MONEY Debt

A Debt Collector Went After My 5-Year-Old

boy checking mailbox
R. Nelson—Getty Images

What should I do?

Other than a few birthday cards, preschoolers generally don’t get mail. That’s why a Credit.com reader was surprised when the reader’s 5-year-old son received a debt-collection notice:

My son is 5 years old and I recently received a letter in the mail from a collection agency addressed to him saying he owes a debt from his former hospital…he has insurance so I’m not sure how he can owe anything but what advice do you have for me and what can I do to pursue this?

Based on this short message, there are two issues to explore: First, having health insurance doesn’t mean all medical expenses are covered, so it’s definitely possible a health care provider required payment for whatever service the child received, even after insurance. Medical bills often go to a debt collector — sometimes, that’s the first time the patient learns about them — and because collection accounts damage your credit standing, it’s important to address them as soon as you can.

The other issue this reader brings up is what parents and guardians should do when a debt collector pursues a minor.

“Minors can’t contract, by law,” said Craig T. Kimmel, a consumer attorney and founding partner at Kimmel & Silverman. “The general rule is a parent is not responsible for a contract by a minor.” Of course, there’s an exception, and it includes medical care. Medical services fall under the doctrine of necessaries, which varies by state, but generally means a parent or next of kin can be held liable for bills a person incurs out of life-sustaining necessity, like food, shelter and medical care.

“If the debt’s legitimate, the parent must be responsible for the child, whether or not the parents brought the child to the hospital,” Kimmel said.

Because the parent is the one responsible for the debt, the name on the account and contact information used by the debt collector should be updated.

“Calling the debt collector and addressing that is the most straightforward way,” said April Kuehnhoff, a staff attorney at the National Consumer Law Center. “To the extent that the parents are having trouble with the debt collector, they can always go back to the hospital.”

The debt should be reported to the adult’s credit report — a child shouldn’t have a credit report, but parents can request one to make sure the debt doesn’t generate a credit report, and if it does, they can work to fix the problem.

That’s sort of the neat-and-tidy scenario in a situation like this, but it’s possible there’s something messier going on. If your child is receiving debt collection notices or other debt- or credit-related mail, it could be a sign of identity theft — that someone is using your child’s personal information to fraudulently obtain and use credit instruments or medical care. As with any debt collection notice, you should first request a letter of validation from the collector, and if the debt isn’t legitimate, it’s time to start investigating what happened. This is another reason you’d want to request a child’s credit report: to see if they’ve been a victim of identity theft.

Kimmel mentioned another possible reason a minor might receive a debt collection notice: The debt collector is pursuing someone else with the same or a similar name. In that event, the consumer should try to correct the confusion, but if the collector insists on pursuing the wrong person (the minor), the adult has legal recourse under the Fair Debt Collection Practices Act.

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MONEY buying a home

Our Dream House Was a Money Pit

150529_REA_DreamHome
Perry Mastrovito—Getty Images

Here's how we dug ourselves out of a financial mess.

Once upon a time purchasing a home landed at the very top of my bucket list.

At 25 years old it felt like the next logical step in growing up—a move that would inch my wife, Jessica, and me closer to the American dream.

From the outside it appeared we were ready for it. We’d built up our emergency fund, paid off our car loans, and started setting aside cash for a down payment. We did everything by the book.

Well, not everything.

When it came time to pull the trigger on our new home, we completely maxed out our budget—effectively signing ourselves up for months of financial strain, emotional stress and major regret.

Landing Our Dream Home—$50K Over Budget

In 2009 Jessica and I were living in the Dallas–Forth Worth area. At 23 and 24 years old, respectively, we were doing great.

I was a firefighter/paramedic, and Jessica was studying photography at the University of North Texas while working as a preschool teacher. Together, we pulled in $75,000—and had zero debt, no kids, and about $25,000 saved up between our emergency fund and retirement accounts.

We were renting a one-bedroom apartment for $750 a month, but loved the idea of putting down roots and moving into a home where we could eventually raise a family.

So, with giddy excitement, we began house hunting for properties in the $150,000 to $170,000 range—a number we settled on after plugging our finances into an online mortgage calculator.

We also decided to look into an FHA loan for first-time homebuyers, which would only require us to make a 3% down payment. I knew 20% was the rule of thumb, but it just wasn’t really something I saw other first-time buyers my age doing. Plus, putting down 3% would preserve some of our savings, and I liked having a reliable cushion to cover us in emergencies.

Two months into our search, we noticed a “for sale” sign on a stunning house just a few doors down from a home we’d just viewed. When our realtor offered to give us a peek on the spot, it was love at first sight.

The house was enchanting: It was just a few years old, with four full bedrooms, 2,400 square feet, and a lush backyard. We couldn’t find anything wrong with it, until we heard the price—$206,000.

We knew it was well over our budget, but couldn’t bear the thought of letting it go. Plus, we’d been pre-approved for a $200,000 loan, which felt like permission to purchase a home of that size.

In hindsight, I know this was a terribly risky move, but at the time I didn’t know any better. And none of our friends or family advised us against buying the home.

After the closing costs were said and done, the total came to around $207,000. We plunked down $7,000—and moved in August 2010.

Plenty of House, Not Enough Cash

Although we loved the home, we were instantly struck by our high expenses.

While our original $150,000–$170,000 price range would have put our housing costs at a manageable 30% of our total income, springing for a $200,000 loan shot that number up to just shy of 50%.

But we felt confident we could handle the expenses, since I was banking on a steady flow of raises from my employer. (Spoiler alert: They didn’t.)

We’d just have to tighten our belts to sustain our $2,000 housing bills, which included the mortgage, insurance, taxes and utility bills.

That meant some serious lifestyle changes, like declining after-work drinks with friends and passing on the dinner date nights we loved. We couldn’t even afford to fully furnish and decorate the place—inviting friends over to an empty house was really tough on my pride.

Even worse, our new bills put an end to the $250 savings contribution we used to make every month. And forget about retirement—our nest eggs were put on hold entirely after moving into the house.

In a matter of months, we had gone from feeling financially flush to pinching every penny—a change that put unnecessary stress on our marriage. More and more we found ourselves nitpicking and bickering with each other.

Over the next nine months, as Jessica and I had many conversations about our decision, it became more apparent that we were being seriously weighed down by the house. We felt stuck, and began to wonder: Had we made a huge mistake?

About a year and a half after moving in, we made the drastic decision to put the house on the market in August 2012. There was no straw that broke the camel’s back—you can only go so long living paycheck to paycheck before you realize that something’s got to give.

While waiting for it to sell, we did everything we could to start saving again. We had a feeling we might take a loss on the house, and wanted to lessen the sting. So we began selling our belongings—our boat, TV, cars—and socked away the profits.

Jessica and I also explored ways of bringing in additional money on the side. She picked up freelance photography work, while I began building websites. All in all, we were able to shore up an additional $15,000.

We finally sold the house at the beginning of 2013, taking a $10,000 loss. While the hit didn’t feel good, the sale took a massive weight off our shoulders.

Our New Life: House Poor, Cash Rich

Armed with about $30,000 in savings and two travel backpacks, Jessica and I did something even crazier after giving up our homeowner status: We left our jobs—and decided to travel the world.

For two years we went all over Europe and South Asia, mastering the art of budget travel. We picked up odd jobs teaching English, painting houses—and even herding sheep! I also continued to do some web development work, and invested in a few blue-chip stocks.

By the time we returned to Texas in the fall of 2014, we had about $100,000 to our names—and were ready for a fresh start.

Jessica is still doing freelance photography work, as well as running a few photography workshops. And I continue to take on web development projects.

But, in a strange twist of fate, I also decided to break into the real estate industry. A few months ago, I earned my realtor’s license and was recently hired at a national agency. I’m looking forward to helping guide other first-time buyers to find a great house—in their budget.

Although we’re certainly not in any hurry to buy another home, if we ever do I’ll definitely be taking my own advice: Buy only what you can afford.

As you might imagine, living out of a backpack for two years really changes your priorities when it comes to material possessions. Having financial security and a better quality of life now means much more to us than a fancy house.

In the end, our version of the American dream has turned out to be different from most. But I’m happy that it’s ours.

(as told to Marianne Hayes)

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MONEY home financing

The $265 Billion Bill That’s Coming Due for Homeowners

miniature house with dollar sign
Getty Images

Brace yourself.

Millions of consumers will have to absorb a major hit to their household budget in the coming months. About $265 billion in home equity lines of credit (HELOCs) will enter the repayment period in the next few years, according to a study from Experian, and consumers may see their monthly payments spike — in some cases, triple or quadruple what they previously paid.

HELOC originations soared from 2005 up until the start of the housing crisis, and because many HELOCs enter the repayment phase after 10 years, these billions of dollars in outstanding credit balances are just now coming due. This wave of HELOC resets is expected to significantly stress borrowers’ finances and the lending industry.

“This analysis is critical as we want to not only help lenders prepare and understand the payment stress of their borrowers, but also give consumers an opportunity to understand what the impact may be to their financial status and how to be better prepared for it,” said Michele Raneri, Experian’s vice president of analytics and business development, in a statement about the study.

HELOCs are generally divided into two periods: draw and repayment. During the draw period, consumers can use the line of credit while making minimum, interest-only payments. Once the HELOC resets, consumers can no longer borrow from that line of credit, and they must restore the equity they haven’t yet repaid.

“Instead of using it like a line of credit, borrowing and then repaying the loan to restore the home equity that had been tapped into, most people simply took the maximum amount in cash and never tried to pay down the outstanding amount for the entire 10-year period,” said Charles Phelan, a debt-relief consultant who specializes in HELOC negotiation, in an email. He contributes content on the topic to Credit.com. “In effect, most existing HELOCs are therefore like a huge credit card debt that has been at the maximum limit for years, with only interest expense being paid each month to keep the balance the same and not reduce it.”

How much your payment increases depends on many things, like the interest rate and the length of the repayment period — a shorter repayment period generally translates into a larger increase in payment. Some HELOCs have no repayment period and require a lump-sum repayment when the draw period ends.

The HELOCs that are coming due were opened in very different economic times, under the impression that home values would continue to rise. Because that didn’t happen, borrowers may not be prepared to handle this significant change to their finances.

“A lucky few will be able to absorb the new high monthly payment without defaulting and thereby risking foreclosure, and some will have sufficient equity to obtain a traditional refinance to a new single mortgage,” Phelan wrote. “For a majority of homeowners with HELOCs, however, options are limited due to real estate prices having dropped to the point where the most HELOCs are not covered by equity. This blocks people from refinancing to a single new mortgage at a more reasonable payment level.”

Even if refinancing is an option, it requires the borrower to have great credit. Phelan said borrowers without the ability to refinance can look into government loan-modification programs, Chapter 13 bankruptcy or settling the second lien, but he expects HELOC defaults to skyrocket. No matter how you plan to address your HELOC reset, it’s crucial to have a grasp on your credit standing so you can better research your options for managing repayment and how those options will impact your credit. One way to get your credit scores for free is through Credit.com, where you’ll also get suggestions to help you improve your credit.

“With more than 10 million of these contracts having been issued during 2005-2008, a tsunami of defaults is likely and will be a downward drag on America’s housing recovery for years to come,” Phelan wrote.

If you took out a HELOC between 2005 and 2008 and you’re not sure what you’ll be facing when the HELOC resets, it’s time to look at your agreement and understand what you’re dealing with. Simply by calling your lender, you can get a handle on the situation and prepare to absorb this shock to your finances.

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MONEY credit cards

When Someone You Love Opens a Credit Card in Your Name

woman glaring at boyfriend
Klaus Tiedge—Getty Images

Coping with financial betrayal.

When a loved one uses your personal information to apply for credit, he or she has committed identity theft. After the initial shock of discovering this betrayal, you face difficult decisions. One is that if you report the person to law enforcement, you run the risk of damaging your relationship. But if you don’t, you may not be able to get out from under any debt created and it could take years for your credit to recover from any damage done.

To help with the decision process if this happens to you, the Nerds reached out to Bruce McClary, vice president of public relations and external affairs at the National Foundation for Credit Counseling.

Gather the facts

The first item of business, regardless of which direction you take, is to collect all the information that confirms what happened and points to a possible perpetrator. Start by ordering a free copy of your credit report from AnnualCreditReport.com to find the fraudulent account and see whether there are others.

Next, call the credit card issuer to tell it that you did not open the account. Ask the issuer to close the account and flag it as fraud. Request a copy of the signed cardholder agreements and any records of interactions the company has had with the person in question. If you choose to report the fraudulent activity to the authorities, McClary says it’s important to “confirm what took place and leave no room for doubt in the eyes of the law.”

Freeze your credit

Contact all three credit reporting bureaus and add a fraud alert to your credit report.

A fraud alert typically lasts 90 days initially, but you can renew it indefinitely. If you file a police report later, you can choose to request an extended fraud alert, which stays on your credit report for seven years. Once you have a fraud alert in place, creditors must call a phone number you provide to confirm your identity before extending any credit.

Nerd note: Because your loved one may know enough about you to pass a credit grantor’s identity quiz, the Nerds recommend using your cellphone or work number to ensure that the creditor reaches you.

Deal with your emotions

Deciding to confront your loved one about the identity theft may be the most difficult step in the process. You’ve been deceived by someone you trusted, so it’s a good idea to take some time to work through the shock. It’s also understandable that you might have second thoughts about filing a police report against the person. You’ll likely want to consider how outing him or her could affect your relationship as well as the individual’s relationship with others close to you.

When working through this dilemma, McClary urges you to “consider the fact that they acted without any regard for your rights or feelings when they committed the crime.” Although this doesn’t make it easier, it’s a reminder you are the victim and any consequences will remain on your credit report for up to seven years and might cost you when you apply for credit.

Seek a resolution

If you caught the fraudulent activity early enough and not much damage has been done to your credit, you may be able to resolve it personally with the loved one. Andy B., a 28-year-old insurance adjuster from Lincoln, Nebraska, was fortunate enough to deal with his case of familial identity theft this way.

While applying for a personal loan, Andy’s loan officer told him he had a high balance on a card that he knew nothing about. After some digging, he found out that his mother had opened up a credit card in his name 10 years previously. “I called her after I got off of the phone with the credit card company,” Andy says. “It was confusing, to say the least. I have a very positive relationship with my mother. … I knew she didn’t act maliciously and I definitely didn’t want to get her into any sort of legal trouble.”

After working things out with his mother and the credit card company, Andy is no longer liable for the debt and doesn’t think his mother will be prosecuted. He adds, “Do I think it was irresponsible? Yes. Do I forgive her? Absolutely.”

Andy acknowledges that he and his mother are fortunate to have worked this out, but he “can think of countless ways a family member can destroy a family member’s credit, not to mention their trust.”

Another alternative is to file a police report. Although this may not sound appealing because of how it could affect your relationship with the perpetrator as well as those around you, McClary believes that it’s necessary if you want to save your credit: “Notifying the police creates a record of enforcement that can be used to clear your name from the debt when that information is shared with the creditors.”

Put it in perspective

Regardless of which avenue you choose after your identity is stolen by someone close to you, your relationship may still suffer. The question you need to ask yourself is if you want to suffer the consequences of damaged credit, which could potentially make it difficult for you to obtain credit at favorable rates — if at all — for years to come. The decision is a personal one, but it’s important that you do what’s best for you and your financial future.

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MONEY

Al Franken: Millions of Americans Are Struggling to Pay Student Loan Debt

Sen. Al Franken, D-Minn., Senate Majority Leader Harry Reid, D-Nev., and Sen. Elizabeth Warren, D-Mass., hold their news conference following the failed vote on student loan reforms on Wednesday, June 11, 2014.
Bill Clark—CQ Roll Call via Getty Images Sen. Al Franken, D-Minn., Senate Majority Leader Harry Reid, D-Nev., and Sen. Elizabeth Warren, D-Mass., hold their news conference following the failed vote on student loan reforms on Wednesday, June 11, 2014.

Here's how it's damaging the economy.

Last year, at the University of Minnesota in Minneapolis, I met Joelle Stangler, a sophomore who was the incoming student body president. Joelle had graduated from Rogers High School in Minnesota as the valedictorian, with a 4.12 GPA. Joelle doesn’t lack motivation.

Both of Joelle’s parents were teachers, and in fact she comes from a long line of educators going back six generations. But a couple of years ago, Joelle’s mother made the difficult decision to quit her job as a 5th grade teacher to go work in the private sector to help send her four kids to college. Even with her mom’s sacrifice, Joelle, who is finishing up her third year of college, already has $20,000 in student loans, and she estimates that her total debt will be around $35,000 by the time she graduates next year.

It didn’t use to be this way. Things have changed a lot since my wife Franni and I went to college in the early 1970s. A full Pell Grant paid for almost 80% of a public college education. Today, it pays for less than 35%.

Today, the total amount of student loan debt held by Americans is more than $1.3 trillion – more than the total amount of credit card debt in our nation. Student loan debt doesn’t just affect the individual lives of the 40 million Americans who carry the debt. Student loan debt also has an enormous negative impact on our nation’s economy. I recently spoke with Nobel Prize winning economist Joseph Stiglitz, and he explained that student loan debt dramatically limits people’s ability to buy a home, save for retirement and start a business. These types of big-ticket purchases help keep our economy growing, and delaying these acquisitions is damaging to the long-term well-being of our country.

So students are coming out of college with crippling debt that holds them back. Yet we keep telling young people that they need to go to college in order to aspire to the middle class. And that’s true; in fact, college graduates earn over 60% more per year than high school graduates. We should be encouraging more Americans to get a college degree, but they shouldn’t have to take on huge amounts of debt that will take decades to pay off.

Part of the reason that this debt is long term is because borrowers are paying high interest rates. Many college graduates are locked into loans with interest rates as high as 10%, which makes it all the more difficult to pay off. When interest rates are low, homeowners, businesses and even local governments regularly refinance their debts. However, the federal government – despite being the biggest student lender by far – offers no refinancing option to student borrowers. Once you graduate with high interest rates, you’re stuck with that high interest rate forever.

So I’m doing something to fix that problem. Earlier this year I joined Sen. Elizabeth Warren from Massachusetts in introducing the Bank on Student Emergency Loan Refinancing Act. Our legislation will allow borrowers to take advantage of lower interest rates and refinance their student loans. This will help millions of Americans, like Joelle, cut down their debt and keep more of their hard-earned paychecks.

I also wrote two bipartisan bills with Republican Sen. Chuck Grassley of Iowa that would help students and families better understand college costs before taking on debt. Our Net Price Calculator Improvement Act makes online cost-calculation tools more user-friendly in order to give students and their families a better estimate of college expenses before they decide where to apply. Sen. Grassley and I have another bill that will require schools to use a universal financial aid letter. Right now, these letters are confusing – they often don’t clearly explain the difference between a grant and a loan, which means students and families may take on debt that they don’t know they have to pay back. Our bill would make sure that students and their families get uniform information so they can make apples-to-apples comparisons between what the different schools are offering.

We have a lot of work to do and a long way to go to reduce student debt and make college more affordable. But it’s critical that we do. Addressing college affordability will not only make college accessible to more Americans, but it will also help more young graduates start a business sooner, buy a home earlier and start a family – things far too many young people have been forced to delay because of being saddled with college debt. That’s not only good for those graduates, but is enormously beneficial to our economy.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its affiliates.

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MONEY credit cards

How to Get Approved for Any Credit Card

woman holding credit card while on phone
Jamie Grill—Getty Images

5 tips every cardholder should know.

Applying for a credit card these days is as simple as entering your information into an online form and clicking “submit.” But getting approved for a credit card requires proactive planning that should start long before you apply.

1. Know your FICO score

Your FICO score is one of the most important factors in a credit card issuer’s decision to approve your application. Although there might be some variation depending on the bank you’re working with, FICO scores are typically classified by lenders as follows:

300-629: Bad credit
630-689: Average credit
690-719: Good credit
720 and up: Excellent credit

Most rewards credit cards require good or excellent credit. So if you’ve struggled to maintain a good credit history, it may be worth it to put off applying until you can get your finances in top order. You can do this by making payments on time, keeping your balances low on existing credit cards and avoiding new debt.

Nerd note: When checking your credit score, make sure it’s a real FICO. Several companies and even the credit reporting bureaus offer a proprietary credit score, but lenders are not as likely to use these in credit decisions.

2. Reduce your debt

A full 30% of your credit score is determined by how much you owe. High credit card balances can be especially damaging. Your credit utilization ratio — your balance divided by your credit limit — should be below 30% on each credit card. So if, for example, you have a credit limit of $10,000, it’s recommended to keep the balance below $3,000 at all times.

You can lower your credit utilization by creating a plan to pay down an existing balance as quickly as possible. Additionally, consider paying off purchases more than once a month to keep your balance lower throughout the month.

3. Don’t apply for the first offer you see

If you don’t have good credit, you may find it difficult to get approved for a card with a large sign-up bonus and a lucrative reward structure. Each credit card application ends up on your credit report, so the Nerds recommend using our tool to find a card that fit your credit profile before applying. If you’re still unsure, call the card issuer and ask about a specific card’s requirements.

4. Include all of your income in the application

Your credit score is a good indicator of your overall creditworthiness, but it doesn’t tell lenders about one important thing: your income. Credit card issuers need your income level to calculate your debt-to-income ratio, which helps determine your ability to make payments. There are two ways to lower this ratio: increase income or decrease debt.

If you earn money outside your full-time job, include it on your application so that an accurate debt-to-income ratio will be reflected. However, resist the temptation to overstate your income. If an issuer finds that you knowingly provided false information on your application, you could be charged with credit card fraud, which is punishable by up to $1 million in fines and/or 30 years of imprisonment.

5. Don’t give up

If you think you’ve done everything right and your application is still denied, don’t move on just yet. Credit card issuers have reconsideration lines you can call to plead your case.

Have a plan before you call. Get a copy of your free credit report at AnnualCreditReport.com so you can understand why you may have been denied. Formulate a convincing argument as to why you want the card and why you are fiscally responsible. Above all, be polite. Customer service agents are much more likely to respond positively if you have a pleasant demeanor.

The bottom line

Being denied for a credit card hurts — both psychologically and in terms of your credit score. That’s why it’s essential to take stock of your credit situation before you apply for your next card. Also, make sure give accurate information during the application.

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MONEY Debt

The One Text Message Everyone Hates Getting

man worried about text message
Noel Hendrickson—Getty Images

"Messaging for Money" may be permanently banned.

Debt collectors reportedly have a new strategy to get consumers’ attention: text messages.

“YOUR PAYMENT DECLINED WITH CARD ****-****-****-5463 . . . CALL 866.256.2117 IMMEDIATELY,” reads one such text, according to the Federal Trade Commission.

The agency has temporarily halted three debt collection operations that allegedly misused texts and is attempting to permanently ban the activity as part of its “Messaging for Money” enforcement sweep.

New York-based Unified Global Group sent the text above, and others like it, the FTC says. Some consumers who received such texts hadn’t set up any card payment with the firm; and the firm failed to identify itself as a debt collector in the message, a violation of the Fair Debt Collections Practices Act, according to the FTC.

“Legitimate debt collectors know the rules,” said Jessica Rich, Director of the FTC’s Bureau of Consumer Protection. “They can’t harass or lie to you, whether they send a text, email, or call you.”

The FTC also obtained restraining orders against New York-based Premier Debt Acquisitions and Georgia-based Primary Group, accusing each of sending texts and making phone calls that violated federal law.

The FTC alleges that Premier impersonated state or law enforcement officials, falsely threatened consumers with a lawsuit or arrest, and falsely threatened to charge some consumers with criminal fraud, garnish their wages, or seize their property. The FTC says the firm claimed in text messages that it would sue the consumers and threatened to seize their possessions unless they paid.

Primary Group was also accused of sending illegal texts. One example provided by the FTC: “I’m a process server w/ Primary Solutions, appointed to serve you papers for case [eight digit number]. Would you like delivery at [consumer’s home address]?”

Premier did not immediately respond to an email request for comment. A website listed for Primary Group was no longer in operation, and contact information for the firm was not immediately available. The same was true for Unified Group.

According to the FTC, Premier Debt Acquisitions also sent deceptive emails claiming that making a payment would help a consumer’s credit report, but the defendants had no ability to make good on that claim.

“They also kept trying to collect after consumers challenged the debt or its amount, without investigating the dispute,” the FTC said. “In one instance, they persisted despite written evidence that the debt was a result of identity theft and a prior debt collector had marked it fully paid. In other instances, the defendants tried to collect a payment even after they had received it, and hounded one person for two years about someone else’s debt.”

When a debt collector – or a party claiming to be one – contacts you, it’s important to do your research before you pay them. Ask the party to provide written verification of the debt they’re attempting to collect on. It’s also a good idea to get your credit reports to see if there are any collection accounts listed, and if there are any errors.

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MONEY consumer psychology

19 Secrets Your Millionaire Neighbor Won’t Tell You

The secret to financial freedom.

From time to time we bring you posts from our partners that may not be new but contain advice that bears repeating. Look for these classics on the weekends.

That’s right. Although having a million bucks isn’t as impressive as it once was, it’s still nothing to sneeze at.

In fact, CNBC reports that in 2013 there were 13.2 million millionairesin the United States alone.

That’s a lot of people, people. And the odds are one or two of them are living near you.

Heck, one of them might even be your neighbor. In fact, the odds are very good that it is your neighbor.

But, Len, you don’t know my neighbor. That guy doesn’t look anything like a millionaire.

Well, guess what? Your suburban millionaire neighbor called (oh yeah, we go way back) and the two of us had a nice little chat.

Here’s a few things he shared with me but apparently doesn’t want to tell you. (No offense, I’m sure.)

1. He always spends less than he earns. In fact his mantra is, over the long run, you’re better off if you strive to be anonymously rich rather than deceptively poor.

2. He knows that patience is a virtue. The odds are you won’t become a millionaire overnight. If you’re like him, your wealth will be accumulated gradually by diligently saving your money over multiple decades.

3. When you go to his modest three-bed two-bath house, you’re going to be drinking Folgers instead of Starbucks. And if you need a lift, well, you’re going to get a ride in his ten-year-old economy sedan. And if you think that makes him cheap, ask him if he cares. (He doesn’t.)

4. He pays off his credit cards in full every month. He’s smart enough to understand that if he can’t afford to pay cash for something, then he can’t afford it.

5. He realized early on that money does not buy happiness. If you’re looking for nirvana, you need to focus on attaining financial freedom.

6. He never forgets that financial freedom is a state of mind that comes from being debt free. Best of all, it can be attained regardless of your income level.

7. He knows that getting a second job not only increases the size of your bank account quicker but it also keeps you busy — and being busy makes it difficult to spend what you already have.

8. He understands that money is like a toddler; it is incapable of managing itself. After all, you can’t expect your money to grow and mature as it should without some form of credible money management.

9. He’s a big believer in paying yourself first. Paying yourself first is an essential tenet of personal finance and a great way to build your savings and instill financial discipline.

10. Although it’s possible to get rich if you spend your life making a living doing something you don’t enjoy, he wonders why you do. Life is too short.

11. He knows that failing to plan is the same as planning to fail. He also knows that the few millionaires that reached that milestone without a plan got there only because of dumb luck. It’s not enough to simply declare that you want to be financially free.

12. When it came time to set his savings goals, he wasn’t afraid to think big. Financial success demands that you have a vision that is significantly larger than you can currently deliver upon.

13. Over time, he found out that hard work can often help make up for a lot of financial mistakes — and you will make financial mistakes.

14. He realizes that stuff happens, that’s why you’re a fool if you don’t insure yourself against risk. Remember that the potential for bankruptcy is always just around the corner and can be triggered from multiple sources: the death of the family’s key bread winner, divorce, or disability that leads to a loss of work.

15. He understands that time is an ally of the young. He was fortunate enough to begin saving in his twenties so he could take maximum advantage of the power of compounding growth on his nest egg.

16. He knows that you can’t spend what you don’t see. You should use automatic paycheck deductions to build up your retirement and other savings accounts. As your salary increases you can painlessly increase the size of those deductions.

17. Even though he has a job that he loves, he doesn’t have to work anymore because everything he owns is paid for — and has been for years.

18. He’s not impressed that you drive an over-priced luxury car and live in a McMansion that’s two sizes too big for your family of four.

19. After six months of asking, he finally quit waiting for you to return his pruning shears. He broke down and bought himself a new pair last month. There’s no hard feelings though; he can afford it.

So that’s it. Now you know what your millionaire neighbor won’t tell you.

Oh, and, um, would you be so kind to keep this just between you and me? I’d hate to ruffle anyone’s feathers or cause of any kind of neighborly spat.

Please?

Thanks. You’re a peach.

More From Len Penzo dot COM:

Len Penzo blogs at lenpenzo.com, “the off-beat personal finance blog for responsible people”.

MONEY credit cards

The Latest You Can Pay a Credit Card Bill Without It Going on Your Record

time expired on parking meter
Mie Ahmt—Getty Images

Credit bureaus follow this standard reporting guideline

It’s irritating to run across a bill and to realize it was due yesterday… or last week. If it’s a credit card bill, you may also have to pay a fee (sometimes, if it’s a rare slip-up, you can get it waived), and it can be especially scary to find an overdue bill if you have applied for credit or plan to in order to make a big purchase, like a house or vehicle. Readers often ask us how late a payment has to be before their creditors report it to the credit bureaus:

  • From Ig08: Hi, I have my credit card since last 6 years and have never missed any payments, but my last payment was due on 4th may and I paid it on 6th. … Does being one/two days late affect credit score?
  • From INVNOONE: Today [my bill] is 30 days late. When I called my bank they stated, “we cannot tell if it has been reported to the credit bureau.” Should I pay the loan today not knowing if they already reported it late to the credit bureau? This will leave me with very little money but I do care about my credit report.
  • From Stephen: I have perfect credit and a small business and my credit is very important to me. I had a credit card … I thought it was completely paid off there was a $6 remaining balance I paid it in full and it was 31 days late and they put it on my report what kind of options do I have?

First, know that even if a late payment does make its way onto your credit report, it’s not necessarily the end of the world. There are many, many worse things, and there are degrees of lateness. Ninety days late is worse than 60 days, and 60 is worse than 30, for example. One late payment among years of on-time payments is far less serious than a late payment and limited credit history. (Of course, if you are in the middle of applying for a mortgage, one late payment could be a serious setback.)

Chi Chi Wu, a staff attorney with the National Consumer Law Center, said 30 days is the magic number. “Late payments generally don’t show up until the payment is 30 days ​past due,” she said in an email. “This is the standard reporting guideline for the credit bureaus.”

But one of our readers who goes by the screen name AJ says she was just 14 days late on a car payment, and it showed up on her credit reports. She hasn’t been able to get it removed. Rod Griffin, director of public education for Experian, said that because it was a car payment (rather than a revolving account, like a credit card), “the ’30-day grace period’ doesn’t necessarily apply.” He added that the payment was late as of the due date, “so the lender may have reported it immediately. You should always be sure to understand the lender’s policy for reporting late payments for the account.” he said. “The commenter should review their contract with the lender to determine what it says regarding when late payments will be reported, or contact the lender. The lender should be able to explain its policy. The 30-day period is specific to revolving accounts, not installment loans.”

If a credit card payment arrives before it is 30 days late, it generally should not be reported negatively or have any effect on your credit score. Beyond that time, however, it’s a distinct possibility that it will. You can get a free annual credit report from each of the three major credit reporting agencies. That can show you whether you have had late payments reported. (This guide can help you interpret those reports.)

If it turns out your late payment has been reported, know that its impact on your score will diminish with time (especially if it’s an isolated event), and that other on-time payments can help counter the effects of a slip-up. And, as with almost any other mistake, the sooner you realize you’ve made it and try to fix it, the less likely it is to turn into a big problem.

More from Credit.com:

MONEY Debt

Help! My Car Loan Outlasted My Car

black car being towed
Jordan Siemens—Getty Images

4 ways to get out of car debt fast

What happens if your car loan lasts longer than your car? While you may have every intention of driving a car long after it’s paid off, an accident (and inadequate insurance), expensive repairs, or mysterious problems your mechanic can’t fix could leave you with a vehicle that’s out of commission even though you’re still making payments.

“Longer-term loans are increasingly prevalent,” says Melinda Zabritski, senior director of automotive credit with Experian. Nearly half (48.2%) of model year 2014 vehicles purchased used were financed with loans of between 61 and 72 months, according to Experian Automotive data.

What can you do if you find yourself in this position? Here are four possible options.

1. Pay Off the Debt

Of course, paying off the balance of your loan would be your best option, but what if you don’t have that kind of cash sitting around? Or what if you need those funds for a down payment on another vehicle? In that case you may have to use another loan to pay off the car loan so that you can get the title and dispose of the vehicle. One option might be a 0% or low-rate credit card balance transfer offer. In many cases, you can have those funds deposited into your bank account and use them for whatever debt you want to pay off. Make sure you understand the fees that will be charged (usually 2% to 4% of the amount transferred) and that you can pay the debt off before the low-rate offer ends.

2. Roll It Into a New Loan

An auto dealer may work with you to roll the balance of your loan on your current vehicle into a new loan. Technically “you can’t roll negative equity into a loan,” says Bob Harwood, vice president at CarLoan.com. but there are ways around it. A dealer can try to inflate the value of the trade-in and/or loan more than the value of the car. “Banks will put a cap on how much over value on a car (you can borrow),” he says. “It’s usually around 120% to125% if you have decent credit.” But with less than stellar credit, they may lend only 100% to 110% of value of the new vehicle — or even less if you have very poor credit.

And, yes, they will want your old vehicle even if it’s now a junker, says Harwood, if only to try to increase the value of the trade-in to make the deal work.

3. Park & Pay

You could simply park the vehicle and continue to pay off the loan. When it’s paid off, you can then get the title back and donate it to charity, sell it, or use it as a trade in on another vehicle.

But be careful: This strategy assumes you have a place to safely store it. And you may need to keep tags and/or a minimum level of insurance on the vehicle. Your homeowner’s insurer (or your landlord’s), for example, may not look kindly on an inoperable untagged vehicle sitting on blocks in your driveway. Or your city may require these types of vehicles to be garaged. Check with your insurance company, your DMV and city or municipality to find out what’s permissible.

4. Call a Bankruptcy Attorney

You may be able to use bankruptcy to get out of this mess. “Bankruptcy can be a ticket out of this type of situation,” says Atlanta bankruptcy attorney Jonathan Ginsberg. “If you qualify for a Chapter 7 you can surrender the vehicle and cancel the installment contract and owe nothing,” he explains. What if you don’t qualify? You may look into Chapter 13, which Ginsberg says may offer several outs: “’Cram down’ the loan to the value of the vehicle, ‘redeem’ the vehicle for the fair market value, or surrender the car and pay any deficiency at pennies on the dollar.”

More From Credit.com

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