Should you stay in debt to help your scores?

Dear Liz: I have a high-interest car loan (more than 10%) and just landed a part-time job to add to my full-time cash flow. I want to pay the car off as quickly as possible, but I have read and been told that paying a loan off early doesn’t help scores as much as paying the duration of the loan. Is there truth to this? It seems foolish, though, since won’t I be paying more interest?

Answer: The primary concern with paying off a loan is that the lender may stop reporting the account to the credit bureaus. Although there are limits to how long most negative information can stay on a credit report, there are no limits to how long good information can or must be reported.

Still, most lenders continue to report accounts that have been paid off for several years. If you can pay off a high-rate loan, you probably should, and trust that you’ll get “credit” for your on-time payments for years to come.

Mom stole college fund. What to do?

Dear Liz: What recourse would my 21-year-old nephew have if his mother embezzled his college fund? The fund was set up by his parents when he was a child.

Answer: If your nephew wants to try to sue his mother, or file a criminal complaint against her, he should talk to an attorney about his options. Money that’s placed in a trust or custodial account for a child’s benefit is no longer the parent’s to take, although too many parents don’t understand this and grab at an easy source of funds when money gets tight.

In the more likely case that he doesn’t want to take formal action against his mother, he could simply ask her to return the money she took. His chances of success may not be great — people who steal from their kids may not be eager to make amends — but he likely stands no chance if he doesn’t ask.

Bankruptcy may be the best of bad options

Dear Liz: I am having a terrible time with my finances. I am a single woman with no kids, and I work as a teacher at a charter school making $40,000 a year. I am working with a debt management program to pay off my credit cards. But I am constantly late in paying my bills and often bounce checks, which costs me money I don’t have to cover the fees. I can’t even save. I’m actively seeking another job or an additional part-time job, but no luck so far. I am in default on my student loans (they want me to pay $700 a month, but I can’t). I am very depressed and am so tired of this. I have holes in my tennis shoes and I can’t afford new ones. I am on a strict budget, I use coupons, don’t go out much anymore (which makes me more depressed because I am cooped up all the time). I have house problems that I need to deal with but can’t. I hate living like this. I honestly don’t know what to do. Please help.

Answer: The first thing you need to do is opt out of your bank’s bounced-check protection program. You may think you need to borrow money this way to make ends meet, but as you’ve discovered, it’s driving you further into the hole.

Next, rethink your participation in the debt management program. It was honorable of you to try to avoid bankruptcy, but it’s pretty clear you can’t afford to continue with this program if doing so leaves you in default on your student loan obligations. Credit card debts can be erased in Bankruptcy Court; student loan debt can almost never be wiped out that way.

If you have federal student loans, you may be able to qualify for the income-based repayment program, which caps your payment at a reasonable amount and erases any remaining balance after 10 years in a public service job (such as teaching in the public school system). Otherwise, the balance is erased after 25 years of payments. If you have private loans, you have far fewer options for repayment, but wiping out the credit card debt would free up more money to pay these loans back. Talk to your lenders to see what options you may have.

Another factor to consider is how much you’re spending on housing. If you own a home, the mortgage and related home-owning costs may simply be too much for you on your current income. Getting rid of the house in a short sale, or even letting it go into foreclosure, may be a far better option than continuing to cling to a home you can’t afford.

Bankruptcy, short sales and foreclosures are all drastic options. But some financial problems are so great that a drastic solution is the only reasonable choice if you ever want to get back on your financial feet.

Don’t overdose on debt for a child’s education

Dear Liz: I have an 18-year-old daughter who wants to attend a private, out-of-state school. I don’t have any money saved for her education and do not make enough to cover the cost of this college. What are my options? She’s an A student and is planning to go to medical school.

Answer: You need to have the conversation you probably should have initiated a few years ago, before she started the college application process. She must understand that what she wants and what you can afford to provide for her may be two very different things.

Start by applying for financial aid at the colleges that have accepted her (let’s hope she applied to more than one). The “estimated family contribution” calculator at FinAid.org can give you a rough idea of what you’ll be expected to pay, but the actual package you’re offered can vary somewhat depending on how much the school wants your daughter to attend. You may want to invest in some books to help you understand the process, such as the Princeton Review’s “Paying for College Without Going Broke, 2012 Edition” and education expert Lynn O’Shaughnessy’s workbook, “Shrinking the Cost of College,” available at thecollegesolution.com.

Once you have the financial aid offers you can see which schools may be within your grasp and which are too expensive. Some schools encourage students and their parents to borrow heavily to attend, but that can lead to financial disaster — particularly since she has so many years of schooling ahead. Your daughter should try to limit her borrowing for her undergraduate education to what’s available through the federal student loan program (typically $33,000, total) and avoid private student loans, which have fewer consumer protections.

You as a parent can borrow through the federal PLUS program, but it’s easy to go overboard. The PLUS program will lend you up to the full cost of your daughter’s education, but the loan payments could be overwhelming and could prevent you from retiring. Student loan debt is almost impossible to discharge in bankruptcy, so you should be cautious about taking it on.

Your daughter should be able to cobble together an affordable education if she’s flexible about where she gets her undergraduate degree. Beyond that, she should know that the military and the National Health Service Corps pay for medical school in exchange for several years of service.

Close cards the smart way

Dear Liz: My wife and I have opened about 20 credit cards, including retail cards, over the past 12 years or so. We have no balances on any of these accounts. We recently bought a home and don’t plan to apply for any new loans in the near future. Should we close all these accounts and take the potential credit hit now, in order to have a much cleaner credit sheet after a few years?

Answer: One of the many persistent myths about credit is that having too many cards is bad for your credit scores. In reality, the leading credit scoring formula, the FICO, doesn’t punish you for having “too much” available credit. You can, however, hurt your credit scores by closing accounts.

If you’re not going to be in the market for a new loan any time soon, you can certainly close a few retail cards if you no longer use them and don’t want the hassle of keeping track of those accounts. But you’ll probably want to keep open your major credit card accounts (Visa, MasterCard, Discover, American Express) unless there’s a compelling reason to close them, such as an annual fee you don’t want to pay.