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Dear Liz: How deep in debt must a person get before he or she is able to get a mortgage on a home? My grandson, age 26, has been steadily employed by the same company for nearly six years. He rents a place he can afford, buys used cars for cash, has a nice savings account and basically avoids debt by not buying things he can’t afford with cash. Now he would like to begin investing in a home. When applying, however, all he hears is that because he doesn’t have a credit rating, he can’t get a loan. Does he really have to create debt in order to get a loan?
Answer: The idea that you have to be in debt to have a good credit score is a persistent and destructive myth. It’s just as wrong as the idea that all you have to do to have good scores is manage your finances responsibly.
To have good credit scores, you must have and use credit accounts. This does not mean you have to be in debt or carry credit card balances. Simply using a couple of credit cards lightly but regularly and paying them off in full is enough to build good scores over time.
Your grandson may need to start by getting a secured card, which offers a line of credit equal to the amount of cash the applicant deposits at the issuing bank. Websites such as NerdWallet, CreditCards.com, CardRatings.com and LowCards.com highlight current secured card deals.
He also could consider “piggybacking” onto someone else’s good credit by being added as an authorized user to that person’s credit card. In some cases, the other person’s history with the card can be imported to your grandson’s credit bureau files. The person considering adding your grandson should check with the issuer to see whether such an import is possible.
I only noticed the difference after I swiped my card and was about to press the key to start the pump. I checked the station’s signage, and noticed the display advertising the “cash” price was a lot bigger than the one showing the “credit” price.
Technically, California has a law that’s supposed to prevent surcharges for plastic. But as my buddy David Lazarus has pointed out in his column, Section 1748.1 of the California Civil Code has some big fat loopholes. Gas stations get away with double pricing because they’re supposedly offering a discount for cash, not a surcharge for plastic.
Now that retailers elsewhere in the country can add surcharges to Visa and MasterCard transactions, the question is: will they?
Those of us who love our credit card rewards programs—including the rewards card ninjas I highlighted in my column this week—hope the answer is no. It wouldn’t take much of a surcharge to wipe out the value most people get from their rewards cards.
Brian Kelly, the founder of The Points Guy, says retailers who add surcharges could be shooting themselves in the foot.
“High-end consumers love their rewards,” Kelly said. Retailers who don’t add surcharges will have a competitive advantage, which could make attempts to impose the fees short-lived.
I know that I’ll vote with my feet. Once I noticed I was about to pay $4.09 cents a gallon, rather than the $3.89 I expected, I hung up the nozzle. I didn’t have to drive far to find a Mobil station that charged $3.89, cash or credit. Guess where I’ll be gassing up in the future?
Dear Liz: Where can I sign up to have my name removed from the mailing lists for credit card offers?
Answer: You can remove yourself from marketing lists provided by credit bureaus to credit card and insurance companies by calling (888) 5-OPT-OUT (567-8688) or visiting www.optoutprescreen.com. You should see a significant reduction over time in the offers you receive, although you may still get unsolicited offers from other sources.
Dear Liz: I have a friend who owes $30,000 in credit card debt. I suggested he see a financial advisor who can help him to get out of this situation, but he never finds the time to do it. He pays all his bills on time, but only the minimum required, and there’s nothing left for him to save for his old age. He has a good-paying job but still struggles financially. How can we help him?
Answer: If your friend can pay only the minimum on his debt and can’t save for retirement, he’s in a deeper hole than he probably realizes. Many people in his situation wind up filing for bankruptcy, often after years of throwing money at impossible-to-pay debt.
Your friend should make two appointments: one with a legitimate credit counselor (referrals from the National Foundation for Credit Counseling at www.nfcc.org) and another with an experienced bankruptcy attorney (referrals from the National Assn. of Consumer Bankruptcy Attorneys at www.nacba.org).
The credit counselor will review his financial situation and see whether he qualifies for a low-interest repayment program that would allow him to pay off his debt within five years. The bankruptcy attorney will let him know whether bankruptcy might be the better option.
As a friend, you can pass these suggestions along to him, and even offer to go with him to one or both appointments if he’s comfortable with that idea. But you can’t force him to face reality or take any action until he’s ready to do so. One thing you definitely shouldn’t do is lend him money. He’s not managing the debt he has, and you don’t want your loan winding up with the rest of his bills in Bankruptcy Court.
Dear Liz: I have read tons of books on finance and debt repayment, but I’m having trouble deciding what to do next. My husband and I are 52. He receives a monthly disability income, and I work two days a week. We still have about $105,000 left before our mortgage is paid off. We also owe about $7,000 in credit card debt and $5,500 in overdraft charges.
Should I concentrate solely on paying off debt, including the mortgage? Should we modestly renovate our 20-year-old home because after six kids, it is in need of a little TLC? We could downsize, but I’m somewhat emotionally attached to this house, and downsizing would still mean renovating to get the house in shape to sell. At the same time, we’d like to start a small business in our town. It wouldn’t be a huge investment of money, but it’s an outlay nonetheless. I don’t really want to wait five or 10 years to have to do this because it would mean income for one of our children who needs it and sometimes has to rely on us financially. How should I focus?
Answer: You didn’t say a word about retirement savings, but that should be a priority for most people.
If you don’t make a lot of money, Social Security is designed to replace 40% to 50% of your earnings. (The more you make, the less Social Security will replace, on the assumption that you’ve had more opportunity to save.) But most people, of any income level, would have trouble adjusting to living solely on their Social Security checks.
You can estimate your future benefit checks by using the Social Security Administration’s calculator at http://www.ssa.gov/estimator. Your results will be based on your actual earnings. Then you can use the AARP calculator (in the “work and retirement” section of the website) to figure out how much you need to save to have a comfortable retirement. You may not be able to reach that goal, but you should at least try to put aside something to improve your future life.
You don’t need to be in a rush to pay off your mortgage, but you should target that credit card debt and that shocking amount of overdraft charges. You also should know that renovations rarely pay for themselves when you’re ready to sell a home. At best, you typically get back 80 cents for every dollar you spend. A better approach is to make some cosmetic fixes that don’t cost a lot, such as new paint, clean windows and freshened-up landscaping.
As for opening a store, understand that small businesses can take a while to get off the ground. If you don’t have adequate savings or access to a line of credit, the business could fail and take your investment with it. The Small Business Administration at http://www.sba.gov has resources and Small Business Development Centers to help you understand what lies ahead. Do your research before you begin, and consider holding off at least until your toxic debts are repaid.
Finally, you didn’t explain why your child needs your money. If he or she is still a minor, that’s one thing. If he or she is an adult and not disabled in some way, however, then the parental dole needs to stop. It doesn’t sound like you and your husband are adequately providing for your futures. Your kids need to know they have to provide for their own.
Dear Liz: I question your advice to the father whose son was turned down for a car loan. You told the father: “Your children don’t need to take on debt to build their credit histories. A couple of credit cards, used lightly but regularly and paid off in full every month, will do the job.”
Recently I was on the phone with a credit bureau questioning an item on my credit report. I have always paid off my credit card balance every month. The credit bureau representative told me that my credit score would be higher if I paid less than the full balance owed on my credit card every month. I asked her how it could possibly hurt my credit score by paying what I owe each month on a timely basis. She assured me that it does hurt my score. I still don’t understand it, but after I read your piece I thought I would pass on to you the advice I received from this credit bureau representative.
Answer: Just because someone works at a credit bureau’s customer service center does not mean she understands how credit scores work.
The information she gave you was dead wrong. She’s not only incorrect about how credit scoring works, but she seems unclear about how credit information is actually reported to her bureau.
The credit card balances that lenders report to the bureaus don’t reflect whether you pay your debt in full. The credit card issuers report the balance on a given day each month. Typically, but not always, it’s the balance from your last statement. You could pay the full amount the day you get your bill, or pay only the minimum. The credit bureaus would never know.
The leading credit scoring formula, the FICO, uses the balances that are reported to the bureaus to calculate your credit utilization. Since neither the bureaus nor the scoring formula “know” whether you pay that balance in full or not, there’s no advantage to carrying a balance. It doesn’t help your credit; it just costs you money. That’s also why it’s important to limit how much of your credit you use at any given time, since maxing out your cards can hurt your scores, even if you pay the balance in full.
“There is no reason to carry a balance to improve your score,” said Anthony A. Sprauve, public relations director for myFico.com, the only place where people can buy their FICO scores. “If someone is paying all of their bills on time; keeping their credit card balances low or at zero; and not opening new lines of credit, they are doing the three most important things they can to have a good credit score.”
Dear Liz: I’m 27 and have no consumer debt, a decent salary and a boatload of student loans. I use my credit cards for most of my expenses to earn rewards points and generally pay off my cards each month. I also take advantage of the 0% introductory rate offered by many credit card companies. This grace period gives me a security blanket so that I can spread large expenses such as insurance or car repairs over several months without derailing my saving plans. Can I apply for these offers without wrecking my excellent scores?
Answer: Occasionally applying for a new card won’t affect your scores much. Typically such applications ding your scores by five points or less.
You should be budgeting and saving for large expenses, however, rather than leaning on your cards. (Car repairs, in particular, aren’t really “emergency” costs — if you have a car, you know they’re coming, and calculators like Edmunds.com’s “True Cost to Own” feature can give you a good idea of what they’re likely to be.) Those 0% offers often come with balance transfer fees or other charges that make the deals a lot less attractive than they seem at first glance.
Also, you should be in the habit of always paying your cards in full — always. “Generally” isn’t good enough, since you could easily be enticed into spending beyond your means, especially as you chase rewards points. Rewards cards are a good deal only if you don’t carry a balance. Otherwise, you can pay frighteningly high interest rates that offset any benefit you may earn.