Paying the Price for a Spotty Credit History

In the years I was reporting on Peter Ueberroth, leader of the 1984 Los Angeles Olympic effort, he gave me two pieces of advice I’ve never forgotten: Don’t ever break with your children. And don’t let yourself slide into bad credit.

That second bit of advice is underlined by a letter I received recently from Larry Ellis, a schoolteacher from Long Beach.

Ellis said that in a former career as a businessman he suffered reverses, fell victim to fraud, and had to file for bankruptcy.

His letter focused on the credit card experience that followed and illustrated the profound disadvantages suffered by people with a bad credit record.

Ellis said he needed a credit card after bankruptcy so he could go online with his computer.

But he said the best offer he could find came from Cross Country Bank of Wilmington, Del., a company with more than 2 million cardholders that specializes in what is commonly known as the “sub-prime” market.

Cross Country’s executive vice president, Paul Seitz, likes to call it the “nontraditional” market. Regardless what you call it, it includes millions of Americans who either have had credit problems in the past or who lack a credit history.

“The whole sub-prime business really is a different animal, rough and tumble,” observes Warren Heller of Veribanc, a Massachusetts bank-rating and research firm. “You have to price for the risk. The seamy side is there’s a whole number of practices that us ordinary folks would consider exploitive . . . fees piled on top of fees, a whole array of fees.”

Still, I was a little taken aback when Ellis informed me, and Seitz confirmed, that in order to receive a $500 credit limit, Ellis had to pay an “account origination fee” of $100 and an annual fee of $50.

So, $150 to get the card at all, and then, during the present quarter, a 21.24% annual interest fee on all unpaid balances.

Actually, Seitz said, sometimes Cross Country offers a credit limit of only $350 for the $150 in fees, though the limit can go as high as $2,500, he added.

The 21.24% is by no means the highest interest rate charged on loans to those with bad credit or sketchy credit histories.

In the proliferating cash advance offices that offer loans on future paychecks, for example, those unable to pay their debts off all at once and forced to roll them over, pay interest at a rate California allows to run as high as an annualized 911%. More about that in a future column.

But even though he wasn’t facing that sort of rate, Ellis said he found the Cross Country terms bad enough. He kept the card about a year, but last August decided to pay off the balance and close his account.

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One no longer needs a credit card to go online, he explains.

Although Ellis says he called the bank, wrote a letter saying he wanted the account closed, and sent in what he believed was the remaining balance, he says he was later informed by customer service that he fell 12 cents short.

“They tacked on a $1.50 service fee and a $29 late fee,” he wrote me. “During September, I received a bill for $30.62 and, not paying attention closely enough, I made the payment, thus paying my account off a second time.”

Later, however, despite what Ellis says was assurance from a customer service supervisor that his account would be zeroed out and closed, more late charges were added, and the outstanding amount reached $82 by Jan. 3.

Ellis, who had stopped paying, said that beginning Dec. 12, he began receiving calls dunning him, and by January, the calls were coming to his home every day.

“This is why I have come to you for assistance,” he wrote me.

When I reached Seitz, he checked into the matter, and later challenged the notion that Ellis’ balance had fallen to 12 cents or had always been paid on time.

For privacy reasons, the bank executive said, he could not give precise details of the matter. But if the charge left had only been 12 cents, the account would have been put in an inactive status and no late fees charged.

Cross Country bills submitted to me later by Ellis indicated the balance at one time may have been 55 cents, and the monthly late fees charged were $27, not $29.

But the bottom line, finally, Seitz said, was that Cross Country has now decided to “zero out” any remaining balances from late fees and close Ellis’ account.

Two days after I first contacted him, Seitz said Friday that the calls to Ellis’ home had been stopped, and Ellis confirmed it.

On Tuesday, Seitz said, “It was clear to us, on reviewing the record, that he wanted to close his account and move on.” So, he said, Cross Country naturally would go along.

As of Wednesday, Ellis had not yet been contacted, but Seitz said that a closing statement, with a zero balance, would go out immediately.

Fine. But I should add that checks The Times editorial library made for me on the Lexis-Nexis database turned up scattered complaints against Cross Country elsewhere in the country from people who said they, too, had trouble canceling an account.

Despite accepting the Ellis complaint, Seitz emphasized that Cross Country believes it performs an important service in providing persons with poor credit records some limited credit, even though it charges more than regular cards.

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The risk to the bank is so considerable, the number of cardholders who default so large, that the prices must be higher, he asserted.

“We may have a loss ratio of 10% to 12%,” Seitz said, “and the chairwoman of the Federal Deposit Insurance Corp., Donna Tanoue, has urged us to charge enough to cover those risks.”

Indeed, in an October speech to the American Bankers Assn., Tanoue did say that unless sub-prime lenders protected themselves, an economic downturn could put a strain on FDIC insurance and hurt the banking industry as a whole.

Sliding into bad credit is obviously a curse, but one our banking system is maneuvering to accommodate.

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Ken Reich can be contacted with your accounts of true consumer adventures at (213) 237-7060 or by e-mail at ken.reich@latimes.com.