Ask Liz Weston

Get smart with your money

Credit & Debt

Q&A: Co-signing for a student loan backfires

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Dear Liz: My wife and I both had excellent credit scores. Now mine are in the dump. I co-signed for a friend’s daughter’s school loan 10 years ago. I know now this was a bad mistake. I guaranteed $25,000. Now two things have happened: The daughter quit paying the loan and the friendship took a bad turn.

This is seriously hurting my credit. We have already been told when trying to refinance our mortgage that we’ll need to fix the school loan, which is showing more than 90 days behind. The outstanding balance is $20,000. I can pay the loan off. Making payments just adds interest to the problem. Are there any other options to repair my credit that don’t rely on the daughter’s ability to keep the loan current?

Answer: If you can pay the loan off, then do. You are legally responsible for this debt, and the longer it goes unpaid the worse the damage to your credit scores.

If this were a federal student loan, you would have the option of rehabilitation, which can erase some of the negative marks on your credit reports after you make a series of on-time payments. Because it’s a private loan — I know this because federal student loans don’t have co-signers — you probably don’t have a rehabilitation option (although it certainly doesn’t hurt to ask).

Once the loan is paid off, you can proceed with the refinancing but you probably will find that lenders want to base the loan on your battered scores, rather than your wife’s better ones. That means you might not qualify, or you might have to pay a much higher rate. If she can qualify for the refinance on her own, that’s one option. Otherwise, you might have to wait for your credit to heal before you refinance.

Q&A: Fixing a wounded credit score

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Dear Liz: My wife and I co-signed on our daughter’s mortgage, then the home went into foreclosure. My wife and I have no debt and a net worth that exceeds $1 million. We purchased our cars with cash and the single credit card we have with a $35,000 limit is paid off in full each month. Since the foreclosure, our FICO score has been in the “fair” range. We have no plans to take out a loan for anything and plan to continue our “cash and carry” lifestyle. However, the low FICO is a little disconcerting. It appears the only cure is time (measured in years). We welcome any additional guidance.

Answer: You can’t fix your wounded FICO scores overnight, but you could speed up your credit score rehabilitation by adding one or two more credit accounts to your mix. At least one of those accounts should be an installment loan, since scoring formulas want evidence you can handle different types of credit. If you don’t want an auto or personal loan, then consider a “credit builder” loan that puts your payments into a certificate of deposit that you claim when all the payments have been made. Credit builder loans are offered by credit unions and some online lenders.

Is it worth the effort, even though you don’t plan to borrow? In most states (although not California), credit scores heavily influence what you pay for auto and homeowners’ insurance. People who don’t have the best scores can pay hundreds of dollars more each year for coverage. Credit scores also may be used to determine deposits for utilities and wireless service. If you need to rent an apartment, your credit scores matter as well.

If none of those are a concern, you can continue to take the slow road to rebuilding your credit, since the foreclosure will fall off your credit reports after seven years. If you want to speed things along, though, another credit account or two should help.

Q&A: Letting car be repossessed will make debt problem worse

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Dear Liz: I own a car that I can no longer afford. Unfortunately, buying it was a poor decision and came with terrible interest rates and terms. I’ve been 30 to 60 days late on the payments for close to a year and have other debts that I haven’t been able to pay. Because of this, my credit is already in the basement. I’m underwater on the car (by about $7,000) and am feeling like the only option is to have it “voluntarily” repossessed. I really feel that if I didn’t have this $400 payment and another $200 a month in car-related costs, I could get my other debts squashed, build some savings and get in a much better place financially. I should mention that I have another (free!) car available to me when I need it and live in an area with reliable public transit, plus I have carpooling options that can get me to and from work at little to no cost. I have no major plans for anything that would require amazing credit scores. I have a stable job and rent an apartment with my boyfriend, who has strong credit but not a huge capacity to help financially. Am I insane? How would I even begin to recover from a repossession?

Answer: Having your car repossessed won’t relieve you of the debt. In fact, your debt is likely to increase.

Repossession costs such as storage, preparation for sale and attorney fees can be added to your loan balance. You’ll owe the difference between that amount and the price the creditor gets for the vehicle when it’s resold, often at auction.

If you don’t pay what you owe, your creditor can sue you — and probably will, given that nice steady job with reliable wages that can be garnished.

So yes, you probably would be insane to think repossession is the answer to your situation.

Usually the best solution when you owe more than a car is worth is to “drive out of the loan” — in other words, to own the car at least until the loan is paid off. In your case, the best solution may be to park the car while you pay it off. A parked car doesn’t need much gas or maintenance (as long as you start it occasionally). You may be able to get discounts on insurance and registration if you don’t operate it.

If you still can’t make ends meet, then get a second job that will bring in some extra cash. Pay off the loan as quickly as possible and then start saving to pay cash for your next car. Also work on repairing your credit so that if you want loans in the future you’ll be able to get decent rates and terms.

Q&A: Understating financial situation

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Dear Liz: When applying for credit or at other times when one must state gross income, how should virtual income be computed and treated? My wife and I have annual tax-free income of about $96,000, not subject to offset of any kind, plus our $8,000 annual property taxes are waived in their entirety, as are our vehicle license fees and many other smaller fees. We have free health insurance through the military and the Department of Veterans Affairs that far exceeds the best plan out there. To state our household income as the money that goes into our bank accounts annually is a serious understatement of our financial position. We do not want to lie on a credit application, but we feel we are not being totally honest no matter how we answer questions asking for gross income.

Answer: Creditors are far more worried about people inflating their incomes than they are about people who understate their financial situations. In short: Don’t worry about it.

Q&A: How to deal with debt collectors

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Dear Liz: After struggling financially for seven years, I’m getting a good lawsuit settlement. After taxes, I’ll be set. I want to pay my bills but to the actual company — for example, the credit card company, not some bill-collecting clowns that threatened me with “the sheriff will come over and arrest you” or “your brother and sister will inherit your debt” and other lies.

I also don’t want to pay these inflated fees from bill collectors that have no rhyme or reason and sound like they are throwing darts at numbers board.

Finally, I’ve asked a couple of the bill collectors to provide me with the name and contact at the original company so I can verify that they have authorization. But with data being compromised every day, how do I know they are legit?’

Answer: You typically don’t have the option to pay the original creditor once a debt collector enters the scene. Chances are good the original creditor long ago wrote off the debt as a loss and sold it, often for pennies on the dollar. You’ll know the bill is in the hands of a debt buyer if you check your credit reports and the original creditor shows the amount owed as zero, said Michael Bovee, president of Consumer Recovery Network, a debt relief company.

You’re right to be concerned about paying the right party — not because of database breaches but because of the lousy records and bad practices that plague the debt collection industry. The same debt may be sold to multiple buyers or come with so little identifying information that it’s unclear who originally owed what to whom.

Before you pay any debt, you should ask in writing for it to be verified. By law, debt collectors must provide you with the name of the creditor, the amount owed and how you can dispute the debt or seek further verification. The Consumer Financial Protection Bureau offers sample letters on its site, www.consumerfinance.gov.

The CFPB also accepts and investigates complaints about collection agencies, such as those who violate the federal Fair Debt Collection Practices Act by harassing people or falsely threatening to arrest them (you typically can’t be arrested for debt).

It’s understandable that you don’t want to deal with a rogue collector or an unethical collection agency. If the debt is beyond your state’s statute of limitations and you can’t be sued over it, then there’s little reason to open negotiations with such bad actors. They could renege on any deal they make with you and simply sell the debt to someone else, starting the whole circus over again.

If you must resolve the debt — you typically can’t get a home loan, for example, if you have open collection accounts showing on your credit reports — then you should call the original creditor and verify which company bought the debt. If the debt wasn’t sold but assigned to a collection agency, get the name of that firm. Then you can call and negotiate payoffs low enough to offset any fees or interest that have accumulated, Bovee said. But do so before you apply for the loan and don’t let the collectors know you need to clean up your credit, since that weakens your bargaining position.

You’ll want to arm yourself with as much knowledge as possible before you contact any collection agency. You can download a free e-book at DebtCollectionAnswers.com, a site run by consumer advocate Gerri Detweiler, that can help you get started.

Q&A: Helping a friend build credit

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Dear Liz: I am selling my car to an old friend with no credit history. (The used car salesman wanted to charge her 6.5% interest.) Is there a way that I can report her timely payments to the credit reporting services to help her build her credit?

Answer: It’s not really practical for individuals to report payments, since subscribing to credit bureaus is expensive.

The rate your friend was quoted actually isn’t bad given her lack of credit history. If she kept the loan term relatively short (four years or less), she might be able to build up enough equity and credit history to refinance it to a lower rate in a year or two.

If she’d prefer not to take that route, you might suggest she explore credit builder loans. These loans, offered by credit unions, banks and some online lenders, are designed to help establish credit histories at the bureaus. The lenders typically put the borrowers monthly payments, minus a small interest charge, into a certificate of deposit that is the borrowers to keep after the final payment.

Secured credit cards are another good way to build credit scores. Borrowers make a refundable deposit with the issuing bank and get a credit line that’s typical equal to that deposit.