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!

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. 

Seek chain of command help with pay problem

Q:  My pay has been wrong for several months.  I have tried putting in pay inquiries and talking to my chain of command and nothing has been done.  I was promoted months ago, and lately even more deductions have been made and I am getting swamped with bills.  What can I do!  Thanks!

-Kyle, Fort Lewis, Wash.

A:  Of all the organizations I’ve been a part of the military has done the best job of taking care of its people.  Granted, sometimes it takes a time or two to get it right…but the intent is to do just that!  So, keep asking the right questions, involve your chain of command and eventually finance will get it right.  The good news is that you should get a big paycheck making up what you didn’t receive back to your promotion date.  What a great opportunity that will be for paying off debt and maybe setting up an emergency fund.  In the meantime, keep making at least your minimum payments, stay up-to-date on all of your bills, and start building a budget which includes a plan to get rid of your debt, build an emergency fund, and start saving for the long haul…because trust me, the long haul gets here before you know it.

 

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.

Things to think about when buying a home

Q: I want to purchase a house in South Carolina and want to know where I should start.  I am a first time buyer, and I’m currently living in and working in Germany.  I am retired US Army. Thanks.

-Cliff

A: Retired Army, hooah and thanks for your service.  Not to put the cart before the horse, but I will mention that if it fits your timeline you’ll want to purchase your new house before December 1, 2009.  If you do that, you’ll be eligible for a 10% tax credit (up to $8,000) on the purchase.  So, any home purchase greater than $80,000 may result in $8,000 back in your pocket!  If you’re single, your modified adjusted gross income can not exceed $75,000 ($150,000 for married filing jointly) to receive the full credit.  That’s a pretty good incentive. 

However, your question as to where you should start is right on target.  A budget exercise including a detailed accounting of what will be coming in (military retirement, employment income, investment income, etc.) and going out (utilities, household expenses, food, clothing, etc.) is an excellent first step.  How much house can you afford?  Being fairly conservative, I would suggest that your payment (principal, interest, taxes, and insurance = PITI) should be less than 28% of your gross monthly income.  For example, if you’ll have $5,000 of income from all sources, you should target a maximum payment (PITI) of $1,400.  In today’s environment, this would equate to an absolute ceiling of around $225,000 for your new home.  Think hard about committing that much income to a house payment for 30 years.

The next step is to make sure you have a clean credit report.  It’s not uncommon to find errors on a report so review it closely and dispute anything that doesn’t belong to you.  If you’ve had an “oops” in the past, like an unpaid bill, make good on it now because a late payment – even if it’s really late – is better than a “charge off.”  You can get a free credit report every year from annualcreditreport.com.  Considering you’re overseas right now, you may have to give them a call to get yours.  Your score will cost an extra $8 or so.  And that number makes all the difference in the interest rate you get.  Even a quarter of a percent too much makes an enormous difference on the amount of interest you pay over the life of the loan.  It’s very important.

After determining what you can afford, you’ll want to get pre-approved for this amount through your lender.  Caution: your calculation of what you can afford should be your guideline, not what the lender is willing to lend!  There is a difference between qualifying for and affording a mortgage. Discuss using a Veterans Affairs loan with your lender.  A VA loan could certainly minimize the out-of-pocket costs to move into your new home as no down payment is required.  Now you’re ready to begin the hunt for your house.  In addition to helping you with the details, a quality realtor should be able to help you sort through neighborhoods and available properties.  This is especially important if you don’t know the area well.  Remember, real estate is a long term proposition, so do your homework and shop smart.  In the meantime, set aside funds in a savings or money market account so you’re ready for all of those expenses that inevitably come with moving into a new home.  Your emergency fund of 3-6 months of expenses should be well established before purchasing a home.  Good luck and welcome to the American Dream.

Use deployment to deal with debt

Q:  I am recently married and wondering if getting a debt consolidation loan for my debts that I have accrued would be a good Idea. I was thinking so because I am getting deployed next month and my debt is only about 2,000 dollars.

-James, Kearney, Neb.

A:  If you’ve read my column before, you’ve seen that I try to put a positive financial spin on deployment.  In my view, the additional allowances, tax-free pay and reduced expenses often afford us an opportunity to eliminate debt, build savings, and start or grow your investment program.  Do a “deployment budget” and figure out how quick you can eliminate that $2,000 debt.  That should be your first priority!  My guess is that it’s not worth the hassle to consolidate…just knock it out.  Not only is it a hassle, but you’d be applying for more credit.  That application will be noted on your credit report and typically represents a short term ding on your score.  You should never apply for more credit than you really need.  For more info, check out myfico.com and more of my columns under the “credit” heading.  And congratulations and best wishes on your new marriage!

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!

Creditors can't tap Social Security or disability pay

Q: June, I am a disabled veteran.  I served with the Marines in Vietnam, spent 21 years in the Marine reserves and was activated for over eight months during 1991 (first gulf war).  I retired from the reserves as a master sergeant (E-8) in 1992.

I have heard that credit card companies cannot access your Social Security, veteran's disability pay or 401k/403b/IRA distribution.  Is this true? What are the mechanics of it?  Does it hurt your credit rating etc....any info would be appreciated.

-Mike, Dickinson, Tex.

A: Thank you for your service and sacrifice to and for our great country.  Credit card companies can’t directly access anyone’s Social Security, disability, or retirement plan distributions.  However, they certainly have an expectation of being paid for items and services purchased using their cards.  If you are unable or unwilling to make the required payments it will most definitely be reported to the rating agencies and negatively impact your credit score.  If you are having problems making ends meet, I would suggest taking some time to develop a bare bones budget—look for opportunities to reduce spending to free-up resources to apply to your financial obligations, such as credit card debt.  If you need a helping hand putting all the pieces together, contact an organization affiliated with the National Federation for Credit Counseling (www.nfcc.org) to help you develop an action plan to get back on top of things.  Thanks again for all you have done.  I wish you the best.

 

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.

 

 

Car buying dilemma

Q:  I am a reservist and a full-time college student.  My car is falling apart and I am looking to buy a new one.  I refuse to buy a car that I don't love.  However, the one I want is looking to cost $375 a month, but I only make $900 a month.  Well, at least while I am in school.  I guess deep down inside I know I shouldn't buy it but I really want to.  Do you have any ideas how to help make this purchase more affordable, especially lowering the APR?

 

--Stephen, Pittsburgh, Pa.

 

A:  Follow your instincts!  Throughout life and your military career there will be times and situations that demand that you dig-in, stick to your guns, or make some difficult changes and choices…refusing “to buy a car I that I don’t love” is not one of those.  My recommendation is to fix your car or buy an affordable replacement and start socking away money so that you can put down some cash and be able to afford the car (and the payment) of your dreams later on.  By the way, a lower APR helps but stretching your car loan out 7 or 8 years is not the answer.  Keep in mind, a vehicle is typically a daily depreciating asset.  Too many people give up too much financially by stretching their budget with a car payment.  There are a lot of competing interests for our money: rent, food, utilities, entertainment, gasoline, saving for various goals.  Here’s an idea:  start setting aside your reserve pay each month once you graduate and get a higher paying job.  Your service to our nation can also be the path to your next vehicle.  So in the meantime, take good care of your credit score to get the lowest APR available.  Be sure to make all payments, such as credit cards, on time every time and keep balances low or at zero!