Q&A: Business credit card dilemma

Dear Liz: I am a sole proprietor and have two business credit cards. I used my Social Security number to apply for the cards and put $2,000 to $3,000 a month on these cards, yet all this credit card activity is not reported to Experian, thereby hurting my credit score, and I now have “stale credit” per Experian. Is my credit card activity not reported because my cards are considered business cards?

Answer: The short answer is yes. Although you used your personal credit history to apply for the cards, business cards typically don’t report activity to the consumer credit bureaus (although negative activity may be reported, such as if the account is delinquent).

You can remedy the situation by getting and using a personal credit card or two. If your credit report has become so stale that it can’t generate a credit score at all, you may need to start with a secured card or look into a credit builder loan.

Q&A: Why you need a credit score even if you don’t like debt

Dear Liz: As I counsel my teenage kids about their personal finances, I am wondering if they can live without a credit score. It is puzzling that to get a good credit score, you need to have debt, or at least a credit card. Wouldn’t living debt free be best? With FICO scores becoming de rigueur, is it reasonable for anyone to get away with no credit score at all, especially if the only debt they would consider is a mortgage someday? Also, the credit reporting companies now have some adjunct services that provide reporting based on payments for rent and utilities that might be helpful. How effective are those reports?

Answer: Credit scores aren’t meant to gauge how well you manage money. They’re meant to gauge how well you handle credit. If you don’t have and use credit, you won’t have scores, and lenders will be reluctant to extend you credit when you want or need it.

You also may have to pay higher deposits for utilities, miss out on the best cellphone deals and have trouble renting an apartment. In most states, credit information helps determine property insurance premiums as well. In fact, your credit may matter more than your driving record in determining auto insurance premiums.

It’s a myth that you must be in debt to have good credit scores. You just need to have and lightly use a credit card, and you should pay it in full every month. Another option is a credit builder loan, through which the money you borrow is placed in a savings account or certificate of deposit for you to claim when you’ve finished making 12 monthly payments.

There are services that will add rent and utility payments to your credit reports. The most commonly used versions of the FICO score, however, don’t include that information in calculating scores.

Q&A: The right site for free credit reports

Dear Liz: It would appear you have been taken in by a scam. In a recent column, you state a free credit report may be obtained through www.annualcreditreport.com. I went to the site and filled out the information requested. Instead of receiving a credit report, it signed me up for a paid membership. I was able to cancel it but I did not receive any credit report.

Answer:
AnnualCreditReport.com, which has provided free credit reports since 2005, is not a scam. Unfortunately, many people navigate to the wrong sites and wind up being pitched credit monitoring or similar products. If you’re being asked for a credit card, you’re not on the right site.

One problem is that people search for terms such as “free credit report,” “annual credit report” or even “AnnualCreditReport.com” and click on the first link that comes up, not realizing that many search engines top their results pages with paid advertisements. The actual site, annualcreditreport.com, could be halfway down the page. The better way to access the site is to either click on a trusted link, such as the one provided here, or type the full URL into the address bar of your browser.

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.