Dear Liz: I've heard about the credit card debt relief act but can't find details about how it works or what I can do to take advantage of it. I have a huge credit card debt load and struggle to pay it since my work from self-employment has dried up. I see many website companies offering help, but I can't determine which are real or fake. Can you help me?
Answer: If you come across a company touting a new federal law that makes it easier to settle debt, rest assured: It's a scam. There is no such law, and these outfits are capitalizing on people's confusion about changes in credit markets (for another example, see below).
If you're struggling with credit card debt, first make an appointment with a legitimate credit counselor, preferably one affiliated with the National Foundation for Credit Counseling. These counselors can review your situation and see if you could qualify for a debt management plan, which would allow you to pay off your debt over five years or so, typically at a reduced interest rate.
Also, make an appointment with a bankruptcy attorney to discuss your options. Credit counseling is designed to steer you away from bankruptcy, but you may be better off in the long run by filing. Meeting with both a credit counselor and a bankruptcy attorney will give you a better idea of your alternatives.
Some people are able to settle their debts for less than they owe, but many who try wind up getting sued by their creditors. The debt settlement field is filled with scam artists who charge huge upfront fees and then fail to settle any debts. If neither credit counseling nor bankruptcy is a good option for you, you can ask the bankruptcy attorney for a referral to one of the relatively few settlement companies that's legitimate and may be able to help you.
Low-limit card vulnerable to cancellation
Dear Liz: What's up with creditors closing accounts in good standing because "the account does not have a high-enough credit limit"? My husband's credit card, on which he has never made a late payment and which he typically pays in full monthly, has been closed for the reason stated above. I know of others this has happened to.
The ding to one's credit rating can't be good because the account is listed as "closed by credit" and it causes an immediate increase in the debt-to-limit ratio. This seems wrong, and it must have something to do with the credit reform. But what can we as consumers do to mitigate the damage?
Answer: Issuers actually started closing accounts and reducing people's credit limits when the credit crunch hit in late 2007 — long before the credit card reform act that was signed into law in May 2009.
The trend accelerated as the recession led to a big spike in delinquencies. Credit card companies fled risk, and among the hardest hit were people with less-than-stellar credit. A low-limit card is typically a sign that the cardholder's credit isn't great, and some issuers made the decision to close many of these accounts.
A closed account can ding scores further, but the credit scoring formulas don't care who closed the account. You don't lose more points, in other words, if a creditor shuts down the account rather than you closing the card voluntarily.
Your husband's best option at this point may be to check with a local credit union to see if it would issue him a credit card. Credit unions are often more flexible about credit scores than other issuers.
If he can't get another regular credit card, another option is to apply for a secured credit card that offers a line of credit equal to the deposit he makes at an issuing bank. He should look for a card that charges no upfront fees, has a relatively low annual fee (under $100) and reports to all three credit bureaus. Sites including CreditCards.com, CardRatings.com and Card Hub list such offers.
Once he has the card, he should use less than 30% of its credit limit and pay it off in full each month. Over time, that should help him improve his scores enough to get a regular card.
Liz Pulliam Weston is the author of "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.