When you're marrying the girl...and her credit

Q: I have excellent credit, but my fiancée has bad credit.  How will that affect our future purchases?  Can you give me some tips and advice?  By authorizing her to use my credit card, will I affect my credit score?

-Ronaldo, U.S. Army

A: Wow, what a great and insightful question!  I’m pleased that you’re thinking about your life together rather than just being in the moment.  Very smart.  I’m glad she’s your fiancée and not your wife…yet.  There’s still some work to be done before the big day.  The question you need to ask, discuss, and work out is whether your fiancée’s poor financial habits will jeopardize your marriage!  Because, of course, money is a major source of fights and more serious marital challenges.  I would definitely recommend frank financial discussions about spending habits, saving for goals and budgeting before you get married.  It would be wise to even consider professional counseling on this front.  It is that important. 

Now to your specific questions.  First, her bad credit score could most definitely have a negative impact when you make joint purchases.  It could result in higher interest rates, lower credit limits, and even impact the availability of credit.  In the case of a mortgage, you could pay hundreds more in interest every month due to a poor collective score!  And, I know that is hard-earned money in the Army!  See examples on www.myfico.com.  Allowing her to be an authorized user on your credit card, in and of itself, will not affect your score—that is unless she exhibits the same behaviors that might have resulted in her poor credit record. 

So, assuming that you two have that all-important financial pow-wow, and agree to be jointly responsible, I would work on building up your fiancée’s credit by taking the following steps:

• Start by having her pay down any credit card balances to 50% of the maximum allowable balance (ie., a $10,000 limit would call for a balance of $5,000 or less), then work her way to 35% with the specific goal being zeroing out her cards.  This helps to illustrate responsible use of available credit.
• Pay “charge offs” listed on her credit report. That could be an old cell phone (I have personal experience with this one!), a medical bill or any number of things.  This will help to drive up her score because she is showing financially responsibility.
• Use credit responsibly.  You will likely need credit to purchase your first home together. And you want the best score possible.  To have a good score, you need to use credit – but don’t overuse it!
• Make payments on time every time! 

You can ruin a credit score practically overnight!  But repairing it takes a lot of time.  Be patient and persistent.  It will be worth it.  Make a “Monthly Money Date” part of your lives now and especially as you marry. You both need to stay on top of your finances so that you may live within your means, pay the lowest possible interest and achieve your joint financial goals.  Good luck in your lives together!

SBA loans for veterans, spouse, too

Q:  I wanted to know if there were any veteran programs through the Small Business Administration (SBA) to start up a new business or invest in an existing one?

-Brian, Los Angeles, Calif.

A:  It’s exciting to have a great idea for a new business.  Now all you need is cash!  Yes, there are monies available, but it’s a big step so be sure to think through every detail before you leap!  In recent years the government has ramped up support of our service members and veterans.  A vastly expanded GI Bill, robust incentives for service and continued service, and programs like the Patriot Express loan program through the SBA are all examples. 

 

And the Patriot Express may be exactly what you’re looking for.  As is true with all SBA offerings, you’ll have to work through a participating lender, but it’s a huge opportunity with loan amounts up to $500,000.  Available to veterans, disabled vets, reservists, transitioning active duty, and even spouses of all of these groups, the loans carry low interest rates and can be used for most business purposes, including: start-up, expansion, equipment purchases, working capital, inventory or business-occupied real-estate purchases.  The SBA also offers small business training.  This looks as though it might be just what the doctor ordered!  Good luck.

 

Consolidate debt? Let's take a look

 

Q: Is it better for me to consolidate our debt on a credit card with an interest rate of 9.9% or to take out a 3-year loan at 12% interest? Thank you for your help.

 

-Timothy, Vidor, Texas

A: Great question!  In order to illustrate, I’m going to assume you have $12,000 of credit card debt and are weighing the two options you highlighted.  First off, a 3-year, 12% loan would require a monthly payment just under $400.  If you can afford that type of payment each and every month, this might be a solid option.  I like that this strategy has a definite beginning and end date.  However, the risk is that you build back up your credit card debt that you consolidated and then end up with credit card debt and your “tried-to-consolidate” loan.  That’s bad news and often happens.  If you fear this scenario then I would opt for the lower-interest credit card.  If you make similar payments of about $400 per month, you’ll still end up debt free in three years (or less) and that is just plain good!  Plus, you would also save a little over $400 in interest over the higher interest rate consolidation loan.  No matter which direction you head, it should all start with a focus on the basics…living within your means.  Putting together a budget you can live with is the cornerstone of financial success. 

A "how-to" for wiping out your credit card debt

I'm posting with the reporter's permission a Colorado Springs Business Journal article. It's well organized and may help some of my readers who have found themselves saddled with credit card debt.

Best plan: Tackle your credit card debt, step by step

by Rebecca Tonn

Published: July 10,2009

Time posted: 9:48 am

Tags: Banking and Finance, credit card

Since early 2008, consumers and businesses have become more aware of their financial excesses. Although it’s never too late to rein in one’s excesses, it is certainly overdue for many Americans.

“I’ve seen a lot of people going back to basics in the last year and a half,” said June Walbert, certified financial planner practitioner with USAA Financial Planning Services. “They’ve gone back to the whole needs vs. wants discussion, which is very healthy. We Americans have been subsidizing our lifestyle for years — dare I say decades.”

But the problem with living beyond one’s means is that it’s “difficult, if not impossible” to reach any other life’s goals, such as retirement or educating your children.

“Americans have about $1 trillion in revolving debt,” Walbert said.

But credit lines across the country are being cut, and interest rates are going up, which effectively reduces the “income” consumers and businesses have become accustomed to.

Walbert recommends that people “face the music” — and “put on their big-girl shoes and open their statements and see what position they’re in.”

With a highlighter in hand, illuminate three items on each statement: the interest rate, minimum payment and the total balance owed.

Then add all the totals.

“That can be a sobering experience,” Walbert said. “Many people have seven to 10 credit cards and don’t know how much they owe.”

Next, “rack and stack” your credit card statements.

(At least she manages to make it sound exotic or fun.)

Method No. 1:  “Figure out how much money you can throw at the card with the highest interest rate, while making the minimum payment on the other cards,” Walbert said.

These involves — gasp — developing a budget (aka), a spending/savings plan and calculating how long it will take to pay off the first card. After the first card is paid off, take that monthly payment (the most you can afford, remember?), and apply it toward the card with the second highest interest rate and “aggressively go after paying it off while still making minimum payments on the other cards,” Walbert said.

If you’re starting to see a pattern here — well, that’s the whole point, because this method will eliminate credit card debt.

For those of you who are tempted in get a consolidation loan, Walbert doesn’t recommend it.

“People need to feel the pain of paying each card off one at a time,” she said, so they learn a life lesson.

But that’s not all.

The problem with a consolidation loan, she said, is that such loans don’t change behavior, or as she calls it, “overspending ways. Then you end up with both a consolidation loan and fresh balances on credit cards.”

Egads — then you’re really in trouble, like being halfway up the Incline when the lightening and hail start with a Rocky Mountain vengeance. (Been there, done that, don’t recommend it.)

However, there is one thing Walbert sees as an advantage with consolidation loans — it’s one bill to pay, with an end date, so people know they will be debt-free in, say, three or five years.

Although the average credit card/revolving line of credit debt per household is $8,000 to $9,000, in reality, some people have no debt, while others have “much, much more.”

“Living within your means is the cornerstone of financial success,” she said. “If you can master that, you’ll be credit-card-debt free and able to live the nice life in retirement, buy that summer home or whatever your goal is.”

Now, there is an alternate method of destroying credit card debt, which, Walbert points out, is not as “mathematically efficient,” but is more effective for people who need instant gratification.

It’s simple: Pay off the credit card with the smallest balance first.

Then, of course, with all that positive momentum, move on and decimate the balance on the next card, and so on.

“It’s a quick win,” she said. People are motivated by the rapid success of paying off one card, so they continue with the plan.

But don’t haphazardly cancel each credit card after it’s paid off. Ideally, consumers should only keep one to three major credit cards.

Consumers should keep open the cards with the longest payment history, so it doesn’t “negatively impact” their credit score.

The FICO score, used by credit agencies and financial institutions to evaluate credit worthiness, determines a consumer’s interest rates.

And by managing credit responsibly, consumers can get lower interest rates on installment purchases such as homes or cars.

FICO has five components: 30 percent is debt to maximum allowable balance ratio, 35 percent is payment history, 15 percent is length of credit history, 10 percent is types of credit and 10 percent is applications for new credit.

Walbert advises clients not to owe more than 10 percent to 30 percent of their maximum allowable balance. If your total allowable balance is $10,000, then don’t owe more than $3,000.

Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.

Let them repossess it...that's the question

Q:  Hello June, I have this problem and I really need some advice.  The payment on my car was due plus I am behind for two months.  Should I let them repossess the car instead of paying?  Because I just started working, I won't be able to come up with the amount I owe.  Please.  I really need some advice.  Thank you.

-Monica, San Diego, Calif.

 

A:  I’m glad to hear you’re working—that’s a key first step!  Congratulations!  I know life can sometimes dog pile us, but we still must be financially responsible.  After all, you’re likely going to want to borrow money again someday for another big purchase like a car or perhaps a house?  But a question you really need to ask yourself is: Can I really afford that car?  Sometimes it makes sense to “trade down” to a more affordable mode of transportation.  I know that’s not easy, but reality can be tough – particularly if you owe more than it’s worth.  If you’ve decided with your new income that you can indeed afford the car, then put on your big girl shoes and call the company/bank that has your car loan and talk with them.  Explain that you’re interested in meeting your obligations, but that you just recently got a job.  They’ll truly be happy for you as this is a tough job market!  Ask if they’d be willing to negotiate your interest rate to lower the payment?  Or might they be willing to recoup the missed payments over the next few months (and possibly without adding more dings to your credit report)?  I’m sure they would rather work with you than repossess your car.  Good luck!

Buying a home and your credit score

Q:  With today’s economic crisis, can my husband and I still purchase our first home?  Our credit is not that good.  Also my husband does have a VA home loan certificate of eligibility which we have not used yet.  My credit range is 600; I do not have my husband’s information yet.

 

--Patricia, Federal Way, Wash.

 

A:  In many ways, this may be an ideal time to buy a home.  Interest rates are historically low and home values in many, if not most, parts of the country are down.  Both of those things make buying a house more affordable and attractive.  However, lenders are substantially more interested in the credit worthiness of prospective home buyers. 

 

Your credit score is not particularly strong, so that is something that you should work on whether you buy a house or not. Please read this article for additional information in case you have credit card debt.  An immediate goal should be to bring your score up to the 680 to 700 range. How can you do that?  Check out the info on this column as well as www.myfico.com for information on how to do just that.  In short, catch up on any recent late payments and resolve charge-offs (pay off anything that's in collection status).  The next step in the right direction would be to an reduce credit balances to 50% of the max allowable balance.  For example, with a $10,000 credit limit, you should owe no more than $5,000.  And then work your way toward owing no more than 35% of the max allowable balance for an even better score.  Be sure to order a free credit report from www.annualcreditreport.com and look for and dispute any errors or negative information that does not belong to you. The cleaner your report is the better.

 

Having said all that, there is nothing that says that you can’t buy your first home and having the ability to use a VA loan will certainly help.  I would contact a lender and see what your prospects look like.  However, before you do that, sit down and make a detailed list of income, expenses, assets and liabilities to help you figure out if this is truly the right time to take this big step—homes may be more affordable, but that doesn’t necessarily mean you can afford one!

 

Handling post divorce debt

Q:  I got into about $20,000 in credit card debt due to the fact that my ex-husband only had a job about half the 7 years we were married.  Through the process of our divorce we split the debt between us and I am now almost completely out of credit card debt!  Also because of him I now have a low credit score because some of the accounts that he took over would not take my name off the accounts and he has made several late payments.  He has had creditors after him on those accounts that share my name.  I know that it's not a good idea to close unused credit accounts, but if I no longer have control over them should I have him close them when they are paid off?  Also, as far as raising my credit score, I have heard that keeping a small balance of a couple hundred dollars on a credit card while continuing to use it and pay on it will help raise a credit score...is this true? Thank you!

 

--Felicia, Warren, PA

 

A:  Congratulations for making such great progress on paying down your debt!  It’s not easy and it sounds like you’re making great progress.  What I want you to do is remember how painful the struggle to become debt free has been and don’t let it happen again! 

 

Now to the ex and your current financial issues. A word to the wise: It’s always best  to contact your creditor to let them know what’s going on, otherwise they can’t give you an assist.  It sounds like you’ve already done that. So, if the joint accounts are still open please attempt to close them now to prevent any future charges. Then the balance will change from revolving to amortized debt.  You’re right, it’s usually not a good idea to close accounts because a long payment history is usually a positive when it comes to calculating your score plus you lose that available credit line which could also negatively impact your score.  Since your credit history is already damaged, it may be best to protect yourself from further dings.  But please note that closing your account does not eliminate the bad payment history.  That will lurk on your report for 7 years.  If your ex-husband refuses to comply, then ask about the possibility of freezing the accounts.  In other words, talk with the bank about ensuring that no more charges can be made to the cards.  Another option could be each of you opening a credit card in your name and transferring your part of the balance.  Transfer fees may be owed, but separating yourself sooner rather than later could be a step in the right direction to repairing your credit. 

 

Responsibly using credit is the key to increasing your credit score.  That means continuing to pay your bills on time every time.  Consider signing up for online bill paying services – my philosophy is if it’s convenient to pay the bills, you’re more likely to do it.  Your hard work at cleaning up things since the divorce would indicate that’s your style.  Whether you leave a small balance or better yet, use and pay-off your cards each month you will be rebuilding your credit score over time.  Learn more at www.myfico.com.  Keep up the good work and good luck in this new chapter of your life.

 

 

When the unsat contractor wins...what now?

Q:  Hi June,

What advice would you give to someone who’s been sued regarding where to come up with money to pay a settlement and legal fees, especially in this time of financial crisis?  I got in this situation for non-payment of a subcontractor who didn’t perform, and I was the one who was found at fault, so according to the law, if you agree to pay, you pay -- regardless of the outcome.  Boy, do I feel stupid for not just paying the guy whatever he wanted in the first place!  The lawyer is the only one winning.

Most of the advice I find is related to reducing debt. Some situations, like mine, require a person to come up with a large sum of money that they just don’t have, or else.

Do you have any thoughts on that?  Thank you.

--Gina, San Antonio, TX

A:  You are indeed in a pickle, but I understand. It is difficult to cowboy up and pay for substandard work. I would certainly consider turning your contractor into the Better Business Bureau to help warn off others who may be considering using this guy for their project. First, I would check with your attorney (or get a second opinion) regarding the judgment - can they get blood out of a turnip? Will the opposition settle for less than the judgment? Is your lawyer willing to negotiate legal fees or work out a payment plan with you?

Here's what I recommend (flying somewhat blind and assuming you have great credit) in the order of priority:
1. Tap your emergency fund as this truly is one.
2. Liquidate non-retirement investments. This is a tough time to sell but you could benefit from capital gains tax rates or if you have losses you can deduct up to $3,000 per year from ordinary income.
3. Take out an unsecured loan. These are usually for minimal amounts of money and interest rates can be high.
4. Leverage your home equity. Just be sure the monthly expected payment is affordable.  While you are putting your home at risk, at least you can benefit from tax-deductible interest.
5. Borrow up to $50,000 from your 401(k). You'll pay yourself interest on a set time schedule, but should you change firms you'll be expected to pay it all back at once or it's considered an early distribution (taxes and penalties).
6. Borrow from friends and family. This has obvious pitfalls.
7. Take an early distribution from retirement accounts. This will generally be subject to income taxes and penalties if younger than 59 and ½ (except Roth IRA contributions can be withdrawn anytime tax and penalty free).
8. Default on the judgment. Ask your attorney for info regarding the ramifications.
9. File bankruptcy. I'm not a big fan of this tactic as it will haunt you for years and years.

I really can't stand the idea of robbing your future by tapping investment accounts, but sometimes when your back is against the wall it's all you can do. Have you considered calling one of the local TV stations to do an “On Your Side” piece?  Most of them have a consumer reporter that looks into “unsat” stuff like this. I hope this helps and I wish you the best of luck.

SBA offers business help to veterans

Q:  Hello June, I have a vending business that I would like to expand.  I want to know if there is any truth to the government-backed business loans available to veterans?  And, if so, how do I go about getting one?  Thanks.

--Michael, Texas

A:  Yes, there’s help out there for entrepreneurs like you!  The U.S. Small Business Administration has a program called the Patriot Express Pilot Loan Initiative which might be just what you’re looking for.  These loans are guaranteed by the SBA and have favorable interest rates.  Here’s a link to more information: http://www.sba.gov/patriotexpress/index.html.  There never seems to be a vending machine close at hand when I’m having chocolate attacks!  So good luck with your expansion.

Wipe Out Debt During Deployment

Q: I am trying to clean up my credit report. My credit is not that good so trying to consolidate my debt is hard because no one will finance me. I don't know what other way to do it. I'm currently deployed in Iraq so I'm trying to take care of it while I'm here. Please help.

-Armando

A: I like the way you think. Cleaning up your finances during your deployment is definitely taking a glass half-full approach! Plus it's smart. Expenses should be down and income is up (no taxes, additional monies such as hazardous duty pay, etc.) which could be a great combination when you're focused on becoming debt-free. It sounds like you're going to have to tackle them one at time. This may be the best — albeit the most painful — approach. You'll remember how hard it was to get out of debt and will be less likely to get in that trouble again. A lesson learned. Your task is to put together an action plan to get this done in an orderly and efficient fashion. First step: rack and stack your debts by interest rate. Attack the highest interest debt you have with all the money you can put together to knock it down while making the minimum or required payment on your other debts. Pay that one off, and then put that money with the minimum payment you were making on the next highest interest rate and zero it out. And then work your way down the rest of the list with the same approach. For more detailed information, check out the March webcast on usaa.com entitled Wiping Out Debt: Your 2008 Action Plan. Thanks for your service and be safe.