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Too Much Debt

Question: I'm ashamed to say that I am one of those Americans who have used credit cards to make ends meet. Mostly they've been used for moving expenses due to health reasons, and financing school supplies. I'm now having trouble paying off these cards, and worried about calling those groups that advertize debt consolidation services on late night TV. Who do I contact to help me get the interest rates on these cards to a reasonable level and organized so I can make a single payment each month? Maureen

Answer: You have no reason to feel ashamed. At some point in our lives, most people take on too much debt. They end up with big credit bills for good reasons--medical bills, a move, a lost job, helping out a child--and not because they're living the champagne lifestyle on a beer salary.

The real question is: What lessons do we take away from the experience of carrying too much debt? In other words, will you leave your debt burdens behind and change your money habits? Or will you go on a roller coaster, zooming into too much debt, followed by a period of getting rid of it, only to take on more debt once your balance reaches zero?

Finally, you're so right to steer clear of the fly-by-night outfits that advertize on late night TV. Don't dial their 1-800 numbers.

I wish I could say that there's a magic wand to wave that will get you out of debt fast. There isn't. But here's a two-step formula:

First, get a copy of a book such as Gerri Detweiler's "The Ultimate Credit Handbook: How to Cut Your Debt and Have a Lifetime of Great Credit." It's in its third edition. Gerri is good at dealing with debt issues, and her book will give you a practical lay of the credit landscape. You could also check out Nolo, a leading financial self-help information organization. It's at www.nolo.com.

If you want to work with an organization--a good move for many people--I would contact the National Foundation for Credit Counseling (NFCC). It's the largest and oldest national nonprofit credit counseling service. You can find a branch near you at www.nfcc.org. If you like working online, by the way, I know that one branch--the Consumer Credit Counseling Service of San Francisco at www.cccssf.org--offers all the financial basics, plus an online debt counseling service and debt management plan.

Good luck.

01/28/08 by Chris Farrell

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Boosting Credit Score

Question: I am looking for a way to boost my credit score. My fiancé and I plan on buying a house in about a year. My credit score is considered poor or medium-high risk. I had tried to get a credit card a few months ago and I was turned down.

My bills are all current and I've paid off any old debt I had accrued. But I do not have any credit cards right now- only a car loan and a student loan. Would you recommend getting a credit card and staying current and keeping a low balance for better credit? If so, is there a certain type of credit card that's more "forgiving" of a lower credit score? If not, are there any other ways? Could I pay one of those people who "repair" credit? I would really appreciate any advice. Thank you very much. Michelle, San Diego CA

Answer: Time is on your side. You've paid off your old debts, and you're current on your car loan and student loan. The longer you make your loan payments on time the better your credit score will become.

That said, it can make sense for you to get a credit card, assuming you use it and pay off the bill in full at the end of the billing period. (Technically, it doesn't matter if you carry a balance so long as you pay the bill on time. Your credit score will improve whether or not you're carrying a balance. I just don't want you to take on any credit card debt.)

One common maneuver for getting a credit card is to apply for a retailer's card. Retail credit cards aren't that attractive since they usually come with high rates. But if you use it and build a good credit history with it you can always get rid of it later on and apply for a better card. (And this time you'll qualify.) Another option is a "secured" credit card. With secured plastic, you open up a savings account with a bank that issues you a card that looks like any other credit card. Your credit is equal to or somewhat less than the amount you deposit. Eventually, after showing a pattern of paying off your bills on time, you can usually switch to a traditional "unsecured" credit card.

03/25/08 by Chris Farrell

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Canceling Credit Cards

Question: I would like to cancel some of my credit cards that I no longer use. I'm concerned about identity theft, and about fees charged on cards even if they're not used. Is there any reason I shouldn't cancel these cards? Thank you! Dennise, Santa Cruz, CA.

Answer: In the perverse world of credit scoring, closing these accounts will lower your overall score for awhile. I still think it's smart to get rid of the accounts for the reasons you mention. So, if you have a major purchase coming up in the next year, say, a home or a car, I would hold getting rid of the credit card accounts until after you've borrowed money to buy a car or home. You'll get a better interest rate this way. Once the purchase is behind you, cancel the cards. Of course, if there isn't a big borrowing in your near-term future, get rid of them right away.

04/24/08 by Chris Farrell

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Payment Plan?

Question: I'm a grad student on a very tight budget. I worked for a few years before coming back to grad school, and unwisely brought some credit card debt back to school with me. I've been shopping for a new credit card to roll that high interest balance to a new account that would hopefully be 0% interest for the first year. I believe I could make a much bigger dent in the debt with zero APR.

Yesterday, my credit card company called and suggested a payoff plan. They want to direct-withdrawal money from my checking account each month, and they claim they will give me 0% interest on a 5 year pay off. Is this some sort of gimmick? What kind of questions should I ask to make sure it's legitimate? thanks! Josh. Boulder, CO

Answer: This is a new one for me. I hadn't heard of a credit card company doing this before (and I plan on checking it out some more). I wonder if this offer reflects a shift in tactics, moving from raising customer rates to working with them on a payment plan?

For the moment, let's assume everything is on the up-and-up. I would have two questions. First, is there a fee attached to the program? Secondly, and more importantly, you can do this on your own without locking your self into the credit card company's program. After all, you say you are on a tight budget, and I would imagine every once in awhile you might have to pull back from paying off the credit card debt. It's a good idea to put yourself on a payment schedule, but I would do it on my own, which is remarkably easy in an era of online banking and automatic transfers. But I would stay in control. I'd worry about giving up financial flexibility.

05/08/08 by Chris Farrell

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Credit Card Debt

Question: I've accumulated some credit card debt (due to a drop in planned income) in the last 6 months. At this point, I have some money in a savings account that could pay off that debt but it would empty the savings account. I've been reluctant to do that because it's my emergency fund (car breaks down, some major home repair) - but since I haven't been able to make a lot of headway on the credit card debt I'm starting to question that choice. Is it worth the risk of emptying the account to pay off this credit card debt? Both the debt and the savings account are less than $2K at this point. Sheri, Rochester, NY

Answer: In theory, there shouldn't be much of a difference between having $2,000 in a savings account and draining that bank account to pay off a $2,000 credit card bill. A credit card without any debt is a form of savings.

That's in theory. Psychologically, most of us like to have cash in the bank even if we are carrying some debt. I think many people find it easier to pay down debt if they can see some improvement in their savings.

How about a compromise? Set up a time period, say, 6 months to a year, and divide your debt by the number of months. This way, you'll pay off the debt within a reasonable period of time with a combination of income and savings. Hopefully, you'll be able to keep something of a savings cushion. And with time frame the interest burden or penalty won't be that high..

06/26/08 by Chris Farrell

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O% interest

Question: Ok Chris Farrell (or associate) I have a question that may give you a monetary migraine. I have approximately $7,000 in credit card debt (yes...shame on me). To top it off (and this requires that you be sitting down) the interest rate is 29%! I missed a payment two years ago on a different card that is now paid off however that one missed payment lead to my interest rate to be changed from 11% to 29%.

My question is this: There are many offers that come in the mail for credit cards that will transfer the balance and not assess interest for 6-12 months (0% interest). Now, after this period the interest rate stated is up to 29% (which is the rate I am at now). My thought is that I have nothing to lose interest-wise and could make some head-way into decreasing this debt during that period. Should I do it? or to sharpen the question... would you (if you were in this situation) do it? Please advise and inform me if my rational is misguided. Thanks. Kris, Pontiac, MI

Answer: There's no need for me to be sitting down or you to be ashamed. Yes, you have a lot of credit card debt, but so do a lot of people. I've seen a lot worse numbers. But I am outraged at credit card companies that boost interest charges to 29%.

Two things: First, shifting to credit cards with 0% interest for 6 to 12 months is a smart financial move in your circumstances. The gap between 0% and 29% is so large that you'll save money. Hopefully, you will qualify for the 0% interest.

Second, the key to this strategy is paying down the debt steadily. Once it is gone don't let it creep up again. The zero rate cards are a tool to make it easier for you to accomplish that goal: No balance on your credit cards.

by Chris Farrell

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Students & Credit Cards

Comment: I am listening to your answer to the parents who have a son going to Prague for fall semester. I have two daughters who have just graduated from college with no debt and no credit card. Now they are on their own - for real - for the first time in their lives with great grade point averages, but with NO CREDIT HISTORY.

My husband and I thought we were protecting our daughters from lenders by them not having credit cards, but we were actually handcuffing them. Since graduation, they had trouble getting apartments and they found it difficult to establish themselves in their new cities. I hardily endorse the "get a credit card" answer you gave the e-mailer, and don't chicken out with the pre-paid card. As I understand it, they don't really work to help establish your credit record. If I had it to do again, I'd get them a card when they were sophomores or juniors and have the very long talk about not spending more than they can pay, but use the card regularly and pay off immediately. Thanks, Lynn.

Response: Thanks for your comment. I'm posting it because you offer a different--and useful--perspective. A lot of people agree with you.

The advantage of a secured card in this case is that it prevents the novice user from getting into trouble while allowing the parents to rest easy that their student is financially covered in an emergency. (If a secured credit card from one of the dominant card issuers is regularly used the payment history will be reported to at least one of the major reporting bureaus. It's a "safe" way to build a credit history, and usually a secured card can be exchanged for an unsecured one after a period of time. The bigger issue here is to stay away from secured card scams.)

However, since the credit card companies make it so easy, most college students should get an unsecured credit card right before graduation.

On the more general question of students and credit cards, the reason why I lean toward the more conservative side of the equation is that the evidence shows too many college students are taking on too much credit card debt. Yes, students may have a credit history and a credit score. But a number are starting out their work careers with a debt burden that can hamper their financial freedom. I'd rather students graduate with no credit card debt and no credit score. They will have a lifetime of earnings to build up their credit history. I know it isn't fashionable, but I am still troubled with anyone having a credit card (except for emergencies) without earning an income.

Of course, parents know their children. And for some getting a card early and using it often is the right choice. For others, caution is the better course of action.

06/30/08 by Chris Farrell

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