Credit Cleanup Plan Gives Many a 2nd Chance : Finances: Former Texas businessman who hit bottom in the early ‘80s wants to help others get out of the hole.
Mike Farmer was a Texas businessman living off the fat of the land when an oil industry glut in the early 1980s sent prices through the floor and many of his customers into bankruptcy. His telephone services business quickly followed suit.
Farmer lost everything--his savings, his investments and then, tragically, his wife was killed in a traffic accident. At age 25, he had three children to raise and was $50,000 in debt. His credit was ruined, and he eventually lost his credit cards.
“I was financially disadvantaged,” he said. “I couldn’t cash a check, make a hotel reservation or pay for emergency medical treatment.”
Today, Farmer is putting his hard-earned experience to work. He runs a fledgling credit card business in San Clemente that tries to help people obtain or regain good credit ratings.
It seems Farmer’s venture couldn’t come at a better time. The rate of bank credit card delinquencies is higher now than it has been in four years, according to figures released by American Bankers Assn. Credit card delinquencies have risen to a four-year high, with roughly 4% of the bank card balances outstanding more than 30 days past due in the third quarter, the association recently reported.
Farmer’s own experience taught him how credit cards have become a nearly essential part of life, and it spurred him to do some research.
His research told him that half the nation’s adults can’t qualify for credit cards, usually because they have been in personal bankruptcy or have never established a credit rating history.
Besides, he found, some bank programs designed to reinstate credit were onerous at best or rip-offs at worst, he said. Twice, Farmer mailed checks to companies that promised to help him clear up his credit--and never heard anything back.
“Nothing ever happened,” he said. “These companies survive because so many people are like me--desperate to reestablish yourself and prove you’re not one of the bad guys.”
Usually, programs designed to reinstate credit require customers to put $1,000 to $2,500 into bank accounts, while extending a credit limit of no more than $1,000. Customers have no access to the money other than by charging something on the card.
Farmer decided that he could create a better program. He set up American Standard Credit in San Clemente, and he started looking for banks to back his idea.
It hasn’t been easy, especially because his plan doesn’t let banks gouge customers with hefty interest rates of more than 20%. Finally, Farmer found a bank in Marin County run by a former Bank of America executive, and the plan was launched in May.
Farmer’s program lets customers put a minimum $300 in a regular savings account. The bank then issues a MasterCard or Visa with a credit limit equal to their savings balance. The savings account acts as security for the credit card charges without limiting access to their savings. However, if they withdraw $100, for example, that amount appears as a charge on their credit card.
Applicants pay a $60 fee when they are accepted into the program and a $25 annual charge.
“For people who want to reestablish credit, it’s probably a fair outlet for them to do that, and the fact that the minimums are so low is something I haven’t seen elsewhere in the country,” said Gregory J. Bjorndahl of the West Coast Group, a marketing firm that studies credit card use.
“But for those who have never had credit before, there is no reason to go through this type program,” he said. “They can surely establish credit in other ways.”
Bjorndahl said the program is good as long as First National Bank of Marin has an appetite for the accounts--the large banks would not be interested in such small amounts.
Alvin C. Rice, chairman of First National Bank of Marin in San Rafael, is enthusiastic about the program.
“There’s a huge market out there for this type of thing,” he said. “Someone who loses his job on the average can only go three pay periods before he falls behind on a home loan payment or an automobile payment. This gives them an opportunity to reestablish themselves.”
He said he is approving about 1,000 applications a month through Farmer’s program. The bank makes almost $25 a year on each of the 12,000 to 13,000 secured accounts.
Farmer said delinquent accounts--those overdue by 30 days or more--are between 2.5% and 3% of the total. His company guarantees banks that it will reimburse any losses when the percentage of delinquent accounts exceeds 2%.
Rice said Farmer’s program does a good job of informing potential customers of their requirements and responsibilities. “The secured credit card business has always drawn to it highly promotional programs that haven’t always delivered what’s promised to the applicant,” he said. “This one is a fair system.”
The idea is to build confidence and trust between the bank and the customer so that credit can be extended in the usual way. “The aim is to establish credit so that after a year, the customer gradually builds up an unsecured line of credit,” Farmer said.
He found, however, that the basic fairness he sought for the program wasn’t such a good selling point to the banks more interested in making money and avoiding risk. So he set up two other aspects to his program--a monitoring effort and an educational system.
Farmer’s 28 employees look for unusual credit purchases among their customers.
“If there’s an inordinate amount of activity in an account, we’ll call them and ask what’s wrong,” he said.
His company also sends out newsletters with each month’s statements. Those newsletters provide financial tips, such as how to set up a budget or how to save money. The company also has a toll-free line for customers to learn about how credit works and what interest is.
For Christmas gift-giving, for instance, the company tells its customers to budget the money they plan to spend and stick to the budget. Christmas is a notorious time for overspending, Farmer said.
Farmer’s search for a bank to back the program was difficult. Banks have to get federal regulatory approval, and Farmer had to get Visa and MasterCard approval. But banks shied away for another reason--the credit risk.
“One banker said we were bottom-fishing,” he said. “But there’s 1.7 million people with bad credit or no credit. Many who lost credit did so because of temporary events, like illness or loss of a job. They were still good credit risks.”
