Your Credit Questions Answered

By Gerri Detweiler
The Union Credit Doctor

In February, union members had the opportunity to ask consumer credit expert Gerri Detweiler their credit questions.  We were unable to answer all of the questions submitted during the Smart Credit Strategies Webinar.  Below, Gerri answers some of those questions.

When I am paying off debts, is it better to pay off two small ones or a large chunk of one with a higher interest rate?

Here are two ways to tackle this:

1. Pay off the lowest balance cards and apply the rest to the highest balance card. This advice is based on the notion that you will feel great about paying off your three credit cards with small balances, and will be so excited the momentum will carry over to the bigger job of paying off the card with the large balance.
    
2. Pay off the card with the highest interest rate first, regardless of the size of the balance. With this approach, you are looking to get the biggest bang for your buck. You will save the most money using this strategy, though how much you will save depends on your interest rates on each account. Simply pay as much as possible toward the card with the highest interest rate, and when you have paid off that card, move on to the next one, and so on. Your decision about which will work best for you depends on the details of your debts, and even your personality. Only you can decide which one will work best for you. You will find calculators that will allow to you see how much you can save by paying down your debt faster here.

My card issuer closed a credit card that I was not using. Someone told me that they can't do that. Is that true?  

It is perfectly legal for a credit card issuer to close your account at any time, for any reason. FICO recently reported that 16% of consumers had at least one account closed in a recent seven-month period. Many issuers are closing accounts to minimize their exposure in this shaky economy. Here are two ways to help protect yourself:

1. If you have a major credit card you have not used in a while, dust it off and use it from time to time. Use it to buy things you would purchase anyway, and pay the bill in full to avoid interest charges. The card issuer may still decide to close your account, but it’s less likely to do so if you are using the card.
    
2. Make sure you have a back up credit card. If you are relying on just one major credit card, you may be in for a rude surprise if your card issuer lowers your credit limit, closes the account, or raises your interest rate. Again, it’s helpful to keep at least two major credit cards open and active so you’ll have a back up. You may want to consider the Union Plus Credit Card which offers consumer-friendly features not available on other major credit cards.

If I have opened retail accounts to get discounts, and now they are paid off. Can I get them closed and completely OFF my credit report?

Congratulations on paying off those cards! While you have been successful in eliminating those balances, you aren't likely to be successful at getting those accounts removed from your credit reports. Even if you close them, they will remain on your credit reports indefinitely, provided the information reported is neutral or positive. If there are late payments listed on those accounts, they can remain for seven years from the date you were late.

I assume you want to get them removed because you are concerned they may be hurting your credit scores in some way. However, the opposite is true. If they were paid on time, they demonstrate a history of managing credit well, and that’s a plus for your credit history. If you did fall behind, rest assured that as the negative information becomes older, it will have less and less of an impact on your credit.


Do you have any tips for negotiating with creditors?

Are you trying to negotiate lower interest rates, smaller monthly payments on your accounts? Or both? Either way, here are a few suggestions:

If you want a lower interest rate, simply call your card issuer and ask. Fewer issuers are willing to lower customer’s rates than in the past, but it doesn't hurt to ask. A warning: If you are trying to lower your rates because you are having financial difficulties, mentioning your financial problems may result in your card issuer lowering your credit limit or closing your account.

If you need a lower rate or a smaller monthly payment due to a financial hardship, make sure you gather basic information about your income and expenses head of time, and know what you can realistically afford to pay. Every credit card company has different policies with regard to hardship payment plans. Some will temporarily lower payments or interest rates, while others will offer no concessions at all.

If your interest rates or monthly payments are making it impossible for you to get out of debt, your best bet is to work with a reputable credit counseling agency that can negotiate on your behalf. Union Plus Credit Counseling can help with a free credit counseling session, budget analysis and money management advice. Complete a confidential request for consumer credit counseling online or call 1-877-833-1745 - available 24/7.


Will a secured card for my wife help repair her credit and will it affect my credit score?

You can tell your wife that a secured credit card is an excellent way to rebuild her credit. With a secured card, you place a security deposit with the card issuer. In exchange, you get a major credit card you can use just like any other major credit card. If you pay on time, you’ll build a positive credit reference that will help your credit rating.

A secured card is not the same thing as a debit card or a prepaid Master Card or Visa card. Those types of accounts are not generally reported to the major credit reporting agencies, so they do not help you build a credit rating.

Please make sure your wife avoids “fee harvester” credit cards. These are cards that promise a major credit card regardless of your credit history. However, when you get one of these cards you are billed immediately for all kinds of fees. It is not unusual for a one of these programs to offer a cardholder a credit limit of $300, but charge $275 in fees the first month! Unlike a secured card, where you get your deposit back when you close the account or graduate to an unsecured card, those fees are never refunded.

You may want to tell your wife about the Union Plus Secured Card which offers a better deal than most secured cards.


What is the maximum percentage rate that credit card companies can charge?

Credit card companies can typically charge whatever interest rate they want. That’s why we are seeing interest rates today as high as 37%! Most credit card companies are based in Delaware or South Dakota, where there are no caps on interest rates. They can then send those cards to consumers across the country, regardless of any state caps on interest rates.

The Union Plus Credit Card caps retail rates at 22.99% and limits penalty rates to 24.99%.


I want to refinance my mortgage but am upside down in my house. What can I do?

You may be eligible for one of the new programs designed to help keep homeowners in their homes.

The Making Home Affordable program may be an option as long as your mortgage balance is not more than 105% of your home’s value. If you meet the program qualifications, your lender will refinance your loan into a low-rate loan with a fixed interest rate.

If you owe more than 105% of your home’s value, you may want to check out loan modification through the Home Affordable Modification Program. If you are eligible, your lender can reduce your interest rate to as low as 2% in order to get your monthly payment down to a point where it is about 31% of your gross monthly income. If you can stick with the new, lower payments for three months, your rate will be fixed for five years. In addition, your lender may be able to stretch out your loan to forty years, forgive part of your balance, and/or help negotiate forgiveness of a second mortgage, if you have one. You can learn more about these programs at MakingHomeAffordable.gov 

In addition to researching these programs, I would recommend you call the Union Plus Save My Home Hotline to learn about all your options.

If you cannot refinance or modify your loan, you may want to consult with a bankruptcy attorney to find out whether bankruptcy can help you save your home. Call the special bankruptcy line at Union Plus Credit Counseling at 1-866-279-7197 for bankruptcy counseling. The fee will be waived under the Union SAFE benefits program. You can also use the Union Plus Legal Service for discounted bankruptcy attorney fees.


I canceled both of my credit cards and only use my debit card. Does using my MasterCard debit card help my credit?

Debit cards are generally not reported to the credit reporting agencies, and do not help build your credit rating. You may want to consider keeping one major credit card to help maintain your credit scores. Credit cards also offer additional protection in the case of purchase or billing disputes and can be especially valuable for shopping online, as well as when you travel. 


I'm using all my income to pay down my debt. Should I save a little or continue paying off my debt?

Congratulations on paying down your debt! In the past, I may have recommended that you use all your extra cash to pay down your debt. After all, you could always use a credit card in case of a true emergency. But with card issuers cutting credit limits and raising interest rates these days, you are probably better off building a basic emergency fund before you commit all your money toward paying down your debt.

If you would like a professional to help you review and fine tune your budget and debt reduction plan, take advantage of the free budgeting session available through the Union Plus Credit Counseling Service. It’s free and confidential, and you may find ways to pay off your debt even faster!


How long does a bankruptcy stay on your credit report and how does it affect borrowing down the road?

Filing for bankruptcy is very stressful, and if you must file you are probably worried about how you’ll ever manage to get your credit on track. But rest assured, you can rebuild good credit after bankruptcy – perhaps sooner than you think.

By law, bankruptcy can be reported on your credit report for up to ten years from the date you file for bankruptcy protection. However, the three major credit reporting agencies will voluntarily remove a Chapter 13 bankruptcy (where you pay back some of your debt over time) seven years from the date you file. In addition, any individual accounts that were included in your bankruptcy may include a notation such as “included in bankruptcy” or “charged-off.” That information will remain on your credit report for seven years.

While bankruptcy is a serious negative blow to your credit, it does not mean you be locked out of the credit system for the next 7-10 years. In fact, you can begin to rebuild your credit the moment you file. Here’s what you can do:

1. If you keep any debts out of your bankruptcy, or continue to make full payments on loans such as your car loan or mortgage, be sure to pay them on time each month. Those credit references will be very valuable as you begin to rebuild your credit.
    
2. About two months after your case is completed (discharged), order your credit reports through AnnualCreditReport.com and check to make sure that all your accounts are reported correctly. Those that were wiped out (discharged) in your bankruptcy, for example, should show zero balances.
    
3. As soon as your case is completed, start building positive new credit references. A good place to start is with a secured credit card, and the Union Plus Secured Card is an excellent one to help you get back on track.

If you haven’t already filed for bankruptcy, call Union Plus Credit Counseling Service at 1-877-833-1745. If you need the mandatory bankruptcy counseling that is required before you file. Your counseling fee will be waived under the Union SAFE benefits program. You can also use the Union Plus Legal Service for discounted bankruptcy attorney fees.


Is there a way where credit card companies can work with people that are having hard times, and is it possible to have forbearance put on credit cards?

Credit card companies will often work with consumers who are in a financial hardship. Though they don’t usually suspend payments all together, they may reduce interest rates, fees and/or payments temporarily in hardship situations. Contact the Union Plus Credit Counseling Service for help negotiating repayment plans with your creditors. Professional counselors are available 24/7 online or by calling 1-877-833-1845. And through the Union SAFE program, if you decide to enter a Debt Management Program, your set-up fees will be waived (a $75 value) and your monthly fees will be refunded after one year of successfully paying your debts through the DMP.

Tip: If you are a Union Plus Cardholder, you may be eligible to skip two payments a year (and up to four payments a year – three consecutively – if you are on strike). Your account must be in good standing, including a history of on-time payments, and you must meet eligibility requirements. Finance charges continue to accrue, but no penalty fees apply. If you want to take advantage of this benefit, call the Union Plus Credit Card at 1-800-622-2580 before your payment is due.


I want to refinance my mortgage because of the lower rates. My FICO score went down from the 700s to the 600s due to late credit card payments after being laid-off from a per diem job. How can I refinance? I have started to repay my credit cards. What strategies can I use to put myself in position to refinance my mortgage?

As you’ve probably discovered, most lenders are requiring higher credit scores for new mortgage loans as well as refinance loans. However, there may be alternative programs that can help.

If you have not been late on your mortgage payment in the past year, you may want to find out if you are eligible for the Making Home Affordable program. If your lender participates and you meet the program qualifications, your lender will refinance your loan into a low-rate loan with a fixed interest rate.

If you don’t qualify for the program, you may be eligible for the Home Affordable Modification Program. If you meet the program guidelines, your lender can reduce your interest rate to as low as 2% in order to get your monthly payment down to a point where it is about 31% of your gross monthly income.

If you do not qualify for either of these programs, I would still recommend you call the Union Plus Mortgage Program at 1-800-416-5786 (8 am to 10 pm ET Mon - Fri; 9 am to 5 pm ET on Sat.) to find out what you can do to get your credit back on track so you can refinance in the future.

Finally, if your goal is to rebuild your credit, you may want to listen to the Smart Credit Strategies for Union Members Webinar, where we discussed reliable methods for repairing your own credit.


Is it true that if a company buys a debt and they contact you to settle, the 7 years starts over again?

When a debt is turned over to collections, there are two time periods you’ll want to understand. One is the time period for reporting the debt on your credit reports, and the other is the statute of limitations.

With regard to your credit report, the good news is that collection accounts may be reported for up to seven and one-half years from the date you first fell behind with the original creditor. Making a payment arrangement on the account does not start a new period. It sounds like your debt is already seven years old. If that’s the case, it should not be on your credit report – or scheduled to fall off in the next six months. Be sure to check your credit reports at AnnualCreditReport.com to make sure.

If you did fall behind on this debt more than 7½ years ago, then the only way it can appear on your credit report again is if the creditor or collection agency takes you to court and wins a court judgment against you. (By the way, if the debt buyer is threatening to report it to the credit reporting agencies if you don’t pay, that threat may be illegal.)

The statute of limitations, on the other hand, refers to the time period the creditor or collection agency can sue you to collect a debt. In most states, the statute of limitations for credit cards and other debts is between four and six years. If a creditor tries to sue you to collect a debt that is too old, you can raise the statute of limitations as a defense and the creditor will lose the case. If you agree to make payments on a debt, the statute of limitations may start over again, although that won’t affect how long the account can appear on your credit report.

It is important to understand your rights when dealing with debt collectors. You may want to check out the e-book Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights, which is available to union members at a 50% discount here.


We pay off our credit cards in full each month. Would it be smarter to pay with cash?

Not necessarily. Credit cards offer several advantages over cash:

1. If you lose your credit card, you are not likely to be responsible for any fraudulent charges. If you lose cash, it’s probably gone for good.
    
2. Credit cards offer protection in the case of a billing dispute with a merchant. You may be able to withhold payment while your credit card company investigates the matter.
    
3. You may earn rewards for credit card purchases.
    
4. A credit card paid on time over time is one of the strongest references on your credit report. Strong credit scores can earn you the best auto and homeowner insurance rates, as well as better interest rates when you do borrow.

As long as you pay in full each month and don’t overspend, credit cards can be very convenient!


I have $15,000 in an IRA and $15,000 in credit card debt. Should I sell the IRA and pay off the credit card debt? I have about $2,000 in savings. I receive income from Social Security and pensions. My husband and I are 79 and 83 years old. We own our own home. Would the tax owed cancel out my cash from the IRA?

Please explore other options before you use your retirement funds to pay your credit card debts. Your retirement accounts are protected from creditors, and using them to pay debt should be your last resort. You’ll need to talk with a tax professional about the tax impact of cashing in that retirement plan so you can figure that cost into the equation.

You may be able to conquer your debt without tapping your retirement funds. Call the Union Plus Credit Counseling service at 1-877-833-1745 for a free credit counseling session. They are available 24/7. You can also go online to complete a confidential request for credit counseling.


My income is pretty low. Is my low income limiting my credit score?

Income is not a factor in calculating your credit scores. That means you can build a great credit score on any income!


What do you do if income is now lower and your mortgage rate is still the same? My husband had a job loss and I work for less now. I would like to know how I can get my mortgage lowered. I was told I had to default on my loan to get it lowered but I don’t want to ruin my credit.

Many homeowners have been frustrated to learn that their lenders will not modify their loans unless have fallen behind. The good news is that under the new Home Affordable Modification Program, lenders are encouraged to modify loans before homeowners fall behind. The goal of the program is to get your monthly payment down to a total that is about 31% of your gross monthly income. If you qualify, your interest rate may be lowered to 2%, and your lender may also stretch out your loan or forgive part of the balance. You can find out whether you may be eligible at MakingHomeAffordable.gov. You can also call the Union Plus Save My Home Hotline to learn about other options.


My student loan is going to be about $50,000. What if I cannot afford the monthly payment?

There is a new program available to help borrowers with federal student loans. It’s called the Income Based Repayment Program, and it can help reduce your monthly payments based on your income. In addition, you may be eligible for loan forgiveness after ten years if you work in public service, or twenty-five years otherwise. Visit IBRinfo.org to learn more.