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.

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%.

How charge cards affect your credit

Dear Liz: I’ve followed your advice on building credit and now, at 20, have credit scores around 730. I recently applied for and received an American Express gold card. But I’ve read that charge cards can hurt your credit score, or at least not help it. Should I use this card?

Answer: Charge cards require you to pay your balance in full every month, unlike credit cards that allow you to pay only a fraction of what you owe. You typically need good credit scores to qualify for a charge card, and it can be an excellent way to manage your finances without incurring debt.

The concern with charge cards used to be that they didn’t report credit limits. Unlike credit cards, charge cards typically don’t have preset spending limits. Without a reported credit limit, credit scoring formulas often used the highest reported balance as a proxy. If you charged about the same amount every month, it looked to the formulas as if you were using most or all of your available credit.

But the most recent versions of the FICO — the credit scoring formula used by most lenders — now make allowances for charge cards. The amounts you charge on your gold card won’t be factored into the FICO’s credit use calculations, but having and using the card responsibly will still benefit your scores.

Congratulations, by the way, on achieving good credit scores so young. If you continue to manage your credit responsibly, you can save hundreds of thousands of dollars over your lifetime in reduced interest rates and lower insurance premiums.

Why credit scores differ

Dear Liz: I monitor my credit reports through an identity monitoring program offered through my credit card company. Month after month, my Experian and Equifax scores are similar; however, my TransUnion score is much lower. I was recently denied for a car loan because the lender pulled the TransUnion score. Should I call TransUnion, or is its scoring method different from the other two companies’?

Answer: If you were turned down for credit, you have a right under federal law to a free copy of the credit report that was used in making the decision. You should examine the report to see if there are errors that need to be corrected. If so, dispute the incorrect information directly with TransUnion.

Remember that the three credit bureaus are private, competing companies, so the information they collect and report isn’t necessarily going to be the same. Some creditors report information to just one bureau. Other times, one bureau will mistake you for someone else or combine a stranger’s information with your file.

Your scores across the bureaus can vary because the underlying information in the reports can vary, and also because the bureaus sell different credit scores to consumers. Equifax typically sells FICO scores, the same scoring formula most lenders use, while Experian and TransUnion may provide their in-house “educational” scores or a VantageScore. The next time you’re about to apply for a major loan, you’ll want to buy FICO scores from MyFico.com to get a better idea of where you stand.

Does a credit card make you a slave to lenders?

Dear Liz: I haven’t had a credit card since 1993. I refuse to get one. So how do I buy a house? Don’t tell me to get a credit card, because I absolutely refuse to let the banks and credit people rule me. If I can’t buy it with cash, I don’t need it that bad. I do have a car loan now and pay utilities. I pay everything on time. Any suggestions? READ MORE