Thanks for asking a lot of good credit and debt questions.
Today begins the first installment of the answers. They are provided by the credit counselors of CredAbility, an Atlanta nonprofit that specializes in these issues.
Please return Tuesday morning for the next group of answers. My guess is that there were enough good questions to run this every morning this week.
Q: I recently went through a home loan modification, which did a great deal of damage to my credit score — about 200 points worth. But over the last quarter, payments have began to be reported and my score has climbed back by 30 points. How soon before I get to a 620 again. I am looking to purchase a vehicle mid-summer and would like to be able to get a good deal, which I am used to.
A: We can’t predict when your credit score will return to 620. But we can offer some tips that should help you get back on track and might show results in time for your summer car shopping.
– Pay your mortgage and all other bills on time or early every month.
– If you have credit card debt, try to pay it down so the amount you owe is at least less than half of your credit limit. Have a goal of paying down your debt to less than 30 percent of your limit.
– Be sure to get a free copy of your credit report at www.annualcreditreport.com and check to make sure all of the information is accurate. If any negative information is wrong, write to the three credit reporting agencies (Equifax, Experian and TransUnion) to dispute it.
– If you had a one-time setback that caused you to fall behind on your mortgage, you can send a statement to the three credit reporting agencies explaining the situation in 100 words or less.
Q: My fiancee and I have about $4,000 in combined credit card debt. However, we have been contributing 10percent of our monthly paychecks to our respective 401(k) accounts for a few years. We are in our mid-20s.
I have heard that carrying debt is a poor use of my money. Would I be better off reducing my 401(k) temporarily and shifting the same amount to my credit card bills until they are paid off, and then reinstating my 401(k) contribution? I understand the time value of money, and reducing my retirement contributions now could have a multiplier effect later in life. But I also would prefer to remove the ball and chain that is debt as much as possible. Any advice?
A: This is an excellent question that we hear often. Because the interest on your credit cards is almost certainly higher than the returns you’ll get on your 401(k), we’d typically advise someone in your situation to make a temporary change in priorities.
You are correct that there is a multiplier effect to a 401(k) plan, especially for contributions at your age. But there is also great benefit in being debt-free. People in your situation who temporarily halt retirement contributions to pay down credit card debt will enjoy the satisfaction of becoming debt free.
Q: I am 29. I have no debt, having paid off my student loan two years ago and my car loan last year. I have two credit cards, both of which I have had since college, one with a $12,000 limit and one with a $10,000 limit. I do not use either of them much and pay them off each month.
Is it bad to have this much unsecured credit? Or is it better to just have them open, use them occasionally and never be late? I have considered just closing one of them, since I do not really need both of them.
A: You have been doing the right things to position yourself for financial success. Living debt free gives you lots of options. We would advise someone in your situation not to close credit cards. Using them occasionally and paying them off looks great on your credit report and gives you flexibility if you want to make a large purchase without using cash.
It probably is a good idea to use each card for at least a small purchase each month, because there have been reports of creditors closing accounts that are unused for long periods of time. A person at your age with debt under control is free to focus on building emergency savings to cover six months of expenses and contribute to a retirement fund. It is good to have options!
Please return Tuesday for the next installment of answers. Thanks.
- Henry Unger, The Biz Beat
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