Do you have a question? Ask Mary Melcer, president of Lighthouse Credit Foundation! With “Ask Mary,” you will receive a personal response to any question you may have, from general money management issues to inquiries about Lighthouse services! Browse through questions from past readers in our “Ask Mary” archives, or send a new question by clicking here.*

Lighthouse clients: If you have a question pertaining to your personal account with Lighthouse, please submit that question to client@lighthousecredit.org.

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ANSWERS
    1. If I enter your debt management program, will I need to continue to take my creditors’ phone calls?

    Good question. Your partnership with Lighthouse is actually a three-way partnership, between you, your creditor and our agency. All three play very active roles in the debt management program. Lighthouse is simply here to facilitate the relationships with your creditors, and to help you get and stay on track with your budget and debts.

    Your creditors may continue to call you in the early months of the program if you have been or are currently delinquent on your payments. Your job is to let them know that you have entered the program with Lighthouse, and to contact us with any questions. Once the creditor notes your account that you are working through a credit counseling agency, they normally will stop calling to request payment from you. However, most creditors want to see that you are committed to the program, and intend to follow through with it. Therefore, they may want to see three on-time payments (paid through Lighthouse) before they will stop trying to collect on your account.

    The key ingredient to early success is patience. Even if a creditor may have called before, simply repeat for them that you have entered our program, ask them to note their system, and kindly ask them to contact us with any follow-up questions. Remember, you are still their customer, and although we will be handling your payments and any inquiries from them, they still retain certain rights as to your account with them.

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    2. Your representative explained re-aging to me, but it sounds awfully complicated. Can you explain how an account is re-aged in layman’s terms?

    Re-aging is a complicated thing to explain, no question about it, but let’s give it a try, shall we? If I had to explain re-aging very simply, it is a process by which, under certain circumstances, your creditors agree to “re-write history”, so to speak. Your creditors want a commitment from you that you are serious about repaying your debts. In exchange, they will offer certain account concessions – one of which is re-aging of accounts.

    Typically, for those creditors who do agree to re-age accounts (and most of the major banks do), after three on-time payments through your debt management plan, they will send information to the three credit bureaus that indicates that your account is now, and has been for the past three payment cycles, current. Any previous delinquent payment notations in that 90 day period will be removed, as will any indication of a delinquent balance. (Of course, you will still owe any delinquent balance, but it will be added to the total outstanding debt.)

    Hopefully, this provides a clear and simple answer to a unique feature of debt management.

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    3. Do your counselors help with questions about other types of debt, rather than just credit card debt?

    Absolutely! Our goal is to help you become financially knowledgeable and self-sufficient, through a wide range of educational information available from both our counselors and our website. Our goal in credit counseling is to help you determine the root cause of your debt, help you restructure (or create for the first time!) your budget into one that works for you and your family, and to offer encouragement and support as you work through the very difficult task of turning your financial life around, setting goals, and creating reasonable timelines in which to accomplish all of this!

    Our counselors are not a substitute for a financial planner, legal adviser or tax professional, but they can offer suggestions on topics such as working with both secured and unsecured debt, mortgage opportunities, automobile leasing and financing, savings plans and numerous other money saving tips. The counselors are available from 8:30 a.m. ET until 10:00 p.m. ET, so that you can call and talk with one of them confidentially at your convenience.Alternately, any financial questions you may have may also be e-mailed to one of our counselors, if that option feels more comfortable for you. The e-mail address to which you would direct those questions is:counseling@lighthousecredit.org.

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    4. How do I know that my payments are being made to my creditors on time each month?

    Remember the partnership idea I mentioned earlier? Part of your responsibility is to continue to monitor your credit card statements just like you did before Lighthouse stepped in. Actually, you will probably want to monitor them even more diligently to ensure that there are no errors being made by any of the “partners” – Lighthouse, yourself, or your creditors. If you spot any discrepancy, you need to contact us immediately so that we may investigate the situation or explain for you, clearly and accurately, what the circumstances may be. When you consistently review your statements, you will not only feel secure in your decision to enter the debt management program, but you will remain an active participant in this newly created partnership.

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    5. Could I get my creditors to reduce payments and interest rates on my own without going through credit counseling and debt management?

    Actually, you could, with a big BUT… And here’s the but: You may be able to call each of your individual creditors and ask them for rate or payment concessions, but they will be unlikely to grant them unless you are already quite delinquent on your account. Sounds strange, huh? Favors go to those who haven’t paid as they should have? But look at it from the creditor’s perspective: if you are the type of person who has always paid the creditor, why should they reduce your rate or payment terms, since you’ll probably continue to pay anyway (perhaps grudgingly, but you’ll make the payments). In contrast, a person who has already fallen behind represents a greater risk to the creditor, who may then be willing to grant them some concessions. Doesn’t seem fair, does it?Pay as agreed, and you get no special considerations. That’s life in the credit business, I suppose. And I certainly wouldn’t recommend that you stop paying or delay payments to creditors in the hopes of getting concessions on your own eventually – a credit counseling agency such as Lighthouse is much better equipped to help get you reductions even when you have been paying on time.

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    6. Do you have numbers regarding how many individuals are currently in debt? I am also trying to find out an approximation of how many clients you have in Lighthouse's Consumer Credit Counseling Program.

    Determining exactly how many people are in debt at any given time would be almost impossible considering that many countries do not release these statistics or do not even keep these statistics. Even if we narrow the question to how many people in the U.S. are in debt, finding an exact answer would be difficult and I am not familiar with any periodic statistical report that tracks this number. However, page 23 of the Federal Reserve report, Recent Changes in U.S. Family Finances: Evidence from the1998 and 2001 Survey of Consumer Finances reports that 75.1 percent of all families in the U.S. are in some kind of debt (source: http://www.federalreserve.gov/pubs/oss/oss2/2001/bull0103.pdf).

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    7. We went through some hard times and did not pay certain bills (gas cards, phones, cell phones, etc.). We are now in the process of paying them off. Some of them are charge-offs on our credit. If we pay these, will it show up as paid on our credit report? Also, once these are paid, how long does it take for our credit score to start going up? Sometimes we are embarrassed about not qualifying for low interest on car loans, so we really want to "fix" our credit. Thanks for your help.

    First of all, yes, generally when you pay off a debt that has been charged off, it will show up as paid on your credit report. However, sometimes accounts that are charged off have multiple creditors listed on the credit report. For example, let's say you had a Discover card that charged off and they sold the debt to ABC Collections. Your report would probably have two separate entries for the same debt. Under Discover, it would show the account history and that the debt had been charged off and transferred. There would also be an entry with ABC Collections. Then, when the account with ABC Collections is paid in full, it will be noted under ABC Collections that the account is paid in full.

    Secondly, because a credit score is like a "snapshot" in time of your credit, it is really always changing. So your score will generally be improving each month as negative information is replaced by positive information, negative information fades into the past, and positive information is added. Because credit scores are calculated based on the information in the credit report and many creditors update the information in credit reports each month, many consumers have actually seen changes in credit scores from one month to the next. Part of the key to having a good credit score is by know how credit scores are calculated, so you should explore some of the resources on our web site. I would also encourage you to take advantage of our FREE online educational course at http://debtalliancellc.com/lighthouse/freecourse.html. Chapters 9 and 10 of the course are about credit reports and scores.

    Understanding this information will allow you to make good choices that will result in "permanently" fixing your credit score and put you in control of your credit. Credit is a tool and when used properly will only benefit you and your family. I would also like to offer a friendly reminder of an accounting principle related to car purchases. Remember that cars depreciate in value. So, regardless of what interest rate you get, you will always be paying interest on an asset that is declining in value. I am not saying that people shouldn't get new cars or finance cars, but I think sometimes our cars prevent/inhibit us from achieving our most important financial goals. If this concept/topic is of any interest to you, you might enjoy reading the NY Times Bestseller Rich Dad, Poor Dad (try the library if you are not sure it is worth the price). We work with many educators in our area and financial literacy is a big concern in their classes, so some teachers are using this book in their classrooms.

    Finally, I don't think you have anything to be embarrassed about because, when you stumbled, you didn't give up! You hit hard times and you rebounded! It is when we stop trying that we should be embarrassed. You are also searching for answers and that search will help prepare you for the future stumbles and might even prevent some of the stumbles. If you have not had the chance, go back and look at what caused the hard times and identify what types of "safety nets" you wish would have been in place--maybe an emergency fund or liquid assets--and then work toward putting those measures in place. And enjoy knowing that when hard times come you have proven you can make it through the storm..."You can sleep when the wind blows." You might enjoy sharing this story, called, "When the Wind Blows."

    Years ago a farmer owned land along the Atlantic seacoast. He constantly advertised for hired hands. Most people were reluctant to work on farms along the Atlantic. They dreaded the awful storms that raged across the Atlantic, wreaking havoc on the buildings and crops. As the farmer interviewed applicants for the job, he received nothing but refusals. Finally, a short, thin man, well past middle age, approached the farmer.

    "Are you a good farm hand?" the farmer asked him.

    "Well, I can sleep when the wind blows," answered the little man.

    Although puzzled by this answer, the farmer, desperate for help, hired him. The little man worked well around the farm, busy from dawn to dusk, and the farmer felt satisfied with the man's work.

    Then one night the wind howled loudly in from offshore. Jumping out of bed, the farmer grabbed a lantern and rushed next door to the hired hand's sleeping quarters. He shook the little man and yelled, "Get up! A storm is coming! Tie things down before they blow away!" The little man rolled over in bed and said firmly, "No sir. I told you, I can sleep when the wind blows."

    Enraged by the old man's response, the farmer was tempted to fire him on the spot. Instead, he hurried outside to prepare for the storm. To his amazement, he discovered that all of the haystacks had been covered with tarpaulins. The cows were in the barn, the chickens were in the coops, and the doors were barred. The shutters were tightly secured. Everything was tied down. Nothing could blow away. The farmer then understood what his hired hand meant, and he returned to bed to also sleep while the wind blew.

    (Author Unknown, Adapted from Albert L. Zobell, Jr. Story Teller's Scrapbook; Bookcraft, SLC, Utah 1948: pages 111, 112.)

    I hope this information has answered your questions and that you find it helpful!

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    8. I declared bankruptcy 3 1/2 years ago and my income is still very low at $19,000 with $5,000 in tips. I have a condo and a 2000 Focus all purchased at the time of bankruptcy. With an extended warrantee until November 2005 that I got for free because of recalls.

    Now I have a 20% interest rate on two charge cards with a balance of $5,000. I want to pay off my car and cards with the equity at 5.75% fixed rate. My mortgage is 6% and my car is 5% with a balance of $6,000. If I do, my mortgage will jump from $50,000 to $68,000. I will save $189 per month. The closing costs will be $2,000 and with all the prepaid appraisal etc will total about $4,000.

    So, I want to get $15,000 to pay off the car and charge cards and to go to school in August, which is under $3,000. Is this the best way to handle my situation now?

    You started off on the right foot by gathering the financial information related to the option you are considering and sharing the information with an unbiased third party. However, to do a more in-depth financial analysis, we would actually need some additional figures. Regardless of the actual numbers, the principle behind my answer would remain the same: getting a home equity loan is not really the answer to your situation and it might actually be a very expensive alternative.

    One problem with the proposed "deal" is that your car loan is currently at 5%, so by rolling it into the proposed 5.75% equity loan, you would actually wind up paying more interest on the car (hopefully this was not the lender's idea). Another big problem is that it would actually cost you $4,000 right now just to get the deal! Because you probably don't have $4,000, the lender would probably roll this amount into the loan and then you would be paying 5.75% on the $4,000 for the life of the loan. Further, the benefit of getting your mortgage rate lowered to 5.75% from 6.00% is really not that great (I estimate that on a 30-yr loan of 50,000 at 5.75% vs. 6.00%, the difference in your monthly payment would only be about $8/month or $3,000 total savings…yet they want you to pay $4,000 right now plus interest at 5.75% for this benefit). So, even though the lender might have shown you how this "deal" would be saving you $189 each month, I don't think the lender showed you how much the deal would actually cost you.

    Consider this example: a consumer goes out and buys a $30,000 car at 6% for 5 years. As a result, his loan payment is $579.98. This payment is really high, so he goes straight to the bank to see if they can save him any money each month. The banker gathers the information, runs some financial calculations and tells the consumer he's got great news: "I can get you a lower interest rate, 5.75%, and save you $250.68 each month for the next 5 years." The consumer takes the deal and winds up paying $4,717.88 more than he would have if he would have paid $579.98 each month. How could this happen if he was actually "saving" $250.68 each month? The point is that it couldn't happen if the consumer was truly "saving" money each month. So, in reality, what happened was the consumer was "spending" $250.68 less each month because the lender stretched the loan out by another 5 years. So, even with a lower interest rate, the "deal" actually cost more money and there was no real savings, it was only perceived as "savings" because less money was being taken out of pocket each month.

    As you are probably aware, credit card companies play the same game, making a low monthly payment look so attractive; only the stakes are a lot higher because of the high interest rates they are allowed to charge. And this point brings us back to your problem: you still have a balance of $5,000 on two credit cards at 20%. However, we have found that high-interest credit card debt is usually not the problem, but more of a symptom, so it is important that you ask yourself how and why you accumulated the debt on your credit cards and how to change this pattern. You might also choose to discuss the root cause with a certified credit counselor. Fortunately, there are also a variety of options for overcoming/lessening the negative impacts of the high interest rate symptom. Please consider the following options:

    Self-management
    • Stick to a tight budget so you can pay 2, 3, or even 4 times the required monthly payment, or
    • Evaluate balance transfer options to a 0% card or low-interest card (make sure the cost warrants this move: watch out for transaction fees, requirements to make additional purchases, low rates that only apply to future purchases, etc.), or
    • Contact a credit union to see what low-interest alternatives they offer.

    Credit Counseling
    • Contact a credit counseling agency, like Lighthouse, to discuss the self-management options.
    • If the self-management options aren't feasible, consider a debt management plan.

    Debt Management Plan (DMP)
    • DMPs generally allow consumers to lower interest rates with creditors while becoming current and free of credit card debt in 5 years.
    • Most credit counseling organizations ask for a fee or monthly contribution to help fund the organization.
    • Evaluate the savings analysis to ensure that a DMP would actually save you money.
    The final problem with the loan scenario you asked about and your situation, is that a home equity loan is usually not a good option for paying for college (massage therapy school). Grants and student loans are generally best suited for this purpose. Because I am not an expert on student loans, I would recommend that you talk to someone in the financial aid department regarding these options. (I believe that if a school is accredited through the proper channels then their students become eligible for grants and student loans through the government).

    Again, I think you should give yourself some credit for evaluating different options and for dealing with the situation now so that you won't wind up in a bankruptcy situation down the road. If you would like to speak to one of our credit counselors who is familiar with this situation, please give us a call.

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    9. I am currently a Lighthouse Credit client. My auto lease matures in 7 months and I will need to secure a loan to buy another vehicle. Will my status as a Lighthouse Credit client hurt my chances of getting a good rate on my auto loan? I know, as a member, I'm not allowed any new credit cards; does the same apply for other types of loans? For my next car? Or a student loan? Any info you can give me will be appreciated. Thanks for your help.

    Generally, interest rates for loans are based on risk. The higher the risk associated with a loan, the higher the interest rate the lender offers. One of the factors affecting risk is the borrower's credit history, which is frequently measured by a credit score.

    A spokesperson for Fair Isaac & Co., the company that developed the concept of credit scores and how they are calculated, has explained that the formula used by most lenders to calculate credit scores totally ignores any reference to credit counseling that may be in a consumer's credit file. Accordingly, we would suggest that you look for a lender who will offer you an interest rate comparable to rates being offered to other consumers in your area with the same credit score and will not penalize you for being in credit counseling.

    As for your question about being able to get a new loan while you are still on our program, we don't prevent people from getting new loans while they are working with us to pay off their debts and develop good money management skills. However, we do recommend that they call a credit counselor to discuss how any new loans will impact their financial situation. (Depending on your current financial situation it might be important to remember that automobiles are depreciating assets. Automobile expense is also an area where many consumers are able to "get more for their money" by purchasing less expensive cars, which may also translate into saving money on insurance, and using the money for other purposes.)

    As for students loans, let me make two suggestions: I hope you find this information helpful and I wish you continued success in our program and in your educational pursuits.

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    10. We have been in Lighthouse credit for nearly 2 years, this June! The program has really helped us out. Thank you to all involved. We are really wanting to purchase our first home, but are having problems qualifying for a mortgage. Creditors see us being in credit counseling as a negative. We are also about 30 months away from being mostly debt free, except for a car payment. What do we need to do to get this first mortgage for a home? We are desperate.

    Because lending is not a perfect science, each individual lender has to determine what factors or criteria it will consider before making a loan, without violating the law. As a result, some lenders might consider if a consumer has participated in credit counseling and/or a debt management plan (DMP) and others might not. Further, some might see it as a negative (like the ones you've been dealing with) and others might see it as unimportant or even as a positive. This determination might also be based on the lender's understanding of what credit counseling and DMPs are and how they really work. Because of these differences among lenders, we encourage our clients to work with lenders that do not view credit counseling as a negative or with lenders that don't even consider it in the equation. These lenders typically focus on consumers' credit scores. And according to a spokesperson for Fair Isaac & Co., the company that developed the concept of credit scores and how they are calculated, has explained that the formula used by most lenders to calculate credit scores totally ignores any reference to credit counseling that may be in a consumer's credit file.

    Finally, I understand that being turned down for a loan can be frustrating, but keep in mind that the guidelines used by many lenders would not even allow Donald Trump to get a loan with their bank. Yet, other bankers would love to do business with him. I think the key to his success was that he worked with lenders who were willing to work with him and wanted him to be successful because they knew his success would make them successful. Similarly, I think the key to getting your loan will be finding a lender that understands your situation and is interested in your long-term success. In that situation you will get the loan that is right for you (the amount you can afford, not necessarily the amount you qualify for) when the time is right. With this in mind, I also encourage you to talk with our housing counselor, Scott, at (800) 208-0362 ext. 3142. He provides information and educational materials to first time homebuyers and would be happy to answer any additional questions.

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