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Your Debt Questions—Answered!

Tons of American households are dealing with owing too much debt—and really don’t know what to do about it. To do our bit, we asked you guys to email in their questions, and then handed them over to be answered by Sandy Shore, from the non-profit credit counseling agency Novadebt. Novadebt has been a member of the Better Business Bureau since 1991, and was also a founding member of the AICCCA (Association of Independent Consumer Credit Counseling Agencies). As for Sandy? Not only has she counseled untold households and led many a seminar--she has a 29-year-old daughter who has never been in credit card debt. We received so many questions that we decided to break up her answers. If you don’t see yours here, check back next Thursday.

When should you call in a credit counselor? I’ve been trying to handle everything myself, but it’s getting overwhelming!

You don’t have to wait until everything falls apart. Call a credit counselor as soon as you see any sign of trouble (feeling overwhelmed certainly qualifies) because the sooner you get help, the easier and less painful it will be to fix. Three warning signs: If you don’t have an emergency fund, are not able to pay off your full balance on your credit cards each month or are not able to save to reach your goals, you could be headed in the wrong direction.

Is it possible to consolidate your debt without ruining your credit score?

When you consolidate, you’re just going from one type of debt to another. If you don’t close out the credit cards, you will not lower your score. The problem comes when debtors do this and then use the credit cards again. Serial refinancers usually end up repeating the process until they can’t get any more credit. This will eventually hurt their credit score and may even force them into a situation where they can’t pay the debt at all.

Our mortgage eats up most of our monthly budget. Is it worth it to refinance with the current state of the economy and falling home values? Also, not many homes are selling in our area so we wonder if the mortgage company can run "comps." Still, we'd like to have more cash each month.

If you have very good credit, now would be an excellent time to refinance to get a lower payment and a lower interest rate. The problem is that the economy has left most lenders with less money to lend, so it may be difficult to get a loan. If the mortgage eats up most of your income, the payment might not be reduced enough to make the house affordable. You might want to look at other alternatives. Don’t worry about the comps. The mortgage company will know how to value the house.

Would love some more information about the February Credit and Recovery Act. Will credit card companies now start applying payments to the highest interest rate on a balance if there's more than one interest rate in effect?

The new rules give a lot of additional protection, but you still need to read and understand what you are agreeing to. Any additional payment above the minimum will be applied to the highest rate balance first. The Act also requires 45 days notice before a rate increase and gives you the right to reject the increase, close the card to new charges and pay the debt off at the old rate. Most creditors have eliminated fixed-rate cards in response to this. If the rate is variable, it will change with the index it’s tied to. The 45 days are not required.

If we run short of money one month, how bad is it to miss a payment if we catch up the next month?

If you are 30 days late, it’ll be reported to the credit bureaus. A pattern of late payments is very damaging to your credit. The fact that you caught up does not remove the damage. You should be looking at the underlying causes of this behavior and make the changes that you need to make to handle your finances better. If you need help, a credit counselor can work with you and give you suggestions that will get you back on the right track, including information and referrals on everything from saving on groceries to finding temporary work. They can also refer you to other agencies for additional help. To find a reputable company, get a recommendation from The Association of Independent Consumer Credit Counseling Agencies (AICCCA) or the National Foundation for Credit Counseling (NFCC). These organizations set standards for credit counseling agencies.

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