Getting your credit cleaned up
Dear Dave: I was wondering about these companies that say theyíll help you clean up your credit report and manage debt — especially the ones who want you to send them a check every month to pay off your bills. Are they legitimate? — Shara
Dear Shara: Stay away from these places! They may help you get better interest rates or lower payments, but youíll pay a hefty price later.
When you use one of these companies and then try to get a conventional, FHA or VA loan youíll be treated as if youíd filed Chapter 13 bankruptcy. Mortgage underwriting guidelines for traditional mortgages will consider your credit trashed, so donít do it.
Another problem is that by law according to the Federal Fair Credit Reporting Act, the only things that can legally be taken off your credit report are those that are seven or more years old or mistakes. A Chapter 7 bankruptcy is worse. It will stay on your credit record for 10 years. Anyone who tells you differently is scamming you.
The good news is that thereís not some magical formula to managing debt. The solution is common sense and having a plan. Good debt management is 80 percent behavior and 20 percent head knowledge. It isnít rocket science, as some debt management companies try to make you believe.
True debt management is about one thing, Shara — controlling your money! — Dave
13-year-old & money
Dear Dave: Iím 13 years old and have managed to save $6,000 working on a farm. Iíd like to buy a car in about three years and was wondering what you think is the best way to make my money work for me. — Donovan
Dear Donavan: Wow, youíve done great, man! There are lots of adults out there who donít have the kind of drive youíre showing. Because youíre talking about using the money in just a few years, Iíd recommend a simple money market account or CD at a local bank. You wonít get a lot of interest on your investment, but itís a decent short-term solution.
Lots of times I recommend mutual funds for investing, but you really need to leave the money alone for at least five years when you go that route. Otherwise, you could actually lose some of the money youíve worked so hard for. Keep up the fantastic work, Donovan. Iím really proud of you! — Dave
Liability umbrella policies
Dear Dave: My financial adviser has recommended that we get an umbrella liability policy. What do you know about these, and do you recommend them? — Karen
Dear Karen: If you have a large income or assets of more than $300,000, then you definitely need one. Basically, this kind of policy attaches to your regular coverage on homeowners insurance, auto insurance and those kinds of things. If your homeownerís policy includes $500,000 worth of liability insurance, you could add a $2 million umbrella liability policy for around $300 a year. Then, if something bad happened to someone at your home, youíd have $2.5 million covering you in the event that they sued and won. Itís a good idea, too, Karen, to get the umbrella policy through the same company that handles your homeownerís policy. Youíll have fewer hassles that way. — Dave
For more financial advice, please visit www.davesays.org or call (888) 22-PEACE.