Credit Card Marketers; How To Deal With Debt
Aired August 20, 2005 - 13:00 ET
WASTLER: A couple money mistakes won't put you out of the market for a mortgage. But it might cost you a little bit more to get one. Sub-prime lenders offer high interest loans for consumers with bad credit, or no credit at all. But our next guest says buyer beware. Once you fall into the sub-prime pit, it isn't easy to get out. Robert Manning is author of "Credit Card Nation." Welcome, Robert.
ROBERT MANNING, AUTHOR, "CREDIT CARD NATION:" A pleasure to be joining you today.
WASTLER: I guess we should start, you know, you hear subhuman, sub-par, sub-prime. It is kind of a technical term; you're not exactly sure what it is about. Can you give us an explainer of what sub-prime means and who it is aimed at?
MANNING: Well, the key here is to understand exactly where you are in the credit market. And sub-prime is really in a sense a wolf that is shielding itself in sheep's clothing. These products look like they're respectable, moderate price-loans because they're targeted to people who are ignorant, preying on people's desperation, and focusing on simple minimum monthly payments. What they tend to do, however, is -- these unscrupulous lenders -- is they hide behind a lot of the extra costs such as insurance add-ons, end of the loan product kind of balloon-type notes, these interest rates that in many cases would make illegal loan sharks blush because these can be in an era now where banks are not the only lenders.
What we're seeing today is financial institutions that have begun to emerge that no longer fall under the traditional regulatory framework. So you're seeing today that it is legal in states where there are no usury laws or caps on interest rates, essentially partnering in other states where there is stronger regulation, but they can now offer interest rates that essentially do not have a limit.
LISCOVICZ: Thank you, deregulation, right? The big blue chips are involved with this as well as some of the loan sharks, if you will. But the fact is that they are pervasive and these sub-prime loans have been credited with helping to fuel the housing boom.
MANNING: Well, again, Susan, the key here is the devil is in the details. And when you let unscrupulous lenders offer products that on the surface look like they're legitimate, and the term sounds like they're a normal traditional product, the key point is that most people aren't concerned about how long it is going to take them to pay it off. So what you're looking at and the key for your listeners is, you know, do you know what your credit score is? Sub-prime lenders typically market to people in the 640 to 620 categories. Everybody today has access to a free credit report, but I should add that you have to pay for your credit score. And the important point is that people who find themselves marked as sub-prime, these are specific decisions they ask for FICO, they ask for people with credit scores of under 640 to 590 and there is a lot of mistakes in these categories. A lot of people if they got their credit report and went over the errors, made sure that bad information that is over seven years old has been taken off their credit report, could actually find themselves moving up and outside of the sub-prime lending market.
SERWER: Let me ask you a question. I understand the abuses here in these 200 to 600 percent annual interest rates. Isn't this somewhat of a legitimate business to say someone is bankrupt, they're a person with bad credit, shouldn't they pay more to borrow money than someone who has a good credit score?
MANNING: Well, you know, there are a couple of things. One, on the new bankruptcy law, once you declare bankruptcy, you can't file again for another seven years. So many lenders realize that there is actually less risk for a recent person who declared bankruptcy than somebody who is heavily in debt.
The other issue is what we find under deregulation is there are no more constraints from lenders. It is not a question of whether you get a loan. It is a question of how much are you going to get charged. And this is a real issue. We used to have state usury laws that annual 30 percent was considered illegal. I'm talking about an annual interest rate. Today we're looking at 30 and 40 percent interest rates per month. People who get stuck into the sub-prime market are not going to be able to climb out. And we're talking about the lowest interest rates in the post-World War II period. It is only going to get much worse.
LISCOVICZ: Robert Manning, author of "Credit Card Nation." Thank you so much for joining us.
MANNING: Thank you.
SUSAN LISCOVICZ, CNN ANCHOR, IN THE MONEY: Find out how marketers make you think you need, actually need, another credit card.
Joining me today, a couple of IN THE MONEY veterans, the usual suspects as well. "Fortune" magazine Editor-at-large Andy Serwer and Money.com Managing Editor Andy Wastler.
All right. So we are going to bare our souls about our own personal finances. I'll tell you about one of the most embarrassing incidents I ever had. Now 10 years ago I knew I was going to bounce a check, a big check. The rent check. I call my bank, where I opened the checking account, didn't know anybody there; I was basically groveling on the phone. Please, don't bounce this check. Please don't bounce this check. I spelled my name for them and somebody said to me, are you Susan Lisovicz the business correspondent?
ANDY SERWER, CNN ANCHOR, IN THE MONEY: Oh, nice. Someone who should have their financial house in order but didn't. You know what gets to me, Susan, is the credit card companies are sending out bills in a staggered progression -- instead of sending at the end of the month -- like one every week so I have to constantly pay my bills, otherwise I'm late. Even if I'm paying attention to it, I notice I'm getting hit with late fees because I got to do it every three days, it seems like.
ANDY WASTLER, CNN ANCHOR, IN THE MONEY: Credit cards now are a big wave. Over a decade ago when my wife and I were on the West Coast, starting our careers, double income, no kids, we took the credit limits as challenges, how far you can go. By the time you finish, turn around, 30 grand in debt -- 30 grand in debt. We wanted to buy a house and no, we had to put ourselves on a three-year plan on how to reduce all this.
SERWER: That's why he's still working here today.
LISCOVICZ: Maybe you should be one of our experts on the program.
WASTLER: I've done a lot of fieldwork on the subject.
LISCOVICZ: So now you're back in the safe category.
SERWER: It sounds like none of us are particularly qualified to talk about this subject. But we're doing OK now. You haven't bounced any checks lately. LISCOVICZ: No, I haven't. That was a really good lesson for myself. That's for sure. That's why it is such an important program. One- hundred and eighty-five million Americans have at least one credit card according to Card Web, a private firm that tracks credit card usage for corporations and consumers. The problem isn't having a credit card or even using it, it is paying it off.
LISCOVICZ (voice over): Scan the price tag, swipe the card, and sign on the dotted line. Credit cards have made shopping that easy. And consumers are hooked.
UNIDENTIFIED FEMALE: Bloomingdale's, Rich's, Victoria's Secret.
UNIDENTIFIED FEMALE: Chase, Capital One, and a Premiere. And I really don't remember the others.
UNIDENTIFIED MALE: Macy's, Lord & Taylor, Brooks Brothers, that's it.
LISCOVICZ: The average cardholder has more than seven credit cards. Getting a card isn't the problem. Using it, and using it often, is another story.
GREG MCBRIDE, SR. FINL. ANALYST BANKRATE.COM ENROLLMENT: The past five years have been a perfect storm of low interest rates, easy credit, and rising household costs. Together these increase not only attractiveness of debt, but the tendency to rely on it.
LISCOVICZ: McBride says 60 percent of credit card holders rely on carrying a balance from month to month. And that balance is getting higher and higher. The average U.S. household owes more than $9,300 on their cards -- a figure that has doubled from more than a decade ago. Certified Financial Planner Rick Applegate says it is not one single segment of the population falling deeper into debt.
RICK APPLEGATE, FIRST COMMONWEALTH AT FINCL. ADV: Debt in this country is a phenomenal problem. It is not relegated to any single age. It is the young, it is the middle aged, it is the old. And all have problems with debt. They don't know how to handle it. They're not taught how to handle it. And debt is basically being sold to them. They're buying it by buckets.
LISCOVICZ: Applegate says he's seen consumers run up one card and then go out and get another. And that's where the trouble starts. Eventually their debt exceeds their income. He says you should have as few cards as possible and try to pay them off on a regular basis.
APPLEGATE: The most important thing to know about debt is that it is really not necessary in many respects. We are an indulgent society but the fact is that the best way to avoid becoming a debtor is not to incur it.
(END VIDEOTAPE) LISCOVICZ: Now that, of course, is easier said than done -- especially when people are driven to debt because of medical expenses. Applegate recommends credit counseling before filing for personal bankruptcy as bankruptcy laws are getting stricter this year. And we're going to talk about bankruptcy a little later on in the show.
SERWER: Somewhere between the first Thanksgiving and your last credit card bill, Americans quit trying to just get by. These days we're a country obsessed with getting ahead and it is your stuff that announces how far ahead you are.
But that drive to buy flashy new things and show some of them off is one reason there is so much personal debt in the United States. Peter Whybrow is going to help us understand how we got here. He's the Director of the Simple Institute for Neuroscience and Human Behavior at UCLA and author of "American Mania: When More is Not Enough."
Peter welcome to the program. America has always been known as a consumption society. Lately things seem even more out of whack, though. How did we get here?
PETER WHYBROW, AUTHOR, "AMERICAN MANIA:" Well, you know, we're not very good at dealing with affluence, that's the problem. There used to be constraints. You couldn't do everything 24 hours a day. And if you wanted your lunch, you had to grow it the garden or run from it. Affluence -- human beings don't know what to do with it.
LISCOVICZ: Peter. Even compared to affluent countries, for instance in Europe or especially Japan, the savings rate is just minuscule. Can you lay it out for us, please?
WHYBROW: Yes. The American mindset is different. You see, we're migrants. We came here trying to grasp the future -- trying to somehow catch this dream and make it a material thing. The folks who didn't move, like in Japan and many of the Europeans, they're still saving a fair amount. But we have never saved much. We're much more hooked on the idea, let's grab the future and turn it into a house or a car or a new cell phone because we are sort of uncomfortable with the idea that the future is going to take care of itself. We don't live in a very stable environment.
WASTLER: Peter --
WHYBROW: So migrants are different in temperament. Migrants are very different in temperament. You have 280 million of us here.
WASTLER: Peter --
WHYBROW: All grabbing for the future.
WASTLER: I kind of wonder if our way of government also is an effect here. I remember long ago having a discussion with my father during the Reagan years saying you know, Dad, the debt is piling up too high for our family. Shouldn't we handle that? He said if it is good enough for the government, it is good enough for me. I can run up a deficit, they can run up a deficit, we'll all be happy. Is there some sort of reinforcement there going on?
WHYBROW: Oh I think so. What you're talking about is personal responsibility. And we have tended to get rid of that. On the one side you got the marketplace, constantly asking you to buy more to keep the GPM going. And on the other side you got, as you say, a federal deficit, which is gigantic. If Uncle Sam can spend it, why can't I spend it? Debt is good. Debt is good.
Debt drives the whole machine. The only problem is one day when the debtor comes to reason and you have to pay off that debt or else you go bankrupt. And even the bankruptcy laws in this country are fascinating. There are very few countries you can become bankrupt and a few years later you can start all over again.
SERWER: But Peter how much of the stuff that is really bad? I'm sorry to jump in here. Isn't some of this what makes this country great? On the one hand we like to point our fingers at Germany and Japan and say look how slow and stagnant their economies are, yet you're saying they save so much. How can we have that both ways? We have got the best most attractive economy on Earth, don't with we?
WHYBROW: Well that's the trick, isn't it, to find the balance. At the moment, our most productive economy is going down the chute in terms of the debt -- federally and personally. And anybody knows if you look at your personal checkbook, they can't do that forever. So we have got to come up with something else. You're right, though. The entrepreneurial spirit is what makes America great. When you have the entrepreneurial spirit, you've got to have something that takes care of the risk.
Before, there used to be physical constraints. We couldn't get out far enough to kill ourselves off. Now we can because the technology we have invented allows to us buy things all the time, work harder than we should be working, et cetera, et cetera. You got to find that balance.
LISCOVICZ: It is not only the affluence, it is the age of Wal- Mart -- Wal-Mart being China's seventh largest partner. It is a phenomenal time where you can buy things so cheaply and you actually don't have to be in the upper middle class.
WHYBROW: And we are in fact -- with that very -- that's a very interesting illustration because what is happening, Wal-Mart is bringing in lots of very cheap goods, when they cut out most of the middle manufacturing here. And those cheap goods are enabling us to pretend that we can live in this debt cycle. Mortgage your house a little more for only-interest loan and then go out and buy more stuff. Buy more storage units.
WASTLER: So Peter we got -
WHYBROW: It is madness, don't you think?
WASTLER: We only have a little bit of time left. But can you give just some really quickly -- what is the plan for getting us out of what is apparently, I don't know, kind of a trap? WHYBROW: Well, you know, the thing is you have to understand the way the brain works. We are reward-driven creatures. And that is the way we have been set up, that's the way all animals are. So the only thing that will help us now is understanding, intellectual understanding and rational restraint, which is what you guys are into with this program. Rational restraint is the only way to go. There are no more physical restraints.
LISCOVICZ: Peter Whybrow, author of "American Mania: When More is Not Enough." Thank you very much for your insights. We're going to be talking more about the consequences and how to improve your personal finances when we come back.
Know who you're talking to. See why new legislation makes it so important to check out a credit counselor in advance.
Plus, cutting your debt in the face of temptation. Find out about the ways credit card companies make their plastic sound like a sweet deal.
And look, but don't touch. Your credit score can make the difference between a dream home and a real home. We'll tell you how the numbers add up.
LISCOVICZ: People wind up in debt for all sorts of reasons -- everything from falling in love with a flashy new car to falling out of love with a spouse and getting a divorce. But if you're drowning in red ink, the important thing isn't how you got there; it is how you are going to get out. Bankruptcy attorney Alan Kopit knows what it takes. He's a legal editor with Lawyers.com and a partner at the Cleveland law firm of Hans, Loewser and Parks. Welcome.
ALAN KOPIT, BANKRUPTCY LAWYER: Great to be here.
LISCOVICZ: It is good to have you. Now, you are probably not going to like me saying this but you really don't want people to file for bankruptcy. It is good for your business and we know that business has been robust in that area. But there are ways and consumers should try them always, vigilantly, to stay away from personal bankruptcy.
KOPIT: You know, every bankruptcy lawyer will tell you that. There really are things you want to do because if you file that bankruptcy, you will have ramifications on your credit record for 10 years, and it could hurt whatever you want to do in the future. So you have to be very careful before you take that step.
SERWER: Oh Alan, come on. You're shooting yourself in the foot there. We're trying to hurt your business. Let me ask you a question. Are the bankruptcy laws too easy? And is that what led to the high levels of debt in this country? Because you know you get in debt, you get in trouble, you file for bankruptcy, presto, clean slate. You start all over again.
KOPIT: You start all over again if you can get credit. Now remember that bankruptcy is going to be on your record for 10 years instead of seven years which normal credit information is only on there for seven years. I don't think the bankruptcy laws are the cause of this. It is a misunderstanding of the bankruptcy laws. Bankruptcy is not right for everyone. You have to have the right character of debt. For example if your debts -- if you're in serious debt because of child custody payments, student loans, taxes, bankruptcy is not going to help you because you're not going to erase those debts. We call it discharging debts. It will not help you. So in that situation, you really need look at other alternatives. And you need to talk to someone who understands the bankruptcy laws and can tell you the pros and cons of filing bankruptcy. But there are steps we have to take before we get there.
WASTLER: OK, Alan, let's talk about some of the steps. One of the ones I commonly hear is talk to your creditors first which I think of every old gangster movie I've seen -- gee, I can't pay you. Do you like that arm? Is it like that? Should people have that fear?
KOPIT: Not at all. And more often than not, instead of a gangster, it is a banker that you're talking to. If you tell a creditor, I'm having problems, it could be life hit me hard, I lost my job, I have a problem with my marriage, either there was a death of a spouse or a divorce, maybe I had unexpected health care costs and was uninsured. You talk to the banker and say I would like to pay this debt. I can't do it all at once. Can we stretch out the payment, can we reduce the payment. Is there a way to instead of -- instead of department store debt instead of paying $100, I can pay $80 right now and get this over with? There are ways to do that. And you need to talk to your creditors, because the creditors understand one thing, if you go into bankruptcy, there is a real good chance they won't get 100 cents on the dollar anyway. They would rather work with you and make sure you're not hiding from that debt, you're actually being responsible and trying to pay that off.
LISCOVICZ: Alan, let's pretend you're in a really bad way and there are so many creditors. And pretend they're not that receptive to your woes. There are ways you can talk for free to counselors, are there not?
KOPIT: Absolutely. And that is where if you can't talk to your creditors, there is Consumer Credit Counseling counselors that can do it for you. They are going to do a few things. First of all they are going to help you set up a budget so you live within your means. They are going to look at your debts and cut down on your spending. And most importantly, they may go out and negotiate with creditors for you. There is one problem with credit counseling. There is a lot of bad credit counselors out there, a lot of scams out there. You get e-mail all the time unsolicited that says we can get rid of all your debt, we know how to do it. There is no magic bullet here. You have to be sure of who you're dealing with. There is a national foundation for credit counseling that actually looks at organizations that do this, Consumer Credit Counseling Services across the country. And it actually certifies them as legitimate credit counselors. Make sure that you're dealing with a legitimate counselor. They can often help you get your finances in order.
SERWER: All right. Some sage advice from someone who knows. Alan Kopit, a bankruptcy attorney, thank you for coming on our program.
KOPIT: My pleasure.
SERWER: Coming up after the break, extra credit. Find out what happens when credit card companies push to sell college students on their products.
Plus risky business. See who really wins when people with shaky credit sign up with sub-prime lenders.
And you can guess or you can know. Quit trying to remember those math formulas from high school. That's not a problem with me. We'll show you some loan calculators that do the job for you.
(BEGIN VIDEO CLIP)
UNIDENTIFIED FEMALE: They market students at the beginning of the year. They have all the tables outside. That's all you see. Credit cards. They try to suck you in from the beginning, I think. They want you to stay in debt.
UNIDENTIFIED MALE: They give free water bottles or whatever else.
UNIDENTIFIED MALE: Because you're a student no annual fee or you're a student this or that.
UNIDENTIFIED FEMALE: I get around 10 a week and I stopped looking at them. I throw them out now. Not interested.
UNIDENTIFIED MALE: All the time. All the time. Transfer balances, 0 percent interest, blah, blah, blah. Rip them up, throw them out.
(END VIDEO CLIP)
LISCOVICZ: Whether you're a college student, parent or just somebody with a mailbox, those personal stories about credit card offers probably sound familiar. That's because the credit card companies are targeting every man, woman and child in America. Or at least it certainly feels that way.
Our next guest says credit card companies are actually looking for customers who won't be able to pay them back. Joining us from Los Angeles is Amelia Tyagi, co-author of "The Two Income Track:: Why Middle Class Parents are Going Broke." Welcome.
AMELIA TYAGI, CO-AUTHOR, "THE TWO INCOME TRAP:" Thank you. LISCOVICZ: Is it true or am I just being cynical? Is it getting worse with the offers and the solicitations we're being deluged with?
TYAGI: You are not cynical. It is getting worse. Their profits are up. Credit card companies are making a lot of money and they're making that money by getting more plastic in more people's wallets and advertising it like heck. SERWER: Amelia, let me ask you about something that Susan said in the intro. She said credit card companies used to market people who could pay back their balances. Now they're marketing to people who can't. Can you talk about that, please, Amelia? TYAGI: You bet. It used to be that credit cards were really only out there for the business people. And they made their money by charging annual fees and by getting paid back on time. Today credit card companies make 75 percent of their profits from people who are in trouble. They make their money from high interest rates and from late fees. And the only people who pay those high interest rates and those late fees are people who can't make the payments every month -- people in trouble.
WASTLER: I get to see a lot of my family's mail. Generally, they say, hey, you work in finance, look at this stuff for me. And it seems to me they particularly target old folks and then people that might be hitting college age. Is there a certain demographic there?
TYAGI: They're targeting folks who aren't as sophisticated. College students are a big one. They're going after young people to hook them in while they're young and don't have any income to pay you back.
LISCOVICZ: Amelia, let's -- while we're piling on, let's talk about the retailers, too. Because how many times have you been at a store where they'll ask you if you have the company card and you don't. They'll sign you up right now and they will give you an additional 10 percent off. And there is a reason why -- because the revolving credit is so high.
TYAGI: A lot of these retailers you walk into, they're not even making their money off of selling the blue jeans. They're making their money off credit cards. They're just putting blue jeans out there to try to get you into the credit card business. That's where they make of their profits.
SERWER: Let's take a step back here. Don't we need to stop whining a little bit here? What happened to personal responsibility? People say it is not my fault. This credit card company made me take their credit card. That's not really true. We heard from some people on the program saying I don't take the credit card solicitations. I tear them up. I throw them away. Isn't that easy enough to do, really?
TYAGI: I'll say both things in one breath. One is, you bet. Personal responsibility -- if you're carrying around a credit card balance, by God, paying that balance off. And that has to be your number one priority. Get those cards out of your wallet. In the same breath, I'll say this. A lot of credit card companies are making their money off of fooling people. Off of deliberately misleading people and hooking in people they know are not as sophisticated. I think that's a problem. I don't think that's OK.
WASTLER: Amelia, can you give us an example of how they hook you in like that? What kind of come-ons do they do? Some things sound pretty neat to me, like buy gas, get a refund. Give us some examples. TYGAI: Sure. We were talking about college students earlier. You know that some of these colleges actually sell students' personal information to these credit card companies. Some of this isn't as benign as you might think. Another one, they gave out pizza slips, free pizza to college kids was what the ad said. Didn't say a word about credit cards. You show up for the pizza, turns out you had to fill in a credit card application to get your free pizza.
SERWER: Quick last question, Amelia. Is there a way to legislate change here? Or is this about changing human behavior? What is the solution?
TYGAI: Hey, it is both. You've got to focus on improving your own behavior. You've go to protect yourself out there if you have credit cards in your wallet. But as for legislation, I think there is a place here to put some limits and common sense limits on how much credit card companies can charge. Look, we had those limits in place for 300 years in this country. We just took them away in the last 20 years. It is not working. And I would like to see some better disclosure. I don't think it is OK that you lure hungry 18-year-olds with the promise of a free pizza, and then make them take on a new credit card.
WASTLER: I don't think anybody can argue with that. Amelia Tygai, author of the "Two Income Trap." Thank you so much for joining us.
Coming up on IN THE MONEY, playing the numbers. Credit agencies are keeping score on how much you borrow and how fast you pay. Find out how your record works when you're after a loan.
Also ahead, extreme banking. For people with risky credit histories, sub-prime loans can sound great. See if the offers are as hot as the ads make them sound.
And of mice and mortgages. We'll show you how some online loan calculators could save you a visit to the financial planner.
SUSANNE MALVEAUX, CNNHN ANCHOR: I'm Suzanne Malveaux at the CNN Center in Atlanta. IN THE MONEY continues shortly. First a check of the headlines "Now in the News".
Northwest Airlines mechanics have walked out on strike over pay cuts and job security. The company is planning to operate on a normal schedule using replacement workers. Northwest flight attendants and pilots voted not to join the mechanics on the picket line.
Top Pentagon officials are defending the Bush administration's plan to close or scale back hundreds of U.S. military bases. They say money saved by the cuts will be used to improve combat readiness. The commission hearing their testimony will decide how much of the plan to accept.
Authorities in Pennsylvania, Philadelphia, say they have found the body of Latoya Figueroa, a local pregnant woman who went missing last month. They also say they have arrested her former boyfriend in connection with her death. Philadelphia District Attorney Lynn Abraham spoke this morning to reporters about the case.
(BEGIN VIDEO CLIP)
LYNNE ABRAHAM, PHILADELPHIA DISTRICT ATTY.: The body of Miss Figueroa will be carefully examined so that we can know as close as medical science will allow us to know precisely what caused her death. Mr. Poach is in custody. The charges that I mentioned this -- a few moments ago, of homicide and perhaps other offenses are not yet complete. We do know we are going to be charging him with murder and other offenses. Those other offenses will have to wait until we finish our investigation.
(END VIDEO CLIP)
MALVEAUX: Now the suspect reportedly had a pistol and was wearing a bulletproof vest when arrested.
Space Shuttle Discovery is still not home yet, awaiting a break in the weather on a cross-country trip to Florida. A modified 747 is giving the spaceship a ride home. The next flight opportunity comes tomorrow. Discovery had to land in California on its return to Earth due to low clouds and lighting.
All the day's news at the top of the hour. Now back to IN THE MONEY at CNN.
SERWER: As one of our great philosophers, Satchel Paige, once said, never look back, something might be gaining on you. When it comes to your credit score, that is the case, especially if your score isn't so great. But our next guest says credit scores often contain mistakes that wind up costing you money. Edward MierzwinskI is with the U.S. Public Interest Research Group. He joins us now to explain how credit scores work and how you can clean yours up. Ed, welcome to the program. Let's just start off by explaining to folks what a credit score is, please.
ED MIERZWINSKI, U.S. PUBLIC INTEREST RESEARCH GROUP: A credit report is a financial resume, all the bills that you have got, your national credit cards, mortgage, car loans, are listed and how well and how quickly you pay them, whether you pay them on time, how close you are to your balance, if you have an open-ended line of credit. All of these factors are then put into a black box by the credit scoring computers and your long financial resume is converted into a single number score. It is actually three digits. But it is one number derived from all of your accounts and payment history.
LISCOVICZ: And what is a good score? There is a level there that can really be that gray area between getting the great loans and the great rates and then something where it is much more debatable.
MIERZWINSKI: That's exactly right. First of all, there is one company that is considered the Cadillac of scores and that's known as Fair Isaac's FICO Score. If you have a 620 or lower, you're only going to get sub-prime loans. If you have well above 700, you're in very good shape. So 620 to 700, you're kind of in a gray area. Below 620, high prices.
WASTLER: So if I'm in that gray area, what do I need to do to up it into the brighter area? What is the procedure?
MIERZWINSKI: Well first, look at your credit report and make sure that all of your accounts are being reported correctly. Sometimes the student loan might be double counted because it was transferred or serviced to a new company, same thing with a mortgage. When that happens, you appear to have more credit than you really do have. Having too much credit actually hurts you sometimes, even if it is good credit. Look for those mistakes. Second -- I cannot stress this enough -- the most important thing that any consumer can do is pay their credit cards on time, and not be anywhere near their limit. Your so-called credit ratio, the ratio between how much you owe and how much they're allowing you to borrow is the most important thing to keep low.
SERWER: How do I get one of these free credit reports? And aren't these companies a pain in the neck to deal with?
MIERZWINSKI: Well the credit bureaus are like old dogs, you can't teach them new tricks. And treating us like customers is really a new trick for them. They put you in voice mail jail. They deliberately make it difficult to fix mistakes. But Equifax, Trans Union and Experian are all the big three credit bureaus. Under a new federal law, they all provide free credit reports at anytime, starting on the East Coast, not until September 1, but around the rest of the country already. AnnualCreditReport.com is their joint Web site. LISCOVICZ: OK. All good information. But it is very disturbing to hear that there are mistakes in this black box. How common are the mistakes and how difficult is it to rectify?
MIERZWINSKI: Well, I think that our studies, PIRG studies, have shown that three out of 10 credit reports, 29 percent, contain serious errors that could cause the denial of credit. A study by another consumer group, the CFA, found that there are millions of consumers who are within 50 points of that 620 magic number, and a mistake could put them on the wrong side when they should be on the right side. It is a problem that there are too many mistakes and it is hard to get them fixed. You need to be vigilant. You need to look at your credit report before you apply for credit, not after you have been denied.
WASTLER: Ed, this sounds like something I should be raving at my congressman about. It is apparently very hard to get mistakes corrected. Also, I understand you actually have to pay to see what your credit score is. Is something going on in Washington to sort of correct this? Should I be calling on my congressman?
MIERZWINSKI: Congress doesn't like to give consumers any real strong consumer protections. Companies don't like to be regulated. Companies have a lot of lobbyists. It is this age-old story of Washington. I would urge you to contact your congressperson and tell them that credit reports and credit scores should be free. Nothing prevents your real estate agent or car dealer from showing your score for free, but when you apply to get your free credit report, the bureaus will try to add on a score -- and by the way, the score they sell you most likely won't be that gold plated FICO score, it will be some sort of plain old score that they make, a plain vanilla score.
SERWER: Quick last question, Ed. How do you get your credit report fixed if you see it is messed up?
MIERZWINSKI: Well, when you get your credit report, they'll tell you how to contact them to fix it. The main thing is to send them copies, never originals, of all of the documents that prove that the problem on the credit report is a false problem. You cannot get rid of accurate negative information, but that goes away over time. The most important thing is to be up to date with your bills, currently, don't worry as much about having been late six years ago.
WASTLER: OK. Ed, thank you very much for joining us. Ed Mierzwinski of U.S. Public Research Interest Group. Thanks so much. Appreciate it.
MIERZWINSKI: Thank you.
WASTLER: There's lots more ahead up on IN THE MONEY. Lifeline or leash? Sub-prime lending can help you buy a house if your credit is not so hot. We'll look at whether it is as good as it sounds.
And figure out how much you borrow without having to live on corn flakes. Some online calculators to help you keep it real.
LISCOVICZ: Stick around. There is more to come. Up next, how to turn your computer into a loan adviser. Discover some online tools that will do the heavy lifting before you borrow.
And we'll hear what some of our viewers had to say about debt in dealing with it. We'll check their e-mails.
And you can drop us a line here INTHEMONEY@CNN.com.
LISCOVICZ: So you say you want to take control of your finances but you don't have time for a checkup? Well, our Web master Allen Wastler is here to show you some of the simple -- emphasis on simple -- tools on the Money.com Web site that can help you right now.
WASTLER: Now that we whipped people into a froth about, oh, no, the credit card debt, sub-prime loans what do you do about it? Go to Money.com. We have calculators there. Right on the home page is calculators. Click on that, and you'll see some debt calculators. Let me tell you about one of the most simple ones, OK, a debt planner. You simply put in who you owe, how much you owe, what the interest rate is, and what the minimum payment is. There it is right there. I owe on Cafferty Visa. Let's say I owe them 10 grand. And Cafferty, well, they'll hit you with 20 percent. That's the way he is. I made a minimum payment of $200. Next Susan MasterCard. I put that in there $5,000, 15 percent. These aren't out of line figures either. One- hundred dollar minimum payment. And finally me, two grand --
LISCOVICZ: What happened to Andy?
WASTLER: I forgot Andy. I can only do three. But if you calculate this out, here is the scary part. Ready to be scared? On that calculator, say what if I only make the minimum payment every time, how long will it take me to pay off that debt -- that was 17 grand, some people do a lot more than that -- 60 years and 11 months.
SERWER: That's a life sentence for me.
WASTLER: A life sentence for a lot of people.
So you can go to that calculator, put it in, say what if I paid X amount each month over the minimum payment? What if I wanted to pay it off by a certain date? That calculator will help you figure it all out, put you on the path to debt freedom.
Another thing I want to tell people about. Budgeting. It all comes down to what should I be spending and what shouldn't I be spending? We have a calculator on the site called the ideal budget calculator, very important. Go in there and it will allow you to put in your household expenses. Put in that you make, where is it going? Has a section for your household expenses. Here we got a shot of it right here. For your taxes, and insurance costs, all the things, all of us face. You put it in there and you calculate it up and it will examine what you're spending versus what is the recommended level for those kinds of expenses.
LISCOVICZ: No kidding.
WASTLER: And you know some people need to go outside of the parameters, but it will give you a guideline, a basis for saying, you know, I'm really spending way too much on the Saturday nights. Maybe I need to cut back there.
LISCOVICZ: I heard that about you, actually.
WASTLER: Remember the --
SERWER: From experience.
WASTLER: That's where it all came from. So those are two very simple calculators people can concentrate on. Now if you want to go calculator crazy there, we got lots of stuff for you. We can help you shop for mortgages, figure out which kind mortgage works for you, be aware of the adjustable rate mortgage. What kind of costs you will face on that in the future. We can help you build up your savings. Quick calculation that you will be saving, or a more extensive one to show what kind of vehicles you should be going into. It is all there. Please if we panicked you, please go to Money.com, and just you know, figure it out for yourself.
LISCOVICZ: I haven't utilized that. I will be and I will be tapping the resources that are so readily available.
WASTLER: There you go.
LISCOVICZ: Thank you, Allen.
Coming up next on IN THE MONEY, time to hear from you as we read some of your e-mails from the past week. You send us an e-mail right now. We're at INTHEMONEY@CNN.com.
LISCOVICZ: Now it is time to read your answers to our question about whether you have debt and why.
Art wrote, "My wife and I are in debt because we sent six children to college. We did our best to send them to lower-cost schools, but we could never catch up with the rising overall cost of tuition. So now we're 65, retired, and still paying off a second mortgage."
We hope the kids are helping out though, right?
With all those six kids with all those great diplomas.
Another viewer wrote, "As long as there are property taxes, most of us will be forced to carry some debt. They keep raising the property taxes and the prices of other absolute necessities like transportation, clothes, and food."
And Judy in Florida wrote, "I'm not in debt because I learned that when speaking to my children, the word 'no' really can be a complete sentence. They did without a lot of gadgets and other stuff then, and now we are all better off."
SERWER: That is a tough one.
LISCOVICZ: As always you can send your comments to INTHEMONEY@CNN.com. And you should also visit our show page at MONEY.com/INTHEMONEY. Thanks for joining us for this edition of IN THE MONEY.
And thanks to "Fortune" magazine Editor-at-large Andy Serwer and Money.com Managing Editor Allen Wastler.