Q&A: She counted on pandemic rent relief but didn’t qualify. Now what?

Dear Liz: I have a friend in dire financial straits. She has borrowed from her retirement, spends too much and didn’t pay her rent thinking she would get pandemic relief, but she makes too much to qualify for emergency rental assistance. She has mental health issues, which are being addressed by a therapist, but I would love to offer her financial counseling services as well. She is in her late 50s and desperately depressed over this. It’s hard to stand by when the rest of our friend group is doing well, and we’re not sure how to direct her. I would possibly be willing to pay for a financial counselor but will not “loan” her money because that is a losing proposition.

Answer: Congress approved nearly $50 billion in emergency rental assistance to help pay back rent and utilities for low-income people impacted by the pandemic. The key phrase is “low income.” The help isn’t available for people who earn more than 80% of the area’s median income, and many programs are limiting the aid to those with incomes below 50% of the median. The aid is being distributed through more than 100 state and local agencies, and more programs are on the way. The National Low Income Housing Coalition is keeping a list.

Currently, landlords are mostly prohibited from evicting non-paying tenants, but eviction moratoriums will someday end. Your friend could find herself not just turned out of her home but unable to rent decent housing, since many landlords won’t consider anyone who’s been evicted. Avoiding that fate needs to be a top priority for her.

Nonprofit credit counseling agencies, such as those affiliated with the National Foundation for Credit Counseling, offer a variety of low-cost or free services that may help your friend, including housing counseling, budgeting help and debt management plans. She also should consider discussing her situation with a bankruptcy attorney.

Her depression may make it difficult for her to take action, so you could help her make the appointment and even offer to accompany her. Ultimately, of course, it will be up to her to make the necessary changes, but supportive, nonjudgmental friends could be an enormous help.

Q&A: How much debt can you afford to pay each month? Put it in perspective

Dear Liz: I’m paying down credit card debts. At what ratio of debt to income would you consider my personal finances healthy?

Answer: The healthiest level of credit card debt is none. Credit card interest rates tend to be high and variable, which makes this kind of debt toxic to your financial health. Congratulations for making progress on getting rid of yours.

There are a number of measures you can use to judge whether an appropriate amount of your monthly income goes to debt payments. Among the most common:

◆ Traditionally, mortgage lenders preferred home loan payments to be 28% or less of your gross monthly income and total debt payments, including mortgage, to be 36% or less.

◆ Debt payments, including mortgages, that exceed 40% of gross monthly can be an indication of financial distress, according to the Federal Reserve.

◆ Under the 50/30/20 budget, all your must-have expenses — including housing, utilities, transportation, insurance and minimum loan payments — would be 50% or less of your after-tax income (your gross income minus income and payroll taxes). That leaves 30% for wants and 20% for savings and extra payments on debt. If a loan payment fits under the 50% limit with all your other must-haves, then it may be considered affordable.

You typically don’t need to rush to pay off lower-rate, potentially tax-deductible debt such as mortgages or student loans. Still, you’ll probably want to have all your debts paid off by retirement so you aren’t draining your nest egg to make the payments.

Speaking of retirement, are you saving enough for that goal? Do you have a sufficient emergency fund? Are you adequately insured? Are you able to enjoy your life without excessive stress about money? Financial health includes all those components in addition to paying down debt.

Q&A: Should you pay down debt with extra cash? It may not be the best plan during a pandemic

Dear Liz: I’m a teacher on an income-based repayment plan for my federal student loans. I don’t qualify for any loan forgiveness programs for teachers because I teach in an affluent area. Right now, interest and payments on federal education loans have been suspended because of the pandemic.

I’m trying to decide what to do when payments have to restart. Should I pay down a chunk of the loans from the money that accumulated in my savings from not having to make loan payments since April? Or pick back up where I left off with making near-double payments to get down the principal (slowly) and pay off loans in another five to six years? Or only make the minimum income-based payments while waiting to see if the new administration offers more comprehensive loan forgiveness for teachers? Thank you for any insights.

Answer: Although you may not qualify for loan forgiveness through programs meant to help underserved communities, you can still qualify for the federal public service loan forgiveness program. This program erases debt for schoolteachers and other public servants after they’ve made 120 qualifying payments toward their federal student loans.

You can learn more about this program at the U.S. Department of Education site. Follow the rules carefully because many people who thought they were on track to get forgiveness have discovered otherwise.

If you’re eligible, consider making only the minimum payments on your loans so that the maximum amount is forgiven. Even if you’re not eligible for forgiveness, though, you don’t necessarily want to rush to pay off this relatively low-rate, tax-deductible debt.

You should be on track with your retirement savings, have paid off all other, higher-rate debt and have a substantial emergency fund before you make extra payments on education debt (or a mortgage, for that matter). “Substantial” means having three to six months’ worth of expenses saved. If your job is anything less than rock solid, you may want to set aside even more.

Keep in mind that the money you send to your lenders is gone for good; you can’t get it back should you need it later.

Q&A: How to freeze your credit

Dear Liz: A few months ago you mentioned creating credit freezes that can be simply turned on and off at the customer’s convenience at no cost. However, you didn’t leave a website or an avenue to pursue a credit freeze with all three credit bureaus. Please provide more information on the steps in this process to achieve a credit freeze. It sounds like something I would like to try.

Answer: A credit freeze restricts access to your credit report and can be a good way to deter new account fraud. If someone tries to open a new account in your name, the lender won’t be able to pull your credit and thus is unlikely to approve the application.

Credit freezes do not affect your ability to use your credit cards or other credit accounts. You can temporarily thaw or lift the freeze any time you want to apply for credit. Placing, lifting and removing credit freezes is now free.

Experian’s credit freeze center can be found at https://www.experian.com/freeze/center.html.

Equifax’s is at https://www.equifax.com/personal/credit-report-services/credit-freeze/.

You’ll find TransUnion’s version at https://www.transunion.com/credit-freeze.

Just be sure to follow the instructions carefully and keep track of any personal identification numbers or passwords.

Q&A: How to help your adult kids build their own credit

Dear Liz: My first house is paid for, and my oldest daughter and her husband are living there now. I added her name to my credit card, which is paid in full every month, but otherwise she hasn’t established any credit. I have been paying the utilities up until now, but they are going to take them over. Will changing my name and direct debit bank information to theirs on the accounts help establish her credit?

Answer: Some alternative credit-scoring systems do use utility payments to supplement the information in people’s credit reports. Experian Boost, for example, allows people to add such payments and potentially increase their Experian credit scores. Still, your daughter would be smart to continue adding traditional credit accounts to her reports.

One way to do that is with something called a “credit builder loan,” which is offered by some credit unions and at least one online lender, called Self. Essentially, the applicant borrows a certain amount, which the lender puts in a savings account or certificate of deposit. The borrower can claim the money after making a certain number of payments. The payments are reported to the three credit bureaus, contributing to her scores.

She also could apply for a credit card on her own, to supplement the one you added her to. If her credit isn’t yet good enough to qualify for an unsecured card, she could consider getting a secured card that gives her a line of credit equal to the amount she deposits with the issuing bank.

Q&A: Weekly free credit reports

Dear Liz: In a recent column, you wrote that credit reports are now available weekly from AnnualCreditReport.com. Most people understand that they are entitled to a free credit report once a year via that site. Please explain what is meant by “now available weekly?” By signing up for a paid service from one or more of the credit reporting agencies, or for free, or what?

Answer: AnnualCreditReport.com was created to provide free annual reports, but now you can get your free reports every week.

If you navigate to AnnualCreditReport.com, you’ll see an announcement from the three credit bureaus that the site will provide free credit reports weekly until April 2021.

Free means free. You don’t have to pay or provide credit card information, although the bureaus may try to sell you credit monitoring or other services.

Q&A: I get different credit scores from my bank and card companies. What gives?

Dear Liz: I have three financial providers that supply regular, free credit scores: my bank and two credit card issuers. My credit score from the bank is always a “perfect score” while the two card companies are consistently 17 points lower, both exactly the same for two years now. I always pay off most or all of the outstanding balance on time or early. Any clue as to why there is this consistent difference?

Answer: The companies probably are using different credit scoring formulas or different credit bureaus, or both.

You don’t have one credit score. You have many. FICO is the dominant scoring formula, but lenders also use VantageScores and the credit bureaus sometimes provide their own, proprietary scores.

The formulas have been updated over the years. The FICO 8 is the most commonly used score, but the FICO 9 is the latest version and FICO 10 will be introduced this summer. Some scoring formulas are modified to suit different industries, such as auto lending or credit cards, plus each score is calculated from data at one of the three credit bureaus.

So one institution may provide its customers a FICO Score 9 from Experian, another might offer a FICO 8 Bankcard score from Equifax and a third might give you a VantageScore 3.0 from TransUnion. Even if all three were using the same type of score, they probably would use different credit bureaus, or vice versa. To make things even more confusing, your credit scores are constantly changing as your credit bureau information changes.

Furthermore, you typically can’t predict which score or scores a lender will use to evaluate your application for credit. Rather than worry about which number is “right” — they all are — use the free scores as a general indicator of your credit health.

Q&A: Big debt is bad in the coronavirus downturn. But a consolidation loan might not be the answer

Dear Liz: I have about $40,000 in credit card debt and am considering a consolidation loan. I’m current with my cards. My income is about $130,000 per year. Can you recommend a lender? Any cautions?

Answer: As you probably know, this is a bad time to be burdened with a lot of debt. But taking out another loan may not be the answer.

Personal loans — the type of unsecured loan often used to consolidate other debt — work out best when you can lower the rate on your debt, get it paid off within three to five years and avoid accruing more debt while you do so.

Unfortunately, people who take out consolidation loans often don’t, or can’t, fix the problem that caused the debt in the first place. If the debt came from overspending, for example, they don’t trim their expenses to match their income and wind up borrowing more. If the debt is from medical bills, ill health may cause them to incur more medical-related debt.

Another issue is interest rates. Personal loans typically have fixed rates, which is good, along with fixed payments so you actually pay off the debt over time. That’s in sharp contrast to credit cards, which usually have variable rates and minimum payments that don’t pay down much of your principal.

Unless your credit is good and your income secure, though, you may wind up paying a higher rate than you are now — assuming you can get a personal loan at all. Lenders have tightened their standards considerably in recent weeks because of the current and expected economic fallout from the pandemic.

Many people are better off paying down their debt on their own, making extra payments to get their highest-rate card paid off first, and then moving to the next-highest-rate card, while paying minimums on the rest. (Another approach is to pay the smallest balance first, to give yourself a psychological win that can motivate you to keep going.)

If you can’t pay more than the minimums, then you’re likely in too much debt to dig your way out on your own. Consider making appointments with a credit counselor affiliated with the National Foundation for Credit Counseling and with a bankruptcy attorney (the National Assn. of Consumer Bankruptcy Attorneys offers referrals) so you can better understand your options.

Q&A: Car repo is a nonstarter

Dear Liz: I had to move to assisted living due to a stroke. I no longer need my car — or the car payment. Can I simply stop paying and let it be repossessed? There are about 18 months to go before it’s paid off. I don’t need great credit anymore and our current expenses exceed our income.

Answer: If you’re that close to paying off the loan, then you probably have a good chunk of equity. It would be a shame to lose any of that value to the costs of repossession.

Typically repossessed cars are sold at auction, often for less than their resale value. The proceeds, minus the expenses of repossessing and preparing the car, are applied to your loan. You’d only get what’s left over. (If what’s left over is less than what you owe, the amount is added to your debt.)

This bad financial outcome is on top of the damage done to your credit, which can be substantial. Even if you think it unlikely you’ll need credit again, you don’t know for sure that you won’t.

If you have the option of selling the car to a private party or dealer — or asking a trusted friend or relative to help you do so — that’s usually a much better way to go than letting the vehicle be repossessed.

Q&A: Too many credit cards? Protect your credit scores while closing accounts

Dear Liz: Over the years, my husband and I have accumulated a number of credit cards. All have had a zero balance for years. I want to start canceling these cards, but I’m concerned that will hurt our great credit scores. How should I go about this, or should I?

Answer: As you probably know, closing credit accounts won’t help your scores and may hurt them. That doesn’t mean you can never close a credit card, but you shouldn’t close a bunch of them at once or close any if you’ll be in the market for a major loan, such as a mortgage or auto loan.

If you’re not planning to borrow money in the near future, then you can start closing accounts one at a time. You’ll probably want to keep the cards with the highest credit limits, and perhaps your oldest card as well. Monitor your scores to see how long they take to recover from each closure. You may need to wait a few months before shutting the next account.

Be sure to use your remaining cards occasionally by charging small amounts and paying the balance in full. That will keep the cards active and help prevent the issuer from canceling them.