Ask Liz Weston

Get smart with your money

Credit & Debt

Are student loans a bad idea?

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Dear Liz: I am a junior in college, and I might have to take out a loan my senior year because of financial cuts in the state. Is it really a bad idea to take a loan for college?

Answer: No, it’s not. You don’t want to overdose on education debt, but a student loan that helps you get the right degree could be the best investment you’ll ever make.

Someone with a college degree will earn on average $2.3 million over the course of a working lifetime, which is $1 million more than the lifetime earnings of someone with just a high school diploma, according to a study by the Center on Education and the Workforce at Georgetown University in Washington. College graduates also are more likely to stay employed. The unemployment rate for people with college degrees is about half of that for people with only high school diplomas.

Of course, you’ll want to make sure there is sufficient demand for your degree to justify the costs of your education, since all college degrees are not created equal. PayScale, a site that tracks salary information, has a report on its site called “Majors That Pay You Back” that monitors median starting and mid-career incomes for various degrees.

You’ve probably heard horror stories about people winding up with massive amounts of expensive student debt. In many cases, these scholars used private student loans, which have variable rates and lack the protections of federal student loans.

Limit how much you borrow. In general, don’t borrow more than you expect to make your first year out of school. Also, exhaust all available federal student loans before you consider a private loan. If you can work a part-time job or increase your hours to avoid a private loan, do it — but don’t work so many hours that you can’t complete your schoolwork.

A loan that helps you complete school would be far better than dropping out now, since the economic payoff from a college education requires that you actually get your degree.

Should you pay to boost your credit scores?

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Dear Liz: I’ve seen advertisements for services that promise to help you raise your credit score by the exact number of points you need to qualify for a good mortgage rate. Are these services worth the money?

Answer: There’s one thing you need to know about these services: They don’t have access to the actual FICO formula, which is proprietary. So what they’re doing is essentially guesswork.

They may suggest that you can raise your score a certain number of points in a certain time frame, but the FICO formula isn’t that predictable. Any given action can have different results, depending on the details of your individual credit reports.

Rather than pay money to a firm making such promises, use that cash to pay down any credit card debt you have. Widening the gap between your available credit and your balances can really boost your scores. Other steps you should take include paying your bills on time, disputing serious errors on your credit reports and refraining from opening or closing accounts.

Roommate may be not be telling the truth about his credit

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Dear Liz: I have a roommate who has truly bad credit. He has been turned down from getting a checking account at banks because his mom bounced checks on his account when he was 18 (he is now 31). What is the best way to rehab his credit? He can’t get a secured credit card because he doesn’t have a checking account. Is there a way around this?

Answer: You may not be getting the full story from your roommate. If his mom misused his checking account when he was 18, it shouldn’t still be affecting his ability to establish a bank account. Reports to Chexsystems, the bureau that tells banks about people who have mishandled their bank accounts, typically remain on file for only five years.

Your roommate should first request a free annual report from Chexsystems at http://www.consumerdebit.com and dispute any errors or old information. Even if he’s still listed in Chexsystems, he could get a so-called “second chance” checking account from several major banks, including Wells Fargo, Chase and PNC Bank. Responsible use of those accounts should allow him to graduate to a regular checking account. Then he can start the process of rehabilitating his credit.

What to do with extra cash when an auto loan is paid off

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Dear Liz: I’ll be done paying off my car in a couple of months. What’s a good strategy for redirecting that money once it’s paid off? Should I use the whole amount each month to start saving for my next car, or would I be better off splitting it up and putting it into several savings “buckets” such as retirement, emergency and my next car? I’m 35, have an emergency fund equal to four months’ living expenses and only one other debt, a very low-interest student loan.

Answer: If you aren’t already contributing to a retirement plan, you should be. If you aren’t contributing enough, that should be your priority even before you pay off your debt.

Market researcher and Yale University professor Roger Ibbotson has found that people who start saving for retirement after age 35 have an extremely difficult time “catching up.” They’ve lost a crucial decade or more, and often can’t set aside enough to offset their late start.

If you are on track for retirement and are comfortable with your emergency fund, saving to pay cash for your next car is a reasonable course.

Does paying down installment loans help your credit?

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Dear Liz: I know a high balance on a credit card hurts your credit score and that it’s best to keep balances low and pay them off each month. But does the same theory hold true for installment borrowing such as auto or student loans, which obviously have a higher balance in the beginning of the loan repayment period?

Answer: Paying down installment loans will help your credit score, but typically not as dramatically as paying down balances on revolving debt such as credit cards.

The leading FICO credit scoring formula is much more sensitive to balances on revolving accounts. The wider the gap between your available credit and the amount you’re using, the better.

So is it pointless to try to fix credit report errors?

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Credit Check 1Dear Liz: I watched 60 Minutes last night regarding the 3 credit bureaus and was amazed at what I learned.  I was hoping to spend time trying to repair our credit score, but according to the report last evening, it sounds like a total waste of time as the three credit bureaus basically are not accountable to anyone and they very rarely take action in your defense.  Was this a one-sided view?

Answer: The credit bureaus would tell you yes, but the answer is way more complicated than that.

The show reported that 40 million Americans have errors on their credit reports. That’s about one in five U.S. adults covered by the credit bureau industry. About half (one in 10) have errors serious enough to hurt their credit scores.

(Update: A Federal Trade Commission report released today said one in four had at least one “potentially material error” on at least one of their three credit reports and that one in 20 consumers had significant errors on their credit reports that could cause them to pay more loans.)

That’s a pretty high error rate, but an even bigger problem is that the process to fix mistakes is almost completely automated and structured to favor the data provider (the banks, lenders and others supplying information) over the consumer. Here’s how the Ohio attorney general described it:

“The federal law says that if you believe that there is a mistake, you can go to them and they have an obligation to do a reasonable investigation. They’re not doing a reasonable investigation. They’re not doing an investigation at all.”

The show interviewed former bureau employees in Chile who confirmed what others have reported: that their jobs were to assign two-digit codes to the complaints. That’s it. Then the complaints are forwarded to the lenders and other data providers for response.

People can and do get errors fixed if the data provider acknowledges the error or simply fails to respond to the credit bureaus’ queries. If the data provider continues to insist it’s right, however, it’s pretty tough (if not impossible) to get the bureaus to step in.

That’s how people get caught in seemingly endless cycles of disputing mistakes only to have them reappear, or never disappear, from their reports.

The credit bureaus, which apparently turned down opportunities to respond on camera, now point to a study by the Policy and Economic Research Council that found 95% of consumers were satisfied with the outcome of their disputes. The study was paid for by a grant from the Consumer Data Industry Association, which represents the credit bureaus.

It’s not exactly pointless try to fix errors. The FTC report said four out of five people who dispute errors get results. You should still try, and you may well find it’s possible, but you should plan to be tenacious if your initial efforts are rebuffed. (You should get your free credit reports directly from www.annualcreditreport.com. Don’t go to other, lookalike sites, some of which are owned by the credit bureaus but that aren’t the federally-mandated site that gets you your free reports.)

You should also support efforts by regulators and consumer advocates to require the credit bureaus to put a more responsive system in place.