If you are an Authorized User (AU) on somebody else's credit card - you are not responsible for the payments. But banks will still report this account to all Credit Reporting Agencies (CRAs), thus changing your credit score. There are now laws against this practice.

Being an AU may be very dangerous for you, because if something bad happens to the original lender (late payments, charge-off, bankruptcy including this account) - all the bad things will go to your credit report as well. As the bills go to the original lender, the situation may escalate for months without your knowledge of it.

If something like this happens to you, you should do the following:
- remove your name from the account immediately
- ask the original lender to remove this account from your credit report
- write to Credit Reporting Agencies (CRAs) requesting them to remove this account from your report completely. Explain that this is in violation of the FCRA and unfairly damages your credit rating.
- If you don't want to pay this account - then don't. Legaly you are not responsible. Be careful, because making even a small payment will be considered as accepting full responsibility.

OK, this was about the danges of being an AU.

Is there anything good about being and AU?

Yes, there is: it allows you to use the card, and to improve your credit score.

Several years ago many companies were offering fast credit score improvement by adding the client as an AU to somebody-else's accounts. To protect from this practice, FICO scorring algorithm was changed recently to become more selective.

Today FICO will NOT give a big boost to the score unless you have the same address and/or the same last name as the card owner. And even in this situation the benefit will be limited, so that when you later apply for credit - you may still be rejected because you don't have your own credit accounts.

So today if you want to boost your credit - I wouldn't recommend the Authorized User's trick.

Instead you can do other things. For example, you can open a secured credit card account. Or you can open lines of credit with some stores (so-called subprime merchant credit). We will have a separate video on this topic.

Once again, to protect yourself it is better to NOT be an Authorized User. So if you are listed as AU on an account - call the bank to remove yourself, get a confirmatin letter, make sure this information is updated on your credit reports.

Recently a friend called me. He and his wife have applied to refinance their mortgage and get an associated line of credit. They were turned down for the line of credit. And my friend didn't understand why, because he thought his credit history should've been perfect. Last 20 years he and his wife were always working, generating good 6-figure income. They bought their house 15 years ago. They were always paying bills on time, were not carrying any balances on their credit cards.

But - they were not monitoring their credit reports.

I told him to go to Fair, Isaac & Company web site ( myfico.com ) - and select an option to get 3 reports (from Equifax, Experian, and TransUnion) and 3 FICO scores - and then call me back.

What he found was quite interesting. The scores were ranging from 720 to 780. They were different, because different reports contained different information.

On one of the reports (TransUnion) he found an 18 year old tax lien which reflected an IRS error made 18 years ago. He thought this record was removed - but it had somehow re-appeared. Unpaid tax liens can stay on credit report forever. Luckily for him he still kept an old letter from IRS confirming that this was a mistake.

Second problem was a negative record placed on his account by a collector for homeowner's insurance company. 2.5 years ago they switched insurance. Insurance was paid by the bank (escrow). There was a misunderstanding in dates between the two insurance companies (old and new) which they resolved between themselves and the bank. But somehow a negative record was placed on my friend's record - and never was corrected or removed. The record stated that he never paid the required balance.

There was a 3rd record - late record for a Macys credit card.

I have advised my friend ho to resolve these problems - and it took ~20 days.

This example demonstrates several points.

(1) You never know what can appear or re-appear on your reports - you have to check them at least once a year.
(2) Monitoring just one report is not enough, because errors may appear on other reports. You should periodically check all 3.
(3) Once the error was resolved - it can reappear many years later. So keep records for long-long time.

One more thing. Note that I have recommended Fair Isaac's web site ( myfico.com ) and not any of the CRAs web sites (Equifax, Experian, TransUnion). The reason for this is that CRAs tend to offer their own scores, which are similar to FICO, but sometimes may differ significantly. For example, TransUnion offers TrueCredit score. Experian offers VantageScore (which has score range 501-990 as opposed to FICO 300-850). When you are applying for a mortgage - you really need to know your true FICO score, because this is what all mortgage companies are using today. Fair Isaac company is a public company traded on New York Stock Exchange. They gross about 1 billion dollars per year, employ more than 3,000 people, and have offices all around the world. They were providing services for morethan 50 years (since 1956), and providing credit scoring for almost 40 years (since 1970). Today they are a defacto standard for credit scores.

The short answer - yes, in most cases, but collection agencies are regulated differently from original collectors.

In the previous video we spoke about the major decisions made by US Supreme Court and Congress in 1978 and 1980, allowing national lenders to offer their services in all states practically without limit on the interest they can charge.

These laws are not applicable to collection agencies. The laws which are applicable are FDCPA (The Fair Debt Collection Practices Act), and local states' usury laws and ucc laws (UCC = Uniform Commercial Code).

The FDCPA, Section 808(1) prohibits adding interests or fees unless the amount is expressly authorized by either the state law or by the original contract with the lender. Usually the original contract has these provisions.

Our Resources page has links to the applicable laws (federal and by state). If you read the laws, you will see that the allowed rate depends on the State, on the type and the amount of debt, whether there was a judgment, and other parameters.

If the rate is too high, the court may find it illegal, and in some states (for example, New York) can even void the original debt.

Another question - whether the collector will actually charge the interest and fees. If the collector represents original creditor - they will probably charge the maximum - to balloon the amount so that they can charge it off and receive maximum insurance / tax benefit.

If the collector is not representing the original owner, but bought the collection rights - then it depends on what they know about you. If they think you have money - they will charge the maximum - and will try to sue you. If they believe you don't have money and the amount is not very big - they will agree to settle, or even decide to completely abandon collection efforts.

Short answer in most cases is "YES". Unfortunately.

Today you can see credit card companies applying very high late fees (~$40) and high interest (30-40%).
How can this be legal? Don't we have anti-usury laws?

Let me explain.

Until the end of 1970s the rates were limited by so called anti-usury laws and ucc laws. (Usury means "interest" and UCC - Uniform Commercial Code.) Each state has its own usury laws and ucc laws.

In 1978, the U.S. Supreme Court made a decision that state anti-usury laws regulating interest rates cannot be enforced against nationally-chartered banks based in other states. (case of Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp.).

Some people believe that this court decision was one of the most important decisions of the 2nd half of 20th century, because it has allowed big banks to offer credit cards to anyone in the U.S., thus getting people into credit card debt, charging US people billions in late fees - and overall having major negative influence on American economy.

Two years later, in 1980, the new US law has been passed - Depository Institutions Deregulation and Monetary Control Act. This act allowed institutions to charge any interest rates they chose - thus overriding local usury laws of the states.

Thus national credit card companies really don't have any legal limit and can charge 30, 40, or more % interest.

These decisions put local banks at a disadvantage against national banks. So to help local banks, different states have loosened their anti-usury laws allowing local banks to charge higher interest.

FICO score is the most common scoring system used by mortgage lenders. But do you know that your score may be higher or lower depending on what version of the system your mortgage broker uses?  So far the most common system was  FICO 'Classic'.  It is going to change with the release of the new version called FICO'08.  

With each new version Fair Isaac company, the creator of FICO, makes its product smarter, fixing problems and errors of previous versions.

What Is New in FICO'08

The company says that the new system will better predict risks when assessing consumers with problems in their credit history and consumers with "thin"  history.

It will make more precise decisions of creditworthiness because the scoring will be more refined. Before there were just a few scoring groups, and the customer with a little spot in their history could be placed in the same group and ,consequently, get the same low score, as a customer with much bigger credit problems. The new system has more scoring groups, therefore each customer will get more fair score.

Another change in evaluation of credit history is the way how the negative information is treated.  A consumer could have a problem paying for a car but was always on time paying credit card bills and mortgages. The old system would penalize such a consumer by assuming that his worst performance with auto mortgage would also indicate that he is not trustworthy with another credit. The new system takes into account  negative/positive performance across all types of credit obligations (see fig 1).

 Figure 1:  FICO'08 score measures degree of "bad" behavior (FairIsaac press release).

The FICO® 08 score performance classification measures consumers by degree of positive and negative performance across all credit obligations. For instance, a consumer record delinquent on two of eight trades is categorized differently from one that's delinquent on eight of eight trades.

One very good news for consumers is that there is no more penalty for a "petty crime": Small amount collection agency accounts, judgments and tax liens (original amount under $100) will no longer be evaluated by the FICO® 08 score. This ensures consumers are not negatively impacted by minor infractions like parking tickets and library fines.

So, is FICO'08 better for consumers?

Some may see their score moved down, some will get a boost with a new system. What's clear that it's more fair. Therefore I say it's better.

The Obama administration's foreclosure prevention program is launched. Today officials released details of the program. Who will get help? What's the size of the help? What's in it for banks?

The plan was designed to help homeowners in two ways: help to refinance in new lower interest rates and help to restructure the mortgage to more affordable levels.

For many homeowners refinancing is not an option because the value of their houses dropped.  If you owe more than the home's market value you won't qualify. Banks require at least 20% equity in your home to be able to refinance. The plan will help many homeowners to refinance.  Refinancing will be evailable for those who took loan from Fannie or Freddie and whos mortgage is below 105% of the home's value.  Specific terms and costs of refinancing are up to loan providers.

Loan modification plan is going to be a main engine of the program's success.  It targets borrowers who are behind on their payments but who can with some help keep on for a while until the economic situation improves bringing more jobs and higher salaries.  The "at risk" group includes those who lost part of income or experience increase in expenses, who has increasing adjustable mortgage rates, who owns more than the house is worth or who can show other reasons why their financial situation is close to default.

The rate modification program will do exactly what it says: it will decrease montly mortgage payments to an affordable level which is set to 31% of income. Lenders supposed to cover the lowering rates to 38% and the government will add money to set the rate at 31%. 

Of course there are limits for such a generosity: the new rate can not go below 2%. And it won't stay forever. After 5 years it will start moving up to its initial value.

In addition borrowers participating in rate modification program will receive up to $1,000 a year for paying off the principal for up to five years.

 Who will qualify

There are criteria that have to be met in order to qualify. The general group of conditions is:

• mortgage was obtained before January 1, 2009
• primary mortgage must be less than $729, 500
• The owner must live in the property
• Income must be fully documented (tax returns, pay stubs)

There are additional conditions on property value and mortgage size that should be met.  It is better to ask your lender if you will qualify for the program and if they will be willing to make a deal with you. Lenders' participation in the program is voluntary. Therefore they will be the final desision makers. Currently lenders study the program's details. They say that they will be ready to answer questions and start the services in a few weeks.  

As I've written in my earlier post the main reason of previous fails of government to resolve the foreclosure crisis was the absence of interest from banks to participate. The current plan took an extra effort to make the program attractive for lenders.  So far the responce is positive. JPMorgan Chase said that it "strongly supports" the president's plan.  We shall see how strong the support is very soon. Good luck to us all.

 Go to white house web site  to read answers for borrowers about the
Homeowner Affordability and Stability Plan.

Since 2006 1 million residences having fallen into foreclosure, and an additional 5.9 million expected over the next four years. It is clear now that it's not just a problem of homeowners themselves. It became our economy's crisis.

The signs of upcoming disaster were seen long ago, and actions were taken. "Hope for Homeowners", "Hope Now Alliance" - promising names of these programs. Why didn't they deliver?

In early spring 2007 as overextended borrowers began to default on too-good-to-be-true subprime mortgages, it became clear that a big foreclosures' waive is coming unless something is done. It would be in long-term interests of the banks to review their positions and start adjusting loan terms so borrowers would continue to make some payments, rather than stopping altogether. Foreclosure proceedings typically cost banks about 50% of a property's value. That's assuming the home can be resold — not a certainty when empty houses multiply in a neighborhood.

How did the industry respond? Some didn't want to part with easy money coming from subprime mortgage deals even in the face of possible recession. They wowed to continue selling loans with enticing introductory rates as well as those requiring minimal evidence of borrowers' income. "We are going to keep making these loans until the last second they are legal," these were the words of Sandor E. Samuels, at the time chief legal officer of subprime giant Countrywide Financial.

Others understood the problem and its consequences, but were hesitant to take actions. They hoped to avoid modifying loan terms for those who fail to pay their mortgages, because that would lead to bad financial standings for their own companies. If, for example, a bank lowered the balance of a certain mortgage, there would be a strong argument that it would have to reduce the value on its balance sheet of all similar mortgages in the same geographic area to reflect the danger that the region had hit an economic slump. From this position many more mortgages would look were bad on the balance sheet, and the companies would have to report even bigger losses, which of coursed they did not want to do.

It was clear that the banking industry had lapsed into a denial. The government had to step in.
On October 10, 2007 a government-endorsed private sector organization "Hope Now Alliance" was created. Lenders promised to cooperate with nonprofit credit counselors who would help borrowers prevent defaults. Maybe there were some who thought that the organization is the solution. I think that it was done out of desperation and desire "to do something, do anything."

In a press release last Dec. 22, Hope Now said it had prevented 2.2 million foreclosures in 2008 by arranging for borrowers to catch up on delinquent payments and, in some cases, easing terms. What the report did not say that in many cases modified mortgage agreements had, contrary to common sense, higher monthly payments. Alan M. White, a law professor at Valparaiso University, analyzed the statistics of 21,219 largely subprime mortgages modified in November 2008. He found that only 35% of the cases resulted in lower payments. In 18%, payments stayed the same; in the remaining 47%, they rose. The reason for this strange result: Lenders and loan servicers are tacking on missed payments, taxes, and big fees to borrowers' monthly bills. Not surprising then that more than half of the consumers who were helped with loan modifications were again in mortgage trouble after six months.

The fate of the next "government-baked" foreclosures' remedy, called "Hope for Homeowners", was even worse. The industry lobbyists immediately took an active role in its writing, bending and trimming the document's provisions in industry favor. Their excuse was simple: do it as we want or we won't participate.

In the end, the program included stiff up-front and annual fees and a requirement that homeowners pay the government 50% of any future appreciation in the property's value — all of which made it much less attractive to borrowers. Moreover, the banks' participation was made entirely voluntary; there was no way to pressure them to cooperate.

Congress approved Hope for Homeowners on July 26, 2008. The program has so far produced only 25 refinanced loans (read more about the program).

Since then Fannie Mae, Freddie Mac and many large banks including Bank Of America and Wells Fargo, set temporary moratoriums on foreclosure sales. They are waiting for details of a new government deal proposed by Obama's team. The hope of the banks is that the government will take the burden of paying for sunken housing prices and reduced rates on modified mortgages.

Read our next posts for the new deal's details and what's in it for you.

Mortgage Foreclosure Resources ->

The first most important rule of dealing with debt collectors you must remember: never admit and accept a debt unless it was proven to you that it IS your debt. You have the right to request documentation from the collector substantiating his collection efforts. You must send your validation request no later that 30 day since the collecting agency's first contact.

What debt collectors should provide:

• Proof that the collection company owns the debt/or has been assigned the debt. At a minimum, some account statements from the original creditor.
• Proof that this debt is yours - a copy of the original signed loan agreement or credit card application (or at least account statements from the original creditor).
• Explanation of the amount and all fees and payments starting from the original creditor (this is not in the FCRA or FDCPA - but was established in one of court cases in 2004

Procedure:

1. Send a letter requesting validation to the collection agency (via certified mail)
2. Dispute the collection with the credit bureaus (certified letter). You must never skip this step.
3. Wait 30 days to hear back from the collection agency. Most likely they either not respond - or not provide everything as needed.
4. If they haven't sent you satisfactory proof, send them a 2nd letter with the copy of the first one and delivery receipt. Tell them that they have not complied with the FDCPA and are now in violation of the Act. Tell them they need to immediately remove the collection listing from your credit report or you are going to file a lawsuit because they are in violation of the FDCPA, section 809 (b).
5. Wait 15-20 days to hear back after this second letter to the collection agency. They will either remove it or not respond.
6. If they do provide all required documentation - there is one more thing you can try: see if they are legally licensed to collect the debt in your state (not all states require license).

If the collection agency did not agree to remove the listing, then you need to continue to the next steps.

Here are a few rules that debt collectors must follow, according to the Fair Debt Collection Practices Act (FCRA):

• Within the first five (5) days after calling you for the first time collection agencies are required by law to provide information about them adn the account. Usually you receive the letter on their letterhead which provides their information and account information.
• Within 30 days after first call you have the right to request a verification of the debt. You have to do it in writing. Once you requested verification - the debt collectors should stop calling you until they provide verification as required by law.
• Collectors are only allowed to contact a consumer at home between the hours of 8 a.m. and 9 p.m.
• Collector cannot contact you at work, but they can legally contact your current employer to verify that you work for the company. They can NOT ask for your work phone number, supervisor's name, dates of employment or other information.
• If, after a prescribed amount of time, a collector is unable to contact you, they can employ other tactics including Internet searches, Lexis-Nexis searches and credit bureau file look-ups. They then can contact friends, relatives and neighbors in the attempt to get in touch with you. But they can not talk with third parties, including neighbors, children, and employers, for purposes other than acquiring location information about consumers, without consumers' consent.

It is Illegal for Debt Collectors to:

• Imply that failure to pay the debt could result in arrest, imprisonment, or garnishment of wages.
• Cause the telephone to ring, or repeatedly engage a person in telephone conversations with the intent to annoy, abuse, or harass.
• Threaten to take action (such as filing a lawsuit) when they did not intend to do so.
• Call at inconvenient times and places.
• Use obscene or profane language

Although all these rules are written into law, very frequently debt collectors do not follow them. Don't allow them to put yourself into 'guilty' mood. If they violate the law - you have the power to sue them.

It is always better to have proof. Therefore keep log file with records of all activities: date, time, who called, what was the conversation about, what was decided. Record phone conversations. Just mentioning to the collector that your conversation with him might be recorded will make him more civilized.

The biggest mistakes:

(1) Not using your right to check that the debt is yours. Somebody contacts you about a debt, and says that you owe him. Why would you trust him? How do you know that he did not mix up names? You can validate the debt in writing within 30 days of being notified. The collector has to hold off on contacting you until it sends you a written clarification of the debt in question. Do not be coerced into paying a debt you don't owe, because if you do - it is an admission of guilt, and it will have a very negative impact on your credit score.

(2) Sending money to a debt collector when you have no paperwork what you owe, how they arrived at that figure. While sending a request for validation to a collector - you should ask them to provide the details.

(3) Giving a debt collector your banking or credit card information. If you tell a collector to take $50 per month out of your account - don't be surprised when he takes all the money from your account. And you will have very hard time to revert this, because the collector is going to say you gave your permission.

(4) Signing an agreement or legal document without understanding your rights and obligations. Don't do it, even if you are threatened. If you do not have money to consult an attorney, ask your friend. Do not act while you are in fear. You always have at least one day to think things through.

(5) Not showing up in court, or answering a court suit, when served. If you don't show up - the collector wins by default. Even if the debt was not legal - it becomes legal because you didn't show up. The judgment goes on your credit report for 7 years. The debt will now continue to accrue interest and follow you for many years (the statue of limitations on original debt is 4-6 years, but on the judgment - 12-20 years !!). Many bottom-feeder attorneys never show up in court. All they do is file judgments against many people. They make money because certain percentage of those people don't show up - thus attorney wins by default.