Getting your credit cleaned up

Dear Dave: I was wondering about these companies that say they’ll 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 you’ll pay a hefty price later.

When you use one of these companies and then try to get a conventional, FHA or VA loan you’ll be treated as if you’d filed Chapter 13 bankruptcy. Mortgage underwriting guidelines for traditional mortgages will consider your credit trashed, so don’t 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 there’s 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 isn’t 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: I’m 13 years old and have managed to save $6,000 working on a farm. I’d 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, you’ve done great, man! There are lots of adults out there who don’t have the kind of drive you’re showing. Because you’re talking about using the money in just a few years, I’d recommend a simple money market account or CD at a local bank. You won’t get a lot of interest on your investment, but it’s 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 you’ve worked so hard for. Keep up the fantastic work, Donovan. I’m 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 homeowner’s 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, you’d have $2.5 million covering you in the event that they sued and won. It’s a good idea, too, Karen, to get the umbrella policy through the same company that handles your homeowner’s policy. You’ll have fewer hassles that way. — Dave

For more financial advice, please visit www.davesays.org or call (888) 22-PEACE.

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