Dear Liz: What is your opinion of debt reduction programs? I am constantly receiving mail from various companies, and I was wondering if they are legit. They claim they can reduce my debt, which sounds promising, but I am hesitant to get involved with them.
Answer: You’ve got good instincts.
Many of the companies sending out these solicitations say they can settle your debt for pennies on the dollar. What they often fail to mention is that the debt settlement process can result in your being sued by your creditors and having your credit trashed. That’s assuming they try to settle your debt at all, rather than just disappearing with any money you pay them in advance.
If you’re struggling with too much debt, you should make two appointments: one with a legitimate credit counselor (visit the National Foundation for Credit Counseling at http://www.nfcc.org for referrals) to see whether you qualify for a debt management program to repay your credit card debt, and another with a bankruptcy attorney (check the National Assn. of Consumer Bankruptcy Attorneys at http://www.nacba.org for referrals) to see whether a bankruptcy filing might be appropriate for your situation.
Dear Liz: I have heard that you should never close credit card accounts of your own volition because that can hurt your credit scores. Are there any exceptions? I received a credit card several years ago, when my credit scores were in the toilet because of a number of collection accounts and delinquencies. I had no other open credit cards, so when they offered me unsecured credit, I accepted it willingly. The interest rate was (and is) 23.99%, and I was charged a $72 annual fee. Now, six years later, my credit scores are greatly increased. But you would never know it by this issuer. They have refused my request to lower the interest rate, and the annual fee has now gone up to $99 a year. My credit limit is $2,100 and a credit line increase of $150 would cost me a $14.95 fee. Under these circumstances, would you still counsel not to close this account?
Answer: Closing credit accounts won’t help your credit scores and may hurt them. But that doesn’t mean you should never close an account.
If you have several other credit cards, your credit scores probably won’t suffer much of a hit from a single account closure and will recover quickly from any damage done. You don’t want to close accounts if you’re still trying to improve your scores or if you’re in the market for a major loan, such as a mortgage or auto loan. Otherwise, though, there’s no reason to continuing paying for a card you no longer need.
If this is still your only credit card, you should use your good scores to open one or two cards with better deals. Then you can say good riddance to this one.
Today’s top story: How to pick a credit card when your options are limited. Also in the news: Reducing your taxable income, rescuing your retirement plans, and why shopping from your couch on Black Friday could save you the most money.
How to Pick a Credit Card When You Have Few Options
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Be vigilant. If you haven’t already, sign up for online access to your bank and credit card accounts. You should be reviewing your transactions at least weekly.
Be reachable. Update your contact information so your issuer can reach you quickly in case they spot fraud.
Be alerted. While you’re at it, sign up for alerts. Most issuers allow you to get a text or email alert for large or overseas transactions.
Beware fraudulent deal sites. Their eye-popping bargains may just be a way to get your credit card numbers. Stick with the real deal, like DealNews.
Be diligent. Install and update anti-malware software.
Be smart. Use your credit card rather than your debit card in high-risk situations, as I wrote in “Debit cards can be riskier than credit cards.” If you must use a debit card, sign for it rather than using your PIN since that typically offers you better protection against fraud.
Today’s top story: How to avoid the worst credit cards of 2013. Also in the news: A new debt collection law, five things you should ask your financial advisor, and three investing mistakes retirees must avoid at all costs.
How To Avoid The Worst Credit Cards Of 2013
Easy credit can come at a gigantic price.
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If you live in California, debt collection just became more consumer friendly.
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How social media ruin insurance claims
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Top Story: Predictions for the 2014 housing market. Also in the news: When is the best time to buy a new home, how we’re feeling about money, and the best place to rebuild your nest egg.
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What’s to come in the year ahead.
Is There a Best Time to Buy a Home?
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HealthSherpa is the creation of three guys who actually seem to know how to program. Instead of fighting your way through confusing interfaces, legalese and a long sign-up process, you just type in your Zip Code and bam! Your options start to show up.
HealthSherpa allows you to modify your results by the number of family members and your income (which determines whether you get subsidies to cut the cost–most people do).
HealthSherpa doesn’t have the links to Social Security and the IRS that would allow you to sign up for a plan directly on the site. But it does offer links and phone numbers to insurers that can help you sign up once you pick a plan.
If only Kathleen Sebelius had hired these guys in the first place…
UPDATE: As commenter Kitty notes below, you’ll still need to go through Healthcare.gov to sign up for coverage if you want the subsidies and other cost reductions available through Obamacare. The HealthSherpa site allows you to see and explore your options, which should make signing up a bit easier.
Today’s top story: Figuring out what car repairs really cost. Also in the news: Protecting your children’s credit, tips on smart charitable donations, and how to prepare for Black Friday.
How to Figure Out What Your Car Repair Really Costs
How not to be at the mercy of the repair shop.
Protecting Your Children’s Credit
Even children are at risk for identity theft.
6 tips to donate to charity the smart way
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Practice, practice, practice.
The ’4 Boxes’ Approach To Helping Elderly Parents
Inventorying your parents’ possessions could make important financial decisions easier.
Dear Liz: I’m trying to transfer some credit card balances to existing accounts that are now offering 0% for 12 to 18 months. If I come close to maxing out the credit limit using one of those offers, will that affect my credit score adversely? Or, should I open up a new card, since I’ve gotten several 0% offers recently?
Answer: Using all or even most of your credit line on any revolving account can hurt your credit scores.
Although opening a new card may ding your scores a few points, it’s usually preferable to spread your debt over several accounts rather than pile it all on one card. This advice assumes you plan to use these offers to pay off your debt as rapidly as possible, rather than as an excuse to continue carrying balances.
If you can’t pay off your balances before the teaser rates expire, consider getting a three-year personal loan from your local credit union and using that to get free of debt. The interest rate you pay may be somewhat higher initially but you’ll likely save money in the long run.