Mastering Your Credit with Gerri Detweiler {Google Hangout Replay}

Debt Movement Google Hangout: Mastering Your Credit

with Gerri Detweiler, Credit Expert

Jeff Rose: Hey, this is Jeff Rose from DebtMovement.com. Welcome again to another Google Hangout. This is, I believe, our fourth, maybe our fifth. We’ve been doing so many Hangouts I can’t keep track anymore. 

We have some great information, I have some awesome guests, and today is no exception. We have Gerri Detweiler from Credit.com and when I think of a credit expert that knows anything and everything regarding credit, she comes to mind.

The reason I even know that was last year at FinCon, the Financial Blogger Conference, Liz Weston, who was the keynote speaker, gave a Gerri a shoutout that says, “If you need anything answered about credit, you need to talk to Gerri Detweiler.”

I neatly filed that name away because I had a hunch that I would need to rely on her expertise one day and sure enough, here she is part of the Google Hangout.

Hey, Gerri. How are we doing today?
Gerri Detweiler: Oh, thank you, Jeff, and hey, I’m a big fan of the Debt Movement and what you’re trying to do to help people get out of debt, so I’m glad we connected.

Jeff Rose:   Yeah, me too. You brought me on your radio show recently and shared more about the Debt Movement. I really appreciate you getting the word out and you’ve been able to share some of your expertise thus far with the movement, so I’m excited for you to come on and share. 

We already had several Debt Movement member questions that you’ve agreed to answer. Before we get into those, I wanted you to share how long have you’ve been working with Credit?

Gerri Detweiler: Okay. I have to age myself here. I’ve actually been involved in credit education since 1989. Back then, if you wanted a credit card, you had to send us — I worked for a non-profit group — you had to send us $4 and we’d send you a list. Most of the banks were in Arkansas. 

You didn’t have your Schumer box on your credit card applications. You actually had to wait until you got the card to find out how much it would cost you. You didn’t have your free annual credit report. A lot of things have changed over the years for the positive.

On the other side, you mentioned knowing everything about credit. It’s gotten so much more complex and confusing so I think in some sense it’s better but in some ways it’s even more overwhelming.

Jeff Rose: Is it safe to say that there was a certain part of time, as far as credit score, in checking your credit report, it didn’t seem like that much of an importance and there’s just been in this major shift. How long ago did that happen and how much do people pay attention to what’s going on with their credit?

Gerri Detweiler: Yeah, actually, my colleague, Barry Paperno who worked at FICO for many years, he just wrote an article for the Credit.com blog about this and I was even surprised by this that the credit scores were developed in the 1980s. I thought it was 1950s.

Now, FICO has been around since then but the credit scores really didn’t start taking off until the 1980s. You’re right. They have become more and more important because as we have instant credit decisions, instant decisions about cellphone plans and insurance products, things that are approved online now instead of taking days to approve, a lot of times, credit scores or credit information is one of the reasons that can happen so fast, so it is important.

Jeff Rose: Awesome. Obviously, you probably have helped a ton of consumers with their credit problems, credit questions, credit dilemmas. What are some of the more common things that you see – common mistakes that people are doing that is an easy fix, they just don’t realize it?

Gerri Detweiler: I can tell you a couple of things that are really, really hot on our blog at Credit.com and one of them is medical bills because this can happen to anyone. Even if you have great credit, you always pay everything on time, it is not unusual for medical bills to slip through the cracks and if it slips through the cracks, then ends up collections, and that collection goes on your credit report and then your credit score takes the drop and it’s a big mess. It’s something to really watch out for. 

Another thing that’s getting a lot of attention is I wrote a story about can you get your credit score for free and the answer is yes. We do at Credit.com provide consumers with a truly free credit score. We don’t even ask for a credit card number but a lot of people are saying the number I see there is different than the number my auto lender pulled or another lender pulled. I don’t understand.

The fact is there are probably 35 or 40 different credit scores about you at this given moment. You have to focus more on what areas are strong and what areas need work rather than obsessing about a particular number.

Jeff Rose: Before we get any questions, you bring up an interesting point because a couple of years ago, I was on a quest to find my credit score and I quickly realized how little that I knew. I went in and I got a consumer education score. Is your real credit score, is that your FICO score? Is that your true, true credit score?

Gerri Detweiler: I think that’s what most people think their true credit score is. The problem is even with FICO scores, you have many different scores because it depends on which FICO model they’re using. 

Many lenders customize their FICO scores. You have FICO scores that are created based on each of the credit bureaus’ informations. You have Equifax, Experian, and TransUnion, and even on the same day, if you pull your credit score from all three, they’re going to be different because the underlying data is a little bit different.

Again, I go back to focusing on what factors are strong rather than the number itself and that’s one of the things we do with Credit.com free credit report card as we break it down into the areas. You can see, okay, maybe my debt usage isn’t so great. That’s where the Debt Movement comes in, of course. Or maybe it’s maybe my payment history, what can I do about that?

Jeff Rose: Okay. Hypothetically speaking, let’s say I go to Credit.com, I get my free credit score. As you mentioned, the thing changes daily and you can easily check your score again a week later. How often are we, with Credit.com, are we allowed to check our credit score and then is this what’s called a hard pull or does it affect your credit score the more often you check it? Those are some questions we often get too.

Gerri Detweiler: Perfect questions. Yeah, you can do it once every 30 days with Credit.com. It is a soft inquiry. That means it does not affect your credit score. By law, the credit bureaus have to show you all inquiries I view in the past two years, but the ones that are called soft inquiries don’t calculate into your credit score. 

That also includes things like multiple mortgage inquiries in a short period of time, car loan inquiries in a short period of time, student loan, same thing. Employment-related inquiries are also soft inquiries. As are the inquiries when someone pulls your credit report to pre-screen you for a credit offer — those offers you get in the mail.

Jeff Rose: Wow. When I was working on that post, I should have called you directly.
Gerri Detweiler: You should have.

Jeff Rose: That would have spared me hours and hours of frustration. Awesome, that’s actually some great information. That might be a little self-serving on my part but I know if I have questions, I’m sure there are tens of thousands of people who have the exact same question because I know credit is something that is super, super complex, so thanks for enlightening me and others on some of those questions.

Gerri Detweiler: You’re welcome.

Jeff Rose: All right. Well, let’s go ahead and dive in. We had some really good questions from readers I’m going to go ahead and start with the first one. This is an individual who does have some credit card debts, so hopefully the Debt Movement is helping them out.

The question is, If I owed a lot of money in credit cards but the seven-year limit is coming up next summer, should I wait for that to clear, or what can I do to improve my credit? It says, note: I don’t plan on making any large purchases for the next two years.

Gerri Detweiler: Okay. This is such a great question because I think this person has a very common misperception. They think that the Statute of Limitations for collecting the debt and the time period that remains on your credit report are the same. They are not. Here’s the difference:

With anything negative on your credit report — I’m assuming these went to collections; it sounds like it. They have a lot of credit card debt, the way they’re talking. I presume it went to collections. If not, if it’s just credit card debt, then it’s going to stay on the credit report until it’s paid.

Anything positive can stay on indefinitely so that’s not going to change by making payments or by seven years elapsing.

Let’s say they’re in collections, which is what I’m assuming. Then, the time period for collection accounts to be reported on your credit report is 7 years and 180 days, essentially, 7 1/2 years from the date you first fell behind with the original lender. 

If you fell behind on your MasterCard credit card, for example, January of 2000, that’s when that clock starts ticking. It does not change whether you pay it, whether you don’t pay it, whether it’s sent to another collection agency. That does not change that reporting period. It applies across the board.

Now, the other issue though is the Statute of Limitations. Let’s say this consumer has these accounts in collections.

Depending on what state they live in, I’m in Florida, for example, and the Statute of Limitations is four years. With a four-year Statute of Limitations, after that four years expires, the debt collector can no longer successfully sue me to collect the debt. It doesn’t mean they can’t or won’t.

What happens all the time is some of these zombie debt buyers, they buy old debts. They’ll take people to court, they’ll sue them. The person won’t show up so they get a default judgment and then they can still try to collect.

But generally, if the Statute of Limitations is expired, then they try to collect, you could go to court, raise the Statute of Limitations as defense and then they would lose.

What this person is mixing up here are two different things — their credit report and the debt.

If the Statute of Limitations has expired, and it’s going to be 7 1/2 years, that information’s going to come off their credit report, then they act accordingly. That’s their personal decision whether they want to make good on that debt, or if they can’t, whether they just decide to let it go and just let it fall off their credit report.

But again, it will fall of their credit report after 7 1/2 years from the original date of delinquency regardless of whether it’s paid or not.

Jeff Rose: Wow, that’s great. I think, like you said, that’s definitely a common misconception because I was actually thinking in their lines. Like, okay, after 7 years you’re good, so that’s awesome.

Everybody that’s listening, we’re going to have this transcribed. After your first initial responses, I knew that immediately. This is going to be a great concept for the blog because I know that people have similar questions, similar situations, so all right. Let’s keep trudging along. For the next question, this one reads: 

With no debt and no plans to get any, what negative effects should we be aware of due to a low/no credit score? We will not be opening a credit card just to try to raise our scores. We own a home and have stable jobs. 

Gerri, before you chime in here, a couple of years ago, I had an intern that was working with me. Actually, it was when I was working on my credit score post and I asked him, “Hey, have you checked your credit score recently?” “No, I sure haven’t.” He went on there and checked it. He graduated college. His parents had always advised him not to get any credit cards so he had no credit history. 

Whenever he got, I assume it was a real credit score, it was like a 590, and he’s like, “I don’t get it. I’ve never had any debt.” I’m like, “Well, you don’t have a record.” So ended up doing a secure credit card. Then within nine months, I think he was a high 600s, which is cool to see that.

That’s what he did. He secured a credit card, so I’ll be curious to know if that was the right path or what this individual should do.

Gerri Detweiler: Yeah, you’re exactly right, Jeff. Actually, someone who does not have any credit items that are reporting, or what they call trade lines in the industry, reporting on their credit reports can have a credit score as low as someone who’s been through bankruptcy because the credit score really does rely on recent information in order to predict how you’re likely to handle credit in the future.

I’ll give you an example of where this comes into play. A few years ago, my father got a letter saying he did not the best insurance rate on his auto insurance because of his credit score. If you know my dad, you could lend him money and not only would you be repaid, you’d be repaid early. He’s just super, super careful and responsible with money. It wasn’t anything negative. It was that he didn’t use a lot of credit — the house is paid for, the car is paid for, a credit card or two, that’s it.

What I think a lot of us don’t realize is how much credit plays a role in our financial life. Many auto insurance companies, in fact the majority of auto insurance companies use credit, what’s called an auto insurance-based credit score, to evaluate the rate that you pay or the discount that you get for the insurance that you pay.

Homeowners’ insurance companies often do this. I got a letter once from my homeowners’ insurance company saying I didn’t get the best discount due to my credit score. It really does play a role in what you pay for financial products. I was in line once at Sam’s Club and a woman in front of me, she didn’t get the cellphone that she wanted because of her credit. 

I’m not saying you have to have a credit card, but it sounds like this person is very careful with their money, they just don’t see a need for a credit card. But it doesn’t hurt to have one credit card as a reference and just use it sparingly.

Liz Weston has some great advice. She mentioned earlier, she says, “Just set it up as auto-pay for the cable bill or the electric bill to go on to the credit card and then pay it in full each month.” That’s all you need, just a little bit of activity. You can go ahead and pay it in full and you can still build a solid credit reference and help towards your credit score.

Jeff Rose: Right. I actually have one question that is once again self-serving, but I’ve seen this question asked before and I’ve seen conflicting reports. You mentioned having a low credit score could affect your auto insurance rates. What about employers being able to check your credit and then therefore potentially hurting you getting you getting hired, can employers check your credit?

Gerri Detweiler: Yes, in most states, not all, about 11 or 12 states, have restricted the use of credit reports in employment-related decision or hiring, not for all employees. In most, even in states where they restrict it, if you’re a manager, if you’re making financial decisions, they could still usually check your credit but they’re looking at credit reports, not credit scores, and what they’re usually looking for is a negative information, so not having much information or a lack of positive information usually isn’t the issue with employers. Employers, they’re looking for problems that you’ve had with credit in the past. Again, they don’t get scores. They just get reports.

Jeff Rose: Reports. Once again, I tell you, I looked forever for that answer. I kept reading for information. Wow, you’re an email away now, so.

All right. Let’s move on to the next question. This one is a little bit more involved. It says, my question is this:

Several years ago when I lived in Minnesota, I was trying to buy a house at contract for deed. The owner had a home equity line of credit against it that I thought was paid off but discovered it wasn’t when the bank foreclosed on it. I left the home and moved to Tennessee and realized that the owner had a judgment against me for the balance of the contract, approximately $86,000. However, later in that same year, the owner sold the house to someone else. I want that judgment off my credit report but don’t know the best way to dispute it. So, she got her money from the new owners. I don’t think I should have to pay her for the judgment. Yeah, I think it stays on the report for 10 years. Does it go away after 10 years? It’s been six years now. Help. I’m trying to clean up my credit.

That’s from Vicky.

Gerri Detweiler: This is a detailed question, but I thought it was an important one, Jeff, because I get a lot of questions about judgments and what happens is a judgment is entered when you are taken to court and the judge rules that you owe money. Judgment will be entered.

Judgments can stay on your credit report generally from seven years from the date of entry unless they aren’t paid. If they are not paid then they can stay on until the governing Statute of Limitations expires. She may have gone somewhere and seen that the Statute of Limitations for judgments in her state is 10 years. But guess what? In most states, judgments can be renewed so they can usually last indefinitely, and in many cases, interest can be added on to a judgment as well.

If anyone’s watching in there, they have a judgment on their credit report, this is not something you want to just ignore. It’s very important to figure out a strategy to deal with it because in most states, once a creditor has a judgment against you, they have additional means to collect – things that debt collectors generally can’t do without a judgment.

For example, in some states, they can try to garnish your wages. They may be able to go after your bank accounts. I’ve heard from consumers who have literally discovered one day that their bank account was wiped out because the judgment creditor was able to get to that money and take it and seize it. If you have a judgment, I’m not trying to scare people, but I am saying this is important. This is something you have to deal with.

In her case, what I would recommend she does is two things: the first is I would suggest she has a lawyer review the original contract to see if it was correct that she was on the hook for the entire amount of that money if she defaulted on the contract. If she was, then unfortunately, I’m afraid she didn’t get good advice when she made that real estate deal.

If she is on the hook for that entire amount of money, then she has two options: one is to try to negotiate a settlement. Judgments are usually negotiable, just like any other debt because even a judgment creditor knows that you get the judgment, doesn’t mean you’re going to be able to collect it. She may be able to negotiate a reasonable settlement to get the judgment resolved. Once it’s satisfied, that seven years we talked about kicks in.

If she cannot do that, then she may want to talk to a bankruptcy attorney. Unfortunately, $83,000 is a lot of money. That amount could grow over time with interest or additional penalties. She may need to look at whether she can get the amount of the judgment reduced or wiped out in bankruptcy.

Jeff Rose: That’s great. Vicky, I hope that was helpful. It sounds like you definitely need some expertise to help you out with your situation. I wish you the best of luck. If you have any more questions, I and Gerri will be here to answer.

Moving on, we have a question here. It’s talking about getting some money back from their taxes. I’m getting a decent tax return and I’m looking to purchase a house. I was wondering what would be the best use of my tax money. Lowering my debt to credit ratio by paying down credit cards or save the money towards a down payment on the new house?

Gerri Detweiler: I love that question too. It’s very specific and it’s a great example of why you want to make sure you get good advice when you’re going into this process. The amount of debt that you’re carrying on your credit cards is quite an important factor in your credit score. It’s called the utilization and they take your credit limits and compare them to the balances that are being reported at that moment on your credit report. They look at it individually for each credit card as well as all your credit cards in the aggregate.

Most people have heard the rule of thumb that you shouldn’t have balances above 50% of your available credit, you shouldn’t have balances above 30% of your available credit. I used to say the 30% thing, so I’m guilty there, but what FICO says is consumers with the best scores, what they call their high achievers, tend to use about 10% of their available credit. That’s really a goal you want to work for.

I can tell you, Jeff, this is one of the things that can literally improve your credit score quickly if you pay down those balances. That’s one of the nice benefits of the Debt Movement – not only the financial freedom that paying down debt helps you achieve but the potential to improve your credit scores and get better rates when you need to borrow in the future as well, so paying down high credit card balances is great.

However, in this case, because this reader’s going for a mortgage, what I would recommend doing is meeting with a mortgage lender before making that decision. First of all, you need to figure out what kind of down payment is required and then once the down payment is satisfied, how much money do you have to have in the bank because the lender will require you, typically, to have at least two months of principal and interest tax and insurance PITI payment in the bank to show that you can make this mortgage payment.

So, you need that in addition to the down payment plus any money that might go to closing costs and then after that, if there’s money left over, then that might be used to reduce some balances on some credit cards that are highly utilized and that might improve the credit score and mean a better rate on the mortgage, but it’s not something I would just guess at. I would sit down with a mortgage lender that you trust and make sure that you’re getting good advice on the right approach for your financial situation.

Jeff Rose: I don’t know if you’re aware of this. Ever since the financial crisis of 2008, all the mortgage mess, is it easier now for individuals to get home loans or are you seeing it more difficult?

Gerri Detweiler: It’s absolutely more difficult, absolutely. There’s no question about it. Again, I don’t want to scare people off from the process because the rates are great and so are many home prices in many parts of the country. But you do need to really have your ducks in a row.

I definitely tell people to check credit scores at least three to six months ahead of time so you have time to fix any mistakes, make sure you talk with somebody you trust so you understand what you’re getting into.

I’ll give one more tip. If you’re thinking about an FHA loan, which is a loan program that has a lower down payment requirement, it’s more lenient with the credit score requirements. There are some changes coming up to that program.

As of, I believe, June 3rd of this year, they are going to extend the mortgage insurance premium for the life of the loan. Whereas in the past, if you would pay mortgage insurance, which adds extra money to your monthly payment that you have to pay, in the past, once you pay down your balance to a certain level, you could drop MIP and save that money each month. Now, they’re going to require it for the life of the loan because FHA needs the money.

If you’re thinking about an FHA loan because you have a low down payment or lower credit score, go talk to a lender now. Don’t wait because it will change.

Jeff Rose: That’s good information. Another self-serving question for myself. You’ve mentioned a little bit about utilization ratio and how you’re saying the best credit scores are those that are utilizing 10%. I thought I’d read somewhere where some credit cards don’t do a good job of recording what your limit is

For example, where you think that you have a $10,000 limit but they’re only reporting you have a $5,000 limit and if you have a $2,500 balance, you think you’re at 25% ratio but really you’re at 50%. Is that true? Is that an urban legend? Have you seen instances of that occurring?

Gerri Detweiler: Yeah, I think what you’re probably referring to is in the past, there was a major credit card issue where they did not report credit limits and this was a big problem because basically when the credit score doesn’t have the credit limit available, what they substitute is they substitute the highest balance you’ve ever carried.

So if you have a credit card with a $10,000 limit but the most you ever charged and had reported as a balance was $1,000, it’s the $1,000 that counts in that utilization ratio, which is not a good thing. That’s a big difference.

Now, if you do have a balance or credit limit that is lower than what they were reporting, then presumably on your statement, it will show your credit limit and you could dispute it and you’d have that evidence to back up the fact that the credit limit is not reported correctly.

Now, I’m not aware of any major credit card companies that still report credit limits but if you have a charge card like an American Express card where there is no credit limit, there’s no preset credit limit, then if it’s recorded as a charge card rather than a credit card, then utilization is treated differently. You’re probably fine with that type of card. Typically on the credit report, they’ll be characterized as open or code O as opposed to revolving or a card code R. Revolving code is the code for credit cards.

Jeff Rose: Okay, awesome. If I’ve got credit questions, I’ll just schedule another Google Hangout with you, so much more time efficient. Well, that is pretty much all the easier questions.

We did have one that is talking more about student loans and this was a recap from the last movement, but Gerri has graciously offered to answer this question. It’s a little bit longer so I’m trying to paraphrase it as best as I can.

Here’s the situation: It sounds like we have a parent who is a co-signee of their daughter’s private student loan that has amassed a whopping $144,000. I think a lot of us can relate to that that have gone on to get our college degree. They have been in default for six months. He’s made an attempt to make every minimum payment for the last three months but it ended up in collection in October 2012.

He was assigned to a collection company. He called Sallie May, try to arrange terms of payment. He sent a letter to the collection company requesting proof of the debt within his 30-day window and finally received a response in December. He said he made a call and it looks like the question really is, is like my question to you or your team of experts – Gerri, you’re the expert, not I – is how is the best way to approach Sallie May? The monthly payment for both loans will be a $1,000. It says his daughter currently lives overseas but he just wants to know what’s the best to do it, I’m assuming the debt.

Gerri Detweiler: Jeff, will you just double-check the question? I seem to recall it was six years, not six months, that it’s been in default.

Jeff Rose: I’m sorry, you are correct, yes, six years. I’m sorry, this is a she, this is Laura not a he, so her daughter, yes default for six years, correct.

Gerri Detweiler: Well, I tell you, I hear so many of these stories about parents who have this massive student loan debt for their children and I wish I could help them turn back the clock and do it differently so they don’t end up in this situation. It’s very, very tough.

Now, in most cases, federal loans are better than private student loans, but in this case, Laura may actually have an advantage that this is a private student loan and the reason is there is a Statute of Limitations for collection of private student loan. If the Statute of Limitations is expired, then they may still try to collect but there may be not much they can do if they can’t sue her to collect the debt, then she may be in a good situation.

What I would do if I were in her situation is I would talk with an attorney who handles student loan situations, and there are a number of consumer law attorneys now who are adding that service to their practice because they’re just seeing what a big problem it is for so many consumers.

A consumer law attorney who has experience with student loans can advice her on whether the statute of limitations is expired and in that case, she may not want to make arrangements because here’s the deal: once you start paying on something, usually the statute of limitations starts all over again. You open yourself up to a law suit, a judgment, etc.

I hate to say walk away from this because it sounds really terrible, but a $144,000 is really just a crushing amount of debt if she can’t afford it. Even at $1,000 a month, with the interest continuing to accrue, she may never pay that debt off. The attorney may advice her to just let it go or if she really does want to do something, she could consider making an agreement through the attorney.

I would not do this on my own, through the attorney, to settle that debt for a smaller amount or she may decide, “Here’s what I can afford to pay and I’m going to set up a scholarship fund at my daughter’s school for other students to make good on what I did borrow and what I did use for this debt.”

She has to look at it from that perspective. Given the amount of debt and the circumstances, she should absolutely get professional legal advice.

Jeff Rose: Thank you, Gerri for answering that one. As of now, that actually wraps up all the major questions that we had. For those that want more credit information, want more of your expertise, because you’ve honestly shown that you’ve got it, where’s the best place that people can connect with you?

Gerri Detweiler: Well, on the Credit.com blog, we have a lot of articles. You could look at my name and you can click on my name under one of them and you’ll get a list of all the articles I’ve written. I have some great, terrific colleagues, like I mentioned Barry Paperno, who worked at FICO for many years. He’s also writing stories and we have some great contributors. If you have questions post them there on one of my stories and we will make sure that I or one of other experts give you an expert answer to that question.

Jeff Rose: Awesome. In the event that we have any more questions like this, I don’t know if I’ll have time to do a Hangout during this 90-day movement but I’ll definitely inform Gerri and she can answer them either on the Debt Movement blog or even on the Credit.com blog or mostly likely you probably already answered the question. I appreciate you sharing your time and your expertise with myself and the community.

Gerri Detweiler: Thank you.

Jeff Rose: I know that we greatly, greatly appreciate it.

Gerri Detweiler: Jeff, I think what you’re doing is absolutely awesome. I can’t wait to see the results. I know it’s going to exceed your expectations. I know it is. You’ve got a great movement going on there and we’re glad to be part of it, Credit.com.

Jeff Rose: Yeah, I’m glad you guys are part of it. I appreciate it and I’ll talk to you soon.

Gerri Detweiler: Thank you.

Jeff Rose: Thank you.