CW 313: Credit Scores with John Ulzheimer President of Consumer Education at SmartCredit.com

Welcome to Creating wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven't thought of before. And a new slant on investing fresh new approaches to America's best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine self made multimillionaire who not only talks the talk, but walks the walk. He's been a successful investor for 20 years and currently owns properties in 11 states and South 17 cities. This program will help you follow in Jason's footsteps on the road to financial freedom. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors.

Welcome to the Creating wealth show. This is your host, Jason Hartman. And this is episode number 313. 313. Thanks for joining us today in and today we're going to talk a little bit about consumer credit and how to manage credit with our guest John Alzheimer, who will be coming up in a little bit here. But first, I've got one of my college buddies on the line. And when I say that, I mean it in a rather odd way. I have long since been out of college, but my friend is just about to graduate from college here at Arizona State University and that is Cody. Cody, welcome. How are you?

Oh, I'm doing great. Jason finally got on this show so I'm really happy to be here.

Your 15 minutes of fame is upon you right now. So we talked about having you on show for several months and we just didn't get around to it.

I know it's been, it's been quite busy.

It certainly has. And you graduate next month, so congratulations.

This is very true. Yeah, I'm a little less than a month away from graduation, so it's starting to set in.

Reality wise, what impressed me about you when we first really talked in the breakfast diner here one day is your knowledge of finance and the financial markets and economic principles and so forth and give everybody a little bit of your background, if you would, and tell them about your major and your education.

Yeah, sure, Jason, I'd love to. So I currently attend ASU as Jason already explained, and I'm graduating in May with a degree in finance as well as a minor in international business. And that's from the W.P. carey School here. Now we all know ASU isn't exactly known for their academics, but W.P. carey School of Business, actually it was ranked 24th, I believe, out of the entire country for undergraduate business programs. So that was in the Business Week 2013 survey, so it's actually pretty impressive.

Fantastic.

ASU as a whole.

Yeah, yeah, no, ASU is known as a party school. There's no question about it. And I will attest to that, by the way, which, Cody, by the way, you know, I've been telling you that I think I need to actually graduate too, because my liver needs a rest.

It's definitely taxing on the. It's more taxing than the government, actually, on our bodies.

So.

Funny, but kind of risky at the same time.

Yeah, but being in Tempe, Arizona, here, going to school. I mean, Tempe is such an awesome town. And then you have downtown Phoenix and then Scottsdale, which is just an awesome party scene.

Yeah, a lot of nightlife around here. Arizona is as far as the whole country goes. It's really a very fun place. And gosh, in Scottsdale, you have fantastic restaurants too. I heard it was rated number three for foodies in the entire country after San Francisco and New York.

Wow. I believe that for sure. There's. There's so many great bar and restaurants and nightlife up there.

You know what's interesting, too, and not to get off on a tangent, like we're probably about to, but when you look at government interference in marketplaces and business and government intrusion, a lot of new restaurant concepts start here in Scottsdale, Arizona. And one of the reasons for that, in my opinion, is, number one, the government doesn't get in your way too much in terms of building. And it's fairly easy to get a business moving, start a new business, do construction, do a build out of a space, etc. And open a facility. But then your. Your servers in the restaurants, you only have to pay them here. Like, I think server wage, which is lower than the minimum wage.

I think it's around five.

It's no, it's no. It's like less than that. It's like $4.30 or something per hour. I think y. The servers are lining up for the jobs. It's not like there's any shortage of demand for those jobs. Okay. And, you know, they make their money on tips, obviously. And bartenders can make 30, $35 an hour. That's pretty darn good for a college kid. And waiters and waitresses make good money too. And that's why a lot of new restaurant concepts start here. True food started here. There's a bunch of others. My friend who's in the. He basically leases and sells properties to largely restaurant clientele. And he told me, he says, you know, Arizona, I Mean, especially Scotts is like a hub of new concepts. So again, when government loosens the reins a little bit, things start to flourish and stuff happens. And that's why it's not a zero sum game in economics. When you lower taxes, you actually increase economic activity and ultimately increase net tax revenues to government. And Reaganomics and the Laffer Curve, Arthur Laffer proved this.

Absolutely.

Yeah. Interesting stuff. But anyway, go on about your background. Sorry for the tangent there.

Sure. That's typical though.

It is.

So I actually moved out here from Ohio about four years ago and went through school here. But even before then in 2009, I'd say around 2005, 2006, early high school. I became fond of investing back then where I opened up my first E Trade account and I actually co opened that up with my dad's name just because you have to be 18 to actually have your own account. I did that and actually bought my first investment, two shares of Apple. Back then I think they were trading at like 48 bucks a share and yeah, tenfold increases. I kind of missed out on if I held onto those. After I almost doubled my money with those two shares, I continued learning about the equity markets and stocks and basic investing principles and then kind of merged that with some derivative investments like the futures market. So right now I basically concentrate on a lot of commodity investments, futures and options on futures.

And that, that is the dangerous thing, I think because once you have a success in that market, it's kind of like gambling, you know, it's 100% gambling. Well, no, and what I mean though is they kind of get you in because when you start winning gambling, you think, oh gosh, I'm just going to keep winning and you put more money down and, and that's, that's kind of a crazy thing.

But yeah, it's a SL slope for sure. You definitely have to be diligent with your stop losses and be very protective of your capital because with something like a futures contract, it's highly leveraged, which means you can make a lot more money than with a traditional stock or bond, but you can lose a lot more just as quickly. So it's very, very risky regarding your capital.

Yeah, and you've taught me a lot about that. So it's pretty interesting stuff. But you know me, I love income, property, I love the simplicity of real estate. All that stuff you show me on your, your iPhone and so forth. It's pretty complex.

It definitely, it's taken me, I'm still learning about them, to be honest. And I'VE been in the futures market for a little over three years now. So it's always a continuous learning process.

Yeah. Well, you wanted to talk a little bit about student loans because you're in it, you've got one and your friends have them who are going to school and there's a huge bubble kind of inflating. What are your thoughts? I know you're looking at a recent CNBC article about it too.

Yeah, definitely. We discussed CNBC article I found was published 27th March actually, and they were basically examining Equifax's recent report for the first quarter of 2013 regarding government and private student loans. They actually had a record number. It was about $3.5 billion in these government and private student loans that went bad in the first three months of 2013. And that's been the biggest increase since Equifax began keeping track. So it's definitely alarming.

Yeah, it's definitely alarming. Now, you know, we've talked about this a lot on past shows and I know you've been listening to the podcast, Cody, for a while. When did you start listening to the podcast, by the way?

A little after I met you. So I'd say for about a year now.

About a year, yeah. And we've talked a lot about this. And folks, this is one of my big theories that the student loan bubble, which is now over $1 trillion, not dischargeable debt, so people never get a second chance. The student loans must be repaid, period. End of discussion. So nobody's going to get out of these loans unless there's some big change in the law, which I don't really think that'll happen. But these loans have to be paid and they're going to keep the generation Y cohort as renters for a lot longer than before. Cody, I'd like to ask you kind of a little bit about your outlook about things. I mean, you're a finance guy. You're working for one of the utility companies now here in Arizona doing internal audit work, I believe, right?

Yeah, yeah. I'm intern for the audit services department in the largest utility company in the state of Arizona. And they're actually the highest taxpayer in the state. So it's a multi billion dollar firm where I'm working right now.

Fantastic. And what are your thoughts and what are your peers? What do they say and think about the future? Like do they think they're going get out of school and go buy a house and settle down and get married and have kids, or is that not really Even on their mind, like they're. I think this generation is going to put off family formation a lot longer than any generation before it.

Oh, you know what I mean, to be completely honest, being at Arizona State University right now, it's very distorted regarding everyone's expectations and outlook on life after college. But in general, you know, I think that a lot of people are almost delusional these days about their expectations of what they're going to have after school and just the change in landscape of the career field.

And I agree with you totally. I think a lot of these kids are unfortunately in for a pretty rude awakening.

Oh, that's one of the biggest understatements I think you can make.

Okay, all right.

They're going to get.

So tell me what you mean about that. We live in an area where a lot of these kids, they have really nice cars, they have nice apartments, they've got the latest clothing. I mean, they dress better than I do. That's one of the things I've learned enough about me. Yeah, exactly.

But tell me about that. You know, you say that rude awakening comment is an understatement.

Yeah. You know what I mean? It's great to focus on school, but you also have to build up your professional portfolio concurrently, I believe. And right now, with the job landscape as it is after the 2008 recession here, I mean, it's almost ignorant to expect that you're going to get maybe a 45 or $50,000 job right out of school with little or no experience. And you add in 80% of people's majors here at ASU where it's things like liberal arts, communications, that sort of thing, with no quantitative or scientific skills at all. It's very delusional with the mindset I think that they have.

So, I mean, they expect that things will be just good and they'll have all the material things they want and they'll just go out and get a job and everything will be peachy and they'll have a highly high paying job.

Yeah, I believe a lot of them, they think the job markets like it has been over the last 50 years and it's not even close. There's this huge backlog of job opportunities of people that are staying in their current positions, especially finance and accounting, which I follow really closely because one of my vested interests regarding my career path. But yeah, there's this huge backlog of people just from what I've seen in the corporate world where there's not a lot of incoming entry level job opportunities for us. So it's more competitive than ever because a lot of these older people are staying their careers and not even being able to retire at 65 or 70. But I've seen director at the direct people at the director level and some of the companies I've been with, 70 plus, they're working through retirement just to keep up.

Really. Wow.

There's not a lot of mobility like it used to be, especially in finance and accounting.

Oh, that's, that's pretty amazing. Now you told me recently that you sent out, I think about 200 resumes, was that correct?

Oh, it's, yeah, it's. It's a continuous process. It's, it's something that you can't just send out a batch of applications and wait to hear back, especially in today's market. I mean, things like LinkedIn make it a lot easier to apply for jobs in the searching process and whatnot. But there's definitely a, continue a continuous process of applications that I've been sending out over the past six to eight months and that's for full time positions that start over the summer for incoming graduates.

The one thing I really would say that's really good about your generation, generation Y, is that you're very, very, very entrepreneurial. Every ASU kid that I've met has an idea for something. Granted a lot of them are half baked ideas, but you know, at least.

There'S where all the creativity comes from.

Yeah, no, totally. I mean everybody, it seems every other kid I meet has an idea to develop an iPhone app.

One of the kids, or my friend in our fraternity, he actually just developed his app, it's called Tap Contact Exchange. And yeah, he's been working on that for over a year now and it finally got approved through Apple and went live about three or four weeks ago. So yeah, I have a close friend that's actually that entrepreneurial where he took it to that next level and hired programmers to develop his app.

How's it going for him, do you know? Have you done that?

Yeah, he's definitely on the marketing path right now for the app. Just trying to build up that user base. Yeah, so he's doing really well with that.

Fantastic. And I think the thing that really could save us is technology and it is amazing. Like one of my favorite technologies is 3D printing and I was just reading an article about that today about how that could bring tons of manufacturing back to the United States and really hurt China ultimately. And you know, just the creativity and the entrepreneurial spirit I think is very good about your generation. So I think there's a lot of positives and negatives at the same time. But in either case, as far as just the hard numbers go and the math goes, the lesson for our investors listening to this show is provide rental housing because Generation Y is the largest demographic cohort in American history, larger slightly than the baby boomers. And I say they're going to be renting for a lot longer than other generations. And you know, Cody, there's another concept I've talked about on the show. You've heard me talk about it, but I always like to say the best thing you can have on a resume is mobility.

Absolutely.

The ability to go where the jobs are. Right.

Yeah. Relocation is something that's part of almost any application. If you're willing to relocate, then they're definitely going to take that as a positive attribute to your application.

Yeah. So the lesson there is don't get tied down with a house, be a renter. It's good we can serve those people and help them have that mobility. And it's just a good deal for all concerned. Any other thoughts on the student loan issue?

Oh, you know what I mean. It's definitely something that outpaces a lot of the common topics that we hear about politically all the time regarding Medicare, Medicaid, entitlement spending, transfer payments. It outpaces that by a huge margin. And it's definitely not something that's covered as much as. So the record number of delinquencies and forbearments regarding student loan borrowers is one of the most alarming things regarding any type of government spending because the government's basically guaranteeing all of these loans and the taxpayers eventually are going to be on the hook for these.

Yeah, yeah. Well, the taxpayers. And really different than other loans, the borrowers, because they're just not going to find it very easy to default on these.

They're in debt to get their wages garnished. There's. They'll hunt them down. They'll do anything they can to get that money out of them.

Owing a student loan is like owing money to the irs. They're going to collect.

Absolutely.

Yeah. So that's something different. Let's switch topics here. Before we get to our guest, let's talk a little bit about bitcoin. This is amazing. And we haven't talked much about this on the show, but when I was speaking at that international investing conference or that offshore investing conference in Belize about a month ago, that's when I first heard of Bitcoin. And I don't know when you became familiar with it. But it's this what it is, folks, if you're not familiar, it's this. It's a digital currency, and it's basically a mathematical formula that was invented by. Well, I guess I don't know exactly who invented it, but I think the credit was given to, like, a Chinese guy.

You know what? Yeah, it's kind of interesting because they are. There's some speculation that it's actually a pseudonym developer. So we might not even know the actual developer of the currency.

Right, right. No, it's a bit of a mystery for sure. And what's interesting about this is it's a mathematical formula of a digital currency. And gosh, you talk about fiat currency, while bitcoin is probably the ultimate fiat currency. However, the interesting thing about it is the way the formula works is that it cannot be debased. There is an absolute limit to the amount of currency. Now everybody, when they talk about fiat currencies, they instantly think all the gold bugs start saying, yeah, gold, gold, gold, gold actually can be debased too, because no one really knows the supply of gold. Okay, yes, we do know that it's hard to mine it, and the supply is, at least on earth, ultimately limited at some point, but nobody really knows what the limit is. I mean, when you look at technologies like fracking in natural gas and oil and all the. All the new technologies that have been developed there, we thought the supply was much more limited, but turns out there's a lot more than we thought because now we have new technologies and new ways to get at it. Well, bitcoin was, quote, mined because when this formula was created, you could set up computers to go and mine bitcoin. Don't really ask me how that works. I've never totally understand it, but you let your computer chug away. And at the beginning when the currency was announced, it was easy to mine bitcoin electronically. But now it's much harder because most of the bitcoin, or a lot of it at least, has been quote mined, unquote. And folks, please don't ask me to explain that. Someone explained it to me and I really couldn't get my head around it. How do you mine something electronically off the Internet? It's just weird.

Yeah, I was on TechCrunch the other day. They published an article on how to mine bitcoins.

Oh, okay.

Slush pools. So, yeah, there's actually entire websites dedicated to these slush pools and mining.

Isn't that interesting though?

Yeah, I believe one was located in The Czech Republic, it had a CZ domain. So, yeah, a lot of them are, of course, going to be in international territory.

Fascinating. And then what happens is the people that own bitcoin, that hold it, they put it, they list it on exchanges. And just like any currency, the price fluctuates. Well, when I learned about bitcoin just over a month ago, the price was like $47 per bitcoin US dollars. And just recently, the price went up to, I believe, $260. And then it crashed way down to $100 in, like, one day. And interestingly, I know we were talking about this before Cody, but everybody probably knows who the Winklevoss twins are. Does everybody remember who they are? They're the famous or infamous guys that sued Mark Zuckerberg over Facebook, claiming that they had invented the Facebook idea and Zuckerberg stole it. Of course, probably everybody's seen the movie, the Social Network.

Awesome movie.

Awesome movie. Yeah, yeah, great movie for sure. But. But they're big investors in. In bitcoin. In other words, they're currency traders. They're currency investors. So just like someone might want to hold dollars or hold Japanese yen or hold the euro, well, they hold bitcoin. They hold about $11 million worth of Bitcoin. And people accuse bitcoin of being a big Ponzi scheme. You know, in fact, here's one. One person quoting. People say it's a Ponzi scheme, it's a bubble, and at some point the narrative will shift to virtual currencies are here to stay. And then another expert says, who's anti Bitcoin says to say the investment is highly speculative would be the understatement of the century. So what do you think? I mean, this is. This is basically just a whole currency. Like any currency, it's built on faith.

It's nuts. I mean, even though it came out back in 2009, I recently just found out a couple days when this crash happened. So a lot of the articles I've been researching, media coverage, it's gotten one of them. I think it was the. Yeah, it was the Times or Time magazine, rather. They were comparing it to The Tulip Mania, 17th century home where those prices of rare tulip bulbs soared to absurd highs and then crashed and took out all the speculation. So, I mean, a lot of the speculators are probably going to get burned that are jumping into bitcoin right now, or the exchanges are so high. And another interesting topic they brought up was if you want to compare it to a traditional currency Such as the British pound, they were saying it would be. If the British pound trading around $1 62 pounds per dollar right now, it would have gone up to about $31.90 and then falling back to $12, as if we were going to compare it to this past crash of bitcoin.

That is a big, big swing. And let me tell you something else about bitcoin that I learned. There is a website, I think it's called like Silk Road or something. I think it's called Silk Road. And on Silk Road people trade bitcoin and they buy. They engage in regular legitimate transactions, but they also engage in a lot of illegal transactions like drug trade and so forth. And so the reason they use this bitcoin is that it's anonymous. And so now the feds have really been cracking down on bitcoin and looking at it and under the legal tender laws, they could probably just outlaw it because they say it's being used for all these surreptitious activities. So anyway, it's just an interesting thing. I mean, what a crazy concept. But I don't know, maybe a currency like this does have a chance. Of course, Uncle Ben Bernanke isn't going to like it and none of the Rothschild family will like it because, oh, they'll hate it. It's a competing currency, you know.

Yeah. And you can't just pump more of it into the economy too. It has to be created.

It's crazy, crazy stuff. Really, really fascinating. Just kind of a mind blowing concept, the concept of bitcoin. Well, hey, before we get to our guest Cody, I'd just like to tell everybody about a property real quick. I want to try and mention a property on every show if I can and I usually forget to do it, but this one came up and I thought this was an awesome deal. This is a property in the greater Atlanta, Georgia area in Lithonia. And it's on the website@JasonHartman.com $58 per square foot. This is, this is an inexpensive property for that area. It's a $69,000 property, $58 a foot. It'll take about $21,000 to buy it. Subject to qualifying and cash flow, $3,445 per year. And I'm just looking at the projections here on the pro forma, 16% cash on cash return, a debt coverage ratio of 2.13. And what that debt coverage ratio tells people is that it's very difficult to get into trouble on a property ever with such a good debt Coverage ratio like that and the projected return on investment overall is 40% annually. So you know what I like to say, Cody? Even if things don't go that well, even if they can only go half as well, 20% annually is not bad at all, is it?

Oh, not at all. I mean you're looking at higher. I don't even know what I was going to say. Yeah, but 1986 is not my style.

Yeah, yeah, yeah. Oh, you, you, you found the same property. You're quick, man. Yeah, that's good. No, it's not stylish and swanky. I mean, you know, it's a little regular looking kind of house on just a little middle class street. No big deal.

But 40%, you can't beat that for any year.

Yeah, yeah, yeah. The, the return on investment is phenomenal. So it's a little ranch style house, hardwood floors. No big deal, but good stuff. Well, hey, anything else you'd like to share? Give any people a perspective from college. Any advice to parents? Don't send your kids to asu. They'll just be drinking a lot of beer.

I highly recommend it. Yeah, it's not going to be cheap for the parents, but yeah, definitely give your kids that experience. It's been an amazing four years here to say the least.

Are you excited about moving on and taking on the world?

Not having any finance coursework for a while is going to be amazing. It's going to feel amazing after I get home from work. I won't have to deal with that. But yeah, it'll be a nice change for a little bit. And then I'm sure I'll fall into.

Corporate world and you'll become a Dilbert in a cubicle.

Yeah, I'll be back to the cube life full time.

No, not for too long. You're going to be a good investor.

So anyway, I'm actually in the process of starting a CTA commodity training advisor business with my futures experience. So that's going to be a side project for a while. But hopefully I could return to the show in a little bit and kind of discuss some of the commodity markets and outlooks for things like the metals, the corn and cotton markets, a lot of variety of alternative investments.

Yeah, well let me ask you about that real quick before we get to our guests. What do you think about the price of. The price of gold and silver are really down. I mean it keeps surprising me. I just always love to nail Peter Schiff on this. He said that by the end of Obama's first term, gold would be $5,000 an ounce.

Oh my God.

And you know all the silver bugs, when we had that little crazy blip up about two years ago, two and a half years ago now, I guess they were all saying it's going to go to $75 an ounce in no time. And here we are at what, 28, $29 now and gold is way down. Yeah.

You know any analyst expectations of price appreciation like that? I mean, they were saying the same things about Apple, that it was going to be $1,000 a share within 12 months. And I mean, it's really hard to pinpoint estimates like that.

Yeah, there, there are just so many factors playing on these kinds of things, whether they be stock or commodities. It's just very, very difficult to analyze. Especially, especially, especially when you have government intervention in the markets because you just can't predict governments. They act illogically. They sound principles of economics and understanding motivations of different parties in the economic landscape. When you put government into the mix, it just, it just becomes all very tough to predict and very illogical.

Yeah. You know, it's funny you actually just brought that up. There's a relevant topic that relates directly to that. The bank of Japan, it was about two weeks ago they started buying back government securities to kind of help establish the economy and get it on track to growth rather than the stagnancy that it's been over the past 20, 25 years. So all this bond buying, government intervention that's been, been going on is devalued. The yen. The yen futures took a nosedive about a week ago and it's been an insane spiraling out of control of the devaluation of this yen. And the US Government's. Actually I was reading in the Wall.

Street Journal, they're pretty upset about it.

Yeah, they're absolutely mad. And the Obama administration's contacting them and trying to kind of prevent them from going through with the whole repurchasing program because it's direct competition of what we're doing right now.

Yeah. Yet what's ironic is it's so hypocrisy, hypocritical because we're our Fed. Our Fed is doing the exact same thing.

It's a double standard to say the least. Yeah.

Total double standard. Yeah. Ridiculous. Well, hey, we'd love to have you back, Cody, and good luck with your career and congratulations on graduating next month. And we will be back with our guest here in just a moment. We'll talk about some credit issues. We're going to talk with him. He's from smartcredit.com so we'll be back in just a moment with that.

Are you interested in a property outside of our network? Do you need a second opinion? No problem. Let Jason's experts evaluate the deal. For more information, go to jasonhartman.com now.

It's my pleasure to welcome John Alzheimer to the show. He is a nationally recognized credit expert. He is an author and an expert witness and a credit educator. John, welcome. How are you?

I'm great. Thanks for having me.

Good. I'd like to ask all our guests, where are you located today?

Yeah, I'm actually based in Atlanta.

Okay, fantastic. Well, that's a market we like for real estate investors. So tell us a little bit about what it is you do. And I know there was a recent study out last week that talked about how people have improper information on their credit reports.

Yeah. The FTC published a study that an amendment to the Fair Credit Reporting act in 2003 actually directed them to perform a credit file accuracy study. And they published it actually just a couple of weeks ago. And the study concluded that between 10 and 21% of consumers had what was referred to as a confirmed error on their credit reports. Now, confirmed error is different than an alleged error. A confirmed error means that they actually did confirm that there was something erroneous. It wasn't just a consumer stating that something was wrong on their credit report. The confirmed error rate, the reason it was so broad, the 10 to 21%, was because there were varying definitions of the term error. There were some errors that were cosmetic, meaning that, you know, for example, your former address may have been misspelled, which is almost meaningless, versus an error like, for example, a late payment did not belong to you or perhaps a balance not belong to you. So there were varying degrees of error. But when you apply 10 to 21% to the credit file databases, the numbers start to become pretty impressive. Between 20 and 42 million consumers have some sort of error on their file. And these errors can be as benign, as meaningless, or they can be as problematic as the consumer gets declined for a loan or perhaps gets approved, but with less advantageous interest rates. So it can cost them more money for the loan.

Right. But it's. But it's just. I mean, the confirmed errors are just one error, Right. Or is it at least one error correct?

At least one error.

Wow. So it could be 10 errors on one report. Right?

That's true. That's unusual. Most of the time when consumers have errors on their credit reports, it's not 10 errors. It's usually one error.

If you have a credit report that has 10 confirmed errors, it's more likely that your name has been confused with another consumer and that a lot of their credit has incorrectly been applied to your credit file, which is where you can get a fairly large collection of incorrect information.

Sure, sure. It is so important in today's world to have good credit and for people to pay attention to and manage their credit scores. Do you want to offer some tips on how people can do this? Certainly. They should probably first get a copy of their credit report and review it, right?

Yeah, I think you bring up a pretty good point. The same federal law that directed the FTC to do this credit file accuracy study also directed the credit reporting agencies to set up a unified source to allow consumers to request free copies of their credit reports. And the website, and it's a legitimate website, is annualcreditreport.com that is the only place where a consumer can go on the web and request a truly free copy of their credit report pursuant to federal law. What this FTC study underscores is the importance of actually doing that. Now, you would assume that everybody wants to see what's on their credit report and everybody goes and pulls their credit reports periodically. Unfortunately, that's an incorrect assumption. About 96% of all free credit reports go unclaimed year over year, which is a truly astounding percentage given how important these credit reports are to your ability to get a job, insurance, and competitively priced financing. The study suggested that the credit reporting agencies don't have an obligation to correct information on your credit report until you tell them that something is wrong. So you or any of your listeners can have an incorrect credit report right now. And unless they get a copy of it and raise their hand and say, hey, look, this is wrong, I need you to correct this, then it's never going to get corrected. So that 96% number needs to shrink and it needs to shrink considerably. Otherwise, we're going to be talking about 42 million consumers with errors on their credit reports for quite some time.

That's a big number. I mean, that is a huge, huge number. When you think about it. What does someone do? First of all, when they get a copy of the report, they're reviewing it annually. They see something on there that is incorrect, should they do it themselves? Should they write to the credit bureau or the creditor, or should they hire a service? And then I want to ask you about these different services out there, because people are bombarded with the advertising of many Claims that I'm sure are not true or realistic. Maybe we can touch on that too.

So the first, the first thing that the consumer should do when they get a copy of their credit report and they go through it and they're doing a little bit of an inventory and trying to identify if anything on there is incorrect is you can take your argument to either the credit reporting agencies directly or you can take your argument to the source of the information, which is almost always going to be a financial institution or collection agency. There are pros and cons of doing both. And let me explain why. Most lawyers who practice Fair Credit Reporting act law will tell the consumer that they should always file a dispute with the credit reporting agency first. And here's why. Because if you don't file a dispute with the credit bureaus, you can't sue them for violations of the Fair Credit Reporting Act. You have to give them the opportunity to correct a mistake on the credit report. So I would agree with them. At the very least, give the credit reporting agencies the opportunity to fix a mistake. And the protocol would be to go to them initially and say, hey, look, Equifax or Experian or TransUnion or all three, if you've got the mistake on all three of your credit reports, this is wrong. Here's why it's wrong, and here's what I would like you to do about it. At the same time, you can also contact the source of the information. You can call the bank, you can call the collection agency, you can call the auto financing company, you can call a credit card issuer and say, hey, look, what you're reporting to the credit bureaus is incorrect, that balance is wrong, the late payments never occurred, that account isn't mine, or whatever the dispute happens to be. And then basically what you're doing is you're burning the candle at both ends. And the reason why that's probably not such a bad idea is because the credit reporting agencies are just going to go to the source of the information anyway and confirm with them if what they're reporting is correct or incorrect.

And there's a certain time frame here, right? Doesn't it start like a 30 day clock in which they have to respond?

It's either 30 days or it's 45 days. It's 30 days unless the consumer provides supporting documentation to the credit bureaus or the furnishing party during the 30 day period. So if you send them, I'll give you an example. So if you send them a copy of a canceled check a week into the investigation, then you've just given them 15 more days to complete it. So it's going to be 30 to 45 days. Having said that, I mean, let's be honest about this. That provision of the Fair Credit Reporting act has been around for at least two decades, well in advance. The era of automation that we live in. Most consumer disputes are completed within a week or two because they're highly automated, which is good news and bad news. It's good news because they're done quickly. It's bad news because whenever you heavily automate a process as important as this, there are sure going to be errors.

Yeah, that's true. So with these credit repair agencies that you see out there, advertising and so forth in the marketplace, a lot of our clients ask us about them and show listeners ask about them too. Basically what they're doing is they're kind of gaming the system, aren't they? And they're looking for someone to miss the response time. Is that the play? Usually, yeah.

What they're doing is they're disputing information on behalf of the consumer, so kind of acting as their proxy, for lack of a better term. And they're. And they're filing disputes. They're getting what's called a limited power of attorney from the consumer to sign their name. And they're either mailing the letter of dispute from their own location or they're drop shipping it from where the consumer lives to get a local postal stamp or postal mark on it. They do charge a fee for this and normally it's a subscription. So they're charging them for, I don't know, $19.99 a month or $29.99 a month or something more expensive. Now here I try not to be the morality police when it comes to this kind of stuff. And I let consumers make up their minds one way or the other whether they like the services or dislike the service. If you listen to the industry, the industry portrays credit repair as black hat, as immoral, as rip off. The FTC has called them ripoff artists. If you listen to consumers and the credit repair folks, they're saying, look, we're just trying to help the consumer leverage their rights. And I've been on both sides of the equation and I kind of believe both of them to some extent. There are definitely some bad apples in the lot. Having said that, credit repair is not illegal. That is a huge myth. There is a federal law called the Credit Repair Organizations act that defines how credit repair organizations have to do business. And if they Follow the rules, then they are operating legally whether you like them or not. It's almost like saying, you know, I pay someone to change my oil in my car.

Right? You don't do it yourself. You can have a proxy, sure, I.

Can do it myself, save a boatload of of money. Do I want to do it? Probably not. So yeah, it's just a matter of whether or not consumers want to outsource the process of disputing items on their credit report or whether they want to do them in house. Are they effective? Now here's an argument that the credit bureaus can't make. They are effective. Some of these credit repair companies actually publish statistics on their website. And unless the statistics are just completely made up, which I don't imagine that they are, some of these guys are getting a whole lot of information removed from consumers credit reports. And so from an effectiveness perspective, their services do seem to work. So really at the end of the day, it's a matter for the consumer to decide, hey look, I paid these guys a couple hundred bucks. Did I get value for my money? Right?

Right. Well, you know, they're set up for it like anybody. You go to an outside service. That's the whole idea of specialization in economics. I mean, these companies are set up to do this all day long. Individual consumers, they've got their own job and their own career and their own life to manage. That's kind of the benefit. But a lot of them make a lot of big promises and I think that's where the trouble comes. And they charge upfront fees and then maybe they don't deliver on the promise. Isn't that really kind of where the trouble comes?

Yeah, and actually two of the things that you just mentioned are pretty clear violations of the credit repair organization back. First, you can't promise anything. You can't guarantee that you can get anything off of someone's credit report. You can promise that you're going to work hard for them or you can tell that you can promise them a money back guarantee if they're not satisfied. But you can't market your services as guaranteeing that you can get something removed. The FTC does not like to see that and they will come down hard and heavy on you. The second thing that you mentioned was charging people upfront. That's also a violation of the Credit Repair Organizations Act. You cannot as a credit repair company bill anybody in advance for services that have not been rendered yet. You have to bill them after the services have been rendered. And a lot of credit repair companies have Moved away from the subscription service pricing model where they just hit your credit card at the end of the month for a fee. And now they'll actually charge on what's referred to as a pay per delete model, meaning that they don't charge you anything until they've actually gotten something removed from your credit report, which would be defined as after services have been rendered. And the reason they do that, Jason, is because they're concerned. And frankly, some of them are terrified of that. Credit Repair Organizations act because it's got pretty significant piece.

The ones I found always charge an upfront fee. I don't know how they do it if they're just operating illegally or they're sort of somehow saying it's a retainer. You know, like a lot of the loan modification law firms sort of had that problem, especially in the state of California when there was new legislation a few years ago about loan modification. People that they. They couldn't. They sort of set it up in a way that made it legal. Although I don't think that was the spirit and intent of the law. But maybe we don't want to go too far down that road. But if you have a comment, I think it'd be appreciated.

Some of them will do. They'll say, we're not charging you for services. We're going to charge you a $79 setup fee. And I know a lot of them that do that, or.

I've seen that practice where they'll charge you something and it's definitely up front, but it's not being positioned as you're being charged for services up front or billed in advance for services.

We're charging you a fee to do a credit report review or something kind of innocuous, if you will, that they think anyways keeps them clean in the eyes of the Credit Repair Organizations Act. Again.

It'S really a matter of what does the Federal Trade Commission think about that practices and if they think that's. Or I guess now the cfpb. Now if they think that's a clear violation, you know, that's something that could definitely come back and bite them.

Sure, sure. Yeah. That's interesting. How would someone go about finding a legitimate service versus one of the hokey black hat services?

Yeah, that's a good question.

If you have any to recommend, feel free. But I don't know if you want to recommend a specific. So that's why I asked.

I don't recommend any companies individually, but I will say this, that there is a trade association now for credit repair organizations. And it's called the national association of Responsible Credit Service Organizations. And I know enough about them to know I don't have any sort of affiliation with that organization, just to be clear. But what I do know is that they have standards that in order to be a member of their association, that the credit repair organizations have to follow these standards to be part of their trade association. And that's a pretty significant departure from the way these guys used to operate, which was really kind of the wild, wild west. A lot of seminar marketing, a lot of huge upfront fees, thousands of thousands of dollars charged up front without anything being done, which is just a clear violation of the act. And I can tell you that they have tried to clean up the industry, but the credit bureaus and the FTC have just worked so hard for so long to convince people that they're all dirtbags. And don't get me wrong, there are still some that are. But to simply say that the entire industry is full of scum is just. That's really not the way it is.

Don't throw the baby out with a bathwater. You know, they're scumming every industry.

Here's a way to find a good one. Don't hire someone that's been in business for two weeks. The financial crisis put a lot of people who knew about credit out of work. And all of a sudden they either reappeared as either debt settlement companies or credit repair companies. And you know, I would suggest that you look for someone who's part of a trade association and has been around for a while. And look, there's a lot of ways to find consumer complaints on the Internet. It's not too hard to find those. I don't. The BBB is more of a pay for play type of thing, in my opinion.

The Better Business Bureau, in my opinion, is a bit of a scam. I mean, you know, it's a telemarketing organization. You know, you pay your membership and then you're suddenly okay.

Exactly. I saw, I saw.

Coverage on a, on a news show where Hamas got an A rating and they're a terrorist organization, so they got spoofed, but they're good at it.

There you go. What's sort of the other. Maybe can you take one more chunk? I know we're limited on time here, but is there one more tidbit that you'd like to give our listeners before we wrap up on any area of credit or finance for that matter? What should they know?

So I think there's a couple of things they should know. And a lot of this is myth busting. And understand your free credit report rights. Everyone knows that they get a free one every single every 12 months per federal law. Also, based on where you live, the state that you live in might have additional free credit report laws as well. For example, I'm in Georgia and I get two additional free per year because I'm a Georgia resident. So that means I get three free per year from three credit. That means I get nine free credit reports a year. So I should, I should never have to buy a credit report unless I really want my 10th of the year, which is a little bit obsessive. So understand not only your federal rights as it pertains to credit, but also the state rights because they can be pretty significant and save you a good amount of money. The second is that understand that items on your credit report are not etched in stone. You do have the right to challenge them. They don't necessarily have to be incorrect to be removed. They also have to be verifiable. You can have an item on your credit report that is 100% accurate, yet the credit reporting agencies can't verify it with anybody. They have to remove it. A great example of that is bank A acquires bank A B, bank B either does away with or merges their records and no one can find record of your payments or your non payments. And therefore the credit bureaus can't verify something on your credit report. They have to remove it. Even though it's completely accurate. The law says that. Next is if you're going through a rough time, especially with your credit card insurers, be aware that settlement may not necessarily be a smart way of dealing with the issuer. And here's why. Settlement does not protect you from the creditor. Meaning that if you settle or you stop paying them because you're trying to save enough money to offer them a large amount for settlement, they can actually sue you during that process. So it's not like a bankruptcy where you do have some sort of legal protection from your creditors. So understand that because a lot of services we talked about credit repair, I would say that settlement companies are aggressively market about 100 times more aggressively than credit repair companies. So be aware of your rights with respect to debt settlement and where you are protected and where you are not protected. A lot of people can do settlements themselves. They don't need to hire someone to do settlements on their behalf.

Right. And I've heard a lot of those scams in the debt settlement type of world as well. You know, where they Put them in these payment programs. And I'm no expert, but I've just heard some bad things.

Well.

Payment program is a very misleading term that these guys use. You're not actually paying anything. You're paying the debt settlement company. And all the debt settlement company is doing is accumulating money that you pay them. It's not being paid to a creditor yet. They're basically trying to build a war chest. And the war chest is supposed to be big enough that they can go to your creditors and say, okay, American Express, look, John Oliver Alzheimer, owes you 10 grand. Will you settle for two? I've got 2,000. I can write you a check for 2,000 today. Will you accept 2,000? And they're trying to basically work up enough funds to be able to make that type of offer. Now, keep in mind that the debt settlement company's fees are also going to come out of the war chest that you've acquired. So you're not. When you talk about making payments, I think it's a little bit misleading for these companies to suggest to you that you're actually making a payment that's being applied to some sort of balance.

Are those debt settlement companies keeping, keeping that money during the term in which you're making payments to them?

Yes, they are.

Wow. I would assume some don't have Fidelity insurance and they just run off with the money. I'd assume. Right.

Well, they've got to deposit it. And I mean, they can't just. I mean, they can't just put it under their mattresses. They've got to actually put it in a legitimate financial institution. Whether or not it's got FDIC insurance or NCUA insurance, they're accumulating way more than $250,000 in aggregate. So I, I don't know if that money is fully insured or not. When you're choosing one of those companies, if you do choose to go that route, you should do the same due diligence as you do when you're choosing a lender, when you're choosing a credit repair company, if you choose to do that and make sure that they are not the guy who's been in business for a week and the paint's still wet in their office because they just moved in, that they don't have a boatload of complaints and they're not being sued left and right and the state attorney general isn't taking them task for because of how they're doing business.

Yeah, good point, good point. Well, hey, give out your website, John.

So the where I do most of my writing is a website called Smart Credit, and that's all one word and the S and the C are capitalized. And I also blog for Mint and I blog for Credit Sesame and I also blog for Credit Card Insider. And so I'm published usually probably around one, I think it was one and a half times a day. And it's always about this kind of stuff. Consumer credit, debt, credit reporting, credit scoring, credit file accuracy. If it's about credit and you're a credit junkie, that's where you're going to find that kind of stuff.

Fantastic. And did you want to give out your individual website as well?

Sure. It's johnolzheimer.com and people are always welcome to follow me on Twitter. It's onalzheimer and I tweet my articles and my interviews every day. So it's not hard to.

Not hard to follow them, not hard to follow. Excellent. Well, John Alzheimer, thanks for joining us today.

Yeah, thanks for having me. I appreciate it.

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