Answers to your credit questions

Here is the first installment of answers to the questions you submitted, provided by Consumer Credit Counseling Service of Greater Atlanta.

Please return Friday for the second part, with other installments to follow next week.

Q: I currently have only two debt obligations, my car and student loan payments. I have a credit score of 713 and do not own a credit card. I really do not like to use credit cards, but would like to know if getting one is the only way I can boost my score. If so, do you have any recommendations on cards to apply for? I would be getting this solely to help boost my score by using it sparingly.

A: Getting a credit card is not the only way to increase you score, but if you don’t have one now it can help over time. Paying more than the minimum on your car and student loans will also help. However, it is true that creditors will look more favorably on those who have a mix of credit, and have shown they can handle it responsibly. If you open a credit card account it will actually lower your credit score in the short term. But if you handle it wisely your more diverse mix of credit will boost your score over time.

Q: I have roughly $30,000 left in student loans that I’ve been paying on pretty aggressively (paying $1200/month as compared to the roughly $400 monthly minimum my payment plan requires). I’m paying this way because I want to be rid of as much of the debt as possible before some life changes that seem eminent over the next 2-3 years (marriage, starting a family, buying a home?). I’ve got about $5,000 saved, but am only adding to it by about $200 to $400 a month. My question is should I be focused more on saving for future events and just making monthly minimums on the loans, or is my current method of paying as much of the debt down as possible and only saving what I can here and there OK? Thanks!

A: While you are to be congratulated for aggressively paying off your student loans, CCCS of Greater Atlanta suggests you make saving more of a priority – both in the near-term and as you prepare to take on increasing responsibilities. In this economy it’s a good idea to maintain savings to cover six months of expenses if you lost all income. Most people would need more than $5,000 for that unless there are no costs for room and board.

As you plan for the future, you should create a budget for your goals and begin setting money aside for that in dedicated accounts. How much do you estimate a down payment on a home will cost? How much will you spend on a wedding? It may seem counter-intuitive to postpone paying off your student loan. But these loans typically come with a low interest rate. It sounds like in your case it is better to reduce your financial exposure and prepare for your future through savings than to pay off a loan with low interest.

Q: We purchased a new home in 2008 and at that time our credit scores were in the 700 range with Equifax. After we purchased our new home, we found out 30 days before our taxes were due that we did not have enough money in our escrow to cover them. Our mortgage company paid the taxes and left our escrow $3,000.00 in the negative. In an attempt to have our taxes appealed, and they were successfully appealed, the taxes for 2009 changed, but our mortgage company added the $3,000.00 to our payment, and our mortgage has gone in a spiral. How can you note something on your credit report to show why this occurred?

A: If you have documentation from your local government and your mortgage company that this error was not your fault, you should collect that documentation and write a letter stating what happened. Make four copies of each of the documents and send one copy to your mortgage company and one to each of the credit reporting agencies (Equifax, Experian and TransUnion).

You should also appeal to your mortgage servicer to corroborate your version of events with the credit reporting agencies. Your mortgage servicer has the ability to mitigate the negative information in your credit report. While it is a good thing to maintain a healthy credit score, unless you are making a major purchase like a car or home, you can avoid being hurt by a lowered score by avoiding short-term debt.

Q: The company that has my Mastercard recently ramped up my rate from 12% to over 20% (with the provision that they’d knock it back down to 18% if I continued to use the account monthly). I’m more focused on paying my balance off, as I don’t really need my credit cards for much right now (but want to have them in case of true emergencies). I’m thinking that I want to find a credit union-based Visa credit card to transfer the balance to and then close the 20% Mastercard. Smart move or dumb move? And if it’s a smart move, should I move on this immediately or wait until February [when a new credit card law takes effect]?

A: Your credit score will almost certainly be hurt to some extent anytime you open or close a credit card account. Still, it is always a good idea to evaluate your best options. You can get a good idea of what will work best for you at www.Bankrate.com. It may be that a credit union near you will offer the best deal. If you find a better deal, though, you should give your current card company a call to see if it will match the offer you find on Bankrate.com. Also, you will be covered by the new credit card law after it goes into effect on February 22, whether you open a new account today or wait until the effective date.

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9 comments Add your comment

Brian

January 20th, 2010
4:22 pm

For the 2nd question, the advice is bad. Pay off your loan!!!! The debtor is SLAVE to the lender. You are on the right track to pay off your student loan first. Would you borrow money at that rate to save or invest with? That is exactly what you are doing if you follow that advice!

The FICO score is an I LOVE DEBT score. I, and many others, refuse to worship at the alter of the FICO. Check out Dave Ramsey.

Justin

January 20th, 2010
6:24 pm

I 2nd what Brian said. All hail Dave Ramsey!

Steaming Pile

January 20th, 2010
7:44 pm

You’re repaying your student loans aggressively, at the expense of your ability to build your savings. Then you lose your job and have nothing to fall back on. Was that smart or was that not so smart? Now substitute “mortgage” for “student loan.” You managed to pay down your mortgage by an extra, say, twenty grand before you’re laid off. Now you’re about to lose your house. Do you get the twenty grand back? Wouldn’t you rather still have that twenty grand to keep your house between now and the time you find another job? I have this argument all the time with my wife, and the conclusion is the same. Unless you have enough money to completely pay it off, it’s not a good idea to do this.

While Dave Ramsey means well, and he’s dead right at least 90% of the time in regards to the casual use of credit and the obsession with credit scores that some people have, the trade-off between making extra payments on your long-term, presumably low-interest debt and building a rainy day fund tilts significantly toward the latter, IMO.

Karen

January 20th, 2010
10:19 pm

I agree with building up an emergency fund first. I had a great, secure job, so I took most of my savings to pay off my student loans. Six months later, I was laid off. I thought I’d be able to get another job quickly. Then I became sick and couldn’t work for several months. I ended up having to borrow money (at a higher rate) in order to pay for COBRA and other expenses. Build up an emergency fund first. No one is safe any more.

Kevin

January 21st, 2010
2:48 am

Dave Ramsey would say that you should build an emergency fund before attacking debt. It’s foolish not to have 6 months of earnings in savings, but the American way is to spend, spend, spend… and then spend some more using credit cards.

No matter what the “experts” say. You don’t need a credit card to survive. A debit card works just as well as a credit card with the same purchase protections only it takes money from your bank account so you can’t spend more money than you actually have.

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