Wage Garnishment and how to avoid garnishment

Wage garnishment is a process by which a creditor can bring judgment against you to recover the outstanding debt by taking away money from your wage. However, the court does not collect the money on behalf of the creditor. It only issues the order for garnishment of the debtor’s wage. Wages can be garnished in most states in US with the exception of Pennsylvania, North Carolina, South Carolina and Texas. However, even in these four states, wage can be garnished for outstanding Federal tax dues and alimony and child support obligations. Mostly wages are garnished for credit card debts, medical bills, car loans and student loans.

As per the Federal law, if your weekly disposable income less than $175.50 per week, then you are exempted from wage garnishment. However, if your disposable income is between $175.5 and $234 per week, then the creditor can either garnish the entire amount above $175.5 per week or 10% of your gross income. Now if the disposable income exceeds $234 per week then the creditor can garnish either 10% of your gross income or 25% of your disposable income whichever is less. Even if your wage is under garnishment due to alimony or child support obligation, the creditor can bring judgment to garnish your wages, but the total amount garnished (including the child support and alimony obligation) cannot exceed 25% of your disposable income. However, social security benefits cannot be garnished for payment of private debt.

After the creditor obtains a judgment to garnish your wages, the creditor sends an income execution notice to the city Marshall who will in turn send the notice to the debtor within a period of 20 days. Once the debtor receives a copy of the income execution notice he has 20 days to respond and ask the Marshall for a voluntary repayment plan. If you do not respond to the notice within 20 days, the Marshall may serve the notice to your employer who in turn will send 25% of your disposable income to the Marshall. The Marshall will be sending you an account statement from time to time showing how much payment has already been made and how much is left to repay.

A creditor cannot usually freeze your bank account and garnish your wages at the same time. If your existing garnishment has already exceeded the permissible limit, then no further garnishment of your wage is possible. Moreover, you may not be fired from your job if you have a wage garnishment order for the first time, but if the garnishment is for the second time, the employer can fire you from your present job.

Merry Christmas

Hi everybody
Christmas is on the cards and we are ready to celebrate this auspicious day. Almost all of us go for a vacation to enjoy with our near and dear ones forgetting our professional pressure. We save a portion of our income round the year to spend for this day and return back again in our normal course of work after our vacation.

Now let me try to relate Christmas with our credit problems. Mostly we spend as much as we like during this time without taking into account our ability to repay the amount. We begin spending our savings and once our savings get exhausted we take recourse to our credit cards for our expenses. Now, our credit problem starts from here. Most of us usually have more than 5 credit cards and some of us fully exhaust the credit limit on these credit cards with the expectation that when we return back to work we will repay it slowly from our monthly income. But given our regular monthly consumption expenses, we cannot afford to pay back the credit card outstanding amount and we end up in debt trap because of high interest on these cards. Moreover, due to regular non payment on the credit cards, we become delinquent and this delinquency gets reported in our credit report, which not only reduces our credit score but also increases the probability of the creditor bringing judgment against us.

It is no doubt true that that Christmas comes once a year and we buy clothes and gifts right from the beginning of the month of December and by this time most of us have completed our shopping for this day. So before spending more we should first assess our expenditures because the economy is already on the slowdown and most of us may not have a job when we are going to come back. Moreover, the stimulus payment has not been very much successful in stimulating the economy. We should therefore try to cut down our expenses a bit for this year so that we do not face credit problems the next year when we come back.


Merry Christmas

Bankruptcy: Conditions under which you can file a bankruptcy

There are certain cases where you cannot file a bankruptcy under Chapter 7 or Chapter 13. If you have a Chapter 7 bankruptcy which has been discharged within the last eight years or a chapter 13 bankruptcy discharged within the last six years, you are not eligible to file a bankruptcy again. However, if your Chapter 13 bankruptcy has been discharged on payment of at least 70% of the unsecured debt amount, this six years bar will not be applicable for you. Moreover, if your previous bankruptcy (Chapter 7 or Chapter 13) has already been dismissed within 180 days, you become ineligible for filing any of the two types of bankruptcy. The years are considered from the date the bankruptcy was filed and not from the date you have received a discharge on the bankruptcy.

Now as per the recent bankruptcy law, if you want to file a bankruptcy, you need to undergo a credit counseling program within 180 days of filing bankruptcy and submit a certificate that you have completed the credit counseling program within 15 days of filing bankruptcy in the bankruptcy court. For filing bankruptcy, you need to be a honest debtor in the sense that you should not transfer your property to your friends or relatives to show that you do not have any assets and means to make payments under Chapter 13 bankruptcy and you may be allowed to file a Chapter 7 bankruptcy. In such cases, the court can dismiss your bankruptcy petition.

Even if you qualify for Chapter 7 bankruptcy, your petition may be dismissed if you do not have proper explanation as to how you have spent the cash advances and the reason behind this huge debt. Moreover, if you are undergoing voluntary unemployment in the hope of getting qualified to file a Chapter 7 bankruptcy, your petition can also be dismissed.

Since under Chapter 7 bankruptcy, the Federal Court can order sell of some of your assets to repay a part of the loan and discharge the remaining portion, if you have some assets, like your home, which you would like to keep back, you need to consider going for Chapter 13 bankruptcy as it allows you to keep back your property if you have sufficient income to repay back the outstanding loan amount within a three to five year time frame. If you have huge amount of debt or you have already filed a Chapter 7 bankruptcy within eight years or a Chapter 13 bankruptcy within six years, and you do not qualify for filing bankruptcy, then just do nothing and wait for the creditors to respond first. Now if you don’t have a source of income and the creditor sues you for the debt and judgment against you, they would not be able to collect the outstanding debt because you have nothing to lose. Even if the creditor brings judgment against you, they cannot take away your personal property like clothing, furnishers and other belongings to recover the debt as per the Federal law.

Default judgment: How to vacate a judgment

If you have any outstanding debt with the creditor, and you have not repaid the same, the creditor can sue you to the court. When the creditor files a suit against you in the court, the court sends a summon at your address and you need to file a response to the summon within the date specified, otherwise the creditor may bring a default judgment against you from the court and recover the outstanding debt either through money judgment or judgment to garnish your wages. In some states in US, such as Pennsylvania, Texas and North and South Carolina, wage garnishment is not permitted and so a money judgment may be brought against you. Moreover, the creditor can also bring judgment to garnish your bank account so that as soon as any money gets credited in your account, it is taken away by the bank and deposited it with the creditor and this process will continue so long as the debt is repaid in full.

Now, if you have failed to file a response to summon for some reason or the other, and a default judgment has been brought against you and you are sure that you do not owe any debt to the creditor; you can always file a motion to vacate the judgment. Filing a motion to vacate a judgment means that you are filing an appeal to the court to dismiss the judgment. Motion to vacate a judgment must be filed within 30 days from the date of the default judgment. However, this period may vary from state to state. You need to fill up a form where you have to fill up a declaration in support of your motion and give reason for being absent at the hearing. It is also necessary to state the reason as to why you do not agree to the default judgment. If you have asked for debt validation from the creditor and the creditor did not respond to your validation request within 30 days from the date of receipt of your letter, you can show this as a cause as a reason for filing the motion to vacate the judgment.

After filing the motion to vacate the judgment, the court notifies the plaintiff about the motion you have filed to vacate the default judgment. It may happen that the creditor or the collection agency that has brought judgment you might contact you to settle outside the court. If this happens, then ask them to dismiss the judgment and to inform the collection agencies they have appointed, to stop the process of debt collection from you and get this in writing. You should also ask them to remove the listing from the credit report. However, you should always take note of the fact that you should not go for debt settlement outside the court if the Stature of limitation for the debt has expired.

It may also happen that the creditor might not contact your before the hearing date and even on the date of hearing the creditor may not be present. In such cases you may win the case by default and the judgment will be dismissed. You should obtain a copy of the court order that the judgment has been dismissed and produce it before you employer or the bank in order to stop garnishment. Even if the creditor appears before the court on the court date, and fail to produce necessary documents in support of their claim that they owe the debt, for example, a proper debt validation, then also the judgment would be dismissed.

Departmental store credit cards: Cards that help you to build up a good credit score

Departmental store credit cards are a very important instrument to build up your credit history and therefore a good credit score. Most of the departmental stores in US like the Macy’s, Sears and Wall Mart now have their own credit cards which you can get even if you do not have a credit history or if you have a bad credit history. You can use these cards either to rebuild your damaged credit or to build up a new credit history. You can apply for a new card by just visiting the departmental store and filling up a form.

These departmental store credit cards provide you with a host of facilities, but you can use them only within the chain of the departmental store and not outside. You can use the departmental store credit cards and earn reward points which is as much as six points per dollar spend at the store. The most important thing which one might consider while applying for a departmental store credit card is that, these cards come with a very high rate of interest and low credit limit as compare to general credit cards. Again you do not have the option of cash withdrawals on such cards. However, most of these stores have now converted their cards into VISA or MasterCard co-branded credit cards through tie ups with banks like Citibank and American Express so that you can use them anywhere outside the store chain and can even take cash advances just like normal credit cards. Moreover, these co-branded cards have much lower interest rates as compared to ordinary departmental store credit cards.

Although it is true that the interest rates on these credit cards are high, it does not matter if you pay them off within the interest free grace period. You should spend on these cards upto the limit you think you can afford to pay back within the interest free period and save the interest payment. Moreover, you should not make any new purchases on these cards until your previous debts have been paid off in full. While applying for a departmental store card, you should also take note of the fact that most of these cards offer low introductory interest rates for a period of six months just as an incentive to make you purchase more on the cards. So you should not go by the introductory rates and should spend upto the limit you are able to repay so that you can make the card work to built up a good credit score for you and once you have built up a good credit score, you can apply for an ordinary credit card and start purchasing on the new card and build up a new credit history for that card.

Identity theft: How to prevent such fraud

Identity theft, which is now an increasing crime across US, is the stealing of personal information of the victim like the social security number, date of birth, maiden name of your mother, your complete address or your credit card number. With the help of this personal information, the identity thief can operate the victim’s bank accounts, transfer balances from one account to another, apply for a new line of credit or a credit card, and create an account with utility companies in the name of the victim or to rent an apartment in the name of the victim. The thief may use your social security number to get a driving license in your name with changed picture and address claiming that he has changed his place of communication, so that the credit card gets delivered in his address. But due to the link of the credit card with your social security number, the debt will be listed in your credit report for which you will suffer from low credit score.

Among the most numerous ways of getting access to your identity. The popular among them include stealing mails from your mailbox or obtaining old credit card and utility bills from the paper bins which you throw away carelessly in those bins. The thief may also steal your purse to get your credit card and other personal details and use the information to take financial advantage. So the first step towards your security is to keep the personal information out of the reach of outsiders. Another thing you may do is to destroy the old bills into numerous pieces before throwing them in the bins so that the information cannot be retrieved from those bills.

So to prevent identity theft, the first thing is to become aware of the fact of how to use your personal information. You should always remember your social security number, date of birth and passwords and never write it down somewhere and carry with you. Moreover, you should immediately report any loss of your credit card to the credit card company so that they can lock your card. Although the maximum liability for unauthorized use of your lost credit card under the Federal laws is $50, you should report the loss immediately without any delay to prevent identity theft.

Now if find your identity already stolen and the thief has taken financial advantage from it, you should immediately report it to the Federal Trade Commission by filling up the identity theft complaint form online and register with them as a new victim of identity theft. You should also update the complaint by calling them at their hotline number 1-877-438-4338 even if you have filed the complaint online. Next, you should take the copy of the complaint form with your photograph and identity proof to the local police and file a complaint there and inform the creditor that you have been a victim of identity theft.

Now if at point of time you become aware of the fact that you identity (social security number, or your credit card number) is stolen, you can immediately place a fraud alert service with any one of the three credit bureaus. Once your place the alert service with any one of them, the other two bureaus would be reported immediately and the creditor will verify by calling you up before opening a new line of credit in your name. The fraud alert service is provided by the bureaus free of any charge and can be activated by calling any of the three bureaus (Experian: (888) 397-3742, Trans Union: (800) 680-7289 and Equifax: (800) 525-6285)

Financing your education through Federal Student aid program

Most students opt for student’s loan either for their academic course of study or for their professional studies. However, for availing such loans there are two options available to them – firstly, they can get loans from private financial institutions and secondly, they can go for Federal students aid program. If you want to go for education loans with private financial institutions, you need to provide a guarantor for the loan. However, such a guarantor may not be required if you go for federal students aid program. This Federal aid program is in fact the largest source of student’s aid in US and provides over $80 billion per year in the form of loans, grants, and work-study assistance.

Several factors are taken into account while determining your eligibility for the Federal student aid program. This aid is mostly based on your financial need and is only intended to finance your education. To become eligible for the loan you should be a US citizen, have a valid social security number and should not be default on a previous Federal student loan. After you complete your graduation you get a grace period after which you need to start repaying your loan. This grace period is six months for a Federal or a Direct Stafford loan and nine months for a Federal Perkins loan. If you have received a Federal or a direct loan, you can choose from among the repayment plans. However, if you have received a Federal Perkins loan, there is only one repayment plan and you have to pay back the loan by this repayment plan only. Federal Perkins loan has to be repaid within a period of ten years only. Your monthly repayment will depend upon the amount of your loan and the time you take to repay back the loan.

The loan provider will provide you with all information about your repayment including the date from which your repayment begins. You should make regular repayment on your student’s loan once you repayment date starts else you will be considered delinquent as per the terms of the promissory note. Now once you become delinquent, the three credit reporting agencies may be reported about your delinquency which will be reflected in your credit report and lower your credit score. If credit score decreases, you may have problem getting loans at competitive rates for purchasing a home or a car. With a low credit score you may become ineligible for getting an additional federal student’s loan. Moreover, you can be sued to the court and judgment can be brought against you to recover the outstanding debt including late fees, through garnishment of your wages.

Bankruptcy: Chapter 7 vs Chapter 13

The term “Bankruptcy” refers to a legal process by which a person who cannot afford to pay back an outstanding debt is either exempted from paying it back or are given a new payment plan so that he can afford to pay it back depending upon the debtors financial condition. In US, it is a federal court process to help debtors to give a fresh start in their finances by avoiding the previous debts through an order of the Federal court. Once bankruptcy is filed in a federal court, the creditors have to stop collecting the debts. Moreover, by filing bankruptcy, all pending foreclosures, garnishments and other court orders can be stopped temporarily. One cannot file a bankruptcy if a bankruptcy petition has been dismissed in the preceding 180days.

There are different types of bankruptcies of which Chapter 7 and Chapter 13 are the most important. It is not always possible to choose among the types of bankruptcies you intend to file. If you want to file a bankruptcy, you need to approach the Federal Court and file a list of outstanding debts and assets and the federal court generally decides the type of bankruptcy you can file. However, under the new bankruptcy law, it is not easy to qualify for bankruptcy because if you have an income above the median income level, you need to undergo a 180 day credit counseling before filing bankruptcy.

Most people prefer to file a Chapter 7 bankruptcy. Chapter 7 bankruptcy is also known as “liquidation” or “straight bankruptcy” since under such a bankruptcy, the debtor requests the Federal Court to discharge your outstanding debts. Under such a bankruptcy, the Federal Court may sell off a portion of you property and pay off some of the outstanding debts and as a result the debts listed under the Chapter 7 bankruptcy gets exempted. However, it should be noted that not all of your personal property can be sold under Chapter 7 bankruptcy. Some of the items that are exempt from attachment under this bankruptcy include household appliances, vehicles, clothing, jewelry up to certain limit, pensions and social security benefits. Hence, this type of bankruptcy is filed if the debtor has no assets to lose.

Chapter 13 bankruptcy is also known as a “debt adjustment” bankruptcy and it requires the debtor to pay back the outstanding debts by a repayment plan from his present income. Under Chapter 13 bankruptcy, you need not hand over the assets to discharge your debt and you may pay back the outstanding debt within a 3 to 5 year period from your monthly income.

Statute of Limitation

Statute of limitation for the debt is the time limit by which a creditor needs to file a lawsuit against the debtor to recover the debt. If the creditor does not make any attempt within the SOL period, he loses the right to claim the debt from the debtor. This statute of limitation period depends on the nature of the debt, and starts after six months from the date the debtor first becomes delinquent and may continue from 3 years to 10 years. The nature of debt agreements are of 4 types – oral contract, written contract, promissory notes and open ended accounts.

Oral contract – It is a verbal contract between the creditor and the debtor and is considered to be legal if the contract can be proved in the court

Written contract – Under written contract, you need to sign a loan application form and must agree to the terms and conditions of the loan. Mostly car loans and personal loans fall under written contract agreement.

Promissory notes – A promissory note is like a written contract. However, under promissory note the scheduled payments are pronounced on the note. Mortgage loans are a part of promissory notes.

Open ended accounts – Open ended accounts are those agreements which include revolving lines of credit such as a credit card debt.

Statute of limitation is an important instrument for the debtors to protect themselves from the creditors. If the SOL has expired, the debtor need not pay back the debt although the negative listing will stay in the credit report for seven years from the date of delinquency. If the creditor knows that the SOL in his state has expired, he can tell the creditor that he has an absolute defense because he is aware of the fact that the SOL has expired, if the creditor calls him up and asks him to repay the outstanding debt. However, one should always keep in mind that if the statute of limitation has expired and still he makes a small payment to the creditor, the SOL rewinds and the creditor again recovers the right to sue you to the court and bring judgment against you to recover the debt. So before any payment on your past outstanding debt, one should always check whether the SOL has expired or not.

Piggybacking

Piggybacking is a process by which a person who has a good credit score can help another person who does not have a good credit score to boost his/her credit score. This is done by making the latter an authorized user of the credit card of a person who has a good credit score. This process has been in operational for many years, whereby parents who want their children to build up their credit score, add the name of their children as authorized user of the credit card they hold. Now the parents try and make up regular payments on these credit cards and repay the debt on time. This repayment history not only got reflected on the parent’s credit report, but also got reflected in the credit report of the children, thus enabling their children to build up a good credit score or the FICO score.

Though Piggybacking has a positive impact for building up a credit score for children by their parents, it has always been misused by people fail to pay back the debt on time. Since delinquency gets reported in the credit report and lowers the credit score, these people use to take help from private companies, who used to add bad credit consumers to the credit cards of people with good credit history for a fee, without giving them the right to use or even see the credit card. This simple authorization was enough to boost up the credit score.

This system of piggybacking therefore posed a difficulty for the creditors to judge the creditworthiness of a borrower because a person who is applying for a new line of credit with a good credit score may not have a good repayment history as he is using the credit history of the primary credit card holder to increase his score. To help the creditors to get out of such situation, Fair Isaac has developed a new FICO 08 scoring model which would bar piggybacking. As per the new FICO 08 algorithm only primary user’s credit report should reflect his credit history and it should not be reflected in the credit report of the authorized user. This has both a positive and a negative side. On positive side, it would be easier for the creditors to judge the creditworthiness of the borrower because the credit score of the borrower would reflect his own credit history and on the negative side, it would be very difficult for the parents who has been building a credit history for their children, can no longer do so. Instead these parents have to provide their children with a secured credit card and train their children the secured ways to use these cards so that they can build up a good credit score.

Economic Stimulus payment

Economic Stimulus payment is basically a rebate by the Federal Government which will be available to 130 million US households. The US Government has started sending this cash rebate from the month of May 2008. The amount of rebate depends on your income level. Each eligible individual may get a cash rebate ranging from $300 to $600 while each married couple who has filed tax returns jointly may receive the rebate ranging from $600 to $1200. In addition to this you may receive $300 for each qualifying child you have. Moreover, the individual must have a valid social security number and must not be claimed as dependent on anybody’s tax return. Qualifying child includes sibling, adopted child, nephew, niece or your own child who must have completed 16 years of age and has a valid social security number and is dependent on you as per your income tax return.

Now if you have already filed your income tax return for the year 2007, the IRS will automatically send you a check for the amount you qualify for the rebate. However, if you have not filed the tax return for 2007 yet, you should do it by 15th Oct 08 to avail Economic Stimulus payment. However, if you do not generally file a tax return but you think that you are eligible for this stimulus payment, you need to fill up form 1040A and write “Stimulus Payment” on it. This rebate is non taxable and will be treated just as any other tax refund.

For more information on Economic Stimulus payments you can visit the IRS website or call them at 1-800-829-1040.

Credit Cards – Personal versus Business credit cards

Most people in US prefer cashless transactions for their convenience which has led to the use of credit cards for normal transactions as well as for online purchases. These credit cards not only help people to travel freely without having cash in their pockets, but also help them to build up a good credit history which gets reflected in their credit score. Mostly credit cards are of two types – Personal credit cards and business credit cards. Both of these cards have their own advantages and disadvantages and are meant for different targeted groups.

If you want to build up a good credit history for yourself, then you need to go for a personal credit card. Again Personal credit cards are of two types – Secured credit cards and unsecured credit cards. Secured credit cards are for those who either have a very bad credit score or do not have a credit history at all. In case of secured credit cards, you need to maintain a cash collateral with the bank or the company from which you want to have a secured credit card. The amount of money you keep with the credit card company is the credit limit on your card and this credit limit increases with the increase in cash collateral with the bank or the credit card company. Secured credit cards normally have a low rate of interest and have an annual fee charged on it. If a person with no credit score make purchases with these cards and repay it back regularly, he develops a good credit history with the card which gets reflected in his credit report and as a result of which his credit score increases. Now based on the repayments made on the secured credit cards, you may qualify for unsecured credit cards at a later date. Unsecured credit cards on the other hand do not require cash collateral and the credit limits on these cards vary between cards. Unsecured credit cards require a good or an excellent credit score and it comes with a relatively high rate of interest as compared to secured credit cards. Moreover, unsecured credit cards offer benefits like zero APR balance transfer for a period of 6 to 12 months and cash back on purchases.

However, personal credit cards generally have a much lower credit limit as compared to business credit cards. Personal credit cards offer credit limits up to $10000, while in business credit cards the credit limit can go up to $50,000. Again it is compulsory for a personal credit card holder to make a monthly payment, but it is not for a business credit card holder. If you have a small business, you can use either go for a personal credit card or a business credit card depending upon your requirement. Since a business credit card has a higher credit limit, it helps companies to cover unforeseen expenses and overcome financial crisis. These business cards also come with zero annual fees and low rates of interest. However, the interest while the interest on personal credit card ranges from nine to twenty percent, in case of business credit cards, it is twelve to twenty-five percent. Moreover, the application process in case of business credit cards are much more stricter than those of personal credit cards because of the higher credit limits associated with these cards.

Another type of business credit card is the corporate credit card. These cards are very difficult to obtain and the organization need to have a good credit history to have such a card. Moreover, the Corporation needs to have a good profit history for two to five years and the credit limit on these cards may range from $50,000 to several million dollars.

So while applying for a credit card, you should first judge your requirements. Whether to go for a personal credit card or business credit cards depends on your needs. Even if you need a credit card for your business, you can use a personal credit card, if you do not have a large requirement. However, if you want to maintain one business credit card to meet emergency business requirements, you can always do so.

Debt Validation: The most important instrument against creditors and collection agencies.

Debt validation refers to the debtor’s right to challenge the debt which the original creditor or the collection agency is asking him to repay. Whenever, a creditor or a collection agency calls you up over phone to repay a debt, he should send a debt validation notice to the debtor within five days from the date of first communication. However, if the first communication is in writing, the letter which is sent to the debtor includes a debt validation notice. This debt validation notice is send to the debtor as per the rules of the Fair Debt Collection Practices Act, and is intended to let the debtor know his right to dispute the validity of the debt within 30 days of the date of communication.

You should dispute the debt in writing within 30 days from the date of first communication else the debt is accepted to be valid and the collection agency or the original creditor can take steps to recover the debt from you. However, if you validate the debt within 30 days from the date of communication, the collection agency or the original creditor must send you proper validation of the debt within 30 days from the date of receipt of your debt validation letter else the collection agency must cease collection of the debt. After receiving your request for debt validation, the collection agency must send you the proof that the debt has been sold off to him by the original creditor and presently he owes the debt.

Debt validation letter can also be send to the collection agency if you find the name of the collection agency listed in your credit report against some debt. In such case also, the collection agency must send the validation within 30 days from the date of receipt of your debt validation letter. However, if they do not validate your debt within this period, you can send dispute letters to the credit bureaus asking them to remove the listing from your credit report.

It is always advisable to send all debt validation requests in writing and under certified mail with return receipt requested, to keep a record in case the collection agency or the original creditor later does not acknowledge the acceptance of your debt validation letter. This return receipt may strengthen your case if the collection agency or the creditor later sues you to the court without validating your debt.

Cosigner obligations on loans

Most lenders require a co-signer with a good credit history to sign your loan agreement before they process your loan application. They ask for co-signer because they always try to minimize the risk associated with the loan by transferring the risk to the cosigner. In other words, the co-signer acts as a guarantor to the debt that the actual debtor is opting for.

So it is always advisable to know your obligations before you co-sign a loan agreement. Federal law also requires the creditors to clearly explain the obligations to the cosigner. Mostly people with a bad credit score require a co-signer and so your good credit score may be at stake if somehow the actual borrower does not repay the loan. It has been seen that there are certain lenders who asks the co-signer to repay the debt as soon as the original creditor goes default. Thus, co-signing a loan agreement would mean that you are taking the risk that the original creditor is not willing to take.

You should therefore sign a loan agreement only if you are sure that you will be able to repay it in case the original debtor fails to pay it back. You may be required to pay back the full amount of the debt including the late fees and other charges which may arise from time to time. But in case you too cannot afford to pay back the debt, the creditors and the collection agencies my report it to the credit bureaus who in turn will list the debt in your credit report. This will lower you good credit score which you have used to become a co-signer.

However, in spite of this fact, there are situation where you have to co-sign a loan agreement. For example if the loan applicant is your son or other close family members, you may have no other option but to co- sign the agreement. But in such situations you may negotiate with the creditor to limit your obligation only to the principal balance of the loan. But in such cases too co-sign the agreement only after you are sure that you are able to pay it off.

Credit report and FICO Score

A credit report is a statement which generally shows your credit activities during the past seven to ten years. It lists all types of credit issues like any loans you have opted for, credit card dues, the balances in your credit cards, and your payment history i.e., how conscious you are in repaying these loans. The listings in your credit report is generally categorized under four heads – Identifying information, credit information, public record information and inquiries. Your identifying information includes your name, social security number, birth date, and information about your spouse. Credit information includes your loans with banks, credit card companies, utility companies and even mortgage loans. Public record may include court records on bankruptcy, tax liens, and judgments and finally hard inquiry information includes the name of the creditor who got access to your credit report in the last two years. Based on this information, your FICO score is calculated which forms the basis of your loan eligibility. There are three credit reporting agencies or credit bureaus who prepare your credit score. They are Experian, Transunion and the Equifax.

Developed by Fair Isaac and Company, FICO score is a type of credit score which is widely used by the creditors to determine your potentiality as a debtor. It is a credit scoring model developed in the late 1950s which has been accepted by almost all types of lenders to determine your eligibility as a borrower. Credit score is a numerical three digit score, which normally ranges from 350 to 850 points and is based on the listings on your credit report. The more is your score, lesser interest rate you need to pay on your loans and hence a better deal. FICO score is generally measured in terms of five parameters with maximum weight on your credit history. The five parameters on which your credit score or your FICO score depend are as follow:

• Payment History – It contribution is about 35% in you credit score and so it is always advisable to maintain a good credit history. For this it is always advisable to make timely debt payments and not to miss any payments.
  

• Amounts Owed – Amounts owed contributes about 30% in your credit score. Because of its importance as a factor in determining your credit score, one should not exhaust the entire credit card limit in purchasing through the card. This lowers credit score. Instead, one should focus spending only 30% of the credit limit. Pay back the debt and then reuse it.

• Length of the credit history – Length of the credit history constitutes about 15% in your credit score. So in order to make the payment history long, advisors always suggest not closing any old credit card accounts. Rather, one may close any new account if he is not able to continue with the annual card fees.

• New Credit – Applying for a new credit constitutes about 10% in your credit score. Whenever you apply for a new credit, creditors make an inquiry on your credit report through the credit bureaus. This is known as hard inquiry and it remains in your credit report for two years. Too many hard inquiries suggest that you are “credit hungry” which gives negative impact on your credit report and hence lowers your credit score. And finally

• Types of credit used – This factor contributes 10% in your credit score. This includes the number of credit card, loan and mortgage accounts etc you hold. Too many loan accounts may lower the score because it may suggest that if you take any further loan, you may be delinquent.

It may be noted that FICO takes into account all the five factors in determining your credit score – not just one or two of the factors.

Charge off and its impact on your credit score

“Charge off” is generally a negative term associated with your credit report to describe a bad debt. It is usually an account in which you owe some debt. An account is labeled as charged off, if you have not paid for 180 days form the date you made the first missed payment. Charge off does not necessarily mean that your creditor has closed your account and you are no longer required to pay back your debt or in other words you are no longer liable for the debt. In fact you are totally liable for the debt and your creditor has the option to sue you to the court and if needed get a judgment to garnish your wages to get back the debt till the time the SOL in your state has expired. This means that even though your debt has been written off, you are still responsible to pay off the debt.

Charge off can be labeled in any type of account, be it a credit card account or a loan account. Whenever a lender charge off your account, he reports it to the three credit bureaus or the credit reporting agencies (CRAs) who in turn will list it in your credit report. A charge of listing in your credit report may be damaging to and is considered one of the worst among the listings in the credit report. A charge off listing in your credit report may cause your credit score to fall by as much as 100 points if not more. A charge off listing remains in your credit report for seven years from the date of the first missed payment and adversely affects your credit score.

So it is always advisable to prevent yourself from being charged off. Whenever you find that you are not in a position to cope with your debt repayments and there is a risk of being charged off, immediately contact your creditor directly for a negotiation. Try to come to a repayment plan with your creditor for the repayment of the loan and agree for one which you find suitable for you. You may also consult a credit counselor and he may be able to help you find out a way to get out of the situation.

However, if you have an account already charged off and this charge off gets reflected in the credit report, it is always better to pay off the charge off if you can afford to do so. Once you pay off the charge off, the credit report will read “paid charge off” which is certainly better than if it is listed as “charge off”. Moreover, you can also ask your creditor to change the status of the charge off listing as “paid-as-agreed” which will place your account in good condition. However, it should be kept in mind that even if you pay off the charge off in full, this negative mark will stay in your account for seven years.

Re-Aging your credit account:

The term Re-Aging is generally used to clean up your credit history after you had a bit problem with your credit and you are back in control. Whenever an account is re-aged, it is labeled as current and is no more considered as a past due. As for example if you are a few months late with your credit card repayments, you may persuade your creditor to re-age your account. If your creditor agrees to your request, then you will not only gain by exemption of the late fees, but also you will no longer be considered as delinquent. To take it the other way, your missed payment are just ignored. Re-aging your account is thus good for your credit score as the “late” stain comes out of your credit report and you account is considered as current.

However, it is not so easy to make your creditor agree to re-age you account. It may not come free of cost. To make your creditor agree to re-aging, you may need to offer some form of payment immediately coupled with a schedule of more than minimum payments.

There are also government rules and guidelines relating to re-aging. These rules and guidelines have been set up by the Federal Financial Institutions Examination Council, which is a Government body authorized to make recommendations to promote uniformity in the supervision of financial institutions.

As per the policy resolution taken in the year 1999, the revised standard requires the borrower to express his eagerness and ability to repay the loan, for both open and closed ended credits. Moreover the credit account should have existed for at least nine months and the debtor should have made at least three uninterrupted monthly payments or an equivalent lump sum payment. In addition to this, the loan can only be re-aged once in every twelve months.

One thing should always be kept in mind while you are opting for re-aging. You must have all communications with your creditor in writing and under certified mail, since if re-aging does not take place you will have proofs to claim re-aging.

Impact of credit score on your insurance premiums

Your credit history and hence your credit score can significantly affect your insurance premiums. The cost of your insurance may increase with decreasing credit score – be it personal insurance or an auto insurance. Hence a low credit score would imply a higher insurance premium and a high score would give you the best deal in insurance premiums.

The reason behind this is simple. The insurance companies are of the view that people who have a bad credit history are more likely to file personal insurance claims and hence to minimize the risk, they charge high insurance premiums form these people. Similar is the case with car or auto insurance policies. In addition to your credit score, auto insurance premiums also depend on a few other factors like the type of the car you drive (for example, racing cars are more prone to accident and hence has a high insurance premium), the security system in your car, and the driver’s driving history (more than three speeding fines and two accidents with cost you with more premiums).

Most insurance companies depend on the credit based insurance scores (a numerical ranking which is based on the individual’s credit history or in other words how an individual handles his daily financial matters) to determine the risk involved in offering an insurance policy. These scores help insurers predict the future performance of an individual and hence minimize the risk. The insurance companies use the insurance scores prepared by Fair Isaac which are referred to as Inscore by Equifax, Fair Isaac Insurance Risk Score by Transunion and Fair Isaac Insurance Score at Experian.

A credit score of 700 and above implies that you have a excellent credit score and therefore you can expect the best deal in the insurance premium. However, if your score falls between 650 and 700, it is still a good score and you can expect low insurance premiums. Between 600 and 650, the score is still good, but if the score falls below 600, it is very difficult to get a insurance policy with premiums at competitive rates.

So to get insurance premiums at favorable rates it is always advisable to maintain a good credit score. For this, one should always go through the credit reports periodically and report any discrepancies to the credit bureaus immediately and remove it from the credit report. A good credit score always helps you not only to get good insurance premiums but also a favorable interest on your credit, a good job and much more.

Foreclosure: Is short sale a way out of it?

Foreclosure is a legal instrument which is resorted to by most creditors against the debtors in case the later fails to satisfy a financial obligation with the creditor. Foreclosures are generally a result of non payment of debt which may include mortgage payments, second mortgages, equity lines of credit or even non payment of property tax.

Mostly people fall in the trap of foreclosure because of missed monthly mortgage payments. Foreclosure is really an unpleasant experience in one’s life as you may land up losing your house to the lender. Not only will you lose the roof over your head, but also a judgment can be made issued by the lender against you for the amount you owe and other cost of foreclosure. In addition to this, your credit report will reflect this foreclosure and this will stay in the report for seven years adversely affecting your credit score. Foreclosure may result in lowering your credit score to as much as 260 points.

So one must always try and avoid foreclosure at all cost. To avoid this situation, whenever you are in a financial crisis, contact your lender immediately. Since foreclosure is costly to both your and your lender, most lenders agree to foreclosure. However, it should be noted that if you show a good effort to repay back your missed payment to the lender, you can avoid foreclosure. If you ever miss a payment, ask your lender to give you some time to repay the missed payment plus the late fees on a monthly basis. Pay the dues with the monthly installments slowly.

Another alternative to foreclosure is short sale. Depending upon the area you live in and the market price of your house, you can sell the house to get the full or part of the amount needed to repay the entire mortgage payment. However, for short sale, it is essential for your lender to allow you to sell your house and forgive any shortage between the sell price and the balance due. Both short sale and foreclosure have negative impact on your credit report. Short sale lowers your credit score only by 200 points and you can overcome the impact of short sale faster than foreclosure. However, you have to pay the tax on the amount of the loan forgiven.

Missed mortgage payments and its impact on credit score

If you think that maintaining a good credit score is an essential part of your life, it is advisable not to miss any mortgage payments. Timely mortgage payments every month help you to improve your credit score. It is always recommended to make mortgage payment your first priority among the bills you pay every month since it not only protects your house from foreclosure, but also help you to maintain a good credit score. This is because of the fact that if you have a missed mortgage payment, it technically implies that you are in breach of your agreement with the creditor. Even if your creditor does not initiate foreclosure, late charges and other fees will add to your expense if you miss one payment and will make it even more difficult for you to make up the missed payment at a later date.

A missed mortgage payment no doubt gives a negative impact on your credit report and lowers your credit score. So a missed payment can be very costly. A missed mortgage payment for more than 30 days can even lower your credit score to about 100 points or even more and this decrease in credit score will remain for as around 12 months from the date the account becomes current. Thus in order to keep up your financial health, make sure that you make the payment on time each month.

Ways to ensure that your mortgage payment is made on time.

• If you ever miss your mortgage payment, notify your lender of your financial position immediately, since it may prevent your home from becoming foreclosed. Since foreclosure is costly for both parties, the lenders mostly agree to help the borrowers to keep their houses. But this is the case only when you are one or a couple of payments behind. They can plan you a repayment plan for the missed mortgage payment which you can pay slowly with your current payments.

• Try and cut unnecessary expenditures. Although it is very difficult to cut down expenses, yet it is necessary to do so to make timely mortgage payments. Keep the money you save in a different account and use it to pay your mortgage bills.

• If you are hesitant to talk to your creditor for some reason or the other, call a counselor who is approved by the US Department of Housing and Urban Development, who can assess your financial situation and help you negotiate with your lender.

• Finally always ensure that you reply to the letters send by your lender if you miss a mortgage payment. Else, the lender may take legal action against you which may result in foreclosure.

Pay day loans

The concept of pay day loans arises out of the fact that most Americans undergo financial crisis during the end of the each month and they are severely in need money during this period. Payday loans usually help people to meet such unforeseen expenses till the time you receive the next pay check, when you can afford to pay back the debt.


Payday loans usually come with a very high interest rates and can be availed by anyone with a checking account. For availing a payday loan all you need to have is a permanent source of income. However, the pay day loans are mostly used by people who do not have a credit card account and so mostly people with a very bad credit score or people having no credit history at all take recourse to such type of loans.


The basic advantage of pay day loans is that it is very easy of access mostly during emergencies. These loans are mostly taken to pay emergency medical bills, car repair bills, and other unanticipated expenses. But the most important fact is that it is not free from disadvantages. If you are not able to repay the loan within the end of the term, you may land up paying high additional fees. Moreover, these loans come up with high annual percentage rates which may range from 300% to 1000%. As compared to credit cards which charges mostly 12% interest rates, the rates on pay day loans are astronomically high. So it is always advisable to repay a pay day loans as early as possible.


Some substitutes to pay day loans:

It is of course true that pay day loans are helpful for meeting one time emergency expenses. But one should always consider other options too before going for a pay day loan. You may try the following alternatives before applying for a pay day loan:

• If you have a credit card, then charge the amount you need from your credit card.
• You may take some advance from your employer and repay back on getting the next pay check.
• You may get some loan from your relatives and friends and finally
• The most important alternative to pay day loans is to prepare yourself to meet your emergencies. For this, always try to cut down unnecessary monthly expenses and keep the amount in your savings account. Although it is very difficult to curtail monthly expenses, try and save at least the minimum amount possible.