Student loan debt: the next time bomb?

    Today's graduates hit job market with more debt, fewer prospects
By Tony Mecia
 While consumers have paid down credit card balances and other debts in recent years, there's one area where they continue to borrow heavily: student loans.
    People affected by growing student loan debt are sounding alarms, and no wonder. Look at the numbers. According to data from the Federal Reserve:
    Student loan balances now stand at about $870 billion, an amount that has surpassed total credit card balances ($693 billion) and total auto loan balances ($730 billion).
    The average outstanding student loan balance per borrower is $23,300.
    About 37 million Americans owe money on student loans.
    Almost 10 percent of student loans -- $85 billion worth -- are delinquent, and the Feds fear that number may be understated.
     Student loan debt: the next time bomb? The Occupy Wall Street movement rallied last year around "immediate across-the-board forgiveness" of student debt. The National Association of Consumer Bankruptcy Attorneys says student loans could be "the next debt bomb" for the U.S. economy. Even Federal Reserve Chairman Ben Bernanke -- whose son expects to graduate from medical school with $400,000 in debt -- says student lending requires "careful oversight."
    The growing interest in student debt comes as delinquency and default rates are on the rise, and as total debt figures blow past big milestones. In 2011, student loan debt surpassed credit card debt. In 2012, total student loan debt is expected to hit $1 trillion for the first time.

Lots of student debt, few jobs
That explosion of student debt springs from economic trends: College costs are rising fast and college enrollment is hitting new highs, but students are graduating into a tough job market that makes student loan repayment even tougher. A study by the John J. Heldrich Center for Workforce Development at Rutgers University in 2011 showed that of college students who graduated in 2010, only 56 percent had found a job a year later.

"What you have is a whole generation of young people who are beginning their post-academic lives under a debt burden that Americans have never experienced in the past," says Alan Nasser, a political economy professor at Evergreen State College in Washington.

Although the concept of escalating debt that's tough to repay might sound similar to the subprime mortgage crisis that preceded the 2008 recession, experts say there's little chance that ballooning student loan debt will lead to a similar financial meltdown. That's because more than 85 percent of student loans are backed by the federal government, which has more power than private lenders to force repayment.

Instead, the effects of rising debt are felt individually, by borrowers overwhelmed with the amounts they're compelled to repay. Experts say high debt inhibits consumer spending, discourages further education and creates a disincentive to marry and start families.

"It prevents a lot of people from moving on with their futures, which is bad for productivity and bad for our economy," says Deanne Loonin, an attorney with the National Consumer Law Center, an advocacy group for low-income Americans.

The old trade-off: student debt for skills
Of course, the idea behind student loans is to allow students to pursue degrees, which typically lead to higher incomes. Because of that, many students view them as a worthwhile investment.
Student loan debt: the next time bomb?

Elisabeth Podair, 25, says it was "scary" to sign loan documents when she was an undergraduate at Queens University of Charlotte, N.C., but that it was the only option after winning scholarships to pay for much of her expenses at the small liberal arts school. When she graduated in 2009, she owed $20,000, but felt as though the university prepared her well for the workforce. She landed a job soon after graduation as an account executive at an advertising and marketing agency in Charlotte.

Podair has started paying down the balance to a mix of federal and private lenders. She says she'd prefer to have no debt, but that if she has to have some, educational debt is better to have compared with, say, a car loan, since the value of a car declines with age.

"I hope that the value of my education will only increase over time, and the amount I owe will only decrease over time," she says.

Podair says she owes less than many of her peers.

Nationally, two-thirds of bachelor's degree recipients take out loans to pay for college, according to the College Board. Of those who borrow, the median amount owed at graduation is $20,000. The top 10 percent of borrowers owed $44,500 or more. Graduate students typically borrow more than undergraduates.

For borrowers who are simply unable to pay, there's a complicating factor: College debt is difficult to erase -- more so than credit card debts or even gambling debts. For federally guaranteed loans, which account for more than 80 percent of all student lending, the balances are almost impossible to wipe away, even in bankruptcy. In addition, the government has collection powers unavailable to private lenders, such as intercepting tax refunds and even reducing Social Security benefits.

Students don't always understand loan terms
Experts say consumers need better understanding of the loans when they take them out, as well as their options if they're unable to repay them.

Young adults, for instance, might not realize the effects of carrying tens of thousands of dollars of loan debt.

"Young people, when they're 18 or 19, they're not thinking straight. They don't have much experience with debt," says Allen Carlson, president of the Howard Center for Family, Religion and Society, who has studied the effect of loan debt on families. "They hear what the education establishment tells them, which is, 'This is your ticket to a rich future.'"

The easy availability of student loans -- which are typically made irrespective of a borrower's credit or career choice -- result in a workforce that is "overeducated," Carlson says. So while skilled machinists are in short supply, "we probably have too many lawyers, too many art historians and too many sociologists," he says.

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Mortgages Paying on Time

     FEWER homeowners have been falling behind on their mortgage payments over the last two years, yet even with the improvement, a significant number still are delinquent or in foreclosure.
Related
    Being in such a predicament almost always proves costly for borrowers — both in terms of fees they will owe and the lower credit rating that will result.
      Mortgage delinquencies are “about halfway back to long-term prerecession levels,” said Jay Brinkmann, the chief economist for the Mortgage Bankers Association, in its fourth-quarter delinquency report, which was released last month. Some 7.58 percent of all residential loans were delinquent at the end of 2011, down from a 10 percent high in 2010 but well above the 5 percent prerecession average. All together, 12.63 percent — one in eight homeowners — were in trouble or in foreclosure at the end of the year, the association reported.
      Meanwhile a separate report last month, from the credit-reporting agency TransUnion, found that delinquency rates fell to 6.01 percent in the fourth quarter of 2011 from 6.4 percent the same period the year before, though they rose slightly from the third quarter. Delinquencies of 60 days or more are expected to rise again in the first quarter of 2012, then decline the rest of the year, said David Blumberg, a TransUnion spokesman.
       With so many homeowners still pinched financially, it is crucial to understand and adhere to payment deadlines. In general, payments are due on the first of the month; many lenders, though, allow a 15-day grace period. That means “not written by, not posted by, but received by the servicer” on that day, said Michael McHugh, the president of Continental Home Loans in Melville, N.Y., and the president of the Empire State Mortgage Bankers Association. In scheduling automatic electronic payments, he advised, allow at least “five days’ leeway.”
      If the payment arrives even a day past the grace period,  your lender will very likely charge a late fee of  2 to 5 percent of the monthly payment, Mr. McHugh said. The late fee and timing are spelled out in mortgage documents. Some late fees may be waived, especially if you have a history of on-time payment.
     What is less often waived is the nick to the credit score. At 30 days tardy, a lender sends the credit bureaus a report, which is immediately transferred to your credit report, said Rod Griffin, the director of consumer and public education at Experian, another credit-reporting bureau. The black mark stays on the books seven years, he said, unless successfully challenged.
    “That late payment on a mortgage is going to have a significant negative effect on your credit score,” Mr. Griffin said.

Research last year by FICO, the provider of one of the most popular credit scores used by lenders, showed a 60- to 110-point drop in scores for being 30 days late, with the biggest reduction to those with the highest starting score of 780. It could take nine months to three years for the FICO score to recover fully, the research indicated.

VantageScore, a rival to FICO, estimates that the initial hit would be 60 to 100 points at 30 days delinquent and another 10 to 20 points at 60 days.

The key, the experts say, is to pay up before you are 30 days behind — or, failing that, to keep the payments no more than 120 days delinquent to avoid foreclosure proceedings and many extra costs, they say. “If they can stay between 90 and 120 days’ delinquency,” said Carol Yopp, the manager of the foreclosure program at the Long Island Housing Partnership, “they typically don’t get referred for foreclosure.”

Ms. Yopp, who also has 16 years’ experience as a mortgage underwriter, notes that many lenders will not take partial payments on mortgages; they will hold them in a “suspend account” until the borrower has the full amount. Still, she suggested homeowners make a partial payment anyway, so they’re not tempted to use the earmarked funds elsewhere.

What is CREDIT?

          Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately (thereby generating a         debt), but instead arranges either to repay or return those resources (or other materials of equal value) at a        later date. The resources provided may be financial (e.g. granting a loan), or they may consist of goods or            services (e.g. consumer credit). Credit encompasses any form of deferred payment. Credit is extended by a          creditor, also known as a lender, to a debtor, also known as a borrower.       Credit does not necessarily require money. The credit concept can be applied in barter economies as well, based on the direct exchange of goods and services (Ingham 2004 p.12-19). However, in modern societies credit is usually denominated by a unit of account. Unlike money, credit itself cannot act as a unit of account.

        Movements of financial capital are normally dependent on either credit or equity transfers. Credit is in turn dependent on the reputation or creditworthiness of the entity which takes responsibility for the funds. Credit is also traded in financial markets. The purest form is the credit default swap market, which is essentially a traded market in credit insurance. A credit default swap represents the price at which two parties exchange this risk – the protection "seller" takes the risk of default of the credit in return for a payment, commonly denoted in basis points (one basis point is 1/100 of a percent) of the notional amount to be referenced, while the protection "buyer" pays this premium and in the case of default of the underlying (a loan, bond or other receivable), delivers this receivable to the protection seller and receives from the seller the par amount (that is, is made whole).

        Credit, in commerce and finance, term used to denote transactions involving the transfer of money or other property on promise of repayment, usually at a fixed future date. The transferor thereby becomes a creditor, and the transfer, a debtor; hence credit and debt are simply terms describing the same operation viewed from opposite standpoints. 
            
     

BUCKS; Card Shuffling and Credit Score

 Do you have a chunk of credit-card debt that you keep bouncing from card to card to take advantage of an attractive balance transfer offer? Or have you opened new credit card accounts just so that you can collect extra miles or some other enticing bonus?

     If so, you might be curious about how all of this factors into your credit score. In a few words: it's probably not helping, but not for the reason you may think.

A reader who said he had debt in the ''low five-figures'' recently wrote to us about this issue. He was under the impression that the FICO credit scoring gods look kindly upon accounts that you've held for a long time -- and he's right about that. So his question was this: Will it hurt my score if I close an account shortly after the introductory interest rate expires, say, after a year or two?

     The answer: The account closures might hurt his score, but not simply because he's closing a new account, said John Ulzheimer, president of consumer education at SmartCredit.com. In fact, one of the biggest myths about credit scoring is that closing an account will stunt the aging process. Instead, ''you still get the value of the age of the account whether it's open or closed, active or inactive, balance or no balance,'' he said. The account continues to age, even after it is closed.

     In our reader's case, he already did damage by merely opening up a new account because every new credit inquiry, which happens when you open a new card, could affect your score.

Still, closing the account may still chip at his score some more, especially if it had a sizeable credit limit. That's because FICO scores are helped by the amount of unused credit you have available, and the more of it you have the better. (This is known as your credit utilization rate. FICO considers how maxed out each of your individual cards is, as well as the total amount of debt and sees how that compares with your total available credit.)

     Keeping the account open is likely to help those numbers (though if it has a hefty annual fee, you need to take that into consideration, especially if that money would be better spent paying down debt and you don't plan on making any major credit-dependent purchase in the immediate future).

''It's a math game,'' Mr. Ulzheimer added, ''How much open and available credit do you have compared to your balance?''

People with the highest credit scores, or scores above 760 -- on a scale of 300 to 850 -- are typically using less than 10 percent of their available credit at any given time, he added.

The bottom line: if the card has a high annual fee, or you simply want to keep things simple and cancel it, go right ahead. Just be aware that it may affect your credit utilization rate, which could hurt your score. Also, one other important thing to note: Those closed accounts are eliminated from your credit report after they have been closed for 10 years. So, at that point, the account closure could ultimately dent your score if your other accounts are much newer.

But the biggest problem for serial balance transfer surfers, or those who continually open new cards, is that they are perpetually adding new accounts. That brings down the average age of all of your accounts.

This is a more complete version of the story than the one that appeared in print.

PHOTO: Closing credit card accounts could lower a user's credit rating. (PHOTOGRAPH BY DANIEL ROSENBAUM FOR THE NEW YORK TIMES)

MORTGAGES; A Co-Borrower's Credit Issues

CORRECTION APPENDED IN most cases it is easier to qualify for a home mortgage by applying with another person -- be it a spouse or partner, or even a close friend or sibling. But problems may arise if the other person's credit score is less than stellar.
    The federal agencies that oversee and buy mortgages from lenders, like Fannie Mae and Freddie Mac, require lenders making conventional loans to focus on the lower of the two FICO scores. (Scores generally range from 300 to 850, with the national median at 711, according to FICO.)
But both scores may be factored into other loans. On a jumbo loan, for instance, the lender is likely to ''put more weight on the credit score of the person with the higher income,'' said Greg Gwizdz, an executive vice president of Wells Fargo Home Mortgage in Somerville, N.J.
For some people, however, it may be necessary to hold off on a home purchase for a few months to allow the co-borrower with credit issues to clean up his or her report and raise the score.
      This can be done by being ''hypervigilant on paying your bills on time'' for at least a year, said Tracy Becker, the president of North Shore Advisory, a credit restoration company in Tarrytown, N.Y., or by perusing the credit report and correcting any inaccuracies.
Ms. Becker says that one way to raise a FICO score by 30 to 40 points in a few months is to be added as an authorized user to a well-established person's credit card, even if you don't use the card. Your score can rise, too, if you pay down credit-card balances so they are at least 10 percent of the maximum credit limit.
Even if you cannot afford to pay down the cards that far, it can help even to reduce the balance to, say, 60 percent of the limit, said Joanne Gaskin, the director of product management global scoring at FICO. The closer your balance is to the credit limit, the more the score will increase when the balance is paid down.
If the cards are ''maxed out,'' Ms. Gaskin said, ''that's going to be very negative.''
       Preparation is key, Ms. Becker said, suggesting that both parties review their credit reports and scores together early on in the home-search process.
Alexander Arader, the owner of Arader & Associates, a mortgage broker in Stamford, Conn., said that a borrower with a credit score of 620 to 640 could pay as much as one percentage point more in interest than a borrower with good credit, say around 760 or higher.
''Do whatever it takes to get your credit score up,'' he said.
If there is little time for a significant upgrade in a credit score -- perhaps because you found your dream home and can't wait to make an offer -- borrowers should explain to the lender any issues that might have affected the credit report, said Mr. Gwizdz of Wells Fargo.
''Take time to tell your story,'' he said, and make sure you carefully document any major life issues that might have contributed to a score's decline, like an illness, divorce or job loss.
The borrowers also need to make it clear why a second person is on the mortgage, especially if that person is not living in the house, he said. A parent helping a child buy his first apartment in Manhattan will have less trouble explaining the connection than a friend who isn't there full-time, he said.
Sometimes it may make more sense to have just one person on the mortgage -- provided, of course, that the person can afford the monthly payments alone. Some banks may allow two people to appear on the property's deed with only one on the mortgage note.
While the FICO credit score is important, it is only one part of what lenders evaluate in the application process, Mr. Gwizdz noted.
Among other factors that underwriters examine: the size and source of the down payment (many are now requiring 20 percent); both applicants' incomes and whether they have been rising; their debt-to-income ratios; and the property they are buying.
CHART: INDEX FOR ADJUSTABLE RATE MORTGAGES: 1-year Treasury rate (Source: HSH Associates)

Correction: December 4, 2011, Sunday

This article has been revised to reflect the following correction: The Mortgages column last Sunday, about applying for a mortgage with a co-borrower with poor credit, misstated the length of time that Tracy Becker, the president of a credit restoration company, suggested that borrowers should be ''hypervigilant'' about paying their bills on time to improve their credit scores. It was for at least a year, not for a few months.

A New Credit Report Tracks More of Your Financial Life

       This week’s Your Money column discusses a new credit report from a company called CoreLogic, which includes all sorts of information about your financial life that is not captured by the reports from the traditional credit reporting agencies.

So lenders will now be able to see whether you have any child support judgments or property tax liens, as well as any evictions or applications for payday loans. The company also claims to catch mortgages made by smaller lenders that the big credit bureaus may have missed, as well as any property that you own outright. And the list goes on.

     CoreLogic has also partnered with FICO to create a credit score based on this new data, which will initially be used by mortgage and home equity lenders. While the score will be released in March, the “CoreScore” credit report became available to all types of lenders on Wednesday.

Within a year, the new report will be available through annualcreditreport.com, where consumers are entitled to one free copy annually. That’s the same rule that applies to each of the big bureau’s reports on the site currently. What do you think of this development? Will you get a copy of this new report? If you do, let us know how it compares to the traditional credit reports.

Impatient? It May Be Hurting Your Credit Score

CBS MinnesotaA reproduction of the Stanford marshmallow experiment.

    Remember when you were a kid and your parents harped on the importance of “delayed gratification” to get ahead in life? (You know: Put that birthday money in the piggy bank and save for something nice, instead of blowing it all now on Milky Way bars.)

Well, it turns out that your propensity to wait (or not) is also reflected in your credit score, according to a study from researchers at Columbia and Stanford published online in Psychological Science, a journal of the Association for Psychological Science. (Here’s a link to the press release, though the journal itself is behind a pay wall.)

    Patient people, the study found, tend to have higher credit scores than those who just can’t wait. “Individuals who are more willing to delay gratification have significantly higher FICO scores,” the report concluded.

In the study, researchers recruited 437 low- to moderate-income people from a Boston community tax-preparation center. Participants consented to give researchers access to their credit reports and FICO scores ( a number from 300 to 850 based on credit history). Participants were given a series of questions meant to gauge their willingness to delay a reward. For instance, they were asked if they would rather have $70 now, or $80 in a month.

    Participants who were the most willing to wait for the bigger payout had FICO scores that were roughly 30 points higher than those who were least willing to delay, the study found. (The correlation held, regardless of income and other factors). Those who were the least willing to delay fell below the subprime credit score cutoff of 620, below which people generally pay much higher borrowing costs.

Stephan Meier of Columbia Business School, one of the study’s authors, said the report is sort of an adult, financial version of the “marshmallow studies” done with children, in which kids were left alone in a room with a single marshmallow but told they could have two to eat if they waited until the researcher returned. (Follow-up studies, he said, found that the kids who waited tended to do better in school later on).

Obviously, for some people, the loss of a job or a divorce can have a bigger impact on their credit score than their level of patience. But still, for individuals, Professor Meier said, the findings suggest that those who have trouble postponing rewards might want to consider tactics like automating their monthly credit-card payments to reduce the temptation to pay just the minimum balance.

“I have some problems in this area with food,” he said. “So I make sure my fridge isn’t full.”

A Good Rental History Can Help Borrowers

       Now two other companies, CoreLogic and FICO, are planning a new credit report and score that incorporates payment histories from landlords, as well as payday and other nontraditional loans, child support and, later on perhaps, utility and mobile phone bills.

“Evidence of positive rental payments could be a plus for consumers,” said Joanne Gaskin, FICO’s director of product management global scoring. Rental history data could show up on one in five of the new CoreScore credit reports, she estimated.

      Around 35 percent of households nationwide were renters in 2010, according to the most recent census data, while in parts of New York City, three-quarters or more rent.

Incorporating rental payments into credit scores could affect millions of people who have not established credit histories through credit cards, student loan repayments and other credit sources. That includes recent college graduates, students and some divorced people. “The biggest impact is on individuals who were not previously scoreable,” said Brannan Johnston, the managing director of Experian’s rent bureau.

Almost half of those higher-risk consumers experienced an increase of 100 points or more after their positive rental history was added, Mr. Johnston said. (Those with average or higher scores did not experience major movement.)

     CoreLogic said it was too early to show the effects of its new credit report, which began in December. The changes are “intended to allow lenders and consumers to have greater transparency,” said Tim Grace, a senior vice president of CoreLogic, and that could lead to increased lending.

People who have lost their homes to foreclosure and are now leasing may be able to rebuild their credit histories by being “very responsible renters,” Mr. Grace added.

But consumer groups and advocates are skeptical, noting that reports are sometimes riddled with mistakes and some landlord-tenant disputes may be difficult to capture in a credit report. Rent may not have been paid, for example, because the furnace was left unrepaired for months.

Consumers can dispute any information they believe is inaccurate. “We check and recheck all the information,” Mr. Grace said, adding that consumers could order a copy of their new CoreLogic credit reports online.

      CoreLogic’s Core Score will cover about 100 million people. The three other major credit reporting companies, which also include Equifax and TransUnion, have reports on 200 million; their reports are available free once every 12 months at annualcreditreport.com. TransUnion collects rental payment information and shares it with landlords, but Experian is the only one of the three so far to add rental history to credit reports.

     Experian has mostly major property managers and apartment companies reporting rent histories, via their accounting software. Most small landlords are not, though Experian is considering a system that could allow more independents to report on-time and problem renters.

If your landlord is participating, your rental contract may show up as debts owed on your credit report for up to 12 months, said Maxine Sweet, Experian’s vice president for public education. If your landlord is not yet reporting to Experian or CoreLogic, she added, you can build your own rental history by documenting on-time payments.

In Credit-Card-Number Case, Identity-Theft Victims Finally Get Some Respect

     The three last week lost a Federal Appeals Court case involving sentences they received for fencing high-end stolen goods. Their sentences were 12 years in prison (Ms. Sandoval, the ringleader), 40 months (Ms. Hicks) and 21 months (Mr. Vanderhack). And while the legal matter involved how one interprets sentencing guidelines, their misdeeds should make you pause the next time you give out your credit card numbers.

     Ms. Sandoval, Ms. Hicks and Mr. Vanderhack managed to steal card information from right under the noses of retailers like Neiman Marcus, Bloomingdale’s and Saks Fifth Avenue and fraudulently ordered merchandise that they then kept, resold or returned for cash or merchandise credit.

They stole what are known as clientele books from high-end stores. Those books include information on valued customers like “their names, addresses, clothing preferences, birthday, and, most importantly, credit card numbers,” according to the appeal.

      It seems to have been shockingly easy to pilfer the information, with Ms. Hicks acting as lookout. The posse would use the card numbers to order many thousands of dollars of merchandise and arrange for items to be either held for pickup or express shipped to destinations.

Judges Frank Easterbrook, Diane Sykes and Ilana Rovner handled the appeal, and Ms. Rovner wrote the opinion. “Depending on the package delivery methods, the defendants would pick it up from the store, steal it from the porch of the delivery address (often the victim herself), or intercept the delivery person and claim to be the intended recipient,” wrote Ms. Rovner.

After that, they either fenced the goods at discounted prices or brazenly returned them to the store for cash or credit.

       Saks was suspicious when Ms. Sandoval ordered $5,000 worth of goods using Susan Schweiger’s card information. It contacted Mrs. Schweiger and stopped delivery. She and her husband placed a decoy box on their front porch, and later spotted Mr. Vanderhack walking by and talking on his cellphone.

Ms. Sandoval’s appeal of her sentence is illuminating in informing us who is defined by the law as a victim these days. Before 2009, it was only someone who suffered a financial loss. Now it’s not just pecuniary harm but also anybody “whose means of identification was used unlawfully or without authority.”

That means that her victims were not just the 40 stores and credit card companies that sustained losses but also the 65 people whose cards were used.

•

Another big holiday loser is ATA Airlines Inc., now defunct, which saw a panel of Mr. Easterbrook, Richard Posner and Diane Wood reverse a $65,998,411 judgment against the Federal Express Corporation and do some vivid, derisive finger-wagging about the key expert’s testimony.

The case involved the substantial passenger and cargo services that commercial airlines provided the military in the Civil Reserve Air Fleet. FedEx was the leader of one team, which included ATA. The airline’s share of the team’s revenues peaked at $406 million in 2005, with its profits exceeding $90 million.

FedEx dropped ATA from the team in 2008 — a change “pregnant with menace,” Mr. Posner wrote — and largely prompted its bankruptcy and breach-of-contract suit.

But the panel did not believe the claim should have ever gone to trial and eviscerated ATA’s forensic accountant, Lawrence Morriss. Mr. Posner concluded that neither side’s lawyers — and, by clear implication, Richard Young, the chief federal judge in Indianapolis — had understood Mr. Morris’s dubious regression analysis in assessing ATA’s damages and, if they did, “are unable to communicate their understanding in plain English.”

“Morriss’s regression had as many bloody wounds as Julius Caesar when he was stabbed 23 times by the Roman senators led by Brutus,” Mr. Posner said.

•

It isn’t smart for a lawyer to blow a deadline in filing a client’s appeal, even if there are extenuating circumstances. But those apparently don’t include running for governor of Illinois.

Rich Whitney, a Carbondale lawyer and Green Party candidate for governor in 2010, persuaded a lower-court judge to cut him slack and extend a deadline he had missed soon after the election. An appeals panel of Mr. Posner, Richard Cudahy and Ann Williams reversed that, with Ms. William writing:

“Many practicing attorneys run for office or submit themselves for consideration for positions on nonprofit boards or bar associations but cannot do so to the detriment of their clients.”

TV Adviser on Money Offers Card

      For more than a decade, Suze Orman has exhorted her viewers on CNBC to spend less than they earn, flashed her blazing smile from the covers of best-selling books and endorsed the occasional auto loan provider and brokerage firm.

Never before, however, has she built a financial product from scratch and urged her considerable number of fans to use it frequently. That changes with the introduction on Monday of her Approved card, which works a lot like a bank debit card but does not come with a checking account. It is a prepaid debit card, and companies that offer similar cards have drawn criticism for sky-high fees and poor disclosure.

     The hip-hop mogul Russell Simmons, American Express and the Kardashian sisters are among those who have piled in with their own cards, and they are nearly ubiquitous at drugstores and other retailers. The target customers are most often people who have little credit history — or credit so bad that banks will not come near them.

Ms. Orman seeks to broaden the debit card market by charging low fees and offering new services, including unlimited access to credit reports. She has put more than $1 million of her own money into the venture and is prepared to add more, since the product may not break even right away. But her move also raises so many questions that it is hard to even know where to start.

     How can the Approved card make money charging fees on par with those on Walmart’s cut-rate MoneyCard, while also paying a credit bureau for access to its services? Also, can it really be just fine with CNBC, where Ms. Orman has a weekly show, that her card will compete with products from companies she discusses frequently with viewers? And will her followers care that she is pushing purple pieces of plastic that will help her make money from their everyday spending?

“I couldn’t be more proud of this card if I tried,” she said. “And it doesn’t really matter what I say. It matters what happens when somebody uses this baby.”

Their choice to use it may be colored by the opportune moment in which Ms. Orman finds herself. Big banks have offended scores of consumers with new fees and account balance minimums. People seeking alternatives may well find what they are looking for in prepaid cards.

That might not have been the case several years ago, when most prepaid card issuers marketed them to teenagers, or as gifts, or to people with poor credit who needed a way to make online purchases or visit a  merchant without wads of cash.

    More recently, companies like Green Dot (a partner with Walmart) and NetSpend have emerged. They persuade consumers to buy the cards first, in part through their availability in 300,000 locations, including grocery and convenience stores, according to the Mercator Advisory Group. Then, they try to persuade people to reuse them. Services like direct deposit and online bill payment have helped some. Still, 43 percent of the cards are never reloaded or are reloaded only once, according to Mercator.

These cards differ from checking accounts in other ways. There is no checkbook, nor do they have their own network of A.T.M.’s, though some prepaid card issuers have agreements with networks to offer free withdrawals. And different regulators govern them, which can mean fewer consumer protections under certain circumstances. (It could also mean that the new Consumer Financial Protection Bureau will swoop in and make tougher rules.)

A Credit Nightmare, but Coming Out Better in the End

Maria Ortiz, with her daughter, Princess, was puzzled by job rejections until her credit report revealed faulty information.

      Sitting on her living room sofa, her knees together, her hands clasped tidily on her lap, Maria Ortiz was the picture of professionalism. Wearing a black suit, her hair pulled back, she was smiling confidently. It was the end of another long day, one that started at 6 in the morning, before the rest of her family had even hit the snooze button.

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But Ms. Ortiz, 48, a single mother of two and the sole caretaker of her elderly mother, does not mind waking early to get her son ready for school or preparing dinner for her family every night. And she does not mind the hourlong commute from Astoria, Queens, to her job in Bedford-Stuyvesant, Brooklyn. After spending nearly three years untangling a knot of financial bad luck, she is grateful for normal routines.

In August 2008, Ms. Ortiz was laid off from her job as a manager at a laundromat in Astoria.

“I started folding,” she said in a quiet, humble voice that barely hinted at the hardships she has experienced. “Then they trained me on the computer, and then I became a manager.”

Ms. Ortiz had earned almost $500 a week as a manager on a full-time schedule. When she lost her job, her income was cut in half: she had to support her son, Luis Pellot, then 13, her daughter, Princess Pellot, then 16, and her mother, who has Alzheimer’s disease, on $252 in weekly unemployment benefits. She says she gets no financial support from her children’s father. Her monthly rent was $611, and with utilities, food and credit card bills, she feared that her family would not make ends meet.

In February 2010, after nearly two years of looking for work, Ms. Ortiz was desperate. She had never been unemployed for that long. She sought assistance from the East River Development Alliance’s work-force development program. A caseworker helped Ms. Ortiz with her résumé and career-planning strategies.

“They started sending me out on interviews,” Ms. Ortiz said. “Some of them, I thought I had experience in what they were asking for, but they would call me and tell me no.”

Ms. Ortiz was baffled by the repeated rejections until her caseworker checked her credit report. Everything made sense then: it showed that damaging, faulty information had been added to her report.

“It said I owe over $75,000 and that I have two cars,” Ms. Ortiz squealed. “I don’t drive! It said I have a mortgage. I don’t have a house!”

Quickly realizing that she needed to correct the false information, Ms. Ortiz and her caseworker sent letters to more than 20 companies and the credit bureaus to set straight which debts were veritably hers.

“I did have a lot of credit cards, but I always paid them on time,” she said. “I only had $500 of credit card debt, maybe less, and they weren’t outstanding.”

Her credit reputation has since been restored, and she has achieved a nearly perfect TransUnion score, 798, but the blemish on her record took several months to reverse and was not without consequences.

In the summer of 2010, Ms. Ortiz went to a second interview for a position as a bank teller on Long Island.

“I thought I was going to get the job, but they ran my report and told me no,” she said. Despite the letters Ms. Ortiz had sent out, her report still reflected incorrect information.

With money and time running out — her unemployment benefits were to end in September — Ms. Ortiz took a different course. She went on public assistance and began receiving $500 a month in food stamps and an additional $110 biweekly, but this was not enough to buoy her family of four.

On the advice of her career counselor at the East River Development Alliance, Ms. Ortiz applied to the Grace Institute, which helps women prepare for the job market, to enhance her professional skills.

“A lot of jobs were asking for computer skills I didn’t have,” she said.

Ms. Ortiz was accepted into the institute in July 2010, but did not have the money to pay for books and materials. She approached the development alliance and was referred to a partner organization, the Community Service Society of New York, one of the seven agencies supported by The New York Times Neediest Cases Fund. She received $225 for materials and books and began classes that September.

A newly confident Ms. Ortiz graduated from the Grace Institute in spring 2011 and re-entered the world of résumés and interviews to great success. In August 2011, she was hired as an intake coordinator at the Paul J. Cooper Center for Human Services in Brooklyn, which provides residential services and treatment for chemical dependency and mental health issues, earning $10 an hour. She is currently up for a raise, she said.

As circuitous as it was, the rocky road she traveled may have been worthwhile, Ms. Ortiz admitted.

“My new job’s a lot better,” she said, her eyes gleaming with pride. “In the laundry, I had to be standing the whole time, sometimes 10 hours a day.

“Now, I have my own office.”

Credit Builder Loans Can Help Burnish Your Credit Score

     If you’re one of the many people whose credit took a big hit during the Great Recession, you may be looking for ways to nurse your score back to health. And we’ve written about a variety of strategies and products, including secured credit cards, that can help you along.

But I recently stumbled upon another credit-building product, conveniently known as a credit builder loan, that helps consumers establish credit or improve their scores.

“Credit builder loans are offered as a way for credit union members to do a couple of things: get something good on their credit reports and set aside some money for future use,”  said the credit scoring guru John Ulzheimer.

     The loans, which are usually for small amounts, generally work in a couple of ways. A typical credit builder loan acts much like a layaway plan: instead of getting the money upfront, the borrower makes payments on the loan over a period of time, perhaps a year, and the credit union puts the money in an interest-bearing savings account. Once the loan is paid off, the borrower gets access to the money.

In other cases, the borrower may give, say, $300 or $500 to the lender upfront, who then puts the money in an interest-bearing savings account as collateral. Then, the lender provides a line of credit up to that amount, which the borrower pays off in monthly installments, said Vikki Frank, executive director of the Credit Builders Alliance, which helps microfinance and other nonprofit lenders report the consumers’ payment histories to the big credit bureaus.

(As you may imagine, borrowers usually pay more in interest on the loan than what they earn on their savings. The rates on the loans can range anywhere from the single digits up to 18 percent, though some credit unions subsidize the rates and charge 3 to 5 percent, Ms. Frank added. And some other nonprofits don’t charge any interest at all.)

       With both types of loans, the lender reports the borrower’s payments to the big credit reporting agencies; of course, late or missed payments are also reported.  Ms. Frank said that her organization currently helps small lenders report to TransUnion and Experian. (On their own, individual lenders may not otherwise be able to meet the bureaus’ threshold for reporting a minimum amount of loans. That’s why the alliance is currently unable to report to Equifax, which has not agreed to waive its reporting minimums. Equifax could not immediately be reached for comment.)

“Getting two out of three is critically important because mortgages are generally based on the mid-score of all three bureaus,” Ms. Frank said, adding that if the consumer has no score at one credit bureau, the lower of their other two scores would be the mid-score.

So before you agree to take out one of these loans, just be sure that they are indeed reporting to at least some of the big bureaus. After all, the bureaus are the ones that provide the reports that are used to create the FICO score, which most lenders use to judge borrowers.

Nearly 15 percent of the 7,400 credit unions in the United States offer a credit builder program, according to Steven Rick, a senior economist at Credit Union National Association. You can see if you’re eligible to join a credit union through the aSmarterChoice.org Web site, though you’ll have to call or go to credit union’s individual sites to see if it offers these loans. The loans may also be offered at certain community banks, as well as at certified community development financial institutions, which cater to low- and moderate-income households.

If you can’t find a credit union that you are eligible to join, you can always consider using a secured card, where you are required to put a certain amount of money into a bank account, say $250 or $500, which is then used as collateral. And the available amount of credit is often equivalent to the amount on deposit.

One of the differences between a credit builder loan and a secured card is that you immediately have access to money on the secured card, which isn’t necessarily true with a credit builder loan. And the interest on the secured card is probably going to be much higher than the credit builder loan’s rates, Mr. Ulzheimer said.

“I’m kind of neutral on these loans because they act as an incentive to incur debt simply to rebuild credit,” he added. “That fuels the fire of people who hate credit scoring and say they are an incentive to get into debt.”

But for those who want to eventually secure a decent rate on a car loan or a mortgage, credit builder loans may be a solid stepping stone.

“The credit builder loan is about giving people an opportunity to start building relationships with some sort of financial institution that will help them build a credit history, and will hopefully help them build financial relationships and become part of the mainstream,” Ms. Frank said

Loan of a Sort Revives Credit

      If you're one of the many people whose credit took a big hit during the Great Recession, you may be looking for ways to nurse your score back to health. And we've written about a variety of strategies and products, including secured credit cards, that can help you along.

But I recently stumbled upon another credit-building product, conveniently known as a credit builder loan, that helps consumers establish credit or improve their scores.

''Credit builder loans are offered as a way for credit union members to do a couple of things: get something good on their credit reports and set aside some money for future use,'' said the credit scoring guru John Ulzheimer.

      The loans, which are usually for small amounts, generally work in a couple of ways. A typical credit builder loan acts much like a layaway plan: instead of getting the money upfront, the borrower makes payments on the loan over a period of time, perhaps a year, and the credit union puts the money in an interest-bearing savings account. Once the loan is paid off, the borrower gets access to the money.

In other cases, the borrower may give, say, $300 or $500 to the lender upfront, who then puts the money in an interest-bearing savings account as collateral. Then, the lender provides a line of credit up to that amount, which the borrower pays off in monthly installments, said Vikki Frank, executive director of the Credit Builders Alliance, which helps microfinance and other nonprofit lenders report the consumers' payment histories to the big credit bureaus.

(As you may imagine, borrowers usually pay more in interest on the loan than what they earn on their savings. The rates on the loans can range anywhere from the single digits up to 18 percent, though some credit unions subsidize the rates and charge 3 to 5 percent, Ms. Frank added. And some other nonprofits don't charge any interest at all.)

       With both types of loans, the lender reports the borrower's payments to the big credit reporting agencies; of course, late or missed payments are also reported. Ms. Frank said that her organization currently helps small lenders report to TransUnion and Experian. (On their own, individual lenders may not otherwise be able to meet the bureaus' threshold for reporting a minimum amount of loans. That's why the alliance is currently unable to report to Equifax, which has not agreed to waive its reporting minimums. Equifax could not immediately be reached for comment.)

''Getting two out of three is critically important because mortgages are generally based on the mid-score of all three bureaus,'' Ms. Frank said, adding that if the consumer has no score at one credit bureau, the lower of their other two scores would be the mid-score.

So before you agree to take out one of these loans, just be sure that they are indeed reporting to at least some of the big bureaus. After all, the bureaus are the ones that provide the reports that are used to create the FICO score, which most lenders use to judge borrowers.

Nearly 15 percent of the 7,400 credit unions in the United States offer a credit builder program, according to Steven Rick, a senior economist at Credit Union National Association. You can see if you're eligible to join a credit union through the aSmarterChoice.org Web site, though you'll have to call or go to credit union's individual sites to see if it offers these loans. The loans may also be offered at certain community banks, as well as at certified community development financial institutions, which cater to low- and moderate-income households.

      If you can't find a credit union that you are eligible to join, you can always consider using a secured card, where you are required to put a certain amount of money into a bank account, say $250 or $500, which is then used as collateral. And the available amount of credit is often equivalent to the amount on deposit.

One of the differences between a credit builder loan and a secured card is that you immediately have access to money on the secured card, which isn't necessarily true with a credit builder loan. And the interest on the secured card is probably going to be much higher than the credit builder loan's rates, Mr. Ulzheimer said.

''I'm kind of neutral on these loans because they act as an incentive to incur debt simply to rebuild credit,'' he added. ''That fuels the fire of people who hate credit scoring and say they are an incentive to get into debt.''

But for those who want to eventually secure a decent rate on a car loan or a mortgage, credit builder loans may be a solid stepping stone.

''The credit builder loan is about giving people an opportunity to start building relationships with some sort of financial institution that will help them build a credit history, and will hopefully help them build financial relationships and become part of the mainstream,'' Ms. Frank said.

Collection and Credit Firms Facing Broad New Oversight

     Andrew Harrer/Bloomberg NewsRichard Cordray, director of the Consumer Financial Protection Bureau, before a Senate panel in January.

8:56 p.m. | Updated

      Debt collectors and credit reporting companies are bracing for intense scrutiny after the government’s consumer finance watchdog unveiled a broad plan to regulate financial firms that have largely evaded federal oversight.

     On Thursday, the Consumer Financial Protection Bureau proposed regulations that would allow the agency to supervise those two controversial corners of the finance industry, which have drawn complaints of aggressive tactics and unfair practices.

The draft rule is the most significant proposal yet to emerge from the consumer agency — a symbol of the government’s new regulatory powers and a favorite target of Congressional Republicans — and the first of several efforts to police financial companies that are not banks.

“Debt collectors and credit reporting agencies have gone unsupervised by the federal government for too long,” Richard Cordray, the bureau’s director, told reporters on Thursday. “It is time to provide the kind of oversight of these markets that will help ensure that federal laws protecting consumers in these financial markets are being followed.”

• Documents: Proposed Rule on Debt Collectors

       The proposal now enters a 60-day comment period. The bureau expects to complete the rule by July, the two-year anniversary of its creation. The rule, like many of the bureau’s actions, could become bogged down in a larger political battle that has bedeviled many regulators in the Obama administration. Republicans have threatened to rein in the consumer agency’s budget and authority.

      The bureau, a product of the Dodd-Frank regulatory overhaul, has a broad mandate to police Wall Street banks as well as the more shadowy corners of the financial industry. Such firms are unmarked territory for the federal government. Until now, state authorities largely have licensed and supervised these companies.

But the agency was hamstrung without a leader at the helm, the result of a bitter battle in Congress over the appointment of Mr. Cordray. Republicans refused to bless his nomination unless Democrats agreed to subject the bureau to stricter Congressional oversight.

       In a sharp challenge to Republican lawmakers in January, President Obama circumvented Congress and opted for a recess appointment of Mr. Cordray. The move empowered the bureau to take on the lightly regulated world of payday lenders, mortgage firms and student lenders. The bureau can also oversee the “larger participants” in industries like debt collection, credit reporting and check cashing.

The bureau began its new effort on Thursday with the proposal to define the largest debt collectors and credit reporting companies. The bureau can also sanction smaller firms that run afoul of federal rules.

Some financial firms, on and off Wall Street, are squirming at the thought of an emboldened regulator. New oversight means rising compliance costs and the likelihood of additional penalties.

“I expect increased diligence and increased costs in light of the pronouncement from Mr. Cordray,” said Donald N. Lamson, a former regulator who now works at the law firm Shearman & Sterling. “It would be incumbent on them to beef up those areas that deal with consumer complaints.”

Under the debt collector proposal, the consumer bureau would keep watch over companies that make more than $10 million a year from their consumer business, limiting the scope to about 175 firms. These companies account for about two-thirds of the business in the debt collection market.

The oversight comes after a prolonged upheaval for the industry, which for years has been ensnared in lawsuits and regulatory actions for questionable collection practices. Debt collectors habitually rank as the most common topic of nonfraud consumer complaints at the Federal Trade Commission.

The F.T.C. recently cracked down on debt collectors for harassing consumers, sometimes for money that is not even legally owed. The agency last month levied a $2.5 million fine on Asset Acceptance, one of the nation’s largest debt collectors, to settle accusations that the company deceived consumers.

But the F.T.C.’s powers are limited. While it can sanction a debt collector for violating consumer protection laws, the Consumer Financial Protection Bureau has authority to root out wrongdoing and keep a closer eye on the industry to try and prevent bad acts.

5 Ways to Think About Nuisance Fees

     The fee that some banks charge for mobile deposits by smartphone, however, seems a fair exchange for value.

     First, it’s now been lampooned in the form of a video on the Funny or Die site. In that clip, a fake Bank of America ad quotes customers thanking the bank for not burning down their houses or torturing their families in a dungeon.

Second, it has induced a new wariness among companies in entirely different industries.

“We have the Bank of America fee top of mind,” said Bill Kula, a spokesman for Verizon. “Part of my role is to get in front of executives and say ‘Do you want your head chopped off if you do this?’ ”

And all because Bank of America tried to fully disclose the $5-a-month fee. Given the relatively small size of the fee, it’s pretty clear that something else is going on here, an “end of our rope” consumer declaration that a new set of rules for fees is necessary.

So this week, I rounded up the most discerning consumers I know to write those rules with me. We’ll start with five, but please come to our Bucks blog over the weekend and add to this list.

     COST OF THE SERVICE For Philip Friedman, a consumer lawyer in Washington, the discussion starts with a three-pronged test of whether the fee is reasonable: is it fair, is it disclosed and do you have a choice about paying it?

Fairness is the least clear, but Robin Block, a retired actuary in Manhattan, argues that the fee must have some relationship to the actual cost of providing the item or service.

By that definition, the 3 percent currency conversion fees that credit and debit card issuers levy are unfair. Ditto the $10 or so a day that rental car agencies charge for GPS devices that retail for $100.

Bank of America’s effort to charge $5 a month for debit cards is an interesting case study in this context of cost, given that it said that it all but had to add the fee because of new rules that limited what it could charge merchants for accepting the cards.

What the bank was really doing was trying to equate “making less money from merchants” with “costing the bank more.”

But the new debit card regulations alone are not what threaten the bank’s profitability. Far from it. “Everyone who watches them knows they’re less profitable for all kinds of reasons,” said Dave Hanson, a money manager based in Seattle. “The debit card became less profitable, but it’s not costly. It didn’t go negative.”

LEVEL OF VITRIOL The fact that a mere $5, equivalent to a couple of trips to the wrong A.T.M., set off this firestorm suggests that something else may be going on.

Ken Gallaher, a retired chemist in Bartlesville, Okla., calls it the “It depends on what I think of you” rule.

After several years of bailouts, ill-timed executive bonuses and mortgage shenanigans, any bank executive would have to be tone-deaf to stand up and demand that consumers pay a fee for access to their money. Besides, it was the banks themselves that pushed people into debit cards in the first place.

So the bar for outrage is lower for banks and industries that frequently irritate their customers. If you’re a bank executive, well, life is sometimes unfair like that. But if you’re a consumer, it means that uprisings over bank fees have a better likelihood of success.

THE TRUTH Airline baggage fees were never about the cost of fuel. Sure, bags are heavy. But if the point was to reduce weight and not make a bald grab for revenue, then the airlines would weigh people in with all of their belongings and charge accordingly. Or at least they would charge a fee according to the stuff you bring, wherever you stow it on the flight.

Airlines are not like banks, however, in one important respect: If you want to fly nonstop or fly at a certain time or be guaranteed a particular seat, you may not have much choice in carriers. And so the industry continues to get away with fees that make no sense.

Take fuel surcharges, which don’t seem to depend on the actual price of oil and were questionable in the first place. “I have an M.B.A. and I’ve worked in airline marketing, and it was always my understanding that fuel was part of the cost of doing business,” said Tim Winship, who oversees FrequentFlier.com. “There is something incredibly disingenuous about these fuel surcharges. The whole thing is just so fundamentally dishonest.”

THE VALUE We consumers are not all whiners, though sometimes it may appear that way. In fact, many of us would gladly pay fees for new products or services that offer real convenience and delight.

Few people are complaining about fees to use the wireless Internet on airplanes, except those who book certain flights specifically because the service is available only to discover that it is broken or the airline has switched to a different plane at the last minute.

And while I’m glad my bank doesn’t charge me for depositing a paper check using a picture I take of it with my mobile phone, I’d gladly pay for this service and don’t begrudge U.S. Bank for charging it.

A fee to use a spacious, well-equipped hotel gym seems fair in this regard, as would a fee to talk to a bank teller, though consumers have revolted against both types of fees in the past.

Mr. Hanson of Seattle said he would pay to reach a competent customer service representative immediately in certain circumstances. He also pays to reserve a spot at crowded classes at his gym, even though the classes themselves are supposed to be free. That way, he doesn’t have to come 20 minutes early to be sure he can get in. This, too, seems fair, though more expensive clubs probably couldn’t do it since they should be guaranteeing space in classes in exchange for their higher monthly dues.

PERSPECTIVE However symbolically irritating Bank of America’s move was, we focus on smaller fees at our peril. The biggest potential hit on the fee front probably comes from your investments, where mutual fund fees can quietly rob you of enormous piles of money over time.

Think about it this way: If you have $100,000 invested in mutual funds in a 401(k), a difference of half a percentage point in annual costs, say fund fees that are 0.75 percent instead of 0.25 percent, will mean a loss of $500 a year. All of your bank and baggage fees probably won’t add up to that.

So rather than occupying a Bank of America branch, people who are lucky enough to be employed and have a retirement plan ought to be staging a sit-in in the office of the person who runs that 401(k) plan.

And if you’re managing the money yourself? It’s nice to get a note like the one Mike Sanislo, a consultant in St. Paul, got from Vanguard recently. It showed him how much he would save if he were invested in a different class of mutual fund shares.

Or you could turn to a maverick like Randy Kurtz, who runs about $10 million for high-net-worth investors in his Alpha-Enhanced Index portfolio. He gets nothing if he fails to outperform the Standard & Poor’s 500-stock index. In 2010, he didn’t hit that mark, though in the four other full years of his fund’s existence he has. In those years, he kept one-third of the investment gains beyond the benchmark as a fee.

While I would not bet on his continued outperformance given how hard it is to beat any investment index over time, you have to admire his chutzpah. If only the rest of the world of consumer affairs offered the option of paying nothing in fees unless the performance was extraordinary.