October 8, 2012 By

How to fight a medical collection

Dear Liz: My credit score just dropped more than 100 points within 45 days. The only thing I can think of that might have caused it is a $46 medical bill that was paid by my flexible spending account. I have a confirmation that the bill was paid, but for some reason the bill went to a collection agency. How do I get my credit score back to 828? I just recently moved and need a good credit rating for numerous reasons, especially purchasing a home and a new car. I was just turned down for a credit card from the bank that holds my mortgage. I tried dealing with the original medical office that received my payment, but they said I have to talk to the collection agency.

Answer: Check first to see if the collection account is actually on your credit reports. Go to http://www.annualcreditreport.com, the only site that offers you free, federally mandated annual access to your credit files at the three major credit bureaus. Other sites may advertise “free” credit reports, but they often come with strings attached such as requirements that you sign up for credit monitoring. Sites that offer free scores typically aren’t providing the FICO scores that most lenders use.

If the collection account isn’t on your reports, something else may have caused the score plunge. Consider buying at least one of your FICO scores from MyFico.com, which will give you an explanation of why your score isn’t higher.

If you find the collection account on your records, however, you need to go back to the medical billing office and insist that someone fix this, said Gerri Detweiler, a credit expert for Credit.com.

“The bill did not magically turn up in collections,” Detweiler said. “Someone made a mistake and since it is their office that was the source of the mistake, they need to fix it.”

Detweiler recommends sending a certified letter explaining that the office has damaged your credit reports and that if someone doesn’t fix the mistake immediately, you will be talking to an attorney about a credit damage lawsuit.

“If the medical office placed it for collections, they can pull it back from collections,” Detweiler said. “It sounds like they are being lazy by refusing to help.”

If the office balks for any reason, you can follow up with an attorney (you can get referrals from the National Assn. of Consumer Advocates at http://www.naca.net). You also can send a certified letter to the collection agency explaining the mistake and insisting it be removed from your credit reports.

You should mention in the letter that you’re trying to get a mortgage and a car loan and that if you’re unsuccessful because of this error, you’ll be talking with a consumer law attorney. It would be helpful to include proof of the mistake, Detweiler said. In many cases, the collection agency will simply delete the erroneous information rather than face getting sued.

“They may not want to bother with it since it’s such a small amount and not worth risking a lawsuit over,” Detweiler said.

Filed Under: Credit & Debt, Credit Scoring, Q&A Tagged With: , , , , , , , , , , ,
September 27, 2012 By

Many goals, few resources: How do you focus?

Dear Liz: I have read tons of books on finance and debt repayment, but I’m having trouble deciding what to do next. My husband and I are 52. He receives a monthly disability income, and I work two days a week. We still have about $105,000 left before our mortgage is paid off. We also owe about $7,000 in credit card debt and $5,500 in overdraft charges.

Should I concentrate solely on paying off debt, including the mortgage? Should we modestly renovate our 20-year-old home because after six kids, it is in need of a little TLC? We could downsize, but I’m somewhat emotionally attached to this house, and downsizing would still mean renovating to get the house in shape to sell. At the same time, we’d like to start a small business in our town. It wouldn’t be a huge investment of money, but it’s an outlay nonetheless. I don’t really want to wait five or 10 years to have to do this because it would mean income for one of our children who needs it and sometimes has to rely on us financially. How should I focus?

Answer: You didn’t say a word about retirement savings, but that should be a priority for most people.

If you don’t make a lot of money, Social Security is designed to replace 40% to 50% of your earnings. (The more you make, the less Social Security will replace, on the assumption that you’ve had more opportunity to save.) But most people, of any income level, would have trouble adjusting to living solely on their Social Security checks.

You can estimate your future benefit checks by using the Social Security Administration’s calculator at http://www.ssa.gov/estimator. Your results will be based on your actual earnings. Then you can use the AARP calculator (in the “work and retirement” section of the website) to figure out how much you need to save to have a comfortable retirement. You may not be able to reach that goal, but you should at least try to put aside something to improve your future life.

You don’t need to be in a rush to pay off your mortgage, but you should target that credit card debt and that shocking amount of overdraft charges. You also should know that renovations rarely pay for themselves when you’re ready to sell a home. At best, you typically get back 80 cents for every dollar you spend. A better approach is to make some cosmetic fixes that don’t cost a lot, such as new paint, clean windows and freshened-up landscaping.

As for opening a store, understand that small businesses can take a while to get off the ground. If you don’t have adequate savings or access to a line of credit, the business could fail and take your investment with it. The Small Business Administration at http://www.sba.gov has resources and Small Business Development Centers to help you understand what lies ahead. Do your research before you begin, and consider holding off at least until your toxic debts are repaid.

Finally, you didn’t explain why your child needs your money. If he or she is still a minor, that’s one thing. If he or she is an adult and not disabled in some way, however, then the parental dole needs to stop. It doesn’t sound like you and your husband are adequately providing for your futures. Your kids need to know they have to provide for their own.

Filed Under: Credit & Debt, Credit Cards, Q&A, Retirement Tagged With: , , ,
August 28, 2012 By

Now available: My new book!

Do you have questions about money? Here’s a secret: we all do, and sometimes finding the right answers can be tough. My new book, “There Are No Dumb Questions About Money,” can make it easier for you to figure out your financial world.

I’ve taken your toughest questions about money and answered them in a clear, easy-to-read format. This book can help you manage your spending, improve your credit and find the best way to pay off debt. It can help you make the right choices when you’re investing, paying for your children’s education and prioritizing your financial goals. I’ve also tackled the difficult, emotional side of money: how to get on the same page with your partner, cope with spendthrift children (or parents!) and talk about end-of-life issues that can be so difficult to discuss. (And if you think your family is dysfunctional about money, read Chapter 5…you’ll either find answers to your problems, or be grateful that your situation isn’t as bad as some of the ones described there!)

Interested? You can buy this ebook on iTunes or on Amazon.

Filed Under: Annuities, Banking, Bankruptcy, Budgeting, College, College Savings, Couples & Money, Credit & Debt, Credit Cards, Credit Counseling, Credit Scoring, Divorce & Money, Elder Care, Estate planning, Financial Advisors, Identity Theft, Insurance, Investing, Kids & Money, Liz's Blog, Real Estate, Retirement, Saving Money, Student Loans, Taxes, The Basics Tagged With: , , , , , , , , , , , , , , , , , , , , , ,
August 27, 2012 By

Cash-only lifestyle can complicate getting credit

Dear Liz: My brother is 63, living on Social Security only and needs to obtain a credit card. He is old school and pays cash for virtually everything, but realizes he needs a credit card for some basics (renting a car, for example). If he has only $17,000 income a year, would that be enough to qualify him for a basic credit card from any provider? If not, do you have any suggestions for emergencies where a credit card would normally be required?

Answer: Some people use debit cards or prepaid cards in situations where credit cards are typically accepted. But gas stations, hotels and some other merchants can put a “block” or hold on an account for more than the amount being charged. That can limit the user’s access to the rest of the money in their checking account or on their prepaid card for several hours or even days. Also, debit and prepaid cards have fewer consumer protections than credit cards.

The biggest problem your brother faces in getting a regular credit card is his habit of paying with cash. He may not have enough of a credit history to generate a credit score, and most card issuers rely heavily on scores in evaluating applications. He should consider visiting MyFico.com and see if he can buy one of his FICO scores for $20. If he doesn’t have FICOs, he may want to consider a secured credit card.

A secured card gives him a credit line equal to a deposit he makes at the issuing bank. NerdWallet, an online financial site that evaluates credit cards, recommends the U.S. Bank Secured Visa Card, which has a low $35 annual fee and security deposits ranging from $300 to a respectable $5,000. Another option is the Capital One Secured Card, which has a lower annual fee of $25 but a credit limit of just $200.

Using a secured card lightly but regularly, and paying off the balance in full every month, can help your brother build credit scores that eventually will be high enough to qualify for a regular card.

Filed Under: Credit & Debt, Credit Scoring, Q&A Tagged With: , , , , ,
August 22, 2012 By

Zombie debt and the Supreme Court

This may be a first: I’ve been cited to the Supreme Court.

Specifically, a column I wrote back in 2006 about “zombie debt” was cited in a brief filed by AARP, the Consumer Federation of America, the National Association of Consumer Advocates and other good folks for a case known as Marx v. General Revenue Corp. The case is about whether someone who lost a lawsuit against a collector can be forced to pay damages if the lawsuit wasn’t filed “in bad faith and for purposes of harrassment.”

Olivea Marx sued debt collector General Revenue Corporation after it contacted her employer to find out about her employment status. Marx believed that General Revenue’s action violated the Fair Debt Collection Practices Act. She lost, and the U.S. Court of Appeals for the 10th Circuit ruled she had to pay more than $4,500 to cover the collector’s legal costs.

The Federal Trade Commission, the Department of Justice and the Consumer Financial Protection Bureau also have weighed in against the decision, saying it was inconsistent with the FDCPA, which says people who lose cases against collectors must pay defendants’ litigation costs only if the consumers sued in bad faith or for purposes of harassment.

Collectors complain about frivolous lawsuits. Consumer advocates counter that more lawsuits would be filed if people truly understood their rights. The AARP/CFA brief notes that there isn’t much regulatory enforcement of fair debt collection practices laws, which leaves private action in the form of lawsuits brought by consumers. Debt collection already tops the list of industries that draw FTC consumer complaints; imagine how much bolder collectors might be if they could win damages against anyone who sued them and lost.

 

Filed Under: Credit & Debt, Liz's Blog Tagged With: , , , , ,
August 20, 2012 By

Co-signed loan burdens parent with student debt

Dear Liz: I co-signed some private student loans for my youngest child. She graduated two years ago with about $80,000 in student debt, including federal and private loans. Like many other recent graduates, she has had a difficult time finding a job. She worked part time at a retail store until about a month ago and made around $7,000 annually. I have been helping her make reduced payments and she has gotten deferments and income-based repayment plans.

But I’m planning to retire in a few months and won’t be able to make the payments as I have been. I am heartsick about this whole situation, not just for my family, but also for thousands of young people who face this mountain of un-dischargeable debt. We desperately need some advice on how to deal with huge debt.

Answer: As you know, student loans typically can’t be shed in Bankruptcy Court. Even your Social Security benefits aren’t safe: In 2005, the U.S. Supreme Court upheld the government’s ability to offset Social Security disability and retirement benefits when a borrower has defaulted on federal student loans.

Income-based repayment plans can provide some relief with the federal loans. This repayment option limits the required payment to 15% of your daughter’s discretionary income, and her balance can be forgiven after 25 years, according to Mark Kantrowitz, publisher of the FinAid.org financial aid site. If your daughter has no income, her required payment would fall to zero. Unlike deferment and forbearance plans, which have three-year limits, the income-based repayment allows zero payments indefinitely. She should investigate signing up for such plans for all her federal loans.

The private loans you cosigned have far fewer repayment options. Some have forbearance and deferment options, while others do not. You may be able to negotiate a lower payment temporarily, or you may not. Because private student loans’ rates and terms aren’t regulated the same way federal loans’ are, they’re considered much riskier. Using them is kind of like paying for college with credit cards, except unlike with credit cards, the debt can’t be discharged.

It’s too late to tell you that you shouldn’t have co-signed loans so close to retirement or any time you would be unable to take over the payments. If you have sufficient equity in your home, you may want to consider using it to pay off the private loans. A variable-rate home equity line of credit would allow you to pay only interest for 10 years, while a fixed-rate home equity loan would lock in today’s current low rates for the 20-year life of the loan. You will, of course, be putting your home at risk if you can’t make those payments.

Another possibility is to postpone your retirement until your daughter is gainfully employed. This may not be desirable or even possible, but at the moment you’re the only one with income to repay these loans.

Otherwise, your option is to try to negotiate an affordable repayment plan with the private lenders, which is no easy task. For more information, visit the Student Loan Borrower Assistance program at http://www.studentloanborrowerassistance.org.

Filed Under: College, Credit & Debt, Q&A, Student Loans Tagged With: , , , , ,
August 20, 2012 By

Why high credit scores take longer to heal

Dear Liz: I am confused about your recent article about a person who did a short sale and questioned its effect on her credit. You said that if she started with a score of 680, it would take about three years for her FICO numbers to return to normal. You then said, “If your scores were high, say 780, it would take about seven years to restore them to their old peaks.” This doesn’t make sense to me. Why would it take longer to recover if you started with better credit?

Answer: Think of credit scores as a mountain that gets steeper the higher you climb. Not only does it take longer to achieve the lofty peaks, but if you tumble down the mountain, it will take you longer to return to those peaks than to achieve some intermediate stage.

The FICO formula is designed to reflect your likelihood of default. If you’ve recently missed a payment, had a bill go to collections or had a foreclosure or short sale, the formula assumes you’re much more likely to default on another bill than someone who doesn’t have those black marks on his or her record, and your scores fall to reflect that higher risk of default. As time passes and you handle credit responsibly, your scores will begin to slowly rise, but it will take more time to regain your peak scores if they were high.

Something else to understand is that the penalty for most negative credit events is greater for people with high scores than those with lower scores. Missing a single payment can knock up to 110 points off a 780 score but might deduct just 60 points from a 680 score. That’s because a higher risk of default is already “baked in” to the lower score. The higher score presumes you’re less likely to default. If you do miss a payment, the formula is set up to punish you more. In most cases, though, you won’t “fall down the mountain” as far as someone who started with a lower score. After the missed payment, the 780 score could be 670, while the 680 score could be 620.

Filed Under: Credit & Debt, Credit Scoring, Q&A Tagged With: , , ,
August 6, 2012 By

Will her bad credit prevent him from getting a mortgage?

Dear Liz: Is it possible for me to buy a home without having my wife on the mortgage? She lost her business because of the recession. I do not want to deal with her creditors.

 Answer: You can apply for a mortgage based solely on your own income, credit scores and debt-to-income ratio, if those are sufficient to buy the house you want. Your wife’s income and credit does not have to be considered.

If you can’t swing the purchase without her income, though, you’ll both need to spend some time improving her credit scores. That might include adding her as an authorized user to your credit cards. Another option is to negotiate settlements with her creditors in return for their deleting the collection accounts from her credit reports. You’d want to be cautious in these negotiations, especially if the statute of limitations on the debts hasn’t expired and your wife could be sued. Consider visiting DebtCollectionAnswers.com for help in negotiating with creditors.

Filed Under: Couples & Money, Credit & Debt, Q&A, Real Estate Tagged With: , , , ,
August 6, 2012 By

Why some debtors don’t get sued

Dear Liz: You recently answered a question from a business owner who defaulted on some credit card accounts and wanted to know how to pay these old debts. How is it that this person has not been subjected to numerous judgments on the cards in question? In fact, how could he or she have proceeded in business without being subjected to garnishment of accounts?

Answer: To get a judgment and a garnishment, the credit card company or a subsequent collector typically must sue the borrower in court. Different collectors have different policies about when to file such lawsuits. Sometimes they decide it’s not worth the hassle given the slim chances of collecting. However, many collectors also regularly check’ credit reports to see if a debtor’s financial circumstances seem to be improving. If they see signs of such improvement, they may renew collection attempts, including lawsuits.

Filed Under: Credit & Debt, Q&A Tagged With: , , , , ,