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MONEY TALK

Tough Choices, Hard Work Best Way to Dig Out of Debt

November 24, 2002|Liz Pulliam Weston | Special to The Times

Question: My husband and I are trying to determine whether settling a delinquent credit account for less than we owe might be better than continually making late payments. We are talking about thousands of dollars in debt that carries high interest rates. We're really strapped, mostly from using credit cards to keep our kids in college, and just cannot get on top of some of these debts. They have been dogging us for six to seven years, and they're just getting larger. How much damage does a settlement with a creditor actually do?

Answer: Typically, a lot.

Settling a debt for less than you owe will leave a big black mark on your credit for the next seven years. Although you won't be dogged by creditors anymore, you also won't get much slack from other lenders if you try to apply for credit during that time.

A history of late payments, by contrast, is something that can be ameliorated. In other words, you can make up for a record of paying late by establishing a consistent, recent history of on-time payments.

There's no easy way out of the hole you've dug for yourselves.

The best way to get on top of your debt is to do whatever it takes to pay it off. Tighten your belts, take a second job, sell a second car. If the kids are still in college, have them take a semester off to work and help with their own bills.

Most of all, don't believe any company that tells you that they can settle your debt for pennies on the dollar and not hurt your credit. If it sounds too good to be true....

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Find a Resting Place for Money You'll Need Soon

Q: I'm in the military, stationed overseas, and I'm saving more than 90% of my pay (thanks to no rent, utilities or children). Unfortunately, savings accounts are no place to really make a return on my money. I have roughly $15,000 that I'm adding to rapidly, and would love advice about what to do with it for the next six to eight months. I eventually want to buy a car with cash when I'm reassigned to Germany, but would like to have my money working for me until then.

A: Sometimes our money doesn't need to work for us. Sometimes the best thing we can do is give our money the day off.

As you'll probably need this money within the year, your priority should be to keep it somewhere safe and liquid. You want the money to be there when you need it, after all. Any investment that offers you high returns is going to entail the risk of losing money, which means your dream of a new Mercedes could turn into the reality of a secondhand Beetle.

You might look into investing the cash in a money market account, which offers slightly higher returns than a savings account. You also could consider short-term certificates of deposit (check www.bankrate.com for recent rates).

If you plan to accumulate more money than you need for a car, and can leave your investment alone for several years, you can think about ways to put it to work.

One of the best options would be to put $3,000 into a Roth IRA invested in stock mutual funds and commit to leaving it alone for 30 years, no matter what happens to the markets in that time. By the end, your returns should more than outpace inflation, and your withdrawals in retirement would be tax free.

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Credit Bureaus Will Look Into Any Surprises

Q: I have 40-plus inquiries on my credit reports at each of the three credit bureaus. Someone unknown to me apparently was trying to get mortgage loans. I've tried to contact each of the mortgage lenders but the process has been tedious. Is there a better way to handle this?

A: Your first step should be to contact the bureaus, rather than the lenders, and ask them to investigate these inquiries. Make it clear you did not authorize them and that you want them removed from your record.

Because someone is obviously trying to steal your credit identity, it would also be smart to have a fraud alert put on your files at all three bureaus. This would make it a bit more difficult for you to get credit but should help prevent the thief from being able to open accounts in your name.

You can find out more information about identity theft by visiting the Federal Trade Commission's Web site, www.ftc.gov.

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Liz Pulliam Weston is a contributor to The Times, a columnist for MSN and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at asklizweston@hotmail .com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times' Web site at www.latimes.com/moneytalk.

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