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Money 911: Get the most from creditors

Having trouble with lenders? Problems with your credit cards? TODAY’s financial team offers advice on where to put your money and how to deal with frazzled creditors.
/ Source: TODAY

TODAY’s financial team offers viewers advice on money matters ranging from dealing with lenders to investing money and paying off credit cards — and they include several helpful links to help secure your financial future.

Q: Our lender won't speak with us until we're actually late on a payment for loan modification. Is that normal for them not to talk to you until you're behind on a payment? —Laura, St. Louis, Mo.

Jean Chatzky: This, unfortunately, is normal, or at least it has been over the last year or so. Frustrating, I know. But the hope is that President Obama's Making Home Affordable plan is going to change things. Under that plan (which you can read about at www.makinghomeaffordable.gov) you do NOT have to be behind on your mortgage payments to be eligible for a loan modification — but you do have to be at risk of imminent default. That means either your mortgage payment has increased and you can no longer afford it, your income has been reduced pretty significantly, or you're experiencing some other kind of hardship — a medical emergency, for example. If this is you, you should contact your mortgage servicer (again) and let them know what's going on right away, keeping in mind that you're going to need to document your income and expenses and provide evidence of your change in financial circumstances. Tell them that you think you qualify for a loan modification under the Making Home Affordable plan. They will then be able to run the numbers for you.

If you're still having trouble getting them to talk to you, reach out to Hope Now, an organization that will put you in touch with a HUD-certified housing counselor. He or she will hold your hand through this process. Hope Now's hotline is 888-995-HOPE.

To apply for a Home Affordable Modification, you must:

  • Be an owner-occupant in a one- to four-unit property
  • Have an unpaid principal balance that is equal to or less than $729,750 for one-unit properties (there is a higher limit for two- to four-unit properties; consult your servicer)
  • Have a loan that was originated on or before Jan. 1, 2009
  • Have a mortgage payment (including taxes, insurance, and home owners association dues) that is more than 31 percent of your gross (pre-tax) monthly income
  • Have a mortgage payment that is not affordable, perhaps because of a significant change in income or expenses.

Q: My husband and I are not sure where we should be putting our money. We have no credit card debt and about $15,000 in a savings account. We have IRAs, some stocks, and our savings account. We are not sure if we should continue to put money in savings, stocks, a 529 for our son, CDs or IRAs. We have about $1,000 to $2,000 per month we would like to set aside. What is the best combination we should focus on to build a good safety net as well as grow our retirement fund? How should we put aside money to maximize our return and continue to be smart with our money long term? —Jennifer, Jacksonville, Fla.

David Bach: My first question would be, what's your income? If you have $2,000 to invest a month, I suggest the following split:

  • 30 percent: Pay yourself first (IRA account) — use an asset allocation fund or target dated mutual fund.
  • 20 percent: 529 Plan (conservative allocation) based on child age ... how old?
  • 50 percent: Security — I recommend TIP bonds (Treasury Protected Bonds) or IBond or CDs.

Q: I live in a condominium that was converted from a co-op ownership. We do not have mortgages or deeds, but have share loans and proprietary leases. To convert to individual mortgages, we will incur closing costs and have to exchange our co-op shares for deeds. If we do this, will it qualify as a first-time home purchase eligible for the $7,500 credit since I am about to file my income taxes? — Chris, Ann Arbor, Mich.

Carmen Wong Ulrich: Chris, even though you didn't have a mortgage, all the tax pros I talked with say that you still were a homeowner so you would not qualify as a first-time home buyer to get the tax credit, which this year, 2009, has turned into a true credit of $8,000 under the president's stimulus plan. First-time homebuyers have never owned a home as a principle residence and co-ops qualify as such. Also, note that if you're buying a home for the first time with a spouse or partner and he or she has owned a home before, you're not able to qualify for the credit either. For more information on the first-time homebuyers' tax credit, head to www.IRS.gov.

Q: I have maxed out all of my credit cards. I have heard you talk about calling creditors to get the rates reduced, but I also hear ads for debt consolidation. What do you recommend? — Aaron Boehm, Austin, Texas

Carmen Wong Ulrich: Always avoid those debt consolidation ads! They charge you a lot to do what you can do yourself or with the help of a nonprofit credit counselor. Yes, you can call your lenders to get your rates reduced, but the odds are that they won't comply. These days, creditors are just as pinched as we are, so they're doing all they can to make a profit, which means raising rates, especially on someone who has maxed out their credit. First place to go: a nonprofit credit counselor. Find one near you at www.NFCC.org, the National Foundation for Credit Counseling. For a small fee, they will work as your advocate to do two things: talk to your lenders to work out an affordable plan and work with you to budget your payments as best as possible to pay down the debt. But ask yourself too, why and how did you get into so much debt? You need to get at the root of the problem to make a decision with a counselor as to if you need to take more drastic steps, for example, if these are medical bills running you under, you may want to consider bankruptcy or settlement.

Q: I recently had my credit card limit lowered on one of my cards. After a couple of months I received a letter that the credit card company had decided to close my account. I always pay my bills on time and always pay $50 to $100 over the minimum. Will this affect my credit score?— Veronique

Jean Chatzky: The fact that the company shut down your card will affect your credit score, but this isn't something that you won't be able to bounce back from. Your credit score is made up of five areas: 35 percent is based on your payment history — which is why you need to pay your bills on time; 30 percent is based how much credit you're using versus how much you have available; 15 percent is based on the length of your credit history; 10 percent is based on new credit you take out; and 10 percent is based on the mix of credit you have. In other words, the more variety, the better your score.

The two areas that are going to be affected by this closed card are the length of your credit history and the amount of credit you're using (your utilization ratio). If this is a card that you've had for a long time, your credit history will be shortened, and that can ding your score a bit. Unfortunately, there's not much you can do about that, except hang on to your other cards by using them once or twice a month for small purchases and paying them off in full. By the way, in this economy, this is what we all should be doing with our credit cards to avoid facing Veronique's situation.

Your utilization ratio is also affected, because when they closed that credit card, the amount of credit you had available on that card (the credit line) was taken away from you, and as a result, your ratio of debt to credit was decreased. A quick fix for this is having the credit limit on one of your remaining cards increased, if your lender will allow it (it's certainly worth a call).

Q: We just had American Express call and they lowered our limit to about what we owe on the card. Can I call them and plead my case? We have been paying on the card triple the minimum payments and concentrating on paying the balance down. We have not been using the card, only in emergencies. The balance has been from college expenses and housing upgrades in the past. Also, should we cancel the card in response to the lower limit? Thanks Todd, Cleveland, Ohio

Carmen Wong Ulrich:  You can always call a lender to ask them to change your terms, but as we're seeing with hundreds of calls and e-mails on the show, credit card companies are not budging. Card companies are under considerable duress right now — they're looking at record default rates (up to 10 percent), so their response is to make as much money as they can right now. It's nothing personal! But it surely can hurt, especially if you have a long relationship with a card. What AMEX is doing is called "chasing the balance" — other card issuers are doing the same thing. They lower your credit limit to just above your current balance, which means you can barely use your card unless you pay all of it or a chunk of it off. You've been deemed a risk by the issuer, so they're limiting their risk of your taking on more debt and defaulting by chasing your balance down — and they may do it again! Don't cancel the card. You need a good, long, strong credit history to have a great credit score. What you can do is pay down the balance as much as possible and only use the card for items that you can pay off in full every month. This will raise your credit score, make you seem less of a risk for card issuers and they'll raise your limits.

Q: Due to a dramatic decrease in income last year, I was forced to live on credit cards. Now I have a $30,000 credit card debt. My income has now taken a huge jump. Should I pay off the credit card debt with my extra income right now or build up a savings? I work on commission and do not know how long my income will be at the current level. — Mike, Highlands Ranch, Colo.

Jean Chatzky: If you don't have an emergency fund, that is first priority right now. You need to have at least six months' worth of living expenses in a liquid savings account, so if your income does drop — or, worst-case scenario, you get laid off — you have some cushion to work with and you don't have to rely on that credit card again. That's how you avoid getting into debt in the first place.

Once you've established that, then by all means, start throwing as much money as you can toward those credit cards, starting with the one with the highest interest rate and working your way down, paying at least the minimums on all of them on time each month.

Q: We have a 4.6 percent adjustable rate mortgage, with a $551,000 balance and a $31,000 home equity loan balance. We think the house would appraise for $650,000, and would like to roll over the mortgage into a 30-year fixed rate. Should we borrow from our 401(k) to pay off the home equity loan so that we can get a lower mortgage rate and possibly avoid private mortgage insurance? We have excellent credit, no credit card debt and one car payment. — Kate Larson, Long Beach, Calif.

David Bach: Do not borrow from your 401(k) plan to pay down a loan. You may lose your job and have to repay the loan instantly — and if you don't, you will be hit with taxes and penalties. The loan would be taxed at your ordinary income rate and would also be penalized at 10 percent for early withdrawal.

My question: How long is the rate locked at 4.6 percent (this is a good rate)? If you have it for five to seven years, keep it, or see if you can simply refinance the loan now to a fixed rate for 30 years if you plan to stay with the property.

Q: Our accountant has told us that we can't take advantage of the new five-year carry back provision for losses incurred in our small business due to the alternative minimum tax. My question is whether this is a legislative oversight or if the new five-year carry back provision has been crafted in a way where it appears that small business receives tax relief when in fact it does not? — Sue, Norfolk, Va.

Jean Chatzky:
It sounds like you were given some inaccurate information. Here is the deal: In 2008, if your small business experienced a loss, you can take that loss and apply it to a year within the last five during which you experienced a gain. So let's say you lost $5 million in 2008, but in 2005, you made a $5 million profit. You know as well as I do that the $5 million profit had you paying a nice-sized chunk of change to the IRS back then. Well, now you can offset that 2005 gain with your 2008 loss, and you'll get a refund of the amount you paid to the IRS back then. Make sense?

The limitation here is that your company cannot gross over $15 million. How does the IRS calculate that? They take an average of the last three years. So if you made $10 million in 2008, $15 million in 2007 and $18 million in 2006, you're OK because your average is only a little over $14 million. But if you've made $18 million in 2006 and 2007 and $15 million in 2008, you're not going to qualify.

This, by the way, is new in 2008. Before that, you could only go back two years to offset a gain, which wasn't nearly as helpful — because business tends to go up and down in large swings, you weren't likely to have huge fluctuations in under two years. A five-year carry back, on the other hand, is a big help for many small business owners.