Your Financial Health, Ask Jamie - Part 2

July 04, 2009

Financial advisors providing advice

In part two of our financial Q and A series, Jamie answers questions about bankruptcy, finding credit help when unemployed, how credit consolidation works, and more.

This month, Jamie defines the pros and cons of bankruptcy, finding credit help, how credit consolidation works, getting out of debt, finding your credit score and more.

Dear Jamie,
Are there any companies who offer free help to repair credit reports? Mine is a mess and my husband is unemployed so I do not have the funds to pay someone to help with our financial mess.- Christy, Nashville, TN

Christy,
You can do the same things to repair your credit that a company could do. The first step is to know what is being reported on your credit report. Annually you can obtain a free copy of each of the three major credit reports for free at Annual Credit Report.

Once you have your credit report you will need to review every item in detail, highlighting any items that have been reported incorrectly, accounts that have been charged-off or sent to collection, or accounts with balances over the credit limit. Contact any creditors where you feel the information reported is incorrect. If the creditor cannot substantiate the information reported, they have an obligation to correct or remove the information.

For accounts that have been charged-off or sent to collections, contact the creditor to make arrangements to repay the account, potentially you can negotiate a lower payment schedule. Work to pay down balances on accounts over the limit as your credit score is impacted by your amount of available credit. Repairing your credit takes planned discipline but can be done.

With your husband unemployed and with the reduced income, you may consider a credit counseling agency Credit Counseling. Many have very low fees and can work with creditors to negotiate reduced payments and rates.

Dear Jamie,
I let a couple credit cards sit unused and found out that they were cancelled due to disuse. Can that affect the FICO score? Is it better to use the cards a little and pay off the balance quickly?- Steve, Milwaukee, WI

Steve,
The closing of credit cards can affect your FICO score, lowering the amount of available credit reported on your credit report. MyFICO.com provides the following tips in regard to amounts owed:

  • Keep balances low on credit cards and other "revolving debt." High outstanding debt can affect a credit score.
  • Pay off debt rather than moving it around. The most effective way to improve your credit score is by paying down your revolving credit
  • Don’t close unused credit cards as a short-term strategy to raise your score.
  • Don’t open a number of new credit cards that you don’t need, just to increase your available credit.

For these and other tips on increasing your credit score, visit MyFICO for more details.

Dear Jamie,
I've heard about Credit Consolidation, is this a good option to lower or payments, how does this work?- Aurora, Aurora, CO

Hello Aurora,
Credit consolidation generally consists of transferring all of your debt into one amount with another agency where they, in turn, lower your repayment amount by extending the term over which you will be paying. While this may seem like a good option, financially it is not the best answer if you can afford your current payments. By extending the amount of time over which you repay your debts, you will increase the total amount you repay on the debt. This might be a good option only if you cannot afford to make your current payments, but you may be able to work with your current creditors to negotiate reduced payments until your cash flow improves. Good luck!

Dear Jamie,
What are the advantages/disadvantages of bankruptcy?- Carla, Louisville, KY

Dear Carla,
The decision to file bankruptcy should be weighed very carefully as bankruptcy is one of the worst things you can do for your credit. Only after reviewing all options should you make a decision.
Bankruptcy is a legal way to release you from financial obligations; stopping collection calls, garnishments, and foreclosure proceedings. In a bankruptcy proceeding, a judge will decide if and which creditor obligations can be removed. Also, there are different types of bankruptcies.

Chapter 7 bankruptcy

Chapter 7 bankruptcy allows debts to be forgiven without repayment of the obligation. Secured obligations such as automobiles and homes can be reaffirmed, meaning you agree to continue payments, in order to keep the property. Some states require you to complete a means test to determine how much debt should be forgiven and how much debt an individual should be able to repay.

Chapter 13 bankruptcy

Chapter 13 bankruptcy restructures debt into a repayment plan that is agreed upon by the individual and creditors, allowing someone to keep their property and repay debts over a 3-5 year period. Debts can be settled for less than full amounts and some debts are forgiven entirely.Bankruptcy is reported on your credit report for up to 10 years and will be taken into consideration by creditors when you apply for loans or credit cards, making it harder to obtain credit. Employers will see your bankruptcy filing when pulling credit in relation to a job application. Bankruptcy records are public and filings can be viewed by anyone; friends, family, coworkers. In general, most people look back and consider it one of the most negative experiences of their lives. Only after evaluating the pros, cons, and potential options should you sit down and make a decision about bankruptcy.

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