Thoughts about how to re-establish credit after bankruptcy have been written about on this blog.  One of the practices frequently discussed involves obtaining a secured credit card.  A secured card differs from a standard card in that you must deposit money into an account managed by the issuing cardholder equal to your credit limit.  In other words, if you want a card with a $500 limit, you must first deposit $500 into a savings account at the bank that issues the card.  If you fail to make payments, therefore, the bank has the right to seize funds in the savings account.

The Bankrate.com website has an informative article that explains how secured credit cards work and I recommend it to you as part of your research.  I also found a helpful article from the Texas Bankruptcy Lawyer web site that offers tips about what to look for when considering a secured card.

So, there is plenty of information out there concerning the features and pitfalls of secured credit card offers.  Where can you do your research?

A good place to start is the handy search grid feature at Cardtrak.com.  This site allows you to search for secured credit cards and the resulting table will show you the names of the issuers, the annual fee, the APR and other information.

Of course, Cardtrak.com should be the starting place for your research. I would recommend that you use this site to identify two or three possible issuers, before going to the issuer sites and printing out the actual application with the fine print.  While the Cardtrak comparison feature is helpful, you should not assume that the terms and conditions of the actual offer will match the summary on Cardtrak.   Instead, armed with a list of features that you desire, you can intelligently compare the different offers.

You should also not be afraid of calling the issuers to ask questions.  You may have damaged credit but you are still the consumer in a competitive marketplace.   Is it possible to get a particular card with a lower annual fee or with a lower interest rate?  Perhaps - but you will not know if you do not ask and comparison shop.

The Internet functions as a tremendous resource and leveler of the playing field - when you are shopping for credit cards, do not go into your search with the attitude that the card issuer is doing you a favor.   Stand up for yourself and let the end of your bankruptcy function as the beginning of your new and positive financial future.

Sanders, a member of the Senate Health, Education Labor and Pensions Committee points to a huge increase in the costs connected to health care bureaucrats and bill collectors.  In the last 30 years, “administrative personnel has grown by 25 times the number of physicians.”  He points to systemic fraud perpetrated by private insurance companies, private drug companies and private for-profit hospitals as reasons that our health care is “the most costly, wasteful, complicated and bureaucratic in the world.”  

A review of court records and other public documents, according to Sanders, shows that billions more dollars are lost to fraud and outright corruption.  “This is not the case of ‘one bad player’ acting illegally…but a situation where fraud appears …part of the normal business model”

A CDS is a simple idea.  In its most basic, safe form, it’s a way to hedge the risk of a loan failing.   If a bank loans money to you, it can buy a CDS from an insurance company or other financial player.  The CDS will payoff in the event you do not.  It swaps the risk of a credit (the loan) defaulting to another party in exchange for a premium.  In its best form it is no more or less than insurance.  The lender is willing to take slightly greater risks in lending because a third party is willing to, in effect, act as a guarantor of your loan.  That guarantor of course will set the price of its insurance based on how much risk they believe you present.  So in theory a CDS on a very risky loan will be so expensive to buy, that the lender might not want to make the loan in the first place because there’s no way to “hedge” it.

So how is a CDS also like betting on losing thoroughbreds?  There’s no obligation that someone buying or selling a CDS have any interest in the underlying transaction.  In other words, you don’t have to be the lender or borrower, or involved in the underlying deal in any way, to buy or sell a CDS on a given credit transaction.  You don’t have to own the horse to bet for or against that horse.

Ironically, as many have pointed out lately, credit default swaps were actually illegal under the gambling laws of most states until federal law was changed in 2000 to make it lawful.  The irony is more frightening when you notice there is little requirement that someone writing a CDS maintain enough capital to pay off the swaps if the unthinkable — say the collapse of the American real estate market — came to pass.   Bad bets on these swaps — and the fear of the ramifications of the collapse of the CDS market — are largely to blame for the multi-billion dollar taxpayer investment in AIG among other institutions.

This is not the only way consumers are affected by credit default swaps, though.  CDS bets have been made (and continue to be made) against consumers and businesses across the economy.  There are swaps betting on whether companies will be able to pay back their bonds, whether foreign governments will be able to meet their debt payments, and there’s probably a CDS written betting against you being able to make your credit card, student loan, or mortgage payments.

These bets are still mostly unregulated, underreported, subject to manipulation, and has the potential to encourage large financial players to actually undermine the economy.

Checking Account Scams

One of the latest scams making the rounds typically begins with a postcard advertising easy credit approval or low credit card interest rates.  When consumers call, they are asked for their checking account number, supposedly as part of a “certification process.”  This number can be magnetically encoded on a draft, which is forwarded to the consumer’s bank.  Sometimes banks pay out hundreds of dollars from the consumer’s account, not realizing that the consumer never approved the withdrawal.

Credit by Phone

Pay-per-call or “900 number” services have become a popular vehicle for phony credit schemes.  Television or print ads promise that “guaranteed” credit or cash loans are only a phone call away.  Instead, the caller might receive a list of banks offering low-interest credit cards or a booklet on how to establish credit.  Such calls can end up costing $50 or more, but consumers rarely end up getting credit as a result.

“Gold” or “Platinum” Cards

[P]romotions for “gold” or “platinum” cards…promise to get you credit and build your credit rating even if your credit hisotry is poor.  Although they may sound like general purpose credit cards, some of these “gold” or “platinum” cards only permit you to buy merchanidse from special catalogs and will not help you obtain credit from other sources.  [A]ds for these cards [may] direct you to cal “900″ or “976″ exchanges for more information.

(Source:  PA Attorney General, Bureau of Consumer Protection)

Here’s the deal that came in the mail last week:  My bank is offering a promotional 4.99% rate until January on new charges.  But only restaurant, bar, travel and entertainment services qualify.  This offer was extended in different formats — for different types of spending — on all the cards I have with this bank (we have three for business).

So here we have a large money center bank offering customers an unusual deal:  They’ll “only” charge 4.99%  for the next six months if I’m willing to run up debt on largely unnecessary entertainment.  And of course they’ll apply any payments to these lower rate charges before any higher rate balances I might be carrying (although fortunately we do not carry balances now).  It’s quite a deal — if I had to get overextended on fun.

It’s very odd to have a major bank still acting a little like a drug dealer, trying to get you hooked on the high of overspending.  That is precisely what these offers and ads do:  A 5% APR is far higher than the money in the bank will earn, so it doesn’t make sense to carry an “arbitrage” balance.  The low rate is not for balance transfers from higher rate cards.  And it deliberately applies only to recreational spending.  If you are already carrying a balance, the 5% special is, at best fleeting and, in reality, simply encourages you to carry the higher rate balances longer, earning the bank more money.

And there’s the key to it.  The bank is trying to maximize profits, like any reasonable business.  This makes sense if you are offering the deal to credit-worthy folks who otherwise don’t make you much money (i.e. we pay off our cards every month normally).  It’s a hint of a return to the old days when bankers only offered loans to people who didn’t really need a loan — with just a litte of the more recent predator still thrown in.

• Don’t give personal informationon the phone, through the mail, or over the Internet, unless you’ve initiated the contact or know with whom you’re dealing.
• Ask your financial institutions for their policies about sharing your information.
• Pay attention to your billing or account statement cycles.  Follow up with your financial institutions if your statements don’t arrive on time.
• Carefully monitor your monthly credit card statements.  Report inaccuracies right away.
• Keep items with personal information in a safe place.  Shred any charge receipts, copies of credit applications, insurance forms, bank checks, and other financial statements that you are discarding, expired charge cards, and credit offers you get in the mail.
• Add passwords to your credit card, bank, and other accounts.  Avoid using easily available information like your mother’s maiden name, your birthdate, the last four digits of your Social Security number or your phone number, or a series of consecutive numbers.
• Be mindful about where you leave personal information in your home, especially if you have roommates or are having work done in your home.

(List source:  PA Attorney General, Bureau of Consumer Protection)

At least not yesterday, when a bill collector saved a Victorville, California woman who was being held hostage in her home by an ex-boyfriend.  According to both the Huffington Post and KTLA news, a local car dealership told a saleswoman that on her way home she should try to pick up a late car payment from a local woman.  When she arrived at the Winona Street address, she knocked on the door.  The 30 year old woman who opened the door had noticeable scratches on her body and scribbled the word “help” along with the name of her ex boyfriend.  When the saleswoman asked if she were OK, she whispered that her ex had a gun and was holding her hostage.

The saleswoman called the police who arrested 28-year-old Miguel Rios, a self-admitted gang member, for false imprisonment and making terrorist threats.

In reviewing the legislation, it appears that many of the provisions are designed to eliminate many of the tactics used by credit card lenders to tack on fees or increase interest rates quickly and without notice.

I especially like the provision in the bill that allows consumers to opt out of “overlimit” credit.  In other words, if you have a credit limit of $10,000 on a card and you incur charges that bring your balance to $10,500, many credit lenders now will permit the transaction but then charge you an overlimit fee.  If you use the card again, you will get hit with another, then another overlimit fee.  If you were not aware that you had reached your credit limit you could find yourself with hundreds of dollars in overlimit fees but no knowledge about these fees until you received your bill.

Under the Credit Cardholders’ Bill of Rights you can opt out of access to overlimit credit, meaning that if you attempt to use your card when your credit limit has been reached your card will be declined.

If you do choose to keep overlimit availability, you could not be charged multiple over-limit fees in one billing cycle.

There are a number of other provisions that will be the subject of future blog posts, however….

do not assume that this “Bill of Rights” will stop credit card issuers from figuring out new and creative ways to extract money from you.  As Profession Levitin points out today’s overlimit charges will become tomorrow’s “high balance” charges, today’s high interest rates become tomorrow’s annual fees.

The bottom line: neither this law nor any other law will protect a consumer from misusing credit.  I encourage my bankruptcy clients to treat credit cards as if they were check cards, with money being deducted immediately from your checking account.  If you use credit cards as a source of extended credit you will end up paying more in interest charges than your total balance.

• you will need cash to make a settlement work.  Settlements of debts will range between 25% to 70% on the dollar.  If you are able to negotiate a settlement you will need to forward the lump sum directly to the creditor or creditor’s representative.  Do not expect any payment plans in the debt settlement process.
• you will need to follow a procedure whereby you receive unambiguous written documentation of the settlement before you tender money.   If you do not document your negotiations and final resolution, you may very well end up facing renewed demands for money after you finalize your settlement and issue your lump sum.   Any ambiguity in the terms will come back to haunt you and a verbal deal is useless.
• you will have a great deal of difficulty finding a live person with authority to speak to you.  Credit card companies and collection agencies intentionally make it difficult for you to reach a person in authority.  They know that if they can keep you on the phone for hours, waiting to speak to a “manager” or on hold you will grow frustrated and less demanding.   I have written before about the psychology of debt collection and I can assure you that the executives who set up the procedures to settle debts use every trick in the book when it comes to maximizing their recovery.
• if you have multiple accounts, credit card or otherwise, you will find it exceedingly difficult to manage simultaneous negotiations.   Creditor “A” does not care about your dealings with creditor “B” and if you have a finite pot of money, you will find that every creditor wants as much as it can get without regard to your reality.   The phrase “herding cats” comes to mind.
• debt negotiators will pressure you to move fast.  They will offer a deal but insist that the money be wired to them within a few hours.   This is part of the psychology being used against you and is designed to increase your stress and result in a better recovery for the creditor.
• not every lender will agree to negotiate at all.  Some credit card companies, for example, may offer a 10% reduction but that is it.  They would rather sue you than work out a deal.
• your best window for negotiation often occurs when you are three to four months delinquent.  Most credit card lenders will not talk to you if you are current.  This means that you will have to endure two to three months of daily phone and letter harassment before you can even start a meaningful negotiation.
• many of the debt settlement companies you hear advertise on the radio or TV are ripoffs.  Some are outright fraudulent while others charge a large up front fee and do little more than a legitimate agency like Consumer Credit Counseling (which, by the way, is funded by the credit card companies).

Another point that I did not include in my blog post comes from Michael Schreiber of MainStreet.com - when a credit card lender does reduce your balance or change the terms of your loan, such a modification has a significant derogatory effect on your credit score.

The bottom line: I am not convinced that there is any legitimate interest by large credit card issuers to engage in any sort of meaningful negotiation with debtors.  Despite all the talk, the Congressional testimony, the pseudo-helpful web sites in soothing colors, the overriding goal of credit card companies is to extend just enough credit to you so that you will keep an outstanding balance to accrue finance charges, and to periodically make a late payment to generate late fees.

If the Sumerians lent silver, gold or barley these loans were also expected to be paid back with interest. The interest rate for metals was 20% and for barley was 30%.  The concept of interest on loans has been around for a very long time.  This fact makes me wonder why we still have not developed a system to regulate the lending industry to prevent predatory behavior.

Remember that knowledge is power.  Therefore, the more knowledge you gain about the affects of interest the more power you will have in controlling your financial future.

Written by Kansas City, Missouri Bankruptcy Attorney, Rachel Lynn Foley.