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The Debt Advisor • Bankrate.com

Burned creditor offers new credit card? Be wary

Dear Debt Advisor,
A credit card company that I have a charge-off account with (that's soon to be removed from my credit report) recently offered me a new card with the opportunity to transfer the charged-off balance to it. They say I can remove that credit negative and add a positive. What do you think I should do? Thank you for an answer. -Tyler

Dear Tyler,
It sounds to me as though you hit a patch of rocky road a while ago and one of the bumps turned into a charged-off account. For my readers who might be unclear about charge-offs, they are the result of not paying a debt as agreed for a long time. Usually it is six months, but it can be more or less depending on lender policies. The lender is saying that it is no longer counting your loan as an asset on its books, hence the term "charged-off."

Let's look at the situation from two perspectives -- your credit report and your obligation to pay the debt.

First, the credit report: If the account is about to come off your credit report, the default must be about seven years old. By law, negative but accurate information about your debt payments can stay on your credit reports for seven years. If that's the case, you've been punished for your mistake by being saddled with a bad credit report and high interest rates, but your credit is about to improve, whether you take the lender's offer or not.

Now, let's look at your obligations. My position is you morally owe the debt. You promised to pay, and you should. But whether you legally owe it is another matter.

For the lender to offer you new credit, one of two things is happening. One possibility is you have been making some payments on the account -- enough to lead it to think you are a better risk now than you were before. If you have made any partial payments in the past few years, you're probably still legally on the hook for the debt, and the lender's offer is worth considering.

The other possibility is that you have made no payments and the credit card company is trying a last-ditch effort to collect. If it has been seven years since your payment, it's almost certain you don't legally owe it. State laws vary, but the statutes of limitations for credit card debt generally run four to six years. Only one state -- Wyoming -- has an eight-year statute. The statutes don't bar anyone from attempting to collect the debt, but they do mean a lender cannot win a lawsuit to collect.

I say morally you should pay it, but if you haven't made any payments in almost seven years, I want to make this clear: By moving the debt to a new account, you will likely reactivate a legal obligation that doesn't exist now, and without gaining any credit score advantage since that's about to occur anyway.

If you do consider moving the balance to a new card, be sure you know what the interest rate will be and what limit you will be offered. What you want to avoid is moving say a $2,000 balance at 12-percent interest to a card with a $2,000 limit and a higher rate. You'd gain nothing, but the creditor would have a new debt on its books at a higher rate which, in the event of a new default, could negatively affect your credit going forward more than you may be helped by a nearly 7-year-old charge-off coming off your credit report. Even if you had some room for more spending in your new card limit, any new purchases would begin to accrue interest from the day of purchase, and that is one pricey way to use credit.

My suggestion is to continue to make regular payments to pay down the loan, and if you want a new credit card, get it from a lender you haven't burned in the past. A clean start with a new lender is preferable to rekindling what may or may not be a bad relationship. Getting back together with your old lender might in some ways be like dating a person with whom you had a bad relationship in the past. It might work out, but is it really worth the chance?

As always, and especially in this case, you need to read all the fine print very carefully before you make a decision. And please don't accumulate any new credit balances you can't pay in full each month until you retire the old ball and chain (I'm talking about your old loan). Ultimately, you are the only one who knows if you can be responsible with a new card. But I can assure you that once you pay off that old account, you'll feel great!

Good luck!

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It’s time for a health insurance check-up

Unfortunately, medical debt can quickly become overwhelming, causing it to be one of the leading causes of bankruptcy. A study by Norton’s Bankruptcy Advisor (2000) found that half of the people who seek bankruptcy protection in the United States do so because of the overwhelming burden of medical expenses. And it is no wonder—the daily hospital rate in some parts of the country is now as high as one thousand dollars. If something were to happen to you or a member of your family in the future, having planned ahead can help you avert a serious financial disaster. The best plan of action is to take preventative measures before injury or illness strikes. The experts at Money Management International (MMI) encourage you to perform an annual check-up on your health insurance benefits by asking yourself the following questions:

-Does my plan cover pre-existing conditions? Sometimes, a plan may not cover treatments for an ongoing medical condition for you or you family members. Find out if there are limitations, what they may be, and if there is a waiting period involved in your coverage.

-Is my health coverage sufficient? Find out exactly what services are covered and learn what preventive services are offered. Ask if there are any limits on medical tests, procedures, out-of-hospital care, mental health care and prescription drugs.

-What does my plan cost? Research your premiums and co-payments. Explore the difference in cost between using doctors in the network and those outside the network. Find out if there is a limit to the maximum amount you would be expected to pay out of pocket.

-What are my other options? Even if your current insurance plan seems to be adequate, it may be wise to review all your options. There are many types of insurance such as fee-for-service, and pre-paid services, commonly known as a Health Maintenance Organizations (HMO). A third type of insurance, Preferred Provider Only (PPO), is a combination of fee-for-service and pre-paid service. Many people are also able to get group insurance through membership in a labor union, professional associations, clubs or other organizations.

No matter what you decide upon, do not be tempted to allow your insurance to lapse. Unfortunately, the number of people who have no health insurance coverage is growing as more workers lose their jobs or remain unemployed.

Should you be faced with an unexpected emergency and no insurance coverage, you too could be overwhelmed with medical debt. It is best to protect yourself today by establishing an emergency savings account that contains at least three month’s salary. The comfort of knowing that you are prepared for the worst will do wonders for your mental health.

Make Your “Do It Yourself” Dollars Count

A home improvement project can increase the functionality and value of your home. According to Remodeling Magazine’s recent cost vs. value report, for some home projects, resale value is projected to be more than 100 percent of the original investment; in some cases, quite a bit more.

Of course, there are several factors that affect the cost of the remodel and the resale value of homes. Remodeling Magazine places the costs for materials, subcontractors, and labor at the top of that list. According to Do it Yourself or Not, investing “sweat equity” into a project is often worth the effort. For example, a countertop installer will charge $255 to install a 10-foot straight section of laminate countertop. However, with a little know-how, you can save 53 percent by buying the countertop and installing it yourself.

To make the most of your “do it yourself” dollars, you must learn to be both a good contractor and a good project manager. That entails creating a detailed spending plan and not forgetting to budget for incidentals such as equipment rentals, trash disposal fees and delivery charges. The experts at Money Management International (MMI) offer the following additional suggestions:

1. Be realistic. “Do it yourself” does not necessarily mean you have to do it alone. Some types of projects, such as electrical rewiring or foundation work, usually require an expert. If your project requires work done by a professional, get several bids for comparison purposes. You should also consider enlisting the skills of friends, neighbors and relatives.

2. Know when to say when. Home improvement projects often cause a "snowball effect." Try to take on projects one step at a time and do no more than your budget allows. Just because you plant some trees doesn’t mean that you need a new sprinkler system.

3. Try low-cost alternatives. Dramatic changes can be made for very little money. Instead of tearing down walls, consider some low cost home improvement ideas instead. For example, painting a room and changing the lighting are inexpensive ways to make a dramatic change.

4. Take care of your investment. Taking good care of your home can help you avoid necessary and costly repairs down the road. For example, changing your air filter regularly will improve the quality of your air and improve the efficiency of your heating and cooling system.

It is important to understand that while home improvement projects will usually increase the overall value and comfort of your home, most projects are not an immediate necessity. Remembering that your project may be a "want" and not a "need" can help you to enjoy your home sweet remodeled home.

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About Money Management International

Money Management International (MMI) is a non-profit, full-service credit counseling agency, providing confidential financial guidance, financial education, counseling and debt management assistance to consumers for over 47 years. MMI helps consumers trim their expenses, develop a spending plan and repay debts. Counseling is available by appointment in branch offices and 24/7 by telephone and Internet. Services are available in English or Spanish. To learn more, call 800-762-2271 or visit moneymanagement.org.

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