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How Student Loans Affect Your Credit Scores

This article was written by in Credit. 11 comments.

This is an article by Gerri Detweiler. For the past twenty years, Gerri has been an advocate helping consumers find reliable answers to their credit questions.

Just as student loans can be “good debt” or “bad debt” depending on how they are used, they can be good or bad for your credit scores, depending on how you handle them. Obviously, they can help your credit scores when you’re able to pay them on time, and hurt them when you can’t. But there are important nuances that can make the difference between earning a great score and a mediocre one.

When student loans = good credit

Student loan debtA student loan can provide a student’s first credit reference. That’s especially true now that the Credit CARD Act makes it more difficult to load up on credit cards before you turn 21. Student loans differ from credit cards in an important way, though; they are installment loans, not revolving loans like credit cards. That’s a plus when it comes to building a well-rounded credit file. “Our research has shown that (all things being equal) consumers with a wider range of credit experiences tend to be better credit risks than those with only limited credit experience,” says Anthony Sprauve, public relations director for FICO.

What about the fact that many students graduate with not one, but many, student loans? Unlike maxing out a bunch of credit cards, the fact that your report lists multiple student loans is not necessarily harmful. That’s true even if the balances are high. “While having many revolving type accounts with high balances can hurt your score — even when paid on time — the FICO scoring formula doesn’t place nearly as much importance on the debt amount and the number of loans when considering installment loans,” says Sprauve.

But, of course, it can be hard to keep track of due dates on multiple loans, so the greater the number of loans, the greater your risk that you’ll miss a payment. If you consolidate some or all of your loans it will be easier to keep track of your due dates, but don’t expect a boost to your credit scores. “Typically (consolidation) wouldn’t have a major impact on the score because it’s installment credit and the amount you owe is still the same,” says credit scoring expert Tom Quinn.

When student loans = bad credit

Missing payments on your student loans hurts your credit scores. If you pay a few days late, say on the 5th of the month when the loan is due on the 1st, it’s unlikely the loan will be reported as late. But once a payment is thirty days late, it will likely be reported to the credit reporting agencies, and your scores will suffer as a result.

If you can’t make your payments, check out flexible repayment options, such as the Income Based Repayment Program (now dubbed “Pay As You Earn” by President Obama), graduated repayment, or income-contingent repayment. Or find out if you are eligible to put your loans in deferment or forbearance. Repaying your loans through one of these programs is not likely to hurt your scores, says Quinn.

But be careful. Some students who apply for deferment or forbearance think it’s a done deal and stop paying, only to discover it was not finalized and they are considered delinquent on their loans. Make sure you have something in writing from your lender before you reduce or stop making payments.

Quinn also warns about a common misconception that loans in deferment or forbearance are ignored when credit scores are calculated. “It’s still considered because you are obligated to pay it,” he says, adding that, “Delinquencies are reported even if the loan is deferred.”

What if damage has already been done? Late payments can stay on your credit reports for up to seven years and simply paying the past due amount won’t remove those late payments. But if your federal loan goes into default, you may be able to improve your credit by rehabilitating your student loan. You’ll have to make nine monthly payments on time over a nine to ten month period, depending on your type of loan. Once you do, you can apply for rehabilitation and, if successful, the notation that your loan was in default will be removed from your credit reports.

More student loan and credit scores tips

  • Feel free to prepay. Pay off your student loans early and you’ll save money on interest. Doing so shouldn’t hurt your credit scores, though, Sprauve warns that without other installment loans you could see your scores drop slightly.
  • Keep meticulous records. From the time you take out your first student loan, you should start a file and keep copies of loan documents, statements, etc. This documentation may prove to be invaluable if you experience payment problems.
  • Pay on time. This can’t be emphasized enough. If you move, notify your lenders of your new address. A statement that goes missing does not let you off the hook for a payment. Never heard from a lender about a loan you took out? Track down the lender and find out when payments are due.

Photo: a_mina
Department of Education

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Binding Arbitration: Wells Fargo Taking Away Customers’ Rights

This article was written by in Banking, Featured. 32 comments.

If you enter into an agreement with a company, and that company does something to wrong you, most of the time you can avail yourself of the American judicial system to correct the problem. This happens frequently, with both individual lawsuits and class action lawsuits. For example, Bank of America is dealing with several lawsuits stemming from shady fee practices and other policies enacted by Countrywide Financial, a company Bank of America acquired.

In order for bank to protect themselves from problems and major expenses like these is to take away their customers’ rights to a trial with a jury or a judge. This is legal, and you don’t even need to sign these rights away. Companies can change these terms of your banking agreement, and your continued patronage implies that you agree and are willing to waive your rights for the benefit of remaining a customer.

Wells FargoI make it a point to thumb through the mailed statements because banks will occasionally update terms and change fees, and it’s easy to miss this information if I were to only check my account online or in my Quicken software. A few days ago, I received my statement from Wells Fargo in the mail, and discovered a notice informing me that by remaining a customer at Wells Fargo beyond February 15, 2012, I would never be able to be included in a class action lawsuit or sue the bank myself. Any disputes would go through a binding arbitration process.

Binding arbitration has its benefits. It is often less costly, and businesses can generally get a sense for the result before moving forward. The benefits, plainly one-sided, end there.

Binding arbitration is usually detrimental to consumers. The costs for an individual often outweigh the potential reward, and potential rewards are low because binding arbitration often favors the large company over the individual, unlike juries and most judges. It’s easy to see why arbitrators favor big businesses; arbitration is a business, and if they favor a large corporation, that corporation will likely bring more business to the arbitrator.

A consumer initiating arbitration through the American Arbitration Association, the administer Wells Fargo identifies in its new terms, would be subject to fees, such as:

  • $250 for telephone consultation if the claim is less than $75,000, higher otherwise
  • $750 for in-person consultation of the claim is less than $75,000, higher otherwise
  • Up to $125 in additional fees if the claim is less than $10,000, up to $375 if the claim is less than $75,000, higher otherwise

The business would be subject to fees higher than those listed above for the consumer, but the total expense for a corporation could still be considerably less than dealing with a lawsuit. Not every arbitration organization follows the same pattern for fees, though. In some cases, the consumer could spend more money initiating arbitration than filing his or her own suit.

Also a detriment to the consumer, arbitrators are not required to follow an established process. This uncertainty can limit the consumer’s ability to argue. For example, arbitration does not include a discovery process, making it difficult for consumers to present evidence to support their cases. Also, the consumer does not have the ability to choose the arbitrator. The business selects the arbitrator, so it’s clear that this could easily be a biased approach to settling a disagreement.

Binding arbitration is reviled so much that Congress has been inspired to take action to determine whether binding arbitration clauses can be considered legal — in cellular phone contracts, only. So far, this effort has failed to produce any results beneficial for the consumer.

Bank of America and other banks have been the subject of a class action lawsuit alleging they have forced customers into mandatory binding arbitration agreements. The Supreme Court has ruled 5 to 4 in favor of companies’ options to put binding arbitration into customer agreements.

What a consumer can do about binding arbitration clauses

I’ve been a customer of Wells Fargo or its predecessors for most of my life. I’ve had my primary checking and savings accounts at this bank. But with this change, I am not wasting any more time in moving my money out of this bank. It’s not that I anticipate having any problems that require a lawsuit or arbitration, and if I am included in any class action lawsuit, I don’t expect to gain much.

Businesses and employers force binding arbitration on customers when the customers or employees are in a weaker position than the larger entity. For example, with unemployment high, many Americans feel lucky to have jobs. They’re willing to waive rights in order to be employed, and most do. Most customers will be unaware that by continuing to hold their accounts they waive their rights. Others will be aware and not consider this to be an issue worthy of going through the process of closing their accounts. Very few will use this as an incentive to move money elsewhere.

Banking institutions are everywhere, however, and customers have choices. For example, I could move all of my money held at Wells Fargo to Chase Bank. At one point, Chase included binding arbitration in its customer contracts for credit cards but has recently abandoned this approach. There is always a danger that the terms will change, particularly as more big banks want to protect the revenue they earn from fees. With a Chase branch within walking distance to me, this move makes sense, but it still isn’t a perfect solution.

I would prefer to switch to a credit union, but I’ve researched my options many times, and there are no credit unions convenient for me. Additionally, one of the largest and most popular credit unions, USAA, is as bad as Wells Fargo when it comes to members’ rights: USAA requires customers to waive their rights to a trial by judge or jury, just like the bank I intend to leave.

I’ll be moving my money out of this bank as soon as possible.

If you decide to move your business to a company that does not limit your rights, be sure to let the company know exactly why it is lowing your business. Unfair fee practices and binding arbitration could be only two of many reasons you’d be better off being a customer elsewhere.

Read the entire Wells Fargo notice below. Read the full article →

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The CFPB’s New Credit Card Agreements

This article was written by in Consumer, Credit. 3 comments.

Although Congress is dragging its feet in confirming the Consumer Financial Protection Bureau’s potential director, the bureau has been busy developing new tools to help consumers understand agreements that are potentially damaging to a family’s finances. Last year, issuers debuted new credit card statements designed to frighten borrowers into paying off debt faster. The new statements explicitly outlined how long it would take to pay off an entire balance by paying just the minimum each month.

The CFPB wants to bring this clarity to credit card agreements. These agreements are typically several pages long with small print, like this agreement [pdf] for a Wells Fargo Rewards Visa. The new look suggested by the bureau is more consumer-friendly than it is lawyer-friendly. It will likely need additional support with the terms in legal language, as well, but the new look makes it much easier to understand, and more importantly, compare offers between credit cards.

Here is the first section of the proposed new look for credit card agreements.

CFPB Credit Card Agreement

Right up front, you can easily find the important interest rates, including any introductory rate, regular rate, rates for balance transfers and cash advances, and penalty rates. It will be much more difficult to bury information if all issuers are required to include this information in a format like this.

Following the section displayed above, the agreement explains what payments need to be made, and that includes the formula for determining the minimum monthly payment. More information describes the consequences of missing a payment, including when a customer’s account will go into default, when the penalty interest rate will apply, and the effect on the late payment fee. The agreement also explains the way the interest is calculated in easy-to-understand terms. Consumers who read the agreement will be introduced to their grace period and also understand that if a borrower doesn’t take advantage of the grace period — that is, doesn’t pay the bill in full and on time — interest on new charges will be added to the credit card balance from the moment a transaction occurs.

The next section explains how the terms of the agreement can change. Read the full article →

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How to Spend Money on Fun

This article was written by in Personal Development. 13 comments.

The point of accumulating and saving money is not to die with the most money in the bank. Yes, it can be helpful to your heirs to leave a fortune for the next generation, but not at the expense of living a fulfilled life yourself. There are many opinions about what it means to live a fulfilled life, but for most people, it involves taking the time to do whatever you’d like to do without needing to be concerned about the financial consequences, or whether you’ll have enough money to buy food tomorrow.

Doing whatever you’d like to do doesn’t have to cost money, but sometimes, it does. Some people could be happy living off the land, finding their own meals, and surviving on their own without ever spending a dime. Self-sustenance is an interesting concept and I have respect for people who can manage to live their lives this way. Most of us are consumers, however, and thus earn and spend money in order to live.

You’re reading Consumerism Commentary because you’re interested in finances on a personal level, but it’s important to remember that net worth and income are not the core concepts of living life. I wouldn’t be who I am without the aspects of my life that do not involve earning income. Society could not function if the only activities its inhabitants performed were those activities that other members of society would pay them to do.

Fun SnowboardingIt’s advisable to look for deals when we shop. If we’re spending money in a store, it pays to ensure we’re getting the best price. That could involve bargain hunting, negotiating, and comparison shopping. Paying attention to price and value plays a big role in everyday and occasional spending, but the usual goal in this type of frugal philosophy is ending the day with the most cash left in your pocket. I offer a different goal: ending the day with the experiences that shape you as a human being. It’s harder to measure, but at the end of your life, you’ll likely have fewer regrets and be more satisfied with how you’ve spent your short time alive on this planet.

Let’s call those experiences that add up to a fulfilled life “fun.” They might not always be enjoyable, but you collect these experiences and you can find a method of tallying and rating them. These experiences have the most meaning to you now and in the future.

Here are some tips for spending money for fun.

1. Necessities come first.

Before you can consider partaking in an experience that doesn’t have a positive effect on your net worth, you need to clear a few hurdles. These suggestions speak to the top of Abraham Maslow’s Hierarchy of Needs. I keep coming back to this cope psychological concept, and it might annoy anyone who has studied psychology beyond an introductory-level course, but I feel it’s symbolic of how to best organize personal finance, particularly spending.

The lowest level of the pyramid represents your physiological needs, everything you need in order to survive each day, namely food, water, heat, and shelter. In most communities, basic clothing is also a physiological need. It would be very difficult to rationalize spending money on anything else before these needs are met. Granted, you could avoid some of these expenses by living off the gratuity of family and friends, but that can only last so long — particularly if they see you spending money on fun things without considering moving out.

Feeding your need for self-actualization is a luxury. Climbing the Hierarchy of Needs pyramid can be tough, and focusing on enriching your life comes after your basic needs are met.

2. Define our goals and values.

Once your household has overcome any difficulties in the way of providing the basic physiological necessities, there is an opportunity to think about the big picture. There are many people stuck here, believing their goal is to earn money. Earning money is not a goal in itself, it’s only a path that allows individuals to meet other goals. A friend asked me for financial advice, and although I’m not a financial planner or adviser, I agreed to talk to him and help him think through his issues.

I asked what his goals in life were, because knowing this would be the only way to help someone plan for the future. He said his goal was to retire with $5 million in the bank. Regardless of whether that was a reasonable number, it wasn’t a real goal. I asked him why he wanted that particular sum, and he had never thought about it before. We started to work out what he would do with that money and why it was important for him to be financially independent. You need real life goals, not money goals. With real goals, you can evaluate whether the money you spend is worthwhile, and you have a purpose for saving and investing other than a big balance on your monthly bank statements.

In addition to goals, you should be aware of what ideals are important to you. A set of values defines how you live your life, where you spend your time, and an initiative for your funds beyond the selfish but necessary act of taking care of yourself.

3. Pay off debt.

Being debt-free is the most important financial goal. When you’re in debt, you’re beholden to someone else. Often, that someone else is a company with significant means to make your life miserable if you can’t pay. There are avenues for help if you need it, like bankruptcy, but for the most part, you can’t life a fulfilled life when part of the money you earn is dedicated to someone else.

If you’re earning $3,000 per month and paying $2,000 in interest to your mortgage company and credit card issuers, your income is basically owned by entities other than you. If the remaining $1,000 covers nothing other than your necessities like room and board, you are living in indentured servitude. Some might even say that debt is slavery. You should want any income you earn to be rightfully yours.

These suggestions are not necessarily in order. You can pay off debt while still determining your long-term goals because no matter what goals you choose, being debt-free will be key. In this case, debt includes mortgages and student loans, not just credit cards. Any interest obligation is a waste of your money. You don’t have to be completely debt-free to begin considering spending money for fun (that is, life enrichment), but you should have a plan in place for doing so and for emergencies that might cause trouble along the way.

4. Save for the future.

Living a fulfilled life often means striking the right balance between saving for the future and using the money you earn today for more than just necessities. Again, that’s a luxury that’s best considered only by individuals or families who have done a good job of saving for their future already.

It may be possible to save too much money, but many will not reach the point where this is a concern. There will always be more we can save for the future, but those who are on the path to a more comfortable, debt-free life have more options for spending today without sacrificing their future.

5. Compare your spending with your values.

If measuring success with saving money, the scorecard is simple. Your net worth and net income statements provide feedback. You’ll know where you stand at any moment from a financial perspective. When collecting experiences leading to a fulfilled life, keeping track of your progress is more difficult to measure. You could look at your discretionary spending and compare it with your values. Give yourself points when your expenses match the type of person you’d like to be and give you the feeling that you’ll be satisfied when you look upon your experiences. Subtract points if your spending was frivolous, not well-considered, caused regret, or prevented you from living life in the way you’d like to.

When it comes to spending money for fun, I am a big fan of spontaneity. Being impulsive or spontaneous can be responsible or irresponsible, however. If you’re striving to fill your life with rich experiences and to never look back on your time alive with regret, you can help increase the chances of creating a life you enjoy by taking a responsible approach. Everyone should get a chance to spend their hard-earned money how they want, but that freedom comes from the ability to make a few good, important choices about how to handle finances.

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We Did It: Bank of America Dropping $5 Debit Card Fee Proposal

by Flexo

After Wells Fargo, Chase Bank, SunTrust Bank, and Regions Bank dropped their plans for debit card fees yesterday, the largest bank in the United States, the only bank holding onto its policy of eliminating unprofitable customers by annoying them with inconvenient fees, dropped their own plans to enact a $5 monthly debit card fee in ... Continue reading this article…

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Should Hedge Funds Receive Special Treatment?

by Flexo

The Security and Exchange Commission (SEC) has advised the managers of super-secret hedge funds, investments of the most wealthy, that they will soon need to disclose more information to the regulators. Highly leveraged hedge funds contributed to the economic collapse, but the pressure to increase oversight has been mostly ignored by the industry. In response ... Continue reading this article…

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Under-reporting Personal Household Debt

by Flexo

If you want to know how much credit card debt Americans have, don’t ask the borrowers. For years, economists have sought debt data from both borrowers and lenders for credit card debt and four other debt categories. Borrowers report their debt balances by responding to household surveys, like the Survey of Consumer Finances. Lenders report ... Continue reading this article…

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Wells Fargo Sent Statements to Wrong Customers

by Flexo

The fourth largest bank in the United States by assets, Wells Fargo, admitted last week that many of its customers received statements with other customers’ banking information included. In this security breach, those affected might have received a statement with a stranger’s account number, transaction detail, and in some cases, Social Security number. Other affected ... Continue reading this article…

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