Don’t let disputes go to collections

Dear Liz: Our FICO score is above 900. When we retired and moved to Oregon, our previous landlord in California imposed false charges against our security deposit that we refused to pay. The landlord has since turned the account over to a collection agency that indicates it will notify all three credit agencies of this outstanding amount. How will this affect our FICO score?

Answer: The top FICO score is actually 850. If the last score you saw was over 900, you probably were looking at a VantageScore, which isn’t used by as many lenders.

In any case, your scores probably will drop if the collection agency follows through on its threat. How much they’ll drop depends on the rest of your credit history, how much the collector says you owe and which version of the FICO formula a lender happens to use (the latest, FICO 08, excludes collections under $100).

Typically, though, collections are considered a serious negative that can easily knock your score out of the “prime” range.

This is why you don’t let disputes go to collections. You would have been better off paying the landlord under protest and then suing him or her in Small Claims Court.

Fixed rate? No such thing in the credit card world

Dear Liz: I just received a letter from my credit card issuer hiking my 8.9% fixed rate to a variable rate of 14.65%. I’ve had the card for more than 12 years, have never been late and have a near-perfect credit score. Are there any fixed-rate cards out there anymore?

Answer: There’s no such thing as a true fixed rate in the credit card world. Card issuers have long been able to change your rate and terms at will, and lately they’ve been doing so with a vengeance.

Regulations will go into effect next year that limit issuers’ ability to raise rates on your pre-existing balances unless you pay late. Congress is considering more restrictions, including one that would prevent issuers from advertising fixed rates unless the rate is actually fixed for some period of time.

The good news is that you don’t have to wait. If your credit scores are high, plenty of other card issuers want your business. You can transfer your balance to a lower-rate card and then pay it off.

As you’ve learned, carrying a balance these days is a fool’s game. Use your good credit as a tool to help you get free of the credit card industry’s clutches, and you’ll be well ahead.

What happens to your line of credit when your bank fails

Dear Liz: My wife and I maintain a largely untapped home equity line of credit as a source of emergency funds in the event of a job loss, medical needs, etc. With so many financial institutions seemingly on the verge of bankruptcy, what happens to our ability to draw on our line of credit should the bank go under?

Answer: Your line of credit is one of the bank’s assets. If your bank fails, the bank that takes over would add your loan to its books.

That said, the new bank may have different standards for how much of your equity you can borrow and may cut back or freeze your line of credit. That could happen even if your bank doesn’t fail, since many lenders are reducing their risk exposure by cutting back on lines of credit, particularly in areas where home prices are falling rapidly.

You’re probably safe, for now, if the balance you owe on your mortgage plus your home equity credit limit total less than 60% of your home’s current value. If your “loan-to-value” exceeds that limit, however, you would be smart to look for alternative sources of emergency funds. The best: cash in the bank.

How to use student loans the right way

Dear Liz: I’m a 19-year-old student who will be transferring to a four-year college from community college in the fall. My parents don’t really play a part in paying for college or determining where I go or where to apply; I do all that myself.

I’m seriously considering a university that costs about $46,000 a year and has offered me $39,200 in financial aid (the majority of which is grants, not loans).

However, I have no idea how I’ll be able to pay for the $6,800 gap. My parents don’t have much savings, and I’ve never asked them to pay for anything college-related.

I was planning to get a summer job, and I’m applying for scholarships, but what if that’s not enough?

Do you have any advice for me as to the best way of going about this?

Answer: You’re getting a substantial discount on an expensive education. You should investigate whether you can get a better deal at a public school, but the gap between the cost and the aid you’re being offered might wind up being about the same.

If that’s the case, talk to your parents about whether they can help. If they can’t, consider filling at least some of the gap with federal student loans. The loans in your aid package may be need-based, but you probably qualify for additional federal loan money that doesn’t require you to demonstrate need.

Those loans, plus your earnings, should allow you to pay for this education.

Winning scholarships may not get you much further ahead, since colleges typically compensate by reducing the grants you’re given.

You want to use federal student loans before you turn to the private student-loan market, since private loans are more expensive and less flexible.

Also, don’t borrow more for your education than you expect to make in your first year out of school.

If you follow those guidelines, you should be able to comfortably afford your payments once you’re out of school.

You can find out more about student loans and paying for college at FinAid.org.

When interest rate hikes don’t matter

Dear Liz: I’ve had a Bank of America Visa card for years. My interest rate was lowered from 7.9% to 5.4% a few months ago, but I recently got a letter saying that if I did not agree to a 12% rate, I could “opt out” but no longer use the card. I never carry a balance but use the card extensively. It just seems unfair that they can do this. Can I report them to some agency?

Answer: Like other issuers, Bank of America has been raising interest rates across the board, but what’s mystifying is why you care. If you never carry a balance, you don’t pay interest, so the rate is irrelevant.

If you object to card issuers raising rates on principle, contact your congressional representatives, who are contemplating changes that would make it tougher for credit card companies to alter rates and terms.

Otherwise, simply accept the new rate and use the card as you always have.