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.

Dealing with Mom’s big debt

Dear Liz: My 74-year-old mother was laid off from her full-time job in May. My siblings and I were horrified to learn that she owes $41,000 on 12 credit cards with interest rates ranging from 9.9% to 29.9%. None of the issuing banks is willing to lower her interest rates. With her Social Security benefits and unemployment, she is just barely getting by, but unable to afford more than her minimum payments on the credit cards. She does not own a home and rents a duplex for $650 a month. She has about $70,000 in a retirement fund, $600 in savings and a used car.

One of my siblings has suggested that she stop paying the credit cards altogether and let the debts go to collection. Another has suggested bankruptcy, but we’re uncertain how that would affect her retirement account. Either scenario would affect her credit scores, which would then be a consideration for future employment and could raise her auto insurance rates. Any suggestions?

Answer: If your mother simply stops paying her credit card bills, the issuers or subsequent collectors could sue her over the debt. Because there’s little hope of her being able to pay these bills — her unemployment benefits will end someday, and her prospects of finding another job are probably slim — bankruptcy may be the best of bad options. A Chapter 7 liquidation filing would protect her from creditors, erase the debt and allow her to get a fresh start. Her retirement fund would be safe; whether her small savings account or car would be at risk in a bankruptcy filing depends on state law.

Yes, her credit scores would certainly suffer, and in most states (although not California) that can lead to higher insurance rates. But at this point, her credit scores are probably the least of her worries.

Another option is that the siblings could pitch in to pay off or settle these debts. Although paying off the cards in full would preserve her credit, that may not be the best option. She used these cards to live beyond her means in good times, so she would be tempted to run up more big balances as money gets tighter. If you settle the debt for less than what she owes, the accounts would be closed and her credit would be trashed, so she would have trouble accumulating new debt — at least for a while.

But you may well decide that a better use of your money, if you have any to spare, is to help support her in the future.

It might help to know your mother isn’t alone in her troubles. A Consumer Bankruptcy Project study found the rate of bankruptcy filings more than doubled from 1991 to 2007 for people 65 to 74. For people 75 to 83, the bankruptcy filing rate rose 433%.

Why carrying a balance is stupid

Dear Liz: I was surprised to see your recent comment that “having a credit card does not make you a slave to lenders, unless you’re stupid enough to carry a balance.” So, all individuals who carry a credit card balance are stupid? Is that what you are trying to say?

Answer: There are a few legitimate reasons to temporarily carry a credit card balance. If you suddenly lose your job, for example, you may want to conserve your cash and pay only the minimums on your cards.

But for most people, carrying a balance is a sign that they’re living beyond their means. And that’s pretty stupid.