder or even hurt people, in their efforts to make the system work to their best advantage. The following myths, followed by brief corrections, may arguably be considered the top ten:

  1. "Every person who has a credit record has a credit score." No one has " _a_ credit score." What each consumer has is actually a variety of different credit scores.
  2. "I can choose to 'opt out' of the credit system by simply paying cash for everything." Only someone living as a hermit in a remote area, never paying for rent, utilities or phone service could truly opt out of the credit system.
  3. "My credit profile is the same at all the credit bureaus." Credit profiles—and scores—can vary significantly, from one reporting agency to another. This fact has serious ramifications for your personal credit strategy.
  4. "I'm entitled to a free copy of my credit report and credit score." You are entitled by law to free copies of your credit _reports_ , under certain conditions. You are not entitled to receive any of your _scores_ for free, however, although there are ways that you can obtain some of your scores without paying for them.
  5. "Anyone who wants to get a copy of my credit report needs my written authorization." In reality, the Fair Credit Reporting Act (FCRA) allows anyone to pull a person's credit report (with some restrictions) as long as the person or business retrieving the report has a "legitimate business need for the information in connection with a business transaction involving the consumer," which in actual practice can mean almost anything.
  6. "My credit history and scores will only affect my applications for credit." Credit profiles and scores are now used in numerous other areas, apart from applications for credit, including employment, insurance and even health care.
  7. "There are only three credit bureaus worth knowing about (Equifax, Experian and TransUnion)." This was largely true until quite recently. Now the advent of a new "super" credit bureau suggests that landscape may change significantly.
  8. "The only thing that can remove negative entries from credit reports is the passage of time." Waiting is certainly one option but there are also numerous steps that consumers can take to proactively repair damaged credit.
  9. "All negative information on credit reports is dropped after seven years, except for bankruptcy, which stays on for ten years." There are a number of important exceptions to this rule, exceptions that allow negative information to remain on a consumer's reports indefinitely (that's right: forever).
  10. "Closing a credit card account will lower my credit score." This is possible but not necessarily true. Knowing when you can close down accounts without penalty can save you from effectively being blackmailed into paying years of annual "membership" fees unnecessarily.

These points, too, will be covered in detail in the pages that follow.

## Influence of Credit on Traditional Borrowing

A low credit score can cost you dearly in terms of extra payments over the years toward something like a home loan. The difference between a credit score of 579 as opposed to 760, for example, for a 30-year fixed loan for 80 percent of the value of a property that sold for $300,000 could translate into some $300,000 in additional interest over the life of the loan.

On a typical auto loan from a bank, a borrower with a low score would be charged a higher rate and likely pay at least several thousand dollars more in interest over the life of the loan. In the realm of credit cards, too, the best offers, rates and terms are reserved for consumers with the best credit. People with flawed credit profiles are severely penalized.

Most people have at least a general awareness of the importance of credit with regard to traditional borrowing, as it relates to mortgages, car loans and credit cards. What they are typically not aware of is the influence of personal credit in areas that extend beyond the realm of traditional borrowing. If you are like most others, not only would you not be aware of these aspects. Most likely, you would be quite surprised.

## Influence of Credit Beyond Borrowing

As just mentioned, credit profiles and scores have influence that now extends well beyond the world of borrowing. Landlords, of course, use credit histories and scores to screen applicants. Those with credit issues may be rejected. Most auto and homeowner insurers use credit information in setting premiums, based on the correlation between good credit and low claims costs.

The most important factors in determining car insurance rates are said to be age, place of residence and driving record. When quoting a rate, however, most insurers also check a driver's personal credit. The reason is the strong positive correlation between credit scores and the likelihood of filing an insurance claim. The higher a driver's credit score, the less likely that person is to file a claim.

A handful of states, such as California and Massachusetts, forbid insurance companies from checking credit scores. Efforts to ban the practice nationally through federal legislation have consistently failed, however.

A recent study conducted by CarInsurance.com found that drivers with high credit scores pay substantially less than drivers in the same age bracket with scores that are only average. The version of your credit score that insurers use is not a true FICO score (discussed in detail below) but a variant used specifically by auto insurance companies. In this version, factors deemed to reflect risk—such as bankruptcy filings and fully used credit limits—are given more weight.

The CarInsurance.com study found that young adults aged 25 to 34 with clean driving records and credit scores of 750 and above pay an average of 40 percent less than drivers in their age group with clean driving records who do not have high scores. Although premiums tend to drop with age, drivers in higher age groups with the best credit scores still pay less. In fact, the study found that **_the average lifetime savings for drivers with good credit totals $23,000_**.

If you can achieve this type of savings in a number of different areas of your life—depending on what age you begin—with the magic of compound interest, you may have an additional million dollars upon retirement. As we will repeatedly demonstrate, good credit pays.

Not only can your credit history affect your insurance rates, it may also affect whether you are hired, promoted or fired. Six out of ten private employers check the credit histories of at least some of their job applicants, according to a survey by the Society for Human Resource Management. Thirteen percent use credit checks for all their employees, regardless of whether the job has anything to do with handling money (the traditional rationale for checking).

This practice exists in spite of the lack of evidence linking bad credit and theft or any other on-the-job problem. Employers' ability to check credit reports is restricted in six states (California, Connecticut, Hawaii, Maryland, Oregon and Washington) but these restrictions are limited. Examples of exceptions are jobs in finance or those involving access to large amounts of cash.

The federal Fair Credit Reporting Act (FCRA) requires that employers obtain an applicant's or employee's written permission to conduct a credit check. As a practical matter, however, the individual has little choice. If you want the job or want to keep your job, you must agree.

If the annual salary for the job involved is $75,000 or more, the information that will show up on the report will not exclude negative items that are more than seven years old—or ten years, in the case of bankruptcy. In this case, the reports may show negative information going back in time indefinitely. This is an exception provided for in the Fair Credit Reporting Act.

The logic behind the use of credit reports to screen applicants and employees is to minimize the likelihood of theft or embezzlement, exposure to lawsuits in the event of misconduct on the part of an employee and to assess a person's overall reliability. Presumably, a person under financial pressure from collection accounts and outstanding judgments (unpaid debts that creditors have a right to collect) is more subject to the kinds of behaviors that an employer seeks to avoid.

Unlike the demonstrated correlation between credit scores and insurance claims, there is no actual evidence of any correlation between credit profile data and on-the-job behavior or performance, however.

The use of credit checks by employers spans all industries. It is not just limited to financial institutions, law enforcement, government jobs requiring security clearance and the health care industry, where employees have access to sensitive patient data and closely regulated drugs. Access to customer credit-card data, in any industry, could be used to justify a credit check. Waiters, waitresses, store clerks, online support personnel—the number of people potentially affected is much larger than one may at first think.

The top two reasons for a negative outcome resulting from a credit check are current outstanding judgments and accounts in collection (unpaid debts that a creditor has the legal right to collect). If the negative decision is openly attributed to the credit check, you have a right to receive a copy of the report at no charge if you make your request within 60 days. In this case, the employer must give you the name and address of the credit bureau or bureaus from which your information was accessed.

More likely, however, most employers probably aren't going to disclose an applicant's or employee's being rejected or fired on the basis of information in his or her credit files. It's much easier for an employer to provide another reason or, in some cases, not to offer any reason at all. The people this places in the worst bind are those who have bad credit in part because they lost their jobs but can't get another job because of their bad credit. To paraphrase Yogi Berra, it's Catch-22 all over again.

If you think being turned down for an apartment, an insurance policy or a job can be a serious inconvenience, imagine what it's like to be refused emergency medical treatment because of your credit score. That's right: **_When it comes to hospital admission_** ** _, your credit score can literally be a matter of life and death._** A low score, even if it's based on erroneous information, can prevent someone from being admitted to a hospital, for urgent medical care.

Sometimes a life-or-death situation that hinges on credit can occur outside the context of a hospital. Recently, a senior citizen in poor health wanted to move out of his New York City sixth-floor apartment, with no elevator, to subsidized housing with no stairs to climb. His application was denied when his credit record showed a default judgment of which he was not aware. The judgment was vacated upon appeal with the help of a legal aid society for the indigent. Before the stain could be removed from his credit file, however—living under the strain of six flights of stairs to navigate—the man died.

## Current Trends Relating to Consumer Credit

An understanding of key trends relating to consumer credit provides additional insight as to how the system works. At this time, we may identify five in particular:

  * Tightening of credit in the current economy
  * Increasing sophistication among marketers
  * Burgeoning reporting apparatus and related capabilities
  * Maximization of potential revenue on the part of businesses
  * Proliferation of _legal corporate fraud_ against consumers

"It was supposed to be a simple bargain," as _Time_ magazine reported in the fall of 2011. "We would bail out the banks and they would then bail out the economy." Since the financial crisis, however, bank profits are up a healthy 136 percent but bank lending has actually _declined_ , by nine percent. "Banks haven't fulfilled their part of the bargain—bailouts for Wall Street in exchange for lending on Main Street."

The **tightening of credit in the current economy** means that it's both harder to get credit and easier to be penalized. Credit card companies, for example, deliberately stack the deck against consumers in various ways, to increase the likelihood that cardholders will be late with payments. This gives the credit card companies the excuse to hit cardholders with late payment fees and to jack up interest rates.

The fact that it's harder to get credit underscores the importance of getting a good handle on your personal credit situation and improving your profile as much as possible. The fact that it's easier to be penalized underscores the importance of learning the rules of the game, so that you can use the system to your best advantage.

The **increasing sophistication among marketers** means that you are more vulnerable, as a consumer. This means that it's easier to fall for offers promoting things you don't really need, things that will only take money from your pocket and rack up debt. The best way to protect yourself is to increase your knowledge and heighten your sense of awareness.

Perhaps the best illustration as to the frightening level of sophistication of the scientific behavioral tools at the disposal of present-day marketers is a story that recently appeared in both _Forbes_ and _The New York Times_ about how the giant retailer Target figured out that a particular (unmarried) teenager was pregnant, before her father even suspected she might be.

The irate father appeared one day at a Target store in the Minneapolis area, demanding to speak with a manager. When a manager appeared, the father whipped out a mailer, containing coupons for various maternity items—maternity clothing, baby clothing and nursery furniture—addressed to his daughter. "She's still in high school," the father protested, "and you're sending her coupons for baby clothes and cribs? Are you trying to encourage her to get pregnant?"

The manager apologized profusely and then called the father a few days later, to apologize again. "I had a talk with my daughter," the father said sheepishly. "It turns out there have been some activities in my house I haven't been completely aware of. She's due in August. I owe you an apology."

How did Target know this young woman was pregnant and why did it go through the extraordinary effort that was needed in order to find this out? It turns out that pregnancy is one of the few major life events when old buying habits are readily subject to change—"vulnerable to intervention by marketers," in the parlance of that profession. New parents are typically deluged with advertising _after_ a public record of birth. So a business has a tremendous advantage if it can reach out to the new parents _before_ the birth occurs.

What Target determined was that each trimester of pregnancy is associated with the purchase of certain types of items. So Target tracks each shopper with a unique code, known internally as the Guest ID number, which monitors all purchases. The only way to thwart this tracking would be to always pay in cash and avoid a long list of actions such as signing up for a Target store card, using a credit card or a coupon, filling out a survey, mailing in a refund or calling the customer help line.

Linked to the Guest ID is demographic information that has either been collected by Target or purchased from other sources. This demographic information includes age, marital status, place of residence, length of time at current address, estimated salary, which credit cards you use and which websites you visit. Target can purchase data about your ethnicity, job history, magazine subscriptions, educational background, political affiliations, product preferences and many other things.

The store's Guest Marketing Analytics department assigns each shopper a "pregnancy prediction score," based on the customer's purchase patterns, tied largely to about two dozen specific products. Examples of these products are certain types of lotions and purses large enough to serve as diaper bags, as well as zinc and magnesium supplements. Based on the color of some products the "guest" may buy (think blue or pink), such as room rugs, the store is even able to predict the anticipated _gender_ of the family's new addition.

One interesting thing that Target discovered relatively early on in the process of marketing to women who scored high on the pregnancy prediction spectrum was that they felt "creeped out" by the idea that Target somehow knew about their pregnancies. This had the effect of backfiring, in terms of inducing customers to return to Target to use their coupons.

Target cleverly solved this problem by creating personalized coupon booklets that mixed in offers relating to pregnancy with offers for unrelated products, making the selection appear random. "As long as we don't spook her, it works," the Target statistician in charge of the program admitted to a news reporter, before Target decided to muzzle him. "As long as a pregnant woman thinks she hasn't been spied on, she'll use the coupons. She just assumes that everyone else on her block got the same mailer for diapers and cribs."

Welcome to the era of ultra-sophisticated behavioral marketing and data-mining, from womb to tomb. The reason for telling this story is that this type of activity is not limited to Target—which, by the way, could make an additional fortune selling its "pregnancy prediction score" to other businesses (no existing law would prevent the company from doing so). Maybe it already is.

Most major retailers in fact now have a "predictive analytics" department, whose purpose it is to understand not just consumers' shopping habits but also their personal habits, so as to market to them more effectively and efficiently. "We're living through a golden age of behavioral research," according to Eric Siegel, a consultant and the chairman of a conference called Predictive Analytics World. "It's amazing how much we can figure out about how people think now."

Every detail in every store has been carefully studied, tested and designed, to maximize a shopper's spending. The width of the aisles, the texture and incline of the floors, the lighting, the colors and other particulars of the displays: None of these is left to chance, with the end result being a subtle but potent undermining of a consumer's natural defense mechanisms. The dynamic at work is all the more diabolical because consumers are almost completely unaware of what they are up against.

This kind of "micro-targeting" is facilitated by the vast amounts of information about consumers on the Internet (especially through social media sites) that they unwittingly make available to companies with the tools for sophisticated data mining.

After your information enters a firm's database, the company evaluates your potential profitability as a corporate asset during the years ahead. Through a process called "bucketing," all customers are placed in one of four "value buckets": high, low, medium or no. The company decides how to treat you based on the bucket to which you are assigned. Those in the "no" bucket are unceremoniously dumped.

All of this may seem terribly disconcerting but forewarned is truly forearmed. It really is a jungle out there and the average consumer is no match for the marketing machines of multi-billion-dollar corporations. Heightened awareness will at least go a long way toward helping you keep your money where it usually belongs: in your pocket.

The **burgeoning reporting apparatus and related capabilities** means there are increasingly fewer areas of your financial life that are not subject to scrutiny and reporting. It has traditionally been the case, for example, that when there's not enough money to pay all the bills, you could safely be late with certain categories (cable service, phone bills and utilities, for example), in which any late payments would not show up on your credit reports. With the appearance of the newest credit reporting agency, CoreLogic Credco (described below), this strategy may soon become inappropriate, as CoreLogic has announced that it is going to pick up on information from all of those categories—and more.

The **maximization of potential revenue** on the part of all businesses—including banks, credit card companies and credit bureaus—is yet another aspect of the far-reaching and unrelenting campaign to "monetize" to the fullest every conceivable item and every conceivable service, squeezing customers for every last possible dollar, even every last possible cent.

"There are fees for everything but breathing the air in the bank," says Ed Mierzwinski, a consumer program director at the U.S. PIRG, the federation of state Public Interest Research Groups. Before you dismiss this remark as nothing more than simple sarcasm, consider the fact that a checking-account customer may currently be charged as many as 49 different fees. That is just the median number of fees, according to a study by the Pew Institute of 250 types of checking accounts offered by the ten largest U.S. banks.

Bank "stealth fees" include charges for:

  * Paper statements
  * Using a live bank teller
  * Calling customer service
  * Account usage
  * Not maintaining the required minimum balance
  * Overdrafts and returned items
  * Wire transfers
  * Card replacement
  * Ordering copies of canceled checks
  * Closing an account within six months of opening it

As I was writing this chapter, my wife discovered that she was being charged $12 a month by her bank in part for not having waived her right to use a live teller at a window. She was able to get the fee waived, only by agreeing to only use the bank's Automated Teller Machines (ATMs) and to stop receiving paper statements by postal mail.

Another way for consumers to avoid such fees is by switching to community banks or credit unions, as described in more detail later in other books in the _U.S. Credit Secrets_ series (see for example _How to Borrow Money at Zero Interest_ ).

The banking industry is fond of saying that new and higher fees are necessary, in order to offset revenue losses from the 2009 Credit Card Accountability, Responsibility and Disclosure (CARD) Act (discussed below) and other new regulations, such as the cap on what banks are allowed to charge merchants for accepting debit cards. With major U.S. banks posting multi-billion-dollar record profits, however, this argument does not seem to stand up to scrutiny. The new fees appear to be prompted not by survival requirements but rather the strategy to fully maximize any areas of potential profit, the same way that going "paperless" is not driven by genuine concern for the environment but rather the strategy to reduce expenses and thereby further increase profitability.

The **proliferation of legal fraud on the part of large corporations against consumers** raises one particularly interesting question: Is it really in the best long-term financial interests of these corporations to trick and cheat consumers, even if a case can be made that they are not breaking any existing laws?

The situation was summarized succinctly by Richard Blumenthal when he served as attorney general for the state of Connecticut: "Competing by cheating has become a way of life for ... many ... corporations, many of the most reputable of them. Because it's done by AT&T [and other big-name corporations] people are reluctant to use that word but when all is said and done ... these are scams."

For just a few examples, consider the following:

  * Banks promote credit cards touting "no annual fees," with hard-to-read fine print hiding the existence of _monthly_ fees, which collectively add up to much more than any ordinary annual fee, typically close to an equivalent annual fee of $200!
  * Credit card companies play games with payment deadlines, accelerating due dates, inducing cardholders into inadvertently being late with payments and then hitting them up for penalties and higher interest rates.
  * Payday lenders claim to be helping hard-pressed wage-earners keep current on their obligations, when they are actually gouging them in the most predatory sort of way, at annual percentage rates (APRs) typically exceeding 400 percent.
  * Manufacturers lure consumers into buying products that offer attractive rebates and then make the process of collecting on the rebates so difficult that some 80 percent of such rebates are never redeemed.
  * Gift cards, offered by a variety of companies, are secretively encumbered with a variety of fees, conditions and expiration dates that erode their value, helping to explain why nearly one-third of them are never used.

**Preacquired** **account marketing** (which goes by the innocent-sounding acronym PAM) has been described as "a sales practice that allows companies to charge consumers for services they do not know they ordered and do not use." "PAM" is certainly one of the most egregious types of legal fraud currently perpetrated against U.S. consumers.

There are a number of variations to this scam but it generally begins the same way. A company with which a consumer has done business sells the customer's information—including payment information, such as bank account or credit card details—to a third-party "partner." This is done without the consumer's knowledge or consent but is not illegal.

The partner then places a recurring charge on the consumer's bank or credit card account, typically for some kind of "shopping club" membership or other service that the consumer will not use. This is typically done by means of highly deceptive practices designed to induce consumers to agree to something that they do not understand, such as a clever and seemingly harmless "free trial" offer tied into a purchase transaction.

The club or service is of no real value to the consumer. Its only real purpose is to bilk the consumer out of money on a regular basis, over an extended period of time. The organization that sells the consumer's data to its partner receives a cut of the profits (called "bounties"), as well as up-front fees for sale of the data.

By charging relatively small amounts each statement, labeled with confusing codes, the account holder is less likely to notice what is going on than if the monthly amounts were larger and clearly identified. The partner company makes it extremely difficult for people to opt out of the billing or receive refunds.

Collectively, mainstream companies—including Bank of America, Citigroup and JP Morgan Chase—and their partners rack up billions of dollars in ill-gotten gains each year, through this type of "negative option marketing."

Discover Financial Services has taken "PAM" a step further, by sneaking recurring charges for various "protection plans" onto cardholder statements, without even going through the trouble of fabricating a premise for asserting that the cardholder ever agreed. The mysterious charges, with no intelligible descriptions, made their way onto tens of thousands of billing statements. Though the fees per customer were small, collectively they racked up some $300 million per year for Discover, until the attorneys general of various states forced the company to stop. Customers who had called to complain were only refunded the charges from the two most recent billing cycles. Now federal regulators are preparing an enforcement action against Discover, to make sure the scam does not continue.

These are just a few examples of rip-offs by big-name, mainstream companies, so numerous that they could easily fill an entire chapter, if not an entire book. Even more outrageous than the scams themselves is the fact that they are all purported to be legal.

Given the way the system encourages people to rack up debt—in some ways even pushing or tricking them into doing so, as detailed above—it's little wonder that the average credit card debt per household with credit cards is believed to be approximately $16,000. The average credit card debt for consumers in debt management programs is said to be $24,000, very close to the average college debt per student of approximately $25,000 (graduate and professional school debt for individual students is now often in the six figures).

Millions of Americans have accumulated above-average amounts of debt, many of them in essence living off their credit cards, making charges and taking cash advances that they may not be able to repay.

The statistics in this area are indeed disturbing. More than 20 percent of Americans have "maxed out" their credit cards. Some 40 percent of Americans spend more than they earn each month. Approximately 25 percent of all Americans owe more on their credit cards than they have in savings and nearly 25 percent of individuals 50 and older exhausted their entire savings between the years 2007 and 2010.

It would seem logical that banks and credit card companies prefer responsible cardholders who adhere to a budget and pay off their balances in full each month. This is not the case, however. Credit card companies previously used to refer to such consumers as "30-day wonders." Today, they are known derisively in the jargon of the industry as "deadbeats" (along with the more neutral term, "transactors").

In fact, the industry vastly prefers the other half of all consumers, known as "revolvers" (as in revolving credit) who carry balances from month to month. These cardholders not only pay interest on their balances but are also the ones who pay fines when they are late—and then pay even more interest, after their rates are raised, as a penalty for being late. Of the $155 billion in total credit card company revenue for 2011, the largest portion is derived from interest payments and the second largest portion comes from penalty fees.

## Credit Reports

Credit reports, consumer reports, credit files, credit histories, credit profiles and credit records are all names for the same thing: the collection of your data at credit bureaus, also known as consumer reporting agencies or credit reporting agencies. "Data furnishers" (typically also subscribers) to the credit bureaus automatically report your payment histories of various accounts on an ongoing basis to the credit bureaus: your credit cards, your loans (home and auto, for example), department store accounts and so on. "Public record" items filed at the local courthouse associated with your place of residence (the county or other administrative subdivision in which you reside) are also usually reported. This includes any liens, judgments, collection accounts, bankruptcy filings and so on.

Creditors who typically don't report to the bureaus (unless and until your account goes into collection) include: credit unions, hospitals and health service providers, insurance companies, landlords, utility companies, phone companies and cable companies. With the appearance of the newest credit bureau (CoreLogic Credco, described below), this may soon change. CoreLogic is boldly going where no credit bureau has gone before, in its drive to become a comprehensive repository of information on every single U.S. consumer, as it attempts to track your every financial move.

Problems with credit reports are not uncommon, consumer groups say. A survey last year by the U.S. Public Interest Research Group found that **_79 percent of credit reports contained errors, while 25 percent contained mistakes serious enough to prevent the individual from obtaining credit_**. There are many reasons for these errors, discussed in more detail in _How to Repair Bad Credit_.

Current permissible purposes for accessing consumer credit reports include:

  * Credit approval
  * Renting an apartment
  * Employment or promotion
  * Insurance underwriting
  * Issuing a professional license
  * A court order or subpoena
  * Reviewing or collecting an existing account
  * If you owe the IRS money

When a consumer discovers inaccurate negative items in a credit report, the consumer is entitled to challenge the accuracy of that information with the credit bureau at which this information is on file. The credit bureau, in turn, uses an e-OSCAR (Electronic Online Solution for Complete and Accurate Reporting) system, which forwards consumer disputes to creditors for verification. If the information is confirmed (verified) by the creditor within a 30-day period, the information will likely remain on your credit report. If the information is not confirmed within the specified time period, the information is supposed to be removed from the credit bureau's file. This of course is a highly simplified version of the **dispute process** , which is covered in detail in _How to Repair Bad Credit_.

## Insider Scores and Affiliate Sharing

A relatively new practice among financial institutions, first revealed during Congressional testimony in June 2003, involves the collection and sharing of information about consumers _outside the context of formally recognized credit bureau reports_. Officials of Citigroup, subpoenaed to appear before the U.S. Senate Banking Committee, admitted to sharing consumer data and "insider scores" with affiliate companies, for the purpose of making credit-granting decisions.

Citigroup defended the practice by saying, in effect, that it helps them make better decisions. The main problem with this practice, however, is that it leads to the development of what have been called " **black box databases**." These secret databases go completely unregulated, skirting the guidelines of the Fair Credit Reporting Act (FCRA). Consumers have no knowledge of or control over the use of information about themselves and are completely unable to dispute any inaccuracies—which they have no way of knowing about in the first place, as the databases are being kept secret.

Perhaps the best hope for consumers regarding the practice of insider scores and affiliate sharing is that the newly created Consumer Financial Protection Bureau, now getting into gear, will take action to address this issue. It's challenging enough for us, after all, to monitor the information in our _known_ credit bureau files.

## Credit Bureaus

Credit bureaus—also known as consumer reporting agencies and credit reporting agencies (CRAs)—are the official repositories of your personal data relating to a vast array of financial transactions. The emphasis, of course, is on accounts that involve regular payments and money that you are said to owe (to collection agencies, for example). There can also be "public record" information such as liens, judgments and bankruptcies, as well as tidbits that have been reported from various applications you have made over the years. These include your various addresses, versions of your name, your employers over the years and your job titles. There are often errors of various kinds, some not so serious and others more so. We'll talk more about that later in this section.

_Who appointed these credit bureaus to collect and make money selling your personal data?_ No one, really. They just went into the very profitable business of doing so on their own, decades ago. Your permission has never been sought because it has never been required.

We have only to look at the nomenclature to pinpoint one of the fundamental problems: These businesses, which rake in billions each year selling your data without your permission (and without sharing any of the profit with you), are known as "agencies" and "bureaus." These are typically terms reserved for official government entities. These corporations are not in fact government entities. Yet they manage to capitalize on the aura of officiality they have successfully claimed for themselves. This aura contributes to the carefully cultivated perception that these corporations are supremely powerful, that what they do is inevitable and they can scarcely be challenged.

**_Most books on credit mention only Equifax, Experian and TransUnion._** But there are three other credit bureaus worth knowing about, one in particular because it shows the potential for being a game changer in the world of consumer credit reporting.

The three best-known credit bureaus each have their own traditional geographic base. In the Southeast, for example, most lenders have traditionally used Equifax. On the West Coast, the bureau of choice has typically been Experian. In the Northeast, TransUnion. As time goes on, however, regional distinctions blur, as each company seeks to expand its reach.

Until the late 1980s, five major bureaus formed the constellation of credit reporting agencies throughout the United States: Associated Credit Services (formerly Pinger), CBI (The Credit Bureau, Inc.), Chilton, TRW (originally, Thompson Ramo Wooldridge, Inc.) and Trans Union. A consolidation frenzy around 1990 saw these five morph into the big three that have dominated the industry for the past two decades, controlling the data of some 210 million Americans.

The smallest of the three big-bureaus is Chicago-based **TransUnion** , acquired in 1981 by the Pritzker family, best known for its ownership of the Hyatt hotel chain. From humble beginnings in 1968, TransUnion now boasts 250 offices throughout the U.S. and 25 in various other countries, including places as far-flung as Nicaragua and Botswana.

In 2003, an Oregon consumer named Judy Thomas was awarded a $5.3 million judgment in a lawsuit against TransUnion. The suit was filed after Thomas labored for six years to get TransUnion to remove another woman's credit information from Thomas's file. (A federal judge later reduced the award to $1 million.)

**Experian** , the largest of the three big-name bureaus, is a $4-billion Dublin-based corporation with operations in 41 countries, employing some 15,500 individuals worldwide. Experian has recently begun the process of collecting data on consumer rental payments and including those data in its credit reports. In 2010, Experian acquired RentBureau, the largest and most widely used credit bureau for information about tenants, who comprise approximately one-third of the U.S. population. Most rental data, however, are not yet being reported.

Until the formation of the Consumer Financial Protection Bureau (CFPB) in 2011, the Federal Trade Commission (FTC) has been the sole government agency charged with monitoring the activities of credit bureaus. The FTC concluded in 2005 that promotions touting Experian's "free credit report" offer did not adequately disclose the fact that registrants would be automatically enrolled in Experian's credit-monitoring program at a cost of nearly $80 for the first year. According to the FTC, Experian's deceptive advertising violated federal law. The 2005 settlement required Experian to return to consumers $950,000 in ill-gotten gains. Just two years later, the FTC determined that Experian had continued to engage in the same deceptive practices. The second settlement obliged Experian to return $300,000 to defrauded consumers, requiring "clear and conspicuous disclosure of terms and conditions of any 'free' offer."

Founded in 1899 by a Tennessee grocer who sold his customers' payment records to fellow shopkeepers, the company that was to become **Equifax** is the oldest of the three best-known credit bureaus. Based in Atlanta, Georgia and listed on the New York Stock Exchange, Equifax collects and distributes information on 400 million individuals worldwide.

The company attracted criticism during the 1960s and 1970s for the way it compiled investigative reports that were sold to insurance companies and lenders. Equifax employees, allegedly rewarded for collecting negative information on consumers, reported all manner of rumor and hearsay, including but not limited to a person's marital situation, sex life and political activities.

These outrageous practices did result in at least one important positive contribution: passage in 1971 of the Fair Credit Reporting Act (FCRA which occurred in large measure due to public outrage over the company's excesses. Prior to the FCRA, consumers had no right to see the information in their files. At least partly in an attempt to shed its discredited image, Retail Credit in 1975 changed its name to Equifax.

Equifax joined Experian and TransUnion in being fined $2.5 million by the FTC in 2000 for deliberately blocking and delaying phone calls from consumers who were trying to get information about their credit files. Three years later, the FTC took Equifax to court separately on the identical charge and settled with the company for $250,000.

It would be a mistake to conclude from these actions that the FTC has been conscientious and aggressive in its duty to monitor the credit bureaus and prosecute offenses. In reality, the credit bureaus have only been taken to task for a very small portion of the most persistent and egregious offenses. In order for an offense to draw action on the part of the FTC, it has to truly shock the conscience to such an extent that public outcry rises above the power of the credit bureau's protective lobbying efforts.

On the relatively rare occasions that this has happened, the credit bureaus have been "at the most faced with relatively minor fines, which they look upon as simply the cost of doing business," in the words of the quotation that opened this chapter. The estimated $25 million a year in court fines that the credit bureaus have been paying is indeed a minor expense in the context of this $7 billion industry. It can only be hoped that the newly minted CFPB (discussed in more detail below) will have more resources and resolve in its oversight of the credit bureaus than has been the case for the overwhelmed and understaffed FTC in the past.

Equifax's sordid history with regard to investigative reports is a reminder of the credit system's decidedly **_negative orientation_**. Just as credit card companies are obsessed with developing increasingly sophisticated techniques to entrap customers into carrying balances, paying late fees and penalty interest rates, so the credit bureaus are focused on collecting and highlighting negative information in consumers' files.

Creditors pay for access to these files mainly for any negative information they may find. In all fairness, there are valid reasons for this. As one former banker put it, "Loan officers are instructed to be conservative because the loss from one default usually far exceeds the profits accrued from a successful loan."

Lending, it has been said, is the art and science not of selecting the good risks but of eliminating the poor ones. Any fool can lend money. What takes skill is getting it back (with interest, of course).

American Express has been symbolic of this negative orientation. Originally, the company reported only negative information to the credit bureaus. It would not automatically report accounts of its own in good standing, though it routinely used the credit bureaus to search for derogatory information on applicants. For many years, the same has been true of student loans, only reported to the credit bureaus in the event of default.

Certainly, a case can be made for the focus on negative information, as mentioned above. What is less defensible are the deliberate efforts on the part of the credit bureaus to frustrate consumers in their legitimate attempts to obtain the information that is in their files, to understand it and then to dispute inaccuracies. As countless consumers who have gone through this process can attest, it can be exceedingly difficult to correct inaccuracies in one's credit files, negative information that can impact a consumer's life in very serious ways.

**Innovis** (also known as CBCInnovis) is sometimes referred to as the fourth credit bureau. Though the number of creditors that access Innovis is substantially smaller than is the case for Equifax, Experian and TransUnion, it is nonetheless used by some major corporations, such as GMAC Mortgage. It also counts among the ranks of its data furnishers major companies such as Verizon, which reports its accounts to Innovis on a regular basis.

Innovis became a major player in early 2001, when the Federal National Mortgage Association (FNMA, commonly known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC, commonly known as Freddie Mac) began requiring their mortgage servicers to report borrower payment histories to the Houston-based credit bureau. ("Fannie" and "Freddie" are the government-sponsored enterprises that purchase and securitize a large portion of mortgage for the secondary mortgage market.) Fannie has required servicers to notify Innovis of delinquencies and foreclosures, while Freddie has required servicers to inform Innovis of every borrower's payment status. The federal government reports to Innovis concerning individuals who are late with debt payments.

Innovis's specialty, however, has actually been in the area of helping creditors compile mailing lists. Adverse information on your Innovis credit file could prevent you from receiving favorable offers in the mail. Though many would see no downside to this, it could in fact be disadvantageous with regard to building good credit and getting it at the most favorable rates and terms, as explained in detail in _How to Build Good Credit_. As you are entitled to a free copy of your report at Innovis, it's worth accessing your file (following the instructions in the next chapter) to see what it contains.

**PRBC** is sometimes called the fifth credit bureau. The original phrase on which the initials were based was "Pay Rent, Build Credit." That was later changed to "Payment Reporting Builds Credit," after the organization's scope expanded beyond reporting of rent payments only.

PRBC is a non-traditional credit reporting agency, designed to assist "thin file" individuals, often referred to as the underbanked (not to be confused with "subprime" consumers, whose problem is not lack of credit history but bad credit history). An estimated 50 million Americans are believed to fall into this category.

Take for example the hypothetical case of a couple who immigrated to the United States several years ago. Husband and wife have been paying to rent an apartment, as well as paying fees regularly for utilities and phone service. In keeping with norms from their culture of origin, they have been paying for things in cash. They have no credit cards and not even any bank accounts. They prefer to keep their money in what they consider to be a safe place, not in a bank, and have accumulated a considerable sum toward a down payment for the house they now wish to buy.

Speaking with a loan consultant in their community, they learn that they will not be able to receive financing at a favorable rate because their credit files at the three big-name bureaus are too thin. This is where PRBC might come in. The couple could self-enroll and pay fees to PRBC to compile data relating to their positive non-debt payment histories, for rent, utilities and so on. A FICO Expansion Score, reflecting this positive payment history, could then be provided to the lender, upon request. It should be noted that this strategy depends upon the lender's cooperation, as not all lenders will want to make a credit decision on the basis of an Expansion score derived from a PRBC file.

The fees charged by PRBC for adding rental history are not insignificant: These involve a $39.95 set-up fee, followed by an annual membership fee of $89.95. There are other methods for building good credit (see _How to Build Good Credit_ ) but these generally take longer than the results that may be obtained under optimum conditions, using PRBC's pay-to-play program. Under certain circumstances, this could be a good option, however, resulting in substantial savings over the long run.

If the credit bureau antics and excesses described above concern you, you're probably going to find the news about the newest credit bureau all the more troubling. In December 2011, a company named **CoreLogic** Credco announced a new type of credit file "based on the giant repository of consumer data it maintains on just about everything that most of the traditional credit bureaus do not."

CoreLogic credit reports will not only compile information from Equifax, Experian and TransUnion but on top of that will add all kinds of data previously unreported. Are your homeowner's association dues in arrears? Are you "underwater" on your home mortgage (in other words, is the amount you owe on your home greater than its current market value)? Are you behind in child support payments? Have you applied for any "payday" loans?

CoreLogic will boldly go where no credit reporting agency has gone before, tracking you more closely than has ever been the case with other credit bureaus. One problem here is that some of these data, while superficially correct, are nonetheless misleading and do not tell the whole story. Maybe you have legitimately withheld rental or utility payments because of a matter that was in dispute and ultimately resolved in your favor. (In my case, for example, a city utility company had been overcharging us because of a malfunctioning meter, a mistake on the part of the city, for which we were in the end credited.)

It could also have happened, as a further example, that your landlord had failed to perform in correcting some defect in accordance with the terms of your lease and because of this, you were legitimately withholding all or some portion of rent for the appropriate period of time. None of these extenuating circumstances would be reflected in your CoreLogic file. All your file would show would be negative entries for missed payments.

Why do prospective creditors, especially mortgage companies and insurers, need to know so much about you? "Lenders are looking for ways to expand but to expand safely," according to Joanne Gaskin, director of product management global scoring at FICO, with whom CoreLogic Credco has established a partnership to formulate a new credit score based on new data.

In other words, in today's more conservative lending climate, lenders would like to lend more but believe they need more information in order to safely make credit-granting decisions. More detailed credit reports will presumably allow them to do so. In this way, consumers (the ones with the best credit profiles, at least) will benefit. Loans that otherwise might not have been granted will now be approved. With more money being loaned, the overall economy will benefit, to everyone's general advantage. That's the theory, anyway.

The multi-billion-dollar multinational corporation known today as CoreLogic dates back to 1991, when TRW Real Estate Information Services entered into a partnership with a Dutch publishing company named Elsevier. The firm's credit-reporting arm was subsequently spun off in 1996 to become a separate company, named Experian. After a number of transformations, CoreLogic has decided to get back into the credit reporting business, while remaining actively involved in numerous other financially related areas, including mortgage origination services, risk and fraud analytics and specialty finance solutions.

In February 2011, Anthony "Buddy" Piszel resigned as CoreLogic's chief financial officer, after receiving notice from the Securities and Exchange Commission (SEC) that it was considering taking action against him for certain things he did when he was previously chief financial officer of Freddie Mac. Four months later, the Federal Deposit and Insurance Corporation (FDIC) declared CoreLogic guilty of "gross negligence," having inflated some 75 percent of home appraisals. The FDIC has brought suit against CoreLogic, calling for $283 million in damages. The same month, a subsidiary of CoreLogic called Teletrack was fined $1.8 million by the FTC for FCRA violations. Does this sound like a company that can be trusted with so much power over consumers' credit records? You be the judge.

## FICOs versus FAKOs

The origins of the fabled FICO (Fair Isaac Corporation) scores may be traced back to 1956, when engineer Bill Fair and mathematician Earl Isaac began working with banks and department stores to calculate the creditworthiness of their customers.

The actual FICO (Fair Isaac Corporation) score phenomenon formally made its appearance on the consumer credit scene in 1989, in collaboration with Equifax. A Brookings Institution scholar named Matt Fellowes has gone so far as to call FICO scores "the wizard behind the curtain of the economy." It's also been said that your three-digit FICO can have a six-digit financial impact on your life.

The financial meltdown that began during the first decade of the 21st century has actually been attributed in part to the success of FICO scores. As lenders came to rely on these more and more, they increasingly adopted the shortcut of failing to investigate borrowers' financial capacity. This facilitated the spread of so-called "stated" (unverified) income applications, giving rise to what became known as "liar's loans," as lenders seemed all too happy to use FICO scores as a substitute for laborious underwriting.

A credit score is not intended to predict your _ability_ to pay ("capacity"), which is measured by your income and assets. Rather, credit scores are intended to predict whether you are _likely_ to pay your bills, based on the principle that past behavior is the best predictor of future performance. Credit scores rely completely on the information in your credit reports.

Speaking in terms of "my FICO score" is actually inaccurate. You do not have a single FICO score, any more than married couples "share" the same scores by virtue of being married. In reality, you have a variety of different FICO scores, each associated with a different credit bureau or a different process (such as a special "Expansion" score).

Lenders that pull an applicant's FICO scores from the three best-known credit bureaus will often discard the high and low scores, using the middle one, rather than averaging all three. This follows the statistical principle of use of the median value as one that offers a more accurate picture, with the elimination of "outlier" values. If CoreLogic Credco's reports take off, the CoreScore FICO may supplant this practice, as CoreScore file data are drawn from Equifax, Experian and TransUnion.

The FICO scoring system (also known as a mathematical formula or algorithm) awards points for each factor that is considered in predicting a person's likelihood to repay debts on time. The point total, the "credit score," forecasts a consumer's future behavior with regard to making payments. Otherwise stated, the FICO score—a three-digit number between 300 and 850—represents a snapshot of an individual's creditworthiness at a particular point in time. The higher the score, in general, the more likely an applicant is to be approved for credit at favorable rates.

Fair Isaac's formula or algorithm is billed as a trade secret, although some have claimed to have reverse-engineered it. Nonetheless, the key factors and how they are weighted are disclosed on the company's website (myFICO.com):

  * **Payment history (35%)**. This category includes any adverse public record items (such as bankruptcies, judgments and liens), as well as collection accounts.
  * **Amounts owed (30%)**. This addresses the critically important "utilization ratio," the percentage of your available credit of which you are making use. Utilization ratios above 30 percent are considered high.
  * **Length of credit history (15%)**. This considers both the time since an account has been opened, as well as the time since there has been activity on the account. One valid reason to avoid closing an account one does not otherwise need is that, without it, the consumer's length of credit history may suffer.
  * **New credit (10%)**. This category includes not only recently opened accounts but recent "hard" inquiries and requests for credit. Consumers are penalized for new accounts, as well as an excessive number of such inquiries within a 12-month period.
  * **Types of credit used (10%)**. Points are awarded for a "diversity" of types of accounts: credit cards, retail accounts, installment loans, home mortgage and so on.

Contrary to popular belief, income, ethnicity and job history are not considered in FICO scores. The importance of any of the factors above for any given consumer depends on the overall information in that person's credit report.

As Fair Isaac states on its website: "For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your FICO score.... What's important is the _mix_ of information, which varies from person to person, and for any one person over time" (emphasis added).

In 2007-2008, the bar for good credit scores went up, with the following rough breakdown:

  * **760 +** = very good
  * **700 - 760** = good
  * **650 - 700** = fair range
  * **600 - 650** = bad score
  * **< 600** = very bad

As a general rule, all other things being equal, the higher your score, the more likely you are to be granted credit on the most favorable terms, which over the course of a lifetime represents tens or maybe even hundreds of thousands of dollars in savings. The current median score, according to Fair Isaac, is approximately 711. According to CreditKarma.com, the average FICO score nationwide is an ominous 666. As nearly 40 percent of consumers have credit scores below 660, that is the percentage that would likely be denied for home and auto loans, charged sky-high interest rates on other products and would probably only qualify for a secured credit card (explained in some detail in _How to Repair Bad Credit_ ).

A recent Columbia University business school study found a positive correlation between patience, along with willingness to defer gratification, and higher FICO scores. Other research, such as the results of a recent study published in the _Journal of Consumer Research_ (June 2011 issue) supports these findings. So if you find yourself challenged with lower FICO scores than you would like, it may be helpful to look deeper, beyond just the data on your credit files.

According to a 2003 survey commissioned by the Consumer Federation of America, only two percent of Americans said they knew their credit scores (and only three percent could, unprompted, name the three best-known credit bureaus). Even that number is probably inflated, as some of those who _say_ they know their scores in fact do not. I have heard people brag that "my FICO score is 900," when the scale only goes up to 850—and I have yet to actually meet anyone with a truly "perfect" score. Moreover, there is no such thing as "a (single) FICO score," as discussed above.

The drive on the part of super-achievers to break 800 on the FICO scale has been described as a "fool's errand" because a score of 750-760 will already get you the best rates possible. The probability of default does not drop after that level, which means that creditors will not price an applicant differently and extend better rates, as the risk is virtually the same.

That being said, there is one advantage to scores well into the 800s, apart from the bragging rights that come with them: You will have more of a cushion in the event that something happens to negatively affect your scores.

The FICO Expansion Score was mentioned above in the context of PRBC, a Fair Isaac partner. This is a score based on a file that draws its data from non-traditional sources, a consumer's record of payment for things that are traditionally not reported to the credit bureaus, such as rent, utilities and phone bills. Fair Isaac promotes this Expansion Score in the context of a highly saturated market, dangling the prospect of millions of creditworthy consumers who have been overlooked by competing businesses.

The **variance in FICO credit scores between bureaus** has been documented in Congressional testimony. Stephen Brobeck, Executive Director of the Consumer Federation of America, testified in July 2003 before the U.S. House Committee on Financial Services, in connection with the Fair and Accurate Credit Transactions Act of 2003.

Brobeck described a study of the credit files of 500,000 consumers ("the most comprehensive study of credit reports ever completed"), produced jointly by the Consumer Federation of America and the National Credit Reporting Association, an industry group. The study found that **_29 percent of consumers had discrepancies in their credit reports obtained from Equifax, Experian and TransUnion, resulting in a variance of 50 points or more in their FICO credit scores_**. This points to the importance of familiarizing yourself with your scores associated with the different bureaus—or at least the variations in content between your files. Before applying for credit, ask what credit bureau or bureau will be accessed. For best results, match your applications with the credit bureau or bureaus at which you have the best profile.

People often assume that creditors will not reveal this information but I have yet to encounter a situation in which my question was not answered. If you're ever pressed to explain why you want to know, you could always say something along these lines: "There's an issue I'm working to resolve at one of the bureaus and I want to be sure before I apply that you will be using another one of the reporting agencies."

Though Fair Isaac's algorithm for deriving FICO scores is based on a complex formula incorporating numerous variables, it nonetheless can be manipulated fairly easily by those with a knowledge of the system, as explained in more detail in _How to Build Good Credit_. Also, although FICO naturally disputes the assertion, some analysts point to the increasingly weak predictive power of the score to anticipate borrower defaults on home loans.

According to a study by Fitch Ratings (widely considered one of the big three credit rating agencies worldwide), _the ability of FICO scores to predict borrower default on home loans has been slipping over time_. This has prompted no less an expert than Glenn Costello, co-head of Fitch Ratings' U.S. residential mortgage-backed securities group, to say the data suggest that "there's something wrong with FICO."

Golden West Financial is an example of one mortgage lender that has moved away from FICO after discovering that "some of our best borrowers had low FICO scores and some of our worst had FICO scores of 750." Following its decision to engage in manual investigation of an applicant's creditworthiness, it reports that its delinquency rate on traditional mortgages is running at 0.75 percent, as opposed to the industry average of 1.04.

In the aftermath of the sub-prime crisis, Fair Isaac introduced a new scoring system, known first as FICO 08. The new model is billed as having greater accuracy with regard to predicting defaults. While the original FICO score model penalized consumers equally for any type of delinquency, FICO 08 has been fine-tuned to consider different aspects of delinquency and types of debt involved. Overall, Fair Isaac estimates, FICO 08 will improve the accuracy of lending decisions, reducing default rates by as much as 15 percent.

The newer FICO model will also confer greater rewards for having different types of installment loans, such as auto and home loans. Higher utilization ratios (explained above) and late payment histories will be penalized more severely. The jury is still out on the practice of "piggybacking," becoming an authorized user on an established account in someone else's name.

Fair Isaac CEO Mark N. Greene in a candid moment admitted to _Businessweek_ , in the words of its reporters, that "Fair Isaac has grown insular, even arrogant, over the years as its hold over the credit-scoring market strengthened." The long-term future of the company may depend in part on whether or how well Fair Isaac succeeds in making necessary reforms.

One little-known fact about how credit scores work is the existence within the FICO scoring model of what are called " **score cards**." FICO's traditional scoring model, known as FICO Classic, has ten. FICO's newer model, now known as FICO 8, has at least 12 (some say 16).

A card is like a category. Known categories include consumers with "thin files" (whose profiles contain little data), people who have recently filed for bankruptcy and individuals whose credit histories are both lengthy and clean. FICO does not disclose a complete list of its score cards.

Various items affect consumers in different ways, depending on the card or category to which the individual has been assigned. For example, "An inquiry is not worth the same number of points for a young consumer as it is for someone who's had credit for 30 years," says John Ulzheimer, president of consumer education for Credit.com and a former FICO manager. A young consumer will be docked more points for an inquiry than someone with a credit profile dating back 30 years or more.

Counterintuitively, as your credit improves, your credit score might actually drop—at least temporarily—at certain intervals. Take the example of a consumer who filed for bankruptcy. Once the bankruptcy is ten years old and drops off the regular version of his or her credit report, that person moves to a different score card. The FICO credit score may drop as a result, even though the consumer has not accumulated any new bad marks.

Barry Paperno, a consumer operations manager at FICO, uses an analogy from grade school to explain this paradox: "It's like going from the low-level reading group back in elementary school to the medium-level group. You basically went from being at the top of that low group to the bottom of that higher group."

Overall, FICO scores range from 300 to 850, as mentioned above. Each score card or group, however, has its own individual range. The range for the group with a recent bankruptcy, for example, will not extend to 850. That will also be the case for consumers who are new to credit. This is one part of the credit landscape, at least, that makes sense. A young college graduate has not yet had the opportunity to demonstrate the kind of responsible behavior as an older individual with decades to have established a track record.

You may wonder how you can possibly keep tabs on all of this, especially when FICO is not going to disclose to you which card or category you belong to, at any given point in time. The answer, simply stated, is that you really don't have to worry about it. If you utilize the information in the _U.S. Credit Secrets_ series, you will definitely (with adequate time) be able to extend your FICO credit score to at least 760 or somewhat beyond, which is all that matters. You won't get a better interest rate at 830 than you would at 760.

The federal Fair Credit Reporting Act or FCRA (described in more detail in the next section, below) mandates that Credit Reporting Agencies make available to consumers "credit scores" for a reasonable fee.

The FCRA allows these scores to be of a purely "educational" nature—in other words, not actually used by lenders or others in making decision to grant credit. They may be scores based on a system developed by the credit bureaus, solely for the purpose of selling them to consumers. (Though it would be incorrect to say that no lenders consider any credit scores other than FICO, this is nonetheless overwhelmingly true.)

Well-intentioned as this idea may be—to help consumers understand how the disparate data in their files will work together to generate a true FICO score—the result has been a situation in which the credit bureaus profit handsomely, largely at the expense of consumers. On top of the billions they already make from selling consumer data to businesses, the credit reporting agencies and their affiliates rake in additional billions from the consumers themselves, by selling them their own data, scores derived from those data and services to monitor the data.

There are perhaps two major issues with these phony " **FAKO** " scores, as they are sometimes called, to contrast them with the genuine article. The first issue is the natural confusion created in the minds of consumers when they hear the term credit score. When the offer of getting their "credit score" is dangled in front of them, consumers mistakenly believe they are going to be getting true FICO scores, which of course turns out not to be the case.

The second issue is that "free" credit score offers are often used as bait, to induce consumers to sign up for "credit monitoring" services, which experts unanimously agree are largely worthless. They are worthless, in part, because the monitoring could be accomplished at no cost, by staggering requests for free annual reports from the different bureaus.

In both cases, the problem relates to insufficient disclosure. When consumers are offered "free credit scores," it is not made clear in any of the promotions that these are not actual FICO scores. When consumers are induced to provide credit card information in order to avail themselves of an offer to access their scores and reports, it is often not made clear to them that they will be billed for something else. So it is that largely worthless "FAKO" scores are used deceptively, to drive sales of largely worthless credit monitoring services.

The millions of dollars in penalties levied against the credit bureaus over the years pale in comparison with the billions of dollars in profits from continuing deceptive practices that defraud consumers. For this reason, it's no surprise that the credit bureaus would tend to look upon the occasional fines and settlements as simply part of the cost of doing business.

## Key Laws Relating to U.S. Consumer Credit

Consumer credit emerged as a separate area of the law during the mid-1960s. Consumer credit itself developed as part of the boom economy that followed World War Two, as "buy now, pay later" became part of the American ethos.

To understand the U.S. credit system, it helps to have a basic understanding—or at least some awareness—of the major federal laws relating to consumer protection in this area. Here's a rundown, in chronological order:

  * **Consumer Credit Protection Act** (CCPA) of **1968**. The first general federal consumer protection legislation, this statute is designed to protect those who borrow money, by requiring complete disclosure of the terms and conditions of finance charges involved in the transactions. It also protects consumers by limiting the garnishment of wages and by regulating the use of charge accounts.
  * **Truth in Lending Act** (TILA) of **1968** (actually a subchapter of the CCPA, described above). This act requires that the terms in transactions involving consumer credit be fully explained to borrowers and sets forth three basic rules: (1) a creditor may not advertise a deal that ordinarily is not available to anyone except a preferred borrower, (2) advertisements must contain either all the terms of a credit transaction or none of them and (3) if the credit is to be repaid in more than four payments, the agreement must indicate, in clear and conspicuous print, that "the cost of credit is included in the price quoted for the goods and services." The regulations apply to creditors but not advertising media. Both TILA and the Consumer Leasing Act included therein were amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (see below), which expanded consumer protections by increasing the thresholds for exempt consumer credit transactions and consumer leases from $25,000 to $50,000, also requiring that these dollar thresholds be adjusted by any annual percentage change in the consumer price index, beginning in 2012.
  * **Fair Credit Reporting Act** (FCRA) of **1970** (amended in 1996, 2003 and 2010). Embodied in the title VI subchapter of the Consumer Credit Protection Act (see above), the FCRA represents the first attempt at federal regulation of the "consumer reporting industry" (credit bureaus), as well as investigative reporting entities, detective agencies and collection companies. The main idea is to ensure that reporting activities are conducted in a manner that is fair to consumers and to protect the individual's right to privacy. Even after the various amendments, however, there remain major loopholes that are heavily exploited by the credit reporting agencies, to the detriment of consumers.
  * **Equal Credit Opportunity Act** (ECOA) of **1974**. ECOA makes it unlawful for any creditor to discriminate against any applicant, with regard to any aspect of a credit transaction, on the basis of race, color, religion, national origin, gender, marital status or age (as long as the applicant has the legal capacity to enter into a contract). The law applies to any person who in the ordinary course of business regularly participates in credit decisions, including banks, retailers, bankcard companies, finance companies and credit unions.
  * **Real Estate Settlement Procedures Act** (RESPA) of **1974**. This law prohibits kickbacks between lenders and third-party settlement service agents in the real estate settlement process. Even reciprocal referrals among these types of professions could be construed as a violation of RESPA, which requires lenders to provide a good-faith estimate for all the approximate costs of a particular loan and finally a HUD-1 (for real estate purchase loans) or a HUD-1A (for refinances of real estate loans) at the closing of the transaction.
  * **Fair Credit Billing Act** (FCBA) of **1975**. Enacted as an amendment to the Truth in Lending Act (described above), its purpose is to protect consumers from unfair billing practices and to provide a mechanism for addressing billing errors in "open end" credit accounts, such as credit or charge card accounts. The FCBA gives consumers the right to dispute billing errors by sending a written notice of the dispute to the creditor, which if done according to regulations, triggers duties under the Act on the part of creditors.
  * **Fair Debt Collection Practices Act** (FDCPA) of **1978**. Title VIII of the Consumer Credit Protection Act is intended to eliminate abusive practices in the collection of consumer debts, promote fair debt collection and provide consumers with an avenue for disputing and obtaining validation of debt information, in order to ensure the information's accuracy. The Act creates guidelines under which debt collectors may conduct business, defines the rights of consumers involved with debt collectors and prescribes penalties and remedies for violations. The FDCPA does not apply to in-house collectors, employees of the original collector to whom a debt is owed, who are governed instead by individual state laws.
  * **Electronic Fund Transfer Act** (EFTA) of **1978**. This legislation establishes rights and responsibilities for persons and institutions utilizing electronic funds transfers. Persons who discover errors on their statements have 60 days to report the error or be considered responsible. The customer's legal liability for lost or stolen EFT cards is limited, provided that the financial institution involved is informed of the loss or theft.
  * **Truth in Savings Act** (TISA) of **1991**. This law requires banks to disclose any fees to be charged on customers' accounts. It also requires financial institutions to disclose the conditions under which these fees are enforceable. TISA is intended to help consumers compare deposit accounts offered by depository institutions, mainly through open publication of fees, the annual percentage yield (APY), the interest rate and other account terms.
  * **Home Ownership and Equity Protection Act** (HOEPA) of **1994**. HOEPA places restrictions on the terms of credit, such as balloon payments, and requires additional disclosures when total points and fees payable by the consumer exceed the fee-based trigger (initially set at $400 and adjusted annually) or eight percent of the total loan amount, whichever is greater.
  * **Consumer Credit Reporting Reform Act** (CCRRA) of **1996**. This Act regulates the use of credit reports for employment purposes. Under this law, employers who conduct credit checks on employees must (1) disclose to the employee or applicant in advance the company's intention to obtain a credit report for employment purposes and (2) obtain written authorization from the employee or applicant to conduct the credit check. Before taking any action prompted by the report, the employer must provide to the employee or applicant (1) a copy of the report and (2) a description in writing of the rights of the employee or applicant under this title, as prescribed by the Federal Trade Commission (and provided by the credit bureau).
  * **Credit Repair Organizations Act** (CROA) of **1996** (technically a subchapter of the Consumer Credit Protection Act). CROA is intended to protect consumers from deceptive advertising and fraud on the part of for-profit "credit repair clinics," as they were originally called. The act specifically prohibits credit repair organizations from collecting payment until contractually promised services have been fully performed. The restrictions, requirements and penalties placed on credit repair organizations are such that most companies in this category have effectively been put out of business. Some firms have managed to survive and thrive as nonprofits (in name, at least), which are exempt under the CROA. Credit repair organizations operating as law offices have also apparently managed to sidestep the Act's provisions.
  * **Electronic Signatures in Global and National Commerce Act** (ESIGN) of **2000**. Under ESIGN, electronic signatures and records are deemed equal to their paper equivalents—and therefore subject to the same scrutiny of authenticity. At the same time, the Act preserves the rights of individuals to _not use_ electronic signatures if they prefer. When businesses are required by law to retain a record of a transaction, ESIGN provides that the requirement may be satisfied by retaining the record in electronic form.
  * **Servicemembers Civil Relief Act** (SCRA) of **2003**. The SCRA is an overhaul of the Soldiers' and Sailors' Civil Relief Act of 1940, which dates back to the Civil War, when the U.S. Congress enacted an absolute moratorium on civil actions brought against Federal soldiers and sailors, with various southern states enacting similar legislation. The intent of this law is to enable members of the armed forces to carry out their duties without having to worry about financial and credit-related obligations, which they are often not in a position to attend to, while fulfilling their military duties. The law applies among other things to outstanding credit card debt and mortgage payments but with a variety of conditions and restrictions.
  * **Fair and Accurate Credit Transactions Act** (FACTA or FACT Act) of **2003**. Passed by Congress as an amendment to the Fair Credit Reporting Act, FACTA gives consumers the right to a free copy of their credit report once every 12 months, from any consumer credit reporting agency regulated by the FCRA. The Act also includes provisions intended to reduce identity theft—such as the option to place alerts on their credit bureau files if identity theft is suspected—to deter fraudulent applications for credit. FACTA furthermore establishes higher standards for the handling of consumer credit data. The act contains seven major titles (subchapters), including: Identity Theft Prevention and Credit History Restoration, Improvements in Use of and Consumer Access to Credit Information and Enhancing the Accuracy of Consumer Report Information. Consumer advocacy groups have criticized FACTA for pre-empting stricter state regulations and for providing extremely generous exceptions to banks regarding disclosure of consumers' personal information.
  * **Bankruptcy Abuse Prevention and Consumer Protection Act** (BAPCPA) of **2005**. The "New Bankruptcy Law," as it's commonly known, is one of the more significant legislative changes to personal finance passed by Congress in recent history. The sweeping changes to U.S. bankruptcy laws affect both consumer and business bankruptcies. The deliberate intention, however, is to make it considerably more difficult for consumers to file a Chapter 7 Bankruptcy, under which most debts are discharged (forgiven). Instead, the new law pushes individual debtors toward Chapter 13, which requires them to repay some portion of the debt. The relationship between bankruptcy and personal credit is discussed in some detail in Section 1 of Chapter 3 in this book.
  * **Credit Card Accountability, Responsibility and Disclosure Act** of **2009** (also known as the Credit CARD Act of 2009). The Credit CARD Act is wide-ranging credit card reform legislation intended to "establish fair and transparent practices relating to the extension of credit under an open end consumer credit plan and for other purposes." Though the legislation includes a number of provisions aimed at limiting how credit card companies may charge consumers, it does not include price controls, rate caps or fee setting. Business and corporate credit cards are not covered. Credit card companies are still allowed to close accounts and slash credit limits abruptly, without providing any advance notice to cardholders. CreditCards.com has reported that since the legislation was enacted, "Many banks are already finding ways around the law and launching new fees not specifically banned by the credit card reform law."
  * **Red Flag Program Clarification Act** of **2010**. This law amends the Fair Credit Reporting Act with respect to federal agency (so-called red flag) guidelines regarding identity theft and the users of consumer (credit) reports, to more narrowly define the term creditor. This amendment was precipitated by protests on the part of various entities, such as health-care providers, who asserted that the responsibility of establishing and maintaining identity theft prevention programs was inappropriate for those for whom extension of credit was incidental to the main services provided.
  * **Dodd-Frank Wall Street Reform and Consumer Protection Act** of **2010** , which established the **_Consumer Financial Protection Bureau_** (CFPB. Dodd-Frank, as the Act is known, created a single consumer watchdog agency, allowing consumers free access to their credit scores under certain conditions. The CFPB is vested with the power to regulate a wide range of financial products and services, including credit counseling, payday loans, mortgages, credit cards and other bank products. Consumer advocates have called the new Consumer Financial Protection Bureau "the biggest consumer financial victory since the establishment of deposit insurance after the 1929 Great Crash." In February 2012, the new bureau proposed to oversee the largest consumer reporting companies (along with debt collection firms) under its nonbank supervision program. The tracking of consumer complaints through unified CFPB oversight could go a long way toward greater fairness for consumers, according to John Ulzheimer, former FICO manager and president of consumer education at SmartCredit.com.

The Internet makes it easy to find and search any piece of legislation. Simply enter the name into your preferred search engine. If you're more comfortable with a file in PDF (Adobe Acrobat's Portable Document Format), which you can also easily download to your computer, select that version of the document. You can then type whatever term you are looking for in the search box near the top.

## Answering Arguments Against the Use of Credit

This book is based on the fundamental premise that your personal credit situation is important to you, in the sense that mastery over your credit will at the very least help you save a tremendous amount of money during your lifetime—and, in turn, help you accumulate enough for a comfortable retirement. It could even go well beyond that, to helping you achieve things you otherwise would not be able to achieve, such as getting the job you want (where a credit check might be involved) or starting a business of your own (for which a good grasp of your credit situation would be extremely helpful). As mentioned above, a low credit score, even if it's based on erroneous information, can even prevent someone from being admitted to a hospital, for urgent medical care.

Not everyone, however, takes the position that your personal credit situation is important. At the end of this chapter on how the consumer credit system works, it's appropriate to devote some space to examining this opposing point of view. Two rationales have been presented for "opting out" of the credit system, always paying for everything in cash. The first rationale is either aesthetic or ascetic in nature, while the second is utilitarian.

The first rationale for opposing the use of credit is articulated by proponents of what has been called the voluntary simplicity movement and it is either aesthetic or ascetic (depending on how you understand its philosophy). "Followers of a movement known as 'voluntary simplicity' suggest that reliance on credit is one of the reasons people are overworked and overstressed," in the words of attorneys Robin Leonard and Margaret Reiter, authors of a popular book on credit repair. "Credit gives us the chance to consume—and often we consume far more than we need to live comfortably and at an easy pace."

The utilitarian argument against the use of credit asserts that, as a practical matter, abstinence from credit carries with it more benefits than the use of credit. The use of credit, according to this point of view, is not only without benefit. It is downright dangerous and even harmful. The use of credit is potentially dangerous because it will lure you into overspending and taking on debt that you otherwise would not take on, if you did not access credit. The rules relating to use of credit, furthermore, are too confusing and hard to follow.

To address the utilitarian argument first, my own response to this would be to point out that it is not the use of credit in and of itself that is bad. Credit only has negative outcomes when it is mishandled. When utilized correctly, it offers a multitude of advantages—so much so that it is downright foolish to miss out on them.

We can cite a few of these advantages, by way of overview:

  * Credit offers both safety and convenience, as you don't have to carry around cash or a checkbook.
  * Credit offers security because you are limited to responsibility for the first $50 of fraudulent charges in the event your card is lost or stolen (and typically, in my experience, the bank will not hold you responsible for even that first $50).
  * Credit also offers security in terms of substandard service or merchandise, which can be returned and easily charged back, unlike the situation you encounter when you pay with cash.
  * The judicious use of credit helps build a good credit history, which in turn gives the consumer access to financing at better rates (most people are not in a position to pay cash for their homes), resulting in savings of tens of thousands of dollars during the course of a lifetime.
  * Credit, when used intelligently, can be leveraged to generate substantial cash savings and rewards, as explained later in this book.

With all these benefits at stake, how would it make sense to pass up on all of them? In my opinion, there is only one good reason. Those consumers who are not capable of handling credit responsibly are indeed better off refraining from its use. For these individuals, the benefits of using credit are certainly outweighed by the potential dangers.

For others, for everyone else, this is not the case. For anyone challenged with high-interest debt, furthermore, access to funds at zero interest or simply even lower interest can mean the difference between liquidating the debt in a relatively short period of time—or being effectively condemned to many years of additional (minimum) payments.

To address the argument on the part of the proponents of "voluntary simplicity" against the use of credit, the main point I would raise is this: Mastery of the credit system does not mean that one needs to acquire more material things. And there is no reason why the additional savings you accumulate over the years cannot be used to fund causes you believe in or even an experiment in "sustainable living."

Furthermore, only someone capable of living off the land as a hermit in a remote area, never paying for rent, utilities or phone service—someone who will never need a car, insurance or health care—could truly "opt out" of the credit system. For everyone else, opting out is not really an option. It is for this vast majority that this book has been written.

## Chapter 1 in a Nutshell

There are increasingly fewer areas of your financial life that are not subject to scrutiny and reporting. The influence of credit reports and scores today extends well beyond the world of borrowing, to auto and homeowners insurance, rental applications, employment and even at times hospital admission.

Your credit history and the scores that go along with it serve as your passport to full participation in the U.S. economy. Your ability to take full advantage of numerous financial benefits will be limited, to whatever extent this passport is not in good standing.

Legal scams on the part of big-name corporations against consumers make it all the more important to be vigilant and aware. A survey last year by the U.S. Public Interest Research Group found that 79 percent of credit reports contained errors, while 25 percent contained mistakes serious enough to prevent the individual from obtaining credit.

When people think of credit bureaus, they typically think of Equifax, Experian and TransUnion. But there are three other major bureaus that are worth knowing about, one in particular because it shows the potential for being a game changer in the world of consumer credit reporting. Similarly, be sure you know the difference between genuine FICO scores and what are often called FAKO scores, which the credit bureaus and their affiliates try to pass off as the real McCoy, as bait for overpriced and unnecessary credit monitoring and related services.

Though this chapter is not an absolute prerequisite for credit improvement, a basic understanding of the major components of the U.S. consumer credit system will give you a better foundation for the various aspects of credit improvement—including, most immediately, obtaining and understanding your personal data.

# Chapter 2  
How to Obtain and Understand  
Your Credit Reports and Credit Scores

_Know your opponent and know yourself. Do this and you shall never fail._

_—Sun Tzu_

The previous chapter taught you the basics of the credit system—in particular, the credit bureaus (your adversary, so to speak). The next step is for you to get a handle on what the credit reporting agencies are telling the world about you. There are two dimensions to this, your _files_ and your _scores_. We'll approach each aspect separately.

The vast majority of U.S. consumers have not looked at copies of their credit reports during the past 12 months, though everyone is entitled to one free credit report annually from each of the bureaus governed by the Fair Credit Reporting Act (FCRA). You are also entitled to an _additional_ free report from each bureau if you are on welfare or:

  * You were denied credit within the past 60 days.
  * You are unemployed and planning to seek employment within the next 60 days.
  * You're a victim of fraud or identity theft and have reported it to the police.

**_At a minimum, you should obtain copies of your reports from the three big-name credit reporting agencies:_**

**Equifax**  
P.O. Box 740256  
Atlanta, GA 30374  
(800) 685-1111  
www.equifax.com

**Experian**  
P.O. Box 919  
Allen, TX 75013  
888-EXPERIAN (397-4742)  
www.experian.com

**TransUnion**  
P.O. Box 2000  
Chester, PA 19022  
(800) 916-8800  
www.transunion.com

The government has established a website, FreeAnnualReport.com, for the purpose of helping consumers obtain copies of their credit reports from these three bureaus. There are three main problems with the online method, however. The first problem is that, for many individuals, the identity verification process is so complicated that the website will ultimately generate an error message, informing them that they must instead contact the bureaus directly.

The second problem with FreeAnnualReport.com is that if you want to have paper copies of the reports—which you really will need, in order to understand and work with them (taking notes and marking them up)—you will have to print them out yourself. The data will not print out nearly as well on your printer as they will appear on the hard copies you receive from the credit reporting agencies. And in the case of Experian, at least, the color coding will help you to understand the information (Equifax and TransUnion are black-and-white).

A third issue with obtaining your reports through FreeAnnualReport.com is that you will then be positioned by the bureaus to make any disputes you may have using their online methodology, which will be distinctly to your disadvantage. This will deprive you of the ability to use certified mail, return receipt requested (CMRRR), through the U.S. postal system, to prove the dates that your disputes were mailed and received. This is critical with regard to the 30- and 45-day deadlines for response prescribed by the FCRA (Fair Credit Reporting Act). By forfeiting this right, you lose perhaps the single major source of leverage afforded to you by law. The relevance of the deadlines is discussed in detail in _How to Repair Bad Credit_.

It is not recommended that you send your requests for reports by certified mail, as this represents additional time and expense that is usually not necessary. Only do so if your original requests go unanswered. All you need is **a simple, one-page letter** asking for a free annual copy of your credit report.

Your letter should be signed and dated. After your signature, include the basic identifying information required by the credit bureaus, to verify your identity: Social Security number, date of birth, driver's license or state photo ID number, current residence, previous residence, previous mailing address and current mailing address.

You also have the option of using a form from the FTC's website. The same form can be used to request your credit files from all three big-name bureaus. You will save two first-class postage stamps but it will take longer for you to get your reports, as the form will have to be transmitted to the three credit bureaus. You can find the form by pointing your browser to this URL: www.ftc.gov/bcp/edu/resources/forms/requestformfinal.pdf

In some cases, the credit bureau will respond by asking you to verify your identity, in the form of one document each from two categories. The first will require a copy of a government-issued photo ID, such as a driver's license. The second can be something like a utility bill clearly showing your name and current address. If you wish to attach these to your first request, you may do so.

NOTE: At the outset of your credit improvement program, for the most complete big-picture view, I recommend that you obtain copies from the three big-name bureaus all at once. After you have accomplished that and completed your disputes of whichever items you wish to dispute, you can then stagger your requests, so that you get a copy of your file from a different bureau every four months. For example:

_January_ —Experian, _May_ —Equifax, _September_ —TransUnion

This will effectively serve as a **free credit monitoring service** , saving you the $120 or whatever it would cost you to pay for such a service through one of the credit reporting agencies, an affiliate or compiler.

If you're willing to go the extra mile for yourself, so to speak, it is also recommended that you obtain free copies of your reports from CoreLogic and Innovis, which were introduced in the previous chapter. You make your requests using the one-page letter described above.

**CoreLogic** **Credco** ("CoreScore" credit reports)  
P.O. Box 509124  
San Diego, CA 92150  
1-877-532-8778  
credco.com/consumer/obtain-corescore-credit-report.aspx

**Innovis**  
P.O. Box 1689  
Pittsburgh, PA 15230  
1-800-540-2505

To summarize, **Innovis** is used primarily for purposes of home mortgages, while **CreditLogic** is positioning itself to be more comprehensive than any of the three more familiar, big-name bureaus listed above (Equifax, Experian and TransUnion), including information that has not traditionally been included on credit reports, such as real estate holdings, rental data generated by landlords and utility company payments.

**PRBC** (Payment Reporting Builds Credit) is a pay-to-play, non-traditional credit reporting agency, specifically designed to assist "thin file" individuals, as described in the preceding chapter. The consumer pays fees to PRBC, to have credit history from various sources—such as landlords and utility companies—recorded on their consumer files. A FICO Expansion Score, reflecting this positive payment history, could then be provided to the lender, upon request.

**PRBC**  
MicroBilt Corporation  
1640 Airport Rd., Suite 115  
Kennesaw, GA 30144  
InfoPRBC@MicroBilt.com  
1-800-884-CRED(2733)  
www.microbilt.com/nontraditional-credit-report.aspx

Your file at PRBC will be blank unless you have self-enrolled in its program and paid the required fees to compile data relating to your positive non-debt payment history. Like the other credit reporting agencies listed above, however, PRBC is governed by the FCRA. So if you are curious and willing to invest the cost of a first-class postage stamp, no harm will be done by requesting a copy of your report.

**_After you have obtained copies of your credit files, you will need to sit down with them and understand them._** For best results, you may wish to use a large surface, such as a cleared dining room table. I recommend the following supplies: a pen and notepad, a yellow highlight marker and a small pad of Post-it Notes or something similar.

In his now classic work on psychology and spirituality, _The Road Less Traveled_ , Dr. M. Scott Peck tells the story of how, at the age of 37, he learned to fix things. After a neighbor in effect chastises Peck for not taking adequate time to problem solve mechanical repairs, the psychiatrist finds himself faced with the opportunity to demonstrate his ability to exercise the self-discipline needed to overcome his long-standing impatience in this regard.

Lying on his back on the floor of a patient's car, gazing at the underside of the dashboard on the driver's side, Dr. Peck is trying to pinpoint the mechanism that will release a jammed parking brake. "At first all I saw was a confusing jumble of wires and tubes and rods," he recollects. But after patiently concentrating on what he was looking at, he gradually began to make sense of things and eventually figures out what he needs to know.

You will probably find the feeling of looking at your credit reports for the first time to be similar to what Dr. Peck experienced when looking underneath the dashboard area of that car. At first, it will seem like a confusing jumble of small letters and symbols on paper. If you're willing to concentrate patiently for a while on what you see before you, however, you will gradually be able to sort things out.

**_There are essentially five types of information on your credit files:_** (1) personal identifying information, (2) credit account information, (3) collection activity, if any, (4) public record information and (5) inquiries. There will also be boilerplate "educational" information about your rights under the federal Fair Credit Reporting Act and dispute forms, which you do not have to use.

Your **personal identifying information** will include various versions of your name, as reported by creditors over the years, addresses with associated dates and basic employment data, such as the names of companies you have worked for. Very often, there are minor errors in this section but it's generally not worth the time to dispute any of it because this doesn't figure into your credit score, anyway, and prospective creditors tend not to look at it.

Your **credit account information** represents the heart or core of your report. This shows the history of your payments over time. The various bureaus have different ways of calling attention to late payments or delinquencies, as well as different ways of "slicing and dicing" the data. Your accounts may be organized in categories of satisfactory (no late payments or delinquencies reported) or potentially negative (with the notations just described). Your payments on each "tradeline" account will be reported, month by month, with a symbol or number, showing whether the payment was made on time or, if not, how late it was.

For all three bureaus, you will notice a "timeline" orientation, in reverse chronological order (with the most recent data first), suggesting how the negative items are scheduled to drop off when they reach the end of the reported seven-year timeline. You will also notice that your balances and credit limits are reported. You can calculate your credit utilization ratios for each file, by dividing the collective balances by the collective credit limits, as explained in the preceding chapter.

**Collection activity** will show accounts in collection, including amounts and dates. **Public record information** includes judgments, liens and bankruptcies. If these two categories are populated in your files, you may wish to consult the related sections in _How to Repair Bad Credit_ and Chapter 3 in this publication (on bankruptcy, debt collection or whatever part pertains to your situation).

**Inquiries** are discussed in some detail in _How to Repair Bad Credit_. "Hard" inquiries (which in general are scored and count against you) will be in one section and "soft" or promotional inquiries in another, each clearly marked. Inquiries are rarely worth challenging, unless you become aware of an inquiry that was clearly made in violation of Fair Credit Reporting Act guidelines.

If you take the time to patiently read through your reports, the way that Scott Peck stared at the configuration under the dashboard until he could see the patterns, chances are that everything will eventually make sense to you. To whatever extent it does not, however, you have at least **_three options for getting free help_**.

**Option A** : Make an appointment with an officer at your local bank or credit union branch, explaining specifically that it is for the purpose of getting help understanding your credit reports. That way, you will end up speaking with someone who probably knows enough to help you. At the time of your meeting, you don't need to say anything more than you are trying to get a better handle on your financial affairs. The bank officer will almost certainly respect you for that. It will probably be the first time in that person's career that a customer has ever asked for that kind of assistance and he or she will be flattered.

**Option B** : Call the credit bureau and tell the person who takes your call that you need help understanding information on your report. Limit your questions at any particular credit reporting agency to your file from that agency. Call each bureau for which you have questions about the profile that's generated. Avoid Mondays, to reduce your time on hold. Call later in the week, if possible.

**Option C** : Online discussion forums relating to consumer credit (listed in _How to Repair Bad Credit_ and _How to Play and Win the Credit Card Game_ ) represent a third option for getting free help understanding your credit reports. First use the local search engine to search the archives at the forum, to see whether your question has previously been answered. If you don't find the answer there, familiarize yourself sufficiently with the forum to know the appropriate place to ask your question. Make sure you know the group's protocol. You will have to register (which is always free), before you are allowed to participate. Then post your question and select the option to notify you whenever answers come in.

Options A, B and C are not mutually exclusive. You can use a combination of all three. Between the bank officer, the credit bureaus and the online discussion forums, there should be no question that goes unanswered.

**Bonus idea:** Find the website for a local community college and search for an instructor who teaches courses relating to personal finance. Email that person in advance to ask for permission to visit during office hours for help reading your credit reports. The mission of these colleges is generally to contribute to the larger community in which they are based and not just to serve their students, so this may also be a good opportunity to get help. If you hit it off with the instructor, you may decide to enroll in a class.

## How to Obtain Your Genuine FICO Scores

Unlike the system regarding credit reports, the company behind FICO scores, **_Fair Isaac_** , **_is NOT required by law to provide consumers with their scores at no charge_** once a year—or any other interval of time, for that matter. Credit reporting agencies are required to make available for a reasonable fee an "educational" score, which is of little practical value.

The media are full of "free" offers that promise to give you your "credit score" or scores, if only you stop by to register at a particular website, with a cleverly conceived domain name. Sometimes, the offer is tied to a "free" credit report. In most cases, these offers are at best misleading, in two ways.

First, they are misleading because the "credit score" in question is an "educational" score, rather than one of the official FICO scores that is actually used by creditors in making decisions to extend credit. (We say "one of the official FICO scores," because a unique FICO score is developed from the data at each individual credit bureau. Typically, a consumer will have _three_ different FICO scores, at Equifax, Experian and TransUnion.) As the "FICO vs. FAKO" section in the Chapter 1 points out, the only credit scores that really count are your FICO scores.

The second reason these offers are misleading is that they have a hidden agenda, which tends to be devilishly well-concealed. The objective is to get your credit card information for "registration" purposes and then charge you monthly for some kind of credit monitoring service that you really don't need.

New **_federal law requires that creditors disclose to consumers their credit scores_** obtained in the process of considering them for credit, regardless of whether the consumer was approved or denied. In the event of an "adverse action" (denial), the lender must provide to the consumer:

  * The specific credit scores on which the adverse action was based.
  * The date on which the credit scores were created.
  * The range of possible scores under the model used.
  * The top factors or reasons that caused the credit scores to be low.
  * The name of the credit reporting agency or agencies that provided the credit score.

The top factors or reasons must be ranked in order of their importance and should not exceed four in number, unless the number of inquiries is a factor and not already reflected in the top four.

If you do not receive your scores from a creditor as a result of having applied for credit, there are several ways of obtaining your FICO scores:

  * Purchase your Equifax and TransUnion scores at MyFICO.com.
  * Receive your Equifax score through a free trial offer at MyFICO.com.
  * Get your Experian score for free, as part of a credit union membership.

The free trial offer at MyFICO.com currently works this way: You sign up for a ten-day free trial Equifax credit report monitoring service called Score Watch, by registering a valid credit card number. You get instant access to your Equifax report and your FICO score based on that report, as well as an analysis of where your score is weak and how it could best be improved. If you cancel this subscription within the ten-day period, you have no further obligation. This free trial is only available once during a two-year period, however. As stated at the website: "If you do not cancel prior to the end of the 10-day trial, you will be billed at the monthly subscription rate of $14.95 when the 10-day trial expires. A three month minimum subscription applies." The various benefits involved if you do not cancel are described at MyFICO.com.
The credit scores offered through the three big-name credit bureaus and the availability of true FICO scores are summarized in the two tables immediately below.

Table 2-1. Credit Scores Offered through the Three Big-Name Credit Bureaus

**Credit Bureau Name** | **Web Address( es)** | **Credit Score(s) Offered**  
---|---|---  
Equifax* | www.equifax.com |

Equifax Credit Score

FICO Score

Experian |

www.experian.com

www.freecreditscore.com

www.familysecure.com

| Experian PLUS Score  
TransUnion |

www.transunion.com

www.truecredit.com | VantageScore

(formerly: TransRisk Score)

_* Equifax is the only one of these three credit bureaus licensed to sell FICO scores._
Table 2-2. Availability of True FICO Scores  
**Associated Bureau File** | **Score Provider** | **Fee**  
---|---|---  
Equifax |

equifax.com

myFICO.com

M & T Bank | $19.95 with credit report

$19.95 with credit report

$2.99 monthly

Experian |

Credit Sesame

psecu.com

(see explanation below) | Free, with site registration*

Free, with CU membership†

($6 minimum to open account)

TransUnion |

myFICO.com

| $19.95 with credit report

_* No credit card required to register at CreditSesame.com  
† Requires membership in the Arts Association of Harrisburg or the Pennsylvania Recreation & Park Society (PRPS)._
As mentioned in Chapter 1, after 2007-2008, the bar for good credit scores went up, with the following rough breakdown:

  * **760 +** = very good
  * **700-760** = good
  * **650-700** = fair range
  * **600-650** = bad score
  * **< 600** = very bad

## Investigative Consumer Reports

An investigative consumer report is a kind of detailed background check, usually prepared in response to applications for multi-million dollar insurance policies or jobs requiring security clearance. In addition to addressing your general creditworthiness, an investigative consumer report also involves the gathering of information on an individual's character, general reputation and personal characteristics.

The information gathering process may include interviews with neighbors, friends and associates about the subject's lifestyle, character and reputation. Such reports do not include any information about credit history obtained directly from creditors and may not be used for credit-granting purposes.

If a company chooses to perform an investigative consumer report on someone, that person must be notified in advance in writing. If the investigative consumer report is to be used for employment purposes, federal law requires the prospective employer to first obtain permission from the applicant. In the event that the application for employment is rejected as a result of the investigative consumer report, the employer must give the applicant a copy of the report. If an application for insurance purposes is rejected, the applicant may contact the credit reporting agency for more information but the agency is not required to reveal its sources of its information.

## The Effect of Credit Scores on Insurance

Credit scores affect how much consumers pay for insurance, except in those states where the practice is forbidden by law (such as California). The type of insurance affected is home and auto. Health, disability, long-term care and life are not affected by insurance credit scores, though a multi-million dollar life insurance policy could prompt an investigative consumer report, as described above.

Insurance scores differ from FICO scores, in that most insurance companies use scores tabulated by a company called Choice Point (see table below). This company combines your credit history and prior claims history to develop the score that is marketed both to insurance companies and also to you, the consumer, as a Choice Point Attract Insurance Score. You can purchase your auto insurance score or your home insurance score for a fee of $12.95 each. The score comes with a detailed report, known as a CLUE (comprehensive loss underwriting exchange report).

Numerous studies commissioned by insurance companies show that the lower someone's credit score, the more likely that person is to file an insurance claim. Choice Point's Attract scores range from 500-997. Unpaid tax liens remain on these reports for up to 15 years, while positive information may remain indefinitely.

## Specialty Consumer Reporting Agencies

In addition to what has been touched upon above, there is in fact a whole world of what are called specialty consumer reporting agencies or specialty credit bureaus. You have the right to obtain free annual reports from these agencies, just as you do with your files at Equifax, Experian and TransUnion. Some of these files either contain entirely negative data or no data at all on a consumer. These specialty credit bureaus are summarized in Table 2.3 below. This list is provided for informational purposes only. It is not recommended that you pursue collection of your files at all of these companies, as the time involved would exceed the time available to most individuals.
Table 2-3. Specialty Consumer Reporting Agencies  
**Credit Category** | **Company Name** | **Phone**  
---|---|---  
Casinos | Central Credit Services |

702-855-3000

800-833-7110

Checking Accounts |

Certegy/Equifax

CheckCenter/CrossCheck

CheckRite

ChexSystems

International Check Services

SCAN

TeleCheck | 800-437-5120

800-843-0760

800-466-2748

800-428-9623

800-526-5380

800-262-7771

800-835-3243

Employment |

Choice Trust Employment Reports

| 866-527-2600  
Insurance |

CLUE Auto History

CLUE Homeowners' History

ISO's A-Plus Auto and Property Databases | 866-312-8076

866-312-8076

800-709-8842

Medical Information |

Medical Information Bureau (MIB)

MedPoint (Optuminsight)*

Milliman, Inc.* | 617-426-3660

888-206-0335

206-624-7940

Rental Information |

Accufax

American Tenant Screen

ChoicePoint Tenant History Reports

National Tenant Network

Tenant Data Services

Tenant Screening Services

UD Registry | 800-256-8898

800-888-1287

877-448-5732

800-228-0989

800-228-1837

800-296-5050

818-785-3905

_* The Web-based form to order medical reports from Optuminsight (formerly Ingenix) and Millman, requiring a fee of $20, is located at AnnualMedicalReport.com_

## Chapter 2 in a Nutshell

Whatever your situation is and whatever your plans are regarding credit improvement, debt reduction and so on, you should at a minimum request copies of your consumer reports from the three big-name bureaus: Experian, Equifax and TransUnion. The law entitles you to a free copy of your credit report from each bureau at least once a year. The best way to do this is by postal mail, as explained in the beginning of this chapter.

Following your retrieval of all reports at once, when you're getting started, you may in subsequent years stagger your requests so that you get a copy of your file from a different big-name bureau every four months. This will effectively serve as a free credit monitoring service, saving you the $120 or whatever it would cost you to pay for such a service through one of the credit reporting agencies, an affiliate or compiler.

There are several ways of getting help for free to understand your credit report, if you are unable to do so on your own: (1) in person, from an officer at your local bank or credit union, (2) by phone from the credit bureaus and (3) over the Internet, from one of several online discussion forums devoted to consumer credit. An instructor who teaches personal finance at a local community college may also be willing to help.

Unlike the system regarding credit reports, the company behind FICO scores, Fair Isaac, is not required by law to provide consumers with their scores at no charge once a year—or any other interval of time, for that matter. There are several ways of obtaining your genuine FICO scores, described in detail in this chapter. Credit bureaus and their affiliates will try to lure you with "FAKO" scores, which are of little real value.

Once you have obtained your credit reports and you understand the data there, you may wish to consult one of the "cheat sheets" in the next chapter, if one or more of the issues described there applies to you. If you have obtained one or more of your FICO scores, you will be all the better positioned to proceed.

# Chapter 3  
Ten Areas You May Want to Know More About

In this chapter, you will find overviews, insights and quick tips on ten areas relating to personal credit that consumers often have questions about. Though the treatments here are not comprehensive, each section offers resources for additional tools and information. Topic areas are listed in alphabetical order: (1) bankruptcy, (2) credit and divorce, (3) credit and marriage, (4) credit counseling, (5) debt collection, (6) debt consolidation, (7) debt settlement companies, (8) foreclosure, (9) home loans and (10) identify theft. Think of these as "cheat sheets" for getting a running start on whatever topics are of particular interest to you.

## 1. Bankruptcy

**The most profound insight—and best advice—relating to bankruptcy** that I have ever heard was articulated by the former lead bankruptcy attorney for the city of Vallejo, California, which filed for Chapter 9 bankruptcy in May 2008. (It was at the time the largest city in the state of California ever to file for bankruptcy.)

Speaking on National Public Radio's _Talk of the Nation_ show on 20 October 2011, Mark Levinson said this: "Bankruptcy is [almost] always a bad choice. **_The only time it's a good choice is when it's the only choice_**."

Levinson was being interviewed in the context of the trend represented by an increasing number of U.S. cities (most recently, Harrisburg, the capital of the state of Pennsylvania) filing for or considering bankruptcy, an action that was previously considered not a viable option for a city or any government municipality.

Levinson pointed out that bankruptcy was the only viable option for the city of Vallejo at the time of its filing, as the other options were either illegal or untenable. Although Levinson was speaking in the context of corporate bankruptcy, the same principle applies to individual bankruptcy (Chapter 7 or 13).

The credit industry lobbied hard and successfully for Congress to tighten existing bankruptcy laws, making it more difficult for individuals to discharge their debts under court protection. The industry's efforts culminated in the so-called **Bankruptcy Abuse Prevention and Consumer Protection Act of 2005** The nomenclature is clearly ironical, as the distinct intent of the Act is not to protect consumers at all but rather to protect the interests of their creditors.

Individuals who file for bankruptcy must now submit to credit counseling and financial management instruction, in addition to undergoing median income and means testing. Those who are deemed unqualified for Chapter 7 ("straight" bankruptcy) may have the option of a Chapter 13 "repayment plan," through which a portion of their debts to creditors are paid in installments over time—typically a minimum duration of five years.

Those who are deemed unqualified for either Chapter 7 or Chapter 13 must withdraw their filings. For purposes of the credit bureaus, it should be noted that **_a bankruptcy filing that is withdrawn is treated similarly to one that is not withdrawn_**. It shows up on the consumer's record and has similarly negative effects.

The greater difficulty in getting approved for bankruptcy, in combination with the consequences of a filing that must be withdrawn (offering none of the benefits of bankruptcy, while suffering the penalties for having the item on record), makes it imperative that a consumer get good legal advice in this regard. Filing on one's own, without an attorney or only with assistance from a paralegal, is not recommended.

To educate yourself about bankruptcy, you may wish to consider the Nolo Press series of books on this subject, in particular, _The New Bankruptcy: Will It Work for You?_ by Stephen Elias (2011) and _Solve Your Money Troubles: Debt, Credit & Bankruptcy_ by Robin Leonard and Margaret Reiter (2011)

If you cannot afford the services of a good bankruptcy attorney, you can search the American Bankruptcy Institute's helpful online **Bankruptcy Pro Bono** 70 **Resource Locator** (which you can find at probono.abiworld.org), to locate a bankruptcy attorney who will help you at no charge. If you don't qualify for pro bono services, you may be able to work out an installment plan with a non-pro bono attorney

How can you tell whether a bankruptcy attorney (or any other service provider, for that matter) is good? Go online and search review sites such as Yelp.com or simply google the name and identifying information (profession and location) followed by the word reviews. To avoid incompetent service providers, google their names and other identifying information followed by the word complaint. That doesn't give you any guarantees of course but if someone has been in business for a number of years, it should expose most of the bad apples.

Before you invest your time in consulting with an attorney, you may wish to consider these **two key questions** : (1) Is there anything more that you could do to meet your financial obligations? and (2) Is there any hope of finding a solution acceptable to both your creditors and you, outside of bankruptcy?

When bankruptcy is indeed the only viable option and the person filing will be deemed qualified, it may give comfort to know that many famous people who have filed for bankruptcy subsequently thrived: Henry Ford and Walt Disney are two well-known examples. Bankruptcy protection has been sought by many prominent corporations

Donald Trump's companies have filed for bankruptcy (Chapter 11 "business bankruptcy") no fewer than four times. When businesspeople do it, they avoid the word bankruptcy. They refer to it euphemistically as "restructuring debt," speaking of it in positive and even glowing terms. "I've used the laws of this country to pare debt," The Donald told ABC's George Stephanopoulos in April 2011. "We'll throw [the company] into a chapter. We'll negotiate with the banks. We'll make a fantastic deal. You know, it's like on _The Apprentice_. It's not personal. It's just business."

If Donald Trump is not your hero, you may prefer to turn your thoughts to three leading historical figures who filed for bankruptcy: Thomas Jefferson, Abraham Lincoln and Mark Twain.

Once you've concluded that bankruptcy is inevitable, in addition to considering yourself in good company, you may take heart in the pronouncements of the experts to the effect that " ** _it's easier to reestablish credit after a bankruptcy than it is for a person who hasn't filed bankruptcy and has bad credit_**."

As Nolo Press attorneys Robin Leonard and Margaret Reiter reveal in more detail: "Ironically, a bankruptcy may help you start building good credit sooner than if you don't file for bankruptcy and continue to struggle with more debt than you can pay, especially if you wind up filing bankruptcy later anyway. Eliminating or reducing debts through bankruptcy will help you (when the bankruptcy is over) to meet the two most important goals for a good credit score: making your payments on time (35% of your FICO score) and not using most of your available credit (30% of your FICO score). Creditors vary in how soon after a bankruptcy they will offer credit, or good interest rates and credit terms, but they tend to treat your more recent credit history as more important than older problems."

In fact, in the words of Leonard and Reiter, "For many creditors, **_your greatly reduced debts after bankruptcy and the prohibition on filing bankruptcy again for several years actually make you an attractive candidate for credit card offers_**."

According to a 2000 study entitled _The Fragile Middle Class: Americans in Debt_ one in three individuals who file for Chapter 13 (the so-called wage earner's plan) subsequently converts to a Chapter 7 ("straight bankruptcy"). Bankruptcy expert Stephen Snyder speculates that the figure is closer to two in three and in his popular book, _Credit After Bankruptcy_ , he explains why:

"If two people filed for bankruptcy at the exact same time, one filing Chapter 7 and the other Chapter 13, the Chapter 7 filer would have a HUGE advantage. By the time the Chapter 13 filer gets discharged, the Chapter 7 filer has probably already bought a home, financed a new car and acquired a couple of credit cards ... in other words, the Chapter 7 filer is on their way to being fully recovered, while the Chapter 13 filer is still at the starting line." The debtor in Chapter 13 will be making monthly payments to a bankruptcy trustee for several years, in other words, while the debtor who enters into Chapter 7 is immediately discharged

Be aware that if you first file for one type of bankruptcy and then convert to another, your two public-record filings will likely both be picked up on by the credit bureaus, resulting in " **Chapter 20** " status, the informal name given to consecutive filings of the two different types of personal bankruptcy. The challenges of rebuilding credit in this situation are understandably greater.

Despite the 2005 Act, which initially reduced the number of both business and personal filings, those numbers have since been rising again steadily, from 617,660 total filings in 2006 to 1,536,799 in 2010, according to the American Bankruptcy Institute. The Consumer Bankruptcy Project II study finds that there is still a substantial stigma associated with bankruptcy, although this stigma has declined. The study also finds that "even though some upper- and lower-class Americans may find themselves in bankruptcy court, bankruptcy is a largely middle-class phenomenon."

**How long does a bankruptcy remain on one's record?** Popular wisdom holds that a Chapter 7 remains on one's record for ten years, while a Chapter 13 may drop off after seven years (the time period for the latter being at the discretion of the individual credit bureaus).

What most people do not realize is that the federal Fair Credit Reporting Act (FCRA), even as it was amended in 1996, allows consumer credit reports to include bankruptcies and certain other public record items to remain on consumer credit reports indefinitely if the consumer credit report is used in connection with:

  1. _a credit transaction involving, or which may reasonably be expected to involve, a principal amount of $150,000 or more;_
  2. _the underwriting of life insurance involving, or which may reasonably be expected to involve, a face amount of $150,000 or more; or_
  3. _the employment of any individual at an annual salary which equals, or which may reasonably be expected to equal $75,000, or more._ _ **80**_

In these three scenarios, in other words, bankruptcies and other public record items such as civil judgments, collection accounts and tax liens, may follow you **_forever_**. Yes, that's right: for all eternity, as far as the Fair Credit Reporting Act is concerned

It's also worth keeping in mind that some applications for credit or employment ask whether the applicant has "ever" filed for bankruptcy. In this situation, an applicant to whom this applies is obliged to answer in the affirmative, regardless of how many years have passed since the filing(s). This contributes to making bankruptcy a "forever" kind of decision (though it is said to be illegal for an employer to discriminate against someone for having a bankruptcy on record

The good news is that the importance of these negative items will decline over time. If you re-establish good credit, ten years after the fact, it won't matter much that you had a bankruptcy. It is nonetheless sobering to know that this information can follow an individual forever. Clearly, the decision to file for bankruptcy calls for careful consideration.

**Some overreact to bankruptcy by living their lives on a cash-only basis** thereafter. By never re-establishing credit, they have no access to credit when they need it. As a result, they are both inconvenienced and handicapped. Furthermore, their bankruptcies and other negative public-record items from years ago will carry greater weight, when not followed by good credit that supersedes the bad

When re-establishing credit, it is best to avoid predatory type finance companies with high-interest loans of all kinds (including auto loans, rent-to-own programs and payday loans). These types of loans will stigmatize you, negatively affecting your credit profile.

As tempting as "easy credit" may sometimes seem, a consumer trying to re-establish credit after bankruptcy should only open accounts with mainstream lenders offering reasonable rates. (For more details, see _How to Build Good Credit_ , publication #4 in the _U.S. Credit Secrets_ series.)

**Types of credit that are beneficial** include secured credit cards, gasoline cards, retail store cards and secured loans from banks and credit unions. Experts advise starting with a checking and savings account, as the basic building blocks for re-establishing good credit.

You should also prepare a **statement** explaining why you filed for bankruptcy and memorize a short version of that statement. It is your "elevator speech," to be used for purposes of credit and job applications, when the bankruptcy on your record must be addressed. The written version of the statement may be submitted when appropriate.

Ideally, the filing can be attributed to a traumatic event or series of events, beyond your control. You take responsibility for it, express contriteness (regret or sorrow for sins or offenses) and say you have learned from the experience, having taken steps to ensure that the situation that led to your bankruptcy will not happen again. An example follows.

_My credit report will show that I filed for bankruptcy in 2008. It's certainly not something I'm proud of. The year before, I developed a serious illness and racked up six-figure medical bills, which I ultimately could not pay. My only choice was to declare bankruptcy, as much as I didn't want to do that. Since that time, I've re-established good credit and taken steps, such as increasing my insurance coverage, to make sure that something like that does not happen to me ever again._

Here are some **additional tips** to consider for those who wish **to expedite** their **recovery from bankruptcy** :

  * Consider keeping open one or two of your older, lower-balance cards or lines of credit, by "reaffirming" them, in the bankruptcy. This means that these debts are not included in your bankruptcy, so only do this if you can manage to pay what you owe.
  * Apply for a secured card. One of the best places to look for such a card is the bank at which you have your checking and savings accounts but you can compare programs online, using the various comparison URLs given in _How to Build Good Credit_. Consult the guidelines for applying for secured cards there.
  * Open what is referred to as a passbook installment loan. This is a loan that is collateralized by the money in your savings account. Especially if your account is with a credit union, make sure that your positive repayment history will be reported to all the major bureaus.
  * After your discharge, check to see whether the bankruptcy appears on your files at all the major credit bureaus. If it does not, as is sometimes the case, you could explore the strategy detailed in Chapter 1. Simply stated, this involves applying for credit at those places that access the credit bureau at which you have the most favorable consumer file.
  * Reference the guidelines in _How to Build Good Credit_ (publication #4 in the _U.S. Credit Secrets_ series), particularly the section entitled "Recommended Strategies for Building Good Credit," as the general principles for (re)establishing good credit after bankruptcy will be similar to building good credit in any scenario.

In conclusion, the decision to file for bankruptcy is one that should be approached with utmost caution. The information and resources above should help you arrive at an informed decision, the one that is best for you. If bankruptcy is truly your only viable choice, however, the tips here will help you make the best of it and recover as expeditiously as possible.

## 2. Credit and Marriage

A popular misconception holds that the credit files of married partners are merged upon their joining in marriage and they become "as one" in this aspect of their lives, as in others. In reality, the two spouses continue to have separate credit histories (as well as credit scores), except for the fact that joint credit becomes jointly reported.

Nor is it true that:

  * Credit history is erased when a surname is changed.
  * You automatically become a joint user on your spouse's accounts.
  * Your spouse's poor credit will automatically hurt or damage your own.

All of these are myths, although it may certainly turn out to be true that one spouse's poor habits with regard to managing finances and credit may ultimately have a negative impact on the other partner.

For this reason, many experts urge couples to candidly discuss financial and credit matters, both in terms of their actual situations and also their attitudes toward these topics, prior to entering into a committed relationship. According to these experts, couples who do not have this discussion prior to marriage are taking a foolish risk and setting themselves up for unpleasant surprises.

This may be true but if we step back to look at the bigger picture, we may be even better advised to give more consideration to various tests that have been devised in recent years to determine overall compatibility. A team of British and American mathematicians, for example, conducted a 12-year study involving 700 newlyweds. The newlyweds were given a simple test that grouped them into five categories. On the basis of results after 12 years, the scientists reported that they had been able to determine compatibility to a degree of 94 percent accuracy. For further details, google "the test that can tell you if your marriage will survive." You can find numerous others by googling the phrase, "premarital compatibility test."

If one spouse has excellent credit, while the other has poor credit, joint applications for credit will likely not have favorable outcomes. Ideally, in such a situation, the spouse with excellent credit could serve as the guide or mentor to the spouse whose credit needs to be improved. Using the techniques in this book, the spouse with poor credit can eventually "catch up" with the one whose credit is already exemplary.

One technique that is used in such situations is to add the spouse whose credit needs improvement as an authorized user or a joint card holder onto an account in good standing held by the spouse with exemplary credit. This will result in improving the credit profile—and credit scores—of the other spouse. Before this is done, however, it is critical that the spouse with the flawed record have learned sufficiently good money management skills to avoid doing anything that could do damage to the account history: making purchases irresponsibly, for example, or going over the credit limit.

At the risk of stating the obvious, a spouse whose credit history is good should never be added to an account with a history of late payments or other transgressions, as this would cause the account with negative information to appear on the credit files of the partner with good credit, whose credit may be adversely affected as a result.

One frequently asked question relates to the differences between authorized user status and joint account holder status. People want to know which is the better choice. An authorized user has the right to use the account but is not responsible for payment. The account may not necessarily appear on the authorized user's credit report but the credit card company can be asked to report the account, as well as to discontinue reporting the account.

A joint account holder, in addition to having the right to use the account, is also responsible for payment. The account history will appear on the joint account holder's credit reports, with no option for discontinuing the reporting. A joint account holder is much more difficult to remove from an account than an authorized user. In some cases, it may be necessary to close the account, in order to remove the user.

With all this in mind, the option that represents a better choice for a particular couple depends on the particular circumstances. Careful deliberation is in order, regardless of the ultimate decision.

Sometimes the question arises as to whether the spouse with a weaker credit profile, who is paying higher interest rates as a result, should close his or her accounts, to avoid paying higher rates. This would generally not be advisable, as both individuals should be cultivating strong credit profiles. Closing down one's accounts does not move a consumer in that direction.

A better solution would be to pay off high-interest balances and only use those accounts for purchases when the statement balance can be paid in full within the allotted grace period. If the interest rates are not automatically lowered as a result, you could call to request that this be done.

Typically, when buying a home, one spouse's profile (income and credit history) is not enough to support the financing. Therefore, lenders look at the credit histories and FICO scores of both spouses, in addition to their income. The best interest rates are only available to borrowers with good credit. In order to be in a position to purchase the kind of property you want for your home, therefore, you will want to begin using the techniques described elsewhere in the _U.S. Credit Secrets_ series, to ensure that both spouses have good credit. (For more information on home loans, see that section later in this chapter.)

## 3. Credit and Divorce

Half of all U.S. marriages currently end in divorce, while 75 percent of all subsequent marriages end that way. This unfortunate reality makes the subject of credit and divorce worthy of addressing.

The statute of limitations for most negative items on credit reports gives new meaning to the term "seven-year itch." If you follow the guidelines in this series, however, you will not have to wait seven years after divorce before you enjoy the benefits that good credit has to offer.

**Accounts established jointly** during a marriage continue to be the responsibility of both ex-spouses following divorce. Though a divorce decree may specify one former partner as the party responsible for a debt, the language of a divorce decree is not binding with regard to creditors. If a designated ex-spouse fails to pay a debt as specified by a divorce decree, creditors will report late payment and non-payment information to the credit bureaus, for both parties responsible on a jointly held account.

**Mediation** is preferable to litigation (except perhaps for the lawyers) and it is in the best long-term interest of both parties to keep this in mind. Creating two households out of one is typically a strain on both parties. No matter what an individual receives in the settlement, it is always less than what was previously owned together during the marriage.

Divorce and bankruptcy are often closely linked, although either one may precede the other. Adding **bankruptcy** to the mix vastly complicates the situation and calls for good legal advice. Please refer to the section above on bankruptcy for additional information, including how to find legal help if you cannot afford to pay an attorney.

**_To minimize the negative consequences following divorce, consider these tips:_**

  * **Obtain copies of credit reports before the divorce begins.** This helps the couple assess which accounts and obligations are held jointly. It also serves to document whatever negative and erroneous information is being reported prior to the divorce.
  * **Pay off and close all joint accounts.** This makes for a cleaner separation and minimizes unpleasant surprises. Some creditors may allow for the conversion of a joint account to a separate account. This has the advantage of maintaining "aged" credit, for the spouse who keeps the account.
  * **Be sure the settlement addresses every debt owed.** In the heat of the unpleasantries, it's easy to overlook something. Following the first tip above will help to mitigate against this mistake.
  * **Monitor your credit reports closely during the months ahead.** Use the technique described earlier in this book for establishing a free credit monitoring service, by staggering requests for free copies of your credit reports every three months.
  * **Discontinue use of personal identification numbers (PINs) previously used jointly** , even though extra effort will be required. Even if your ex does not stoop to raiding your accounts, changing the passwords will remove any doubt in your mind, in the event of any suspicious activity.

Financial issues are often mentioned as the number one reason for conflict in a marriage and a major precipitating cause of divorce. Good management of finances and credit during a marriage, therefore, will increase the chances that a couple will stay together. If it's too late for you to use this bit of wisdom to save your current marriage, at least consider it the next time around.

## 4. Credit Counseling

If you're drowning in debt and falling behind in your payments, credit counseling is an option worth considering. A competent credit counseling agency may be able to help you work your way out of debt and get back on your feet again.

Like so many other things in life, **working with a credit counseling service involves a set of trade-offs**. Even a legitimate non-profit service typically charges a small set-up fee and ongoing monthly fees for its services. In that sense, you will be spending additional money for the privilege of receiving this assistance.

A second trade-off that's involved is that **your participation in a credit counseling program may show up on your credit history**. Even after completion of your program, creditors will be unlikely to extend further credit to you until you have accumulated a couple years of solid repayment history.

A third aspect to be aware of is that non-profit services with membership in the National Foundation for Credit Counseling (NFCC), going by the name Consumer Credit Counseling Service (CCCS), receive **_financial support from creditors_** such as major banks and credit card companies. Consumer advocates make the point that these counseling services owe their primary allegiance to creditors, rather than consumers.

Consumer advocates say that if bankruptcy is your better option, you would not hear that from a CCCS counselor, as the counselor represents the interests of the creditors, who would rather have you engaged in several years of payments—to pay off all the balances of everything you owe—as opposed to any other solution that would offer them less money.

Finally, if you do not have a steady source of reliable income that can be tapped for the purpose of paying off your debts in regular monthly installments, a counseling service may deem you unqualified for any of its programs.

You are probably the best judge as to whether you have the self-discipline, organizational skills and sophistication to deal with creditors on your own or you need the services of a counseling agency. If you're the kind of person who needs the services of such an agency, then the relatively nominal fees involved and even the notation on your credit files are probably a price worth paying in exchange for the potential benefit of eventually getting out of debt. (You may be able to get the fees waived if you can't afford them.)

As far as the other issues are concerned, you may be best advised to engage in at least two initial consultations before you arrive at a decision regarding participation in a credit counseling program. First confer with someone at the credit counseling service. Then confer with a bankruptcy attorney, following the guidelines in the first section in this chapter.

Understand that the credit counseling industry is currently unregulated and this lack of regulation translates into danger for consumers who explore alternatives beyond the relatively safe ones given here. Be aware that the Federal Trade Commission (FTC) has in recent years filed more than a dozen civil actions against counseling agencies that have preyed on vulnerable and unsuspecting consumers, grossly overcharging them in exchange for providing little or no real service.

A legitimate counseling agency will provide you with free information, including details of the services they provide, without requiring you to disclose any specific information about your financial situation. You will probably be required to stop using your credit cards, with some exceptions—which is usually a good idea, anyway, for someone who is drowning in debt.

**CCCS** has more than a thousand offices nationwide, in every state. To find a location near you, visit NFCC's website: nfcc.org or debtadvice.org. Counseling is offered in person, by phone and over the Internet. A second legitimate, nonprofit umbrella organization is the **Association of Independent Consumer Credit Counseling Agencies** (aicccaa.org).

Another option for getting referrals to a legitimate credit counseling organization is the **United States Trustee Program** , the agency of the United States Department of Justice that is responsible for overseeing the administration of bankruptcy cases and private trustees. To find a list of DOJ-approved credit counseling agencies, go to justice.gov/ust/. From the vertical navigational menu on the left, click on "Consumer Information," then scroll down the page, to "Credit Counseling and Debtor Education."

Though such credit counseling agencies do not negotiate the debt itself (you will be expected to pay the entire balance), they are often able to reduce or eliminate altogether the _interest_ that you would otherwise be expected to pay, as well as reduce monthly payment amounts. Some late fees or penalties may also be eliminated.

This type of plan is considered voluntary, rather than a legal agreement, and typically extends for a maximum of five years. You will receive monthly statements documenting the disbursement of your funds. During this time, it is expected that the debtor will not apply for or use credit, with limited exceptions. Secured debt such as home mortgages and auto loans are typically beyond the scope of such programs, which focus primarily on consumer-related debts such as credit card balances and personal loans.

Payment plans through credit counseling agencies typically involve paying a lump sum monthly to the agency, which in turn makes payments to your individual creditors. In this respect, it may be thought of as a debt consolidation program, one without any reduction to the outstanding balance. Fees to the agency vary according to state law but typically a set-up fee will not exceed $100, while monthly service fees will not exceed $50.

You may wish to read the sections that follow on debt collection, debt consolidation and debt settlement companies, before arriving at a plan for contacting and working with a credit counseling agency.

## 5. Debt Collection

More complaints to the Federal Trade Commission (FTC) were filed last year against debt collectors than any other industry, approximately 181,000. For more than a decade, I had a kind of inside view of the situation.

I formerly lived in a rental unit across the way from a young man who was a professional debt collector, working out of his home. We shared a small common landing area. When my kitchen window was open on hot summer days, I could not help but hear his end of the conversation, if you want to call it that. The two best words I can think of to describe the way he yelled at the debtors he called are ungodly and blood-curdling.

Imagine a drill sergeant caricature in the movies or on TV, barking an in-your-face question or command at the top of his lungs directly into the ear of the unfortunate recruit. Now imagine that this extends not for a few seconds but for minutes on end, relentlessly. Even though the shouting and browbeating from my neighbor were not intended for me, so extreme was the level of volume and animosity that just hearing it made me cringe and shudder.

Was this type of intimidation a violation of the Fair Debt Collection Practices Act (FDCPA), which in Section 806 states that, "A debt collector may not engage in any conduct the natural consequence of which is to harass, oppress or abuse any person in connection with the collection of a debt"? I am not a lawyer but I have heard attorneys say that it is and that they can recover for the consumer $1,000 for each such violation, as well as actual damages.

A debt is sold to a collection agency after the original holder of the debt deems it to be uncollectable, usually at a discounted rate (a percentage of the original sum). Sometimes, the collection agency does not buy the debt but is compensated on the basis of a set fee or a percentage of whatever money is collected. Even in this latter scenario, in which the collection agency does not own the debt, the collector is usually given the authority to negotiate with the debtor. This involves payment plans and the acceptance of a lump sum settlement for less than the full amount owing. (See number 7 below, "Debt Settlement Companies," for additional information on debt negotiation.)

**Debt collectors function on the basis of fear and ignorance** on the part of consumers. It's a little like the situation you see on crime dramas with suspects who are rounded up by police and then browbeaten relentlessly in a small interrogation room (presumably after being read their Miranda rights), utilizing all manner of psychological tactics. These match-ups are typically unfair, pitting a team of hardened investigators against a suspect who may have no experience at all in dealing with the police. The suspect may be completely innocent but is not capable of protecting his or her rights when going up against law enforcement professionals. Many a false confession has been elicited under such circumstances.

All the suspect had to do, however, was to refuse to speak to investigators and insist on the right to confer with an attorney. That would stop the interrogation dead in its tracks. A consumer contacted by a debt collector can do basically the same thing, with a simple letter, as will be described below.

**If you receive a debt collection phone call** , the best approach is to ask the caller five key questions, being sure to write down all the answers:

  * What is your name?
  * What is the name of the collection agency on whose behalf you are calling?
  * What is the address at which I can contact the collection agency?
  * What is the name of the creditor?
  * What is the amount that is claimed I owe?

Do not answer questions or offer any information about yourself. Tell the caller you will look into the matter and ask the collector to send you a letter describing the claim (this is a legal requirement). Designate a folder or large envelope into which you place all material relating to the collection.

**Collectors have many techniques** for achieving their objectives—some legal, others not. Debt collectors are not allowed to threaten you, harass you or lie to you. On the other hand, debt collectors _are_ allowed to:

  * Contact you directly unless you provide contact information for your attorney.
  * Call you by phone during the hours of 8 a.m. and 9 p.m., your time.
  * Call you at your place of employment.
  * Send you letters by postal mail.
  * Contact others for information about where you live and work.
  * Add charges to your balance owing and raise the interest rate.
  * Ask you to write post-dated checks (depending on your state laws).
  * Report information about your account to the credit bureaus.
  * Repossess the item, if the debt involves a purchase.
  * Seek a court judgment against you.
  * Garnish your wages or put a lien on your home, if the judgment is successful.
  * Negotiate a new agreement or settlement with you.

One particularly insidious trick that collectors employ with regard to people who don't take their phone calls is to contact neighbors and ask the neighbors to leave a note on your door, asking you to call so-and-so about an important matter. (The collector is not allowed to engage the neighbor in conversation about your alleged debt or even reveal that you are being contacted with regard to collection of a debt.)

**You have the right to dispute a collection action** , by writing to the collection agency, to deny the debt, if this happens to be accurate. Several years ago, the wife of an independent contractor I had engaged—and paid well for his services—got the notion that I owed them more money, when in fact I did not. She engaged a law office, functioning as a collection agency, which sent me an ominous-sounding letter. I responded as follows:

_Dear Mr. [name of attorney]:_

_This is in reply to your letter (file number xxxxxxx), referencing a claim by [name of claimant] in the amount of $xxx._

_I DISPUTE THE VALIDITY OF THIS CLAIM, in its entirety._

_PLEASE CEASE AND DESIST FROM ALL FURTHER COMMUNICATION WITH ME, WRITTEN AND ORAL._

_This is not a valid claim. I am aware of the laws pertaining to credit and collection. I will not hesitate to pursue action against anyone who violates the law or my legal rights. One may not damage someone's credit simply as a way to blackmail a person into paying out money that is not rightfully owed._

_Sincerely,_

_[signature above typed name]_

_P.S. I will first fax this letter to the number on your notice (xxx-xxx-xxxx) and then send it to you by certified mail, return receipt requested (#xxxx xxxx xxxx xxxx xxxx)._

I never heard from that collection agency again but the contractor's wife consecutively engaged two other collection agencies, to attempt to collect from me the same debt that I did not owe. I sent them the same letter, always by certified mail, return receipt requested. Finally, Mrs. Z left me alone and that was the end of the matter. She had no documentation to back up her claim. By the way, can you guess who helped me with that letter to the collection agency? It was my neighbor across the way, the debt collector, who I approached for guidance. We always enjoyed cordial relations.

You also have the option of writing to the collection agency to ask that it stop contacting you, by phone or mail. If the collector receives documentation to the effect that the debt is legitimate and the legitimacy of the debt is not in dispute, even though the collection agency is prohibited from contacting you by phone or mail, it may continue to pursue other collection activities, such as initiating court action.

The Privacy Rights Clearinghouse (PRC)—a project of the Utility Consumers' Action Network (UCAN), a non-profit consumer advocacy organization—has produced a series of **sample letters to collection agencies** that you can access online for free on this page of their website: www.privacyrights.org/Letters/letters.htm#Debt

The same organization has produced an excellent **online guide to dealing with collection agencies** : http://www.privacyrights.org/fs/fs27-debtcoll.htm

Always send such correspondence by certified mail, return receipt requested (ask at the post office for the proper forms, if you need help). I also recommend faxing a copy of the letter first, making sure to keep a copy of the confirmation of transmission receipt. Keep all materials related to the matter in an appropriately labeled file. It's important that you be organized and have easy access to all your documentation. As there is no statute of limitations on collection efforts—even though there are statutes of limitations on debts (more on this below)—it's prudent to keep the file indefinitely.

One major point with regard to debt collection negotiation, as it relates to a consumer's credit profile—in the event that the debt is legitimate—is that the consumer has the option of negotiating how the item will be reported to the credit bureaus. The collector or creditor may be required, as a condition of settlement, to request removal of the item from credit bureau records. If a consumer tries to negotiate this condition directly with creditors or collectors, the likely response will be that reporting guidelines prohibit the creditor from this type of action. The credit bureaus would say that this type of arrangement compromises the integrity of their data and is therefore prohibited. To best advance and protect your interests as a consumer, it is best to employ in these types of negotiations the services of an attorney specializing in consumer credit matters.

From the perspective of credit history, you need to be aware that this type of activity results in multiple notations on a consumer's credit file: "past due" and charge-off entries (reported by the original creditor), a record of collection activity (reported by the collection agency) and possibly a notation in the public records section if the matter results in a court judgment. A judgment may be followed in turn by other public-record items, such as wage garnishment orders and property liens.

Speaking of court judgments, unscrupulous collection agencies are famous for winning "default judgments," simply because defendants don't show up in court. If you are properly served, don't ignore the court appearance. If you discover a judgment entered against you and you were not properly served (notified by delivery of legal documents), consult with a qualified attorney about getting the judgment overturned on that basis.

In its online factsheet, "Debt Collection Practices: When Hardball Tactics Go Too Far," the Privacy Rights Clearinghouse (PRC) states: "If you find the same account is reported in multiple areas of your credit report, we recommend you dispute this with the credit bureaus and file a complaint with the Federal Trade Commission. Dual (or multiple) reporting of a single account can unfairly lower your credit score."

Section 605(c)(1) of the Fair Credit Reporting Act (FCRA) provides that the seven-year period that a charge-off may be reported on a consumer's reports begins 180 days from the date that the charge-off is first reported to the credit bureaus. The Federal Trade Commission has issued a number of "staff opinion letters" to the effect that the reporting period may not be extended by the party (such as a collection agency) to whom the account has been sold or transferred, when the consumer makes a payment or has some other contact with the successor creditor. Some collection agencies will illegally "re-age" an account, extending the reporting period, for the purpose of gaining additional leverage over the consumer. This is prohibited by the FCRA and can be successfully challenged with the credit bureaus.

Does a debt collector have access to your credit files? The answer is yes. The Fair Credit Reporting Act (FCRA) lists several "permissible purposes" for accessing a consumer's credit reports. One of these permissible purposes is for "review or collection of an account" (FCRA Sec 604(3)(A)). If you are dealing with a debt collector, therefore, it would be prudent to keep close tabs on your credit reports. Use the free "credit monitoring" system described earlier in this book.

In conclusion, let's review these **tips for communication and negotiation with collection agencies** :

  * Educate yourself about your rights. The Privacy Rights Clearinghouse project online guide to dealing with collection agencies (URL given above) is both clear and comprehensive.
  * Don't allow yourself to be rushed. It's easy for experienced collectors to make you feel pressured but if you stick to your guns and refuse to be rattled, you'll come out on top.
  * Prioritize your obligations. If you have multiple financial obligations, in the context of limited funds and income, some obligations will inevitably be more important than others. You must be the one to make that decision, not the collectors.
  * For old debts, either check your state attorney general's website to see whether the statue of limitations—ranging from 2-15 years—has passed or consult with an attorney. Remember that once you make a payment, you restart the clock on the statute of limitations. (There is no statute of limitations for student loans, however). If the statute of limitations (often abbreviated as SOL) applies, the debt collector is truly SOL, in another sense of the term.
  * Keep thorough records of all communications. Follow the suggestions above for creating and maintaining your file. The "paper trail" you create may be critical to a positive outcome.
  * Drive a hard bargain. Keep in mind that debt collection companies typically purchase debts for pennies on the dollar. One of the largest companies, Portfolio Recovery Associates (PRA) during a recent ten-year period purchased more than 650 debt portfolios, with a face value of more than $16 billion, for an average of just 2.5 cents on the dollar. That translates into lots of room for the debtor to negotiate, even if the collection agency does its best to play hardball, pretending that deep discounting is not possible.
  * Use the bankruptcy option as leverage. Creditors and collectors would immensely prefer to get something rather than nothing. They may talk tough but they are aware that it's not in their best interests to drive a debtor into bankruptcy.
  * Consider hiring a professional. Few consumers are capable of holding their own in negotiations with professional debt collectors. Unless you are a rare exception, you would be well-advised to consider hiring a professional, such as an attorney who does bankruptcies.
  * Negotiate at the end of the month. Debt collectors' commissions are based on their totals at the end of the month. For this reason, they tend to be more amenable to accepting a settlement at that time. If you are negotiating on your own behalf, I recommend doing so in writing by letter only (certified mail, return receipt requested). The average consumer is no match in a phone conversation with hardened, experienced debt collectors.
  * Be aware that charged-off debt may be considered taxable income. After a debt is written off, it may be reported to the IRS, which will be harder to shake off than collection agencies.

In addition to the Privacy Rights Clearinghouse project of the non-profit consumer advocacy organization Utility Consumers' Action Network, another excellent resource is the **National Association of Consumer Advocates**. At NACA's website (naca.net), you can search for attorneys in your vicinity by area of practice, including debt collection and a variety of others, such as credit cards, credit bureaus and identity theft.

The Fair Debt Collection Practices Act (FDCPA), mentioned above, gives consumers numerous rights in this regard. You can access the complete text of this law by simply googling the name or searching for it at the website of the Federal Trade Commission (FTC). Note that the FDCPA law does not apply to in-house collectors, who are governed by individual state laws.

Under current U.S. law, **student loans** can rarely be discharged, even in bankruptcy. The Department of Education has turned to private debt collection companies, in its efforts to collect on defaulted student loans. During the first three quarters last year, these government contractors raked in approximately $1 billion in commissions. These commissions of up to 20 percent of the amount recovered prompt collectors to make false representations, in violation of the Fair Debt Collection Practices Act.

Borrowers who find themselves pursued by an aggressive collector may benefit from contacting the nonprofit National Consumer Law Center (nclc.org), to educate themselves about their rights and possibly receive free legal guidance. Consult the Center's Student Loan Borrower Assistance website, studentloanborrowerassistance.org.

## 6. Debt Consolidation

At its most basic level, debt consolidation involves combining multiple loans into a single loan with one monthly payment. Debt consolidation is motivated by a variety of **underlying purposes:**

  * _Convenience._ For some people, multiple payments are hard to keep track of and increase the likelihood that the borrower will be late on one or more accounts, resulting in additional fees and penalties. Servicing a single obligation is easier.
  * _Lower monthly payment._ If you've racked up considerable debt on numerous accounts, you may find it difficult to keep up with all the payments. Combining the debts into a single loan with a lower payment than the combined total of the original loans makes it possible for you to keep up with your obligations.
  * _Fixed interest rate._ If some of the original loans have variable interest rates, consolidating them into a single loan with a fixed interest rate offers stability and a certain peace of mind, knowing that your payments will not spiral out of control.
  * _Lower interest rate._ The ideal scenario, of course, is one in which the interest rate on the consolidated loan is lower than the average of the rates of the original multiple obligations. This enables the borrower to pay down and liquidate the debt more quickly, with more of the money going toward paying the balance, as opposed to interest.
  * _Balance reduction._ If loan consolidation is done as part of a debt settlement process, in theory at least, it is possible to reduce the collective balance, relieving the borrower of some of the burden of the original amount of the debt. From this perspective, a Chapter 13 bankruptcy is a kind of debt consolidation.

Yet another purpose of debt consolidation is to improve one individual's credit profile, for the purpose of achieving a particular objective. Take the example of a married couple in a situation in which one spouse wants to apply for a particular job that will involve a credit check and the likelihood of rejection if that person's credit profiles reveal existing financial obligations. Shifting the debt to the other spouse may enable the couple to improve their income (by getting the job), with a view toward working their way out of debt more quickly.

There are **a variety of ways in which debt consolidation can be accomplished:**

  * _Finance companies._ Ease and convenience can make it tempting to consolidate debt with a low-end lender. This temptation should be resisted because of the accompanying disadvantages. Though the monthly payment may be lower, the interest rate will typically be high, so more money will be paid out in interest over time. Also, these types of loans tend to lower one's credit scores.
  * _Chapter 13 bankruptcy._ As mentioned above, Chapter 13 is a kind of debt consolidation, as the debtor is combining debts into a single obligation, to be paid monthly to the trustee, who in turn disburses funds to the creditors. Some reduction of the debt is also involved, with approved filers paying a certain number of cents on the dollar. There are of course multiple disadvantages to this course of action, described in some detail in section one above, on the subject of bankruptcy.
  * _Debt settlement company._ Programs through this type of company are actually quite similar to a Chapter 13 bankruptcy, in the sense that your debt is reduced (in theory, at least), you make payments over time to a single entity—and you will not be considered creditworthy for some time to come. Debt settlement companies are not recommended, for reasons that will be explained in the next section.
  * _Borrowing from retirement accounts._ Financial planners will tell you that borrowing from a retirement account should be considered as a last resort, only to be considered when better financial options are not available or the loan will help you improve your overall financial situation. Not all retirement accounts allow for this option but when they do, the interest rates are favorable relative to credit cards and although the amount you pay in interest may be double taxed, at least the interest will be paid into your own account. It is highly recommended that you consult with your financial planner prior to making such a move, as there are numerous considerations and ramifications involved.
  * _Borrowing against insurance policies._ Some policies with cash value may be more suitable for borrowing than for others but, in any case, the principle articulated above with regard to borrowing from retirement accounts applies here as well: This type of loan should only be considered as a last resort, when better financial options are not available or the loan will help you improve your overall financial situation. There are often hidden costs involved and, of course, the death benefit is reduced by the amount of the loan, thwarting the purpose of the policy. Be sure to consult with a financial planner (ideally you work with someone who is fee-based, rather than commission-based) before availing yourself of this option.
  * _Personal loan._ This type of loan has been defined in different ways. One definition makes the dichotomy between personal loans and business loans. Based on this definition, any loan that is not for business purposes is considered a personal loan and most of the options listed here would be personal loans. Another way of defining a personal loan would be money that is borrowed on the basis of a personal relationship, from a friend or family member. If such a loan is offered on favorable terms, it can be a preferred option. Great care should be exercised to make a formal agreement and abide by its terms, lest the relationship on which the loan is based be jeopardized.
  * _Financial institutions._ Credit unions, regional banks, community banks and even big mainstream banks are also potential sources for debt consolidation loans, on better terms than those offered by finance companies. The bonus chapter in _How to Borrow Money at Zero Interest_ offers details in this regard.
  * _Home equity loan or line of credit._ A home equity loan is taken as a one-time lump sum, to be paid off during a set period of time. Sometimes called a term loan, it typically involves a fixed rate of interest and unchanging monthly payments. A home equity line of credit (HELOC), in contrast, works more like a credit card. You can tap into it whenever you wish, to the extent of the credit limit. A HELOC's interest rate is variable, with payments fluctuating over time. Unlike the obligation incurred through use of a credit card, a HELOC is secured, collateralized, by your real estate. If you don't pay it back, you risk losing your home. Though interest rates tend to be favorable and there are potential tax advantages involved, in the form of interest deductions, extreme care should be exercised in tapping into the equity of your residence, whether by means of loan or line of credit.
  * _Peer-to-peer (P2P) lenders._ This is often a better solution, offering the potential for a reasonable interest rate and no damage to one's credit, as long as monthly payments are made as agreed.
  * _Zero-interest balance transfers._ Though a lower interest loan from a peer-to-peer lender or credit union is certainly preferable to a higher interest loan from a finance company, paying zero interest is even better. For details in this area and the one mentioned immediately above, see _How to Borrow Money at Zero Interest_.

When prudently implemented, debt consolidation offers numerous advantages. But the accompanying **risks** must first be carefully considered:

  * _Many potential pitfalls._ The many details and possible complications summarized briefly above mean that any debt consolidation plan should be approached with extreme caution. Don't cut corners on educating yourself about what you may be getting into and make sure you get good professional counseling before making any decision.
  * _Temptation to get further into debt._ For those who are not sufficiently disciplined, freeing up credit cards by shifting the debt to another instrument would not be a good idea. If you end up simply getting deeper into debt, you are better off not doing the consolidation. Those who need discipline imposed from outside may wish to consider credit counseling, described above in section 4 of this chapter.
  * _Risks involved when converting unsecured loans into secured loans._ Failing to pay a credit card balance will result in damage to your credit and possibly attempts to garnish your wages. Failing to pay a home equity loan or line of credit may result in the loss of your home. Debt consolidation measures should be contemplated and executed with appropriate care.

## 7. Debt Settlement Companies

"Settle your debts for just pennies on the dollar. We've helped thousands wipe their slates clean. Now let us help you!" The ads on television usually show some "typical" cases, involving people who owed tens or even hundreds of thousands of dollars, with settlement amounts that would make anyone's jaw drop. Debts totaling $75,000 are settled for $25,000. Debts totaling $250,000 are settled for $50,000 or less. And so on. There's just one problem with these representations: They are highly misleading, if not outright untrue.

Debt settlement companies, also known as debt negotiation companies, use a standard formula: They suck the consumer in, with claims so dazzling as to make even the most jaded among us fantasize about what it would be like to "wipe the slate clean" so easily. "If they've been advertising on TV for so long and they're still around," it's natural to think, "they must be legitimate." But they are not.

After they get you to call or visit them, they will then assure you that they can work their magic on your behalf. What you need to do, they explain—if you have not done so already—is to stop making payments on your obligations, such as your credit card accounts. Instead, you hand over to them monthly whatever you can afford, to build a cash "pot" that will be used to settle your debts, after your creditors are ready to deal, in terms of a lump-sum settlement.

Oh, yes: There's also the matter of a "modest" set-up fee that you pay the debt settlement company. This is in addition to other fees that you will pay down the road, including monthly fees and a percentage of the amount you were saved through the negotiated settlement, if things ever get that far. Hey, if you're going to ultimately be saving lots of money, what's wrong with that?

What's wrong is this:

  * There are no actual guarantees that your creditors will accept any settlement offer.
  * Your creditors may take you to court, garnish your wages, put a lien on your house, etc.
  * You are in effect taking on additional debt, in the form of payments to the settlement company.
  * If the settlement company violates the law, in your name, you may be held responsible for those actions.
  * The settlement company could effectively disappear at any time, with all your money.
  * When your savings are gone, you will have an even harder time working your way out of the mess.
  * Your credit will be severely damaged for years to come.
  * You may receive a 1099 for any debt actually forgiven and be obliged to pay taxes on that money.

"The basic business model is not a good one for consumers," according to Deanne Loonin, an attorney at the national Consumer Law Center who has researched this area. "A lot of creditors won't even work with debt settlement companies."

In the words of Anamaria Segura, a New York City attorney with a nonprofit law firm representing low-income consumers, "I've never seen a client benefit from debt settlement, other than the initial peace of mind they experience before everything goes sour."

If your objective is to reach debt settlements with your creditors, you may be better off discussing your situation with an experienced attorney who specializes in bankruptcy and debt negotiation. Just make sure you are dealing with someone who has a good track record and a good reputation.

Here are three possible starting points for you in your search for a qualified attorney:

  * The National Association of Consumer Advocates (naca.net): Search for attorneys in your vicinity by area of practice.
  * The National Consumer Law Center (nclc.org): Access the drop-down menu on the "For Consumers" link on the home page, to select, "How to Get Legal Assistance."
  * The Nolo Press Lawyer Directory (nolo.com/lawyers).

It's a good idea to search for reviews online before you engage in even an initial consultation with any attorney. If you don't turn up anything, that does not necessarily rule the individual out. But if your search uncovers substantive negative reviews, well, it's good to see that information sooner rather than later.

By the way, **tax settlement companies** tend to be no more legitimate than debt settlement companies. If you are considering engaging such a firm, may I suggest that you go online to your favorite search engine and type in the name of the firm followed by the word complaint, scam or rip-off. Just today as I was researching this area, I read a comment beneath one of the online complaints by someone who wrote: "I sure wish I had read this before I gave those scoundrels my $2,500." Forewarned is forearmed.

As this book was being written, "TaxMasters"—the tax-resolution firm known for its television commercials featuring its portly, red-bearded CEO Patrick Cox—filed for bankruptcy, after coming under fire from multiple states' attorneys general. According to news reports, the company essentially stole from thousands of distressed individuals, taking money for services not performed.

"If (former customers) paid the fees using a credit card," said CBS News Money Watch reporter Ray Martin, then all they would need to do is to contact their credit card company and dispute the credit card charge, stating that the services were never delivered as agreed. In this situation, the disputed charges on a credit card would be credited back to their card account and the credit card company would have to file its claim against the bankrupt firm. Once again, this is another example of why paying with credit cards can be more secure than paying with checks or debit cards."

## 8. Foreclosure

Simply stated, foreclosure is a legal process by which a lender confiscates a homeowner's real property in order to satisfy a debt, following "default" (failure to make payments for a certain length of time). Record numbers of Americans in recent years have lost their homes through foreclosure and are currently facing foreclosure. In 2010, nearly 3 million U.S. properties received foreclosure filings and approximately one in four U.S. homes—nearly 25 percent—are estimated to be "under water" (valued for less than the amount owing on their associated loans).

According to a Freddie Mac/Roper poll, more than 60 percent of homeowners delinquent in their mortgage payments are not aware of services that mortgage lenders can offer to borrowers in trouble. Furthermore, according to the same poll, homeowners fail to contact their lender because they are embarrassed, don't believe the lender can help or believe it would cause them to lose their home more quickly. According to a study cited by the Federal Deposit Insurance Corporation (FDIC), however, low- and moderate-income borrowers who enter a repayment plan are 68 percent less likely to lose their homes.

As a practical matter, what that means for a homeowner facing foreclosure is that it is highly advisable to **seek expert assistance as early in the process as possible**. Three possible starting points in the search for a qualified attorney are listed in the preceding section. For homeowners without the financial capacity to pay for services, help is available. _The Consumer Financial Protection Bureau, a new federal government agency, is a good place to start_. Go to their website, at consumerfinance.gov, and click on "Trouble Paying Your Mortgage?" The CFPB will put you in touch with a housing counselor approved by HUD (the Department of Housing and Urban Development), who will work with you at no cost, to help you avoid foreclosure.

It's impossible to predict exactly how a foreclosure will affect your credit. From a lender's perspective, it is considered a serious offense and will effectively make it impossible for you to borrow money from a conventional lender at reasonable rates for at least a couple of years, unless you significantly reduce your loan-to-value ratio. The higher the amount of your downpayment, the more you can counterbalance the negative effects of a foreclosure on your record, as a high downpayment reduces risk from the lender's point of view. If you are able to make a downpayment of 50 percent, for example, and only borrow half of the purchase price, your foreclosure will make less of a difference to prospective lenders.

The Fair Credit Reporting Act (FCRA) allows credit bureaus to report a foreclosure on your credit files for seven years or indefinitely, if you are applying for a loan of $150,000 or more. A foreclosure will result in a major drop in your credit scores, the exact amount of which will depend on what your scores were prior to the foreclosure. The higher your scores previously were, the greater the drop will be.

Another alternative to homebuyers with a foreclosure on their records is what's known as " **seller carried back financing**." This is an arrangement in which the seller effectively becomes the lender, providing the buyer with the financing needed in order to purchase the property. Why would a seller do this? One reason would be to get a higher selling price than the market would otherwise bear. A buyer may be willing to pay a higher price, in exchange for the opportunity to receive seller financing, if the buyer would otherwise be unable to purchase a home. In this way, it is a win-win situation: The sellers get the price they want and the buyers are able to buy the home they want, without the involvement of a conventional lender (financial institution), from which they would not get the loan on the terms they would need to purchase the property. After several years of rebuilding good credit, the buyers would be able to substitute conventional financing for the seller carried back financing, which typically involves a higher interest rate.

Another reason that a seller might be inclined to carry back financing for the buyer, in addition to the one given immediately above, would be for tax advantages. Carrying back financing may in some cases spread the seller's tax obligation out over time, as opposed to incurring one very large obligation all at once.

For those who are further along in the process of recovery from foreclosure and for whom home ownership makes sense, an additional alternative is a " **lease option** " (lease with option to purchase). Under this arrangement, the landlord and tenant agree that the tenant will have the right to purchase the property after a certain length of time for an agreed-upon amount, if certain conditions are met. A lease option has numerous advantages for both parties.

From the perspective of the tenant and prospective buyer, the most obvious advantage is that a certain proportion of rents paid will accrue toward a downpayment on the property, in the event that the tenant exercises the option to purchase. For many people, this is preferable to "throwing money out the window" for rent. The lease-option arrangement also buys time for the tenants to accumulate additional savings and improve their credit situation, to purchase at a future point in time a home they have decided they would like to own and live in for the long term, at a predetermined price. There is value to stability and for many families, a reduction in household moves over time represents a substantial savings.

From the perspective of the landlord and potential seller, the possible advantages to a lease-option arrangement include: (1) earning above-market rent, as tenant-buyers are typically willing to pay a premium for the lease-option privilege, (2) reducing vacancy time, as this additional option broadens the appeal of the listing, (3) finding higher quality and longer-term tenants, who are attracted to the lease option arrangement and (5) delegating maintenance costs and responsibilities to tenants, as part of the lease-option deal.

For those willing to think creatively, there is no reason why a lease-option arrangement cannot include a provision for seller carried back financing.

Turning back to the situation of homeowners who find themselves facing foreclosure and unable to achieve a solution to allow them to stay in their homes through some sort of loan modification or the like, a number of alternatives are available. One such alternative is what's known as a " **short sale** ," in which the house is sold for less than the amount necessary to pay off the existing financing. This of course requires lender approval and is typically a lengthy, arduous process—taking close to a year, on average—although the situation seems to be improving somewhat, as major banks have been developing better mechanisms for implementing short sales. A short sale will likely appear on the borrower's credit reports with the notation, "Creditor settled for less than amount due."

According to information recently released by FICO, a short sale will do as much damage to a credit score as a foreclosure. Both scenarios "would turn a FICO 790 into a 590 (with a loss of 200 points) overnight," according to John Ulzheimer, president of consumer education at SmartCredit.com and a former manager at FICO.

You can mitigate the damage somewhat, however, by arranging with the lender not to report a balance owed. _The best time to negotiate this with the lender is before or during the short sale process._ After everything is said and done, it is usually very difficult to get the lender's attention. Most consumers would benefit from the assistance of a real estate attorney with experience in this area, as the typical borrower is no match for the lender's representative.

The fact that the short sale process can be quite lengthy is another reason that homeowners facing possible foreclosure should begin to investigate their options sooner rather than later.

Another alternative to foreclosure, one that is becoming increasing popular, is known as a **deed in lieu (DIL) of foreclosure** , typically done after a house has been listed for an extended period of time and does not sell. This involves transferring ownership interest in the property to the lender, who is not obliged to accept a deed in lieu but often will. Keep in mind that you don't get any cash back this way, regardless of how much equity you may have in your property (but if you did have substantial equity, you would sell rather than pursue this option).Also be aware that there may be negative tax consequences. Usually, you can't qualify for a DIL if you have a second mortgage, an equity loan or other lien on the property.

As far as implications for future credit applications are concerned, especially with regard to home loans, _the advantages of the short sale and DIL solutions as opposed to a foreclosure can be significant_. Your efforts to work with a lender to avoid foreclosure may be viewed positively, resulting in your ability to be considered creditworthy sooner than would be the case if you had simply selected the foreclosure option.

If you do go the DIL route, it is recommended that you try to get concessions from the lender, based on the principle that you are saving the lender the expense and headache of foreclosing on the property. (According to statistics cited by the FDIC, lenders typically lose more than $50,000 on a single foreclosure.) You could ask that the lender either eliminate the entire tradeline relating to the loan on your credit report, for example, or report it as paid in full. You could ask for more time to stay in the house or you could ask for a cash lump sum to help you with your move (known in the real estate business as "cash for keys"). You could ask for all of those things, for that matter. In your DIL negotiations with the lender, it would be wise to engage a competent and experienced real estate attorney. See the recommendations in the preceding section for finding such a person.

Laws relating to " **deficiencies** " (the amount you may be held liable to the lender for following surrender of the property) have been steadily evolving, making it even more important to consult with qualified professionals—your attorney and your accountant—throughout the process.

Remember that landlords routinely check the credit of anyone applying to rent, so it will be extremely helpful to make your new housing arrangements _before_ your foreclosure, short sale, DIL or whatever hits your credit reports. If it's too late for you to do this in advance, there are measures you can take to overcome negative public record information. One thing that often helps is to personalize your application to rent with information explaining your situation, showing evidence that you are responsible in meeting your obligations despite having been overtaken by events that precipitated the loss of your personal residence. Good references can be effective in this regard. Other options are to offer a larger security deposit and to offer to pay several months rent in advance (all the more reason to negotiate with the lender in the event of a DIL, as described above). As a last resort, you could offer to pay a higher rent.

If you choose to contact your lender directly for help with a **loan modification** , the department to ask to be transferred to is known alternately as the loss mitigation department, the workout department or the homeownership retention department. Keep in mind that a "forbearance" temporarily modifies or eliminates payments (which also has the virtue of preventing your credit from being damaged), while a loan modification changes one or more terms of the original contract. A loan modification, if you can achieve one, is vastly preferable to a foreclosure, short sale or DIL, as far as your credit is concerned. The choice between a solution—such as a loan modification—that involves remaining in a home that is "under water" as opposed to walking away in "strategic default" (voluntary foreclosure) is a personal decision, one that continues to be hotly debated in various quarters.

For most people, the loss of one's personal residence is a catastrophic event from which it takes time to recover—financially and emotionally—even under a best-case scenario. The sooner you begin on the path to resolving your difficulties, however, the sooner you will put your problems behind you.

An excellent resource for consumers facing foreclosure is _The Foreclosure Survival Guide: Keep Your House or Walk Away with Money in Your Pocket_ (Nolo Press, 2011) by the late attorney Stephen R. Elias, former associate publisher at Nolo and president of the National Bankruptcy Law Project.

## 9. Home Loans

A surprising admission was recently made by a well-known attorney on public radio. Speaking in response to a caller's question, Anita Hill—a professor of law at one of the nation's top universities (Brandeis)—revealed her personal experience with a mortgage she had taken out in 2007. The documents that Hill received from her lender were so confusing, she said, that she was unable to understand them on her own. For this reason, she engaged in a four-to-five-hour phone conversation with someone at the bank, in an attempt to clear up her questions. Even after that lengthy conversation, however, she was still unable to understand all the terms and conditions of her loan.

Here we have a professor of law (a graduate of Yale Law School)— _someone who had previously taught a course on loans and lending documents_ —who was unable to understand the details of her own mortgage documents, after hours of study and questioning. Regardless of one's personal opinion with regard to Hill's testimony in 1991 Senate hearings, there is no denying that she is a highly intelligent and well-educated individual. If someone such as this cannot understand her loan documents, what does that say about the ability of average people, who are not lawyers, to understand these papers? More importantly, perhaps, what does it say about the documents themselves?

I have heard similar disclosures over the years from real estate attorneys. They were not always as candid as Hill but they basically said the same thing. Please do not misunderstand. I am not advising you not to make your best effort to understand your loan documents. Indeed, I would urge everyone to make their best effort to do so. At the same time, I am acknowledging the formidable nature of the task.

To approach the subject from a different perspective, in my experience, **the biggest trap that most home buyers fall into is indiscriminate rate shopping**. Let me explain. It's easy to get caught up in focusing on a single number—the interest rate—because that's something we feel we can understand. Everyone naturally wants to get the best rate on their home loan. This creates an unfortunate tendency to focus on that single number, at the expense of other considerations. In their quest to shave off a fractional amount from that all-important number, borrowers can get sucked into bait-and-switch situations in which, on balance, they lose more than they gain.

Instead, **your focus should be on finding the most reliable loan consultant**. Then let that person guide you to the mortgage that represents the best fit for you. By all means, interview several different loan officers and compare the mortgages they recommend. Just don't get caught up in focusing on the interest rate as the single overriding consideration.

Consider this all-too-frequent scenario: You're buying a house. Your purchase offer has been accepted, you've conducted your home inspections and everything has checked out. After cleverly shopping around for the very best rate on your loan, it's all lined up and you're ready to go. You have a close-of-escrow date and a signing appointment with the title company or other escrow agent. After you arrive and review your loan documents, however, you discover that the terms of the financing appear to be different from the loan you thought you would be getting. Maybe the interest rate is higher. Maybe it turns out not to be exactly the type of loan that you had wanted. Maybe there are terms and conditions that you were not supposed to be saddled with, such as a prepayment penalty or a clause to the effect that the loan would become due in full upon the death of either borrower.

Now, here you are: Your boxes are packed. You have already committed to sell your current residence on a certain date, by accepting your buyer's offer to purchase. All the wheels have been set in motion for your move, in just a few days. You call your loan consultant for an explanation. You get voice mail. She does not call you back.

As you consider your options, you are aware that you could simply refuse to sign the documents and cancel the loan. The process of replacing that mortgage could take several weeks, maybe longer, depending on your individual situation. In the meantime, you are on the hook for quite a few things to which you have committed, not the least of which may be your contractual obligations to the seller of the home you are buying, as well as your contractual obligations to the buyer of the home you are selling. Not an enviable position to be in, regardless of whatever decision you ultimately decide to make.

The cost of fall-out from breaking contracts with other parties, the deposits paid to moving companies, the potential "opportunity cost" of interest rates and real estate prices that may go up—to say nothing of the possibility that it might not be possible to find a "replacement" property that one likes as much: All of these factors translate into a very high cost for walking away from what has turned out to be a bait-and-switch ploy.

Rather than investing your energy in rate shopping, you would be better advised to do some advance planning. **The time to begin laying the groundwork for a new home mortgage** , with a great interest rate, **is at least a full year before you plan to purchase your home**. Sit down with a loan consultant you feel you can trust (ideas about how to find such a person appear below). That person will obtain your credit information and scores, at no cost to you. Figure out what you need to do to improve your credit files, so as to obtain a mortgage with the best possible rate and terms. Use the information in this book to devise your plan and follow it faithfully.

The significant improvement in interest rates that this approach typically yields makes the fractional amounts involved with misguided rate shopping relatively inconsequential. More importantly, the improved interest rate you enjoy as a result will be real, unlike the mirage employed by bait-and-switch operators.

At today's interest rates, for example, a difference of one percent on a 30-year fixed loan for $250,000 translates into approximately $60,000 over the life of the loan. For those who live in cities where the loan amount is likely to be double, the savings over the life of the loan is a six-figure sum, approximately $120,000. **_The rewards for good planning and good credit are substantial_** , indeed.

So how do you find a good loan person, someone who is unlikely to lead you astray? Begin at the financial institution at which you have an existing relationship, where you have your checking and savings accounts. As a customer, you may be offered a preferred rate. Recommendations from friends and family are always worth considering. Online reviews can be helpful. Stay away from sensationalist advertising, as tempting as the offers may seem: "Lowest rate, no points, no fees!" Mortgage brokers who are doing good work for their clients receive a steady stream of referrals and do not need to run these kinds of ads, which are the hallmark of bait-and-switch operators, always on the prowl for new victims.

Probably **the best source for referrals to good loan officers is real estate agents**. Buyers often deliberately avoid asking their real estate agents for such referrals. Their position is motivated by three concerns. First, some are concerned that their real estate agent might have a conflict of interest, in the sense that the real estate agent may receive a kickback from the loan agent, in exchange for referring the loan. The fear is that the real estate will recommend a loan agent on the basis of the kickback that the real estate agent will be getting, rather than on the basis of how good a job the loan agent will do for the borrowers. Second, buyers often don't like the idea of their real estate agent knowing about their financial affairs. They don't want too much knowledge or power concentrated in the hands of their real estate agent. Third, buyers often simply don't trust their real estate agent enough to give them good recommendations.

In reality, no one has a better knowledge as to which loan officers are providing the best services for borrowers than real estate agents. The bane of every real estate agent's existence is the transaction that falls through because the financing was bungled. Your real estate agent does have a vested interest in your financing—in the success of your financing. Because if the financing doesn't work out, the real estate agent does not get paid. Hundreds of hours can potentially go down the drain that way. Your agent's livelihood, in other words, depends in part on knowing who the most competent loan consultants are.

The Real Estate Settlement and Procedures Act (RESPA) makes it illegal for a real estate licensee to receive any kind of kickback from a loan person for referring business. To be sure, there is always a certain number of people in any industry who engage in illegal practices. If you take pains to vet the real estate professional you work with, however, you will find someone for whom the risks of breaking the law would simply not be worthwhile, ethical considerations notwithstanding.

You should search for a real estate professional to represent you until you find someone you feel you can trust. If your agent is not someone you're willing to trust, you should not be working with that person. As far as the fear that your real estate agent will know too much about your financial situation is concerned, a professional loan consultant will not reveal the details of a customer's circumstances to an outside party. The referring real estate agent will not be privy to the details and documentation you submitted to the loan person.

Some loan agents, as a matter of habit, do not cooperate closely with the borrower's real estate representative. They don't take the real estate agent's phone calls or respond to emails. This usually works to the detriment of the buyers, in part because offers to purchase require coordination between all parties. A new offer to purchase, for example, may call for a new preapproval letter. If the buyers' loan officer is not cooperating with their real estate agent, the new preapproval letter may not come in time and the buyers may lose out on the home they wanted. If an existing preapproval letter must be used, the amount for which the buyers are preapproved may be higher than appropriate, tipping their hand as to how much they can afford. This in turn may encourage the sellers to counter with a higher offer. After much senseless anxiety—and, sometimes, disaster—many are the buyers who later remark to their Realtor, "I wish I would have come to you in the beginning for a referral for our loan." By then, of course, it's usually too late.

This leads to another important point: You want to **have your loan preapproval letter in hand** , not just at the time you make an offer but **_before you even start looking at homes_**. Looking at properties above your price range, for instance, is not a good use of your time. And you would not want to stretch yourself to a price point that would be burdensome or risky for you, anyway.

You are entitled to **three key disclosure documents** relating to the specifics of your transaction:

  * A Good-Faith Estimate (GFE). This is a laundry list of all the costs you will eventually have to pay. The lender is required to give you this document within three days of receipt of your loan application.
  * A Truth-in-Lending Statement (TIL). This document spells out the specific terms of the loan, including the total amount borrowed, type of loan (fixed or adjustable), term of the loan, the interest rate, APR and so on. You are entitled to receive your TIL at the same time you get your GFE.
  * A HUD-1 Settlement Statement (HUD-1). This statement is required to be provided to you by your escrow company or other closing agent at least 24 hours before you close escrow. It is a detailed breakdown of all charges, costs and fees.

It is not uncommon for lenders and escrow agents to fail to abide by their responsibilities in this regard. But it's important that you get this information with sufficient time to review it, so you need to be aware of the timetables and insist on what you are entitled to. Don't hesitate to get help from outside parties in understanding these documents. Your loan officer and your escrow agent are two resources available to you at no additional charge (you are already paying for the loan and also for the escrow, which gives you the right to ask questions).

Much has been said on the subject of **inquiries** , which is covered in some depth here in Chapter 1. Consumers tend to be either blissfully unaware about the repercussions of inquiries or to obsess about them, blowing their importance completely out of proportion. To review briefly, when a prospective creditor retrieves a copy of your credit file, this creates a notation known as an inquiry. You lose a small number of points on your credit score for each inquiry and if you accumulate too many during a short period of time, you (temporarily) disqualify yourself for any further extensions of credit. The operative principle here is that you are irresponsibly attempting to overextend yourself.

That's the bad news. The good news is that, with the passage of time (months, not years), you regain the points that the inquiries have cost you and you are once again considered creditworthy, in the absence of other issues. The additional good news is that credit scoring models recognize that responsible and well-informed consumers will want to discuss financing with more than one lender. So home loan inquiries during a given 30-day period are counted as a single inquiry. For this reason, it is wise to concentrate your applications into a single one-month period.

Be aware of the fact that when a lender pulls your credit report, this creates what is known in the business as a " **trigger lead**." The credit bureaus sell such leads to other lenders, who call consumers, trying to make them think that the call is coming from a lender with whom the consumer is already dealing ("This is the mortgage company," the caller may announce). The idea is to fool people into unwittingly shifting their business to the predatory company.

These **additional tips** with regard to home loans are worth keeping in mind:

  * Stay with mainstream lenders, while avoiding exotic loans, as well as loan agents who do not answer your questions in a manner that is clear and straightforward.
  * Watch out for the existence of a prepayment penalty. Not everyone keeps their mortgages for a full 30-year term (in fact, most do not). A prepayment penalty can really take a bite out of your proceeds from a sale.
  * Specifically ask your loan consultant whether the details of the loan include any special terms or conditions that you should be aware of, especially anything that a borrower would consider disadvantageous.
  * Consider investing in a consultation with a real estate attorney who specializes in financial contracts. (Sure, the attorney might not catch everything but you will at least be better informed than you would be otherwise.)
  * Take pains not to overextend yourself in terms of financing, remembering to err on the side of caution. Expenses always have a way of adding up to more than originally anticipated. Make a deliberate effort to live within your means.
  * Take advantage of a variety of free online loan calculators and comparison tools, such as those offered at BankRate.com and similar sites.
  * Prepare yourself for the fact that the system is structured to push people along before they adequately understand what they are getting into. Steel yourself to politely resist such pressures.
  * At your signing, check to make sure there is a " **Right of Rescission** " document included in your loan paperwork. This gives you the right to cancel within a 72-hour period of signing, regardless of whether yours is a new loan or a "refi" (serves to refinance your property, substituting a new loan for an old one). This right applies to primary residences only and the 72 hours does not include Sundays or holidays. Best to get legal help if you avail yourself of this option.

In summary, beware of rate shopping, for someone who will simply tell you what you want to hear. Find a reliable loan provider, someone who will not engage in bait-and-switch at your expense. Remember that even a minor difference in FICO scores can add up to a tremendous difference in interest paid over the life of a loan. By using the techniques in the _U.S. Credit Secrets_ series, you will improve your credit and therefore help yourself to get a home loan at the best rates on the most favorable terms.

## 10. Identity Theft

One of the most memorable credit-related ad campaigns in recent years was produced by the identity theft protection service LifeLock. Then company CEO Todd Davis appeared in ads prominently featuring his complete Social Security number, with language to the effect that LifeLock is so good at protecting people from identify theft that he is not concerned about publicly broadcasting his actual Social Security number, because LifeLock will protect him from anyone who tries to misuse it.

It was subsequently reported that this former CEO experienced identity theft at least 13 times since 2007. So much for the company's ability to protect against identity theft (also sometimes referred to as iJacking). That's not the worst of the company's problems, however. In March 2010, it was fined $12 million dollars by the Federal Trade Commission (FTC) for deceptive advertising. This followed in the wake of revelations of various criminal activities on the part of one of the company's co-founders, Robert Maynard, Jr., such as obtaining an American Express card in his father's name and subsequently running up $150,000 in fraudulent charges.

According to _Consumer Reports_ , identity theft protection and monitoring services are "often overrated, oversold and overpriced." As the FTC basically states on its website, you can do for yourself at no charge what LifeLock charges an annual fee of $110 for. You can place **fraud alert** s on your files at the major credit bureaus, renewing them every three months. A fraud alert obliges creditors to confirm the identity of the applicant before issuing any new credit in the consumer's name.

If you can provide documentation (such as a police report or other official record) to the effect that you have been the victim of identity theft, you can obtain an extended fraud alert, which remains in effect for seven years. In such cases, you can also get two extra credit reports at no charge from all the major bureaus each year, in addition to the one free copy to which consumers who have not been the victim of identity theft are entitled.

An added level of protection is offered by a **credit freeze** (sometimes called a security freeze, considered one of the most effective tools available to consumers for protection against identity theft. The way it works is simple. You seal your file with a credit bureau and receive a personal identification number that you can use to "thaw" the frozen file when you want to allow a prospective creditor access to your information. This prevents thieves from opening accounts in your name.

If it's as easy as that, why doesn't everyone put their credit on ice? The main reason is the fees involved. Seniors and victims of identity theft may be able to have the fees waived. Otherwise, you will have to pay a fee each time you freeze and thaw your credit file. The fee will range from $3 to $10 depending on which state you live in and the fees apply to each credit bureau. So if you live in a state where the fee is $10, for example, each time you freeze and unfreeze your files at the three big-name bureaus, plus CoreLogic (see Chapter 1), you will rack up total fees of $80 ($10 x 4 x 2). If you did that four times a year, you would be paying out $320 annually for the privilege.

Another issue in connection with credit freezes is that some consumers have reported difficulty unfreezing their files. Imagine the nightmare of having your data locked up when you are applying for something important, such as a mortgage when in the process of buying a home.

Contrary to what many believe, the overwhelming majority of identity theft takes place off the Internet, through traditional methods such as dumpster diving and "friendly theft" by friends, family members or in-home employees who steal your personal data on paper. In half of all cases of identity theft reported to the FTC (Federal Trade Commission), the perpetrators of the fraud are relatives, friends and neighbors.

You can substantially minimize the possibility of identity theft, by following a number of **common-sense precautions** :

  * Don't carry your Social Security card around with you.
  * Don't give out your Social Security number unless required by law to do so.
  * Don't carry around a checkbook and don't print your Social Security number or driver's license number on your checks.
  * Don't leave bill payments in your mailbox, for your mailperson to pick up.
  * Always take your credit card, debit card and ATM receipts with you, after conducting any kind of transaction that results in a receipt.
  * Don't give out any personal information by phone unless you were the one to initiate the conversation.
  * Be careful not to respond to email scammers (which includes not clicking on links from unknown senders).
  * If you use wireless Internet access, be sure to use password protection and encryption.
  * Do not include your year of birth in your date of birth on a Facebook profile or elsewhere on the Internet.
  * Don't access personal sites or information from an unsecure public computer.
  * Invest in a shredder (a cross-cut shredder is best) and use it for documents with personal info before discarding.
  * Rather than having new checks mailed to you, pick them up at the bank.
  * Always review your statements and bills promptly upon receipt.
  * Write "Photo ID Required" in place of the signature on the backs of your credit cards, which will make it more difficult for a thief to make purchases with your stolen cards.
  * Be aware of individuals attempting to "shoulder surf" (looking over your shoulder) for personal information.
  * Monitor your credit reports every three or four months, for free, as described earlier in this book.
  * Learn about your state's credit freeze law, by visiting financialprivacynow.org.

If you ever determine that you have been a victim of identity theft, file a police report immediately, as you may need this for documentation in the future, for a number of reasons. Also file a complaint with the FTC by calling its identity theft hotline (877-ID-THEFT or 877-438-4338) or by going to FTCComplaintAssistant.gov (be sure to print a copy of the online form you fill out, for your records).

For additional free tools, visit ftc.gov and type "Identity Theft Tools for Victims"  
in the search box. Another excellent resource for additional information about identity theft is the Privacy Rights Clearinghouse (PRC). Go to privacyrights.org and type "identity theft" into the search box. Last but by no means least, be aware that the **Identity Theft Resource Center** (online at IDTheftCenter.org) offers victim assistance at no cost and can be reached toll-free at 1(888)400-5530.

## Chapter 3 in a Nutshell

This chapter offers overviews, insights and quick tips on ten areas relating to personal credit about which consumers often have questions.

These ten topic areas are treated in alphabetical order:

1. Bankruptcy

2. Credit and Divorce

3. Credit and Marriage

4. Credit Counseling

5. Debt Collection

6. Debt Consolidation

7. Debt Settlement Companies

8. Foreclosure

9. Home Loans

10. Identify Theft

Though the treatments here are condensed, each section offers resources for additional tools and information—packed with insights, quick tips and inside information often not revealed in more lengthy discussions.

# Conclusion

**Mastery of your credit situation** **can change your life** , significantly and for the better. The purpose of this book is to give you the information you need to get started on the productive path to improving your credit—and to avoid costly mistakes, by doing things right the first time.

The question that naturally presents itself at the end of the book is this: **_Now that you have acquired the knowledge you need to get started, what will you do with it?_** As poet Maya Angelou has said: "Nothing will work unless you do."

The best way to get started, if you haven't done so already, is to obtain copies of your credit reports, at a minimum, from the three big-name bureaus (Equifax, Experian and TransUnion), following the instructions presented here in Chapter 2.

After you have obtained copies of your credit reports and you understand them, it's time to decide where to go from there. Your strategy and approach will of course depend on your individual situation but regardless of whether your priority is repairing bad credit, leveraging good credit for various rewards or something else, there's a publication in the _U.S. Credit Secrets_ series that will probably match your objectives:

  * _How to Repair Bad Credit_
  * _How to Build Good Credit_
  * _How to Play and Win the Credit Card Game_
  * _How to Borrow Money at Zero Interest_
  * _How to Beat the Banks and Credit Bureaus: Advanced Techniques_
  * _How to Save Money& Make Extra Money: 111 Proven Techniques_

Detailed descriptions are available in the next section.

# About the Author

**Daniel Berman** 's work as a credit counselor in the 1980s led to publication in 1988 of his first book on consumer credit, which the American Library Association called "a thorough and enlightening primer on a subject of interest to most Americans."

In his new _**US Credit Secrets**_ series, Dan brings to bear his training as an investigative news reporter and a social science Ph.D., presenting the results of meticulous research in an easy-to-read and entertaining format. If you have information you think should be added to this or any other title in the series, you are invited to email with your comments or feedback.

Dan lives with his wife Anny in the San Francisco Bay Area, where they operate a real estate brokerage based on a new and innovative model. In their spare time, they enjoy exploring the area's many cultural offerings and natural beauty.

**AUTHOR'S NOTE TO READERS:** Did you enjoy reading this book? Do you feel you have benefitted from it? If so, I would very much appreciate your taking a moment to review it and to mention it to others who may also benefit.

# Consulting Option

For information on consulting with the author,

please email **info@USCreditSecrets.ORG**

(with the word consulting in the subject line).

# Other Titles in the _US Credit Secrets_ Series

_   
_

_US Credit Secrets_ series title #3: **_How to Repair Bad Credit_** _: The Concise Yet Complete Guide to Overcoming All Issues and Achieving a Sterling, Triple-A Rating_

Description: Most people think in terms of credit blemishes as being the only obstacle to enjoying all the benefits that good credit has to offer, including access to credit on the most favorable terms and at the lowest interest rates, which during the course of a consumer's lifetime typically translates into savings of many thousands of dollars. But "bad" credit (credit blemishes) is actually only one obstacle. Another, less obvious, obstacle is the absence or lack of "good" credit (a positive, established credit history). And when engaging in credit "repair," consumers typically limit themselves to the purging of negative items on credit reports. But just as a lack of sufficient good credit can be almost as much of a handicap as bad credit, it's just as important to work on establishing good credit at the same time as purging negative items from credit reports. For one thing, positive credit entries can go a long way toward neutralizing the negative. In this concise yet complete guide to building good credit, you get the inside scoop from a former credit counselor and consumer advocate who's been researching this area for more than 25 years. Learn the proven, practical, nuts-and-bolts techniques that banks and credit bureaus don't want you to know, some of which are likely to surprise you. Though establishing good credit as a whole is not an overnight process, there are certain techniques that can be used to build good credit literally overnight. If you're one of the many who lack a well-developed credit history, you need this handy guidebook, which will pay for itself more than a thousand fold, in the months and years ahead.

* * *

_   
_

_US Credit Secrets_ series title #4: **_How to Build Good Credit_** _: The Concise Yet Complete Guide to Establishing a Sterling, Triple-A Rating, to Help You Achieve Your Financial Goals_

Description: Most people think in terms of credit blemishes as being the only obstacle to enjoying all the benefits that good credit has to offer, including access to credit on the most favorable terms and at the lowest interest rates, which during the course of a consumer's lifetime typically translates into savings of many thousands of dollars. But "bad" credit (credit blemishes) is actually only one obstacle. Another, less obvious, obstacle is the absence or lack of "good" credit (a positive, established credit history). And when engaging in credit "repair," consumers typically limit themselves to the purging of negative items on credit reports. But just as a lack of sufficient good credit can be almost as much of a handicap as bad credit, it's just as important to work on establishing good credit at the same time as purging negative items from credit reports. For one thing, positive credit entries can go a long way toward neutralizing the negative. In this concise yet complete guide to building good credit, you get the inside scoop from a former credit counselor and consumer advocate who's been researching this area for more than 25 years. Learn the proven, practical, nuts-and-bolts techniques that banks and credit bureaus don't want you to know, some of which are likely to surprise you. Though establishing good credit as a whole is not an overnight process, there are certain techniques that can be used to build good credit literally overnight. If you're one of the many who lack a well-developed credit history, you need this handy guidebook, which will pay for itself more than a thousand fold, in the months and years ahead.

* * *

_   
_

_US Credit Secrets_ series title #5: **_How to Play and Win the Credit Card Game_** _: Make that Fantastic Plastic Work in Your Favor and Help You Achieve Your Financial Goals_

Description: This is one card game that does not depend at all on luck. Regardless of the hand that you've been previously dealt in life, you can learn to make credit cards work in your favor, realizing all kinds of rewards and benefits that you probably never even dreamed possible, to the tune of hundreds and even thousands of dollars each year. The problem is that credit cards are booby trapped with numerous landmines that can blow up in your face unexpectedly, with serious consequences. Accurate information is the only antidote for this potential problem, to sidestep what's bad in favor of what's good. In this concise yet complete guide to playing the credit card game to win, you get the inside scoop from a former credit counselor and consumer advocate who's been researching this area for more than 25 years. Learn the proven, practical, nuts-and-bolts techniques that banks and credit card companies don't want you to know, some of which are certain to surprise you. _How to Play and Win_ offers valuable information for consumers on all points of the credit spectrum, from those just getting started to those in recovery to those who are already quite sophisticated and interested in leveraging their situations to full advantage. In the process of enhancing your financial position, this easy and enjoyable resource will also show you have to have FUN achieving success. Make that fantastic plastic work to your benefit and help you achieve your financial goals!

* * *

_   
_

_US Credit Secrets_ series title #6: **_How to Borrow Money at Zero Interest_** _: Legally Eliminate Your Debt in Record Time, Utilizing Inside Information that Banks and Credit Card Companies Don't Want You to Know_

Description: Sometimes, on rare occasion, what sounds too good to be true is nonetheless in fact actually so. This is one of those rare occasions. If you have accumulated debt that you would like to liquidate in a fraction of the time that would normally be required, paying conventional interest rates, this is a system with life-changing implications. The essence of the formula is simple: Position yourself to apply for credit cards with zero-interest balance transfer offers. Move your high-interest debt (credit card or other) to these zero-interest accounts, for the length of the zero-interest offer, which typically runs from 12-18 months. By the time the original zero-interest offers or the extensions run out, absorb those balances with other zero-interest offers. Allocate your savings in interest toward accelerated payment on the debt. Continue until all your balances are paid off, which will happen in a fraction of the time that it would take you if you played the bank's game. If it would change your life to be debt-free, then this book can have life-changing implications for you. Learn the details of this remarkable system in this pathbreaking and one-of-a-kind guide to borrowing money at zero interest, from a former credit counselor and consumer advocate who's been researching this area for more than 25 years. A bonus chapter includes inside information about low-interest loans, including little-known programs that can be used either as a prelude to or in conjunction with the zero-interest programs. The minimal investment in this book can probably save you thousands during the months ahead.

* * *

_   
_

_US Credit Secrets_ series title #7: **_How to Beat the Banks and Credit Bureaus: Advanced Techniques_** _to Instantly Level the Playing Field and Get You the Desired Results_

Description: A recent report by _The New York Times_ documented a dirty little secret on the part of the credit bureaus: the reporting agencies maintain a two-tiered system, one for VIPs such as celebrities and politicians, who receive special "concierge" treatment, in stark contrast with that massive, immovable "brick wall" that everyone else runs into. If you've ever been given the runaround or stonewalled by a bank or credit bureau, you know that maddening, desperate, infuriating feeling of being up against an uncaring corporate giant that abuses its tremendous power, walking all over people with impunity because it knows it can get away with it. Most people accept the fact that they are second-class citizens in the eyes of the corporate bullies and simply give up. But former credit counselor and consumer advocate Dan Berman has uncovered five powerful, no-cost approaches for leveling the playing field, to set the scene for going up against and actually beating Goliath. This knowledge can serve as your personal "equalizer," to give you access to the same quality of service as that which is all to often provided only to the privileged elite. Each of the five sections includes a clear description of the strategy, examples and specific contact information or guidelines, making it easy to explore the next step, with pros and cons of various approaches discussed. Most of these strategies apply not just to banks and credit bureaus but corporate bullies of all stripes.

* * *

_   
_

_US Credit Secrets_ series title #8: **_How to Save Money& Make Extra Money _: 111 Proven Techniques_ for You to Choose From, to Help You Achieve Your Financial Goals_**

Description: This book was written for busy people who don't want to spend time wading through folksy stories and inspirational messages, on the way to getting out of debt and improving their financial situations. The text begins with a simple three-word "secret" at the core of the solution to getting out of debt and living debt-free thereafter. This is followed by approximately 50 tips for generating extra income and then 50-plus for saving money. The approach is not one of deprivation but rather intelligently and creatively taking advantage of various opportunities to spend less and earn more. The author shows how he uses the techniques in part two to save more than $10,000 annually and makes his living entirely off of the methods in part one. Of course you're not expected to implement even the majority of the ideas but rather just choose from the select few that seem the best fit for your individual interests and circumstances. The two parts when used in combination should result in a pronounced acceleration in achieving your financial goals.

* * *

[FORTHCOMING] _US Credit Secrets_ series title #9: **_The New Immigrant's Guide to the U.S. Credit System_** _: How to Claim Your Keys to the American Dream_ (English-Language Edition)

Description: Even most people who grow up in the United States find the credit system here confusing and difficult to work with. So it's entirely understandable that consumers from other countries have an even harder time. The initial reaction of many new immigrants is to announce that they simply don't intend to borrow money. They will buy only what they can afford to pay for in cash, the same way they did in the old country. Inevitably, however, they are eventually confronted with the reality that the U.S. economy is very much credit-oriented. For a variety of reasons, not the least of which are safety and security, credit cards are a necessity. That staple of the American dream, home ownership, usually involves financing. Even if you have the cash to do without a home loan, important tax advantages are sacrificed without one. And who wants to pay tens of thousands of dollars more over the life of a loan than necessary, without the high credit scores that enable access to financing on the most favorable terms? Renting an apartment, buying a car, even getting a job: all of these basic involvements in American life, as well as many others, tend to be easier with good credit. The bad news is that many new immigrants will suffer because they don't know the ropes of this seemingly strange and illogical system. The good news is that they don't have to. Written by a former college teacher with 25 years' experience researching consumer credit, The Savvy Immigrant's Guide enables the newest arrivals to promptly claim their keys to the American Dream. _Soon to be available in several major languages._

* * *

US Credit Secrets series title #1: **The Newest Story of O** : How to Legally Pay 0% Interest on the Money You Owe & Eliminate Your Debt in a Fraction of the Time — Secrets to Making the Credit System Work in Your Favor

Description: This is the flagship volume, combining all the information in the entire US Credit Secrets series, based on the reality that your credit history and the scores that go along with it serve as your passport to full participation in the U.S. economy and your ability to take full advantage of numerous financial benefits will be limited, to whatever extent this passport is not in good standing. Actually several books in one, The Newest Story of O is a concisely written and highly readable source of high-quality, how-to material, creatively connecting personal credit with debt minimization. It boldly goes where no such book has gone before, offering cutting-edge inside information, while exposing many commonly perpetuated and potentially harmful myths. With this information at your fingertips, you will be able to convert your high-interest debt to low interest and even zero interest, paying it off in a fraction of the time. If your goal is to become debt-free or simply to improve your financial position, you won't want to miss out on what this book can teach you. The ten-chapter framework is organized as follows: (1) How the Credit System Works, (2) How to Obtain and Understand Your Reports and Scores, (3) How to Repair Bad Credit, (4) How to Build Good Credit, (5) How to Play and Win the Credit Card Game, (6) Zero-Interest Balance Transfer Offers, (7) Low-Interest Loans and Peer-to-Peer Lending, (8) Fight and Win Against the Banks and Bureaus, (9) Tips for Making Money and Tips for Saving, (10) Ten Special Topic Area "Cheat Sheets": Bankruptcy, Credit and Marriage, Credit and Divorce, Credit Counseling, Debt Collection, Debt Consolidation, Debt Settlement Companies, Foreclosure, Home Loans and Identity Theft. Highly accessible in its presentation of a rich font of valuable, practical knowledge, if you only buy one book on personal credit or debt reduction, this is clearly the one to get. You could buy all the individual books in the series for $18 or you could save close to 50 percent and get this single, comprehensive volume.

* * *

# Authors' Resources

Authors and aspiring authors may find the following of potential interest.

  * Book editing & consulting services: ACIbooks
  * Copywriting & marketing collateral: BurningBullseye
  * Degree program application or completion assistance: CollegeSolutions
  * Get millions in free publicity through radio interviews: TalkShowGold
  * Earn a six-figure annual income publishing ebooks: eBookGold

* * *

* * *

 Speaking on MSNBC's _Dylan Ratigan_ _Show_ , 29 November 2011.

 Anne Kadet, "How Problems Go Global," _SmartMoney.com_ , 2 February 2009. http://www.smartmoney.com/spend/rip-offs/why-the-credit-bureaus-cannot-get-it-right/

 U.S. PIRG Education Fund, "Bigger Banks, Bigger Fees 2011: A National Survey of Bank Fees and Fee Disclosure Policies," page 4.

 "Bigger Banks, Bigger Fees," page 3. The U.S. PIRG is a private, non-profit consumer advocacy organization.

 Edmund Mierzwinski, "Consumer Protection 2.0: Protecting Consumers in the 21st Century" (Colston E. Warne Lecture), _The Journal of Consumer Affairs_ , Fall 2010 (vol. 44, no. 3), page 585.

 Quoted in Ryan Grim, "Dick Durbin: Banks 'Frankly Own the Place,'" _HuffingtonPost.com_ , 30 May 2009. http://www.huffingtonpost.com/2009/04/29/dick-durbin-banks-frankly_n_193010.html

 Frontline (PBS), "Secret History of the Credit Card: Interview with Edmund Mierzwinski," posted 23 November 2004. http://www.pbs.org/wgbh/pages/frontline/shows/credit/interviews/mierzwinski.html#ixzz1lZu7SndL

 Ann Carrns, "Want to Pay Less for Car Insurance? Have Good Credit," _The New York Times_ , 23 February 2012. http://bucks.blogs.nytimes.com/2011/06/22/want-to-pay-less-for-car-insurance-have-good-credit/#more-48459

 "How to Improve Your Credit Score in 2012," _U.S._ _News_ , 29 December 2011. http://money.usnews.com/money/blogs/alpha-consumer/2011/12/29/how-to-improve-your-credit-score-in-2012

 Kerry Hannon, "Bad Credit Can Cost You a Job," _Forbes_ , 31 January 2012.

http://www.forbes.com/sites/kerryhannon/2012/01/31/bad-credit-can-cost-you-a-job/?partner=relatedstoriesbox

 Dean Foust and Aaron Pressman, "Credit Scores: Not-So-Magic Numbers," _Businessweek_ , 7 February 2008. http://www.businessweek.com/magazine/content/08_07/b4071038384407.htm

 Sarah Morgan, "10 Things Debt Collectors Won't Say: The Truth Behind All those Threatening Calls," 17 October 2011, _SmartMoney.com_. http://www.smartmoney.com/borrow/debt-stategies/10-things-debt-collectors-wont-tell-you-1318541041015/

 Stephen Gandel, "After Three Years and Trillions of Dollars, Our Banks Still Don't Work," _Time_ , 26 September 2011, pages 40-42 and 45.

 Kashmir Hill, "How Target Figured Out a Teen Girl was Pregnant Before Her Father Did," _Forbes_ , 18 February 2012. http://www.forbes.com/sites/kashmirhill/2012/02/16/how-target-figured-out-a-teen-girl-was-pregnant-before-her-father-did/

 A phrase made famous in the 1980s by then-UCLA professor of marketing Alan R. Andreasen, now with the McDonough School of Business at Georgetown University.

 Charles Duhigg, "How Companies Learn Your Secrets," _The New York Times_ _Magazine_ , 16 February 2012. http://www.nytimes.com/2012/02/19/magazine/shopping-habits.html?_r=2

 Kashmir Hill, "How Target Figured Out a Teen Girl was Pregnant Before Her Father Did."

 Kashmir Hill, "How Target Figured Out a Teen Girl was Pregnant Before Her Father Did."

 Quoted in Charles Duhigg, "How Companies Learn Your Secrets."

 See Martin Lindstrom, "Zones of Seduction: How Supermarkets Turn Shoppers into Hoarders," _Time_ , 7 November 2011, page 58.

 Patricia Sahm of Auriemma Consulting Group, a financial-services consultancy, quoted in Bill Saporio, "Take This Fee and Shove It," _Time_ , 24 October 2011, page 58.

 Anna Vander Broek, "Don't Get Fleeced by Overdraft Fees," _Forbes.com_ , 8 April 2009. http://www.forbes.com/2009/04/09/overdraft-fees-checking-personal-finance-young-money-insufficient-funds.html

 Jennifer Openshaw, "New Bank Fees to Watch for in 2012," _Yahoo! Finance_ , 15 February 2012. http://finance.yahoo.com/news/bank-fees-watch-2012-050114176.html

 Interview with Steve Kroft on CBS's _60 Minutes_ , 16 December 2001.

 Cox, Prentiss, "The Invisible Hand of Preacquired Account Marketing," _Harvard Journal on Legislation_ , Summer 2010 (Vol. 47, No. 2), pages 425, 426 and 431.

 A class action complaint filed against J.C. Penny and its partner, Stonebridge Benefit Services (love the "Benefit" part!), in October 2011 describes their scam in great detail. See http://www.scambook.com/blog/2011/11/class-action-j-c-penny-stonebridge-benefit-services/.

 Clark Howard, "Discover Reprimanded for Charges on Credit Card Statements," _ClarkHoward.com_ , posted 18 October 2011. http://www.clarkhoward.com/news/clark-howard/personal-finance-credit/discover-reprimanded-charges-credit-card-statement/nFJQ5/

 Source: College Board, as reported on the _NBC Nightly News_ , 26 October 2011.

 Ben Woolsey and Matt Schulz, "Credit Card Statistics, Industry Facts, Debt Statistics," _CreditCards.com_ , updated 14 July 2011. http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php

 Reported by John Yang, _NBC Nightly News_ , 21 February 2012.

 American Association of Retired Persons (AARP) survey, reported on the _NBC Nightly News_ , 19 October 2011.

 Kate Fitzgerald, "Report: Credit Card Industry Revenue Fell 6% in 2011," _American Banker_ , 3 January 2012. http://www.americanbanker.com/issues/177_2/credit-cards-revenue-fell-economy-1045394-1.html

 Anne Kadet, "Why the Credit Bureaus Can't Get It Right," _SmartMoney_ , 2 February 2009.

http://www.smartmoney.com/spend/rip-offs/why-the-credit-bureaus-cannot-get-it-right

 People used to joke that the initials TRW stood for "The Report is Wrong."

 Federal Trade Commission (FTC), "Consumerinfo.com Settles FTC Charges: FTC Alleges Ads for 'Free' Credit Report Violate Federal Court Order," FTC Website, 21 February 2007. http://www.ftc.gov/opa/2007/02/cic.shtm

 Simson Garfinkel, "Separating Equifax from Fiction," _Wired_ , September 1995. http://www.wired.com/wired/archive/3.09/equifax.html

 Jamaine Burrell, _How to Repair Your Credit Score Now_ (Ocala, FL: Atlantic Publishing Group, 2007), page 88.

 Leslie McFadden, "Pay $90 to Build Credit?" _Bankrate.com_ , 28 September 2011. http://www.bankrate.com/financing/credit-cards/pay-90-to-build-credit/#ixzz1mzJ0OCSB

 Tara Siegel Bernard, "A Credit Score That Tracks You More Closely," _The New York Times_ , 2 December 2011.

 Bernard, "A Credit Score That Tracks You More Closely," page 4.

 David S. Hilzenrath, "Former Fannie Mae CEO Mudd Takes Leave from Hedge Fund Firm," _WashingtonPost.com_ , 21 December 2011. http://www.washingtonpost.com/business/economy/former-fannie-mae-ceo-mudd-takes-leave-from-hedge-fund-firm/2011/12/21/gIQApzIQ9O_story.html

 Victor Lund, "FDIC Sues CoreLogic and LPS," _WavGroup.com_ , 2 June 2011. http://waves.wavgroup.com/2011/06/02/fdic-sues-corelogic-and-lps/

 Federal Trade Commission, "Consumer Reporting Agency to Pay $1.8 Million for Fair Credit Reporting Act Violations: Company Provided Sensitive Consumer Credit Information to Marketers in Violation of Law," 27 June 2011. http://www.ftc.gov/opa/2011/06/teletrack.shtm

 Dean Foust and Aaron Pressman, "Credit Scores: Not-So-Magic Numbers."

 "What's In Your FICO Score," _myFICO.com_ (Education tab). http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx

 Alexis Leondis, "Credit Score Zealots Pursue Fool's Errand for Top Score," _Bloomberg News_ , 13 January 2012. http://www.bloomberg.com/news/2012-01-13/credit-score-zealots-pursue-fool-s-errand-for-numbers-over-800.html

 Justine Rivero, "The New Credit Score Rules," _Forbes.com_ , 29 August 2011. http://finance.yahoo.com/news/pf_article_113367.html

 "Do Impatient People Have Lower Credit Scores?" _USNews.com_ , 5 January 2012. http://money.usnews.com/money/blogs/alpha-consumer/2012/01/05/do-impatient-people-have-lower-credit-scores-

 According to an undated _MotleyFool.com_ article, "About 1% of the population has perfect credit, meaning a FICO score of 850." Dayana Yochim, "60-Second Guide to Perfect Credit." http://www.fool.com/personal-finance/credit/60-second-guide-to-perfect-credit.aspx

 Alexis Leondis, "Credit Score Zealots Pursue Fool's Errand for Top Score."

 Dean Foust and Aaron Pressman, "Credit Scores: Not-So-Magic Numbers."

 Dean Foust and Aaron Pressman, "Credit Scores: Not-So-Magic Numbers."

 Aparna Iyer, "Credit Score Ranges and What They Mean," _Buzzle.com_ , 9 January 2012. http://www.buzzle.com/articles/credit-score-ranges-and-what-they-mean.html

 Dean Foust and Aaron Pressman, "Credit Scores: Not-So-Magic Numbers."

 See for example Christopher Maag, "New Credit Score Could Help Millions," _Credit.com_ , 13 September 2011.

 Quoted in Leslie McFadden, "How Secret Score Cards Affect Credit," _BankRate.com_ , 4 August 2009. http://www.bankrate.com/finance/credit-cards/how-scorecards-affect-credit-scores.aspx

 Quoted in Leslie McFadden, "How Secret Score Cards Affect Credit."

 See Marta Lugones Moakley, "Credit Repair Organizations After Regulation: Wolves in Nonprofits' Clothing?" _Florida_ _Bar Journal_ , 1 July 2003. http://www.thefreelibrary.com/Credit+repair+organizations+after+regulation%3a+wolves+in+nonprofits%27+...-a0104730583

 See "Fair and Accurate Credit Transactions Act," in _The Free Dictionary_ by Farlex. http://encyclopedia.thefreedictionary.com/Fair+and+Accurate+Credit+Transactions+Act

 Text of H.R. 627 [111th]: Credit Card Accountability Responsibility and Disclosure Act of 2009. http://www.govtrack.us/congress/billtext.xpd?bill=h111-627

 Connie Prater, "What the New Credit Card Law Means for You," _CreditCard.com_ (undated). http://www.creditcards.com/credit-card-news/help/what-the-new-credit-card-rules-mean-6000.php

 Mierzwinski, "Consumer Protection 2.0: Protecting Consumers in the 21st Century," page 586.

 Quoted in Janna Herron, "CFPB: The Credit Bureau Boss?" _BankRate.com_ , 17 February 2012. http://www.bankrate.com/financing/credit-cards/cfpb-the-credit-bureau-boss/

 Dean Foust and Aaron Pressman, "Credit Scores: Not-So-Magic Numbers."

 Robin Leonard and Margaret Reiter, _Credit Repair_ (Nolo Press, 10th edition, 2011), page 215.

 See Ralph Blumenthal and Rachel Mostelle, "Voluntary Simplicity Movement Re-Emerges," _The New York Times_ , 18 May 2008, for a story about "chasing a utopian vision of a self-sustaining life on the land."

 M. Scott Peck, M.D., _The Road Less Traveled: A New Psychology of Love, Traditional Values and Spiritual Growth_ (New York and other cities: Simon & Schuster, 1978), pages 27-28.

 Based on "Credit Monitoring Providers and Services" (Table 1), in _The Impact of Differences Between Consumer- and Creditor-Purchased Credit Scores_ , Consumer Financial Protection Bureau (CFPB) Report to Congress, 19 July 2011, page 11.

 Chapter 9 is the code that applies specifically to financially distressed municipalities.

 Short for _pro bono publico_ (Latin, "for the public good"), this refers to professional and especially legal services provided without compensation.

 Quoted in "Donald Trump's Companies Filed for Bankruptcy Four Times" by Amy Bingham, ABC News online, 21 April 2011.

 Stephen Snyder, _Credit After Bankruptcy_ (Chapter 20 Publishing, 2008), page 7.

 Robin Leonard and Margaret Reiter, _Solve Your Money Troubles: Debt, Credit & Bankruptcy_ (Nolo Press, 2011), pages 140-141.

 Leonard and Reiter, page 141.

 Teresa A. Sullivan, Elizabeth Warren and Jay Lawrence Westbrook, _The Fragile Middle Class: Americans in Debt_ (Yale University Press, 2000), the written report of the Consumer Bankruptcy Project II.

 Snyder, page 272.

 Snyder, page 270.

 The data are available at abiworld.org.

 Sullivan, Warren and Westbrook, pages 6 and 264.

 The Fair Credit Reporting Act (FCRA), § 605 [15 U.S.C. §1681c] (b), amended by the Consumer Credit Reporting Reform Act of 1996, posted to the website of the Federal Trade Commission (FTC), ftc.gov, on 30 July 2004.

 The results were reported by Professor James Murray of Oxford University to the Royal Society in London on 29 March 2009.

 John Hechinger, "Obama Relies on Debt Collectors Profiting from Student Loan Woe," _Bloomberg_ , 26 March 2012. http://finance.yahoo.com/news/obama-relies-debt-collectors-profiting-040100344.html

 "How Long Do Negative Items Stay on My Credit Report?" _CreditInfoCenter.com_ , 28 May 2010. (A key FTC staff opinion letter is reproduced here.) http://www.creditinfocenter.com/creditreports/cr_time.shtml

 Quoted in Tara Siegel Bernard, "Weighing the Options with Credit Card Debt," _The New York Times_ , 15 May 2009. http://www.nytimes.com/2009/05/16/your-money/credit-and-debit-cards/16counsel.html?_r=1

 Quoted in "More Trouble for Debtors" (Viewpoint), _Consumer Reports_ magazine, March 2010. http://www.consumerreports.org/cro/magazine-archive/2010/march/viewpoint/overview/more-trouble-for-debtors.htm

 Ray Martin, "TaxMasters Bankruptcy Leaves Clients in the Lurch," CBS News Money Watch, 20 March 2012. http://www.cbsnews.com/8301-500395_162-57400629/taxmasters-bankruptcy-leaves-clients-in-the-lurch/

 RealtyTrac, http://www.realtytrac.com/content/press-releases/record-29-million-us-properties-receive-foreclosure-filings-in-2010-despite-30-month-low-in-december-6309

 National Public Radio (NPR) website, npr.org/blogs/thetwo-way/2009/11/one_in_four_us_homes_underwate.html

 "Foreclosure Statistics," cited on the website of the Federal Deposit Insurance Corporation (FDIC), at http://www.fdic.gov/about/comein/files/foreclosure_statistics.pdf

 Quoted in Tara Siegel Bernard, "Healing a Wounded Credit Score," _The New York Times_ , 18 February 2011, page B1. http://www.nytimes.com/2011/02/19/your-money/19money.html?pagewanted=all

 "Foreclosure Statistics," cited on the website of the Federal Deposit Insurance Corporation (FDIC), at http://www.fdic.gov/about/comein/files/foreclosure_statistics.pdf

 _Forum_ with Michael Krasny, National Public Radio, 12 December 2011. A recording of the interview is available online at http://www.kqed.org/a/forum/R201112121030.

 Kim Zetter, "LifeLock CEO's Identity Stolen 13 Times," _Wired_ , 18 May 2010.

 Ray Stern, "What Happened in Vegas," _Phoenix New Times_ , 31 May 2007.

 Michelle Singletary, "When ID Theft Starts at Home," _Washington Post_ , 13 February 2005
