Frequently Asked Questions
- Am I liable for my spouse's debts?The general rule is that spouses are not responsible for each other's debts, but there are exceptions. Many states will hold both spouses responsible for a debt incurred by one spouse if the debt constituted a family expense (e.g., child care or groceries). In addition, community property states will hold one spouse responsible for the other's debts because both spouses have equal rights to each other's income. Also, you are both responsible for any debt that you have in both names (e.g., mortgage, home equity loan, credit card).
- Can I buy a house even though I declared bankruptcy?
Believe it or not, there is financial life after bankruptcy. It will take some effort on your part, but you can rebuild your credit with careful budgeting and record keeping.
A bankruptcy is a red flag that makes lenders leery, and it will stay on your credit report for 10 years. If you have a history of bad credit (e.g., a bankruptcy and numerous late payments) and don't take steps to repair it, most lenders won't take on the risk of giving you credit. If you find a lender willing to give you credit, you can expect a high interest rate (e.g., twice the going market rate). However, if you work to improve your credit rating by obtaining a line of credit and making all of your payments on time, for example, you may be able to obtain the financing you need to buy a home.
Remember that lenders want to see good credit histories. Therefore, it's important to begin establishing good credit as soon as possible. Many people believe that the way to fix a bad credit problem is to pay for everything in cash. Although this is a good way to get out of debt and control your spending, it won't help you get a mortgage. When you pay cash, you're not establishing credit. Thus, lenders have no way of gauging whether you're a good or bad credit risk.
Consider beginning your journey back to creditworthiness by obtaining a low-interest credit card. Be sure to make your payments on time, every month. If you can't get a traditional credit card, ask about a secured credit card that operates much like an ATM debit card. Here, your credit limit is based on the amount you deposit in your account. For example, if you deposit $500 in the account, you'll have a credit limit of $500. If high credit limits are what landed you in your current financial troubles, a secured card can help you stay on track by keeping you on a short leash. In a short time, you may be able to prove to lenders that you're creditworthy.
For more information, contact your local consumer credit counselor.
- Do I need to provide credit information on my auto insurance application?
When you apply for an auto insurance policy, don't be surprised to find questions about your credit on the insurance company's application. In addition to the other information you provide, the company may use your credit information as part of its applicant-screening process. But are insurance companies being too nosy and intrusive when they request your credit information? Perhaps. Many lawmakers, consumer rights groups, and others certainly think so. However, many companies claim that they really need this information to properly evaluate your insurance application.
Believe it or not, there may actually be some truth to that. Statistics do show a link between a person's credit history and driving record. In other words, drivers with poor credit generally file more auto insurance claims than drivers with sound credit. How do you explain this connection? According to insurers, careless or irresponsible individuals tend to be that way in all areas of their lives, including both driving and finances. Based on this trend, an insurer may actually charge you a higher premium (or even deny you coverage) if you have shaky credit. Your credit information can also give an insurer a good idea of how likely you are to pay your premiums on time.
Insurers generally must follow specific guidelines when considering an applicant's credit history. Contact your state's insurance department if you have questions about the regulation of credit-based insurance scoring in your state.
- How can I correct errors on my credit report?
Under the Fair Credit Reporting Act, you have the right to have any incorrect or misleading information removed from your credit report. If an error appears on your credit report, you should contact the credit bureau and request a re-investigation of the disputed information. If the error is not removed, you have the right to add a 100-word consumer statement to your credit bureau file to explain your side of the story. The three major credit reporting agencies are Experian, Trans Union, and Equifax. You can contact these agencies by phone, by mail, or through their websites.
Keep in mind that since mistakes do occur in credit reporting, you should check your credit report once a year as part of your financial planning process. Also, the more common your name is (e.g., John Smith), the more likely you are to have someone else's information added to your report.
- How can I pay off my credit card debt?
Certainly the best way to pay off your credit card debt is with a single payment. If you can find the money to pay off all your credit card debt, you'll get back on solid financial ground quickly and without paying additional interest.
The next-best method is to pay off the card with the highest interest rate first. You'll want to pay as much as you can to that account and then send the minimum payment due to each of the other accounts. When you've paid off one card, start paying on the card with the next highest interest rate. Focusing on one card at a time gives you clear financial goals, minimizes your interest expense, and creates a sense of satisfaction.
If available, you can use a home equity loan to pay off credit card debt. The interest on home equity loans is typically lower than credit card rates and is usually tax deductible. This can be an effective repayment method if you can handle it with discipline. However, these loans can be as easy to abuse as credit cards, particularly if you have a line of credit. Also, you run the risk of paying down the home equity loan at the same time you're running up more debt on your newly cleared credit cards. Remember, your home equity loan, unlike credit cards, will be secured by a lien on your home. If you can't make your payments, you'll be in default, and the lender can foreclose on your home.
A less aggressive way to pay off your debt is to transfer your balances to lower-rate accounts. Known as credit card surfing, this method works until you run out of lower-interest opportunities. However, it does allow you to reduce interest fees and pay more against your existing balance.
It's always best to control new spending and pay more than the required minimum payment whenever possible. Invariably, these cover little more than the finance charges. You continue to carry the bulk of your balance forward for many years without actually reducing that balance. Ideally, charging only what you can afford to pay off each month gives you the best benefits of a credit card and few of the drawbacks.
- How can I repair my poor credit?
Your first step in repairing poor credit should be to obtain a copy of your credit report. The three major credit reporting agencies are Experian, Trans Union, and Equifax. You can obtain a copy of your report by contacting these agencies by phone, by mail, or through their websites. Check the report carefully for any errors and make sure that all the information contained in the report is correct.
Next, you can try mitigating the impact of any derogatory credit you may have on your credit report by adding positive account information to your credit file. Start by contacting creditors with whom you have a good credit relationship and give them permission to release your account information to credit reporting agencies. You should then contact the credit reporting agencies and provide them with the names and telephone numbers of the creditors with whom you have good credit. For a small fee, most credit reporting agencies will call your creditors and add the positive account information to your file.
Another option is to go directly to your creditors and try to clear your credit record. If your poor credit resulted from circumstances that were beyond your control (e.g., hospitalization, layoff), and you have reconciled your account since that time, you may be able to convince your creditors to upgrade your rating.
If you have bad debts that are current, you may be able to negotiate away poor credit by agreeing to pay off your debts over a period of time. Contact your creditors and propose a deal in which you will agree to a reasonable repayment schedule if they agree to upgrade your status with the credit bureau.
You can also add a statement to your credit report that tells your side of the story. You have the right to include a 100-word statement in your credit file. The statement should list any extenuating circumstances that could possibly mitigate the negative credit information in your credit report. Perhaps you were hospitalized for a period of time and were unable to pay your bills, or maybe you were laid off from your job. If your credit history shows that you typically pay your bills on time, this statement could help to explain an isolated instance or period of derogatory credit.
Finally, you can always choose to wait out your credit problems. With some minor exceptions, derogatory credit will be purged from your credit report within seven years. However, if you can show income stability and prompt payment patterns, your situation will improve within one to three years. Keep in mind that you should avoid incurring any more derogatory credit while you try to repair your poor credit. If you do incur derogatory credit, the seven-year clock resets and starts ticking again!
- How do I get a copy of my credit report?
You are entitled to a free copy of your credit report every 12 months from each of the three nationwide credit reporting agencies: Experian,TransUnion, and Equifax. You are also entitled to a free report if:
- A company has taken adverse action against you, such as denying you credit, insurance, or employment (you must request a copy within 60 days of the adverse action)
- You're unemployed and plan to look for a job within the next 60 days
- You receive welfare benefits
- Your report is inaccurate because of fraud, including identity theft
Visit www.annualcreditreport.com for more information.
- I am behind on my mortgage payments. Will my lender begin foreclosure proceedings?
When you buy a home using a mortgage loan, your home becomes collateral for the loan. If you do not repay the mortgage loan as agreed, your lender has the right to take your property and sell it to satisfy the debt, also known as foreclosure.
Whether or not your lender will begin foreclosure proceedings depends on exactly how far behind you are on your mortgage payments. If you are only a month or two behind on payments, your lender will not likely begin foreclosure proceedings. Typically, a lender will not file for foreclosure unless the lender is absolutely certain that the borrower is defaulting on the loan.
It is important to remember, however, that late mortgage payments can damage your credit rating. If you are more than 30 days late on a mortgage payment, it will appear on your credit report and can remain there for up to seven years. In addition, most lenders will charge a late fee if you miss the due date for your mortgage payment.
If you are in a situation that will impact your ability to make timely payments (e.g., you or your spouse has become disabled), you should seek advice on how to deal with your creditors rather than wait until you are at risk of losing your home.
- I can't pay my bills. Should I declare bankruptcy?
If you're unable to meet your financial obligations, you should investigate a number of options before considering bankruptcy. If your income has been reduced (e.g., because of illness or unemployment), you might consider cutting down on your monthly expenses, taking advantage of unemployment and public assistance, and liquidating assets. Another option is to restructure your debts. Debt restructuring involves negotiating new repayment terms with creditors so you can meet your monthly expenses and pay off your debts within a reasonable amount of time.
You should consider hiring a professional credit counselor to assist you in restructuring your debts. Professional credit counselors will contact your creditors and attempt to negotiate affordable repayment terms for you. If you can't afford to hire a credit counselor, you may find help at your local Consumer Credit Counseling Service (CCCS) office or other nonprofit credit counseling service. These nonprofit companies provide basically the same services as a professional credit counselor but at little or no cost to you. Hiring a credit counselor now will help you even if you decide to declare bankruptcy later, because you may need to submit a certificate to the bankruptcy court that states you've received a briefing from an approved credit counselor in the six-month period prior to filing.
If you decide that bankruptcy is your only option, you may file for personal bankruptcy under Chapter 7 or Chapter 13. Chapter 7 bankruptcy can remove obligations to repay certain outstanding debts but requires you to liquidate certain assets and use the proceeds to pay creditors. You can only file under Chapter 7 if you pass an income eligibility test. Otherwise, you must file under Chapter 13 for relief, which institutes a payment plan to repay creditors over a three- or five-year period. A bankruptcy attorney can help you sort out your options.
- I've finally paid off my credit cards. Should I close the accounts or leave them open with zero balances?
It's a good idea to close redundant or unused accounts you do not consider necessary. Here are a few reasons why:
- If credit is easily available, you may be tempted to use it. Any impulsive purchases could quickly mount up and result in serious debt problems.
- Open accounts may be used fraudulently if your account numbers are stolen or your cards are lost.
- You may have to pay annual fees for the cards even if you don't use them.
- Whether used or not, open accounts may create trouble when you apply for other credit such as mortgages or loans. Lenders commonly review your credit history and may see you as a credit risk if you have multiple open accounts with a large amount of available credit. Potentially, you could still use them and build up unacceptable levels of debt.
It's best to cut up and return to the issuer any cards you don't want. Refuse to accept renewal cards you don't plan to use. You'll want to contact each card issuer to determine specific account closing requirements. Ask for a confirmation letter of the closing and check that it is listed on your credit report as having been "closed at the customer's request."
- Should I refinance my home mortgage?
Mortgage refinancing refers to the process of taking out a new home mortgage and using some or all of the proceeds to pay off an existing mortgage on your home. The main purpose of refinancing is to obtain a lower interest rate or lower your monthly payments by extending the term of your loan. Remember that if you extend the term of the loan, you will reduce your monthly mortgage, but you will end up paying more total interest over the years.
If you do refinance your home mortgage, you want to make sure that your monthly savings from refinancing will pay back the costs that are associated with refinancing while you are still living in your home. If you move before your refinancing has paid for itself, you really won't be saving any money. You can determine how long it will take for you to pay off the refinancing by dividing the cost of refinancing (points, closing costs, and private mortgage insurance) by the amount you will save each month from refinancing. Alternatively, you can eliminate the problem if you can find a no-point, no-closing-cost mortgage.
Generally, there are two types of mortgage refinancing: no cash-out refinancing and cash-out refinancing. No cash-out refinancing occurs when the amount of the new loan does not exceed the mortgage debt that you currently owe. Typically, you can borrow up to 95 percent of your home's appraised value with this type of refinancing.
Cash-out refinancing occurs when you borrow more than you owe on your current mortgage. You are generally limited to borrowing no more than 75 to 80 percent of your home's appraised value with cash-out refinancing. You can use the excess proceeds in any way you wish. Most people use this type of refinancing to pay off other outstanding loans, since the interest rate they pay on the extra cash they borrow will usually be less than the interest rate on the debt that they pay off (e.g., car loans, credit cards). Also, mortgage interest is typically tax deductible, while consumer debt is not. This strategy is useful if you use it to reduce your debt payments and you do not start charging items on your credit card again.
- What's the difference between a home equity line of credit and a second mortgage?
A home equity loan is a loan that is secured by your home. If you repay the loan as agreed, your lender will discharge the mortgage. If you do not repay the loan as agreed, your lender can foreclose on your home to satisfy the debt. Generally, the amount that you can borrow is limited to 80 percent of the equity in your home, although in some situations this amount may be higher. The actual amount of the loan will also depend on your income, credit history, and the market value of your home. The two distinct types of home equity loans are the home equity line of credit (HELOC) and the closed-end home equity loan, often referred to as a second mortgage.
A HELOC, which is the more popular loan, is structured as a revolving line of credit. You can borrow as much as you need, whenever you need it, by writing a check as long as your total borrowing does not exceed your credit limit. Because it is a line of credit, you make payments only on the amount you have actually borrowed, not the full amount available. Borrowers will usually set up a HELOC so that it is available for unexpected expenses. It may also be beneficial to use your home equity loan to purchase a car or pay your child's college tuition, since the interest is generally tax deductible.
A closed-end home equity loan, or second mortgage, is a loan for a fixed amount of money that must be repaid over a fixed term, just like your original mortgage. Borrowers typically use closed-end home equity loans to pay for a single large expense, such as a major home improvement or college tuition.
- What's the difference between Chapter 7 and Chapter 13 bankruptcy?
A Chapter 7 bankruptcy is often referred to as a liquidation bankruptcy. In Chapter 7 proceedings, you do not pay anything to unsecured creditors included in your bankruptcy petition unless the court requires a liquidation sale of your nonexempt assets. (Nonexempt assets are those not protected from forced liquidation by either federal or state statutes. For example, under the federal statutes each individual is allowed to exempt, among other things, $25,150 for real estate used as a primary residence, $4,000 for a vehicle, the right to state or federal benefits, and domestic support benefits (as of April 1, 2019). If you own assets that are nonexempt, you may be required to liquidate them. The court would then distribute the proceeds from the sale to your unsecured creditors as partial satisfaction of the debts you owe. Any remaining unpaid debt would then be discharged (with some exceptions), and you would no longer be held responsible for it. You can only file under Chapter 7 if you pass an income eligibility test. Otherwise, you must file under Chapter 13 for relief.
Often known as a "wage-earner's plan," a Chapter 13 bankruptcy does not require liquidation of nonexempt assets to satisfy your creditors. Instead, you pay some or all of your unsecured debt back through the court over a three- or five-year period. The percentage of unsecured debt you are required to repay must be at least equal to what your creditors would receive in a Chapter 7 bankruptcy. If you successfully complete the court-ordered repayment schedule, any unpaid unsecured debt is then discharged (with some exceptions).
If you wish to forestall and ultimately prevent foreclosure on real property (e.g., your home), you should seek to do so through Chapter 13. Although a Chapter 7 petition delays foreclosure, it does not prevent it without liquidation of the property to satisfy the mortgage debt. In Chapter 13, you may be given the opportunity to catch up in full on a mortgage arrearage as part of the court-approved repayment plan. If you do so, the foreclosure is prevented and the mortgage is brought up to date.
- What's the Homestead Act?The federal Homestead Act, which was enacted in 1862, offered free 160-acre parcels of land to early settlers, or "homesteaders." Although this act was repealed in 1977, many states have enacted their own homestead laws. Some states use their homestead laws to encourage property ownership in certain areas by selling the property at a nominal price or offering special tax relief to buyers. Other states have homestead laws that protect your home against judgments and creditors. Consult a real estate broker or attorney to find out whether your state has enacted homestead laws and, if so, how you can take advantage of them.
- Will debt consolidation hurt or help my credit rating?Debt consolidation can lead to an improvement in your credit rating by making your debt easier to manage. Sometimes, debt consolidation means taking a loan at a lower interest rate to pay off several smaller loans at higher interest rates. Making one payment instead of many may help you keep your debt under better control, make it easier for you to make timely payments, and thus improve your credit rating. Although managing your debt will improve your credit record in the long run, consolidation can have a more immediate impact. For example, if you have 10 accounts in default on your credit report, your lenders will consider you a bad credit risk. But if you can pay off those accounts with a consolidation loan, you have eliminated the problem. Your new credit report will now show that you cured the defaults and retired the debts. And you have only one open account--your consolidation loan. As long as you stay current on the consolidation loan payments, your credit rating will be viewed more favorably than before. Remember, your goal is to manage your debt by making your payments more affordable. You can do this by lowering your interest rate or increasing the number of months you have to pay off the debt. There is no point in consolidating if you don't achieve one or both of these goals--you'll want to be sure you can afford the consolidation loan and make the payments. Otherwise, you'll end up back where you started. Although debt consolidation has its advantages, you must recognize that by extending the time to pay off your debt, you will ultimately be paying more in interest charges. Also, once you get a consolidation loan, you should consider closing some of your credit card accounts so that you can't simply run up your bills again.
- How can I lower the interest rate on my credit card?
One way is to call your existing lender and try to negotiate a lower rate. Often, the threat of losing a customer and the associated income from your finance charges can inspire a card company to accept a lower interest rate and keep the relationship. Negotiation is most effective if you have a stable payment history with the company.
If your present card company won't negotiate, you can transfer your existing balance to a new lender with a lower rate. Be careful, however, that it isn't a teaser rate that's offered for a few months and then will be raised higher than your existing rate. Ask for a clear accounting of what the rate applies to (e.g., balance transfers, new purchases, cash advances), as well as all other card limitations and penalties. Find out if there is a transaction fee before you agree to the transfer.
Keep in mind that lenders are making it increasingly difficult to continuously "surf" for low credit card rates. Some card companies now restrict balance transfers during a set time (e.g., a year) after you sign up. If you try to transfer to another card during that period, you may be retroactively charged a higher rate.
- How can I get credit if I have no credit history?
It's the old catch-22. You cannot establish a credit history without having credit, and you cannot get credit without a credit history. But if you work at it, this problem can be overcome. While you create a history, be sure your efforts will be reported to the credit bureaus.
Use the credit history of a family member or friend to leverage yourself into credit in your own name. If you are added as a joint party or authorized user to another person's credit card, the lender may report the account's payment history on your credit report.
If you have a checking account, ask your bank for overdraft protection (or cash reserve) privileges. With this feature added to your account, you can create credit by writing a check for an amount greater than the balance in your account (but not greater than the limit of your cash reserve line!). Alternatively, ask the bank for a small personal loan. As you repay these debts, you establish a credit history. Make sure the bank reports that history to the credit bureaus.
Secured credit cards are also a good way to get started. Your credit line is secured by your deposit in the bank, minimizing the creditor's risk. For example, if you deposit $500 in the bank, you get a credit card with a maximum limit of $500. As you use the card and make payments, you establish a credit history. These cards have high interest rates, but your goal is only to charge what you can afford to repay. As you repay the debt, you establish a repayment pattern seen by other creditors.
You may also want to see if you qualify for a retail/department store charge card or gas card. Because these cards have lower credit limits and may be used only with the companies that issue them, the lending guidelines may be more liberal than those for major credit cards.
If you still have difficulty obtaining credit in your own name, consider a collateralized or cosigned loan. With a collateralized loan, the item you pledge as collateral (such as a car) minimizes the risk to the credit grantor. With a cosigned loan, your cosigner is equally liable for the balance. Spreading the responsibility for repayment in this fashion minimizes the lender's risk. Successful repayment of these types of loans can then be used to establish your own credit history.
- I get a lot of credit card offers. How can I tell which one is best?
Start by carefully reading the advertisement or application you've seen or received. It may seem like a lot of jargon, but that fine print contains important information about terms and costs. Here are three points to consider when comparing credit card offers:
Annual percentage rate (APR): What interest rate will apply to outstanding balances? If you plan to carry a balance, it's especially important to choose a card that has a low APR. But don't be fooled by a low introductory rate. It may apply for only a few months, and only to balance transfers, not new purchases. It's essential to understand what rate will apply once the introductory period is over.
Find out, too, if the APR will change over time. If the rate is variable, you can expect it to go up or down periodically because it's tied to an index (often the prime rate) that changes. If the rate is fixed, it won't fluctuate, but that doesn't mean it will stay the same forever. A credit card issuer can change your rate at any time, as long as you're given written notice 45 days in advance of the rate change. And find out what will happen to your APR if you make a late payment. Some card issuers send your rate skyrocketing if you pay your bill late. However, a creditor can only increase the rate on an existing balance if the account is 60 days past due. What's more, the rate must be returned to what it was at the time of the increase once you've made six months of timely payments.
Grace period: How long will you have to pay your balance in full before interest starts accruing? If you plan to pay off your balance every month, you'll want to look for a card that offers a relatively long grace period (e.g., 25 to 30 days).
Fees: What fees will apply? If you plan to pay off your balance every month, avoid signing up for a card that has an annual fee. If you plan to carry a balance, it may be worth paying a fee if the interest rate is low enough. And watch out for hidden transaction costs. Compare the fees you'll be charged for transferring your balance, using your card to get a cash advance, exceeding your credit limit, or paying your bill late.
Finally, even if you've carefully read through the offer, you may still have questions. If so, call the credit card issuer before signing an application.