What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Recovering from abysmal credit
2. Handling debt collection
3. Preparing for a layoff
4. Starting with web design
5. Repaying loans now or later
6. Deciding whether to become contractor
7. Getting started with GTD
8. Paying off a mortgage quickly
9. Severing your credit from someone
10. Why mention prayer?
One interesting situation I now find myself in is that authors now come to me and ask me to put blurbs on their book covers. “Will you send me a nice quote to put on my book?”
Some authors just put a blurb on everything. Some of them blurb nothing at all. Others just blurb for their friends.
I’ve made the (perhaps) mistake of asking people to send me a copy of their manuscript so that I can read it. The end result is that I have a big pile of soon-to-be-published personal finance book manuscripts sitting on my desk.
I’ve been trying to read them and write reviews of them that I can hold onto until they’re released, but that basically means that I’m reading and reviewing two personal finance books a week (for the time being). That’s a lot of reading!
Q1: Recovering from abysmal credit
What do you do if you have horrible, abysmal credit? I am rejected for any credit card I apply for (even the Orchard Bank ones, that everyone can get). I racked up about 10k in CC debt about 5 years ago and defaulted on my student loan…. I have since fully paid off the CC debt and my student loan is back on track but I just feel like I will never be able to establish credit. I just got a new job and will be eligible for their 401k in a year but I’d love to find a credit card and slowly start to establish credit. I am 28 years old and single with no debt except about 4k in student loans. All I have is my bank credit/debit card and I am trying to get back on track. Please advise.
The easiest first step to take in this situation is to head down to your local credit union and discuss options with them. Some credit unions will offer you a small collateralized loan at a reasonable interest rate to help members re-establish credit.
If that’s not an option, you can take out a secured credit card. A secured card is one where you essentially pay a deposit when opening the card and that deposit is equal to your credit limit. You then make payments as normal and receive the deposit back if you close the card, but you lose the deposit if you fail to make payments. This, again, will help you build positive credit.
Another option is to convince someone you’re close to, such as your parents, to add you to a credit card of theirs to help you raise your credit. You wouldn’t need to actually have a physical card at all or ever charge a single thing to that card. Having a line of credit on your credit report will certainly help, especially when that credit line is actually controlled by someone else that is reliably paying the debt.
Q2: Handling debt collection
I ran into credit card problems after being laid-off from my job about 5 years ago. I was paying the credit cards on time and monthly, but unfortunately, the credit cards companies ran credit report on me and decided that my debt was too high and increased my interest rates – some to 24%. After doing this, I could no longer afford the payments and my credit cards (there were four) ended up in charge-off status. The total debt is $55k.
The debt for 3 of cards was sold to debt collectors/law firms and I was subsequently brought to court and judgments were filed against me. The 4th card is with a debt collector but there hasn’t been a judgment filed.
Currently, I am gainfully employed and paying the judgments monthly. The 4th card has a total debt of 33k. I am saving up to approach this company with an offer of debt settlement.
Do I approach this company with an offer of say, 15k? And if they accept, what happens to my credit report? What can I do ensure that they remove the negative mark on my cc report (if I can at all)? Is this the best approach? (Debt Settlement)
Down the road when this is all paid off, I would like to buy a home. What can I do now to ensure that my past problems don’t make it impossible for me to purchase a home?
My goal is not to have this prior debt ruin my future and it seems that credit reports are being used more and more. Do you think that once it is paid off, it will go away? It is a huge burden in many ways.
Settling with these people is certainly an option here. Most likely, they’ll be happy to negotiate with you. I would suggest lowballing them for even less than you’re offering here, though.
If you do reach an agreement with them, your credit will be marked as having paid off the debt. However, that late debt will be brought up to the current date. That means that instead of having a black mark on your credit for two or three more years, you’ll have more of a gray mark (not nearly as bad) mark on your credit for the next seven years.
The less honest approach is to just never pay back the loan. It’ll fall off of your credit history in a few years and no longer impact your credit. It’s rather strange, but that’s how credit reports work.
Q3: Preparing for a layoff
I have just been told that layoffs for a large portion of the staff at our company may be coming by the end of the year. While I do not know for sure if this will affect me, I would like to assume it will and be prepared for it. I have no idea if there will be a severance package or if I’ll need to apply for unemployment and I would expect it might take me 3-6 months to find a similar job.
I currently have about $6,000 of credit card debt, a mortgage (which is about the same per month as I’d pay in rent around here), a small car payment and a few student loans. In addition, I have about $5,000 saved in an emergency fund (which equals about 2-3 months of living expenses). Up until now, I have been aggressively paying off my credit cards at a rate of about $1,000 per month, so I expect to have them paid in 7-8 months. However, with the possibility of a layoff looming, should I continue this path or should I pay the minimums and save the cash for when I might be unemployed?
If I were you and I knew a job los was looming without a replacement job lined up, I would immediately go to minimum payments and start adding every dime I could to an emergency fund. It’s impossible to tell how long your jobless period will last, but you should be prepared for the worst.
If everything goes well and you quickly get a job, don’t hesitate to make a big payment on your debts out of your savings. You won’t have lost much money in the process.
On the other hand, if things don’t go well, you’re going to be incredibly glad to have that money in the bank.
Q4: Starting with web design
I am a long time reader of your blog and truly admire your commitment. I am not a technical person but I would like to learn the basics of web design and have my own web site. I have some ideas to monetize my site and yet I do not want to be dependent on a web designer at least at the early phases of my hobby/side business.
What would you recommend? There are lots of books about this at Amazon but, I cannot decide where to start.
Since I don’t really have a grasp of your level of computer skill nor the type of project you have in mind, my honest suggestion would be for you to head down to your local library and start perusing the computer book section. Look for books that speak to your specific need and level and check out a few of those.
Another path might be to learn a software package that does this all for you. The best software package I’ve found for such things is Adobe Dreamweaver.
Better yet, do both. Knowing how to use Dreamweaver coupled with some raw HTML skills can be a valuable mix, both for your own goals and for contributing to other projects.
Q5: Repaying loans now or later
I am a full-time college student, about to start my Junior year in August. During the past two years, to finance my education, I have taken out $20,000 in student loans at 6.8% interest. I never planned to borrow so much, but poor decisions on my part and unforeseen circumstances lead me to where I am. However, inspired by your blog and similar blogs, I’ve already made drastic changes. I am transferring schools in August to save money, and my tuition and other educational expenses will be completely covered by a scholarship and grant. Further, while I’ve always had a part time job during school, I’m working full time this summer, learning to budget, and contributing to an IRA. It feels great to finally understand finances and get back on my feet!
At this point, I want to start paying off my loans – I have started reading Dave Ramsey’s book Total Money Makeover, and I just finished building my “beginner” emergency fund. Now that I’m moving onto Step 2 – Debt Snowball, I’m not sure if I should continue. My dilemma? I plan on attending law school in two years when I graduate, and there’s a very good chance I will have to take out more loans to attend. I would like to start saving money for law school now, but that means not paying off my current debt at this time. I have some flexibility in my decision: about half of my current loans don’t start incurring interest until after I am completely done with my education. I certainly don’t have the money to both save for law school AND do the debt snowball; I make less than 10 dollars an hour.
So, would you recommend I forget about paying back my loans for now, save for law school, and worry about the loans after I graduate? Or, should I stay on Dave’s plan, pay off all my debts, and maybe even forget about law school until I can actually afford it without loans(maybe 5 to 10 years from now)? Is there a compromise?
There are a lot of factors involved in this decision that you didn’t mention. Is the degree you’re working on now going to be able to employ you on its own without the law degree? Are you going to be able to get into a good law school (in other words, is this plan realistic with your current grades and academic progress)? What is the broader financial picture of your family like? And do you want to go to law school, or is this something you’ve convinced yourself (or others have convinced you) that you should do?
I can’t answer these questions for you. However, I will say this. If you’re sure that law school is the path you want to follow, I would plan on doing it right after graduating and I would start saving for law school immediately. If you leave school for a while, you’ll find it increasingly difficult to return and the return on investment of a higher education degree will grow smaller each year you’re out of school.
Sit down and think about what you want, first and foremost.
Q6: Deciding whether to become contractor
I am 27 years old in a pretty decent financial situation (0 debt and over 6 months of expenses in savings), single and in good health. I’ve received an offer to become a long term contractor doing similar work as I do now. The pay would be about double my current hourly rate but there would cuts to benefit options by becoming independent (I would be paid/managed by a professional services agency instead of workplace). What things do I need to be thinking about when making my decision about the job?
How good is your resume? Do you have a skill set that will make it easy for you to find work elsewhere if the situation changes? Are you actively building your skills?
What exactly does the long term contract look like? What are the “outs” for you and for the company? How long is the term of that contract? Are you eligible to continue your current health care plan for a while under COBRA?
I would be asking myself and all parties involved those questions. I would only make this leap if you were really in the driver’s seat when it comes to your career. If you’re really a top performer, you’ll make more as a contractor. If you’re not, contracting will be a painful experience over the long term.
Q7: Getting started with GTD
I read through your GTD series and I have two quick questions.
How do you deal with daily items. You used an example of making pizza or cooking dinner. If you cook every day, or close to it, do you really have next actions on your lists for cooking dinner? For instance, I would like to incorporate this into my life with my wife. Much of her day is composed of daily routine. Doing laundry, daily house cleaning (not a deep cleaning or something you would plan that I can see as an actionable item), picking and dropping kids off at school or friends, etc.. Basically my question is, what is your demarcation line between things that make the list and things that don’t need to be written down.
I also work from home and over the years I’ve done a pretty good job at adjusting to the presto change quick change required sometimes to transform from project leader in crises to daddy pick me up in the space of 30 seconds. Yet, it’s vital for me to create separation between home and work, separate time, work space, etc.. Do you keep separate action lists for home and work? Separate systems? Or do you find it easier to lump it all in?
I don’t put things that are normal parts of my daily routine into my inbox. Instead, for them, I have a daily checklist that I just move through. If I really want to establish a new routine, I add it to my daily checklist. My “inbox” is for irregular activities and ideas.
Some people will undoubtedly be governed more by a checklist and less by an “inbox.” It really depends on how routine-oriented your days typically are.
As for your other question, I don’t keep a separate system for home and for work. I found that there were too many things that made sense to combine to keep them separate. For example, if I’m driving to the next town for a meeting and research, it’s worthwhile to know that I also need to stop at the grocery store or to pick up a baseball glove or something like that on the same trip. I chose to work at home to take advantage of these synergies.
Q8: Paying off a mortgage quickly
First some background on our financial situation. We have: no debt, 3 months of living expenses in an emergency account (we would like to get to 6 months), $13,000 in my Roth IRA, $5,000 per year in my company retirement plan (tax-deferred), $8,000 in my wife’s IRA, and she fully contributes to company match ~$1,500 per year (tax-deferred). We also have a HSA with $300 and $500 monthly surplus after all our bills. We also have general savings of $15,000 and good credit (760).
Now for our potential home purchase info. We have chosen an upper limit of $75,000 because we are in a position with a down payment, home prices, and interest rates, that we could pay off a place in 5 years or less (which I consider “non-traditional”). Because this isn’t the norm, and our first home purchase, I am interested to hear your thoughts. Below is a potential home in our area which meets our criteria:
Potential monthly costs ($65k list price condo/townhouse)
$945 – mortgage ($50k mortgage after $15k down payment, 5 years at 5% interest)
$120 – HOA (water, trash, exterior maintenance, roof, plumbing, a/c, etc.)
$75 – electricity
$30 – homeowner’s insurance
Since we are a younger couple, paying this off in 5 years and reducing our housing costs (and our only real financial obligations) to $225 per month for HOA, utilities, and insurance would really improve our financial flexibility for the long-term. We could save substantial amounts of our salaries, go to one salary (if we have kids), or even rent it out. It almost seems too good to be true. The one downside I see in aggressively paying off the mortgage is it would reduce our ability to save for retirement during our potentially most important investing years for compounding interest. On the other hand though, eventually eliminating our single largest monthly expense is pretty big too.
Again, since this is a non-traditional mortgage length and I have to wonder, are we crazy? Am I missing something in this situation? Is it too good to be true?
Even if you can pay it off in five years, I would not get a 5/1 adjustable rate mortgage. If you were to slip in your plans, the interest rate adjustment would be a big fistful of sand in the oil of your progress.
Instead, I would get a fifteen year fixed rate mortgage and make extra payments as often as possible. You’ll still get a stellar rate right now with some breathing room in the event of something changing in your life. Aside from that, your plan sounds good.
Many people plan their lives as though nothing can ever go wrong and then find themselves in a real pickle when things do go wrong. Don’t put yourself in that situation needlessly. Another fraction of a percent in interest is worth it to keep yourself out of a mortgage rate adjustment when you don’t need it.
Q9: Severing your credit from someone
I am recently divorced and have looked at my credit reports on the big three. Found that I have not been divorced financially from ex in their systems. Oh, I have good credit, and all, but I am also listed as residing at his address on one; am paying well and on time at the jewelry store for her engagement ring; etc. When I contacted the credit bureaus, one wrote that I had to send a copy of my divorce decree for them to sever my credit report from his. That’s a problem as every governmental agency that I’ve contacted to get my name back wants an original (63 pages at $1.00 per page – plus raised seal). At least one of the bureaus hasn’t updated my/our information for years. My question: Is it worth the hassle to work with the bureaus to get my credit severed from his or do I wait until it is done, more or less automatically? So far, he seems to be doing okay with his credit.
Having your credit tied together is a risk for both of you. If you damage your credit, it will damage his and vice versa. The question really is how big that risk is?
If I were you, I’d probably change every piece of information I could for free, then allow the others to slowly drift away. You should both start switching to lines of credit that are free from the other person, ceasing use of the old lines of credit, and eventually closing them.
This will take time, of course, and you’re both risking that the other person won’t do something damaging to their credit. If that is a concern for you, then you should probably send copies of your divorce decree to every place necessary with regards to your credit.
If you ignore the spiritual realm entirely, meditation and prayer serve pretty much the same function. They give us a few moments to put our mind at ease and escape the flood of information and thoughts that burden us in our daily lives.
For those who are religious, prayer does also offer an avenue of communication with one’s god. The value of that depends a lot on the value that person puts into their faith. However, the solace that meditation provides is still available to those who are not religious.
Simply put, I mention them together because they can provide benefit to everyone, regardless of religious belief.
Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.