Here’s the fourth installment of answers to the credit and debt questions you’ve asked. They have been provided by CredAbility, an Atlanta nonprofit that specializes in these issues.
Please return Friday for the final part. Thanks.
Q: If my home’s value is way below what I paid, could I use this as a bargaining tool to have my loan modified? Are you allowed to threaten non-payment if the mortgage isn’t modified?
A: Millions of people owe more on their home than it would bring if they sold it. But your mortgage is a contract you signed with your lender and you should pay that debt if you can afford it. It is never a good negotiating strategy to threaten not to pay.
If you are having trouble making payments, you may find options that will work for you through the federal government’s Making Home Affordable program (makinghomeaffordable.gov). A nonprofit housing counselor can also advise you if you are having trouble paying your mortgage. (You can schedule an appointment with CredAbility by calling: 800-251-2227.) But if you are able to comfortably make your monthly mortgage payments, you are in the same boat as many Americans — hoping the housing market improves before they need to sell.
Q: After going through a very rough financial period a couple of years back and subsequently filing bankruptcy, I have come through the other side a very diligent saver and a conscientious bill payer.
Since then, I have managed to save several thousand dollars by being very practical and working hard to live below my means. I feel safer financially now than I ever have with the money in the bank knowing if disaster strikes, my daughter and I would be OK for a little while. I have three credit cards and carry no balance on any of them. I use one credit card and pay it off in full each month. My only remaining debt is a large school loan.
Here is where I am torn: Do I continue making monthly payments on my loan for another 20 years and save as I have been? Or now that I have enough to pay the loan off in full, do I opt to do that and start back over on my savings? If I go with the second option, I will start saving again immediately and within a couple of years, I could be back where I am today — only with NO student loan and all of the interest that comes along with it.
One side note — I do hope to purchase a home within the next year or two, as a first-time buyer.
A: We would advise someone in your situation to pay down the student loan for one big reason: You have recently demonstrated the discipline and commitment to build up your savings significantly. We would set aside about $1,000 for emergencies, but use the rest of the money to pay down — or pay off — your student loan. Anyone who pays on a student loan for 15 years and faces continued payments through 2030 would want to get that debt off their shoulders.
The key to this suggestion is to immediately begin aggressively saving again. Your monthly expenses will be decreased by amount of the student loan. Put that and the amount you’ve been setting aside into emergency savings (eight months of living expenses) and for the 20 percent downpayment you’ll want to have when you go house shopping. This assumes you are putting money aside for retirement. If not, a retirement savings account also should be a priority.
Q: I need a fresh start. I’m 52 and my credit score is below average. The thing is I have only a car, house, and two open accounts with a credit union. Everything else is either closed or written off. I really want to get on track. What do you suggest?
A: Congratulations on your decision to make a new start. If your goal is to improve your score, it will help to understand where the number comes from. Key factors in a FICO credit score are: payment history, amounts owed, length of credit history, new credit, and types of credit used.
Payment history is given the greatest weight, so it is important to pay all monthly bills on time or early. The amount you owe compared to your credit limit is also a key factor. If you have a credit card or line of credit with your credit union, be sure that you are using less than 50 percent of it, with a goal of paying it down to less than 30 percent. It will take time, but if you stick to your plan you will see results. Since the biggest reason to be concerned about a low credit score is when making a large purchase, you should be in relatively good shape, since you already have a car and a house. Good luck!
- Henry Unger, The Biz Beat
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