Bad credit can stick for years
Bruce Williams, the Cincinnati Post
DEAR BRUCE: My wife and I have had bad credit for some time (four years) due to my many credit cards. We began two years ago paying down our debt. Between us there were 15 credit cards and about $30,000 debt. One company we owed advised us to file bankruptcy, but we chose not to do so.
Now we're down to about five cards and a total debt of $4,000. We recently decided to buy a car with 200,000 miles on it only to find we didn't qualify for credit. We have not been late on any payments for two years. How long does it take to get your credit re-established? Would it have been better to file for bankruptcy? - B&J, Rock Island, Ill.
DEAR B&J: You guys are poster children for what can and usually goes wrong. Why anybody would ever need 15 credit cards is a total mystery to me. That having been said, you are to be congratulated for doing the honorable thing and paying off your debts.
I can appreciate that you need a vehicle, but you are going to find your credit still is very bad and will be for a considerable period of time.
You've mentioned some friends have gone bankrupt - in my opinion, the dishonorable thing to do. While they may get credit, it's going to be at a price. Understand, to some extent, the lender is better protected because the friend can't go bankrupt a second time until the statutory period has expired, and the laws are getting tighter which will make them a better credit risk.
You will find lenders, particularly companies that are a finance wing of a manufacturer whose primary mission is to facilitate car sales, will give people with very bruised credit a shot more often than a bank or other institution, which is simply loaning money for a profit. They will be more critical in their evaluations because they are not part of the sale.
You didn't mention your age, but I suspect you are relatively young. There is life after bad credit.
DEAR BRUCE: We have a rental on which we owe about $85,000. It is rented for $950 a month. That area is selling for about $200,000. I was thinking of taking a home equity loan from the rental and paying off our main residence, for which we owe about $67,000. My husband is retiring in about five months and would love to have no mortgage. Any problems with the IRS? Is this a good idea? - Z.G., Las Vegas, Nev.
DEAR Z.G.: I am happy with your success on the appreciation of the property. Las Vegas property is on a fire path, but I believe it will cool off.
You have $115,000 of equity. I would sell that property and pay the capital gains, which probably will leave you with a net of somewhere in the area of $100,000. The $100,000 appropriately invested could bring you more return than the rental, without any headaches.
As to whether you should spend $67,000 of that $100,000 to pay off your mortgage is an answer that's found by taking into account whatever tax-related savings there are by having the mortgage, how you would invest the money if you did not pay off the mortgage, and the interest rate of your current mortgage. If it is very high, it's better off to pay it off; if low, no way.
You're doing well, but I would not stay in the rental business, given the numbers you have described. You're not getting near enough for a unit worth $200,000.
DEAR BRUCE: We owe less than $7,000 on three credit cards. Thanks to an inheritance, we expect to pay it off in the next two weeks. We have at least six different credit cards with different banks. My husband would like to close all but two of the cards.
Does closing an account hurt our credit rating? Other than size of credit limit, are there other things to consider in deciding which ones to keep and which ones to cancel? - C.G., via e-mail
DEAR C.G.: Closing the account is not hurting your credit. Further, except for any membership fees or other costs, the interest rate that your card will impose and other fees will help you decide which ones to cancel.
I would certainly close at least four, possibly five of these accounts. There's no reason to have them. I again must wonder why in the world do you guys apply for so many different credit cards?
I'm also wondering why so many credit card companies would issue as much available credit as they do. A very poor management decision, in my opinion.
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