Debt Collector Threatened to Sue Over Credit Card Balance

Reader Question: My daughter got a call from her Credit Card company's Debt collectors, saying if she doesn't pay her full balance by the end of the month of April, they are going to take her to court. She hadn't been able to make a payment in about six months. She told them she can give them a thousand dollars on the account, and will work with them to make payments, they said they can't, as the credit card company is very strict, and wants the entire 2,500.00 by April 30th, or they will take her to court, and she will have to pay the court fees.

Is there anything she can do. Coming up with 2,500.00 in just a few days, is just about impossible. She took a thousand out of her 401k, but the debt collector said that's not enough, they want it all.

Our Response:

Your daughter signed a contract when she applied for the card. The contract states (in some form or fashion) that she is obligated to pay her debts on time. So yes, your daughter is obligated to pay and can be sued if she does not. If I borrowed money from you and refused to pay it back, you want to have some kind of legal recourse, the same way the credit card company does.

Every debt-collection agency has different practices, and I certainly don't know the full story about this particular scenario. Some are willing to allow payment plans or credit card debt settlement, while others demand payment in full. Some are more aggressive than others, as well.

Of course, if the debt collector is calling or writing to threaten her with a lawsuit, as an intimidation tactic, then they are violating the Fair Debt Collections Act. A debt collection company cannot harass a debtor, nor can they threaten to sue in order to coerce payment. The collection agency can sue, legally speaking -- they just can't use it as a threat or an intimidation tactic. If you feel this is what's happening, I would contact your state attorney general's office ASAP.

I also recommend reading this article:
Being Sued Over a Debt - Know Your Rights

Hope that helps. Good luck.

Minimum Credit Score Needed for a Mortgage Loan

Reader Question: Can you tell me the minimum credit score needed to get a home mortgage loan in the current economy? I know a lot has changed over the last few years, but I can't seem to find a straight answer on this one. Thanks. -Ann

Hi Ann. The reason you can't get a straight answer to this question is because there isn't one. I can give you some average credit scores needed to qualify for a mortgage, but you should not take them as gospel.

In 2009, you would probably need a minimum score of 660 (give or take a few points) to be approved for a home mortgage loan. You would need an even higher score to qualify for the best rates -- we'll take more about that in a moment.

There are many variables involved with the mortgage qualification process, and the minimum credit score needed is just one of those variables. For example, a person with a FICO score of 720, but mountains of debt, might get denied for a certain loan. While a person with a score of 710, and very little debt, could very well get approved for that same loan.

Lenders will look at many factors when considering your application -- credit score, income, amount of debt, the affordability of the loan and more. This is why it's so hard to say what minimum score is needed to get a home mortgage loan.

Also, keep in mind that there's a difference between (A) qualifying for a home loan and (B) getting the best rates on that loan. You might be able to get a mortgage with a minimum score of 680 or so, but you won't get the best rates at that level -- you'd need a score of about 750 or higher to get the lowest interest rates.

I'd like to reiterate that my comments are by no means set in stone. The only way to know if you qualify for a home loan is to apply for one. Only a lender can tell you whether or not you meet their standards, or what their minimum credit score requirements are. Anyone else who talks about this subject (including myself) is just offering an educated guess -- so don't take it as gospel.

Apply online for a mortgage and you'll quickly find out if you meet a lender's minimum FICO score standards. This is really the only way to know where you stand, with any certainty at least.

Related Article:

Credit Score Need to Buy a Home in 2009
This article is a great place for you to go next. It's actually a combination article and video, and it explains how the FICO scoring system applies to home loan qualification. It also discusses the minimum score needed to (A) qualify for a mortgage and (B) get the best rates on a loan.

Should I Negotiate a Charge Off with the Original Creditor?

Reader Question: "I have some unpaid debts on a store credit card, and it has been sent to a collection agency. I've heard it's possible to negotiate a charge-off with the original creditor to have this removed from my credit reports. Is that really possible?"

It depends on the situation. In some cases, the original creditor (in this case the store who issued the card) will charge off the debt when they sell it to a collection agency. Every company has its own procedures and timelines for this process, but 120 days is the general rule. When accounts are overdue by more than 120 days, most creditors will transfer the debt to a collection agency. If that has already happened with your debt, then there would be nothing to negotiate with the original creditor -- it's past that point.

In other scenarios, the creditor will keep the debt on their books and try to collect on it using their own collections department. This is usually the first part of the process, before the debt gets charged off.

There's really no reason to negotiate a charge-off with the original creditor, because it won't help you much. Your negotiations would have to start before this point. A charge-off just means they are accepting the loss and writing it off their books.

Typically, when people negotiate with their original creditors about an unpaid debt, they are actually trying to settle the debt -- before it reaches the charge-off point. In other words, they are negotiating a lesser settlement amount to pay off. If your account has not exceeded 120 days past due, then there's a good chance the original creditor still has it "in house." If this is the case, and you feel you cannot pay the full balance for some hardship reason, you may be able to negotiate a settlement for a lesser amount.

I can't tell you how well this will work, if at all. Every creditor is different. Some will pursue reasonable settlements, while others have a "no settle" attitude. There's only one way to find out if they're willing to negotiate the debt -- and that's to contact them. If you do this, be sure to keep copies of all the communications between you and the original creditor. It's best to put everything in paper and correspond by mail, for tracking purposes.

How a Charge Off Affects Your Credit

As far as your credit score goes, the best-case scenario is to pay off the overdue amount in full. If you do this before the creditor has reported the missed payments, this issue won't affect your credit. If they have already reported it, then you are in "damage control" mode by trying to reduce the impact it has on your score. If you pay off the debt in full, your score will recover more quickly (than if you negotiate a settlement with the original creditor).

The worst thing you can do is ignore the debt entirely. If you do this, it will follow you for a long time. Debt collectors will sell the account among themselves, in many cases, and this often makes it remain on your credit report even longer than the seven-year limit by law.

Learning How to Negotiate from "Veterans"

I recommend you visit the credit forums on the MyFICO.com website. Use the search tool at the top of the site, and you'll be able to find some forum threads (ongoing discussions) from people who have been through this situation. Granted, they are the individual experiences of others, so you have to take them with a grain of salt. But it will give you a better understanding of how the process works, from people who have negotiated with creditors in the past.

Related article:
How does debt settlement affect my credit score?

I hope this helps you understand the process that takes place when people negotiate with a creditor prior to the charge off point. Remember, check out those forums at MyFICO.com if you want to learn more about it from people who have "been there, done that." Good luck.

Getting Your Free Credit Report Without a Credit Card - Here's How

Reader Question: I am trying to get a copy of my free credit report online. But most of the websites I visit want me to sign up for some kind of free trial that requires a credit card number. Where can I get my free report without having to use a credit card, or is there such a thing?

Yes, there is such a thing. It's a website called AnnualCreditReport.com, and you can use it free of charge with no credit card required. Of all the websites offering free credit reports online these days, this is the only one recommended by the Federal Trade Commission (FTC) and other government agencies. The website is jointly owned by Experian, Equifax and TransUnion, and it's the only place where you can get all three of your free reports without entering any credit card information.

Now that I've answered your most immediate question, let me offer some background information to clear up some of the confusion you have. For what it's worth, a lot of people are equally confused about this topic, and you will soon understand why.

First of all, it's important to realize you have not one but three different reports, one for each of the credit reporting companies. So if you really want to know what's going on with your credit picture (and to check for errors), you need to request all three of them.

The reason you've encountered so many websites asking you for credit card information is that the free credit reports are often used as an enticement to sell other products. It's perfectly legal, and sometimes those other products are worthwhile, but it does create a lot of confusion.

Under federal law, you are entitled to one free credit report per year, from all three of the companies that maintain them -- Experian, TransUnion and Equifax. You can do this without using a credit card by visiting the website I began this article with. You can request them online through that site, or you can request them by phone or mail. Mailing address and phone numbers are provided on the website. No credit card is required when you go this route.

What to Do With Your Credit Reports

So that answers the question of obtaining your free reports without a credit card number. The next question is, what do you do with them once you've received them?

I once read an independent study that claimed something like 70% of consumer credit reports contained some kind of mistakes on them. These errors might range from misspelled names to "phantom" accounts that don't actually belong to the consumer. These things can be innocent administrative mistakes, or they can be signs of identity theft.

Errors on your reports can also lower your overall credit scores, which can affect your ability to get financing (car loans, mortgage loans, etc.). So it's important to review your information once a year or so, in order to correct mistakes and monitor for identity theft. And you can do this without a credit card by getting your free credit reports through AnnualCreditReport.com.

Here are some helpful articles to continue your research:

• How to Read Your Credit Reports
• How to Dispute Errors if You Find Them

I hope this answers your question, and I wish you luck in your financial future. Keep in mind that this blog has hundreds of credit lessons and articles. You can use the Google search tool at the top of the blog to find more information.

Rebuilding Your Credit After Foreclosure

Reader Question: I have heard a lot of conflicting information about rebuilding a credit score after the foreclosure process. Why is there so much dispute over this topic, and how can I rebuild my credit after being foreclosed on?

There are two reasons you encounter so much conflicting information on the subject. The first has to do with the abundance of misinformation online today. There is no "intelligence barrier" to publishing things online. Anyone with a blog or a website can put up an article about rebuilding credit after foreclosure, regardless of their knowledge or expertise.

In other words, a lot of folks just don't know what they're talking about -- but that doesn't prevent them from sounding off! :-)

The second reason for mixed messages has to do with variables. There are dozens of variables when it comes to credit scores, the foreclosure process, and rebuilding your score after you've been foreclosed upon. For example, let's say that two neighbors in California both go through foreclosure (not too far-fetched, in this economy):

• John has always had good credit, and being foreclosed on is an isolated incident. He is also determined to improve his score after the fact, and he knows exactly how to do it.
• Fred, on the other hand, has had a lot of financial problems -- the home foreclosure is just the latest in a long series of missteps. He is not inclined to work as hard as John to rebuild his score after the fact.

In this scenario, John will have an easier time rebuilding his credit after the foreclosure process. He will also see results more quickly. For one thing, his score probably did not drop as low as Fred's did, because the foreclosure was the only financial problem he has had. He will also be more proactive than Fred in taking the steps needed to improve his credit after that incident.

Now you can see why there's so much confusion about this subject, and so much information that doesn't seem to "jive" with other sources. When you combine the misinformation with the many variables involved in the process, it gets even more confusing.

Here's the good news. Restoring your credit score after foreclosure is not that complicated. Sure, it takes discipline on your part. And it's a slow-but-steady process that could take months. But it's possible. Here a couple of articles I recommend reading, for starters:

• How Long Does a Foreclosure Stay on Your Credit Report?
• How to Repair Credit After Bankruptcy?

By the way, I'm aware of the differences between filing bankruptcy and getting foreclosed on. But both of these things will do serious damage to your score, so it's a relevant article worth reading.

At this point, you're probably wondering how long it will take to rebuild your credit after going through a foreclosure process. Unfortunately, this is not something I can answer (for the reasons outlined above). This kind of negative entry can stay on your credit report for up to seven years. During that time, you may be limited as to how high you can raise your score again. But you can certainly improve it during that seven-year period -- you just might hit a "ceiling" at some point, at least until the item expires from your credit report.

I hope you have found this response helpful, and I encourage you to dig deeper into this website. There are nearly 200 articles, tutorials and Q&A sessions on this blog. Use the search tool at the top of the site to get started. Good luck rebuilding your credit score!

How to Become Debt Free With Planning and Discipline

How to become debt free is something every consumer ponders at one time or another. For many of us it seems like a pipe dream, something beyond our reach. But in reality, anyone can live debt free if they work hard to achieve it. Sure, it will take longer for some people than it will for others, but it's almost always possible.

In this article, I've gathered the advice of a variety of financial experts, all of them giving tips on how to become debt free in your lifetime. You might also want to check out my tutorial on the best ways to pay off debt.

Expert Advice on Becoming Debt Free

Without further ado, let's look at what the credit experts have to say about becoming debt free. I've searched far and wide to gather the best advice, and I've arranged their quotes in a way that makes sense.

Part 1 - Fixing the Problem

Before you can become debt free, you need to identify and eliminate the source of the problem. In other words, you need to find out why you're racking up so much debt and do something to change it. Here's what the experts have to say about this step in the process.

"Understand why you're in debt. If you don't fix the underlying problem, conquering the symptoms will do you no good in the long run. You'll repeat the same behavior and end up in the same debt hole again." -Jean Chatzky, CNN Money

"You need to be willing to work and sacrifice in order to fix the situations that you created with your own irresponsibility. If you are not willing, then you cannot be helped." -Dave Ramsey, daveramsey.com

"After keeping track of expenses, consumers are often amazed how much money they waste each month on nonessential items such as dry cleaning, restaurant meals and expensive coffee." -Emily Starbuck Gerson, creditcards.com

Part 2 - Creating a Plan for Success

Awareness is the key to success when becoming debt free, and this includes creating a plan for success. You must understand what's going on with your finances, and work from there to create a budget and a debt reduction plan. Here's some advice to get you started.

"To keep costs lower than your income, weigh true needs vs. wants, and spend accordingly ... Take a closer look at overall family spending patterns. What expenses can be cut back?" -Deborah Nayrocker, cbn.com

"Determine the amount to put towards debt repayment by subtracting the amount needed for total monthly expenses (not including debt) from your total net monthly income (after payroll deductions)." -University of Wisconsin, uwex.edu

Part 3 - Reducing Your Debt Balances

The only way to become debt free is to consistently chip away at your outstanding balances. This often means paying more than the minimum amount due each month. Here's some guidance on this part of the process.

"Figure your monthly minimums for each of your debts and (if possible) add 5% or 10% to this number. The addition is not mandatory but will dramatically improve the success of the program." -Michael Peterson, womentodaymagazine.com

"I lined up my debts from lowest balance to highest, and repaid them in that order. Though this didn’t yield mathematically optimal results, it gave me quick victories." -getrichslowly.org

"Now that you have your debts prioritized, take a look at your assets. If you have any cash in savings accounts or under the mattress, you should immediately consider using all of it to pay off some debt."-David Weliver, moneyunder30.com

"You will have to make sacrifices to pay down your debt balances, and you may need to work extra hours as well. It's up to you to make these changes. Nobody else can do it for you. The government did not impose this debt upon you, so don't look to them for help. Look within yourself." -Brandon Cornett, homebuyinginstitute.com

This article offers advice on how to become debt free through planning and discipline. If you would like to learn more about this topic, check out the debt category for similar articles and tutorials.

What Credit Score is Needed to Refinance a Mortgage Loan?

What credit score do I need to refinance my mortgage loan? This is one of the most common questions among homeowners who are thinking about refinancing. And with the attractively low interest rates we are seeing right now, there are a lot of homeowners in this situation. So, what score is needed to refinance your home? Let's take a look.

• The first thing you need to realize is that the credit score is only part of the picture. Lenders will also require you to have a certain amount of equity in your home, as well as a manageable level of debt.
• There is no way to answer this credit question across the board, because different lenders have different qualification standards. With that being said, you'll probably need a credit score of 750 or higher if you want to refinance your mortgage in the current economy.
• A lot of the information online relating to this topic is outdated and inaccurate. Most information published before 2008 is no longer relevant, because we have experienced a mortgage crisis and economic recession since then. So consider the date of publication when reading about mortgage refinance online.
  
• Most lenders today will require you to have at least 20% equity, in addition to having a good credit score. If you don't have enough equity, you might want to look into the government refinancing programs that were launched in 2009.
• If you apply for refinancing and get turned down because of your credit score, you should focus your energy on improving the score. Here is the fastest way to do this.
• Before you decide to refinance your mortgage loan, you need to find out if it makes sense to do so. In particular, you need to find out if the money you save in lower interest makes up for the money you pay in closing costs. (Learn more about the average cost of a refi.)
  

If you have already checked your credit, and you feel you have the score needed to refinance your mortgage (something north of 750), then you should go ahead and get some refinancing quotes from lenders. Once you do that, you'll be able to determine whether or not a refi makes sense. To do this, you would calculate your savings (with the lower interest rate) over the life of the new loan.

Related Articles:

The Refinancing Process Explained
If you have never refinanced a home before, I strongly encourage you to read this article. It explains how the process works and give you an idea of what to expect.

What to Know About Refinance Rates
If you have the credit score needed for refinancing, and you get approved for the loan, you still need to determine if it's a smart move to make. This article explains the importance of the interest rate on refi loans, and how would you use it to determine your break-even point.

Income Needed to Qualify for a Mortgage Loan

We typically get questions from people about credit scores, as they relate to mortgage qualification. But this score is only one part of the qualification picture. Lenders will also consider your income when considering you for a loan. So in this article I'll answer the common question: How much income is needed to qualify for a home mortgage loan?

Let me begin by saying all of this varies from one lender to the next. For example, if I approach a handful of lenders about a certain home loan, and my income level is on the qualification "border" of acceptability, one company might approve me for the mortgage while others turn me down. That's because they have their own comfort zones, as far as income needed to qualify for a loan.

On top of this, your level of income is only one piece of qualification puzzle. Lenders will review other things, such as your credit score and your total amount of debt, when considering you for a loan. Remember, your debt takes away a big part of your income. So even if you meet the lenders general guidelines for income level, you'll be denied if you are paying too much money toward your other debts (because you would have less money left over each month to put toward a mortgage payment).

How Much Income to Qualify

With this introduction and disclaimer out of the way, you can use 30% as a rule of thumb. In other words, most lenders want your annual income to equal around 30% of your mortgage amount. So based on this rule of thumb, if I wanted to qualify for a mortgage loan of $300,000, I would need an annual income in the neighborhood of $90,000.

Just remember what I said about debt. The scenario above assumes that I have a favorable debt-to-income ratio (i.e., my monthly debt payments are not too high, relative to my income). So John, who makes $90,000 a year, might qualify for a mortgage loan because he has a reasonable amount of debt. But Sally, who has the same income but a lot more debt, might be denied by the lender.

You can find plenty of calculators online to help you find out what income is needed to qualify for a certain amount of mortgage loan -- generally speaking. To find these calculators, just do a Google search for the phrase "mortgage qualification calculator." You'll find plenty of them online. Many of them offer additional information on how lenders qualify borrowers, based on income level and other factors.

Apply for a Mortgage Quote

When you've done the necessary research, and you feel you're ready to take on a mortgage loan, the next logical step is to apply for quotes from mortgage lenders. The good news is this process is easier than ever, because you can apply online and get information sent to you by email. Granted, you'll have to fill out a more complete application at some point (with information about your debt, income and other qualifying factors), but it the initial online application is a good way to get the ball rolling.

One thing I've noticed over the years is that a lot of people are reluctant to take this necessary step. I'm not sure why, but I think people feel they'll be obligated into something once they apply for a loan -- or that they'll ruin their credit by making mortgage applications. But this is not true. You can get offers from a handful of lenders and choose the one that suits you best. You can reject any offers you don't agree with. You won't encounter any obligations at this point in the process, so you really have nothing to lose.

Don't Overstretch Your Income

The last point I want to make is that a mortgage lender cannot tell you what you can afford. They can only tell you what they are willing to give you, in terms of a loan. You must determine your own affordability limits, before you even start talking to lenders. It's possible to qualify for a mortgage that's too big for you, based on your income level. It happens all the time, and it often turns into a foreclosure situation. So don't buy beyond your means.

Related Articles

This article pertains to income needed to qualify for a home mortgage loan. Here are some other articles related to this subject:

How Much Can I Afford to Borrow
One of the key points I made above is that qualifying for a mortgage is not the same as being able to afford one. In other words, it's possible to qualify for a home loan that's too expensive. This article will teach you about affordability and making smart choices.

Best Ways to Pay Off Debt
By reducing the amount of debt you're carrying, you can improve your chances of qualifying for a loan. You'll also improve your quality of life and ease your financial burdens. This article gives you tips on paying down your debt.