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Melanie C. Hardie, MA, CFP®, AFC, LADC
Managing Debt:
Steps in the Right Direction
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Objectives Prepare you to address most debt related challenges
common when engaging with pro-bono clients
Go over the Types of Debt, and their Management Options
Mortgages and Home-Equity Loans/Lines-of-Credit
Credit Cards
Personal Loans and Lines-of-Credit
Student Loans
Medical Bills
Collections
Payday and Title Loans
Address which Community and Web Resources to use
2
Debt Management Options & Resources
Consolidation, is it a myth?
Credit implications of debt options
= ?
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The Many Sources of Debt
And their options for resolution
4
Mortgages &
Home-equity loans/Lines-of-Credit
Contacting the lender(s)
HUD and Making Home Affordable programs
www.makinghomeaffordable.gov
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Credit Cards
Contacting the lender or creditor
Consumer Credit Counseling Services (CCCS)
www.nfcc.org/FirstStep/locator.cfm
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Personal Loans and Lines-of-credit
Contacting the lender or creditor
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Student Loans
Contacting the lender or creditor
Deferment and Forbearance options
Dept. of Education for loan consolidation
Private student loan options
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Medical Bills
Contacting the lender or creditor
Current status of medical collection
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Collections
Contacting the collector in writing
Fair Debt Collections Practices Act
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Payday and Title Loans
What are Payday loans?
What are Title loans?
Contacting the lender or creditor
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Other Resources & Appendix
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Community & Web Resources
Download List Directly Browse FPA Website
www.fpamn.org/wordpress/wp-
content/uploads/2013/07/Client-
Resource-Website-Links.pdf
Future updates will be current on
the Pro-Bono Resources Page
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Appendix: Credit Management
FPA Newsletter – ProBono Article for July, 2014
Credit Management
Written by: Melanie Hardie, CFP®
Credit means a lot of things. When I hear a client use the word “credit” it’s a trigger for me to ask for more
information about what “credit” area is the client referring to. It could mean the client has credit report issues, it may
be the client is wanting help understanding credit reporting and credit scoring, or that they have credit/debt
problems.
Today, credit has become more important than ever. It’s a part of our financial lives, employment reviews, insurance
considerations, and even impacts our relationship decisions. When a client has credit problems, it can be
overwhelming for them because they don’t know where to start or how to go about addressing their credit concerns.
These are important topics for the financial planner to have a basic understanding about. In this article, my goal is to
provide an overview of credit report management topics and strategies for working with clients.
The first step is to review their credit reports from all 3 of the national Credit Reporting Agencies (CRA) to see
what’s on showing on their credit histories. The 3 national credit bureaus are: Experian, Equifax, and Trans Union.
Under the Fair and Accurate Credit Reporting Act, consumers can get 1 free credit report per year from each CRA
using the Annual Credit Request Service: www.annualcreditreport.com to view the reports online or they can get a
mail request form by calling 1-877-322-8228 to receive a paper copy. Consumers should also review their credit
reports (and scores, discussed later), 3-6 months prior to a major credit financing application and on an annual basis
using this free service. (…continued…)
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Appendix: Article Continued
A credit report has 3 parts: demographic information; account records; and inquiries & public record. The account
record section is where all creditors report payment and balance activity and if there are legal actions that have been
taken by or against the consumer (foreclosure, bankruptcy, or judgments), they would be reported under public
record. Under the Fair Credit Reporting Act, all account information is reported for 7 years from the date of last
activity—so active credit accounts are reported for as long as they’re active and then for 7 years after they are paid
and/or closed. Public record is reported for 10 years and if the balance is still owed on a judgment, it can be re-
docketed by the court of issue for another 10 years. So judgments need to be paid and showing a zero balance from
the court for them to drop-off the credit history after 10 years.
The account record section of the credit reports is the “heart” of the credit history. The consumer will want to list all
accounts that show a balance owing and any negative notations for those accounts being reported (late payments,
delinquency, charge-off) by a creditor. Unfortunately, errors are a common occurrence on credit reports and
consumers have the right to dispute errors they find on their credit history in writing to the CRA showing the
error(s). There are online dispute forms at the websites for each of the CRAs and the consumer providing the CRA
with an explanation and any documents to support the dispute will aid the CRA in their investigation. The CRAs are
required to investigate and respond to consumer disputes within 45 days. Another unfortunate aspect to credit
reporting is that the CRAs don’t communicate with each other, except when there is a fraud alert. So, if you find the
same error on all 3 credit reports, the consumer will need to complete a dispute form with all 3 CRAs. If the disputed
item(s) are found to be erroneous, the CRA will remove them and send a corrected credit report to the consumer and
any credit application inquiries recorded by that CRA in the prior 60 days. (…continued…)
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Appendix: Article ContinuedHaving the opportunity to correct errors is the main reason to review credit reports in advance of major financing
applications. Once the errors are disputed and corrected, then consumers need to begin addressing the negative
accounts showing on their credit history: unpaid outstanding balances, collections, and judgments. I encourage clients
to make a list of unpaid accounts and deal with these creditors or collectors one-at-a-time. The consumer needs to be
organized and keep separate folders for each negative account, keep records of phone contacts, get payment or
settlement agreements in writing prior to sending the agreed to payment(s), and be consistent in following through
with agreed to payment(s). I encourage keeping copies of everything and sending payments via certified mail-return
receipt requested; it’s roughly $5 at the post office but there will proof the payment was sent and the return receipt
card will be proof the payment was received. If a debt collection goes into court, the most accepted proof of
payment(s) being sent and received is the US Postal Service return receipt card.
After errors are removed and negative accounts are showing zero balances, then time and good credit activity will
begin to rebuild the consumer’s credit rating. Remember all account information is reported for 7 years from the date
of last activity, so the outstanding accounts once paid will still show on the consumer’s credit history for 7 years, but
with a zero balance owed they are less negative for credit scoring purposes. There are no “quick fixes” in credit
management or rebuilding and credit repair services typically charge fees ($300+) to flood the CRAs with dispute of
everything on the consumers credit reports. This can cause problems if good credit information is removed as part of
the flooded disputes and chaotic CRA investigations. (…continued…)
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Appendix: Article ContinuedSpeaking of credit scoring, this topic is presently fraught with problems for consumers, as I’ll explain below, and there
are NO free credit scores. We pay for them one way or another. The Federal credit laws have not yet given the
consumer free access to their credit scores or adopted a uniform credit scoring system. The cost can range from $10-
$20 for a score based on each credit report and remember there are 3 CRAs. Originally, credit scoring was created by
the Fair Issac Company (FICO) of Minneapolis as a tool for lenders to have a numeric representation of the consumers
credit worthiness. FICO scores range from 350-850, the higher the score the better. If you want to learn more about
the FICO scores, you can go to their website: www.myfico.com and use the “learn about credit scores” tab across the
top. I do not advocate paying for any of the services or resources the Fair Issac Company advertises and sells on their
website, but the educational information available is excellent.
The 3 CRAs realized that Fair Issac Company was making a lot of money using their consumer credit histories to
generate a score for lenders and consumers. So, each of the 3 CRAs and created their own credit scoring system
(Beacon score, Advantage score, etc.) loosely based on the same factors as the FICO formula. But these different credit
scores they are not using the exact same scoring factors or the same scoring number ranges. Consumers are hearing
about the importance of their credit scores in qualifying for credit and getting lower interest rates, but there isn’t a
uniform scoring system to know what the consumer is getting or to be able to effectively compare their credit scores.
The consumer may be looking at the credit scores they pay for from each of the 3 CRAs and they are not all using the
same scoring system and it’s likely the lender is still using the FICO scores as the most established and reliable… but
consumers don’t know for sure which credit scores their lender is using either. (…continued…)
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Appendix: Article ContinuedThe current state of credit scoring is very frustrating and confusing for financial professionals and consumers alike. If
the consumer can get the potential future lender to disclose which credit scoring system(s) they’re reviewing, then the
consumer can in advance of applying for credit, pay for those credit scores to see what the score(s) fall on the
corresponding number range for that score and have the opportunity to fix errors and clear old debts to have an
improved credit score in the future. It can take 3-12 months for errors and zero balances to have a positive impact on
credit scores, so ultimately it takes time and good credit practices that includes credit monitoring to build up a good
credit score and credit history.
As an example of how to apply this information, here’s a client story:
A young couple wanted to buy a house and wanted their credit “fixed” right away. I gave them the bad news that once
credit goes bad, it’s a slow credit rebuilding process. I cautioned them about credit repair services that “flood” or
dispute everything on their credit histories to the Credit Reporting Agencies (CRA), and explained that errors and
some of both their good and bad credit activity drops off because the CRA’s aren’t able to verify all disputed items
within the 45 day dispute investigation timeframe. Once the legitimate bad credit items are verified by the CRA, they
reappear on their credit reports again and ultimately there’s very little positive credit gain for the fees paid to the
credit repair service. Instead, we discussed them doing it themselves by pulling their free credit reports through the
Annual Credit Request Service for all 3 credit bureaus for each of them. .continued…
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Appendix: Article ContinuedWe learned they had a few small credit cards that were charged-off, both had old unpaid cellular phone bills and
utilities and all these accounts were being reported in collections. I explained that the mortgage approval process
requires credit scrutiny by underwriters and they wouldn’t be approved with outstanding debts that are unpaid and not
in verifiable payment plans. We began working on a budget to focus on managing their cash-flow to identify what
resources they have available to pay off these outstanding debts and collections. I coached them about contacting the
creditors/collectors for each outstanding account, one-at-a-time and negotiating payment or settlement plans. I
explained the importance of the clients keeping an accurate paper trail, maintaining control and record of payments,
and getting everything from the creditor/collector in writing. Once their outstanding debts were paid, we discussed
good credit practices for their ongoing credit accounts and building up their savings for the down payment and closing
costs for purchasing a home. I encouraged them to enroll in first-time homebuyer classes through HUD or their State
or County Housing agencies to learn about the complex home buying and mortgage processes.
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