Before the pandemic, Graciela Gomez relied on two jobs to keep up with her expenses. After losing her part-time job at Macy’s in March 2020, she had to choose between paying off her credit cards or paying her rent. She chose the latter.
“I didn’t know who to talk to, who to contact. I was embarrassed,” Gomez said.
An ad for a debt settlement company appeared on her social media feed promising to lower her debt. After following up, she says what she got was a lawsuit from one of her credit card companies in March. She’s still fighting today.
As California emerges from the pandemic, some residents face crippling personal debt, even as many of the state’s richest residents have seen their wealth grow. Among the economic winners is the booming debt settlement industry, composed largely of online companies that promise to reduce personal debt by negotiating with banks and credit card companies on the customer’s behalf. But consumer advocates point out that these companies often prey on financial desperation and fail to warn customers of the potential consequences — like ending up in court.
Now California lawmakers are considering legislation that would more tightly regulate the industry after largely overlooking personal debt from credit cards and loans in pandemic-era legislation focused on relieving rental and utility debt. The bill is reviving a perennial debate in the Capitol over whether alternative financial services — like payday loans, debt settlement, and credit repair — are financial predators or a needed lifeline for Californians with little or poor credit.
Assemblymember Buffy Wicks, a Democrat from Oakland who authored the bill, contends that existing federal regulations don’t go far enough to protect Californians.
“Let’s make sure that if they are working with these companies, that there’s transparency and empowerment for the consumer in that process,” Wicks said.
How debt settlement works
After Gomez’s first phone call with ClearOne Advantage, the debt settlement company, she said she was under the impression that the company would pay off all her debts, and that she would only need to make one monthly payment to the company until she paid off the balance.
“She made it sound easy, like ‘We’re here to help….Your life is going to change. It’s going to be so much easier.’ And I believed it,” Gomez said.
ClearOne Advantage declined to comment on Gomez’s experience. The company provided what it said was testimony from a satisfied customer, but refused to provide contact information so CalMatters could interview the customer.
Desiree Nguyen Orth, director of the Consumer Justice Clinic at the East Bay Community Law Center, explained how most debt settlement companies work.
Customers who enroll in a debt settlement plan make a monthly payment to a debt settlement fund. According to Nguyen Orth, debt settlement companies wait until the customer has defaulted on their debts — which can sometimes take up to six months — before they begin to negotiate with creditors.
The defaults must occur before the negotiation process can begin, but the debt settlement companies avoid explicitly saying this, Nguyen Orth said. Debt settlement companies like ClearOne Advantage make money by charging customers a percentage of the total debt owed.
In a best-case scenario, willing creditors agree to settle the debt for less than the amount owed. After the customer agrees to the new terms, the debt settlement fund will be used to pay the debt.
The outcome is worse if a creditor refuses to work with the debt settlement company. As part of the program, customers sign a cease-and-desist letter that prohibits creditors from contacting them directly. In an effort to collect the debt, creditors will sue customers, often resulting in a judge ordering that the money be taken out of the customer’s bank account or paychecks.
“They come to me when they get sued and they’re like, ‘Why am I being sued? I enrolled in a debt settlement plan. I don’t get it,’” Nguyen Orth said.
She added that most customers don’t realize they can negotiate with creditors themselves. For free.
“I think (debt settlement) is one of the options that need to be there,” said Tomas Gordon, CEO of ClearOne Advantage and president of the Consumer Debt Relief Initiative, a debt settlement industry advocacy organization. “We educate people the right way, and make sure that we self-police the industry to make sure that consumers are getting the best possible outcomes.”
As part of the enrollment process, Gomez provided her income, expenses, and debts to establish a monthly budget. But she said she was left with the impression she could afford to pay a monthly $250 deposit into her settlement fund when she really couldn’t.
The ClearOne Advantage representative also told her that they could not help her if she was not enrolling at least $10,000 in debt, she said — prompting her to enroll in a credit card on which she had been making regular payments so she could participate in the program.
The agreement Gomez signed, which CalMatters reviewed, has no mention of minimum requirements to enroll in the program but does charge a fee assessed at 25% of the total debt. That means the company ultimately plans to charge her just over $2,500. As of June 2021, Gomez deposited $2,259 into her settlement fund, of which $1,053 has been debited as service and transaction fees.
It wasn’t until Gomez was sued by Bank of America, she said, that she learned she had defaulted on all her credit cards and she was now facing a court judgment.
“If I had known since day one that I could have been sued, I think right there, I would have stopped and I would have tried to get more research to try to understand what was the point of paying (ClearOne Advantage),” Gomez said.
What the bill would do
Assembly Bill 1405 wouldn’t change how debt settlement companies work, but it would add more regulation. Existing federal regulation is limited to companies servicing customers across state lines.
The state bill would mimic some of those federal rules, applying them to California-based companies, as well as adding new rules like giving customers a three-day “cooling off period” before the contract takes effect.
The bill is advancing despite almost unanimous opposition from Republicans. Several lobbies have removed their opposition after successfully pushing for amendments, including one that would remove regulations around referral fees, a major source of income for the industry.
But before the most recent amendments, the debt settlement industry had coalesced in opposition to the bill. The Consumer Debt Relief Initiative, composed of members of the debt settlement industry, maintained that new regulations would harm the very consumers that the bill is trying to protect by driving debt settlement companies out of California, leaving consumers with few options.
“Why would any state take away debt settlement as an option to these families during this pandemic?” said Willie Brown, former Assembly Speaker and mayor of San Francisco, in a Consumer Debt Relief Initiative video. “It’s a vital service to those who need it most.”
The alternative for many families, Brown and the industry argue, is bankruptcy or worse.
“You’re left with nothing but bad actors — it creates almost a black market,” said Gordon, the group’s president.
Assemblymember Wicks disagreed. “For the bad actors, if they feel like they can’t operate in California, then they can go somewhere else,” she said. “And for the good actors, they can stay here and they can help our working families that do need help.”
Gordon said he believes the bill is more about benefiting banks and credit card companies who don’t like having to negotiate customer debts down.
OneMain Financial, the only creditor backing the bill, declined to comment but wrote in a letter of support for the bill that their main goal is to work directly with their customers who default on their debts.
Primed for debt settlement
Despite loan forbearance from the federal CARES Act and a statewide eviction moratorium that aims to protect Californians, personal debt such as credit cards and medical bills have been largely overlooked by lawmakers, leaving consumers exposed to potential predatory practices by alternative financial services.
“That is a huge bubble of people who are primed for debt settlement,” Nguyen Orth said.
The debt settlement industry expects to do very well. In a February meeting of the Consumer Debt Relief Initiative, an Accenture market analysis said that the industry projects a 75% increase in the number of accounts enrolled in debt settlement services in 2021.
The new California Consumer Financial Protection Law, which took effect Jan. 1, gave the state Department of Financial Protection and Innovation new authority to regulate the industry. The agency says it won’t start tracking debt settlement companies until 2023.
Does the bill go far enough?
According to Nguyen Orth, everything ClearOne Advantage did in this case is legal, so it’s unlikely that AB 1405 would have changed much for Gomez. But the bill would address some of the more egregious practices that Nguyen Orth has seen, she said, like promising unrealistic outcomes without advising customers of the possible risks or offering predatory loans that can lead to further debt.
Gomez ended her contract with ClearOne Advantage at the end of June, but she is still working with Bank of America to settle the lawsuit and outstanding balance. Her advice for others? Avoid debt settlement companies at all costs.
“It’s an absolute scam. They prey on people like me,” Gomez said. “Call the credit cards or collection agencies yourself….It’s easier, and the money will go directly to who you owe.”
This article is part of The California Divide, a collaboration among newsrooms examining income inequity and economic survival in California.
Building credit from scratch is often referred to as a chicken-or-the-egg problem. If you don’t have a credit history, it can be challenging to get approved for a credit card. But if you don’t have a credit card, it’s hard to build a credit history.
Here’s where secured credit cards can save the day. It’s possible to be turned down for a secured credit card, but if you’re approved for one, it’s a good way to get started on your journey to great credit.
We’ll start with the basics and work our way up to the advantages – and disadvantages – of secured credit cards.
There are both unsecured and secured credit cards. An unsecured credit card doesn’t require a deposit to get approved for the card. The top unsecured credit cards from major issuers are typically used by those who have at least fair credit. There are some unsecured credit cards available for those with zero or bad credit, but they tend to have high interest rates and fees.
Due to the cost of unsecured cards that target those with little or bad credit, many turn to secured credit cards. Secured credit cards do require a deposit, usually ranging from $200 to several thousand dollars, depending on the deposit requirements of the issuer.
The deposit stays in an account, and the purpose of the deposit is to decrease the risk for the lender. If you don’t pay for the purchases you made with your secured credit card, the financial institution will use your deposit to pay it off.
When you get approved for a secured credit card, you’ll receive a credit card that looks just like an unsecured credit card. There’s no visible clue that the card is secured.
The amount of your security deposit is usually equal to the credit limit for your new secured card. You’ll use your secured credit card just like you would an unsecured card. You can use it for purchases everywhere that accepts your secured credit card.
Just to be clear, your security deposit stays in an account with the issuer. You’ll make payments on your balance from one of your own bank accounts. So, you’re actually buying things on credit.
Most secured credit card issuers report your payment history to the three major credit bureaus: Equifax, TransUnion and Experian. If you can’t find confirmation on the card’s home page that payment history is reported, call the issuer to make sure it’s the policy.
When your secured card’s bill comes, you must pay the bill by the due date. If you pay your balance in full, you’ll avoid paying compound interest. If you consistently make on-time payments and keep low balances on your card during the month, your credit score will begin to increase.
Secured credit cards have many advantages, but there are also downsides to this type of credit card.
Secured credit cards help you build credit and develop a good credit score.
Secured cards help you learn how credit works. And since the credit limits are on the low side, it helps to minimize your risk of getting into debt.
Some credit card issuers will promote you to an unsecured credit card. Not all secured card issuers have unsecured versions, but many of them do.
When you’ve built a good credit history and you’re ready to upgrade to an unsecured card, you can get a refund of your deposit.
Many secured credit cards offer rewards and benefits.
You have to make a security deposit, and this ties up your money for the life of the secured card.
Some secured cards have many fees, so you have to read the fine print carefully.
You’ll probably have a low credit limit, but this is often a good thing while you’re getting comfortable using credit.
Some secured credit card issuers don’t offer unsecured versions, which means you have to apply for an unsecured card from another issuer.
I know it’s difficult to build credit or to come back from a poor credit score. A secured credit card can be a great option, but be sure you read all the disclosure statements and understand if there are fees involved. After about a year of responsible use, you’ll probably have at least a fair FICO score (580-669), which is good enough to make the leap to an unsecured credit card.
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How This Card Works
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But rewards shouldn’t be the most important thing to students. Instead, consider this card because it’s very easy for Bank of America customers to manage, along with their checking and savings accounts. It also helps students to build their credit by offering them a free FICO score each month. It’s compatible with digital wallet technology and can be managed by a full featured mobile app.
New accounts also receive 15 months of 0% APR financing on both new purchases and balance transfers, and there’s no annual fee for this card.
While most student credit cards are very basic, this one comes with generous rewards, including a new account bonus. Other advantages are its promotional financing offer and free monthly FICO score. There’s no annual fee for this card, but that’s expected with a product designed for students.
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If this card has one disadvantage is that it may be that it’s too generous. Offering students rewards for spending could encourage some to incur debt, which is never a good idea. Likewise, interest free promotional financing won’t cost students anything to carry a balance, at first. But this offer expires after 15 months, and some cardholders may get in the bad habit of just charging it and worrying about the payments later. But so long as students use this card responsibly, these drawbacks will not matter.
Discover it Student Cash Back Credit Card. This card offers 1% cash back on most purchases, and 5% back on up to $1,500 spent each month on rotating categories of purchases. You also receive 6 months of 0% APR financing on new purchases, and a $20 statement credit each year your GPA is 3.0 or higher, for up to five years with the Discover it Student Cash Back card. There’s no annual fee for this card.
Capital One Journey Student Rewards. This card offers 1% cash back on all purchases, plus an increase to 1.25% when you make your payments on-time. There’s no annual fee for the Capital One Journey Student Rewards card.
Chase Freedom® Student credit card. This card offers a $50 bonus when you make your first purchase within three months of account opening. It also offers a $20 good standing reward each year on your account anniversary, for five years. You can earn a credit limit increase when you make five monthly payments on-time within 10 months of account opening. There’s no annual fee for this card.
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A credit repair company could improve your chances of getting approved.
Credit Repair companies, like Credit Saint, specialize in finding and helping you remove mistakes on your report to help you improve your credit.
If you would like to refinance your current home loan but lack the credit score to snag a low rate, this article is for you. Here, we’ll suggest ways you can improve your current interest rate, even if your credit is less than perfect.
Can you refinance your mortgage with bad credit?
The short answer is maybe. It’s certainly not out of the question. If you’re looking for a conventional refinance, you’ll likely need a credit score of 620 or higher. Don’t let that discourage you if you’re not quite there, though. A mortgage lender will also consider factors like how much you earn and your cash reserves (to determine whether you can cover financial emergencies). Even if your credit score is low, a lender may be willing to take the risk as long as other aspects of your application are strong.
But first, you need to know where to start.
Speak with your current lender
Let your current lender know that you’d like to refinance and find out if it offers options that will work for you. The best thing about working with your current lender is that it knows your mortgage file and can quickly determine whether you’d qualify for any of their refinance programs, even with bad credit.
Your current lender may help by changing your loan terms. For example, it may be willing to refinance your loan to a longer term. You’d end up paying more in total interest over the life of the loan if you extend it, but it will lower your payments and, hopefully, give your budget a little breathing room.
Also, if you’re still carrying private mortgage insurance (PMI) on your loan because you put less than 20% down when you purchased the property, find out how close you are to hitting the 20% equity mark. Once you have 20% equity in the property, your mortgage lender will drop PMI. Here’s how that works:
Get your home appraised. A home appraisal typically runs between $300 and $450. You have to pay for the appraisal, but it could take as little as two months to recoup the cost once PMI is dropped.
Figure out how much you still owe. Let’s say the appraisal comes in at $325,000, and you currently owe $250,000. That means you owe less than 80% of what the home is worth (giving you more than 20% equity) and are eligible to drop PMI. ($250,000 ÷ $325,000 = 0.769, or just shy of 77%).
Ask your lender to drop PMI. Provide your mortgage company with the appraisal and a written request to drop your PMI payments.
Seek a government-backed loan
Government-backed loans — like FHA, VA, and USDA mortgages — are designed for everyday people who may not have much cash to get into a home. Though regular mortgage lenders distribute them, these loans are backed by the U.S. government. Lenders know that if you default on the loan, the government will make them whole. Simply put, if you want to refinance but your credit score is nothing to write home about, a government-backed loan may be your best option. While these loans do have minimum credit qualifications, they are typically lower than a traditional mortgage.
If you currently have an FHA mortgage, the FHA streamline option allows you to refinance without a credit check or income verification. The catch is that your mortgage must be current. If you’re hoping to switch from a conventional loan to FHA, you’ll need to undergo the typical credit check.
Loans backed by the Veterans Administration are for active and former military members and their families. Although you will likely need a credit score of at least 620 to qualify (depending on the lender), a VA Interest Rate Reduction Refinance Loan (VA IRRRL) allows you to refinance an existing VA loan as long as you’ve made at least the last 12 payments on time. (This requirement varies by lender.) Lenders may also have guidelines regarding how long you’ve held your current mortgage. Unfortunately, there is no cash-out option available with a VA IRRRL.
Home buyers with an income of up to 115% of the median income for the area where they hope to buy (or refinance) a property may be eligible for a USDA loan. The home in question must be located in an area designated as USDA eligible.
If you have a current USDA loan, their streamlined assist program lets you refinance without a credit check. You qualify as long as you’ve made the last 12 months’ worth of payments.
Add a cosigner
Though we’re putting this option out there for your consideration, convincing a cosigner to refinance a mortgage is not as simple as it sounds. Not only do you have to talk someone into taking responsibility for your mortgage if you miss payments, but some lenders want the cosigner to be on the title of the home. In addition, if your credit score is very low, a cosigner may not help. That’s because mortgage lenders use the lowest median credit score between you. No matter how high your cosigner’s credit scores are from the big three credit reporting agencies, the lender will be more interested in your median score. Let’s say your three scores are 600, 590, and 580. It’s that middle score (590) they’ll use to make a credit decision.
That said, if your median score is right on the cusp of the lender’s minimum required score, having a cosigner with excellent credit may be enough to inspire the lender to refinance your mortgage. For example, if the minimum required score is 660, and your median score is 650, you may have a shot.
There’s no credit score so low that it can’t be rehabilitated. So as you work through your refinancing options, take steps to raise your credit score. You might not be able to do it overnight, but you can do it.In the meantime, if you’re not sure where to get started, look at the best mortgage lenders for bad credit. They can point you in the right direction.
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