Answers to some Common Questions
Q: I have no debt except a Visa card, which is paid off monthly. Does it make financial sense to carry more debt so I'll be able to get credit in the future? I find it hard to carry debt when I don't need to, even though it might improve my credit score.
A: Congratulations on having no debt. Many people would love to be in your position.
If your objective is to increase your credit score, you might consider opening additional lines of credit, as the credit-scoring model likes to see that you can responsibly handle revolving credit, such as the Visa you have, as well as fixed payments, such as a car loan. It's also good to have at least three open and active lines of credit.
Before taking on debt unnecessarily, though, make sure you have an emergency fund equal to at least six to nine months of living expenses that will serve as your financial safety net.
Q: Should I carry a small balance from one cycle to another to increase my score ?
A: The only impact of carrying a balance over to the next month is that you will be charged interest. Part of your score (about 30%) is based on your credit-utilization ratio (the difference between your credit limit and your balance). If the card is a charge card, meaning the balance is due in full each month, then the account is not included in the utilization calculation. If it's a credit card and the limit is not reported, then your highest balance reached on that card is often used for the calculation. If you've always kept your balance extremely low, then your utilization could appear to be very high because the balance would be essentially the same as the credit limit. You may want to consider switching to cards that include the limit when they report your account information. Even though cards with no preset limits can give you a lot of freedom, they aren't great for boosting your score.
Q: How do I get rid of delinquent items on my credit report more than 7 years old?
A: Most negative information should automatically come off of your report seven years from the date of the major delinquency. There are a few exceptions, including some forms of bankruptcy, tax debts and student loans. If you have a negative item on your report and it has been more that seven years since the date of major delinquency, you can follow these steps to request that it be removed:
• Pull a free copy of your credit report from AnnualCreditReport.com. Make a copy to
keep for your records.
• In most cases, you will see an online option to dispute an item on your report.
If not, submit your dispute to the credit bureau in writing.
• Give the reason for the dispute, such as "This item is more than 7 years old."
• If you have any supporting documentation, you may need to include it. Send the
copy of your report, your dispute letter and documentation to the credit bureau
with confirmation requested (so that someone will have to sign for the letter when it
• The credit bureau will have 30 days to investigate and reply to your dispute.
• If the credit bureau replies that it has confirmed the information is accurate with the
creditor, then you will need to repeat this process with the creditor. But you should
always start with the credit bureau first.
You should only dispute inaccurate information. Disputing information that you know to be correct is considered fraud. Also, there's no need to pay someone to "fix" your credit. Anything that can legally be done to improve your credit, you can do yourself for free.
Q: I'm getting divorced, and we have several joint credit card accounts. My wife has agreed to pay half of them, and I will pay the other half. Will this negatively affect my credit score?
A: As long as you both keep your end of the bargain and pay the accounts on time, it should not negatively affect your credit. Please be aware, though, that because these are joint accounts, it will affect both you and your wife's credit reports if payments are not made on time. The only way to end your obligation is to pay them off or have your wife transfer the balances to a card in her name. Credit card companies will hold you both liable for debt repayment on joint accounts no matter what is stated in the divorce decree.
Q: I keep hearing commercials advertising a free credit score and report. Are they really free?
A: Usually, there's a catch. Companies that offer free credit reports or scores usually require you to sign up for monthly credit monitoring or some other service. Typically, these must be canceled within 30 days to avoid a charge.
There are ways to get your credit report for free, and with no catch. According to the Fair Credit Reporting Act (FCRA), you are entitled to a free credit report once a year from each of the credit reporting bureaus (Equifax, TransUnion and Experian). You can go to AnnualCreditReport.com and pull a free report once a year. However, you usually have to pay extra for a credit score.
Q: I have about $50,000 in credit card debt and have been contacted by a debt-settlement company that says it can make my creditors stop calling me. Does this sound legitimate?
A: There are numerous drawbacks to dealing with a debt-settlement company. Normally they ask the consumer to deposit a monthly payment into an account, but do not pay the creditors from that account until enough is accumulated to present to the creditor a settlement amount. This can take years. In the meantime, creditors may file a lawsuit against you, and your wages could be garnished. Even if the company successfully negotiates a settlement, you could owe income taxes on the forgiven debt.
If you want to try settling with a creditor, you may be better off negotiating on your own instead of paying hefty fees to a third party.
Q: I want to consolidate my student loans. Who do I trust and how do I start? So much has changed in recent years from when my friends did it.
A: First you'll want to locate and review all of your student loans. For federal loans, you can call the U.S. Department of Education Federal Student Aid Information Center at 800-4-FED-AID or go to www.nslds.ed.gov/nslds_SA/. You'll need a PIN from www.pin.ed.gov. For private loans, contact the lender for information on consolidation.
Consolidation extends repayment and overall loan cost, so keep that in mind as well. It may be better to focus on getting the loan paid off altogether.
A great place to start for student loan information from a borrower's perspective, including loan consolidation, is the Student Loan Borrower Assistance website, www.studentloanborrowerassistance.org.
You should never consolidate your federal loans into a private loan. With federal loans, you can apply for deferment, forbearance or income-based repayments if you run into financial difficulties. Those aren't options for private loans.
Q: My company is downsizing, and I'm afraid that I may be next. What should I be doing now in case I lose my job?
A: Now is the time to take steps to strengthen your financial position. Look for ways to reduce spending, and put this money into savings. Ideally, develop and follow a written budget with only your "must-have" expenses. That means cutting back on discretionary spending such as eating out, gifts, clothes and entertainment. Contact your Internet, cable and cell phone providers and ask for less-expensive plans. Don't take on more debt unless it's for genuine needs. Identify cash resources you can access, including savings at your bank or credit union. Find out if there are any penalties for withdrawing savings or taking money from a retirement plan.
Q: I've been using my retirement savings to cover expenses. Is this better than going into debt? What suggestions do you have to avoid doing this?
A: This is a common problem. Nineteen percent of Americans report that they have dipped into their retirement savings to cover expenses. However, depending on your age, you could lose up to 25%-35% of the amount you withdraw in penalty fees and taxes. Also, remember that every dollar you take out today will reduce the amount of cash available when you retire.
Instead of getting into the habit of borrowing from your savings, make sure you are living on a solid budget. Often you can uncover areas of overspending by tracking your expenses. Other options include taking out short-term loans or using a low-interest credit card for emergencies, such as car or home repairs.