Here’s the second installment of answers to your credit and debt questions from CredAbility, an Atlanta nonprofit that helps consumers.
Please return Wednesday for the next group of answers.
Q: Over the past few years, the value of my home has dropped from $112,000 to $70,000 or less. Some of the foreclosures in the neighborhood sold for $25,000 to $40,000. My credit score, when I purchased my home six years ago, was 742. Now it is less than 500 because my bank dropped my credit limit on the card from $18,000 to $5,000, because I stopped using the cards.
I have considered bankrupcy or debt consolidation to eliminate the debt. The value of the home will possibly never be recovered in equity. I want to know if debt consolidation or bankruptcy should be considered. Thank you for your assistance.
A: We can’t give legal advice, but someone in your situation probably should speak with a credit counselor at a nonprofit agency before taking an action as drastic as bankruptcy. One of the first things a counselor will ask you is what your goals are. For example, if your goal is to stay in your home and you can afford the monthly payments, you should focus on paying down other debts and not worry about equity. Many of us owe more on our homes than they are worth on paper, but you haven’t lost anything unless you sell.
People who don’t want to stay in their homes and believe they owe more than they can sell for should seek legal advice. Make sure the advice includes information about the effect a bankruptcy will have on creditworthiness and your ability to buy a house in the future. If you would like free credit counseling from a nonprofit agency you can schedule an appointment with CredAbility by calling 800-251-2227.
Q: I have several credit cards on which I do not carry much of a balance. I usually charge and pay off a couple of hundred dollars a month just to keep them active. I have a 15 year credit history, exclusive of these cards, so I do not really need them to bolster that aspect of my credit rating. Would it reflect better on my credit report if I closed the accounts to show that there’s no worry that I’m going to run up more debt? Or does it look better to have them open to lower my debt-to-credit ratio?
A: The answer really depends on how much trouble it is for you to manage the cards the way you are now. Generally, having credit cards with a low debt-to-limit ratio is a positive. But if it feels like you are constantly juggling and having to work hard to keep track of payments, then you might want to make things easier.
Instead of closing any of the accounts, just use two of the cards and put the others away in a safe place. Pick the ones you’ll continue to use based on the best rewards deals, or your relationship with the bank. It’s possible when you go a long period of time without using a card that the bank will close that account. But that isn’t likely to do much damage to someone who has used credit carefully.
Q: I took out a loan for $3,000 back in 2004 and it went into default in 2005. The account has been charged off. During the last five years, the total for that loan has ballooned to over $6,000, due to interest and fees. If the loan is charged off, then why is it still accruing interest? My credit score is being affected by this charge off.
On all of my other accounts, I have paid on time for over 3 years now, but my credit score is only in the high 500s. I would like to buy a home within the next two years and I would like to know what my options are to resolve the debt.
A: It sounds like the original debt wasn’t truly charged off. If it was, you should get a record of that from the original lender and dispute the current collection efforts. Assuming the debt was not charged off, the first thing we would advise is to determine who the owner of the debt is. You should be able to do that by getting a copy of your credit report. You can get a free one at: www.annualcreditreport.com.
Once you determine who is reporting your debt to the credit reporting agencies, you should contact that company and try to work out a repayment plan. The amount of repayment is often negotiable and you could start by offering to repay the original amount of $3,000. Once you have repaid the debt, ask the party you repaid to furnish you with a letter confirming that, so you can forward it to the credit reporting agencies. This is a long process, but one you can complete in two years.
- Henry Unger, The Biz Beat
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