Financial Blunders to Avoid
By Kristi Feathers
If you have bad credit you may be very vulnerable to fall prey to these scams and blunders. They focus on the credit-needy and come at you at the worst time- when you are in a bind to rebuild credit or trying to get a loan. Before you sign documents out of desperation know a few key warning signs. While you may be thinking that you are a very sensible person that would never fall prey to such scams, you can be dead wrong. The credit scams are organized in such a way that even the most financial savvy person can fall into the traps of greed and urgency.
Credit Restoration companies:
These companies will promise to correct your credit for a fee. You think they can do things for you that are only known to the insiders of the industry. Not true. They are no more privy to credit secrets than you. Simply put, there are reputable sources and scammers.
Scammers will promise you a new identity and claims of perfect credit within 6 months. They claim to be able to remove bankruptcies, charge offs, collection accounts and more. The truth of it is, they can do nothing more than you could do given you had the right tools which is nothing more than the law and education. On the other hand reputable sources can be used as a credit tool. Reputable companies will not tote miracles.
By researching laws, arguing over inaccurate credit reports and negotiating with creditors, you can improve your credit legally and ethically. Reputable credit repair agencies are rare in deed. You will not find droves of really reputable credit restoration companies because the reputable ones don’t operate solely as credit restoration. Usually they consist of financial planners, mortgage brokers and credit officers who, over the course of years in the field, have mastered how to effectively improve credit.
It’s not that they have special access to any miracle cure, they are simply in the business and know how the industry operates and can help you achieve maximum results is rebuilding your credit. Credit rebuilding takes time. You will not wake up tomorrow with perfect credit. It will take months of disputations, negotiations and proper use of new and established credit to see real changes that are positive.
Credit Restoration software:
You see the ads and think it must be some special top-secret credit repair software that will magically wipe away all of your bad credit. The companies tote that it’s “Amazing”, “Never before seen” and you are "so lucky to have found it". Wrong! credit restoration software is nothing more than an electronic book of tips and tricks. Some offer legal solutions while others offer to teach you how to obtain false identities or new credit files. The Internet is a breading ground for these scams, taking millions of consumers for huge amounts of money every day.
What you will find once you purchase the software is usually nothing more than a few pages explaining how to apply for new credit or so-called “Build your credit fast” scams all to coerce you into spending more. There are some really good resources but many are books written by attorneys or credit specialists who know what you need to do in realistic terms to properly increase your credit score and build good credit.
Divorce Decrees:
If you are unfortunate enough to suffer through a terrible divorce then don’t make it worse by thinking the spouse is liable to pay certain debts. Many people think a divorce decree overrules a written contract. It does not. A divorce decree is simply what the judge has found fair for both parties to pay. It does not cover default. If you default on your debts thinking you can get out of them because the judge awarded the other party liable, you are wrong. Should those debts go delinquent, all parties who signed them or lived in a joint property state will be liable for debts incurred during the marriage.
Cosigning loans:
How many times have you cosigned a loan for one of your children? Probably at least once, as many parents have. This is O.K. if you implicitly trust your child and have the money to pay it in case they can’t, but if you know little about your responsibilities as a cosigner then think before you sign. First off, your credit will be affected if the payments are late.
The credit history is reported on the cosigners credit reports and can be calculated into your debt ratio when you apply for a loan later. You could be denied if your debt ratio is high because of co signed loans that you really are not paying. It doesn’t matter if you pay it or not, the liability is there for payment so it is included in your debt ratio. Your kids or brother may have the best intentions for paying the loan back but just know what you are putting at risk by signing that loan document. Your Credit!
Advanced fee loans:
These can be very sneaky to reveal as scams because many appear to operate as lending institutions. Advance fee loans are pure and simple: Fees paid before the loan. That means the scam artist or so called broker will charge you in advance to find you loans. They soon disappear with your money. Always check these so called advanced fee loan brokers out through your local consumer agency before you pay a penny.
Payday loans:
Payday loans are another trap. Simply put: If you do not have the money now, what makes you think you can pay back an advanced loan with fees in a week or two out of your paycheck? This is a bad cycle to get into and the industry makes millions off of desperate consumers.
Credit Card Insurance:
This is one of the biggest wastes of money. The fact is only a small handful of people will use this “Insurance” but the fees you pay out for it can really add up. They promise to pay your credit card payments should you become disabled or unemployed. That may be fine if you think that is a real threat in your life but on the average, the industry cranks in millions and most consumers never use the insurance.
In addition they reap the fees and if you are disabled or unemployed the insurance simply pays off their investment—Your Debt! So who is the real winner here? The insurance company ad the creditors. The other bad part of this offer is that they add it onto your credit card bill usually monthly or quarterly. That can add up because you are already paying interest on your debt, now you will be adding interest to your credit card insurance. Doesn’t sound like such a great deal anymore does it?
Extended Warranties:
This is another offer that literally bilks millions each year. Most of the major appliance stores and computer stores offer it with the tag line, of “Never pay for repairs” and again the odds of you using this out ways the justification of the fees. Extended warranties, promise for a fee to cover any mechanical failures should your regular warranty expire. How many times have you actually had a computer or refrigerator die the day the warranty expires? Rarely, most mechanical breakdowns will happen while the original warranty is valid. You are literally throwing your money away by signing up for these extended warranties. Unless the actual purchase is so grand that it warrants the additional coverage don’t do it.
Credit Card or fraud protection:
This is one of the biggest rip offs today. Companies will convince you that you need fraud insurance to protect you in case your credit card is ever lost or stolen. This way, you pay nothing for the charges. Hello! There’s a law that says you are not liable anyway unless you were actually involved in the fraud or did not act responsibly in preventing it. Even then you usually only pay the first $50.00 in damages as a deductible. No person can legally be held liable for credit card fraud. The Fair Billing Act, Truth In Lending Act and other various consumer protection laws protect you. This coverage is a HUGE waste of money.
Loan Agreement Extensions or Skip-a-pay plans:
Again, these are just well hidden ways to get you to pay more. Say you have an auto loan with your credit union or bank or even a credit card. The bank offers to do you a huge favor by letting you skip a payment during the holidays or if you are low on cash one month. What you are really getting is 30 to 60 days of unpaid interest added to your debt, which in the long run will add more to what you owe and take you longer to pay off. Solution? Don’t do it. You can come up with the money each month as you always have if you curb spending and pay your bills out of a well-defined budget. Living on borrowed money does nothing for you.
Robbing Peter to pay Paul:
This may not be a scam but it’s a very bad habit. If you can’t pay the debts you have right now what makes you think that taking out another credit card debt to payoff an existing credit card debt is any better? Many people do this or use the card for monthly living expenses. Very bad move. If you use the cards to pay living expenses then obviously you wont be able to pay back the loan much less your rent the next month along with your new credit card debt. Transfer balances only if doing so is going to reduce your interest rate or because you are going to consolidate two cards into one for a lower payment.
Getting Pre-approvals in the mail:
How many times have you filled out those little pre-approval cards that come in the mail and guarantee you a credit card? What you are really getting is a guaranteed offer to apply based on your credit. It does not mean you were approved it just means you pre-qualified for overall credit worthiness based on a prescreening that creditors do using the credit bureaus. Most of the time, you are denied after and stuck with yet another credit lowering inquiry. Don’t fill these out unless you really think you qualify and need it. No one needs 100 open accounts anyway. Use your head. If you have bad credit and get an American Express offer, do you really think you will get it?
Loan Sharks:
These so called agents or brokers offer you loans at exorbitant fees, which can be usury. They charge you enormous fees to lend you money when no one else will. Think before you do it or you could be paying up to 51% interest to some crook. Try other methods like family or friends with an interest rate acceptable to both of you.
Cross Collateral Clauses:
Again, while certainly not illegal, many people have no idea what they are really agreeing to by signing loan documents with a cross collateral clause. Credit Unions and Banks insert this little clause as a way to secure your signature loans or credit card debt to an existing auto or home loan. Why are these so bad? Because if you ever get to a point that you can no longer pay your debts and decide to file bankruptcy but keep your car or house, that little clause will give the creditor the right to consider that debt secured and refuse it to be discharged in your bankruptcy unless you return the car or house too!
Can you imagine having 2 or 3 credit card debts with your credit union for 15,000.00 and thinking you have freed yourself from them only to find after you have filed BK that the debts are not dischargeable! Not only do you now have a BK on your credit reports, you still owe a massive portion of debt that you thought was unsecured! Read before you sign! A cross collateral clause should be very obvious in your documents and many states require that you initial next to it to insure compliance.
PMI or forced auto insurance:
This is a real rip off but completely legal. If you have an automobile financed, do not skip on your insurance. The bank has every right to force on car insurance at extortion rates! The amount is added onto your car loan and you end up financing extremely expensive auto insurance plus interest from the loan. What this means is the loan you thought you had for 48 months has now gone to 58 months with a larger payment and all with interest too! The same insurance you may pay 53.00 a month for through a private broker is now 283.00 per month for less coverage! And it’s legal! Never EVER lapse on car insurance while a bank holds the title.
The other bad part of not keeping the loan insured is that the bank reserves the right to repossess the car for what is called inadequate protection. Just avoid this at all costs. Additionally, if your asset exceeds the cost of loan then you can refuse to insure the vehicle. Example: Car is worth 34,000,00 and you are only borrowing 10,000.00. You should not have to insure the car-based on the value.
Signing “At Will” Employment Applications:
If you interview for a job and sign the employment application, be sure to read the language in the contract. If it states “At Will”, as many do then you may have waived your rights to secure your position. At will means the company can fire you on the spot without reason. There is little you can do about it if you signed the original employment application that warned you about “At Will”. If you see that in your contract, ask questions and try to get a waiver. If the company thinks you are worth it or has been bidding for you then chances are they will waive it.
Mail order:
This one is so obvious to many but others fall victim every day. Ordering by mail by using a select offer from the mail order company. They offer you a credit line of $1,000.00 to buy anything you want and you think it's either a credit card that you can use anywhere or you think it’s a credit builder. It is usually nothing more than a high interest rate to buy poorly made products through a catalog. You end up paying 180.00 for a 29.00 comforter. Not a good deal at all. Avoid these unless you shop from your favorite catalog using your own preferred credit card.
Prepayment penalties:
While not illegal this is a costly mistake. Before you sign on the dotted line for your new mortgage, read the terms carefully! Many companies in an effort to lock you in will have a huge prepayment penalty of up to 5,000.00 if you refinance the loan early. A very well known bank does this as part of their standard business so that clients can’t refinance a year later when the rates go down. Also be very careful with ARM (Adjustable Rate mortgages) You may get in with a 5.9% credit builder rate but may try to get out at 11%. Read the contracts.
Right of privacy:
Have you ever received all those offers in the mail and keep wondering how the heck you got on the advertisement list? Well, the credit bureaus can sell your information to potential lenders as a form of marketing. Unless you specifically ask to “opt out” then you can literally be placed on thousands of lists. How do you avoid this? First off, when you buy products. Make sure you check the box that says you do NOT want your information sold.
Secondly, look at the company’s privacy polices. Finally, contact the credit bureaus and ask to be removed from future offers. If a telemarketer calls you after you have told them not to, they can be fined 200.00 per incident. Learn more about Opt-Out procedures and the benefits.
Collection fees:
Before you sign for a loan, read the contract for the collection fees. Many states will have a stipulation in the contract that they can charge you extra for future collection expenses or for retaining an attorney. Argue this before you sign, as collection fees are a cost of doing business and you should not sign a contract that states otherwise. In addition some states don’t allow the collection fees unless the debt has gone to judgment, then the collection fees are justified. If you don’t catch it, who will? Certainly not the lender.
Credit card late fees & over limit fees:
Every year the credit card industry collects millions in late fees. While this may be perfectly justifiable in most cases it is not justifiable when the following applies. Say your credit card company reduces your line of credit down because you became delinquent. However they reduced it below what your balance is. Now every month, you are being charged late fees and over limit fees for a limit that is not actually your original limit, so in essence the credit card company has gone over the limit not you.
Quickly dispute this if it has happened to you. If the credit card company is so worried about your delinquency then simply have them block the card from future use or request that you return the card. Demand that the late fees and over limit fees be reversed. Millions of Americans have paid unjustifiable late fees and over limit fees.
Assigning a power of attorney:
Many people will assign a power of attorney to a financial planner or relative without fully understanding what it means. If you do sign a power of attorney then be sure to have a good attorney review the language. You may just be signing over your entire fortune to a scammer. Some brokers convince clients to sign a power of attorney and then Willy Nelly them right out of their savings. Be cautious and careful when assigning power of attorneys.
Kristi Feathers is an author and speaker on credit issues. To reach her visit http://www.kristifeathers.com or to purchase her credit management guide for consumers go to http://www.carreonandassociates.com
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Tips on avoiding serious financial blunders
