Sunday, March 21, 2010
FPU: Credit Sharks in Suits
In this lesson Dave tackles the myth about the importance of having a good credit score and the vicious (and illegal) tactics that creditors use to play on your emotions.
We are bombarded every day with messages about establishing good credit, protecting our credit score, rebuilding credit. Dave challenges all of that. He goes so far as saying we don't need a credit score at all. If you think about it, it's true. If you pay with cash, your credit score doesn't matter. Wow! What a crazy concept!
Dave calls the FICO score, the "I love debt" score. After all, it's determined by your debt. According to myfico.com, your credit score is determined by the following:
35% - Payment (Debt) History
30% - Debt levels
15% - Length of Payments
10% - Type of debt
10% - New debt
So, if you have no debt and are making no payments than you will have no credit score. Having a good FICO score is not a sign of winning. It's a reflection of how well you play the game.
While Dave does not believe at worshiping at the alter of the great FICO score, he does stress the importance of making sure it's accurate. Statistics show that 79% contain some error and 25% contain a serious error. It's important to pull your credit on a regular basis and look through it very carefully. Dave offers a wide variety of help with your credit report (including how to read it, form letters, etc) on his website, so I won't go in to it completely here but encourage you to read more on your own.
The second half of the lesson focuses on creditors. If you've ever heard Dave on the radio or TV you know that he is NOT a fan of debt collectors. While he believes that every body should own up to their debts and pay them, he hates the practices of many of the collection agencies. Dave encourages any one dealing with collections to learn the basics of the Federal Fair Debt Collection Practices Act. He reviews basic rules that we should all know"
* Collectors are restricted to calling between the hours of 8am -9pm YOUR TIME!!!
* You can demand that creditors cease calling you at work
* You can even insist that creditors stop ALL contact with you (although he does not recommend this any more because data shows you are more likely to get sued if you do this)
* Collectors or creditors cannot confiscate your bank account or garnishee wages without lengthy legal action
Creditors are highly trained to play on your emotions and throw you off guard so they can get you to pay up. Once they figure out your trigger, they'll note it in their database and use it over and over. Be aware of these things and know your rights.
One of the tools I forgot about from when we originally listened to the audio cd's was the Pro Rate Method. He outlines a plan on how to continue making payments even when you don't have enough to cover the minimum payments on your credit cards. Basically you total all your debts and figure out what percentage each makes up of your total debt. You then take that percentage and apply it to your disposable income. That is the amount you pay each creditor. So, if Discover accounts for 60% of your debt and you have $200 in disposable income, you would send them a payment of $120. The rest would be divided accordingly among your other debts. The FPU workbook includes a sample letter you can send to your creditor explaining your situation and the reason they are not receiving a full payment.
While it might seem odd to make several partial payments as opposed to just paying one and forgetting about the rest, Dave says this plan has been proven to work for millions and helps hold off lawsuits. "They won't put a bullet in a horse that's limping."
Tim and I were fortunate to not have to deal with creditors, but we know from family and friends that they can be quite horrible. Hopefully you will never have to deal with them, but if you do there are a lot of tools out there to help you. THAT DOES NOT INCLUDE DEBT SETTLEMENT AGENCIES. Dave NEVER recommends having some one else consolidate or pay your debts. If you are in a position where you need any of these forms, you can most likely find a book by Dave Ramsey at the library. He makes most of his forms available in all his books.
There was a LOT of information in this section that was hard to cover in a blog post. Feel free to contact me if you have any specific questions!