Credit Cards, News

Deeper Into Credit Card Debt With No Regrets This Holiday Season

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Deeper Into Credit Card Debt With No Regrets This Holiday Season

This holiday season, spending increased 7.9 percent from a year ago (according to the MasterCard Spending Pulse report). People spent more money on gifts, making many retailers happy and helping the overall economy.

Although the increased spending will be applauded by retailers, many American households are left with a precarious post-holiday financial situation. The euphoria of giving gifts will undoubtedly be replaced by a predictable debt hangover in January. MagnifyMoney conducted a national survey, and found that:

  • American consumers spent without a plan. 50.7% of people set no holiday budget at all. A further 15.1% of people set a budget, but ignored it and spent more than planned. That means 65.8% of people had no control over their holiday spending.
  • After spending money on holiday gifts, a majority of Americans are “broke.” 56.3% of people surveyed have less than $1,000 combined in their checking and savings account.
  • Credit cards will be used to fund a big portion of holiday purchases. 38.3% of the people surveyed will not be able to pay off their credit card in full this month. High interest rate credit cards were used to fund holiday debt.
  • Despite the debt, there was “no regret.” Despite borrowing money at high interest rates to fund holiday purchases, 85.7% of Americans have no regrets about their holiday spending.

During the 2015 holiday season, American consumers have demonstrated their willingness, and apparent happiness, to spend money they don’t have on gifts they can’t afford.

But in just a few days, people will start making New Year’s Resolutions. And if 2016 is like any other year, two themes will dominate the resolutions made across the country. People will promise to become physically fit and financially fit in the New Year.

One of the top resolutions made in January 2015, according to Nielsen, was to “spend less and save more.” This is a recurring theme, and we can expect similar resolutions in 2016, as the credit card statements start to arrive and the debt hangover begins.

However, Nick Clements, Co-Founder of MagnifyMoney, has two messages for people who have found themselves deeper in debt after the holidays:

First, we need to learn valuable lessons from our grandparents and great-grandparents about how to manage money. Before credit cards ever existed, people would only spend money if they had it. Most of our grandparents would have never even considered borrowing money to buy people gifts during the holidays. If we don’t develop that same type of mentality, any New Year’s Resolution will fail. I don’t want to sound like a belated Grinch, but borrowing money to buy gifts should have left more people feeling regret.   

Second, people need to be wise about how they try to fulfill their New Year’s Resolution to become financially fit. Skipping a few lattes isn’t going to do the trick. I recommend taking a day off, and spending as much time and effort building a financial plan for 2016 as you did organizing your presents and your holiday parties in 2015. 

Survey Results in More Detail

There was no spending plan or budget in place

  • 50.7% set no budget. Instead, they “just spent.”
  • 34.2% set a budget and followed the budget.
  • 15.1% set a budget, but ignored the budget and spent more.

A majority of Americans are “broke”

  • 24.8% have less than $100 in their accounts.
  • 23.8% have between $101 and $500 in their accounts.
  • 7.7% have between $501 and $1,000 in their accounts.
  • 16.4% have between $1,001 and $5,000 in their accounts.
  • 27.3% have more than $5,000 in their accounts.

Most financial planners recommend having an emergency fund with at least $1,000. Ideally, the fund should cover three to six months of living expenses. 56.3% do not have even the minimum of $1,000.

A significant minority will be paying off their credit cards for a long time

  • 61.7% of people will be able to pay their balance in full.
  • 27% will take some time, but pay more than the minimum due.
  • 11.3% can only afford to pay the minimum due.

For the 11.3% paying the minimum due, they can expect to stay in debt for more than 25 years and will end up paying more interest than the original amount borrowed.

Despite the spending, we felt no regrets.

  • 85.7% do not regret the amount of money they spent.
  • 14.3% do regret the amount they spent.
  • Of those with no regrets, 13.3% felt they could have spent more.

Tips for A Successful New Year’s Resolution

When the credit card bills start to arrive in January, many people will start to feel the annual debt hangover. As an antidote, people will start making resolutions to spend less, save more and get their finances in order.

MagnifyMoney believes that people should spend as much time in January building a financial plan for 2016 as they did shopping in December for the holidays.

For people in credit card debt, MagnifyMoney has a free 45 page Debt Guide available for download. This guide helps people prepare a customized action plan to lower interest rates, build a budget, negotiate hard with creditors and become debt-free.

In addition, MagnifyMoney recommends that all people spend time in January 2016 doing the following:

  1. Understand where your money actually went. When people create forward-looking budgets, those budgets almost always balance. Yet, when people look back in time, they have usually spent more than they planned. The best way to diagnose your spending problem is to understand where the money has actually gone. And there are great apps, like LevelMoney or Mint, which can help you understand where your money has gone. We particularly like LevelMoney, because it splits your expenditure into fixed, recurring expenses and variable expenses.
  2. Review your credit report from all three reporting agencies. You need to know what is on your credit report in order to build a good credit score. You can download your report for free at AnnualCreditReport.com.
  3. Understand your credit score and put together a plan to improve your score during 2016. People with the best scores never charge more than 10% of their available credit and pay their bills on time every month. Not only is that good for your score, but it is good for your wallet. And you can now get your official FICO for free in a number of places. Otherwise, you can get your VantageScore at sites like CreditKarma.
  4. If you have a good credit score, all debt can probably be refinanced. Mortgages, student loans, auto loans and credit cards (with a balance transfer or personal loan) can all be refinanced. Although the Federal Reserve increased interest rates in December, the rates are still very low. Find ways to lock in much lower interest rates now to help you pay off your debt faster.
  5. There are two big warnings with refinancing. First, try to avoid extending the term to get a lower payment. The biggest trap people fall into with refinancing is that they lower their rate and extend their term. By doing this, you might end up paying more money in the long run. Second, be careful before you refinance federal student loans, because you give up valuable protection.
  6. Automate all of your decisions, including savings and making credit card payments. Data has consistently shown that automating decisions greatly increases the likelihood of achieving your goals. To build that emergency fund, set up automatic transfers from your checking to your savings account. (Even better, get a higher interest rate online account and keep it completely separate from your checking account). To build your retirement savings, automate your 401(k) or IRA contributions. And to pay your credit card bill, automate your monthly payments.
  7. “Net worth” is not just a concept for the rich, and you need to focus on your net worth now. Net worth is a simple concept: it is what you own minus what you owe. Building wealth and being financially responsible means you are building your net worth. It doesn’t mean you make your payments on time and have a fancy car. Focus on the right number: building your net worth.

holiday-spending-trends

Survey Methodology

The survey was conducted by Google Consumer Surveys for MagnifyMoney between December 24 – 26, 2015. 532 people responded to the questions in a nationwide, online survey. All respondents were 18 or older.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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Consumer Watchdog, Featured, News

How the “Financial Choice Act” Could Impact Your Wallet

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Wikimedia Commons

A plan to repeal major aspects of Dodd-Frank — legislation enacted to regulate the types of lender behavior that contributed to the 2008 economic crisis — crossed its first major hurdle last week when the U.S. House passed the Financial Choice Act.

The bill still has to pass the U.S. Senate and be signed by the president before becoming a law. However, if it does, significant changes would be made to some regulations that might require consumers to pay more attention to their financial decisions.

“[The Financial Choice Act] stands for economic growth for all, but bank bailouts for none. We will end bank bailouts once and for all. We will replace bailouts with bankruptcy,” Rep. Jeb Hensarling (R-Texas), House Financial Services Committee chairman, said in a press release. “We will replace economic stagnation with a growing, healthy economy.”

What’s at stake with the Financial Choice Act, and how does it impact your finances? We’ll explore these questions in this post.

What did the Dodd-Frank Act do, anyway?

Bailouts: After it was implemented in 2010 by President Barack Obama, one of the law’s main pillars was enacting the “Orderly Liquidation Authority” to use taxpayer dollars to bail out financial institutions that were failing but considered “too big to fail” — meaning their collapse would significantly hurt the economy. In addition, Dodd-Frank created a fund for the FDIC to use instead of taxpayer dollars for any future bailouts.

Consumer watchdog: Dodd-Frank also created the Consumer Financial Protection Bureau, an independent government agency that focuses on protecting “consumers from unfair, deceptive, or abusive practices and take action against companies that break the law.”

In one of its most high profile cases to date, the CFPB in 2016 fined Wells Fargo $100 million for allegedly opening accounts customers did not ask for.

The CFPB’s actions against predatory practices in a number of industries, including payday lending, prepaid debit cards, and mortgage lenders, among others, have won the agency many fans among consumer advocates.

“In fewer than six years, [the CFPB has] returned $12 million to over 29 million Americans, not just harmed by predatory lenders or fly-by-night debt collectors, but some of the biggest banks in the country,” says Ed Mierzwinski, director of the consumer program for the U.S. Public Interest Research Group, a Washington, D.C.-based nonprofit that advocates for consumers.

And how would the Financial Choice Act change Dodd-Frank?

No more bailouts: The Financial Choice Act would replace Dodd-Frank’s Orderly Liquidation Authority with a new bankruptcy code. So financial institutions would have a path to declare bankruptcy in lieu of shutting down completely.

Fewer regulations for banks: The act will provide community banks with “almost two dozen” regulatory relief bills that will lessen the number of rules small banks need to comply with, making it easier for them to operate.

A weaker CFPB: It would convert the CFPB into the Consumer Law Enforcement Agency (CLEA) and make it part of the executive branch. The Financial Choice Act also gives the president the ability to fire the head of the newly created CLEA at any time, for any reason, and gives Congress control over it and its budget. These changes will take away much of the power the CFPB holds to monitor the marketplace and pursue any unfair practices.

“It not only took the bullets out of [the CFPB’s] guns, it took their guns away,” Mierzwinski says.

Specifically, he says the CFPB would no longer be able to go after high-cost, small-dollar credit institutions, such as payday lenders and auto title lenders.

However, some experts see benefits from taking the teeth out of the CFPB.

“I personally think that’s a good thing because I think the way that the CFPB is structured is fundamentally flawed,” says Robert Berger, a retired lawyer who now runs doughroller.net, a personal finance blog. “You basically have one person with very little meaningful oversight that can have a huge impact on the regulations of the financial industry.”

The bill also would roll back the U.S. Department of Labor’s new fiduciary rule, which isn’t part of Dodd-Frank, but requires retirement financial advisers to act in their clients’ best interests. It went into partial effect on June 9.

What does this mean to consumers?

If the Financial Choice Act becomes law, opponents say it could mean that consumers will have to be even more careful with their financial choices and who they trust as a financial adviser because there will be less government oversight.

“If you’re a consumer, you’re going to have to watch your wallet even if you have a zippered pocket with a chain on your wallet,” Mierzwinski says.

If the bill passes the Senate, it could still face some hurdles. Any changes to Dodd-Frank regulations would need to be approved by the heads of the Federal Reserve System and Federal Deposit Insurance Corp. and the Comptroller of the Currency.

Jana Lynn French
Jana Lynn French |

Jana Lynn French is a writer at MagnifyMoney. You can email Jana Lynn here

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News

How a Spending Freeze Can Save Your Finances

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Laura Vondra, 49, from Black Hawk, Colo. saved $3,000 doing a 30-day spending freeze.

Laura Vondra, 49, from Black Hawk, Colo. saved $3,000 doing a 30-day spending freeze. Photo courtesy of Laura Vondra.Just after the 2016 holiday season passed, recent empty-nester Laura Vondra, 49, from Black Hawk, Colo., realized she was at a new financial crossroads — after struggling to make ends meet for 30 years as a single mother of three, she was finally going to learn what it felt like to have wiggle room in her budget.

To jumpstart her new financial lease on life, she decided to try a spending freeze. Spending freezes are fairly straightforward but difficult to execute: for a set period of time, you stop spending money on anything that is not essential.

For Laura, a spending freeze would allow her to take full stock of her financial picture. At the time, she had over $110,000 in debt — a combination of student loans and credit card debt.

Her goal was to start a 30-day freeze beginning January 1, 2017. When the big day arrived, the registered nurse set the ground rules: she’d spend money only on gas and food (for herself and her trio of beloved cats, Baby Girl, Matilda, and Poppy). When she wasn’t shopping for essentials, she left her debit and credit cards at home.

At the end of the month, the results were undeniable: Laura had saved roughly $3,000 — one-half of her monthly earnings. She used the funds to completely pay off one of her credit cards. “Before, I always felt like I was broke, I was poor. This month showed me ‘no, you’re not.’ I could easily live off of what I make,” she told MagnifyMoney. “[I realized] I could actually live off of half of that.”

How to Do a Spending Freeze — the Right Way

The goal of a spending freeze is to reign in all unnecessary spending and help to jumpstart your savings goals.

While a spending freeze requires you to not do something, not spending money isn’t always the easy choice in our consumer-driven culture. Here are a few tips to steel your resolve when faced with the inevitable ad for something you really, really, really need want.

Set a time limit and stick to it.

Committing to a certain time frame will help you remember that your frugal period is only temporary, and prevent you from binge-spending when you get weary of sticking to your budget.

Everyone has a different frugality threshold. The spending freeze can help you test your limit. Start off with a shorter freeze, for maybe about a week, then extend it if it feels tolerable, and learn new financial habits along the way. Eventually you’ll be able to handle a no-spend month or even a year or two like some extreme budgeters have done.

Clemson, N.C., couple Jen and Jordan Harmon have gone on a 30-day spending freeze every January since 2014. For the parents of three, it began as a way to recover from holiday season spending.

“Christmas was awful [that year], and we had spent so much money. We were just miserable,” says Jen. Her father had passed away in early December 2013, and on top of those costs, the family had spent money on holiday gifts and fast food during the chaotic month.

Make a list of things that really matter.

Laura says her spending freeze was a way to take stock of what she really needed to spend money on — and what she didn’t. She began “spending [her] money on things that matter and on things that last, not just a dinner out or to get [her] nails done.”

She’s since focused on taking care of some things she didn’t think she would have been able to afford without going on the freeze, like eliminating her debt.

Set yourself up for success.

The more you plan ahead for your spending freeze, the easier it will be for you.

Laura, for example, planned ahead by brewing her own tea at home and bringing tea bags to the office to replace her daily $25 Starbucks habit.

The Harmons prepared lunches in advance so that Jordan wouldn’t feel pressured to spend money for food on his lunch break.

“It’s the convenience that really gets you,” says Jordan. “Once you break that habit, you realize going out to lunch may only be $5 a day, but it adds up.”

Tell EVERYONE and get them to join you

Telling your friends and family about your spending freeze is a great way to garner support for your no-spend trial as well as help you stay accountable.

When the Harmons announced their freeze on Facebook by making a spending-freeze group their friends could join, Jen said she was a little nervous, thinking, “What are people going to think?”

“I was surprised at the general positivity from friends. I thought one or two would sign up. It was like 20 people in the final group, which was more than I thought it would be,” says Jen.

You can also join groups like The Epic Spending Freeze Challenge and Bells Budget Spending Freeze on Facebook for support. Or, invite a friend or family member to join you. If your debt situation is complicated or you think you may need stronger debt support, groups like Financial Peace University and Debtors Anonymous can be good resources.

Laura joined a couple of spending-freeze groups on Facebook to keep herself motivated throughout the freeze.

“I remember talking a picture of my breakfast one morning, thinking ‘this is my last egg, I won’t have another egg until the end of January,’” she says. She says the image received several comments in the group from others who shared their final mid-month rations too.

Don’t be too rigid.

While social events can often come with a host of unexpected costs, you don’t have to avoid them altogether to have a successful freeze. Sometimes it just takes getting a little creative. You can look for free events in your area or plan nights in with your family or significant others.

Also, remember it’s your freeze, so you can bend the rules slightly for your sanity. When Laura received invites to hang out with friends at a local bar, she compromised — she ate a meal at home and purchased only drinks at the bar.

“I didn’t want to stay all month at home and be antisocial,” she says.

She made one more break for social life. In the final week of her freeze, Laura let her boyfriend — who was otherwise forbidden to spend money on her during the freeze — take her out to dinner using a buy-one-get-one-free coupon, so her meal was free.

Set a purpose for the money you’ll save.

You should be able to get a good idea of the amount of money you’ll save over the period when you first go over your spending-freeze budget. Give it a purpose. At the end of the freeze reward yourself with that thing you always wanted but could never find room in your budget for.

Jen Harmon, 32, and Jordan Harmon, 33, from Clemson, N.C. have completed a January spending freeze every year since 2014. Photo courtesy of Jen Harmon.

The Harmons said they are able to save a couple of hundred dollars each freeze, helping to boost their savings, and they’ve gotten into the habit of adding in the occasional no-spend week when necessary. So much so, that they were able to start saving to pay cash for a new family car. In 2016, the freeze helped boost their savings to buy a Prius that February. They say they would have financed the vehicle had it not been for what they learned practicing the spending freeze.

Hide the money (from yourself).

If you think you’ll have serious trouble keeping your hands off of your money, you could try hiding it from yourself to get that “out of sight, out of mind” effect. Transfer all of the money you won’t need to cover the essentials (or an emergency) to an online savings account or one-month CD with another bank.

When you check your main checking account and don’t see much money there to spend on impulse buys, you might be prevented from spending. On top of that, if you need the money, you’ll have to wait or work to get access to it since it will likely take a day or so for the funds to transfer. The wait may give you the time you need to think about the purchase before you buy.

A final word

Generally speaking, just about anyone can benefit from a spending freeze or no-spend period. The challenging spending break can help you develop a better mindset about how you use money and have lasting results on your day-to-day spending habits.

For example, Laura hasn’t tried another no-spend month, but now she’s found the money in her budget to pay $500 toward her credit card debt each month. She says once she eliminates $9,000 in credit debt, she’ll start making headway on about $100,000 in student loan debt.

She says the freeze helped her learn to spend her money on things that matter, not just on lifestyle perks like going out to dinner or getting her nails done. Building that mindset is the whole point of going on a spending freeze.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

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Building Credit, Featured, News

Average Credit Score in America Reaches New Peak at 699

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In late 2016, American consumers hit an important milestone. For the first time in a decade, over half of American consumers (51%) recorded prime credit scores. On the other side of the scale, less than a third of consumers (32%) suffered from subprime scores.1 As a nation, our average FICO® credit score rose to its highest point ever, 699.2

Despite the rosy national picture, we see regional and age-based disparities. A minority of Southerners still rank below prime credit. In contrast, credit scores in the upper Midwest rank well above the national average. Younger consumers struggle with their credit, but boomers and the Silent Generation secured scores well above the national average.

In a new report on credit scores in America, MagnifyMoney analyzed trends in credit scores. The trends offer insight into how Americans fare with their credit health.

Key Insights:

  1. National average FICO® credit scores are up 13 points since October 2009.3
  2. 51% of consumers have prime credit scores, up from 48.1% in 2007.4
  3. One-third of customers have at least one severely delinquent (90+ days past due) account on their credit report.5
  4. Average Vantage® credit scores in the Deep South are 21 points lower than the national average (652 vs. 673).6
  5. Millennials’ average Vantage® credit score (634) underperformed the national average by 39 points. Only Gen Z has a lower average score (631).7

Credit Scores in America

Average FICO® Score: 6998

Average Vantage® Score: 6739

Percent with prime credit score: 51%10

Percent with subprime credit score: 32%11

Credit Score Factors

Percent with at least one delinquency: 32%12

Average number of late payments per month: .3513

Average credit utilization ratio: 30%14

Percent severely delinquent debt: 3.37%15

Percent severely delinquent debt excluding mortgages: 6.9%16

The Big 3 Credit Scores

Credit scoring companies analyze consumer credit reports. They glean data from the reports and create algorithms that determine consumer borrowing risk. A credit score is a number that represents the risk profile of a borrower. Credit scores influence a bank’s decisions to lend money to consumers. People with high credit scores will find the most attractive borrowing rates because that signals to lenders that they are less risky. Those with low credit scores will struggle to find credit at all.

Banks have hundreds of proprietary credit scoring algorithms. In this article, we analyzed trends on three of the most famous credit scoring algorithms:

  1. FICO® 8 Credit Score (used for underwriting mortgages)
  2. Vantage® 3.0 Credit Score (widely available to consumers)
  3. Equifax Consumer Risk Credit Score (used by the Federal Reserve Bank of New York)

Each of these credit scores ranks risk on a scale of 300-850.

In all three models, prime credit is any score above 720.

Subprime credit is any score below 660. All three models consider similar data when they create credit risk profiles. The most common factors include:

  1. Payment history
  2. Revolving debt levels (or revolving debt utilization ratios)
  3. Length of credit history
  4. Number of recent credit inquires
  5. Variety of credit (installment and revolving)

However, each model weights the information differently. This means that a FICO® Score cannot be compared directly to a Vantage® Score or an Equifax Risk Score.

American Credit Scores over Time

Average FICO® Credit Scores in America are on the rise for the eighth straight year. The average credit score in America is now 699.

We’re also seeing healthy increases in prime credit scores. In the three major credit scoring models, a prime credit score is any score above 720.

According to the Federal Reserve Bank of New York, 51% of all Americans have prime credit scores as measured by the Equifax Risk Score. Following the housing market crash in 2010, just 48.4% of Americans had prime credit scores.20

Credit Scores and Loan Originations

Following the 2007-2008 implosion of the housing market, banks saw mortgage borrowers defaulting at a higher rates than ever before. In addition to higher mortgage default rates, the market downturn led to higher default rates across all types of consumer loans.

To maintain profitability banks began tightening lending practices. More stringent lending standards made it tough for anyone with poor credit to get a loan at a reasonable rate.

Although banks have loosened lending somewhat in the last two years, people with subprime credit will continue to struggle to get loans. In February 2017, banks rejected 85% of all credit applications from people with Equifax Risk Scores below 680. By contrast, banks rejected 8.74% of credit applications from those with credit scores above 760.22

Credit Scores and Mortgage Origination

Before 2008, the median homebuyer had an Equifax Risk Score of 720. In 2017, the median score was 764, a full 44 points higher than the pre-bubble scores. The bottom tenth of buyers had a score of 657, a massive 65 point growth over the pre-recession average.23

Some below prime borrowers still get mortgages. But banks no longer underwrite mortgages for deep subprime borrowers. More stringent lending standards have resulted in near all-time lows in mortgage foreclosures.

Credit Scores and Auto Loan Origination

The subprime lending bubble didn’t directly influence the auto loan market, but banks increased their lending standards for auto loans, too. Before 2008, the median credit score for people originating auto loans was 682. By the first quarter of 2017, the median score for auto borrowers was 706.26

In the case of auto loans, the lower median risk profile hasn’t paid off for banks. In the first quarter of 2017, $8.27 billion dollars of auto loans fell into severely delinquent status. That means the owners of vehicles did not pay on their loans for at least 90 days. Auto delinquencies are now as bad as they were in 2008.28

Consumers looking for new auto loans should expect more stringent lending standards in coming months. This means it’s more important than ever for Americans to grow their credit score.

Credit Scores for Credit Cards

Unlike other types of credit, even people with deep subprime credit scores usually qualify to open a secured credit card. However, credit card use among people with poor credit scores is still near an all-time low. In the last decade, credit card use among deep subprime borrowers fell 16.7%. Today, just over 50% of deep subprime borrowers have credit card accounts.30

The dramatic decline came between 2009 and 2011. During this period, half or more of all credit card account closures came from borrowers with below prime credit scores. More than one-third of all closures came from deep subprime consumers.

However, banks are showing an increased willingness to allow customers with poor credit to open credit card accounts. In 2015, more than 60% of all new credit card accounts went to borrowers with subprime credit. 25% of all the accounts went to borrowers with deep subprime credit.

State Level Credit Scores

Consumers across the nation are seeing higher credit scores, but regional variations persist. People living in the Deep South and Southwest have lower credit scores than the rest of the nation. States in the Deep South have an average Vantage® credit score of 652 compared to a nationwide average of 673. Southwestern states have an average score of 658.

States in the Upper Midwest outperform the nation as a whole. These states had average Vantage® Scores of 689.

Unsurprisingly, consumers across the southern United States are far more likely to have subprime credit scores than consumers across the north. Minnesota had the fewest subprime consumers. In December 2016, just 21.9% of residents fell below an Equifax Risk Score of 660. Mississippi had the worst subprime rate in the nation. 48.3% of Mississippi residents had credit scores below 660 in December 2016.35

These are the distributions of Equifax Risk Scores by state:37

Credit Score by Age

In general, older consumers have higher credit scores than younger generations. Credit scoring models consider consumers with longer credit histories less risky than those with short credit histories. The Silent Generation and boomers enjoy higher credit scores due to long credit histories. However, these generations show better credit behavior, too. Their revolving credit utilization rates are lower than younger generations. They are less likely to have a severely delinquent credit item on their credit report.

Gen X and millennials have almost identical revolving utilization ratios and delinquency rates. Compared to millennials, Gen X has higher credit card balances and more debt. Still, Gen X’s longer credit history gives them a 21 point advantage over millennials on average.

To improve their credit scores, millennials and Gen X need to focus on timely payments. On-time payments and lower credit card utilization will drive their scores up.

A report by FICO® showed that younger consumers can earn high credit scores with excellent credit behavior. 93% of consumers with credit scores between 750 and 799 who were under age 29 never had a late payment on the credit report. In contrast, 57% of the total population had at least one delinquency. This good credit group also used less of their available credit. They had an average revolving credit utilization ratio of 6%. The nation as a whole had a utilization ratio of 15%.39

Sources

  1. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  2. Ethan Dornhelm, “US Credit Quality Rising … The Beat Goes On,” Fair Isaac Corporation. Accessed May 24, 2017.
  3. Ethan Dornhelm, “US Credit Quality Rising … The Beat Goes On,” Fair Isaac Corporation. Accessed May 24, 2017.
  4. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  5. 2016 State of Credit Report” National 2016 90+ Days Past Due, Experian, Accessed May 24, 2017
  6. 2016 State of Credit Report” State 2016 Average Vantage® Credit Score, Experian. Accessed May 24, 2017.
  7. 2016 State of Credit Report” National 2016 Average Vantage® Credit Score, Experian. Accessed May 24, 2017.
  8. Ethan Dornhelm, “US Credit Quality Rising … The Beat Goes On,” Fair Isaac Corporation. Accessed May 24, 2017.
  9. 2016 State of Credit Report” National 2016 Average Vantage® Credit Score, Experian. Accessed May 24, 2017.
  10. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  11. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  12. 2016 State of Credit Report” National 2016 90+ Days Past Due, Experian. Accessed May 24, 2017.
  13. 2016 State of Credit Report” National 2016 Average Late Payments, Experian. Accessed May 24, 2017.
  14. 2016 State of Credit Report” National 2016 Average Revolving Credit Utilization Ratio, Experian. Accessed May 24, 2017.
  15. Quarterly Report on Household Debt and Credit May 2017” Percent of Balance 90+ Days Delinquent by Loan Type, All Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  16. Calculated metric using data from “Quarterly Report on Household Debt and Credit May 2017” Percent of Balance 90+ Days Delinquent by Loan Type and Total Debt Balance and Its Composition. All Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.Multiply all debt balances by percent of balance 90 days delinquent for Q1 2017, and summarize all delinquent balances. Total delinquent balance for non-mortgage debt = $284 billion. Total non-mortgage debt balance = $4.1 trillion $284 billion /$4.1 trillion = 6.9%.
  17. 2016 State of Credit Report” State 2016 Average Vantage® Credit Score, Experian. Accessed May 24, 2017.
  18. Ethan Dornhelm, “US Credit Quality Rising … The Beat Goes On,” Fair Isaac Corporation. Accessed May 24, 2017.
  19. Ethan Dornhelm, “US Credit Quality Rising … The Beat Goes On,” Fair Isaac Corporation. Accessed May 24, 2017.
  20. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  21. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  22. Survey of Consumer Expectations, © 2013-2017 Federal Reserve Bank of New York (FRBNY). The SCE data are available without charge at http://www.newyorkfed.org/microeconomics/sce and may be used subject to license terms posted there. FRBNY disclaims any responsibility or legal liability for this analysis and interpretation of Survey of Consumer Expectations data.
  23. Quarterly Report on Household Debt and Credit May 2017” Credit Score at Origination: Mortgages, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  24. Quarterly Report on Household Debt and Credit May 2017” Credit Score at Origination: Mortgages, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  25. Quarterly Report on Household Debt and Credit May 2017” Number of Consumers with New Foreclosures and Bankruptcies, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  26. Quarterly Report on Household Debt and Credit May 2017” Credit Score at Origination: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  27. Quarterly Report on Household Debt and Credit May 2017” Credit Score at Origination: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  28. Quarterly Report on Household Debt and Credit May 2017” Flow into Severe Delinquency (90+) by Loan Type, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  29. Quarterly Report on Household Debt and Credit May 2017” Flow into Severe Delinquency (90+) by Loan Type, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  30. Graham Campbell, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw, “Just Released: Recent Developments in Consumer Credit Card Borrowing,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 9, 2016. Accessed May 24, 2017.
  31. Graham Campbell, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw, “Just Released: Recent Developments in Consumer Credit Card Borrowing,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 9, 2016. Accessed May 24, 2017.
  32. Graham Campbell, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw, “Just Released: Recent Developments in Consumer Credit Card Borrowing,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 9, 2016. Accessed May 24, 2017.
  33. Graham Campbell, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw, “Just Released: Recent Developments in Consumer Credit Card Borrowing,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 9, 2016. Accessed May 24, 2017.
  34. 2016 State of Credit Report” State 2016 Average Vantage® Credit Score, Experian. Accessed May 24, 2017.
  35. 2016 State of Credit Report” State 2016 Average Vantage® Credit Score, Experian. Accessed May 24, 2017.
  36. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  37. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  38. 2016 State of Credit Report” National 2016 Vantage® Credit Score, Experian. Accessed May 24, 2017.
  39. Ethan Dornhelm, “US Credit Quality Rising … The Beat Goes On,” Fair Isaac Corporation. Accessed May 24, 2017.
Hannah Rounds
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Hannah Rounds is a writer at MagnifyMoney. You can email Hannah at hannah@magnifymoney.com

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4 Ways Being a Perfectionist Can Hurt Your Finances

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Everyone knows a perfectionist. They’re that friend who obsesses about succeeding in everything they do, fears making even the smallest mistakes, and berates himself at the first sign of failure.

American culture tends to reward those who relentlessly pursue high standards, and many perfectionists even claim the anxiety that motivates them to get things done is helpful. However, numerous studies support the opposite: perfectionism can be an extremely harmful personality trait that can lead to anxiety, depression, or self-harm.

Trying to maintain your finances perfectly comes at a price, too. If you’re demonstrating any of the following traits of financial perfectionism, you could be harming your financial future.

You’re waiting to focus on your finances until you’ve learned everything there is to know about money first

Financial perfectionists fear making mistakes with their money. They may put off investing, for example, until they feel they can do it perfectly and with consistent success.

“Fear of making the wrong decisions is a powerful thing and oftentimes keeps people from making decisions at all,” says Overland Park, Kan.-based certified financial planner Patrick Amey.

Time is money. If you’re waiting to know everything about money to start working on your finances, you might waste valuable time and miss out on potential income from investment. In the worst-case scenario, you could never start building wealth because you don’t make the time to educate yourself on financial matters.

For example, there is no perfect time to enter the market. As Knoxville, Tenn.-based certified financial planner Rose Swanger puts it, “we all experience the perfect hindsight effect.” Swanger says she often hears people speak of the returns they would have reaped if they had invested during the financial crisis. In reality, she adds, no one could have predicted how long or how well the market would recover.

The key is to start investing now and stick with it for the long term. Rather than obsessively tracking stocks and trying to pick the best investments, Swanger encourages her clients to practice systematic investing. They invest an equal amount of money every week or month (for example, automatically contributing 10% of their paycheck to their retirement fund).

They key to investing isn’t to be perfect — it’s to start as early as possible. Case in point: according to JP Morgan’s 2017 Guide to Retirement, a person who invests $5,000 a year starting at age 22 would have more than $820,000 saved by the time they are 65 years old. If they had waited until age 35 and invested the same amount, they would have saved only half as much, $419,000.

The market will have its ups and downs. Don’t let that deter you from investing because you think it reflects poorly on your ability. Nobody can predict the market, not even the professionals paid to try. Aim to keep your investments diversified with broad exposure to the market (like you would get with a target-date fund) and try not to get spooked if the market starts to look shaky.

It can be as easy as enrolling in your employer’s retirement plan if you have access to one. If not, you can set up an investment account with most banks or a mutual fund company like Fidelity or Vanguard.

You give up on your budget too easily

Budgets are especially susceptible to a perfectionist’s all-or-nothing approach to situations. For example, you could be following your budget religiously for weeks, then you receive one unexpected bill that skews your spending for the month. Rather than make adjustments to your budget to accommodate the unexpected, you might give up on the entire plan until you can get it just right.

“I’ve seen budgets for groceries down to the penny. While I appreciate this hard work, it is very rare that the exact same amount can be spent on groceries each month, and determining the right amount can be painstaking,” Amey says.

Amey advises creating a cash flow system that allows for flexibility so you won’t feel as guilty when you can’t follow your budget down to the last penny. Random expenses are a fact of life, but they are difficult to predict. Leave room in your budget for wedding gifts, birthdays, or even emergencies, so they won’t throw you off and leave you feeling discouraged at the end of the month.

If your budget doesn’t work out, don’t beat yourself up for it. Forgive yourself and try to adjust accordingly.

You’re desperate to achieve the “perfect” credit score

While it’s nice to brag about maxing out your credit score, having a perfect 850 is not only almost impossible, it’s also completely unnecessary.

No lender requires you to have an 850 to get approved or be offered the best terms. According to Informa Research, which tracks interest rates by credit scores, the ideal FICO credit score for the best credit offers is 760, not 850. In fact, you’ll still have a good shot at getting approved for the best deals with a credit score 90 to 130 points off the maximum.

So, if you already have a score in the mid-700s, your efforts to increase your score could be pointless. If you’re not quite at a 760 yet, try these strategies to help build your score.

Depriving yourself of simple pleasures can lead to “binging”

Much like the dieter who finally snaps from starvation and eats a tub of ice cream, trying to adhere to an inflexible budget could make you more prone to sudden “binge” attacks.

After months of depriving yourself of small creature comforts like a daily coffee or a cab ride home after a long night, you might decide to reward yourself with a night out. And because it’s been so long since you’ve enjoyed spending money, you might go overboard, ordering way more than you might on a normal day, offering to pay for your friends’ tabs, etc. And once you’ve blown your budget, you might consider it a total loss and toss it out the window altogether.

If that sounds like you, it’s a sign you might be too hard on yourself. When you deprive yourself to follow an extremely strict budget you’re depleting your self-control.

If this happens to you, try to modify your budget and focus your mind on your overarching goal of financial freedom instead of financial perfection.

Whatever you do, Melville, N.Y.- based certified financial planner David Frisch says to try not to get frustrated with the short-term deviations, or mistakes, and keep the long-term goals in mind. He adds to remember in these situations that no one is perfect, and so expecting to handle your finances perfectly can’t be realistic either.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

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Consumer Watchdog, Eliminating Fees, Featured, News

What the New DOL Fiduciary Rule Means For You

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Geeting advice on future investments

Seven years in the making, the Department of Labor’s long-awaited Fiduciary Rule finally went into effect June 9.* The full breadth of the rule’s impact won’t officially be felt until January 2018, when advisors must be fully compliant with the rule’s requirements.

The rule survived an upheaval by the Trump administration, which had hinted earlier this year that it might seek to block the rule’s implementation.

Aimed at saving consumers billions of dollars in fees in their retirement accounts, the Department of Labor’s new fiduciary rule will require financial advisers to act in your best interest. However, the final rule includes a number of modifications, including several concessions to the brokerage industry, from the original version proposed six years ago.

Here’s what you need to know about these new rules and how they may affect your money.

*This story has been updated to reflect the rule’s successful release.

What is a Fiduciary?

So what exactly is a fiduciary? According to the Certified Financial Planner (CFP) Board, the fiduciary standard requires that financial advisers act solely in your best interest when offering personalized financial advice. This means advisers can’t put personal profits over your needs.

Currently, most advisers are only held to the U.S. Securities and Exchange Commission’s suitability standard when handling your investments. This looser standard allows advisers to recommend suitable products, based on your personal situation. These suitable products may include funds with higher fees — with revenue sharing and commissions lining their own pockets —  which may not reflect your best possible options.

What is Changing Exactly?

Affecting an estimated $14 trillion in retirement savings, the Department of Labor’s new fiduciary rule is meant to help you receive investment advice that will aid your nest egg’s ability to grow. Many investors have been pushed toward products with high fees that quickly eat away at profits.

All financial professionals providing retirement advice will now be required to act as fiduciaries that must act in your best interest. This applies to all financial products you may find in a tax-advantaged retirement accounts. Because IRAs offer fewer protections than employment-based plans, the Department is concerned about “conflicts of interest” from brokers, insurance agents, registered investment advisers, or other financial advisers you may turn to for advice.

Despite these new protections, the Department of Labor also made some key concessions. Previously, brokers were required to provide explicit disclosures about the costs of products to their clients. This included one, five, and ten year projections. However, this requirement has been eliminated. After heavy pushback from the industry, the Department of Labor also agreed to allow the use of proprietary products.

Additionally, the Department of Labor has pushed the deadline for full implementation of their new rules. Firms must be compliant with several provisions by June and fully compliant by January 1, 2018.

Despite all of these concessions, the Department of Labor’s highest official insists the integrity of their rule is still in place.

Exceptions You Should Know About

Although advisers working with retirement investments will no longer be able to accept compensation or payments that create a conflict of interest, there’s an exception many brokers will likely pursue.

Firms will be allowed to continue their previous compensation arrangements if they commit to a best interest contract (BIC), adopt anti-conflict policies, disclose any conflicts of interest, direct consumers to a website that explains how they make money, and only charge “reasonable compensation.” The best interest contract will soon be easier for firms and advisers to use because it can be presented at the same time as other required paperwork.

How These New Rules Might Affect Your Investment Options

Although these new rules don’t call out specific investment products as bad options, it’s expected advisers may direct you to lower-cost products, like index funds, more regularly. New York Times also predicts the new regulations may also accelerate the movement toward more fee-based relationships. They also suggest complex investments like variable annuities may soon fall out of favor.

What Will the Larger Impact of These Changes Be?

Backed by extensive academic research, the Department of Labor’s analysis suggests IRA holders receiving conflicted investment advice can expect their investments to underperform by an average of one-half to one percentage point per year over the next 20 years. Once their new rules are in place, they are anticipating retirement funds will shift to lower cost investments, savings consumers billions of dollars.

What You Can Do To Protect Yourself

Although these new rules are a positive step for consumers, it’s important to remember there are still a wide variety of financial professionals out there. And the quality of the advice you receive can vary greatly based on their level of education, experience, and credentials. In order to find someone who is equipped to handle your unique financial situation, you will still need to do your homework.

You may want to start by looking for a fee-only financial planner. Due to the nature of how they are compensated, fee-only financial planners operate without an inherent conflict of interest. They are paid a fee for the services they provide and they don’t earn commissions from product sales.

Once you’ve narrowed down your options you’ll want to ask about their credentials, what types of clients they work with, what types of services they offer, while carefully checking their background and references. Like any professional working relationship, you’ll want to feel comfortable with someone you are receiving financial advice from, so it’s important to make sure your personalities and priorities are aligned. Remember, no one cares more about your money than you do. That’s why it’s essential to carefully vet anyone who is working with you to secure a healthier financial future.

Kate Dore
Kate Dore |

Kate Dore is a writer at MagnifyMoney. You can email Kate at kate@magnifymoney.com

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Featured, News

1 in 5 Americans Will Go into Debt to Pay for Summer Vacation

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With summertime right around the corner, millions of Americans will pile into cars, planes, and trains and head off for summer vacation.

In a new nationwide poll, MagnifyMoney asked 500 U.S. adults planning to take a summer vacation how they will pay for their getaways.

Alarmingly, we found a significant number of vacationers are willing to drive themselves into debt for some fun in the sun.

Key findings:

  • The average American will spend $2,936 on their summer vacation in 2017

  • 1 in 5 vacationers (21%) will go into debt to pay for their summer getaways

  • People who already have debt are twice as likely to use debt to cover some vacation expenses as people who are debt-free: 30% vs. 13%

  • Vacationers who plan to use debt to pay for their vacation will also spend nearly twice as much as the average vacationer: $4,351 vs. $2,936

  • Summer vacation FOMO is real: 31% of people say they feel pressured to go on vacation even though they’d rather pay off debt.

—————————————

Summer Vacation: The Ultimate Debt Trap?

Summer vacation will set the average American back nearly $3,000 this year, according to the survey.

But an alarming number of travelers will be going into debt to finance their getaways.

One in five (21%) of respondents said they plan to go into debt to pay for vacation, according to the survey.

Among those who said they plan go into debt to pay for vacation, a whopping 71% admitted to already carrying some credit card debt.

People who already have debt are more likely to turn to debt to pay for vacation (30%) than those who are debt-free (13%).

 

Using debt to pay for a big trip may not seem like a big deal. But our survey shows using debt can lead people to spend more than they might spend otherwise.

When we looked at respondents who said they are planning to take on debt to pay for their vacation, we found that they were likely to spend significantly more on vacation than their peers.

On average, survey respondents said their vacations will cost $2,936 this year. And they plan to cover 20% of that expense ($595) with some form of debt.

On the other hand, people planning to go into debt said they will spend nearly twice that amount on their vacation — $4,351. And they’ll use debt to cover an even larger share of their total vacation expenses — 38% vs. 20%.

On the flip side, vacationers who have no debt will spend the least on vacation and plan to cover just 14% of their total vacation costs with new debt.

Vacation debt can easily stick around for months or even years to come, depending on how much debt a consumer already has to contend with.

Let’s say a person pays for their vacation expenses on a credit card with an average APR of 16%. They spend $1,670. If they make only minimum payments each month, it would take them over five years to pay off the debt, and they would pay $822 in interest charges.

When it comes to vacation, credit cards are king

The vast majority of respondents who said they will use debt to pay for some of their vacation expenses will use credit cards.

 

FOMO + Vacation Debt

It’s evident from our survey that outside societal pressure to take a big summer vacation can push someone to spend outside of their means.

Nearly one-third (31%) of people who already have debt say they felt pressure to go on vacation anyway.

The pressure is even worse for people who said they are planning to go into debt for vacation. Nearly half (46%) said they felt pressure to go on vacation even though they’d like to pay down some of their existing debt.

People who planned on taking on debt to pay for their summer vacation were also less likely to say they would be willing to skip a summer vacation to pay off their debt.

More than half (53%) of people planning to go into debt for vacation would be willing to skip vacation to pay off debt.

Meanwhile, 60% of people who have no debt said they’d be willing to skip a vacation to pay off debt.

Millennials Rack Up the Most Vacation Debt

Millennials may spend more on vacations than older generations, but it’s Gen Xers and Boomers who are more likely to fund their vacation expenses with plastic.

On average, 18-35 year olds said they will spend $3,163 on vacation and take on $725 of debt in the process. By comparison, respondents age 35 and older will spend $2,761 on vacation and cover $495 of it with debt.

Millennials were slightly more susceptible to peer pressure as well. Just under half (49%) of 18-35 year olds who plan to go into debt for vacation said they feel pressured to vacation rather than pay off debt. Comparatively, 44% of those age 35 years and older who said they plan to go into debt for vacation also said they felt pressure to do so.

Methodology: MagnifyMoney commissioned Pollfish to conduct an online survey of 500 U.S. adults who plan to take a vacation this summer and are responsible for most of the cost of the vacation. Responses were collected April 15 – 26, 2017.

Mandi Woodruff
Mandi Woodruff |

Mandi Woodruff is a writer at MagnifyMoney. You can email Mandi at mandi@magnifymoney.com

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This Brooklyn Grandmother Fought Back Against a Shady Used Car Dealer and Won

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Rhoda Branch, 52, lost thousands of dollars and her mobility when a used car dealer took her for a ride. But with the help of a consumer protection group, she fought back — and won.

This story is Part II of a MagnifyMoney investigation into the risky business of subprime auto lending. Read Part I here

Rhoda Branche’s rocky road began with Superstorm Sandy in 2012. After the hurricane totaled her car, she turned to Giuffre Motors in Brooklyn to shop for a new vehicle.

“They said they would help me,” recalled Rhoda. “They were very friendly – and then they just starting pushing the papers through.”

She said the dealership promised her $4,000 in incentives to buy a used 2004 Volvo SUV – and offered to arrange a loan for her.

According to a copy of the contract obtained by MagnifyMoney, the incentives were missing from the sales contract Rhoda signed. The financing was no bargain either – a subprime loan with an annual interest rate of 23.5%.  Subprime customers are typically high-risk borrowers who pay more in finance charges because of poor credit histories.

Worst of all, Rhoda’s $13,000 SUV would soon stop running. Instead of repairs, the dealership gave her the runaround.

“It was a vehicle that shouldn’t be on the road,” Rhoda said. “They just said the vehicle was fine. It looks good on the outside, but it was a lemon.”

In desperation, she took the Volvo to other mechanics and spent $3,000 from her own pocket, but the SUV kept breaking down. As a last straw, she surrendered the title of ownership to the finance company that held her loan.

Without a car, it often takes Rhoda two buses, a subway ride, and 90 minutes to travel nine miles from her apartment in Coney Island, N.Y., to a hospital where she frequently seeks treatment.

“I have to take public transportation,” said Rhoda, who suffers from injuries that required operations on both knees. “It is very time-consuming. It causes a lot of pain. I have pains all over my body because I had surgery.”

Not the Only One

“Many sellers of cars to people with subprime credit sell you junk. And they know they’re selling you junk,” said Remar Sutton, a former car dealer turned consumer advocate. He wrote about the tricks of the used car trade in his book, “Don’t Get Taken Every Time.”

“They sell you a car they know you cannot pay for, or they know will break down, and they repossess it because you can’t pay for it or it breaks down,” said Sutton. “And then they sell it again.”

Rhoda did not know she was the latest in a long line of customers who were victims of the dealership’s unethical sales tactics.

The New York attorney general sued Giuffre in 2010 on behalf of 42 customers who claimed they were cheated. In Kings County Supreme Court, a judge ordered the dealership to pay more than a half-million dollars in fines and restitution for its illegal business practices.

Giuffre had “a common practice of strong-arm sales methods and unethical conduct,” wrote Judge Bernard Graham in his 2011 decision. “The list of grievances is extensive and unsettling.”

Rhoda was one of at least one dozen consumers who filed complaints against Giuffre with New York City’s Department of Consumer Affairs. Under pressure from the DCA, Giuffre agreed to pay $180,000 in fines plus $100,000 into a restitution fund as part of a consent order in April 2014, nine months after Rhoda’s complaint.

From the settlement, Rhoda confirmed she received roughly $4,600 in restitution. And two months after the consent order, Kings County Civil Court dismissed a $5,000 claim against Rhoda by a finance company that tried to collect the unpaid amount of her car loan.

Owner John Giuffre could not be reached for comment. His lawyer did not respond to MagnifyMoney’s interview requests.

As a result of the DCA consent order, Giuffre was forced out of the car business in New York City. His last dealership closed in December 2014; its doors and windows remain boarded shut. But consumers have plenty of reasons to remain cautious.

“There are, unfortunately, thousands of companies in America that will deliberately sell you cars that they know are going to break down,” said Sutton.

Rhonda hopes she can afford to buy another car someday. But she’s afraid of being ripped off again.

“Now I’m very skeptical going to other places because I remember what I went through,” she lamented. “I don’t know what dealership I should trust when I’m ready to buy another vehicle.”

How to Buy a Used Car Without Being Cheated

Shop for financing before you look for a vehicle: The subprime interest rate a credit union can offer may be half of what a car dealer charges you. Don’t assume that your poor credit history means you won’t have a shot at getting a loan from a reputable lender. It’s perfectly fine to get your own financing outside of a dealer — and, as our story shows, it’s often much more affordable. To make matters better, if you come in with a verified offer from another lender, the dealer has an incentive to try to beat their offer.

Check your credit score yourself: Don’t take a dealer’s word on it when it comes to your credit. Your score may be good enough to qualify for a better rate on a loan elsewhere, but the dealer may not want you to know that.  You can check your credit score on a number of sites for free, including the Discover Scorecard. And again, if you shop around for rates before you go to the dealer, you will know exactly what rates you deserve — and when they are offering you a bad deal.

Buy a car that works: Bring a mechanic or a knowledgeable friend to check it out before you decide. You can also check the vehicle’s background by getting a vehicle history report through resources such as the National Motor Vehicle Title Information System, CARFAX, and AutoCheck.

Buy a car you can afford: If a dealer makes promises, be sure to get it in writing. Go in with a firm idea of what kind of car you want and how much you can afford to pay.

And slow down: Never sign a contract in a hurry. Dealers may be friendly, but they’re not really your friend. To double-check a dealer’s reputability, check out their reviews and rating on the Better Business Bureau website.

Additional reporting by Mandi Woodruff

Mark Lagerkvist
Mark Lagerkvist |

Mark Lagerkvist is a writer at MagnifyMoney. You can email Mark here

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Auto Loan, Featured, News

This Woman Fell Into a Used Car Loan Trap — Now She’s Fighting Back

Editorial Disclaimer: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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Mary McDuffie Morton, 31, was sued by an auto financing company after she stopped making payments on a used car that had mechanical issues. Now the mother of four, who said she was misled by the company, is fighting their claims in court.

This story is Part I of a MagnifyMoney investigation into the risky business of subprime auto lending. Read Part II here.

In the summer of 2013, Mary McDuffie Morton, 31, needed money to buy a car. At the time, the recently divorced mother of four had a poor credit history. So she was excited to hear she could get a subprime loan at a used auto dealership in Bronx, N.Y.

“It [seemed] too good to be true,” Mary recalls. “As long you have a job, you’re approved. It’s like wow, OK, I’m guaranteed approval.”

Nationwide, customers like Mary owe more than a quarter-billion dollars in high-interest, high-risk subprime auto loans. A recent report by Moody’s Investors Service found that Santander Consumer USA Holdings Inc., a major originator of subprime auto loans, has been slacking when it comes to verifying the income reported by loan applicants, according to Bloomberg. This can make it easier for car buyers to take on more debt than they can afford to repay.

But big banks aren’t the biggest problem in auto lending. About three-fourths of subprime auto loans do not originate in banks or credit unions. Instead, they are often signed at car lots like the one in Bronx, N.Y., where Mary was lured by the promise of easy credit.

In many cases, those customers are taken for a ride by predatory dealerships and finance companies alike.

“Their main job is not to care for you. It’s to care for their pocketbook, and that’s all they’re there for,” says Remar Sutton, a former car dealer turned consumer advocate.

“How many of you have seen the ads that say, ‘No credit, bad credit, no worries, we’re the credit fixer’? That is not why those ads are running. Those ads are running because they know if you think you have bad credit, you will pay anything for a car, and they’ll knock a home run on you,” warns Sutton.

That’s what happened to Mary. To buy a used 2003 GMC Envoy XL, the dealer told her she needed to first borrow roughly $7,000.

“The dealership told me they were going to shop around for lenders for me – and they were going to call one and get back to me,” Mary says.

The dealer selected Dependable Credit Corp. of Yonkers, N.Y. The interest rate on Mary’s loan was a whopping 24.9% – just one-tenth of a point below the threshold of criminal usury in New York State.

Mary signed the contract, despite an interest rate so high that it was nearly illegal.

“I was scared that if I didn’t go along with that deal, I wouldn’t get a car, ” she says.

The Secret Bonus

Like many lenders that work with auto dealers, to get business from dealers, Dependable offers them a secret bonus. It’s called a “Dealer Reserve Advance,” and it can add an extra two points of interest to the consumer’s loan. The dealer keeps 70% of it as a reward for making the referral to the finance company.

“When you go into that dealership, do you think they’re going to point you in the direction of a cheap loan? Of course not. They’re going to send you to the finance source that will pay them cash up front on the loan,” says Sutton.

Dependable executives did not respond to multiple requests for an interview or comment.

On its website, the finance company claims it does business with 250 used car dealers in seven states – Massachusetts, Connecticut, Pennsylvania, New Jersey, Delaware, Maryland, and New York – and has financed more than $200 million in loans.

“They’re in hundreds of dealerships because they’re making millions of dollars, because people who are poor, people who are worried about their credit, are being taken advantage of by that business,” says Sutton, a co-founder of FoolProof, a nonprofit website devoted to consumer education.

Mary said the vehicle she purchased had mechanical problems that the dealer refused to fix. Sensing that she was being cheated, the former Bronx resident refused to make loan payments until she received a title proving she owned the car.

“They sold me a lemon,” complains Mary. “I knew that the deal was just a big scam.”

A Long Fight in Court

Dependable repossessed the Envoy when Mary’s payments were five weeks delinquent. By the time she received the title, the car was gone – and she was thousands of dollars in debt.

According to records obtained by MagnifyMoney, the finance company sold the vehicle to an undisclosed owner for $4,200 – a price that was $5,000 less than what Mary paid just four months earlier.

Then Dependable sued her in Bronx County Civil Court for a bill packed with extra charges. The tally includes nearly $1,200 in repairs by Westchester Auto Center and more than $1,700 in storage fees charged by Saw Mill River Realty.

The three businesses are located at the same address. State records show that all three share the same chief executive.

Dependable continues to charge Mary 24.9% interest on a loan for a car it repossessed and sold to someone else three years ago. Last year, the company told the court Mary owes nearly $11,000.

“Unfortunately, most places that want to make you a subprime loan simply want to make more money on you,” says Sutton.

With the help of a legal aid group, Mary is countersuing. She alleges she was cheated through deception and illegal business practices by the finance company and the dealer.

In a counterclaim filed by Mary’s attorney, Shanna Tallarico with the New York Legal Assistance Group, in October 2016, Mary claims that the dealer also required her to trade in her 2004 Cadillac CTS in order to purchase the used Envoy.  The dealership agreed to give her just $1,900 for the vehicle, citing “a significant problem with the Cadillac’s engine,” according to Mary’s counterclaim. Days later, she claims the dealership listed that same Cadillac for sale for $9,999.

Efforts to reach the dealer for comment were unsuccessful. Mary’s case is still pending, Tallarico says.

“I felt like I had just thrown money in the garbage,” says Mary. “The whole experience was a waste of money.”

How to Buy a Used Car Without Being Cheated

Shop for financing before you look for a vehicle: The subprime interest rate a credit union can offer may be half of what a car dealer charges you. Don’t assume that your poor credit history means you won’t have a shot at getting a loan from a reputable lender. It’s perfectly fine to get your own financing outside of a dealer — and, as our story shows, it’s often much more affordable. To make matters better, if you come in with a verified offer from another lender, the dealer has an incentive to try to beat their offer.

Check your credit score yourself: Don’t take a dealer’s word on it when it comes to your credit. Your score may be good enough to qualify for a better rate on a loan elsewhere, but the dealer may not want you to know that. You can check your credit score on a number of sites for free, including the Discover Scorecard. And again, if you shop around for rates before you go to the dealer, you will know exactly what rates you deserve — and when they are offering you a bad deal.

Buy a car that works: Bring a mechanic or a knowledgeable friend to check it out before you decide. You can also check the vehicle’s background by getting a vehicle history report through resources such as the National Motor Vehicle Title Information System, CARFAX, and AutoCheck.

Buy a car you can afford: If a dealer makes promises, be sure to get it in writing. Go in with a firm idea of what kind of car you want and how much you can afford to pay.

And slow down: Never sign a contract in a hurry. Dealers may be friendly, but they’re not really your friend. To double check a dealer’s reputability, check out their reviews and rating on the Better Business Bureau website.

Additional reporting by Mandi Woodruff

Mark Lagerkvist
Mark Lagerkvist |

Mark Lagerkvist is a writer at MagnifyMoney. You can email Mark here

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Featured, News

Why the “Do Not Call Registry” Can’t Protect You from Spam Phone Calls Anymore

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If you’re afraid to answer your phone, you’re hardly alone. Spam calls have become so common that they’ve basically rendered the “phone” part of “smartphone” useless. Or at least, very dumb. But help might, finally, be on the way.

The Do Not Call list, which debuted in 2004, was perhaps the most popular program operated by the U.S. government in decades — 50 million numbers were entered before the list even took effect. Since then, another 170 million numbers were entered into the registry. U.S. telemarketers quickly learned to abide by the list or face multi-million dollar fines the Federal Trade Commission could impose — and there have been more than 100 enforcement actions.

It worked…for a while. But the combination of internet-based telephones and cheap long-distance calls have made it easy for telephone scofflaws to operate overseas, far beyond the reach of U.S. authorities. Unwanted calls have returned with a vengeance, making some wonder if the Do Not Call list works at all.

How bad is the problem? A firm called YouMail Inc. tries to count the number of robocalls that pester Americans, and the statistics are staggering. YouMail claims that 2.5 billion unwanted calls were placed just in April 2017, equaling 7.7 calls per person.

For fun, YouMail breaks down its data by ZIP code, and found that Atlanta wins for most robocalls received, with about 50 million placed just to the 404 area code in April. Another 35 million arrived at Atlanta’s 678 area code. Houston and Dallas area codes came in second and third. New York City’s 917 area code was fifth, with 29 million.

The robocall problem has been intractable for a series of reasons — mainly, because it makes the criminals who run scams like fake IRS debt collection like these a lot of money. But two other technology reasons stick out.

1. Criminals can “spoof” caller ID numbers.

First, it’s become easier for criminals to “spoof” caller ID numbers. That not only keeps consumers from blocking numbers, it can also make them more likely to answer. Calls that appear to come from the recipient’s own area code — or even share the same first six digits of their phone number — suggest a local call, so consumers are tempted to answer.

2. The telecom industry has a hard time stopping suspicious calls.

Second, the telecom industry has avoided implementing technology that would stop many suspicious calls because the firms claim they are legally required to connect calls, and they don’t have the authority to decide what is spam and what isn’t.

Years of frustration and consumer complaints finally nudged the Federal Communications Commission toward action last year, and it created the Robocall Strike Force. In August, tech heavy hitters like AT&T, Google, and Microsoft gathered in Washington, D.C., to discuss ideas.

Then in March, with the FCC under new leadership, Chairman Ajit Pai indicated he would go ahead with proposals from the task force. Specifically, he would call for a change in rules that explicitly gave telecom firms the right to cut off spammers.

“Under my proposal, the FCC would give providers greater leeway to block spoofed robocalls. Specifically, they could block calls that purport to be from unassigned or invalid phone numbers — there’s a database that keeps track of all phone numbers, and many of them aren’t assigned to a voice service provider or aren’t otherwise in use,” he wrote in a Medium post explaining the change. “There is no reason why any legitimate caller should be spoofing an unassigned or invalid phone number. It’s just a way for scammers to evade the law.”

Later in March, the FCC approved the proposal. The work isn’t done, however. There’s now a public comment period; a vote to enact the new rules won’t happen until later this year. Then there will be a transition period as carriers implement their spoofed-call-blocking technologies.

How to stop unwanted spam phone calls

Relief is in sight, but it’s not time to turn your ringtone back on just yet. For now, consumers can investigate third-party services like Nomorobo ($2/month, iPhone only, see a review here) or Hiya (free, see iTunes reviews here) that claim to help by using blacklists and other methods to identify spam callers. Some providers and smartphones offer their own free call-blocking options, but they are cumbersome to use. Consumers can Google phone numbers that call, just to see if others have complained online about them. Or simply keep screening those calls for a bit longer.

Bob Sullivan
Bob Sullivan |

Bob Sullivan is a writer at MagnifyMoney. You can email Bob here

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