Warning Signs of Credit Problems


You should be aware of and able to recognize the numerous warning signs that may signal pending financial and credit problems.

As we went through the list of warning signs, did any of you think to yourself, “Yes, that’s me,” or, “I can relate to that!” Or, how many of you thought of friends or family members who have struggled their whole lives dealing with these kinds of issues? Well, if you did, you are not alone.

It is so easy to fall into the trap of any one of these items. And once you are in the hole, digging out (or catching up) oftentimes seems impossible.

Therefore, the rest of this module will focus on providing some sound advice on how to put the pieces back together and hopefully keep your credit intact.

Prepayment Penalty Mortgages


NOTE:
A substantial payment is defined as any amount that exceeds 20% of the original principal balance.
Before you’ve chosen a PPM, make sure that you do not have to pay a penalty fee within the specified period of time if you sell your home.

Whether or not you choose to use a PPM is definitely a personal decision that depends greatly on both your current financial situation and how long you think you’ll keep your mortgage before refinancing or making a large payment against it.

Prepayment penalties or fees are only applicable during the prepayment penalty period or term.

Before choosing a PPM Mortgage be sure to obtain the following information from your lender in writing:
  • The terms of the mortgage provision containing the prepayment penalty.
  • The amount of the penalty that you will be required to pay.
  • The time period in which the penalty will be charged if you prepay or make a substantial payment on your loan.
  • Any other conditions under which the lender may charge you a prepayment penalty.
In addition, you should ask your lender several questions as you consider the pros and cons of a prepayment penalty mortgage, such as:
  • How much will I save on my closing costs or fees?
  • Will my interest rate be lower if I accept a PPM?
  • Under what conditions will the lender enforce the prepayment penalty?
  • Will the lender enforce the prepayment penalty if I sell my home?
  • How is the prepayment penalty calculated, and how much will it be on my loan?
  • When can I prepay the loan without incurring a penalty?
ALWAYS BE SURE to research all of your options as you look for the right type of mortgage for you. Remember, your lender should be available to answer all of your questions and to help you make an informed decision.

Home Equity Loans and Lines of Credit

Another source of possible funding for home improvements may be a home equity loan or a line of credit. There are numerous types of loan products available. If you are considering this type of financing, you should check with the lender and your tax accountant to see if the interest payments are tax-deductible.

Can anyone tell me the difference between a home equity loan and a line of credit?

  • A home equity loan is a loan secured against your home. It is in addition to your existing mortgage. A home equity loan will provide you with a fixed amount of money, for example $15,000. Upon closing, you would be issued a check and subsequently begin making loan payments on the full $15,000.
  • A line of credit is also secured against your home. It is different, however, in that although you are not issued a check, you have access to funds up to the limit of the line of credit. For example, if you had a $15,000 line of credit, you pay interest only on the amount of funds “borrowed” from the account. If you do not draw out any of the money, you do not pay interest. CAUTION: Be careful to make sure that you are not paying “interest only.” Interest-only payments do not reduce the principal (the balance) of the loan. Therefore, you, in theory, would never pay off the loan. As with credit cards, you should always pay more than “the minimum due.” This habit will save you a lot of money over the life of the loan.
WARNING: Always be cautious about using your home as collateral, because nonpayment could result in the loss of your home.

You may be wondering, if a home equity loan or a line of credit is tax deductible, why not get one and use it for all of my major purchases? Well, you could, but home equity loans are often times structured as 10- or 15-year loans. That means, for whatever purpose you spent the money on, it will take a long time to pay it back. Furthermore, homes in most markets have appreciated in value over time. Leaving this appreciation “intact” is an excellent way of building up a nest egg for your future, for retirement, or for your family, etc.

If you need to use your asset (your home) for some important family event—such as a medical emergency or sending a child to college—shop around for a mortgage that is fairly priced, with fair terms and fair marketing.

You have all heard the convincing advertisements regarding debt consolidation. It is in fact true that by rolling the debt from your credit cards, possibly a car or other loans together, you will have one single loan payment that is smaller. But, before you go ahead and do that, think about why you are doing it.

Are you doing it because you feel overextended? Do you have too many debts already? Are your credit cards charged to the maximum?

Then, think about if you do consolidate all of your debts and pay off all of your credit cards—what will happen next? Will you soon thereafter start charging again on the credit cards? Will they fill up faster than you expected? Will you be back in the same situation that you were in before you did the debt consolidation loan?

Better Business Bureau’s Home repair Tips


Do not be intimidated by contractors. It’s your money, and you are hiring them to perform a service for you. Furthermore, don’t believe everything you are told. If, for example, someone stops by saying that they are doing work in your area, or that they have a load of driveway asphalt left over from another job, and they are willing to do your driveway for half price today to get rid of it . . . keep your money and say no thanks!

Finally, as the slide indicates, always get multiple bids. You will learn a lot about different ideas and techniques. Furthermore, you will be amazed at how much bids and prices vary.

Once you have obtained bids on the project, ask the contractors for local references. For example, they may have done work for Gabriel down the street, but was Gabriel happy with the work performed and the time frame that it took to complete the work? Were there cost overruns, etc.? Don’t be afraid to check with him.

Finally, if there have been complaints filed against a contractor, you may wish to investigate further, or simply find another contractor.

Many contractors operate as part of a larger business or company umbrella organization. Therefore, the larger companies will oftentimes offer to finance the project or improvements. While this may be convenient, it may not always offer you, the customer, with the best deal financially.

Therefore, it is important to check around with local banks, your credit union, or other financial institutions to compare loan costs. When comparing financing options, ALWAYS ask for the Annual Percentage Rate (APR). This rate is calculated by taking into account the actual interest rate, as well as all of the costs and fees to secure the financing. The APR allows you to compare apples to apples.

Note: The APR will generally be higher than the loan interest rate. However, a low interest rate on a loan product may actually cost you more, if there are excessive fees and closing costs. You need to compare!

No one likes to “read the fine print.” However, any time that you sign a contract, especially with a person or an institution that you do not know much about, it is imperative to know exactly what you are signing.

Some of the things to watch for in an agreement include: completion dates, payment schedules, prepayment penalties, and excessive late charges or penalties. Also, check and see whether you are financing insurance premiums up-front in your loan for products like credit-life insurance. If you decide to buy a credit insurance product, pay for it on a monthly basis instead.

Remember: If someone wants you to sign something today, because the price will go up tomorrow, or the deal is not available tomorrow, just walk away!

Home Repair Scams


You can never be too careful. Do not be afraid to check with your local city or state government officials on housing code standards or building concerns.

When it comes to money, be sure to get a detailed list of the project costs and the payment schedule in writing, in advance. NEVER pay for the full cost of the project “up front.” And finally, after you have inspected the work and before you issue the contractor the final payment, request a “lien waiver.” A lien waiver is a legal document that indicates that the project has been paid in full and releases you and your property from any future liability and/or claims by the contractor or their subcontractors for non-payment of work performed or materials provided.

Other Scams

Scams come in all shapes and sizes.

A recent report from the Federal Trade Commission presented a case where flyers were distributed at churches, on windshields, and on bulletin boards at senior centers and nursing homes.

The flyers promised $5,000 in Social Security reimbursement and “slave reparation.” The flyers stated that you simply had to pay a fee and provide some personal information. These flyers, as you may have guessed, were a scam.

Oftentimes, people, particularly the elderly, tend to be trusting and optimistic.

Once a scam operation has your Social Security number, it can be used to open accounts, get documents such as a driver’s license and ruin your credit.

TIPS FROM THE FTC:
  1. Never reveal your personal identifying information unless you know exactly who you are dealing with and how it will be used.
  2. Verify the details with any government agency that’s “involved” in any offer.
If you do happen to give someone pertinent personal information, follow up by reading all of your bills carefully and by calling your creditors to dispute any charges that you didn’t make or authorize.


Internet Scams





The top 10 scams cited by the government are:

  1. Internet auctions (failure to provide equipment or products).
  2. Internet access services (traps consumers into long-term contracts with penalties for cancellation).
  3. Credit card fraud (use of credit card information illegally/without authorization).
  4. International modem dialing (costly long distance bills).
  5. Web cramming (offering free customized web pages, then placing monthly charges on the victim’s phone bill).
  6. Multi-level marketing pyramids (offering buying into plans and programs, many of which are illegal).
  7. Travel and vacations (travel and accommodations or services with hidden charges and/or low quality).
  8. Business opportunities (scams such as motivational tapes and stay-at-home businesses).
  9. Investments (stock offers with “no risk” and “huge returns” which deliver neither).
  10. Health care products (miracle products which turn out to be snake oil).
Source: Federal Trade Commission

ENTER AT YOUR OWN RISK, and ALWAYS USE CAUTION WITH PERSONAL DATA OR CREDIT CARD INFORMATION! It has been said that some purchases on the Internet are like buying stock from someone you don’t know in a dark alley.


Protect Yourself Against Identity Theft

The thieves might call your credit card companies and pretend to be you. They might ask to change the mailing address on your credit card account. Then they use your credit card number to charge goods and services.

They might even open a new credit card account using your name, birth date, and Social Security number. If they use your name and Social Security number, the charges can show up as a delinquent account on your credit report since they will not pay the bill. The thieves could even open a bank account in your name and write bad checks.

Here are some of the ways identity thieves can get your personal information and take over your identity.

How identity thieves get your personal information:
  • They steal wallets and purses containing your identification and credit and bank cards.
  • They steal your mail, including your bank and credit card statements, pre-approved credit offers, telephone calling cards, and tax information.
  • They complete a “change of address form” to divert your mail to another location.
  • They rummage through your trash, or the trash of businesses, for personal data in a practice known as “dumpster diving.”
  • They fraudulently obtain your credit report by posing as a landlord, employer, or someone else who may have a legitimate need for—and a legal right to—the information.
  • They get your business or personnel records at work.
  • They find personal information in your home.
  • They use personal information you share on the Internet.
  • They buy your personal information from “inside” sources. For example, an identity thief may pay a store employee for information about you that appears on an application for goods, services, or credit.
How identity thieves use your personal information:
  • They call your credit card issuer and, pretending to be you, ask to change the mailing address on your credit card account. The imposter then runs up charges on your account. Because your bills are being sent to the new address, it may take some time before you realize there’s a problem.
  • They open a new credit card account, using your name, date of birth, and Social Security number. When they use the credit card and don’t pay the bills, the delinquent account is reported on your credit report.
  • They establish a phone or wireless service in your name.
  • They open a bank account in your name and write bad checks on that account.
  • They file for bankruptcy under your name to avoid paying debts they’ve incurred under your name, or to avoid eviction.
  • They counterfeit checks or debit cards, and drain your bank account.
  • They buy cars by taking out auto loans in your name.
To minimize the risk of identity theft, follow these recommendations from the FTC:
  • Before you reveal any personal information, find out how it will be used and whether it will be shared with others.
  • Pay attention to your statements. If your bills don’t arrive on time, contact your creditor. A missing credit card bill might mean that an identity thief has changed your billing address and is using your account.
  • Guard your mail from thieves. Pick up your mail from your mailbox as soon as possible. Place outgoing mail in post office collection boxes.
  • Do not give out personal information over the phone or through the mail unless you have initiated the contact and know with whom you are dealing. Thieves may pose as bankers, government officials, or others to get you to reveal your Social Security number or bank account number.
  • Keep items with personal information safe. When you throw away receipts, credit card applications, and old checks or statements, make sure to shred them.
  • When you make up your PIN for your credit, ATM, or debit card, don’t use something a thief might guess, such as birth date, Social Security number, or phone number.
  • Order a copy of your credit report at least once a year. Catch mistakes and fraud before they ruin your personal finances.
Note: Some issuers of credit cards are now offering identity theft insurance as an optional benefit for card holders. This type of insurance will cover losses incurred, up to certain amounts, resulting from identity theft. If you opt for this insurance, review the policy carefully before signing up. Most importantly, don’t assume an identity theft insurance policy means you can stop safeguarding your personal financial information.

The FTC recommends the following actions if you believe you are a victim of identity theft. You can also call the FTC’s Identity Theft Hotline at 877-ID-THEFT (877-438-4338).

Take action immediately! Keep records of your conversations and all correspondence:
  • Contact the fraud department of the three major credit reporting agencies. Tell them you are an identity theft victim. Ask them to place a “fraud alert” in your file. This alert means that any company that checks your credit will know that your information was stolen, and will therefore have to contact you by phone to authorize the extension of new credit. This will prevent anyone from continuing to illegally (without your knowledge or consent) use your credit. Ask the credit reporting agencies for a copy of your credit report. They must give you a free copy of your report if it is inaccurate because of fraud.
  • Contact your creditors about any accounts that hae been changed or opened fraudulently. Ask to speak with someone in the security or fraud department.
  • File a report with your local police. Get a copy of the police report so you have proof of the crime.

Protect Yourself Against telephone Solicitation Scams


You are probably too familiar with telephone solicitations. The callers are generally scripted and have a canned response for everything you say. Saying yes and/or providing personal information to telephone solicitors may seriously impact your credit.

Our advice is to say to the caller, “Sorry. I’m not interested. Good-bye.”

The Federal Trade Commission (FTC) has created the National Do Not Call Registry to make it easier for consumers to stop unwanted telemarketing calls। You may register your phone number, free of charge, in one of two ways:

  • If you have an active email address, you can register up to three phone numbers online at http://www.donotcall.gov/
  • You can call toll-free, 888-382-1222 (TTY 866-290-4236), from the number you wish to register.


For more information on the National Do Not Call Registry, please log on to http://www.ftc.gov/ or call toll-free 877-FTC-HELP (877-382-4357).

Instant income Tax refund Scams


Although tax laws, regulations, and forms may be overwhelming, don’t despair. If you need assistance, always choose a reputable tax attorney, accountant, or tax service.

Remember: Beware of and avoid offers that are “too good to be true,” such as instant tax refund Instant tax refunds, or refund anticipation loans (RALs), are an expensive way to get your tax refund more quickly. A refund, anticipation loan may only mean that you get your loan a week or so faster, but you may pay a high rate.

By filing your returns electronically and having the funds transferred directly into a savings or checking account, the tax return is promptly processed and you will have all of the funds safe and secure without added cost.

Rent-to-Own Businesses


Rent-to-own businesses structure their “rental” pricing to be very enticin. Yet, in the end, and over the long term, customers would have saved large amounts of money by purchasing the furniture or products from a furniture or department store.

In addition, a purchase using a major credit card or a department store credit card would have provided the consumer with a credit history. Rent-to-own businesses, on the other hand, do not typically cooperate with the credit industry and consequently, even despite a perfect payment record for the goods, the consumer does not develop a credit history from this type of transaction.

Finally, in addition to the long-term, exorbitant prices paid for the products, if a consumer fails to meet all of the terms of the agreement or fails to make a payment, the products may be swiftly repossessed.

High-Cost Cash Advances


Bottom line: You borrow $200. In six weeks you owe $365.
Obviously, this is an outrageous interest rate to be charged for this cash advance.

Interest Calculation:
If the interest charged for six weeks on a $200 loan was $165, then to determine the weekly interest charge, divide $165 by six. This equals a weekly interest charge of $27.50. To determine the annual interest charge, take $27.50 times 52 (52 weeks in a year). This equals $1,430 per year in interest.

To determine the interest rate charged for borrowing $200, take $1,430 divided by $200 = 7.15. To convert this into a percentage, move the decimal point two places (numbers) to the right and it becomes 715 or 715%.

Check Cashing Businesses


Check cashing businesses are legal and found throughout the country. People tend to use check cashing businesses because they do not have any kind of traditional credit, savings, or checking accounts. Among those who often use these businesses are the working poor and persons on public assistance or on fixed incomes, like Social Security.

Check cashing businesses will “cash your check” and provide other financial services. However, some charge customers extremely high fees for the service. Banks and other financial institutions can provide these same services—and more—for less money.

In addition, consider the following:
  • Try to save up enough money to equal the typical check cashing fee. Use the funds to open a savings account, and once opened, you will be able to use the financial institution to deposit and cash your checks. Every time you cash a check in the future, try to put the money that you would have paid to the check cashing business into your new savings account.
  • A number of banks have recently begun offering low fee checking options. Be sure to ask about these special programs.

What Is Predatory Lending?


Predatory lending has been a hot topic in the news, among government officials, consumer advocacy groups, and among members of the credit and mortgage industry.

Most of the attention on predatory lending has occurred as a result of lenders employing unscrupulous lending practices like charging excessive points and fees at the beginning of a mortgage. Consumers who fall prey to such predatory lending practices are often in lower income, elderly, or minority communities. Often, persons who are financially vulnerable with limited options due to a poor credit history, or who have a large amount of equity in their home or own their home outright, are the target of lenders using predatory lending practices. The unfortunate and common end result of predatory mortgage lending is the loss of one’s home and one’s financial worth.

Be an Informed Consumer
Although the mortgage loan and auto loan industries have received the most attention in regard to predatory lending, there are several types of abusive lending practices and scams that may strip equity away from a homeowner or place a consumer in financial hardship. The rest of the slides contained in this module will review each of the primary scams, highlight certain business practices of which to be aware, and provide you with helpful information you may use to avoid borrower pitfalls.

It is important to note that high interest rates or fees do not always indicate predatory lending. “High-risk” borrowers (persons with poor credit) will pay more in interest and fees.

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