Dear Liz: My finances have been on the rocks for six years. I have a defaulted student loan, credit card debt, bounce fees from checking account overdrafts and money owed for utilities. I'm a single mom and recently moved back in with my parents. I finally saved enough money to buy a car with cash, because whoever looks up my credit laughs. It's so bad, I wouldn't give myself a loan.
I finally feel like I'm in a position to start paying down all this debt; however, when I look at it I get anxious because I don't know where to start. I want to get an apartment within in the next year, and I know my credit will have a major impact on my ability to get a decent place. How should I prioritize my debt when it has all gone to collections?
Answer: You got yourself in a muddle, all right, but the fact that you could save cash for a car bodes well for your future. If you have the discipline to do that, you have the discipline to fix your finances.
Your defaulted student loan probably should be your priority. Student loan debt typically can't be erased in bankruptcy, and collectors of this debt have the power to garnish your wages and seize your tax refunds.
If yours is a federal student loan, you'll have plenty of payment options and the ability to "rehabilitate" your loans. If you're accepted for rehabilitation, your default would be removed from your credit reports after making nine on-time payments. Private loans typically don't have rehabilitation options, but you may be able to work out an acceptable repayment plan with your lender.
Since the rest of your debt is already in collections, your best bet may be to negotiate settlements. You'll get the best deal if you can offer a lump sum, but many collectors will accept 50 cents or so on the dollar if you can pay off the agreed amount within a few months. Don't agree to any payment plan you can't stick with or that precludes you from paying other debts.
For more help, visit debt expert Gerri Detweiler's site, DebtCollectionAnswers.com.
Use credit cards as a tool
Dear Liz: I haven't had a credit card since 1993. I refuse to get one. So how do I buy a house? Don't tell me to get a credit card, because I absolutely refuse to let the banks and credit people rule me. If I can't buy it with cash, I don't need it that bad. I do have a car loan now and pay utilities. I pay everything on time. Any suggestions?
Answer: You might want to take a look at the contradictory attitudes you just expressed.
You have a car loan, which means you're in debt and pay interest to a lender. But you refuse to get a credit card, which can help you build your credit scores without having to incur debt or pay a dime in interest.
Having a credit card does not make you a slave to lenders, unless you're stupid enough to carry a balance. On the contrary: It can help you build your credit scores to the point where you're in the cat bird seat, being pursued by mortgage lenders eager to give you a great deal.
If you absolutely can't trust yourself to have a card without carrying a balance, then of course you should forgo plastic. Otherwise, you could use a card like the helpful tool it can be, charging small amounts each month and paying the balance off in full, to boost your credit scores over time.
Liz Pulliam Weston is the author of the book "Your Credit Score: Your Money and What's at Stake." Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon., No. 238, Studio City, CA 91604, or via the "Contact Liz" form at http://www.asklizweston.com. Distributed by No More Red Inc.