UnThreaded | Threaded | Whole Thread (15) | Ignore Thread Prev | Next
Author: SirWired Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308579  
Subject: Re: The long-awaited FAQ v3 Date: 1/24/2004 3:15 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 31
Okay, here it is! (Thanks for the help w/ the tags, fellow Fools!)

SirWired

Introduction
Section 1) Glossary
Section 2) Applying for and Gettting Credit
Section 3) Credit Reports, Scoring, and Credit "Repair"
Section 4) Using Credit
Section 5) Billing
Section 6) ID Theft, Fraud, and Billing Disputes
Section 7) Repaying Credit
Section 8) Credit Counseling, "Debt Reduction", "Credit Repair", BK
Section 9) Delinquent Debt and Collection Agencies
Section 10) Misc.

Introduction
   This FAQ is some of the accumulated wisdom of the Consumer Credit / Credit Cards message board. The answers contained herein are the result of countless hours of effort and elucidation by Fools everywhere. It contains the most-often asked questions encountered by this board, in a small effort to save your time and our time.
   I can't possibly acknowledge the contributions to this FAQ, which, although largely written by me, contains all the knowledge I have gained by hanging out with the regular Fools on this board. Thank you.
   If your question isn't answered here, http://www.ftc.gov/bcp/menu-credit.htm , may have the information you are looking for.
   As it stands, this is one of the most active message boards on the Fool, and in my humble opinion, the most helpful. While we can't solve your financial problems, we can certainly try and point you in the right direction.
   This FAQ contains some sections from the excellent previous version of the FAQ, written by NaggingFool.
   NOTE: One thing this FAQ does NOT cover is opinions of individual companies or organizations (good or bad). Such things would inevitably include my own biases, and therefore I do not think they are appropriate in a FAQ.

Section 1) Glossary

Originally by NaggingFool
Happy Dance - Happy dances are the best part of the credit card board. Each of us does a happy dance when we pay off a card or successfully lower an interst rate. When we share our successes on this board, others join in our happiness, and some of the success of others rubs off on us.

FICO - Fair, Issac COmpany. It refers to the "credit score" they produce and sell to lenders through Credit Bureaus. It is formed by running your credit report through a complex (and undisclosed) mathematical formula to produce a three-digit score. This helps the lender predict your probability of default. See section 3 of the FAQ for more info.

CCCS - Consumer Credit Counseling Service - A not-for-profit collection of local agencies created to assist troubled borrowers trying to get out of debt. Ssection 8 for more info.

BK - Bankruptcy

DH/DW/DF - Dear Husband/Wife/Fiancee

Efund - Emergency Fund (see section 4)

HEL - Home Equity Loan

FUSA - First USA Bank, N.A.

MIL/FIL - Mother/Father In-Law

OCC - Office of the Comptroller of the Currency - Regulates banks with an N.A. after the name. Generally considered to be very helpful and consumer friendly. http://www.occ.ustreas.gov/

OT - This is often put in the subject line of the post. It stands for "Off Topic". It means that the author of the post doesn't have an actual question or observation regarding Consumer Credit, they just want to vent, ramble, or something along those lines.

FTC - Federal Trade Comission - Enforces rules regarding (among other things) telemarketers, Credit Reporting Agencies (CRA's) and debt collectors. http://www.ftc.gov Also acts as a government clearance house for ID Theft complaints.

Snowball Method - See "Repaying Credit" for details.

Section 2) Applying For and Getting Credit

General Information -
   Don't apply for too many cards close together. Doing so will reduce your chances of being granted credit.
   Read all the fine print on the application. They are required by law to disclose all that information for a good reason. All sorts of lousy interest rates, outrageous fees, and unreasonable policies can be hidden there. When the card arrives in the mail, read the cardholder agreement, cover to cover. Every last eye-straining word.

What have you heard about xyzBancCorp? -
   Please, Please, search the board before you ask. We get too many of these to count. By all means, if someone has not asked about your bank before, and the people here are likely to know, go ahead.

I just got an offer for the Platinum/Titanium/Niobium/Depleted-Uranium/Gold/Silver/Super/Plus/Select card. Is it any good? -
   While Gold and Platinum Visa/MasterCard/AmEx cards denote some interesting benefits (i.e. warranty extension, travel insurance, car rental insurance, etc.) the whole precious-metals thing is usually just a pathetic marketing gimmick. A lousy card is still a lousy card, no matter the color. In any case, when you apply for one of these cards, you may end up with a "regular" card anyway. (Read the fine print on the application for details!.)

Should I get a check card instead of a credit card? -
   A check card is more-or-less like an ATM card that you can use almost any place that accepts credit cards. (Exceptions are car rental agencies and possibly hotels.) They are good for people that have trouble managing credit cards and paying them off in full every month. The disadvantages are a couple:
   1) If you pay your credit cards off in full, you are losing the 1-month "float" you get with most credit cards.
   2) If someone steals your card, you are usually not liable for the amount, just as with a credit card. However, if someone steals your number and empties your checking account, there is problem of bounced checks/auto payments until you detect it and convince the bank to put the money back in. With a credit card, the bank is out the money while you work out the dispute. With a check card, YOU are out the money.

I am a college student and don't know where to start getting credit. -
   Congratulations on coming here before getting credit cards, as the Fool has much to teach you. First, you should probably read the section of the FAQ on using credit before applying for it. When you have done that, simply wander down to your student center, and you should find a plethora of applications, if you are not tackled by the people offering free t-shirts to do the same thing. The fact that you have no income does not bother the credit card companies in the least. However, we strongly urge you to limit yourself to one card, and pay off the balance in full every month. Using credit responsibly and paying your montly bill in full and on time will go a long way towards establishing your credit history. Using credit irresponsibly will go a long way towards racking up debt that will leave you deep in hock for the next decade. Choose wisely.

Nope, I'm not a college student, but I just never needed credit before! -
   You never felt the urge to blow massive amounts of money you didn't have?!?! Congratulations! However, because of the bass-ackwards way in which credit approvals are done, someone that has been responsible with their finances, but has the means and ability to pay back credit is considered more of a risk than a college student with zero income. Go figure.
   First, see if you can join a credit union of some kind that offers a credit card. Check through your employer, your church, and even your neighbors to see if they know of one you can join. (Or, go here: http://www.cuna.org/data/consumer/whatis/join/statej_o.html) While Credit Unions are traditionally conservative lenders, they are more likely to treat you like an actual human being instead of a collection of numbers.
   Next, try to get a gasoline or store card. These are traditionally easier to get than a Visa/MC. However, the interest is very high, so make sure to pay in full every month.
   Lastly, try to get a secured card from a reputable bank. Look for one with low fees. http://www.bankrate.com/brm/rate/cc_home.asp may be helpful, as they have a search engine for credit cards. (Ignore their banner ads.)
   Don't apply for too many cards close together, as a run of applications is going to make you less likely to be able to get a card.
   Also: Do not sign up for any "Gold Buying Clubs" or some other similar such moniker you get in the mail. You are usually guaranteed a ludicrously high limit with no credit check. However, the annual fees can run into the hundreds of dollars, and your "credit line" gives you the privledge of ordering overpriced merchandise from a special catalog with terrible repayment terms. If it isn't a gas or store card, and it doesn't say Visa or Mastercard, run away!

I have poor credit due to financial difficulties, bankruptcy, etc. -
   First, think: "Do I really need credit?" If you got into this mess due to irresponsibility, consider seriously doing without. It can be done, life just becomes a little more difficult. If you have bad credit due to divorce, illness, unemployment, etc., see the question above for a solution.

Section 3) Credit Reports, Scoring and Repair

How do I get my credit report? -
   There are three major credit reporting agencies: Equifax (www.equifax.com), Experian (www.experian.com), and Trans Union (www.transunion.com). A general guideline is to pull your report from each agency once a year to check for errors or inaccuracies. If you live in certain states, or have recently been denied credit or employment due to your credit report, or or unemployed, you may be entitled to one from the appropriate agency for free. (Starting in 1/05, we all get a free report once a year! Woohoo!)
   The "consolidated" reports available through a great many online firms (including the big three agencies) do not have a stellar reputation for quality, or ease of use. If you have a dispute, it will usually not include all the addresses and forms you need. Moreover, the only way to get them is to sign up for some cumbersome "credit protection" or "Privacy Guard" service, or pay $24. Ordering from the agencies direcly will cost about $27. Don't bother with "consolidated". The easiest way to order your report is online at their respective websites.
   If you want to call or e-mail the "Big Three", here is their contact info:
   Equifax - https://www.econsumer.equifax.com/consumer/forward.ehtml?forward=credu_privacyrights
   TransUnion - http://www.transunion.com/Contact.jsp
   Experian - What! you actually want to mail them something! Experian doesn't think so. While a phone number and e-mail form can be found here: http://www.experian.com/customer_service/mail.html, you won't find a mailing address anywhere.
Here is one: Experian
PO Box 9595
Allen TX 75013-9595 (Better use certified return receipt.)

Pre-approved credit offers and "live check" loans really annoy me. How do I stop getting these? -
   Call 888-5OPTOUT


What is a Credit Score? -
   Your credit score is determined by a super-secret computer formula developed by Fair, Issacc Company. It is supposed to be a number that represents the probability of you defaulting on credit, all other factors being equal. Your FICO alone is not the determining factor as to whether or not you are denied credit, but a lousy FICO will likely hurt your chances. A FICO above 700'ish is considered good. Anything less may make it more difficult to obtain credit at the best terms.
   NOTE: A credit decision involves more than just your FICO score. FICO does not know your income, job, or lifestyle, or the amount of the credit you are applying for. All three factors can have an effect on your ability to get the loan. For instance, $15,000 in available credit and only $1,000 in balances will look good to FICO, but a prospective lender might look at it as possibly $14,000 in additional liability, should you go on a spending spree. Someone with no assets and a $12,000 income will never get a loan for a $2 Million dollar mansion, no matter how high their FICO is.

How is the FICO calculated? -
   Go to www.myfico.com Look at the links for "How scoring works", "Interpreting Scores" and the sample report. They will tell you more than I can fit in this FAQ. Ignore the links to buy your score. TransUnion includes it in their basic report for free.

How do I get my FICO? -
   Each of the three credit agencies will, as of this writing, give it to you for $12.95.

How can I get my score higher? -
   If you ordered a report with your score, it will tell you the top reasons why it isn't higher, and from there, you should be able to figure out what to do. If your report is above 700'ish, the reasons may look bogus. (i.e. "Credit History too Short" when you have had spotless credit for 15 years.) The reason for this is that once the score gets to a certain level, "15 years is too short" might only be reducing it by five points, but that still makes it one of the "top" reasons it isn't higher. Don't worry about it. Once you hit the prime range, it doesn't matter exactly what score you have.

There are mistakes in my Credit Report! -
   If you did as suggested and ordered your report directly from the agencies, they will include instructions, and sometimes even forms for starting a dispute. Follow the instructions. If you have trouble, consult http://www.ftc.gov/bcp/conline/pubs/credit/fcra.htm to learn of your rights.
   If there is an account on there that is not yours, and the creditor insists it is accurate, see the section on ID Theft, Fraud, and Billing Disputes

I want to get rid of the negative info in my report -
OR: What have you heard about xyzCreditRepair? -

   If negative information is inaccurate, follow the instructions included with your credit report.
   If the negative information is accurate, there is a complex, five-step process to having the information removed:
1) Wait
2) Wait
3) Wait
4) Go to step 1 until seven years have passed for "regular" negatives, ten years for a bankruptcy.
5) If it still won't go away, remind the credit reporting agency that the information is over seven years old.
   Seriously, there is no legal and ethical way to having accurate, but negative, information removed. Period. We aren't kidding or hiding something from you. No matter how much you pay a "credit repair" company, and no matter what they promise. See http://www.ftc.gov/bcp/conline/pubs/credit/repair.htm for more information.

The Bud Hibbs book (from section 9) and/or some other websites said I can get rid of all my delinquent debt and negative credit reports by disputing everything, suing, etc., even if true! What are you hiding?
   We are not hiding anything. If the debts are fraudulent, by all means, dispute, sue, and write away. We wish you the best of luck and will even help you.
   If your debts are valid, you should deal with the consequences of not paying back on time. Every credit agreement states that they can sue you for non-payment, that a delinquency will go on your credit record, that they can send collection agnecies after you, etc. If you don't like this, you didn't have to accept the credit in the first place. Now, we understand that getting into hock may not be your fault. If this is the case, you are legally entitled to a short explanation that will go to everyone that requests your report.
   Yes, while you may have some success in getting true, negative entries removed by disputing everything, it really is not ethical to so so on the basis of an assertion you know to be untrue. Think about it, if someone that you lent money to claimed that they don't know anything about your claimed debt because the record on the debt misspelled their name or address (this is something Bud Hibbs says can be used to dispute your debt), you would be pretty angry.
   The laws that were created to give consumers a mechanism to dispute inaccuracies are just that, a method to dispute wrong information. Just because they can be abused by those looking to escape the consequences of their actions is not an invitation to do so.


Section 4) Using Credit

Should I carry a balance on my Credit Cards to "build credit"? -
   While the bank will do everything in its' power to convince you to carry a balance, you really don't need to. Only a very few banks will cancel an active account that does not carry a balance. Just as long as you use your credit card and pay your bills on time, you will be building your credit.

How many credit cards should I have? -
   Two to three general-purpose cards. Personally, I carry no balance and have a total limit of $10K spread out on two cards. Unless you can get no other kind of card, avoid gas and store cards. The interest rate, should you ever carry a balance, is quite high.

Two credit cards aren't enough! What am I supposed to do if I have an expensive emergency? (i.e. getting laid off, expensive medical bills)
   Fools strongly suggest keeping 3-6 months of expenses in a no-risk account (such as a FDIC-insured money market) as an emergency fund. If you are laid off or having expensive medical bills, it is a REALLY bad time to be gettting yourself in debt. This doesn't imply you will be out of work for 6 months, but that amount is a decent guideline for a cash reserve.

When should I use credit, and when should I pay in cash? -
Examples of "good" debt -
"Regular" Mortgage - (less than 100% of the value of the house)
"right-side-up" car loan
student loans that will enable you to get a job good enough to pay them back
"Bad" Debt -
Credit Card debt
Mortgage over the value of the house
Paying 6-months same as cash deals after the 6-months are up. (The interest is high and retroactive.)
"upside-down" car loan (where you owe more than the car is worth)
Home equity for anything but home improvements
Home equity loan for home improvements with a sale value less than what you owe
401(k) loans
Payday Loans
Overdraft Checking Loans
"Signature" lines of credit

   Basically, if you can't afford something you want to buy with unsecured debt, don't buy it. Fools refer to this as "Living Below Your Means". Check out the board of that name for more details.

Section 5) Billing
How is credit card interest calculated?
   Well, as a good Fool, you shouldn't be paying credit card interest, since your credit card balances are zero... right? :-)
   Seriously, if you do not pay your entire credit card balance within the grace period detailed in your cardmemeber agreement (note: some cards do not have a grace period), you will pay interest on the outstanding balance the following month.
   Your statement should tell you what your daily interest rate, based on your annual interest rate. They usually charge you interest by taking your average balance over the billing period, and multiplying it by the number of days in the billing cycle. A notable exception is "dual-cycle" billing, as detailed in the next question.
   You should check your cardmember agreement for the final word on interest calculation. This information is also detailed on the original application, and sometimes it is also printed on the back of your statement.

What is this "dual-cycle" billing?
   First popularized by FUSA, this is method for the bank to take back your grace period if you carry over a balance. Basically, your finance charges are calculated by computing interest based on the last two months instead of just the current statement cycle. So, in the month you pay off an outstanding balance, the month in which you owe you will still be charged interest, since you carried a balance in the previous month. Avoid this by always paying off your balance. Or at least avoid issuers that use this method. (Read the application. It will tell you all about this.)
   This method makes sense for the bank, as it removes the free ride entirely for those that carry a balance. The drawback is that it may come as a surprise when you get a bill for a finance charges the month after you pay your bill in full.

My interest rate jumped and I don't know why!
   First, examine the last several months of statements very carefully, on the statement itself, or in an insert included with the statement, it may have mentioned your interest rate was going to increase.
   Of special note here are "fixed" rate cards. "Fixed" means that it does not automatically vary every quarter depending on the "prime" rate. It does not mean that it cannot be changed. The bank may change the rate by giving you notice in either a insert in your statement, or on the statement itself. However, if they do, you have the option of calling the bank and "refusing" the new terms. This will lock in your interest rate until the card is paid off. The drawback is that this closes the account to new charges, and you will need to find a new credit card.
   The notice of a rate change can be well hidden, so look carefully at every statement when it arrives. (As a side note, a bank that shall remain nameless attempted to give notice by printing the "notice" on the back of a flyer for magazine subscriptions. The government was not amused by this trick and the bank was forced to refund the interest, or face the wrath of regulatory proceedings.)
   If you have been late making a payment, a increasingly common tactic is to raise your rate to a "penalty" rate for a certain amount of time. This is on top of whatever late fee you may be charged. This should be detailed in your cardmemeber agreement. (You did read it, didn't you?)

How can I get my interest rate reduced? (Assuming you are not in financial distress)
   To get a rate reduced, you may be able to cajole a customer service rep or his/her supervisor into doing so. If you are a good customer with a good credit report, threatening to close the account and/or transfer the outstanding balance.
   If you are in financial distress, see the section on Credit Counseling.

Section 6) ID Theft, Fraud, and Billing Disputes

How do I dispute a charge on my credit card?
   First, read your cardmember agreement. (you did save it, didn't you?) It will spell out in excruciating detail what you must do, and in what timeframe. First try and solve your problem with the merchant directly. Next, read http://www.ftc.gov/bcp/conline/pubs/credit/fcb.htm
   Keep written records of everyone you talk to, and get all promises in writing. If the bank dispute deadline is approaching in the next couple of weeks, call the bank to start the dispute over the phone. Many banks will require you to mail something in to start the process. (certified return-receipt is the Fool's friend when dealing with a bank!)

My credit report lists an account that isn't mine, and the source of the account insists it is accurate!

or

I think I may be a victim of ID theft! What do I do?

   Contact the FTC (http://www.consumer.gov/idtheft/), your local law enforcement agency, and all three credit bureaus. Have the bureaus put a "fraud block" on your report. This means that creditors should contact you before opening credit in your name. Dispute all accounts that are not yours with the credit bureaus. Tell them that the accounts are fraudulent. This is a situation where it is a good idea to also call the holders of the fraudulent accounts so the appropriate freezes may be made immediately. However, follow up all comuminications in writing, and use certified return receipt.
   If your social security number has been stolen, contact your local Social Security Administration office for help. In some circumstances, they may issue you a new number.

My bank has screwed up my bill and is charging late fees where it shouldn't, the wrong interest rate, etc.
   Read http://www.ftc.gov/bcp/conline/pubs/credit/fcb.htm
   Also, since you probably don't feel like suing the bank if they blow you off, contact the regulatory agency that oversees the bank. These agencies have been reported to be quite helpful in assisting consumers. The FTC is not geared to assisting individual consumers directly in disputes (they look for trends so they can file formal regulatory actions.)
   Search here to find the appropriate agency:
http://www.ffiec.gov/nic/ (and click on the link to "Institution Search)
   From there, you will be sent to one of four agencies:
The Office of the Comptroller of the currency: http://www.occ.ustreas.gov/customer.htm
The FDIC: http://www.fdic.gov/consumers/questions/consumer/index.html
The Federal Reserve: http://www.federalreserve.gov/pubs/complaints/
The National Credit Union Administration: http://www.ncua.gov/org/orgchart/oig/CUM1.htm

Section 7) Repaying Credit

I have heavy debt, but I can make my payments. However I don't feel I am making any progress.
1) Cut up ALL your credit cards. (Except possibly for one for dire emergencies. Some Fools suggest freezing it in a block of ice, to prevent impulse spending.) Continuing to spend on credit cards will only make your situation worse. (NOTE: It is not suggested that you close the account unless the balance is zero.)
2) Start "Living Below Your Means". If you are serious about getting out of debt, this is a required action. Unless you can spare additional cash beyond the minimum payments, you could be paying your credit cards for decades.
2) The "snowball method". This is described in the "Fool's School" off the Fool homepage. Basically, pay the minimums on all balances, except for the one with the highest interest rate. To that account, apply every last dime of spare cash. Pick off the accounts one-by-one, until they are all gone. For a handy-dandy spreadsheet that will help you out with this, go here: http://www.geocities.com/schizeckinosy/Snowball.html. This calculator will also help you figure the effect of special balance transfer and introductory offers.
3) Balance Transfer shuffles - Transfer the balances from high-interest accounts to those with a lower permanent rate. You should not necessarily then close the high-interest account. (See the questions concerning FICO below.) You can also take advantage of offers that will give you a lower rate for a specific period of time on the transfer. However, unless you pay the balance off before the intro period ends, it may not save you much, if any, money. WARNING: Examine the fine print of your cardmember agreement and talk with a customer service representative of the card you are transferring to to check for fees (if any) associated with transfers. Also, there may be very steep penalty rates if you are late on a payment.

I'm deep in debt and can't make my minimum payments! What do I do? -
   This is probably the most important question we can help you with. I will give a few general tips here, but for more advice, by all means post to this board for more help.
1) Cut up ALL your credit cards. (Except possibly for one for dire emergencies. Some Fools suggest freezing it in a block of ice, to prevent impulse spending.) Continuing to spend on credit cards will only make your situation worse. (NOTE: It is not suggested that you close the account unless the balance is zero.)
2) Start "Living Below Your Means". If you are serious about getting out of debt, this is a required action. Unless you can spare additional cash beyond the minimum payments, you could be paying your credit cards for decades.
3) Try and get your credit card interest rates lowerered - Call the company and ask to have the rates lowered. If the first person you talk to refuses, ask for a supervisor. If he/she refuses, threaten to transfer the balance to a lower interst card and close the account. (They may call your bluff and still refuse, but they won't actually close it without your say so.) Be polite. Yelling and screaming will NOT do you any good. If still unsuccessful, try again in a few months.
4) See the section on Credit Counseling and Debt Reduction.
   If you want more specific advice, post here to the Fool describing your situation, and we can possibly help. The more information you provide, the better. (i.e. Balances, interest rates, income, fixed expenses, etc.)

Is it ever a good idea to carry a balance on a credit card? -
   No. See the first question in Section 4.
   You should never put "regular" expenses (gas, groceries, etc.) on a card on which you carry a balance. If you must do so to make ends meet, you need to follow the instructions on getting out of debt detailed above. Almost as bad is putting large luxury purchases on credit. (furniture, electronics, etc.) You should save up for such things ahead of time. (A possible execption would be "6-months, no interest" deals. However, if you do not have the loan paid off by the time the 6-months are up, the interest is ususally exhorbinant, and also retroactive to the origination date.)

Do I pay off my credit cards/student loans/mortgage before investing? -
   If your employer offers a 401(k)/503(b) plan, at the very least invest the maximum amount your employer will match. (if applicable)
   After that, pay off ALL your credit cards. Period. End of story. They are most likely going to have an interest rates far exceeding what you can reasonably expect to earn on your investment, after costs and taxes. Paying them off is like an instant 10+%, guaranteed, tax-free return. No investment can do that. There are certain very limited exceptions to this rule, (6-month, no interest deals) but that is it.
For a student loan: It depends. If you have a loan locked in at a low interest rate, maybe you can invest first. Otherwise no. The same guaranteed-return statement above applies here. (NOTE: Student loan interest is sometimes tax-deductible. This can lower your effective interest rate.)
Mortgage: For a regular (as opposed to sub-prime) mortgage, it is purely an emotional decision. From a financial perspective, the historical, after-tax, returns from the stock market exceed that of tax-deductible mortgage interest. From an emotional perspective, it can be a great lift to own your home free-and-clear. Obviously, if the mortgage is paid off it takes a lot more traumatic financial event to have you leave your house
   As a side note, you should really build up a 3-6 month e-fund before you go investing "spare" cash.

Should I use a Home Equity Loan to pay off ugly credit card debt? -
   It depends. The general consensus advice is no. There are three major pitfalls:
   1) You are trading unsecured for secured debt. Instead of a credit card company sending mean letters for non-payment, a mortgage lender can take your house. Bad.
   2) This was a trick question. You are not "paying off" debt. You are merely shifting it around.
   3) If you continue to run up your credit cards (as opposed to cutting them up), you will be back in the exact same spot in a couple of years, only now you will owe at least twice as much money. Ouch. Even though you may think "this won't happen to me" remember you probably never thought you would spend yourself in a hole this deep to begin with. You MUST change your spending habits.
   That said, the interest rate is usually lower, and the interest may be deductible.

Should I use a 401(k) loan to pay off my debt? -
   While tempting, generally no. Yes, you are paying interest to yourself, and it gives you a guaranteed minimal return on your 401(k) investment. The downsides? First, that money is for your retirement, and stocks have returns that are historically higher than what you would be paying yourself in interest. Next, perhaps most important, is most 401(k) loans are payable in full within a month if you quit, are laid off, or are fired. Ouch. If you don't pay it back, it will be taxed as a premature withdrawl and you will owe your marginal state and federal tax rate + a 10% penalty. Also, see notes 2 and 3 above on Home Equity Loans.

Should I cash in my IRA to pay off debt? -
   No. Uncle Sam will usually immedately take your marginal rate + 10% for using it that way. You are also shortchanging your future.

Section 8) Credit Counseling, "Debt Reduction", Bankruptcy

None of the tips in "Paying Credit" worked, and I am still deep in hock! I want to sign up for credit counseling. -
   Generally, a legitimate credit counseling firm will work with your creditors to reduce your interest rates, and set up a repayment schedule that you can afford, given a bare-bones budget. You will be forced to cut up all your credit cards (a good idea anyway), and not make any new applications for credit. While you are in the program, there will be a notation on your record that you are in counseling, but this notation should disappear when your repayment plan is complete.
   The oldest such agency is the Consumer Credit Counseling Service, which has offices in most cities around the country. The sort of service you receive will vary from office to office, as each operates almost independently. Note that CCCS (along with most other credit counsulors) are funded, at least in part, by creditors. Their priortity is to get your debt repaid. Some might argue that this is a conflict of interest. However, nobody forced you to sign for the debt you have gotten yourself into, so creditors expecting you to keep a promise to repay is not unreasonable, in my opinion.
   Fools have also reported success with myvesta.org.
   NOTE: Non-profit does not neccessarily mean what you think it means. While the service itself may be "non-profit", they may force you to use a certain payment processor, or similar such arrangement. The principals of the firm may indeed derive significant financial benefit from running the service. (Ameridebt is one well-known example.)

Is signing up for a debt reduction service a good idea? They promised to settle my debt for "pennies on the dollar." -
   In a word, NO. Several reasons:
   1) No matter what the ad for the agency tells you, your credit record will be destroyed for seven years. Massive settlements for far less than the amount owed will look about as bad as a bankruptcy.
   2) You don't need to pay someone to not pay your creditors and then settle for less. You can do that yourself for free. If you really want to destroy your good name, and go back on your good-faith promises and contractual obligations to your creditors, no need to pay anyone to do that for you. Simply stop sending your creditors money. In short time, they will begin harassing you for payment while destroying your credit record. (They will do this with or without the help of an agency.) You can settle then.
   3) You will probably owe income taxes on the forgiven amount. At the end of the year, the settled creditor will probably send you (and the IRS) a 1099, detailing the amount forgiven. (The ad you saw on TV didn't mention that, did they?) You will owe your marginal income tax rate on that amount. This instantly reduces the amount of the "settlement" by whatever you are going to owe in tax in one nasty lump sum.
   4) Really, it's a bad idea, trust us. We don't work for your creditors, and we still think it's not a good thing to do.

Should I declare bankruptcy, and just get this mess over with? -
   First, a Consumer Credit/Credit Card Board Bankruptcy Warning:
   WARNING: Bankruptcy was created to help those that, through uncontrollable and unforseeable financial circumstances, cannot pay their debts. (i.e. Huge medical bills, laid off for an extended period of time, death of a wage-earner, etc.) If you got into your current fix through financial irresponsibility (Buying a too-nice car or house, and generally living above your means.) the Fools here will have little sympathy (i.e. Nuclear-charged flame-throwing) for you if you do not appear to have learned from your mistakes. The view is that it is a bad thing to have others pay high interest rates to make up for your write-off. If you want bankruptcy advice, make crystal clear that you have learned your lesson.
   There are two main types of bankruptcy: Chapter 7 and Chapter 13.
   In a Ch. 13, it is almost like a court-mandated credit counseling. You will be ordered to adhere to a bare-bones budget while you execute a payment plan lasting up to five years. At the end of the repayment plan, assuming you do not go back on it, the remaining balances will be erased. The advantage of this type is you are allowed to keep more property than in Ch. 7. (Along with the moral satisfaction of satisfying at least SOME of your debt obligations.)
   In Ch. 7, your unsecured debt will be erased, but any assets over a certain amount will be taken away from you, including possibly your house and car.
   New bankruptcy law taking effect soon will force individuals meeting certain criteria into Ch. 13, as opposed to 7.
   Bankruptcy will make it very difficult to obtain credit at reasonable prices for quite some time.

Section 9) Delinquent Debt and Collection Agencies
I have just been contacted by a collection agency, and I don't know what to do!
   First, calm down.
   While there may be good, honest, hard-working debt collectors out there, you probably wouldn't be reading this if that is the kind you have.
   If you are contacted by one:
1) Don't Panic. You WILL NOT go to jail for not paying a debt.
2) Know your rights. Read http://www.ftc.gov/bcp/conline/pubs/credit/fdc.htm No matter what the collector tells you, you have those rights. (In fact the FTC has all kinds of information all Fools should know here: http://www.ftc.gov/ftc/consumer.htm)
3) Some Fools have found www.budhibbs.com a useful guide to dealing with debt collectors. While I don't personally agree with some of his methods detailed on his site, his "Cease-Comm" letter has been cited by many as helpful.
4) Do you, in fact, owe the debt? If so, try and work out a payment arrangement in a calm courteous manner. If they are rude to you, maintain calm, and tell them the facts. Yelling won't help you, as they get yelled at every day.
5) Get everything in writing. Do not commit to ANYTHING over the phone. Zilch. Nada. NEVER, EVER give a collection agency your account numbers over the phone. If they offer to settle for less than the amount owed, do not give them one thin dime before you have the settlement agreement in writing.
   If they violate any of your rights, do not hesitate to report them to the FTC, the original creditor, and the Attorney General both in your state, and in the state which the agency is based.

I have not paid Debt to XXCorp for several years, and they have stopped bothering me about it, or they can't find me. Do I have to pay? -
   Well, if you do owe the money, and you can afford to pay them back, you should do so. You borrowed the money, they lent it to you in good faith, you should give the money back.
   That said, depending on the state you live in, the statute of limitations may have expired on the debt, making it uncollectable. However, if the statute has not expired, they may sue you and still obtain a judgment against you on the debt. The judgment (along with wage garnishments and propery liens) may be renewed for as long as the creditor feels like doing so, making this an albatross around your neck forever. Remember, unsecured debt doesn't mean you can get out of the debt without giving up property. It just means it is more work for the creditor to take it from you.

I did not pay a debt for several years, and now a collection agency is saying I owe twice the principal! What happened, and do I have to pay? -
   All creditors I am aware of, including my friendly Credit Union I do most of my business with, state that if you default on a debt, you are responsible for accrued interest plus reasonable collection costs and legal fees. If you add up the interest over the years, remembering to compound, and add on "reasonable costs", you will find that a doubling may not be out of the question. That being said, creditors are very often willing to negotiate for a lesser amount, for fear of ending up with zero.

My creditors sent the bill to the wrong address, and now two years later, they want a boatload of money! -
   Well, legally, it is your responsibility to pay your debts, even though you never received the bill. That said, most creditors are willing to work with you, possibly forgiving late fees, etc., if the error was their fault.

Section 10) Misc.

Who on earth is WildGirl, and why aren't all of her posts marked OT?
   WildGirl is an institution on this board. If you have about three months of vacation, and a lot of visine, you can peruse the full WildGirl saga on this board. It certainly won't fit in this FAQ. :-)

What are all those little stars? -
   The more posts you make, the more stars/better stars you get.

How do I bold or italicize my posts? -
   You need to surround the text with HTML tags (Ignore and do not use the spaces I have put between the brackets. < b > bold < / b > or < i > italics < / i >.
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (15) | Ignore Thread Prev | Next

Announcements

TMF Credit Center
The Motley Fool Credit Center arms you with real tools and simple messages, that will help you in every credit situation.
Managing Your Wealth
Our own TMFHockeypop from Rule Your Retirement fame on the TV show Managing Your Wealth.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Post of the Day:
Value Hounds

Back to the Future Buffalo Wild Wings
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement