Money Matters

Money Matters: Building good spending habits key to rehabilitating credit score

CorrespondentNovember 23, 2013 

Q. My daughter’s husband passed away a few years ago after being married for less than four years. They had just purchased a cute little starter home which they could easily afford based on both of their incomes when he died unexpectedly. His income was higher than hers, and she filed Chapter 13 bankruptcy to try and keep her home. She tried to keep up the payments, and we helped as much as we could but didn’t want to drain our own retirement accounts. Eventually she realized that she could not make the scheduled payments to the bankruptcy trustee, and recently she filed Chapter 7. She is now in a small apartment, and we are wondering how she should begin to re-establish her credit. There are some financial professionals that say not to worry about credit scores, but I don’t see how she will ever be able to buy another house or car if she doesn’t have decent credit.

A. What a sad story; my condolences to your daughter. Losing your home after losing your husband would make his passing even more devastating. This is a sad situation that can be used to help remind young couples that they are not invincible. They need to buy term life insurance or at the very least mortgage insurance if each spouse is not independently able to meet expenses. Straight term insurance is pure protection; there is no cash buildup. It’s inexpensive because statistics show the odds are you won’t die while you own it. But if a death does occur, the survivor will not have to be as concerned with financial issues as they would if insurance was not in place. Term insurance provides needed protection for the young and healthy at a very low cost. Those having inexpensive term insurance available through an employer should still buy a stand-alone policy since most employer-sponsored life insurance ends when you leave the company for any reason.

There is one very well-known financial celebrity that promotes being debt-free and that credit scores are nothing to worry about. I think he provides a public service by encouraging people to become debt-free. But, I disagree with his stance on credit scores; very few people can buy a house or other major purchase for cash. There is good debt and bad debt. Buying a house in which to live and possibly having some appreciation on the purchase is much different than buying stuff on a credit card that you can’t afford to pay in full every month. Even if you are not applying for a loan, credit scores impact your life. Some examples of this include the possibility of rental agencies checking your credit before approving your application, insurers charging higher rates and employment options affected if your scores are low.

Your daughter should get her current credit reports and scores by contacting the three major credit bureaus, Experian, Equifax and TransUnion. Credit reports are free at https://www.annualcreditreport.com/index.action; there will be a small fee to obtain credit scores. She needs to review the reports and, if needed, correct any inaccuracies. Paying rent, utility and all other bills on time is very important. If she can obtain an unsecured credit card, even if it has a very high interest rate, that would be a good step toward establishing her credit. The high interest rate should not be a deterrent because the idea is to pay this off every month. If she can’t find an unsecured card, a secured card will help establish credit. Some of these cards can be scams, so she needs to look for cards that have no application fee, reasonable annual fees and ones that report to all three credit bureaus previously mentioned. A secured card or loan is one in which you give the bank your own money, and they in turn give you a card or loan for up to that amount. She should try not to charge more than 30 percent of the limit on either the unsecured or secured card and should pay it off in full each month. This will establish good spending habits and should improve her credit score.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624

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