Credit myths that can cost you

How much credit card debt is “normal”? Do you need to carry a balance to have good credit scores? Is bankruptcy always a bad idea?

I tackle these and other credit questions in this video produced by my new publisher, Hudson Street Press. If you’ve got a couple minutes, take a look.

A car loan can help boost your scores

Dear Liz: I am a 27-year-old contractor now working in Iraq. I’ve paid off all the outstanding credit card debt on my credit report as well as my graduate-school loans, and my undergraduate loans are current. It is taking some time for my credit scores to improve. I wanted to invest in some rental properties, but because of the current state of my scores, it is looking harder to accomplish by the day. Would you recommend placing a healthy down payment on a vehicle, making the payments on time and then pursuing my investments?

Answer: An installment loan such as a car loan can indeed improve your credit scores as long as you make the payments on time and don’t overextend yourself. Clearly, though, this purchase will have to wait until you’re back home, since any credit you get abroad won’t help your credit scores in the U.S.

While you’re waiting for your scores to improve, you can build up your savings — real estate investors need a fat cushion to cover down payments, repairs, maintenance and vacancies — and learn more about the skills you’ll need to be a successful investor. You don’t need to waste your money on expensive seminars, since everything you need to know is available in bookstores and libraries. One book to get you started is “Real Estate Investing for Dummies” by Eric Tyson and Robert S. Griswold.

Credit freezes don’t prevent black marks

Dear Liz: Is it possible to put some sort of block on one’s credit reports to prevent current and subsequent unsecured creditors from attaching additional negative marks? I’ve been told by someone I was referred to (I think he’s an ex-mortgage professional) that it’s possible to place blocks on one’s credit to prevent further negative reporting by unsecured credit card issuers as long as they don’t have a copy of your actual Social Security card. It sounds too easy. Everyone would be doing it to minimize credit-rating damage.

Answer: Of course they would. What the former mortgage pro may have been referring to is a credit freeze, which allows you to block potential future lenders from seeing your credit report.

Credit freezes are an important tool for victims of identity theft or those at high risk of having their identities stolen. With the freeze in place, a lender processing the application of the identity thief won’t be able to access your report and will almost certainly refuse to open a new account for the criminal.

If you need credit, you will have to unfreeze your report to allow a lender to see your data. Credit freezes are available at each of the three major credit bureaus that collect your credit information, although there are typically fees involved for freezing and unfreezing your files.

A credit freeze does not prevent your current lenders from reviewing your credit reports or adding new information to them. The best way to prevent negative information is to pay your bills on time, borrow only what you can afford to repay and prevent disputes from going to collections.

Look-alike credit report sites still deceiving consumers

Dear Liz: I saved your column about getting free credit reports at AnnualCreditReport.com. Today I e-mailed my request but the site said I had to send $1 via a credit card. Does this sound right, and is it a safe website and the correct place to request the credit report?

Answer: If you were asked for any money, even if it was framed as a “donation,” you weren’t at the right site. Neither were you at the correct site if you were told you could get access to your credit report in a couple of days, rather than instantly. These lookalike sites are geared to sign you up for expensive and usually unnecessary credit monitoring. They’re supposed to have a banner explaining they’re not the site that offers federally mandated free credit reports, but some are ignoring the rules.

The one and only site to get your free credit reports is http://www.annualcreditreport.com. If you were misled or deceived by any other site, please make a complaint to the Federal Trade Commission at http://www.ftccomplaintassistant.gov.

How to prioritize your money goals

Dear Liz: We’re a newly married couple with an 11-year-old and hope to have another baby soon. We have $20,000 in emergency savings, $40,000 in investments, $480,000 in retirement funds, $20,000 in low-interest student loans and $43,000 in high-interest credit card debt. If we have another child, we’d like for my wife to be able to stay home. I am struggling with how to prioritize debt reduction, college savings, home improvements and building our emergency fund. I don’t want to tap our savings or investments, as there are often surprises in life and I do not want to be caught short. The problem is that aggressively paying down the debt hurts our cash flow for our other goals.

Answer: It’s understandable that you don’t want to tap your savings or investments, since it’s difficult to build up those funds. But it really makes no sense to carry high-interest debt when the returns you’re getting on these other accounts are probably much lower.

Talk to your tax pro about the implications of selling some or all of your non-retirement investments, though. If your investments have gained substantially in value, you’ll want to factor in the tax bill or consider selling some of your money-losers instead.

Once the credit cards are paid off, some money that used to go to those payments will be freed up for other goals.

Your priority needs to be saving for retirement. Once you’re on track there, you probably should focus on rebuilding your emergency fund to equal at least three and preferably six months’ worth of expenses. You may not be able to accomplish that before your second child arrives, though, so consider opening a home equity line of credit as a proxy for a larger emergency fund. Leave the line of credit open and unused, however, because racking up a balance would defeat the purpose.

Saving for college is a worthy goal, although it shouldn’t take priority over retirement, paying off toxic debt or having an emergency fund. You may not be able to save enough to pay the whole bill, but you can shoot for saving one-third or half the expected cost, and your child can use federal student loans for the rest. SavingForCollege.com has a calculator to help fine-tune your plan. Even if you can’t save as much as you’d like, you should save something. Even $25 a month over time will help reduce the amount your child needs to borrow.

Home improvements should be last on your list of priorities, and you should try to pay for those with cash. They are not an investment in your home — although they may improve the value somewhat, you’ll typically get back less than 70% of what you spend.