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Financial Peace University Lesson 5 – Credit Sharks in Suits
Understanding Credit Bureaus & Collection Practices
Dave starts out this lesson by exposing one more myth, similar to what he did during the previous lesson:
Myth: You need to take out a credit card or car loan to “build up your credit score.”
Truth: the FICO score is an “I love debt” score and is NOT a measure of winning financially. I admit that in the past I’ve taken pride in having a “high” FICO score. It is interesting to really look at how it is calculated, though. According to Ramsey, if you want a higher FICO score, you should go into debt and stay in debt for a long time. The more credit cards you have (assuming you don’t have big balances on all of them) and the longer you have had them will generally translate into a higher FICO score. He also explained that you could inherit a bunch of money tomorrow or get a huge raise and if you don’t change any of your debt, then your score will not change at all. So, I agree, this is not a measure of how well you are doing financially…it is basically worthless for that purpose. (He also mentioned that he currently does not have a FICO score at all…and I’m pretty sure that he is doing ok financially!)
Understanding Credit Bureaus
The first portion of this lesson revolves around your credit report. Some interesting notes from Ramsey:
- Information remains on your credit report for seven years after the last activity, except for a Chapter 7 bankruptcy, which remains on there for 10 years.
- Beware of credit clean-up scams – it is not legal to remove accurate information from your report.
- In a survey done by the National Association of State Public Interest Research Groups, 79% of credit reports of the people surveyed contained mistakes.
It is recommended that you check your credit report annually to make sure there are no issues. Of course, this can now be done free using annualcreditreport.com. Through that website, you can get a copy of your credit report from each of the three credit bureaus once a year (FREE – you don’t even have to sign up for credit monitoring or any of the other junk – if you do, you’re most likely at a similarly-named site). So, you can check your credit report every four months if you cycle through the different credit bureaus.
Correcting Credit Report Inaccuracies
According to the 1977 Federal Fair Credit Reporting Act, a credit bureau is required to remove all inaccuracies within 30 days of you notifying them of the mistake. To do this, send a letter for each inaccuracy via certified mail to the bureaus with your credit report attached and the account number circled. The bureau will then request clarification from the company that reported the information in question. Often, that company will not respond and the credit bureau will remove the offending information. If the company responds to the bureau and claims that the information is accurate, then you will have to work with that company to clear up the discrepancy. Most times, the letter to the credit bureau will be sufficient. If they do not remove the inaccuracy within 30 days, however, you can then request that they remove the entire account from your report. Finally, if you are having problems with them, then you might need to complain to the Federal Trade Commission and your state’s Consumer Affairs Division.
Dealing with Collectors
During the remainder of this lesson, Dave discussed collection practices and how to interact with debt collectors. Here are some of the highlights of his teaching:
- The collector’s job is to get your money – not to be your buddy or to help your overall situation
- Typically, they attempt to induce strong emotional reactions from you
- It is illegal for a collector to harass you and they can only call you between 8 AM and 9 PM (unless they have your permission to do so).
- You are able to demand that they stop calling you at work
- It is even possible for you to demand that they stop all contact with you (except notification that they are suing you). Dave does not recommend this, however, as all negotiations then stop and there is no hope of a positive resolution. In fact, this makes it more likely that you will end up being sued by them.
- Except for student loan debt or the IRS, it is not possible for a creditor to garnish your wages or take money from your bank account unless they sue you and win the court case; a threat to do so is just a bluff.
- Of course, it is possible for them to sue you. If they do, they will win (remember you do owe them money) and then they have the right to garnish your wages after a 30 day waiting period.
The purpose of all of this is ensure your life is bearable while you are trying to deal with your creditors. It is not to try to avoid paying back your debts. If you borrow money or owe someone money, the honorable thing to do is to pay what you owe.
Luckily, so far I have not had to deal with debt collectors and I have not found any significant errors on my credit reports (though when I had student loans, so many of them show up on the report that it is hard to keep track of whether they are all accurate or not) so this lesson was not as interesting as some of the others. If you are dealing with collectors, however, Ramsey’s advice is to stay in contact with them once every two weeks and send them more information than they send you. Send them your budget, send them the plan that you are using to work your way out of debt, show them how much money you have to pay debts after your necessities and try to work something out. As long as you keep communicating with them and paying them, even if it is less than they want, they will probably work with you instead of suing you. A lawsuit is expensive and getting some of your money, even if it is slowly, is better than getting none (or spending more on court costs that you actually owe!).
Request a copy of your credit report:
- annualcreditreport.com or call 877.FACT.ACT
To reduce direct mail advertising and telemarketing calls:
(So I recently visited both the opt out site and the do not call site. The do not call site is pretty straightforward but for the opt out site it is so obvious that someone forced them to put that site together. They are not happy about you coming there to opt out of the marketing.)
Check out my previous FPU posts:
- Lesson 1 – Super Saving
- Lesson 2 – Relating with Money
- Lesson 3 – Cash Flow Planning
- Lesson 4 – Dumping Debt