“The most important thing for a young man is to establish credit – a reputation and character.”

John D. Rockefeller

MOST PEOPLE GET into financial holes by mismanaging their credit. Credit is an integral part of living in today’s financial world, but it’s also the single biggest obstacle in your path to wealth. The decisions you make about how you use your credit will be the single-largest determining factor in whether you reach your goal of a debt-free and wealthy life.

I’m convinced that most people wouldn’t get themselves into a credit crisis if they simply understood the ins and outs of credit a little better. So I’m going to provide you with some insight that will help you take better care of your credit. You can turn credit from an obstacle into an advantage if you understand a few simple concepts. I also realize that if you’re reading this book, you may already have a bad credit record, and so I will show you some of the legitimate ways you can fix it.

Getting out of debt takes sacrifice and hard work. There are no shortcuts. Creating a good credit record or fixing a damaged one also takes work and time. The things you’ll learn in this chapter are things you can start doing immediately to improve your credit record, even while you’re still getting out of debt.

Many books have been written on managing credit, and it’s not my intent to overwhelm you with a ton of complex strategies you’ll likely never follow through on. I’ve chosen to focus, instead, on the most common issues that need your immediate and continued attention. We’re going to look at the acceptable uses of credit, your credit report, how to repair your credit, dealing with bill collectors, how to avoid identity theft, and what to do if you’ve been a victim of identity theft.

ACCEPTABLE USES OF CREDIT

The overuse of credit is the number one problem in many American households. Credit has been too easy to get for too many people who have no business having it, let alone using it. Credit has enabled many to live far beyond their means without any accountability. The abuse of credit is the number one cause of divorce, bankruptcy, stress, and unhappiness.

To get through life without using credit in some form is not realistic for most people. Credit, used responsibly, can be a tool for managing major financial purchases. Unfortunately, many of the things people use credit for are nothing more than wants, with no potential for return on investment. Credit should be restricted to needs only. I’m of the opinion that you should limit your use of credit to three things:

  • 1. Housing
  • 2. Transportation
  • 3. Education

Let’s take a look at each of these acceptable uses of credit individually.

Housing

If you’re willing to put off the purchase of a house, it’s certainly better to pay cash, but borrowing money to purchase a house is an acceptable use of credit. The biggest mistake people make is buying a house they can’t afford.

I can remember purchasing my first house and the major stress that transaction caused me. That house cost $69,000 back in 1991, and my mortgage payment was $400. That’s probably not a lot of money by today’s standards, but the thought of having that much debt and a $400 a month payment probably kept me from buying a house for a year or two after I could actually afford one. I simply didn’t want the financial pressure. But with a wife and child, and another on the way, we needed more space than the apartment we were living in. So it was time. I didn’t have enough money to pay cash, but I had enough for a solid down payment and the income to support the monthly payments that would follow.

I could have qualified for a much larger house, but I knew I would be able to afford my $400 payment for an extended period of time if my employment situation changed. That was a key factor in the choice my wife and I made. So we bought a modest house that was far less than what I could afford, but was more than enough to fulfill our needs.

When I finally decided to buy the house of my dreams some ten years later, the decision for me was no different than the first time around. I had great credit, lots of money in the bank, and a substantial annual income. But I chose a house I could pay cash for if I wanted to and one that would have a mortgage payment well within my means if I opted to finance it. I could have purchased a much more expensive home and afforded the payment just fine, but I didn’t need it!

Too many people buy far more house than they can afford, and it becomes a financial anchor that holds them back from ever enjoying a debt-free and wealthy life. I call these people house poor. What would you rather have: a big house, or a more modest home and enough money left over to live a comfortable lifestyle?

Just over the hill from my house is a major new development with hundreds of homes, many with prices of over a million dollars. When I drive through these neighborhoods, I see many 20-30 year old couples with small children living in these massive, expensive homes. I’ve made a great income for most of my career, and I know what it takes to afford a million-dollar house. The question I always ask myself when I see these young families is, “What kind of work do they do to afford that house?” Are there really that many high-paying jobs in our community that so many people can now afford million-dollar homes?

The short answer to that question is NO!

The only way most of these people could afford their million-dollar houses was with a creative loan that allowed them to finance the purchase with no or little money down and to make interest-only payments for some period of time. If they had to make a payment of principle and interest, their payments would likely be far beyond their means. They were banking on their house appreciating in value enough that they could sell it in a few years, before the payments went up, and capture a big equity payday that could be rolled into a new and larger house to start the cycle all over again. I even had a young father explain the whole process to me and give it a name. He called it “equity milling.” I call it “stupidity” and “living far beyond your means!”

My business partner, who also lives in a very, nice upscale neighborhood, attended a homeowners’ association meeting recently that devolved into a debate over the value of adding a stone wall and iron gate to the entrance of the neighborhood. The handful of neighbors pushing for this new feature were all young couples who had made some fast money from the hot real estate market in our area. When my partner asked them why they would want to spend all this money on something as useless as a wall and gate, the ringleader replied, “Don’t you get it? By adding a wall and gate, our homes will be appraised at a higher value, and we’ll be able to pull more money out of them to invest and spend.” When my partner suggested that the plan would also result in an increase in his property taxes, the ringleader dismissed him as being too “old school.”

In the financial crisis of 2007-2009, when real estate prices all over the country began to plummet. Interest rates also increased dramatically, and the easy credit of the past few years came to a screeching halt as banks and major lenders were (literally going out of business or being taken over by the regulators.

Nearly one-half the young real estate tycoons in my partner’s neighborhood have moved out, many doing the “midnight move” to escape the creditors who were after them for the delinquent payments on those million-dollar homes. No wall or gate was ever built, and these homes now sit vacant as the banks try to liquidate them. My partner was unaffected and is still enjoying the home of his dreams, for which he paid cash. I guess old school “gets it” after all.

Back in the neighborhood near my home, one of my young friends is living in a home that is worth 40 percent less than what he owes the bank. In addition to the house’s depreciation in value, he has negative equity because all the payments he’s made have only gone to cover interest. The extra money he made beyond his mortgage interest payment went to furnishing the home and filling the garage with other “things” he couldn’t really afford. To make matters worse, his “adjustable rate” payment is now double or triple what it was when he moved in. My friend is in a financial hole that he and his wife likely will never be able to climb out of. It’s no big surprise that there are “For Sale” signs at nearly every other house along the street in that neighborhood, and my young friend is now learning some very expensive and crushing lessons about dealing with credit and making good choices.

So, it’s okay to buy a house with a mortgage if there is no other way to do it and you need it, but make sure it’s a house you can afford—no matter what happens to the economy. Make sure you have enough money to make a solid down payment (20 percent or more). That will help you get both a better interest rate and a lower payment, which will enable you to pay off the house much faster and still be able to enjoy a comfortable lifestyle in the process. It’s much better for the marriage, the emotions, and the pocketbook to live in a modest house you can afford than to be strapped to an expensive home you can’t.

Transportation

Much like the type of house you choose to live in, the kind of car you drive has become a lifestyle choice. Let me make an important point right up front. Cars depreciate in value. Cars are a terrible investment, no matter how you look at it. It’s the rare car, usually one that sits in a garage under a cover and is not even used for daily transportation, which goes up in value. So if you really want to become debt-free and wealthy, you need to make wise decisions when it comes to the car you drive. When you’re living that wealthy life, you can drive the cars of your dreams. I love cars. I’ve said it before and I’ll say it again. They have been my one indulgence (along with golf), and they’ve cost me a small fortune. But I’ve never borrowed to buy one of them!

Only in extreme cases should you borrow money to buy a car. And you should never lease a car. Leasing is typically the most expensive way to acquire a vehicle. I know this sounds harsh, but you should limit your choices for transportation to vehicles that you can pay cash for, if at all possible. That means you may not be driving the car of your dreams just yet, but if it’s reliable and economical, it’s a good financial choice that won’t impede your progress to freedom from debt and a wealthy life.

If possible, you should also limit yourself to one vehicle, if you’re trying to get out of debt. This may be a big sacrifice for a couple or a family, but the savings from getting rid of every car but one can be huge. You save on licensing, taxes, fuel, insurance, repairs, and tires. These are expenses that easily register in the thousands per year for most any car. Having one car will make you more conscientious about planning trips, which typically results in fewer unnecessary trips and more savings on gas, insurance and maintenance.

Never buy a new car. I admit I’ve bought a few new cars, and I can honestly say that they have been the biggest money losers of them all. If you must buy a new car, plan on driving it until the wheels fall off to get every last ounce of value out of it. A better choice is to buy a late-model, used car. There is typically a glut of cars in the two or three year old range that come back into car dealerships when leases expire. These cars are often still under a factory warranty, have low miles, and have already taken the biggest depreciation hit that occurs when you drive the car off the lot. Even if you don’t plan to keep the car for a long time, you should remain focused on the overall cost of ownership. If you’ve ever read the classic book, The Millionaire Next Door, you realize that the kind of car you drive is usually a poor indicator of wealth. I’ll spare you the details. Get the book. It should be required reading.

You may find this surprising, but one of my favorite cars of all time, a black Porsche 911, was also the most inexpensive car to own that I have ever had. It was a car that was about four years old when I bought it for almost half of what it would have cost brand new. I drove it for a couple years, loved every second, and then sold it for a few thousand less than I had paid. I figured the car cost me less than $2,000 per year in depreciation, in addition to normal service visits and fuel.

Compare that to the hit you’d take if you buy a new Chevrolet or even a Honda off the local dealer’s lot. A car that is two or three years old will not only be less expensive to buy, but less expensive to insure and license, which will help preserve your cash flow. Stop thinking about how the car you drive makes you feel and start thinking how to optimize your spending on transportation. You’ll likely accelerate your progress toward a wealthy life by an order of magnitude over someone who needs a nice car to feel wealthy. I’d rather be wealthy than just feel wealthy. How about you?

So when you’re deciding what to drive, think reliability and economy, not status and prestige, and then you’ll be far more likely to make a wise financial decision. When you’re out of debt and on your way to a wealthy life, you can upgrade your transportation to something nicer that you can pay cash for

Education

I believe that education is an investment in your future, and for that reason it makes my short list of acceptable uses of credit. When I was in college, I remember thinking it was so easy to borrow money, and it seemed like the lenders were giving me forever to pay them back. I thought, “How can I pass up such a great deal?” Only after I graduated and started working—and those long-delayed student loan payments came due—did I realize the true cost of borrowing for an education.

Depending on your situation and the financial means of you and your family, you may need to borrow money to get the education you need in order to succeed in the workplace. But before you accept one of those easy offers for credit, make sure you really need it. Exhaust all potential sources of financial aid including scholarships and grants first. I supported myself through college and paid for most of my education with part-time jobs, scholarships, and Pell grants.

Only use student loans to pay for education, not living expenses. I was able to hold down a part-time job, sometimes two, during most of my college days, which covered my housing, food, and entertainment. You can do it. You’ll be happy you did, and you’ll get a huge jumpstart on living a wealthy live if you do.

My brother–in-law is a very successful dentist who now teaches at a dental school. We were talking at a recent family gathering about debt, and he told me he had just conducted interviews to fill a vacancy at his former dental practice. He said he interviewed a half-dozen candidates and the average debt they had from school was over $300,000! Wow! A professional education is expensive, but many of these candidates had used the easy credit to sustain a dentist’s lifestyle before they even graduated and drilled a single tooth or fixed a single cavity.

So if you need credit to get an education, it’s one of the three things I believe is an acceptable use of credit. But use it wisely and only for actual educational costs. This rule would apply to any type of education that will help you increase your ability to earn a living.

I’ve had a number of opportunities to speak to students nearing graduation at the local university where I live. They are about to leave the sheltered world of student life and enter the dog-eat-dog working world. Many of them will begin their first job saddled with student loans and other debts. The advice I give them is simple. Don’t delay paying off your debts once you get a job just because your lender says you can wait a little longer before you have to start paying. The sooner you pay off your student loans, the better the deal you got on your education and the sooner you’ll actually be able to afford the lifestyle you went to school to get.

Many of you have probably attended college already and know that the standard of living is nothing to brag about. I remember living in a small basement apartment with half a dozen other guys in conditions I would say had to be a notch below the poverty level. But we got by and had a great time. Life was good. So I tell these new graduates to keep living like a student for another year once they get a job and put all the extra money they make toward paying down their debt. It’s almost impossible to do this after you’ve upgraded your lifestyle because you then know what you’re missing and it’s ten times harder to make that sacrifice. It’s easy to sacrifice for a little while longer if you haven’t yet experienced that lifestyle upgrade.

I would give the same advice to anyone who is already working and gets a raise or a promotion. Wait one year after you get that increase before you spend the extra money on enhancing your lifestyle. Apply 100 percent of the raise to your debts, and you’ll get to your wealthy life that much faster and be able to enjoy it that much longer. There is no better way to fast track your progress to a debt-free and wealthy life than to keep your lifestyle in check.

It’s also a great idea to develop the right habits right out of the gate after school. Don’t fall into a credit trap and immediately expand your debt just because you now have some extra cash flow and can afford a few payments. Pay cash for everything, if possible, and develop a solid budget and savings plan to guide your spending decisions. Then you’ll avoid some of the common pitfalls many graduates make in their first few working years. Bad spending decisions in your first years out of college may put you in a hole that often takes the rest of your life to dig out of.

So when it comes to using credit, there is only three acceptable uses in my book: housing, transportation, and education. Each decision to add debt, even for these three acceptable uses, should only be done after considerable deliberation.

YOUR CREDIT REPORT

Your credit report is like a financial report card that lenders, employers, and merchants use to assess your financial condition and discipline. What kind of grade they see when they look at your credit report will have a huge impact on your ability to borrow money, buy a home, rent an apartment, and even get some jobs. You need to know what your credit report says about you and do all in your power to make sure it reflects positively on you and your financial discipline. Before you go any farther, you need to take a look at your credit report. It’s easy to get a copy, and it’s totally free. You are allowed to get a copy of your credit report once a year from each of the three credit reporting agencies.

To get a free copy go to: www.annualcreditreport.com

Or you can submit a request by mail to:

Annual Credit Report Request Service

P.O. Box 105281

Atlanta, GA 30348-5281

You can also request it toll-free at: 1.877.322.8228

THE CREDIT REPORTING AGENCIES

There are three credit-reporting agencies that keep a record of your credit.

Here are the names and contact information for each.

Experian

P.O. Box 2104

Allen,TX 75013

1.888.397.3742

www.experian.com

Equifax

P.O. Box 740241

Atlanta, GA 30374

1.800.685.1111

www.equifax.com

TransUnion

P.O. Box 2000

Chester, PA 19022-2000

1.800.916.8800

www.transunion.com

Each agency uses a slightly different format for their reports, but the information contained in the reports is basically the same. The information can be broken down into four basic categories.

Personal Information – This includes your name, date of birth, and social security number, along with your current and past addresses, current and past phone numbers, current and past employers. The first time you see this, you’re going to be amazed at how much others can learn about you just by looking at your credit report.

Credit Information – Everything you have ever done in the world of credit is listed here, including all your credit cards, auto loans, student loans, home equity loans, mortgages, and any other type of loan you have or have had in the past. Included with each item will be the current balance, credit limit, and monthly payment. It will also show a detailed history of your payments with each item. It’s all here, the good and the bad.

Public Records – This section includes any information that’s in the public record about you. If you have had any legal judgments or tax liens against you or your property, they’ll be listed. Unfortunately, most of what’s in this section is stuff you’d probably rather others not know about, but it’s all here for the world to see.

Inquiries – This is a record of the people who have been checking on your credit. Each inquiry will remain on your credit report for two years. You’ll be able to see every credit card or loan you’ve applied for listed in this section of your credit report. It’s interesting to see who is actually looking at your credit report. Things that don’t appear on your credit report include: bank account balances, race, religion, health, criminal records, income, and driving records.

When you get a copy of your credit report, you need to study it carefully to make sure that all the information is correct. I’ve heard it said many times that over 80% of all credit reports have errors on them. If you find errors, make a list. In a minute we’ll show you how you can fix them or at least contest them. Also, make a note of any items on the report you don’t believe belong to you. They may be legitimate items, but you need to check on anything that doesn’t look familiar.

Another key part of your credit report is your FICO score. This credit score was developed by Fair Isaac and Company, thus the name FICO. Your FICO score is a number between 300 and 850 that equates to your credit worthiness. Think of the FICO score as the common denominator of the credit world. This is the number used most often by lenders to compare you to others in your ability to manage credit. The higher your FICO score, the lower your risk.

A FICO score of 720 is considered average. About 60 percent of all people have a credit score above 700. About 10 percent have a FICO score above 800. If your credit score is below 700, you are considered a credit risk. This may result in your being turned down for credit or being granted credit with a higher interest rate, lower limits, or both. If your credit score is below 600, you will be considered a high credit risk, and it will be very difficult to get any kind of a loan.

Your FICO score is calculated using a very secret formula that takes into account many variables from your financial life. The FICO score is not included with the free annual credit report from the three reporting agencies. When you request your free annual report, the credit bureau will typically ask if you’d like to get your FICO score for a small fee. This is because the bureaus have to pay Fair Isaac to calculate it, so they pass the cost on to you. The credit agencies are working to replace the FICO score with a new type of credit score called the Vantage score. This score is calculated using a formula the credit reporting agencies developed so they control it. It’s not widely used or accepted yet, but expect it to be more common if the credit reporting agencies have anything to say about it.

Your FICO score is calculated using five primary pieces of information. Here’s what they are and the weight they are given in the secret formula:

It is secret.  If everyone knew it, we wouldn’t need the credit agencies to keep track of it.  They would lose their relevance.  I would like to keep it as is.

Payment History (35 percent) – This includes the number of accounts you have, payment history, past due items, time since your last late payment, and other payment-related issues.

Credit Limits and Lines (30 percent) – This includes the credit limit on each of your loans and credit cards, as well as how much of that limit has been used. If you’re getting close to your limits, your score will be lower.

Credit History (15 percent) – This is a record of all the credit accounts that you’ve had. You’ll see how long each account has been open and when the last activity was. The longer the history on a debt, generally the better.

Type of Credit (10 percent) – This item reflects the different types of credit accounts you have, such as credit cards, mortgages, car loans, and department and gas cards. A good mix is a positive, while too many credit cards will drag your score down.

New Credit (10 percent) – This item reflects the new activity in your credit record. This is where you’ll see the recent inquires for new accounts and records of new accounts opened. A flurry of inquires or lots of new accounts will drag down your credit score.

If you take a quick look at the percentages of the items that contribute to your overall credit score, it’s easy to see what has the most impact. The two single biggest influences on your credit score are whether you pay on time and how much of your available credit you have already used.

Here are a few tips to help you improve your credit score.

Make your payments on time – This is the most critical part of improving your credit. You need to make sure you pay your bills on time to avoid late penalties and negative items on your credit report. Develop a system for paying bills that ensures they arrive to your lenders before the due date. Don’t get lazy or you’ll pay the price.

Don’t move your accounts around – Transferring a balance from one card to a new card to get that low introductory rate or to avoid a payment may seem like a great strategy, but the credit reporting agencies will see what you’re doing and it will negatively impact your credit score. Stability is the key here. Established accounts over long periods with solid payment histories are the keys to a good credit score.

Don’t exceed 50 percent of your available credit – If you’re nearing the limit on a credit card, it’s going to knock down your score. This reality may factor into the debts you choose to pay off first in your payoff plan. Once you get below the 50 percent threshold, don’t run it back up. It’s an even bigger plus to keep the balance below 30 percent of the available credit line. If you have an open account without a large balance, you may consider transferring part of your balance from another card to get both of them below the 30-50 percent range.

Increase your credit limits – If you’re close to the limit on a credit card and you’ve made your payments on time, you can improve the impact of this debt on your credit score by calling the company and asking for a higher credit limit. If you have a solid payment history, they are likely to grant that request. With a higher credit limit, the same balance will be a lower percentage of the available credit, and this will help improve your credit score.

Do not close old accounts – It generally does your credit more harm to close an old, unused account than to just leave it alone. If it’s a card you’ve had for a long time, the long history on the account may actually help you.

Pay more than the minimum – If you’re trying to eliminate your debt, you’re likely focusing all your resources on one account at a time and paying far more than the minimum payment. That’s a good thing. Keep it up until all the debts are paid off and you’ll have a stellar payment history on your credit report—and a credit score that reflects it.

Consider paying cash for everything – Just because you have credit doesn’t mean you have to use it.

Don’t apply for new cards – If you receive an offer, just say no! The inquiries for new accounts will pull down your credit score. Plus, once you reply to one of those offers, your name is going to get passed around as a “hot prospect” and you’ll receive even more offers for credit in the mail. If you would like to reduce the number of pre-screened credit and insurance offers you are receiving, visit www.optoutprescreen.com or call 1-888-5OptOut (1-888-567-8688) to opt-out of these offers. This is a free service to consumers offered by the major credit bureaus.

Don’t use your cards for cash advances – This shows desperation or lack of money management and could lower your score.

Avoid department store and gas cards – These cards typically have the most unfavorable terms and rates. Don’t fall for the points or cash back incentive programs. You can pay for gas and clothes with your credit card just as well and get points there too.

Never skip a payment – If you want a black mark on your credit report, this is a sure way to get it. Stay current with at least the minimum payment.

Be proactive when you have problems – The worst thing you can do if you have an emergency that is going to affect your ability to make a payment is to do nothing. Before the due date of the payment, you must call the lender and explain the situation and try to work out an arrangement they are happy with. Being proactive can help avoid a negative report. Don’t procrastinate when you have a problem.

Never co-sign on any debts – It’s tough enough to manage our own debt, let alone be responsible for someone else’s. The simple fact that they can’t get a loan on their own should tell you that you’re taking a huge risk. An exception here may be for your own child. Just go into this situation with your eyes wide open and consider the amount of the loan a gift so that if it does go bad and you have to pay, you’re not surprised. Managing your credit isn’t hard if you stop to think about the big picture.

If you make your payments on time and keep your balances low, you’re making progress. Your credit record can be ruined in a heartbeat, but it takes a long time to repair the damage. Many of the things that negatively impact your credit score are the result of being lazy, so step up and take control of your credit so you can use it to your advantage. A good credit score will help you get lower rates on your home or car loans, lower insurance rates, and maybe even a better job.

HOW TO REPAIR YOUR CREDIT

If you’ve had some credit challenges already, you’re likely to have a few blemishes on your credit report. And if you’re aware of those blemishes, you likely have noticed the large numbers of radio, television, and newspaper advertisements offering credit repair services. This is one of the shadiest industries you could ever get involved with, and I want you to know that there is almost nothing these companies can do to repair your credit that you can’t do yourself for free.

If you get a copy of your credit report and you see errors, you can send a request directly to the credit reporting agencies and have them correct mistakes. Use the addresses I gave you earlier in this chapter and get busy. A few simple things would be to correct any misspellings of your name so that all accounts are in the same name. You can ask them to remove any inquiries that are over two years old to get that number down and improve your credit score. If there is a debt on your report that you don’t recognize, you may have been a victim of identity theft. Check it out quickly. I have a few tips for you later in this chapter on how to avoid identity theft and what to do if you’ve been a victim.

Managing your credit report is mostly about knowing what people are saying about you and making sure it’s correct. The process may take a little time and it will certainly be frustrating, but the results will be worth it.

DEALING WITH BILL COLLECTORS

There is almost nothing worse than dealing with constant calls from collection agencies trying to collect on past debts. As if the stress and pressure of having debt in the first place weren’t bad enough, we often have to deal with relentless collectors who badger and bully people into paying past-due debts.

There are some strict laws that govern how debts can be collected, and if you know them and use them to your advantage, you will be much better prepared to deal with these annoying calls and eventually bring them to a halt

When a company reaches the point where they no longer feel they can collect a debt, they often sell off that account to a debt collector. The debt collector pays the company pennies on the dollar for the right to call on these bad debt accounts to see if they can collect something. They are very good at what they do and often convince a person that they must pay to avoid getting sued or having further damage done to their credit. They will often go to great lengths to harass and pressure you into paying a past-due debt.

If you get a collection call or letter, here are a few simple steps to help you stay in control.

Get all the contact information from the person trying to collect the debt. This includes their name, the name of their company, their address, phone number, and email address.

Verify the original source of the debt. Call the original lender if you can’t remember and verify the original amount, when it was due, and any penalties or interest being charged. Ask them whom this debt was given to for collection. Make sure the debt has not passed the limit of the statue of limitations for your state. If the debt is past this date, it’s not collectible.

Keep a record of every call or letter. You may need to refer back to something that was said or agreed to in a previous exchange, so keep some notes on what you talk about and what you agree to.

Don’t agree to anything in the first call. You have some work to do before you start making any commitments. The key here is to not feel pressured, no matter what they may tell you. Keep your cool and put off making any promises or acknowledgments until you have had time to verify everything on your own. If you pay anything on a debt that’s past the limits for your state, you automatically start the statute of limitations over again. These collectors are often dishonest and aggressive in their tactics. They are bound by some tough laws contained in the Fair Debt Collection Practices Act (FDCPA), but that often doesn’t stop them from doing things they know will make you uncomfortable or create extreme pressure to settle the alleged debt. Here are a few things to help you know your rights and keep collectors from crossing the line:

  • They can’t harass you by using profanity or making physical threats to you. Harassment can also be in the form of repeated calls or threatening messages.
  • They can only call between the hours of 8:00 A.M. and 9:00 P.M.
  • They can’t claim to work for the credit agency.
  • They can’t tell you that you’ve committed a crime and can be arrested.
  • They can’t threaten action they are not allowed to take. Examples might include taking other assets, garnishing your income, collecting from another family member or friend. Typically they must first obtain a court judgment before they can enforce these types of collection efforts.
  • They can’t make you pay on a debt that is not in your name.
  • They can’t represent that they are a lawyer or have any legal powers over you, unless they can verify that fact.
  • They can’t share your debt problem with someone they believe would cause you embarrassment or create pressure to settle, like an employer or family member.

If you feel you’re being harassed or that the debt collector may have violated the laws contained in the FDCPA, you should report them to your state Attorney General’s office or the Division of Consumer Affairs in your state. You can also report them to the Federal Trade Commission (www.ftc.gov).

If they are calling on a legitimate debt, you may need to negotiate with the collector. Just remember that they do this every single day for a living, so you’re likely going to be outmatched. Get some help from a competent consumer law attorney if you feel you need it and if the size of the debt warrants it.

If you choose to negotiate on your own, here are a few tips to help you.

Make sure they understand the limits of your ability to pay. Don’t make your situation any better than it really is.

Start the offer at a very low amount, like 10 cents on the dollar.

When they counter with a much higher number, only raise your offer by a small amount. If you offer 10 cents and they come back with a counteroffer of 80 cents, don’t make your next offer 40 cents; just bump it to 15 cents. The less you increase your offer, the more likely you are to end at a number you like more than them.

Never agree to a payment plan you aren’t certain you can meet. Don’t be embarrassed. Be realistic and honest.

Get any settlement deal in writing before you pay another penny.

Get the collector to agree in writing to remove this item from your credit report. Don’t just have them note it as paid. Get them to remove it completely.

The bottom line here is to only agree to do what you know you can do, and get some help if you need it.

HOW TO AVOID IDENTITY THEFT

As we all know, the bad guys have figured out that it’s pretty easy to take over someone’s identity, steal their money, and use fraudulently obtained credit to enhance their lives at the expense of their victims. Identity theft is one of the fastest growing crimes in the world today. Millions of people each year are having their financial lives destroyed by identity thieves. The fact that companies that hold our personal information are mishandling it and making it easier for the bad guys to get what they need is only fueling this problem.

Identity theft is a serious and growing program in our rapidly changing financial and technological world. There are some simple things that you can do to minimize the likelihood of your identity being stolen and reduce the damage that can be done if it is.

Here are a few interesting facts to get you thinking about this important topic. These facts were published by the Federal Trade Commission in a report about identity theft titled, “ID Theft: What It’s All About.”

Skilled identity thieves use a variety of ways to gain access to your personal information. For example, they may get information from businesses or other institutions by stealing it while they’re on the job, bribing an employee who has access to these records, hacking into private records, and conning information out of employees.

Here are some other ways thieves can get your information:

  • They may steal your wallet or purse.
  • They may steal your personal information through email or the phone by saying they’re from a legitimate company and claiming that you have a problem with your account. This practice is known as “phishing” online or “pretexting” by phone.
  • They may steal your credit or debit card numbers by capturing the information in a data storage device in a practice known as “skimming.” They may swipe your card for an actual purchase, or attach a device to an ATM machine where you enter or swipe your card.
  • They may access your credit report by abusing the authorized access that was granted to their employer, or by posing as a landlord, employer, or someone else who may have a legal right to your report.
  • They may rummage through your trash, the trash of your workplace, or public trash dumps in a practice known as “dumpster diving.”
  • They may break into your home and steal personal information.
  • They may steal your mail, including bank and credit card statements, credit card offers, new checks, and tax information.
  • They may complete a “change of address form” to divert your mail to another location—and then steal your information.

Once identity thieves have your personal information, they may use it to commit fraud or theft. For example:

  • They may call your credit card issuer to change the billing address on your account. The imposter then runs up charges on your account, and because the bills are being sent to a different address, it may be some time before you realize there’s a problem.
  • They may open new credit card accounts in your name. When they use the credit cards and don’t pay the bills, the delinquent accounts are reported on your credit report.
  • They may establish phone or wireless service in your name.
  • They may open a bank account in your name and write bad checks on the account.
  • They may counterfeit checks or credit or debit cards.
  • They may authorize electronic transfers in your name and drain your bank account.
  • They may file for bankruptcy under your name to avoid paying debts they’ve incurred under your name, or to avoid eviction from the apartment they’re renting in your name.
  • They may buy a car by taking out an auto loan in your name.
  • They may get identification such as a driver’s license, issued with their picture but in your name.
  • They may get a job or file fraudulent tax returns in your name.
  • They may give your name to the police during an arrest. Then, if they don’t show up for the court date, a warrant for arrest is issued in your name.

This is scary stuff, and hopefully this list gets your attention. Identity theft should be one of your top concerns when it comes to your money. The federal government has created a number of very helpful reports and articles on identity theft that you should read. Here’s the link to the identity theft section of the government’s website:

www.ftc.gov/bcp/menus/consumer/data/idt.shtm

The government promotes a three-pronged strategy to fighting identity theft:

1. Deter

2. Detect

3. Defend

Let’s look a little closer at each of these protective measures.

Deter

Protect your personal information. Don’t share personal information with anyone who doesn’t need it for a specific purpose. And carefully verify the identity of anyone who claims to need it. Destroy all non-essential personal records to avoid the potential of these records ending up in the wrong hands. In today’s world, a document shredder should be required in every home. Shred all credit offers and non-essential billing and personal records. Don’t carry your Social Security card with you, and always keep your wallet or purse in a safe place.

Keep a record in a safe place of all the credit cards you have, with account numbers and contact information. Then if your wallet or purse is lost or stolen, you can quickly take action to keep your personal information and credit cards from being used without authorization. Be wise about your habits online. Don’t share personal information online with strangers. Don’t fill out forms online from sources you don’t know or trust. Don’t let strangers use your personal computer, as they may be able to steal personal information. Keep track of your checkbook, and keep good records of the checks you write. Start paying attention and be aware of the situations you’re in where your personal information might be placed at risk.

Detect

Get a copy of your credit report regularly, and review it! Question and challenge any items that are not familiar or appear to be in error. If you can’t find a credit card or a piece of personal information like a drivers license, take immediate action to report it lost or stolen and freeze any credit accounts. It’s easier to undo these actions if you find the card later than it is to clean up the mess that can be created by procrastinating. Watch your credit and banking statements closely for unauthorized activity. The primary goal of an identity thief is to acquire money or goods at your expense. Checking your credit report regularly may be your first line of defense in identifying attempts to steal your identity and stopping efforts of potential identity thieves.

Defend

Report lost or stolen ID or credit cards immediately. Contact all the credit reporting agencies listed in this chapter to alert them that you may have been a victim of identity theft. They can place a fraud alert on your account to help protect you from further damage to your credit. The credit agencies also have very helpful resources with specific steps you can take to minimize the damage a thief can do to your credit and finances. If you’ve been a victim, it’s time for a crash course. After you file your reports, spend some time online reading these resources and putting the ideas into action. Contact all your credit card companies and cancel the cards immediately.

File a report with the Federal Trade Commission. Its identify theft website is:

www.ftc.gov/idtheft.

You can also call in a report to: 1.877.ID.THEFT (877.438.4338) You should also report the crime to your local authorities.

The primary key to beating the bad guys when you’ve been a victim of identity theft is to act quickly. This is one of those situations in life where time really is money. Take swift action, and you can minimize the damage of identity theft.

BANKRUPTCY

The final point I want to make about managing your credit has to do with bankruptcy. Many people who have serious problems feel that the only way out is to declare bankruptcy. This is often a huge mistake. You should avoid declaring bankruptcy at all costs. This creates a black mark on your credit record that will stay for 7-10 years and will make it very difficult for you to get credit or insurance. It can possibly even keep you from doing business deals or getting a job. If you’re considering declaring bankruptcy, get some advice from a lawyer or trusted advisor first to see if there is another alternative to solving your credit challenges. There are no easy solutions when it comes to serious debt problems, but bankruptcy is seldom the best solution.