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OPEN HOUSE

Maintaining Good Credit

Aired December 23, 2006 - 09:30   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


GERRI WILLIS, HOST: The holiday season can be a trap. A spending trap many folks across this country fall into and can't recover. The time to make a spending plan is now. The time to get out of debt, right now. A special money edition of OPEN HOUSE starts right now.
Your credit score is one of the key factors companies use to determine your credit health. Insurance companies use your credit score to set rates. Banks use it to determine limits, and now some employers are even using that one number to determine if you should get a job.

(BEGIN VIDEOTAPE)

WILLIS (voice-over): Your credit history is your financial DNA, and like DNA, when your financial history is damaged, bad things can happen.

LISA BAILEY, FEELS DISCRIMINATED AGAINST: I was crushed. I was crushed big time, because I was so excited on July 25th, so excited, I was moving up.

WILLIS: For Lisa, who has a hearing disability, moving up meant trading in temp work for a full-time position at Harvard. Her supervisor even encouraged her.

PIPER HOFFMAN, ATTORNEY, GUTTEN & GOLDEN LLP: Lisa was working as a temp for five months in the alumni office doing a lot of the same responsibilities that were involved in the permanent position that she applied for. She was handling very large checks from alumni, but Harvard didn't find it necessary to check her credit before she started doing that work as a temp.

WILLIS: But when Lisa applied for the job full-time...

HOFFMAN: All of a sudden it mattered.

WILLIS: Lisa didn't get the job. And while she doesn't deny a less than perfect credit history, dating back to days when she was unemployed and relied on credit cards to get by, she also says she's a good worker. To find good workers, more and more employers, like many lenders and insurers, are pre-screening candidates using their financial history.

EDWARD SCHENKER, STERLING TESTING SYSTEMS: Fundamentally, the credit report gives you some indication of a person's future behavior based on their past behavior. And really what you want to mitigate is giving them access to company financials.

WILLIS: But consumer activists argue the system is unfair to many, especially those with little credit experience or tarnished records.

PAULA BRUNER, EEOC: Well, there's been no scientific evidence that credit reports are any indicator of one's able to perform jobs.

WILLIS: Lisa's attorney has filed a charge with the Equal Employment Opportunity Commission.

HOFFMAN: We believe that this is race discrimination, because racial minorities are more likely to have credit problems than whites. So by using credit history as a hiring criterion, employers are having a disparate impact on minorities.

WILLIS: Harvard, for its part, told CNN: "Privacy considerations prevent us from commenting on specific cases, but in general, credit history reviews are conducted with the consent of an applicant only for positions with access to sensitive financial information or involvement in significant financial transactions."

The EEOC continues to investigate the case, as for Lisa, she's back to doing temp work and working to repair her credit history.

(END VIDEOTAPE)

WILLIS: An amazing story. Joining us now from Chicago, personal finance author Terry Savage; and from Atlanta, Todd Mark of the Consumer Credit Counseling Service. Welcome to you both. Good to have you here.

TODD MARK, CONSUMER CREDIT COUNSELING SERVICE: Happy holidays.

WILLIS: Well, let's talk about the psychology of debt. You know, people are going to go out and they are going to be spending this holiday season as much as $800. Terry, let's start with you. Why do people think it's OK to get in to debt?

TERRY SAVAGE, PERSONAL FINANCE AUTHOR: Well, not everyone thinks it's OK to get in to debt, and I -- probably we should point out at the beginning that some people are in debt because they simply had no other choice. They lost a job or there was an illness, and their medical bills that weren't covered by insurance.

WILLIS: Good point.

SAVAGE: But many people just go out there and say, I'm doing a good thing. I'm doing a good thing for myself. I'm doing a good thing for the people I'm giving to. I mean, I can't let my children be deprived on the holiday. And they make excuses for pulling out the plastic and they never think about the consequences that will come in January.

WILLIS: Hey, Todd, let's talk a little about not just the individual but aren't there societal pressures that people succumb to that make them spend more than they might otherwise?

MARK: Well, absolutely. The old cliche of keeping up with the Jones' always applies. And you're talking about psychologically, it's entitlement. Well, everybody else has this. So do I. Remember the powerful, emotional connection of money. Money equals love. Money equals power. It equals control in the relationship sometimes. And most importantly, as we go into the holiday season, you need to remember that we are in an instant gratification society where today you want to buy now what you can't even pay for tomorrow, let alone pay for today.

WILLIS: No kidding. You know, Terry, what are we talking about here? There is a negative savings rate in this country. People are opting to spend so they don't save at all. What is the problem here?

SAVAGE: Well, we're financing our lifestyles on debt, way too many people are taking money out of our homes, which should be -- you know, if we will a fully paid off home when you retire, it could turn in to your pension through a reverse mortgage. Instead we're sucking equity out of our homes. We are borrowing from the future for today, and most of the things you buy will be long gone by the time you pay off that credit card bill in 20 years or more.

WILLIS: That's right.

SAVAGE: So it's an education process, I think, and the best way to teach your kids a good lesson at Christmas is not to be giving them everything they want but to show them that you have some restraints so that we don't raise another generation of people who pull out plastic unwisely.

WILLIS: So, Todd, generation to generation, I'm telling you, I see debt at every level. It's students, it's people right out of college. It's people who are going in to retirement who still owe money for their house.

MARK: Well, Gerri, at CCCS here in Atlanta, we are seeing a tremendous aging of our population. And yes, we are seeing senior citizen who were expecting to be retired, expecting to have their house paid off, and instead because of poor decisions or poor situations that occurred, maybe even investing after 9/11 that went awry, they can't retire. They're taking out money from their mortgage, and they're carrying on for their kids. So we're seeing tremendous problems with debt, and as Terry said, it's such an important issue of educating the problems before you hit crisis point.

WILLIS: Well, Terry and Todd, stay with us. We're going to be back with you in a couple of minutes. We're going to have some solutions. Still ahead on this special money edition of OPEN HOUSE, what's in your wallet? We'll tell you why it might make a big difference in how much of you save and how many debt you carry.

Plus, coming up with a plan to be debt-free. Imagine that. Get a pen and paper. Valuable advice you'll want to write down is straight ahead.

(COMMERCIAL BREAK)

WILLIS: Everyone carries a wallet, but it's what you carry in your wallet that defines not who you are but how much debt you could be in.

(BEGIN VIDEOTAPE)

WILLIS (voice-over): So what exactly is in your wallet? Credit cards...

(on camera): Do you have any idea what the interest rate is on your credit cards?

UNIDENTIFIED FEMALE: I do, 14.

WILLIS: That's not bad. I think 12 is about the average.

(voice-over): And department store cards...

(on camera): Store card. They typically carry higher rates of interest.

UNIDENTIFIED MALE: They do. They do.

WILLIS: You have got to watch them.

UNIDENTIFIED MALE: I know.

WILLIS: Do you have a credit card?

UNIDENTIFIED MALE: I don't.

WILLIS: You don't use one at all?

UNIDENTIFIED MALE: I did once and not anymore.

WILLIS: Why?

UNIDENTIFIED MALE: It just wasn't so responsible and I ended up spending more money than I should have.

WILLIS: Got rid of it?

UNIDENTIFIED MALE: Got rid of it. It's a cash life.

WILLIS (voice-over): So it is.

UNIDENTIFIED MALE: Thirty dollars.

WILLIS (on camera): Thirty bucks.

UNIDENTIFIED FEMALE: About $75.

UNIDENTIFIED MALE: Fifty.

WILLIS: Let's check it out. Come on. That's about right. (voice-over): It also turns out folks carry around lots of, well, stuff.

UNIDENTIFIED MALE: I have a Java Juice card.

WILLIS (on camera): Blockbuster. What's that?

UNIDENTIFIED MALE: Times Square Crossroads.

UNIDENTIFIED MALE: A Dollywood card. That's good to have.

WILLIS: Do you have a Dollywood card?

UNIDENTIFIED FEMALE: It's way expired. It's way expired. I don't know why...

WILLIS: Doesn't it have any ID on it? It has your picture. So I would know what you look like. That's adorable. You can have a Superpass.

(voice-over): But on the whole, it seems as though some people have really gotten smarter, consolidating their debt onto one low rate credit card and slowly but surely paying it off.

UNIDENTIFIED MALE: Well, you know, I used to have a history of actually carrying balances.

WILLIS (on camera): And what did you do?

UNIDENTIFIED MALE: And then I realized how much interest I was paying. And I went, well, not going to happen.

WILLIS (voice-over): But whatever cards you do decide to keep, just make sure you activate the card and sign the back before someone else beats you to it.

(END VIDEOTAPE)

WILLIS: OK. We're back now with Terry Savage and Todd Mark. OK, Terry. You first. What's in your wallet? Let's see it. Show me the goods.

SAVAGE: I can't believe you're making me do this. All right. This is what my wallet looks like, but this is not all credit cards.

WILLIS: It looks like a lot of credit cards.

SAVAGE: Well, one of -- I've got my Starbucks card and I've got the card that gets the health club and the office building, but basically, I have two cards in the bottom section, it is all business. And two cards and a debit card in the top half that's personal. And if I were going shopping for Christmas, I would do it all on this one card. This is a debit card.

WILLIS: Why is that?

SAVAGE: Because if you don't have money in your account, you can't buy anything.

WILLIS: Oh, it's a debit card.

SAVAGE: And that way you won't have -- it's a debit card. And that's the perfect...

WILLIS: Good idea.

SAVAGE: ... card to use for shopping. Put the money you know you're going to spend in your account, if you don't have it, don't spend it. And tell people, you know what? This year I'm giving cards. Or this year I'm giving you a promise, but I'm not going to spend money I don't have. That's my vow.

WILLIS: All right. Todd, you're going to have to jump in here. Tell me what's in your wallet? Show me what you got.

MARK: All right. Here's my wallet. It's not necessarily as big as Terry's purse, but let me show you, first off, I'm going to open up here. I've got $10. Only $10. Why? Because the more cash you have on you, the easier it is to fritter away. I've got, I'm going to open up here, a pocket tracker, a spending plan of where each and every dollar goes. Especially for the holiday season. Now...

WILLIS: So you write down everything you spend, Todd?

MARK: Absolutely. Both charge accounts, debits as well as cash. That way you know where every single penny is going. You don't nickel and dime yourself to death. Now as I open up, I don't have a big fan of plastic. As a matter of fact, you've got a driver's license. I have one credit card, and I have one ATM card. I don't carry a debit card because you don't get the same protections when you purchase.

WILLIS: It's true.

MARK: And I hate seeing people that swipe for convenience and they may be swiping out money they need for a mortgage or a car. So I use one credit card and, of course, I use that credit card because I pay it off on time and in full every month using it just as I would cash.

WILLIS: Todd, you are good. Let me tell you, one quick question you've got to answer me very quickly, one tip for keeping your holiday spending under control, Todd?

MARK: Live within your means. And for holiday spending, put together a spending plan. Know how much you can afford to spend. Put together a list with who you want to spend for. A dollar amount toward every person. And that way you can help avoid the impulse shopping.

WILLIS: Terry?

SAVAGE: Quick thing, if you're going to carry a card -- a wallet full of cards like this, make a list of all of them, the numbers and the toll-free numbers to call and guard your wallet very carefully so it's not stolen. And the second thing is, either use just one card and get miles or bonus points or cash back from a card, or I like that debit card idea.

If you are buying big purchases, maybe you want to use a different card. But for small things, your debit card will track every bit of spending for you online.

WILLIS: OK, guys, thanks so much for your help. Terry, Todd, appreciate it.

MARK: Happy holidays.

WILLIS: Happy holidays to you, too.

Straight ahead on OPEN HOUSE, it's time to get out that pen and paper. "Weekend Project" will show you how to come up with a plan right now to save money and get out of debt for good. That's next when we come right back.

(COMMERCIAL BREAK)

WILLIS: Everyone needs a plan to get out of debt, and to save money. And that's where this week's "Weekend Project" comes in. Raul Vazquez is one ever the founders of livingwithbadcredit.com.

OK. You have got four ideas that our viewers can put into place this afternoon to start improving that credit score. What's the first thing?

RAUL VAZQUEZ, CO-FOUNDER, LIVINGWITHBADCREDIT.COM: Number one is you have got to get rid of your store credit cards and your gas credit cards.

WILLIS: Why is that?

VAZQUEZ: Well, because you can only use them in a limited number of places, or the one store that you have the credit card at. It doesn't have the same impact that a MasterCard or Visa has. So they view it differently.

WILLIS: Don't they carry higher interest rates of interest as well? I mean, they can cost you a ton of dough.

VAZQUEZ: Well, the average store credit card carries an interest rate of over 20 percent versus a MasterCard or Visa, which carries an interest rate of an average of 13 percent.

WILLIS: And does it hurt your credit rating though overall if you're closing down credit accounts?

VAZQUEZ: It depends which card accounts you're closing. Because what happens is, 15 percent of your credit score is made up of length of time on a credit report. So if you're closing old good accounts, yes, that's going to affect you negatively. But if you're closing old accounts, like a store credit card which have a limited credit limit, then, no, that's not going to hurt you because it's actually going to help you, because most of the time people have -- are using more of their credit limit on those kind of cards, because the credit limit is so low. So by percentage it's a lot higher. So if you have a $1,000 credit limit and are using $500 of it, you're using 50 percent.

WILLIS: Let's talk about your idea, you say you've got to know when your credit card company reports to of the credit bureau. How do I find that out and how is that information valuable?

VAZQUEZ: Well, all you have to do call them up and ask them, when do you report to the credit bureau on my account?

WILLIS: They will tell you?

VAZQUEZ: They'll tell you. Now the reason it's important is because, let's give you an example. If you have card with $1,000 credit limit and every month you spend $1,000 but every month you pay it off, in your eyes you have zero annual credit, which, again, that accounts for 30 percent of your score, average credit usage. So that's the amount of money you use versus the amount of credit they give you. So you want that percentage to be under 25 percent. The important thing to remember is that even though you're paying it off, they are reporting it incorrectly, because they're reporting it prior to you paying it. So in the eyes of the creditor, they're looking at it and saying, well, this person is maxed out on their credit card.

WILLIS: Ah, well that -- OK. That's important to know. Does it make sense to buy things at the very end of your billing cycle or early in the billing cycle?

VAZQUEZ: What I always do is I always pay attention to where my billing cycle is. If I've got a major purchase that I have to make, I know that, for instance, one of my credit card cycles on the 4th. So I know to wait a couple of days because it gives me an extra 30 days, especially if I'm carrying a balance on my account. Because that gives me an extra 30 days of free interest.

WILLIS: All right. So you say get a free copy of your credit report. And this isn't as easy as you might think. There are a lot of people who would like to charge you for that credit report.

VAZQUEZ: Well, by law you're entitled to get one free copy of your credit report once a year from each of the three credit bureaus. And it's important that you get it from each of the three credit bureaus, Equifax, Experian, and Transunion, because they all report different things. You might see something on one report and not see it on the other. So you -- all you have to do is order those three copies of those reports. And then when you order the copy report, you can look at it and determine what mistakes are on it. That's the first thing you do. Because one in every four credit reports contains a mistake.

So that's the first thing you have to do is address the mistakes with the credit bureaus. And they're required to take that off. And the other thing that you want to look for is look for old accounts that have negative information on them. And then report those as mistakes to the credit bureaus. Because then they have to go back to the creditor and then look at the credit report and if the creditor does not respond within 30 days, they're again required by law to take that off for your report. And that right there can boost your credit score by a minimum of 50, 60 points.

WILLIS: Wow. Great tips on managing that credit score. Raul, thanks for helping us out.

VAZQUEZ: Thank you.

WILLIS: As always, if you have an idea for "Weekend Project," send us an e-mail to openhouse@cnn.com and you can watch past "Weekend Projects" on our Web site, cnn.com/openhouse.

Coming up, we'll show you big ways to save big money around your house. That, and so much more, when OPEN HOUSE comes right back.

(COMMERCIAL BREAK)

WILLIS: There are ways you can save money in the house and on the road. And not the $3 cup of coffee type of money. We're talking about saving you some real cold, hard cash.

(BEGIN VIDEOTAPE)

WILLIS (voice-over): Are you paying for high-speed Internet and a home phone? Think about canceling your landline and check out voiceover Internet protocol. Using the Internet to make phone calls can cut your phone bill in half.

Spending too much on insurance? Raise your $500 deductible to $1,000. It could save you up to 25 percent on premiums and check into getting your home and auto insurance from the same company. Some companies will give you up to a 15 percent discount, if they hold both policies.

Is that mortgage payment bumming you out? If you own 20 percent equity in your house, ask your mortgage lender to drop your private mortgage insurance. Or if the value of your home has gone up, have the lender reappraise the house and you could find you already own 20 percent. Dropping mortgage insurance could save hundreds of dollars a month.

Take a look outside for more big savings. Set an irrigation system to run in five-minute cycles instead of 30 minutes. This gives the soil time to absorb the water and keep it from running down the street. It could save up to 25 percent on your water bill.

(on camera): Another place to keep costs down is in the garden. Keep a good layer of mulch around your flowers and your shrubs. That way you can keep the moisture in and the weeds down.

(voice-over): This way you won't spend your time or pay a gardener to keep your garden weed-free.

Back inside, make sure your toilet was purchased after 1992. While an older toilet can use up to 14 gallons per flush, newer models use only 1.3 gallons per flush. That's extra money you won't be flushing down the drain.

And if you have an older washing machine, replace it with a new front-loading model. They use 40 to 60 percent less energy and water. Plus some utility companies will actually give you a rebate for buying these high efficiency models up to $100.

Airfares are climbing and seats are scarce as more people are flying this holiday season. Saving money can be tough. For the best deals, avoid buying a ticket for the busiest travel days. Now if you can, try to fly on the actual holiday. And remember to stay vigilant. Even if you have booked your ticket online a while ago, keep checking to see how much that flight costs. And if you find the same flight for less, call the airline and get a voucher for the ticket difference.

And folks not flying will be crowding the highways. This year over 38 million people will be traveling this season. While the pain at pump is less, it will be worth both your time and your money to check out traffic congestion before you leave the house. At traffic.com, you can get specifics on traffic jams in 29 cities. You'll be able to find out how long a delay to expect and where traffic is moving the slowest.

If you have any questions or tips you want to share with your fellow OPEN HOUSE viewers, send us an e-mail to openhouse@cnn.com. And you'll find more on today's guests and topics on our Web site, cnn.com/openhouse.

As always, we thank you for spending part of your Saturday with us. OPEN HOUSE will be back next week right here on CNN. And you can also catch us on HEADLINE NEWS every Saturday and Sunday at 5:30 p.m. Eastern time.

Don't go anywhere. Your top stories are next in the CNN NEWSROOM. Have a great weekend.

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