Your Financial Health, Ask Jamie - Part 1

July 03, 2009

Improving financial health

In part one of our financial Q and A series, Jamie answers questions about your 401(k), refinancing a mortgage, what to do if your credit score is bad, and recovering from debt.

This month, Jamie answers questions about 401(k)s, getting out of debt, mortgage issues, improving your credit score and more.

From our readers

Dear Jamie,
What's the best way to handle a mortgage when the mortgage is more than the home is worth? Refinance? Short sale and get out? Or foreclosure? - Rob, Lake Worth, FL

Dear Rob,
There are considerations for each of the options you mention:

  1. If you make your mortgage payments comfortably, aren't expecting to sell, and view your home as your castle, you may choose to do nothing. The housing market fluctuates and we're experiencing a downturn in real estate values across the country that should stabilize over time.
  2. If you can't afford your mortgage and owe more than the home is worth, you may be able to negotiate with your lender. For instance, forbearance would allow you to pay a lowered amount or nothing at all for a specific period of time. A repayment plan would allow you to pay an additional amount each month until the past-due amount is paid current. And a loan modification alters the terms of the original loan.
  3. If keeping your home isn't an option, you could initiate a short sale. This is where the lender allows you to sell the home for the balance owed on the mortgage, generally forgiving the remainder of what is owed on the loan. A short sale will negatively affect your credit, but potentially less than a foreclosure. Keep in mind that there may be tax implications for the amount of forgiven debt. You need to consult a tax advisor to determine how this option may affect your particular situation.
  4. Foreclosure should be seen as the last resort because it negatively affects your credit standing and ability to obtain credit. Explore and weigh your options in more details at www.makinghomeaffordable.gov
  5. Another option would be to work with a credit counselor to negotiate with your mortgage lender and/or other creditors if applicable. Be aware of counseling scams at www.creditcounseling.org, which allows you to find a counselor in your area who may be able to assist you on an individual basis.

Dear Jamie,
I appreciate the article regarding how to keep your credit score healthy, but what if one already has a bad credit score? Can you assist with steps to help remedy a poor score? - Michael, Houston, TX

Dear Michael,
Repairing your credit and credit score is possible, though it can take some time and dedication. Let's start with the fundamentals:

  1. Pay your bills on time. If you're past due with creditors, get caught up and stay current.
  2. Be aware that collections will still stay on your credit report, generally up to seven years. So the sooner you're current, the faster your credit will improve.
  3. Keep balances low on revolving accounts such as credit cards. If you can, pay debts off versus moving them around. Closing credit cards doesn't necessarily help your credit, nor does opening credit you don't need.
  4. When rate shopping for a home loan or auto, do it within a short timeframe so it may be considered as shopping for one loan versus multiple new attempts to open credit.
  5. Re-establish credit and keep it current.
  6. Check your credit report annually at www.annualcreditreport.com.You're entitled to receive a free copy of your credit report from each of the three major credit bureaus each year. If there are discrepancies or errors, contact the credit bureau directly to have them corrected. Take a moment to reviewwww.myfico.com/CreditEducation for more detailed information and to learn more about managing your credit. Good luck!

Dear Jamie,
I'm afraid to do business with banks who are taking funds via the U.S. stimulus package? Should I be? **- Eydie, Louisville, KY

Dear Eydie,
The type of business you are doing with the bank will determine how safe your money will be. The FDIC (Federal Deposit Insurance Corporation) provides deposit insurance for member banks to guarantee the safety of your funds. Traditional bank accounts such as checking, savings, certificates of deposit, IRAs and some others are generally insured up to $250,000. Some investments such as stocks, bonds, investments or life insurance are not insured. When comparing financial institutions, ask questions about their FDIC status and request an FDIC brochure.

To review in detail what is, or isn't, insured by the FDIC, see the following Website
www.fdic.gov/consumers/consumer/information/fdiciorn.html

Dear Jamie,
I have temporarily stopped contributions to my 401(k): when should I start contributing again? Also, what is the easiest way to transfer my 401(k) to an interest-bearing account instead of the current "stock market" type account it was created in? - Karen, Louisville, KY

Dear Karen,

Many people today think this is a bad time to invest in their 401(k) plan because of the decline in the stock market. For those interested in long-term investing, this may be an ideal time to restart or continue contributing. As prices are generally low, you could potentially see significant increases in value over time. The key is to make a plan and re-evaluate along the way.

You should contact your 401(k) provider to see what transfer options are available. You may be able to select a Roth IRA option or disperse funds to another kind of account. Be aware of all tax and penalty implications if you choose to make changes. If you are closer to retirement, you may want to consult a financial advisor.

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