7/1/2013 7:15 PM ET|
Answers to common credit questions
Credit impacts our finances in many ways, some of which we don’t readily understand. Here is an 11-part primer on credit scores, debt, bankruptcy and other factors.
Our readers ask us questions every day on every kind of credit problem you can imagine. While everyone has their own unique concerns, there are also many universal issues out there. So we rounded up 11 of the more common questions asked and we answer them right here for you.
1. How can the credit card companies raise my interest rate if I've paid my bills on time? What can I do about it?
It used to be that credit card issuers could raise your rate, even on existing balances, at any time and for any reason. Thanks to the Credit CARD Act, a federal law, they can no longer do this. They can, however, raise your rate on your outstanding balance if you are more than 60 days late with a payment and they can increase the interest rate on new purchases, but only if they give you 45 days advance notice so you can cancel your account.
As for what you can do, the best thing is to try to negotiate a lower rate. Call your card issuer and suggest you will take your business elsewhere if you can't get a better deal. This works best if you have other credit cards with available credit lines, since the issuer will no doubt review your credit report to decide whether or not to work with you. It's always worth a try, though. As author Marc Eisenson says, "Not asking is an automatic no!"
If you can't negotiate a better rate, try transferring your balance to another card -- either one you already have, or a new one.
2. A debt collector has contacted me about an old debt. Do I have to pay it?
Maybe; maybe not. Every state has a statute of limitations, which governs how long the creditor or collector has to sue you. If this debt is too old, and they try to sue you to collect, you can raise the statute of limitations as a defense. That means they don't have much leverage in terms of forcing you to pay. And that gives you more leverage to negotiate a settlement -- or just to tell them to leave you alone. For more information, and to fully understand your rights, check with your state attorney general's office or a local consumer attorney.
If the debt is too old, you can simply write to the collection agency, indicate that you believe the debt is outside the statute of limitations, and instruct it to stop contacting you. Send your letter via certified mail and keep a copy for your records.
If you are worried about your credit report, keep in mind that collection items may only be reported for up to 7 1/2 years from the date you fell behind with the original lender, regardless of whether they are paid or not.
3. What is the ideal number of credit cards to carry?
It depends on what you mean by "ideal." Most people will be just fine with two major credit cards. One should be a low-rate card for times when you must carry a balance, and the other should be a card with a grace period. No annual fee is ideal, unless you plan to use the card heavily to earn some type of reward. If that's the case, weigh the cost of the annual fee against the freebies you will earn.
If you are asking about the ideal number of credit cards to obtain a strong credit score, two is a good number as well, though you can have many more and still maintain a strong credit rating. Generally, it's a good idea to have at least four credit accounts of different types (for example, a mortgage, car loan, a major credit card and a retail card). Keep your credit cards active by using them periodically. It's good to pay your bill in full each month to avoid finance charges.
Finally, if you have a lot of credit cards already, don't close them in the hopes that it will boost your credit score. Your score may actually drop if you close old accounts.
4. My child has a lot of debt. What is the best way to help?
The best way to help your child is to give him or her some financial literacy materials to learn about how to manage debt.
But my guess is that you may be writing because he or she is asking you for a consolidation loan to help pay off the debt and, while you want to be helpful, you are not sure that's the route to go.
First, trust your instincts. If you think your child has trouble handling money, then it is likely you will just be enabling him or her to go a bit longer without having to shape up. Even if your child is truly in deep straits, your loan is unlikely to solve the problem. He or she needs crisis intervention, not a loan.
If you simply can't say no, then do one of two things:
Give a gift rather than a loan. You'll never have to worry about whether you will get paid back and there will be no hard feelings if you aren't.
Agree to lend the money only if your child will agree to sign an official loan agreement. It would also be a good idea to have them set up automatic transfer of the payments to your checking or savings account from your child's. There will be no wondering about whether a check has been mailed.
5. My spouse/parent died and I discovered a lot of debt. Do I have to pay it?
In most cases you are not responsible for another person's debt when they die, unless you are a co-signer on the account. If, however, that person was your spouse and you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin), debts incurred during the marriage are considered community property and you are likely responsible for them.
When a person dies with outstanding debt, the creditor will first look to any co-signers and then to the estate for payment. The creditor may not bother to pursue the debt if it is a small amount, but there is no guarantee.
If you are feeling pressured to pay a debt you are not responsible for, or if you are not sure whether you have to pay your deceased relative's debt, you may want to contact an estate planning or consumer law attorney.
6. I don't have the money to file for bankruptcy. What can I do?
I am retired and Social Security is my only income (or I am on disability and have no income except Social Security Disability). That barely even covers my monthly rent, utilities, medicines, medical co-pays, food, etc. I am being hounded for credit card debts and the debt collectors are calling day and night.
It sounds like you have little income and no assets. If that's the case, it may be that you are "judgment proof." That means that even if someone tried to sue you, there wouldn't be any way to force you to pay. Creditors generally cannot seize Social Security payments to pay debts. In addition, most retirement accounts (IRAs, pension plans, etc.) are also protected from creditor claims. If you are judgment proof, there may be no reason to file for bankruptcy.
You may want to talk with a bankruptcy attorney to assess your situation, especially if you have assets such as a home or money in bank accounts outside of retirement accounts.
If you are judgment proof, you will likely be able to stop the creditors or collectors from contacting you by simply writing a letter indicating that you have no income other than Social Security payments and no assets. Explain that you have no way to pay them and ask them to stop contacting you. At that point, they likely will stop. Keep copies of your letters, send the letters certified mail, and keep copies of any correspondence you receive. If you are sent any papers that indicate they may be trying to sue you, contact a consumer law attorney immediately.
7. Will checking my credit report hurt my credit score?
No. When you check your own credit report through a service that sells credit reports directly to consumers, you create what is called a "soft inquiry." These inquiries are listed when you review your own credit report, but they are not shown to creditors and do not affect your score. You can pull a free copy of your credit report at AnnualCreditReport.com or you can check your credit scores using the free Credit Report Card.
It's a great idea to review your credit report on a regular basis, so go for it.
8. How many points does an inquiry take off your credit report?
There is no set number of points that will be deducted from your score for a single inquiry. The same inquiry from the same lender at the same minute can affect two people's credit reports differently.
In general, inquiries are a small part of your credit score (less than 5%), and the stronger your score, the less likely one or two inquiries are to have an effect on your score.
Nevertheless, be very careful about applying for new credit, a cell phone, insurance, or anything that might result in a credit check if you are in the process of getting a mortgage. Sometimes a score drop of just a few points can drop your score below the range for the rate you are trying to get.
9. My ex-husband was supposed to pay this account, he didn't, and it damaged my score. Now what do I do?
Joint accounts can create problems long after a marriage is over. Even though your ex-spouse is supposed to pay the bill according to the divorce decree, you are still on the hook for the debt to the lender if you are a co-signer. That's because your divorce decree is an agreement between you and your ex. It doesn't erase the original contract you had with the lender.
As far as your credit is concerned, the late payment will likely be considered accurate, since the account is still yours until it is paid off, closed, or refinanced into your ex-spouse's name. Once in a while, a creditor will agree to remove the late payment from the innocent spouse's credit report, but may require that it be paid off first.
Talk to your divorce attorney to find out what can be done in terms of forcing your ex to live up to the terms of the divorce decree. If he doesn't have the assets to pay off the debt now, you may want to ask whether he can be required to make payments to your attorney, who can then make sure the payments are made. As long as the account remains unpaid, however, and he pays it late, your credit will be damaged.
10. I co-signed an auto loan for my daughter. When I tried to refinance my mortgage, I found out she has been paying it late, and it has hurt my credit score. What can I do to get that information removed?
Sorry, you're likely out of luck. If there is one piece of advice we can give about co-signing, it is this: don't do it. When you co-sign, you are agreeing to be fully responsible for the debt. And by law, if the issuer reports debts to a credit-reporting agency, it must report that information under the co-signer's name as well as the primary account holder's.
That said, the lender might be willing to remove those late payments if you will bring the account up to date and/or pay it off. If it does agree to "re-age" the account, get it in writing. Of course, by contacting the lender, you may find that you are inviting the creditor to contact you if your daughter gets behind again, whether or not your credit report is cleared. After all, you are the co-signer.
11. I'm deep in debt and have a terrible credit score. What should I do?
While it may not seem like a blessing right now, your lousy credit score may be a plus. It will keep you from digging the hole deeper with a "consolidation" loan. It's time to focus all your effort on one goal -- getting rid of that debt. I would first encourage you to get a free debt consultation to determine whether a credit-counseling program will work for you.
Even with bad credit, you may be able to get your interest rates lowered that way. And you'll get advice to help you build money management skills. If it turns out this type of program won't work for you, you may need to talk with a bankruptcy attorney.
Either way, once your debt is no longer an issue, you can begin to rebuild your credit. We have seen consumers significantly improve their credit scores in less than two years when they worked at it. Good luck!
More from Credit.com
VIDEO ON MSN MONEY
Credit is an integral part or our economic system. Unfortunately many Americans do not understand how credit works and quickly become mired in debt that haunts them for years. Some basic rules:
- DON'T PAY INTEREST. Pay off balances each month. Don't get in the habit of carrying balances even if there are 0% interest cards out there. They eventually will begin to charge you interest.
- Watch your credit ratio. Look at your credit limit and try to keep your balance to less than 15% of your limit. Using more than that will ding you a few points on your score. If your limit is not high enough, spread it out to another card or two. But once again pay them off each month.
- Check your credit reports. You get a free one from each bureau. Pull one every four months and you will always have a good idea of what is going on with your credit. if you see anything that does not make sense - find out what is going on.
- Cosigning, avoid it if you can. You are legally just as responsible for the loan as the primary signer but you get none of the loan proceeds. Sign up only if you could take the loan on. If possible get access to balances and payment information so the loan does not go into arrears and you not know about it until it is in collections.
If you can observe these basic premises you will have very solid credit and be eligible for the best interest rates on your loans...cars, mortgages et. al.
The sheeple appear to have no idea that they have sacrificed their privacy and liberty at the altar of the credit card.
Oh what fools they are.
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