Final part: Answers to your credit questions

Here’s the fifth and final installment of answers to your credit questions.

I’d like to thank the counselors at CredAbility, the Atlanta nonprofit that specializes in consumer issues, for providing the answers.

Q: I’ve read your articles in the AJC these past few days and I’ve found them very informative and helpful. I have a question that I would like to ask you in reference to my personal financial situation. I filed for bankruptcy two years ago and it was discharged in 2009.

However, I was able to keep my home by doing a loan modification. The problem is that added $33,000 to the balance of my loan and increased my monthly payments an additional $300 a month. With the housing market being what it is now, the value of my home has dropped and it’s now worth $55,000 less then the total due on the loan.

I’m also having a very hard time paying the additional $300 a month, along with fees I owe my homeowners’ association because I decided to stay in my home. It’s become a complete nightmare and I just don’t know what to do. I don’t know if I should stay in my home, do a short sale, and let it go into foreclosure or what.

A: About a third of homeowners across metro Atlanta are underwater with their mortgage, which is a situation that is historically unusual. We would advise consumers in your situation to first decide what their goal is. If it is to stay in the home, contact your homeowners’ association and ask if you can have temporary relief from your monthly dues.

Then contact your lender to advise that the modification it set up for you isn’t working. They worked with you before and they might again. If you know the name of the person you worked with before, try to reach that person again. If you try these things and still can’t find a resolution to the problem, we would advise you to call a HUD certified housing counseling agency, such as CredAbility (800-251-2227).

Q: I have always had great credit and little debt, excluding a mortgage. But the past year, my spending got out of control. Some of the spending was necessity and emergency situations that came up. I am now in approximately $60,000 worth of credit card debt and can’t seem to get my head above water. I have never made a late payment on my mortgage and my car is paid off. If I file Chapter 7 bankruptcy can they come after my home or car? What can they come after? How do I start fresh, as far as my credit goes afterwards?

A: You don’t say what your income is. But if you could repay your credit card debt if only the interest rates were lower, it is worth a call to your credit card companies to try to negotiate a an interest rate in the single digits. Tell them you want to repay your debt and avoid saying you are considering bankruptcy.

If that doesn’t help, someone in your situation should speak with a consumer attorney to get advice specific to your situation. Generally, Chapter 7 bankruptcy protects many people from losing their home. In some circumstances, it can also exempt a car from the Chapter 7 repayment plan. If your car is a 1999 Honda Civic you need to get to work, that is more likely to be protected than a Bentley you drive on special occasions.

Bankruptcy is a serious step and before you file you should ask your attorney what impact it will have on your credit. But in some cases, it provides people with a needed fresh start.

Q: I would like to purchase a home within the next five years. My credit isn’t the best right now. Most of my accounts are 7-to-10-years old and other accounts have been closed or written off. What can I do to lower my debt and become a homeowner?

A: Five years should be enough time for you to position yourself to buy a home. It is important to pay all of your bills on time or early every month because payment history is the biggest single influence on your credit score. Make sure you have an emergency fund in place equal to at least six months of your living expenses, so you won’t have to use credit if you suffer an unexpected setback.

Then decide how much home you can afford and create a financial plan to reach that goal. You’ll want to save 20 percent of the purchase price for a downpayment. List all of the expenses associated with homeownership, such as furnishings, insurance and maintenance, to name a few, and start a savings account to pay for those things.

And don’t forget to consider the risks of homeownership. Several homeowners reading this blog this week said they are in trouble because their home is now worth less than they owe on their mortgage. People who bought a home primarly because it was where they wanted to live may still have lost value, but are happy where they are. But people who bought a home primarily because they were investing to get a financial return don’t have that consolation.

Link to Part 1

Part 2

Part 3

Part 4

- Henry Unger, The Biz Beat

For instant updates, follow me on Twitter.

7 comments Add your comment

[...] This post was mentioned on Twitter by Carrie Hunt, Reno Law and Brett Robbins , Roy Hughes. Roy Hughes said: Final part: Answers to your credit questions: However, I was able to keep my home by doing a loan modification. … http://bit.ly/fg5rCY [...]

Posterchild

January 28th, 2011
9:24 am

Henry (or any other knowledgeable readers out there), I was thinking of cutting out an old credit card that I haven’t used in years (and will probably never use again due to having one with better terms/rewards). Exactly how much of a ding will I take on my credit score if I close out a card that’s been active for close to a decade, and does that generally clear up quickly? I don’t plan on applying for any lines of credit anytime soon. I already hold a mortgage, car loan, and student loan, so that’s quite enough for me! Thanks.

Kat

January 28th, 2011
10:52 am

Henry, I just want to say thank you for having these Q&As from time to time. They are very informative. I’d like to see a column from these advisers every so often that go from soup to nuts. Such as: set up an emergency fund – ways to get the money such as garage sales, setting goals, etc. Then, another week might be setting up a budget, how to research for your child’s college education (that’s one for me!), and so on.

These Q&As are great for specific questions, but some people need to start at the beginning and these advisers seem like the best people to go to for learning how to get ourselves in gear.

Again, thank you for these columns.

CredAbility answer

January 28th, 2011
2:47 pm

Posterchild, you are on the right track when you put closing a credit card account in the context of already having a home, car and student loan. If you were about to take out any of those large loans, you would want to postpone closing accounts to avoid the small decrease in your credit score that might cause. But since you don’t expect to apply for new credit anytime soon, the relatively small “ding” closing an account will cause to your creditworthiness should not be a big concern. One suggestion we would offer is to consider keeping the older card open, as length of credit history is a factor in calculating your creditworthiness. You could just put the old card away, unless there is an annual fee or other reason to close the card. If you do go forward with closing the card, that should not hurt your credit worthiness much, as long as you continue to pay your bills on time or early every month.

J.B. STONER

January 29th, 2011
3:22 pm

government controls yor credit. Plain ang simple,

Posterchild

January 31st, 2011
10:24 am

Credability, thanks for the answer. There is no fee with the card, but I’m just trying to streamline all areas of my life. Simplicity has its charms.

[...] Final part: Answers to your credit questionsAtlanta Journal Constitution (blog)It is important to pay all of your bills on time or early every month because payment history is the biggest single influence on your credit score. … [...]