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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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Credit Card Debt

Question: Chris - I'm expecting an annual raise on my next paycheck of 3-4%. In the past, I've taken part of that and increased my 401k contribution. I'm currently at 6%, which is the ceiling for my employer's matching contribution. I also have about $6,000 in credit card debt. This year, because of the stock market's performance, would it be smarter to not increase the 401k contribution and use those dollars to pay off my credit card debt instead? Thanks very much for your time. Nadine. Shoreline, WA.

Answer: It's a good financial choice on your part for two reasons. First, the key to this strategy is that you're taking full advantage of your employers match. The real return kick in a 401(k), 403(b) or comparable retirement plan comes from the employer match.

What's more, paying off the debt will earn you a nice return. I don't know what interest rate you're paying on your credit card, but let's say its 14%. By getting rid of the credit card debt you'll have earned the equivalent of a 14% return on your money. That's a hefty return in any market, let alone this one.

07/08/08 by Chris Farrell

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Prepay Credit Card?

Question: Is there such a thing as receiving interest for pre-paying a credit card? In other words, I could send in (say) $500 to my credit card company and they would give me small interest on it while I have that balance with them. They credit my account with a small amount of interest until I need to use that balance to pay down my credit card bill. Savannah, Three Rivers, CA.

Answer: Not that I am aware of. I'd just put the money into a savings account or a money market mutual fund. And don't carry a balance on your credit card.

07/25/08 by Chris Farrell

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What now?

Question: I am notoriously bad with my finances, and for basically the past five years since I graduated college, I have ignored them. Of course that never works out well. I found myself in about $4000 of credit card debt on top of my student loan of $22,000 which I had deferred for as long as I was able to. About a couple of years ago, it all caught up with me and I enrolled in a debt management plan, consolidated my student loan, and have been making paying both regularly each month.

Now I have paid most of my credit card debt with less than $1000 left to go, and I have stopped the debt management program because I realized that I was simply paying them to write one check a month. I have a 401K plan with a couple of thousand and a couple of hundred in cash savings. I also listen to your show to try and understand my relationship with money.

Finally here's my question: I am young and live on my own in New York. Where should my next financial goals be placed? My expenses are still pretty high but luckily manageable. How do I keep moving forward financially? Thanks, Amelia, Brooklyn, NY

Answer: Congratulations for seizing control of your finances and paying down the credit card debt. That's terrific. I'm always distressed when I hear about debt management programs that essentially take money from people who can't afford it.

How you should move forward financially is a big question, and the answer will evolve over time. But here are some thoughts. I'd continue with whatever system you devised to pay down your credit card debt, but use it to build up savings from this point on.

I want to share this email I got the other day (in a different context). It's from John. He's 69 years old and lives in Ham Lake, Minnesota.

... Some advice I was given when I was 20 years old in 1959 was to save something out of every pay check, having it invested before I ever saw it. AKA, Stock purchase for one company, savings bonds with another and the 401K the last 20 or so years. It has put our children through college, help up purchase a home and gives us retirement income without losing the funds necessary to keep the $$ coming....

You want to save for retirement, which you're already doing. Keep building up that nest egg. By the way, are you putting away the maximum?

We live in a harsh economy. I would also focus on building up your "emergency" savings. This will give you a cushion in case you lose your job. It will also give you the freedom to take a risk and try another employer, to buy a home, or to seize some other investment opportunity that might present itself.

08/20/08 by Chris Farrell

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Credit Score: Carry A Balance or Not?

Question: My 23 year old son applied for a credit card and was turned down because of "lack of credit history." We had held a joint credit card with us but apparently that didn't matter. He had a history of both utilities and rent in his name. His bank suggested a guaranteed credit card. He has applied for one of those. Now he wants to establish his credit. My understanding is that he needs to use the card and pay off in payments. Our family has always paid in full. He is very reluctant to not pay off the total every month. Am I correct in having him pay off in payments? If that is right, what is the minimum amount he needs to carry over each month and how long does he have to do this. He really doesn't want to carry a balance at all. Nancy, Scotts Valley, CA

Answer: No, your son should regularly use the credit card to build up a history, but then he should go ahead and pay off the monthly bill in full. It's a good financial habit to get into, and when it comes to his credit score there's no need (or extra benefit) to carry a balance. He should be able to get a traditional unsecured credit card fairly quickly, too.

By the way, when it comes to creating and improving his credit score, he should keep his credit use to less than 30% of his credit limit--and preferably closer to the 10% mark. Again, it's a sound habit both from the financial and credit score perspective.

09/04/08 by Chris Farrell

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Credit problems

Question: I have been working to eliminate my personal revolving debt for more than five years by paying the minimum monthly or more. It is evident that I'm not really making any headway and may be going in the opposite direction with creditors raising my interest rates to well above 25%. As you know, creditors check credit scores regularly and arbitrarily raise their rates and charges.

Now that my income has unfortunately dropped, I'm wondering if under the new bankruptcy law I'm better off negotiating a settlement with each credit card creditor. I'm not looking for a write-off, but a negotiated settlement with payment terms.

My question is should I take this course, suffer the consequences on my credit score, and rebound down the road? Ron, Escondido CA

Answer: It's outrageous that banks are hiking credit card interest rates when the economy is in recession, job losses are mounting and taxpayers are bailing out the financial system with at least $1 trillion dollars. It seems to me that raising credit card rates now is bad for households and the economy. (Longer term tighter credit terms might be good, but in the short-run it looks bad.)

For instance, both American Express and Citigroup have said they're raising rates by 2 to 3 percentage points on some customers. I expect we will also see many people get hit by "universal default" and the default rate of around 30%. About half of all credit card issuers have a universal default policy hidden in the fine print of a credit card agreement. Late on any payment to any creditor, and the rate on the card could automatically jump to the default rate--even though you're up to date on the credit card payments. I don't see how anyone ever gets out of debt at a 25% to 30% interest rate. That's loan sharking.

Here are three practical suggestions. First, get a copy of 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, and is very helpful. However, my guess is that your way past the kind of advice she gives since you've been working on paying down your debts for 5 years. (But it's worth a look for anyone worried that they're carrying too much debt and trying to pay it down.) I am also a fan of the credit advice at the non-profit organization Nolo.com. Its web address is www.nolo.com.

Second, 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. I'd set up a meeting with a debt counselor, and see what can be done with their help and guidance.

Third, consult with a bankruptcy lawyer to what are your options for wiping the debt slate clean.

You'll then be able to make a reasoned decision.

I wouldn't worry about your credit score right now. The key is to figure out the best, most practical way to eliminate your financial burden and, at the same time, to make sure you won't end up in the same place 5 years from now.

11/19/08 by Chris Farrell

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Bank trouble and a credit card

Question: I have a Citi Bank credit card as my primary credit card. The account is in good standing with no debt, but what happens if Citi Bank collapses, files for bankruptcy, or merges with another company? Also, what about my interest rate, credit card benefits (such as cash back, airline mileage, etc.), and terms of use if something happens to Citi Bank? Sincerely, Andrew, PA

Answer: Citigroup's stock is getting pounded again today. Like GM, investors are losing faith in another icon of Corporate America. The mammoth banking conglomerate has lost 60% of its market value since last Friday and now trades at a 15 year low. Citi hasn't posted a profit in four quarters--unlike several of its major rivals--and the outlook is steadily worsening with the sinking economy and deteriorating credit.

I suspect central bankers and finance ministers worldwide will hold non-stop transatlantic meetings over the weekend about how to deal with the recent precipitous decline in Citi and other financial services stocks. After all, Goldman Sachs is now trading below its initial public offering price. Goldman is no longer the financial services industry's gold standard but a tarnished benchmark.

Citi is one of the biggest issuers of credit cards in the country with some 54 million cardholders. Although the bank has announced it's raising credit card rates on substantial portion of its credit card accounts by 2 to 3 percentage points--supposedly less than 20% of the total--the credit card portfolio is still one of its most valuable franchises.

How will you fare if yet one more unthinkable happens, that Citi sells off assets, gets acquired or the government buys an even bigger stake in the financial services institution? My bottom line: You're fine. Put it this way: If Citi really got into trouble your credit card account would be considered an asset worth owning. And if the past is any guide your credit card will work and you won't be left stranded.

However, a couple of cautions or safeguards. If Citi does get deeper into trouble, read your credit card mail carefully. The new owner might have information for you. For instance, a new owner may change the size of your line of credit. But the typical experience is for a new owner to honor most of the terms of your existing deal. Over time it may bring about changes so that there is only one interest rate, fee, penalty and other policies for all its credit cards.

Most importantly, continue to pay your bill on time.

11/21/08 by Chris Farrell

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Closed credit card account

Question: I just received a letter from Chase informing me that they had closed one of my credit card accounts (I have two Chase cards) due to lack of use. I had this account for almost six years (in fact, the first credit card I ever had) and I have not used it for quite some time. The only reason I didn't ask for it to be closed sooner was my understanding that keeping it open was more beneficial to my credit rating than closing it. Taking that into account, doesn't this amount to Chase damaging my credit rating with no cause? Solon, Albany, NY.

Answer: It's remarkable how fast we've gone from a credit card world defined by billions in solicitations and offers of 0% financing to one defined by slashed credit limits and closed accounts. Yes, your credit score has been dinged somewhat. It doesn't really matter if you close an account or it's closed by your creditor. The main impact typically comes if closing the account affects your ratio of total credit balances to total credit limits. Closing an account lowers your overall credit limit and raises the ratio. But with good credit card habits--such as paying off the balance every month--your credit score will bounce back. It reads that you manage your money well.

I believe that consumers should control their own credit habits and not follow the formulas of Fair Isaac, the main credit scoring company. I know that's a bit naive, but in an era of identity theft and too-easy-credit it's better for most people to close unused accounts than keep them open. (I realize in your case it wasn't a choice. This is as a general approach.) The big exception is if a major purchase, such as a home or car, lies in your immediate future. In that case, it pays to wait to close the accounts until after the deal is done. But I would still close them.

11/25/08 by Chris Farrell

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Negotiating credit card rates?

Question: do you think paying for a service to lower interest rates on credit cards can work? AFL Financial Services charged 990.00 to negotiate with my credit card companies, to lower interest rates. I have personally been able to negotiate with the companies in the past but now they aren't working with me. thank you karen, Seneca Falls, NY

Answer: More and more people are falling behind on their debts, thanks to the twin pincers of a financial crisis and a deep recession. That said, I'm not a fan of paying big fees to any outfit to renegotiate consumer credit card charges.

Here's a checklist for anyone carrying too much debt and looking for help. (My assumption with this list is that the debt burden has created a financially precarious situation calling for strong remedial action.):

First, check out a branch of the National Foundation for Credit Counseling (NFCC). It was founded in 1951, and it's the biggest and oldest national nonprofit credit counseling service. The website is www.nfcc.org and the toll free number is 1-800-388-2227. For example, I looked at the branch nearest you, which is in Syracuse. It offers Internet, phone and in-person counseling and the fees range from zero to $30. Low fees matter. You're already cash-strapped.

Second, for anyone that can't see their way out of debt (and it seems to me from your email that isn't you) consult with a bankruptcy attorney. Sometimes bankruptcy is the best path toward getting a fresh financial start. Sometimes it isn't. But you should be able to make an informed decision. A good source of unbiased information on bankruptcy and other avenues for getting out of debt is www.nolo.com.

Third, don't give up yet on renegotiating rates with lenders. Right now, it appears that your experience is fairly typical. But there is growing pressure on financial institutions benefitting from a taxpayer bailout to work with customers rather than take a tough stance. I'd get back in touch with your creditors in the New Year.

Last, whatever you do to get out from under your debts, congratulations. But the real trick is to make sure you stay out of debt. Create a plan--and stick to it..

12/30/08 by Chris Farrell

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Credit card debt

Question: Recently I received, unsolicited, a new credit card from JC Penneys with a higher credit limit. The new card comes with "benefits"--more opportunity to spend at a time when I want nothing more than to reduce my debt. Is there a downside to refusing the increase? Is there a downside to accepting it? Should I use it as leverage to request a lower interest rate?

I am also concerned in general about the fast-and-loose way banks can change credit agreements, and in particular, Bank of America, which also made changes in the credit agreement on my account with them in the last few months. I'm sure you've gotten this question often, but one more time--what can consumers do to protect themselves against the lack of regulation, aside from not holding credit at all? The looseness is reminiscent of the airline industry where you might book a flight, but they are under no obligation to get you there. Mary Rose, Montpelier, VT

Answer: Continue to pay down your debt. Ignore the increase in your credit limit. You don't want to carry debt on your credit card. Period. If you use a credit card for convenience--which is the reason to have one and use it--pay off your bill in full every month, as soon as the tab comes in. This way, there's nothing the credit card companies can do to you. You have a high credit score. And a pristine balance sheet.

To your second point, many people are getting a harsh lesson in how the credit card industry stacks the deck in its own favor. Here's one of my pet peeves. You probably have a "fixed" rate credit card. Now, to you and me a fixed rate means it can't be changed, just like a 30-year fixed rate mortgage. Problem is, that's not what the credit card companies mean by "fixed" rate. They can change their "fixed" rate with as little as 15 days notice, depending on the state or the credit card's contract terms.

Here's even worse behavior: "Universal default.' A number of issuers impose what's called a "universal" default clause hidden in the fine print of a credit card agreement. If you're late on any payment to any creditor, be it the electric company or your mortgage, the rate on your card could automatically jump--even if you are current with your payments on the card.

I could go on with abuses. The Federal Reserve has approved new rules that ban or clean up a number of these practices. Problem is, the rules don't go into effect until 2010. I don't understand why. It looks like the new Congress doesn't, either. There's a chance that new legislation will accelerate the timetable.

01/27/09 by Chris Farrell

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Pay off credit card

Question: Out of the clear blue sky, I got a notice that my Capital One Platinum credit card rate is being raised from 4.99% to 13.99. I have a very high balance on this card (76% of available credit). I checked my own credit records (perfect, never late, all accounts up to date) and score (942) and figured they would want to negotiate with me, but no dice. The guy on the phone said they mailed out 8 million of these notices this week. My options are 1. Find a 0% introductory rate and transfer the balance (if I can even get one) or 2. Opt out of the change in the rate, close the account, and pay it off at 4.99%. Either way paying it all the way down will take me 12-18 months. What is the best alternative or is there another option that you would recommend? Katryn, Minneapolis, MN.

Answer: What the credit card companies are doing is legal. But it's wrong. That said, the best thing you could do is keep the 4.9% rate, close the account and payoff the debt. It's risky to carry a high balance in an economy sinking lower every day and it's prudent to eliminate credit card debt. So, unless there is some business reason why you need this particular piece of plastic, I'd get rid of it--and fast. Capital One loses a good customer, too. That's the power consumers have in our economy. I'm hoping after the shoddy way most credit card companies have treated their customers during the downturn everyone will refuse to carry a balance, slashing card company profits and practicing good personal finance habits.

02/17/09 by Chris Farrell

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A bad credit card experience

Question: I just had an extremely frustrating conversation with my credit card company (Bank of America). I wanted to get your thoughts. Larke, Washington, DC

Answer: Larke sent us a long email, a self-described "rant." It details an all too common experience with government bailout-gorged credit card issuers. His case involves Bank of America. It raised the credit cards interest rate and cut the line of credit.

A couple of personal finance points: First, Larke is doing the right thing: Paying off the card in full. The beauty of capitalism is that you don't have to do business with companies that mistreat their customers. Second, everyone with a credit card should be prepared for a similar experience. It may not happen to you, but just as mailboxes stuffed with unwanted credit card solicitations was the bane of our financial existence only a few years ago, now hiking rates and slashing lines of credit is normal business practice. Be prepared. Third, don't volunteer to your credit card issuer that you've been laid off. In their business model, you've gone from a good customer to a high risk customer. Period.

Now, over to Larke's story. It needs no further comment:

I called BOA to try and get my interest rate down on my credit card. I have made this type of call in the past when I've been comparing offers from other credit card brands/banking institutions. In this situation, I was trying to use my current unemployment situation as leverage to get my interest rate lowered (i.e., I wasn't just shopping for a lower interest rate, I really thought that there wouldn't be an issue to lower my rate by a reasonable, appropriate amount; I was still riding the mortgage rate reduction train, I suppose).

Not only did the senior credit analyst not lower my interest rate, she cut my line of credit because I was just laid off. Instead of having a cushion of $10K, I now have a cushion of $500. Twenty minutes ago, if I never made the call, my limit would have remained the exact same as it was last night. I also just heard that BOA is experiencing gains. Great. So, BOA got to be irresponsible, get a slap on the wrist and now, can't possible lower someone's credit card rate by 2% (I do understand that rates are based on prime/t-bill calculations so I know that certain rates are just unrealistic, but I don't believe my request was unrealistic).

So, I got humiliated through a job lay-off and now , in trying to be responsible, my credit card company is reducing my credit (I have excellent credit history, always made my payments, own a house, etc.).

They offered me some kind of debt reduction program (a 5 year payoff program) - but I'm pretty positive that will end up costing me more in the long run. So, I'm just going to pay the card off, asap.

Thank you so much for reading my rant - I thought the bank's were supposed to be flexible. I'm very frustrated!

03/13/09 by Chris Farrell

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Credit counseling

Question: I have, unfortunately, managed to rack up about $30,000 in credit card debt. Financially I'm okay and working to pay off the debt and not in danger of bankruptcy or anything right now. I am considering using a credit counseling service to help me negotiate a lower interest rate on some of my cards, and am wondering how it works if you have a balance on a card but close the account? How does it reflect on your credit report? Thank you, Mark, Ashburn, VA

Answer: The answer lies in a world of "sometimes," "maybe" and "not always." Fair Isaac, the 800-pound gorilla of the credit scoring industry, explicitly states that participating in credit counseling doesn't factor into your credit score. That's the right approach. Problem is, there are other credit scoring companies and it could show up elsewhere. Closing a credit card account will usually nick your credit score.

Of course, my reaction is "so what"? The real concern is getting rid of the debt, and congratulations on working so hard to pay off your credit card bill. Your credit report and your credit score will rebound with good debt habits.

One last thing: Be careful when you look for a credit counseling service. It's an area ripe with fraud, malfeasance and fly-by-night operators. The nonprofit affiliates of the National Foundation for Credit Counseling are legitimate. The quality of the service can vary, but it's a good organization and a good place to start. The United Way and a number of churches also offer honest services.

By the way, they may tell you you're doing fine on your own. But it's always good to talk to someone knowledgeable and have them review your situation and go through your options.

04/01/09 by Chris Farrell

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I-bonds at 0%

Question: Every May and November I download the redemption values for my I Bonds. I use the program called "Savings Bond Wizard" that goes to the government website and automatically downloads the values of the bonds for the next period of time (in this case it would be May 2009 thru Nov 2009). Every time I have done this in the past, I can see how my bonds increase every month. This time, I did not see any increase at all in any of the months May June July Aug Sept Oct or Nov 2009. Do you know why this is? Could it be that my bonds will not grow any interest at all for all those months? Thanks for your help! Maxine, Danvers, MA

Answer: You read it right: The yield on I-bonds, the government's inflation protected savings bond, is almost zero. That's right, 0%. The I-bond joins a long list of very safe government backed securities that pay savers from nil to fractional yields.

Here's the deal: Treasury recently announced that inflation-linked bonds bought between May and October will earn 0% interest for the first 6 months. The same holds for current I-bond owners when their rates reset. Remember, I bonds come in two parts: a fixed rate and a rate that adjusts with changes in the Consumer Price Index. The fixed rate is at 0.10% for new issues. That fractional rate of interest will last for the 30 year life span of the bond. The 0% yield component comes from the link to the Consumer Price Index. Reflecting the worst financial crisis since the Great Depression, the CPI came in at a more than 5% annual rate during the prior 6 month period. However, the yield on I-bonds can't fall below zero % so that's what holders will get.

By the way, I still like I-bonds. It's an insurance policy, a good hedge against the risk of rising inflation once the recovery does set in. Plus, these 30-year bonds allow your money to compound tax-deferred until they're cashed in. (I-bonds redeemed before the 5 year mark forfeit the 3 most recent months' interest, but after 5 years that there is no penalty at redemption.) There are no commission costs when buying or selling them.

05/05/09 by Chris Farrell

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Home equity and credit cards

Question: I have a $16,000.00 credit card balance with Chase at 3.99 % until balance is paid off. I also have a home equity credit line that would support paying this balance off. The home equity interest rate is currently at 4.12%.

My question is would I be better off paying off my credit card and putting it into my home equity line of credit where I could deduct the interest on my taxes even though the interest is slightly higher or stay the course and continue to make monthly payments on my credit card. Some one told me it is not a good idea to put your credit card balance against your mortgage. What do you think? Roger, Minneapolis, MN

Answer: I am against using home equity to pay down credit card debt. Yes, you get to deduct the interest. But you're hardly paying much of an interest rate anyway.

Far more important, once all your debt is home-based you risk losing the house if you suffer a setback. If you look at the credit problems of recent years a common mistake was homeowners tapping into their home equity to consolidate debts for the tax break. Then they got into financial trouble--lost their job, suffered a major medical illness, got divorced--and suddenly they couldn't make their mortgage and home equity payments. Results: Foreclosure, a short sale or extreme stress holding on to the property.

Yet there are a number of ways to get financial relief on auto loans, credit cards and similar consumer debts. For instance, you can make minimum payments for a while, go into debt counseling, and even declare bankruptcy. And you get to keep the home. The bottom line: I don't like the risk-to-reward ratio.

I would just focus on paying off the credit card and leave your home equity al

05/07/09 by Chris Farrell

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Small business credit card

Question: We started a small business in July 08. We received an Advanta business credit card with a $20,000 credit line. It was perfect for me and 3 employees. We paid our balance every time. We were notified this week that Advanta was closing all business credit card accounts. Do you know of this? I tried Chase, CITI, and Bank of America for replacement cards but was denied because of too many credit requests on my personal credit report. Any suggestions what to do? This is really bad timing in the life of the business that otherwise is doing well. William, Fort Collins, CO

Answer: Well, you have plenty of company. After posting a $76 million loss in the first quarter, Advanta announced it was closing more than 1 million small business owner credit card accounts.

In the latest twist in the credit crunch, credit card companies are wary of small businesses. For instance, almost two thirds of small business owners said their interest rate had gone up over the past 12 months, and 41% reported that their credit limits were reduced, according to latest survey by the National Small Business Association.

The Credit Card Accountability Responsibility & Disclosure Act recently signed by the Obama only applies to consumer credit cards. Small business cards aren't covered. In practical terms, the credit card reforms protect you if you use your personal credit card for business. But the new credit card rules don't come into play for small businesses that are incorporated, limited liability corporations, and the like.

You can learn more about the current state of small business and credit cards at this Business Week story. To research getting a new card, here is a list of terms from 14 business card issuers (although some have already turned you down). I would also check out your local credit union or community bank. Both of these neighborhood institutions tend to work with local businesses. For instance, I just checked out the website of the Community Development Financial Institution that's a few blocks away from where I work in St. Paul and it offers corporate credit cards.

06/01/09 by Chris Farrell

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Loan payment fees

Question: You mentioned on your May 22nd show that credit card companies will no longer be allowed to make people pay for phone and online payments. I was wondering if this applies to only credit card payments or also payments on other forms of credit, like mortgages and car loans? Jargen, Minnetonka, MN

Answer: No, when it comes to loans the main focus of the new law is on credit cards. (Although a provision attached to the legislation allows visitors to carry guns into national parks. Go figure.) However, a number of banks don't charge a fee for making mortgage or auto payments by phone or online, or they have "windows" where they don't. This is a classic example of it pays to shop around, especially checking into payment policies of a local credit union or community bank.

06/03/09 by Chris Farrell

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Make minimum credit card payments

Question: I recently gave 2 weeks notice at my job which I recognize is slightly insane in this economy, but I'm confident that it was the right decision. I have enough savings and annual leave to not work at all for at least 6 months, but I'm not expecting that to be the case as I also have some freelance work lined up and on the horizon. Over the last year, I've made a significant dent in my credit card debt. My question is: while I'm unemployed, should I continue to pay over and above the minimum balance as I've been doing or should I pay only the minimum balance until I have a full time job again? I should say that my budget calculations for not working for 6 months were based on paying only the minimum and on not having any freelance work coming in. Thank you, Antoinette, Brooklyn, NY

Answer: No, you are not insane. Far from it. Despite the economic downturn and all the financial problems we're living through you still need to weigh the odds and, when it makes sense, take a risk. It seems to me you've thought through your job change well. You have a plan and you have savings. For now, I'm comfortable with you keeping financial flexibility by making minimum payments for a couple of months.

Here's a small trick I picked up from a new book by Gerri Detweiler, Nancy Castleman and Marc Eisenson, Reduce Debt, Reduce Stress: Real Solutions for Solving Your Credit Crisis. (I know you aren't anywhere near a credit crisis, but I like the tip. I'll write more about the book another time.) It might be a smart financial move for you. It's at least worth considering assuming you don't add to your credit card balance.

The basic idea: You pay the minimum required credit card payment this month. Your minimum payment should go down slightly next month. But you send in last month's required payment and you continue to do that for the next several months. The financial impact is very slight at first, barely noticeable. Yet applying just a little bit of extra money every month eventually gathers momentum. With this technique you won't strain your finances, but when you get your next job it will be that much easier to eliminate the credit card debt.

I hope you find the kind of work you're looking for.

06/09/09 by Chris Farrell

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How many credit cards

Question: I have paid off all my credit cards, and am now looking to work on one car loan and then my student loans after that. I am trying to figure out what to do with these 4 credit card accounts now. Do I simply close them out? Do I keep them at a 0 balance but pay the yearly fees for the sake of an improved credit score? What do you recommend? Thank you, Ed, Key Largo, FL

Answer: I bet it feels good to get rid of your debts. It's terrific. I wouldn't clutter up your finances with multiple credit cards. I can't think of a good reason why anyone wants more than one. An exception to that rule is freelancers and other self-employed folks. It's a savvy move for them to have one card for personal use and the other for business expenses. It makes record keeping easier.

What's more, why pay a fee for something you don't need. Go through the cards and decide which offers the best features for the lowest cost. You should also take into account the length you've owned the card. The longer you've had it the bigger its impact on your credit score. Closing the remaining accounts will ding your credit score somewhat, but the effect is fairly limited and with good habits your score will bounce back. The only real issue is timing. If there is a major purchase in your immediate future, such as buying a home, leave your unused accounts alone until the deal is done. Then close them.

One last point: Do you really need a credit card? Or is a debit card enough? A debit card is an electronic checkbook and, with a debit card, you can't spend more than you have in your checking account. In an epic shift, consumers are now using debit cards more than credit cards. It's a wothwhile question to ask. I do need one, but a friend of mine decided he didn't.

06/29/09 by Chris Farrell

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Get a credit card

Question: Hi! I charged up a few credit cards when I was in college and used credit counseling to pay them off. This has been paid off for five years, but I haven't had any credit cards or much other credit activity since. Now, I'd like to rebuild my credit, but I recently applied for a credit card through my bank and was declined. Any suggestions for getting back in the good graces of the powers that be in the credit world? Chandra, Seattle, WA

Answer: It wasn't all that long ago that all you had to do was breath and you could get a credit card. And I'm not convinced that even breathing mattered toward the end of the credit boom. Now that the boom has gone bust it is harder to get your first card.

It's time to revive three classic techniques to get a credit card. One time technique is to apply at a major retail store where you shop. Another is to get a gasoline credit card. The last is a secured credit card. Another option is a "secured" credit card. With secured card, you open up a savings account with a bank. It issues you a card that looks like any other credit card but your credit is equal to or somewhat less than the amount you've put on deposit.

The credit with all three of these options tends to be expensive. The idea is that after showing a pattern of paying off your bills on time you switch to a traditional "unsecured" credit card with a lower interest rate and no fees.

07/14/09 by Chris Farrell

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29% interest rate

Question: I am rec'ing notices that my credit card rates are jumping to 29%. I owe about 35K. I tried to get a consolidation loan to pay them off and reduce my interest. Loan denied. I have no other obligations and work part time 30 hours a week as well as receive a pension of $2500 a month. I called the credit companies and asked for a reduced rate and was told I could pay off my balance and opt out of the cards but no reduction. What can I do short of declaring bankruptcy? John, Rome, NY

Answer: You're carrying a lot of credit card debt. The financial hole is only going to get deeper at a 29% rate of interest. That's a lot of vig. You need a plan.

I'd get help creating that plan. I would do is go online to the website of the National Foundation for Credit Counseling. There are a couple of consumer credit counseling service offices near you. For instance, one is in Utica and another in Syracuse. I would schedule a meeting with a financial counselor to go over your finances and get their recommendation for a budget and a debt repayment plan. Neither office charges a fee for a consultation. There are small fees to pay if you decide to create a repayment plan with one of the services.

That's task number one and, hopefully, by going over your monthly income and monthly expenses they'll see ways of freeing up cash to attack the debt. They can also negotiate on your behalf with the credit card companies. It's a practical step toward getting rid of the debt--and the 29% loan shark rate of interest. Good luck.

07/24/09 by Chris Farrell

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Home equity line of credit

Question: I have a $50,000 mortgage on my condo and was just approved for a $150,000 equity line of credit (no processing fees). I have no emergency funds and was planning to use the LOC to pay for major dental work (not cosmetic) I have been told I need - cost approx $10,000. I am financially very conservative and very uncomfortable with the idea of a second mortgage on my home - would I be better off canceling the equity LOC (I have 3 days) and charging the dental costs on a credit card? I have an excellent FICO score and don't want to do anything to jeopardize that rating. Thank you! Annel, Norwood, MA

Answer: My strong bias is against borrowing against your home to pay for dental work. It isn't just dental work. My general rule of thumb is that any money borrowed against the equity in a home should go toward improving the value of the place and your enjoyment from living there. I think your financially conservative instincts are spot on.

Here's my overall perspective. It was commonplace during the great real estate bubble for homeowners to take out second mortgages to consolidate their debts, pay for vacations and meet tuition bills. It's cheap money, right? The interest rate on a home equity line of credit is lower than the rate on credit cards. You also get to deduct the interest on your taxes. But treating a home like an ATM backfired when the boom went bust. Fact is, too many people needlessly put their homes at risk. For instance, credit card companies can't go after your home if you miss credit card payments. But a lender can start proceedings on the home if you start skipping equity credit line payments.

Now, to be realistic you're far from needing to worry about financial trouble. After all, the lender is willing to set up a very large line of credit with you so I know that you have a lot of equity wealth. The dental payment is comparatively small. You could handle it easily.

Still, I'd prefer that you pay for it on a credit card and then focus on eliminating that debt as quickly as possible. To me, it's a better strategy and money habit. By the way, no matter what you decide to do your FICO score is fine.

07/29/09 by Chris Farrell

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Automatic bill payment

Question: I understand that credit card companies take a dim view of certain credit-using behavior when deciding on your interest rate. For instance, I've read on this site that you shouldn't use credit cards at the salon, at bargain stores, or for purchasing alcohol. What about monthly bills, though? American Express offers double rewards points for setting up your monthly bills (utilities, cable, phone service) to be paid automatically with the card. I already have these bills set up to be paid automatically from my checking account each month anyway, so is there much difference in shifting them to my AmEx and gathering the extra rewards points (to transfer to frequent flyer accounts, or to help out with Christmas gifts, etc.)? And will this have a detrimental effect on my credit score? Suzanne, Rochester, NY

Answer: The biggest factor in determining your credit score is paying bills on time. (It accounts for 35% of the score.) So, it certainly doesn't hurt your credit score to pay them automatically, and it will probably boost it over time. By the way, it doesn't matter whether the bills are paid on time by check, automatic withdrawals from your checking account, or automatic bill paying through your credit card. Of course, the key to the latter method is paying the tab on your card on time.

The credit card companies are replicating the mistake of the recording industry. They are going after customers, changing the rules of the game without notice, closing accounts, raising interest rates, hiking fees, and cutting lines of credit. In trying to lower the overall risk of their credit card portfolios it looks like red flags were raised when customers shifted from shopping at premium stores to discount emporiums. The data mining into our habits and behavior is breathtaking--and disturbing.

Still, the industry would go out of business if it denied credit cards or hiked rates on everyone who on a monthly basis got a haircut, went to a liquor store, picked up household items at a bargain basement store and groceries at discount warehouse. What they're really looking for is abrupt changes in spending that might signal financial trouble. In a sense, with regular bill pay you are steadfast and you get the rewards you want. (There is another whole question about rewarding credit card companies for their behavior, but that is for another forum.) For more on credit card company behavior and your spending habits check out this terrific interview my colleague Tess Vigeland had with Charles Duhigg.

If you're responsible with money it's probably best to use a credit card with an automatic payment instead of a checking account. The reason is that so long as you are well under your credit limit you don't need to worry about overdraft fees and the like from the bank--and those fees are costly.

08/13/09 by Chris Farrell

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Debit cards safe

Question: A year ago, I made the decision to use my debit card more and credit cards less. I currently have no debt - good feeling! I recently heard a financial advisor on a radio show (maybe it was yours) say he only uses his debit card. He doesn't have a credit card and says he can use his debit card. I am aware of certain protections that come with credit cards: limitation of loss if you report a lost card promptly or refund if say you purchase tickets for a cruise that gets cancelled. Does a debit card provide all the same protection to me that a credit card does? Are there any important differences between a debit and credit card that I need to be aware of? Thank you. Char, Bainbridge Island, WA

Answer: Going debit is popular. For the first time consumers are using their debit cards more than credit cards. It's a good trend. I'd probably use my debit card 90% of the time whenever I pull a piece of plastic out of my wallet. But I'm skeptical of going all debit, at least for anyone that travels, shops online, and buys a big ticket item like a washing machine or refrigerator. In certain circumstances I prefer the greater legal protections of a credit card over a debit card. It's a judgment call.

Like you, the driving force behind the widespread shift from credit cards to debit cards is the desire to stay out of debt. A debit card is really an electronic checkbook linked to your checking or savings account. A debit card offers the convenience of plastic and merchants welcome the card. The real issue with a debit card is not to overdraw your account. Banks have learned that it's really profitable to let you overdraw your account and sock you with hefty overdraft fees.

Now, to your question about consumer protection: Credit cards have more legal protections than debit cards. But in practice Visa and Mastercard have a policy of insisting that their issuing banks voluntarily extend credit card protections to debit cards. To ensure that you get the "zero-liability" policy protections when you use your debit card press the "credit" button and sign for the transaction.

Here are the rules. By law, if your credit card is lost or stolen and you tell the card company before any unauthorized charges are posted to your account you're not on the hook at all. But if the unauthorized charges do show up on your bill--and that's how we usually find out about unauthorized charges--your liability is limited at most to first $50 of charges. It's good protection. The debit card rules offer up a tired security system. Your liability is limited to $50 if you tell the issuer within two days of finding the unauthorized charges. Between 2 and 60 days, your potential liability rises to $500. After that you could be on the hook for even more.

However, if your debit card has the Visa or MasterCard logo you don't have to report fraudulent activity within two business days. The policy of the two giants of the industry is that you won't be held liable for fraudulent transactions made over their networks. (That's why you hit credit and sign for the transaction.) But it's a policy, not the law.

In practical terms I'm comfortable with the Visa and Mastercard pledge most of the time. For everyday use around town, going to the grocery store and the dry cleaner, debit cards are safe. It's a sound habit to develop for not taking on debt and spending more than you earn. However, I prefer the deeper legal protections of a credit card when I travel. It's easier to book and protest with credit cards with rental cars, airfares, hotels, and the like. I'm a cautious with the wild west of the Internet so I'll use my credit card for shopping online. If I buy an expensive item I'd rather make sure everything is okay before paying off the bill in full.

So yes, you can go fully debit. But I recommend being a debiter most of the time, just not all the time.

08/14/09 by Chris Farrell

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New credit card

Question: My MasterCard company (Citicards) recently sent me a letter saying that my card number had been compromised by a large-scale theft of credit card numbers. They sent me a new card, which has a different 16-digit number than my old card. When I called to activate the account, the customer service representative asked permission to "close" the old account and "open" the new one. Will this show up on my credit report as one 7-year-old account closing and a new one opening (thus hurting my credit history)? And whom do I call to find out? I am conscientious about paying it off in full every month - I would hate to have this hit my record negatively. Jennifer, Boston, MA

Answer: No, the change in numbers shouldn't impact your credit score. Your credit history should be transferred into the new account when the old one is closed. The other thing is that your balance and credit limit are the same (that's what happened with me after a similar shift following a credit card security breach.) So, there shouldn't be any negative impact on your credit ratio.

08/22/09 by Chris Farrell

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Closing credit card account

Question: I have a high interest credit card--24.9% with Bank of America, with a large balance $12,000. I am closing the account and Bank of America says the interest rate on paying off the balance is 5.5%. Is this ok under the new credit card law signed into affect? Dennis, San Diego, CA

Answer: My guess is that you got an offer of a lower interest rate in return for closing the account. It's common practice these days.

Although many finance experts recommend against closing an account because it will nick your credit score, I often think it's a good move on your part, especially if money is tight. It can be tough to pay off a large balance at a loan shark rate of almost 25%. A 5.5% rate of interest can make a big difference. Just doing a quick calculation, if you paid the minimum payment at 24.9% you would fork out $5,095 in interest payments alone. At 5.5% the interest charge adds up to $774. Hopefully, you can put even more than the minimum toward getting rid of the loan.

The new credit card law that comes into effect in stages basically protects cardholders from unexpected interest rate hikes and significant changes to the terms of the loan. It also bans some bad practices, such a universal default. (A "universal" default policy hidden in the fine print of a credit card agreement meant that if you were late on any payment to any creditor, the rate on your credit card could automatically jump to the default rate of 30%.) I would imagine in the future that so long as credit card issuers give their card holders sufficient, clear notice they should be able to offer a lower rate in return for closing the account.

08/25/09 by Chris Farrell

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Credit problems

Question: I think that my daughter is in deep credit card debt. I would like to pay off some of her credit cards. Is that possible to do on my own without alerting her? Martha, Asheboro, NC

Answer: I don't think so. My answer is going to be short because the solution is for the two of you to talk. I don't know the circumstances, but it's probably much easier for me to say than for you to do. But if you want to help her out she needs to know what's going on and the two of you should come up with a plan together. Good luck.

08/26/09 by Chris Farrell

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Closed credit card account

Question: I just received a notice from HSBC, one of two of my credit card companies, that they were going to increase my interest rate - again! (Six months ago they increased it from 9.9% to 14.9%) This increase is unrelated to any delinquency on my part nor a particularly low credit score (approx. 760+). The notice indicated that HSBC was raising my interest rate because I am part of a "class of accounts" whose interest rates are being raised as of December of 2009. They are offering me the opportunity to "opt out" of the increase. This means they will cancel my account. I know Marketplace has advised other listeners that closed credit card accounts negatively impact credit ratings - so my question is: should I keep the account open and not use the card or should I "opt out" on the presumption that it will not negatively impact my credit score? Chris, Los Angeles, CA

Answer: You have a lot of company. Yes, closing the account will have a slight negative effect on your credit score. The impact of a closed account comes from the change in your ratio of total credit balances to total credit limits. A closed credit card account lowers your overall credit limit and raises the ratio.

But so what? The nick won't really matter unless you're in the market to buy a home, a car, or some other big ticket item. If that's the case, I would swallow the increase for now. But if you aren't going to be borrowing money anytime soon I would recommend closing the account and paying off the balance at the lower rate. Why reward this company with your business considering how it is treating you? After all, the real goal is to get rid of credit card debt. And the effect on your credit score--if any--does fade with time.

One other point: Do you really need more than one credit card anyway? I can't think of a good reason why anyone wants more than one. An important exception to that rule is having one for personal use and the other for business expenses. It makes record keeping easier.

10/05/09 by Chris Farrell

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Responsible for debt

Question: In 1999 I opened a credit card with my nanny to help her establish credit. I have never used the card so all of the charges on it are hers. Last year in July I was informed by the bank that she was late on a payment. I canceled the card. Since then she had been paying regularly until this past May. She is over 90 days late and it is now in collection. I had her fill out a form to assume financial responsibility for the card. The bank will not allow that because she has been late. Technically it is my responsibility. The total due on the card is around $10,000. What can I do so this doesn't ruin my credit? Vivian, San Mateo, CA

Answer: I know you don't need me to say this at the moment, but for other listeners and readers your experience is why it doesn't pay to co-sign or open a joint account with non-family members--no matter how trustworthy. Life intervenes, and many of us fall behind on our payments for a number of reasons. (Even with family members I urge caution; there are other ways to help them out financially without taking on a legal obligation.)

Fact is, the bank and collection agency has every incentive to enforce your legal responsibility for the payments. You can't get off the financial hook. Still, the good news is that you've closed the account. The potential damage is limited to the $10,000 remaining on it. Now that it's in collection the simplest way to minimize any damage to your credit is to pay it off and then work out a payment plan with your nanny. Of course, this course of action depends on your relationship with your nanny.

Does anyone else have a suggestion?

10/27/09 by Chris Farrell

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