Most individuals will deal with a collections agency at least once in their lifetime. For many, this might be the present, and this is as bad of time as ever. What is certain, is that having to deal with an account in collections is about the last thing anyone would want to endure. The process can be stressful, and the experience can leave one feeling like they have been taken advantage of. The following are examples of extreme collections techniques that are both unethical and unlawful. They serve as worse case scenarios, however, but they are useful in highlighting the methods by which collections agencies regularly and aggressively pursue debtors, should you find yourself in such a position.

A reader of the blog, Andrea from Andrea’s Original, recently sent in a question about car loan and improving credit score:

Hi there. I have a question that maybe you can help me with. My husband has slightly lower than OK credit, and he’s trying to build it up. He did file bankruptcy about 2 years ago. He’s only 27. We have Juniper credit cards which give a free (semi-accurate) credit score, and tips on how to make it better. One of his tips was to get a car loan. So he’s driving his car off the lot today. We do have the money to pay the loan off tomorrow, we could have bought it outright but instead put 6K down and borrowed 4.5K. The payments are roughly $100 a month for 4 years at a rate of 7%.

Ok here’s the actual question. What is the best way to use this loan to increase his overall credit score? Should he pay it month to month, and for how long before paying it off? Should we just pay it off in a month? If we pay it month to month will making 2 payments a month help more? We have a baby due in June, with that comes all the baby expenses including daycare, so I am happy that the monthly payment is so low, but would still like to pay it off sooner rather than later, but repairing his credit is obviously more important.

Thanks! - Andrea

Andrea’s hubby’s dilemma: What’s the best way to use a recently acquired car loan to increase overall credit score?

Need to know terms: (yeah it’s slightly boring but you’ll need to know it)

Installment credit: An installment credit is a type of credit account where you have a fixed number of equal payments through the duration of the payment period.  Examples of installment loans are auto and home loans.  In Andrea’s situation, their car loan has a monthly fixed payment of about $100, at 7% APR, and the loan’s term is 4 years.

Revolving credit: A revolving credit is a type of credit account where you don’t have a fixed number of payment.  Borrowers will continue to be able to have access to credit again and again as they make payment towards account.

A credit card is a prime example of a revolving credit account; for example, you may have a $1,000 credit limit card, and you make $900 in purchases and now you’ll only have $100 left in credit to spend on the account.  Once you pay off the $900, you’ll be able to use your entire $1,000 credit limit account.

Why Would Getting a Car Loan Help Andrea’s Husband’s credit?

Without knowing fully their situation and why the Juniper website made the recommendation, we can assume that a car loan was suggested as a means to mix up her husband’s credit profile.

As listed above, there are two types of credit accounts you should be aware of, installment and revolving credit.  People generally will have a better credit score and credit worthiness if they have a mixture in types of  positive credit accounts.

If all else is equal (age of account, positive payment history, etc.), a person with a mixture of revolving/installment credit should have better credit score than a person without the mixture of accounts.  From a lender’s viewpoint and a credit scoring perspective, this shows that the person in question has been trusted with various type of credit accounts, and was able to manage different type of accounts and paid them on time without issues.

Things Andrea and Her Husband Can Do:

1.  Pay off car loan within the month and save money on interest.

2.  Pay off car loan at regular schedule of ~$100 a month for the next 4 years.

3.  Make double payments per month and pay off the car loan in about 2 years.

In the first scenario, if they pay off the car loan within the month, they will save about $1,200 in interest over the next 4 years.  That’s a lot of money being saved, considering it’s over a quarter of the actual $4,500 loan!  As they’ve already acquired the car loan, the account is already in the credit history.  Once paid off, it would be marked as Paid/Closed, and it would end as a positive credit line in the credit history, thereby improving Andrea’s husband’s credit profile.

In the second scenario, Andrea and her husband can make regular payments at about $100 a month for the next 4 years, but this will end up costing them $1,2000 in interest.  Not a small sum, but because of potential future expenses with the arrival of the awesome newborn, it may also be a good idea to have some cash cushion on hand for difficult times.  If they make regular payments, their credit will slowly be improved as the debt is reduced, the age of account lengthens, and the accumulation of on-time payments continues.

In the third scenario, Andrea and her husband can make double the regular payments per month, thereby reducing the length of the loan duration and save about $600 in interest.  They will also be slowly improving their credit during the loan repayment time, and should arrive to a better credit score slightly faster.

So there you go Andrea!  The first scenario seems like the best way to go in terms of getting immediate benefit from this new installment credit (car loan), and the best way to go to save money on interest charges.  If your husband and your incomes are stable and you’ve already have a healthy cash cushion, then this should be the best course of action.  Suggestion: you can always potentially plan and budget possible expenses for the next 1-2 years, just to see how much of an impact paying off the $4,500 loan will do.

Send Us Your General Personal Finance Questions!

If anyone else reading has further input on this edition of “Ask BillShrink Guy,” please chime in by the comment section.  If you have a general personal finance related question, feel free to Ask BillShrink Guy!

Your questions will be answered in the order they are received. You can also use the comment section in this blog post to ask your question. Please be aware that we may modify or edit your question for brevity and your privacy!

photo credit: thetruthabout

Despite the fact that 2008 was a tumultuous financial year and many people took a step back to curb their holiday spending, online holiday spending alone still amounted to about $25.5 billion dollars.

According to The Conference Board, over 27 percentage of American households spent over $500 for the holidays — it appears that many people may have extended or accumulated more onto their consumer debt through the holiday season.

If you’ve tackled on more debt during the holidays, what are some steps you should take?

Unfortunately there’s no easy ways to pay off debt, whether the debts were accumulated through a holiday season or through excessive spending, you’ll have to make some sacrifices to tackle the debt before they overwhelm you. Although you can always find ways to increase your income, the tips below on reducing expense and paying off debt has held up well since the creation of the universe. No joke.

Cut the non-essentials for a few weeks/months. Do you really need 500 different cable channels? Six different magazine and newspaper subscription? Start reducing your various monthly subscription fees, every little bit you save on expenses you can do without (temporarily or not), are  additional dollars you can put towards the debt fighting war chest.

Reduce consumption on everything you can. If you frequent the expensive hair salon, consider scaling back from a couple of times per weeks/months to a handful times per month. Unplug unused electronics and chargers. Yes, its a common tip but I kid you not that I reduce my annual electricity bill by a few hundred after unplugging many gadgets that I don’t use — this is especially true in today’s world of always-on smart gadgets/electronics.

Free entertainment doesn’t mean boring entertainment. If you’re an avid movie watcher or book reader, your local library may be carrying many of the latest titles. In populated cities and regions across the country, many modern libraries have county-wide borrowing privileges, allowing you to select books from neighboring city libraries within the county. You’re already paying for these services via taxes, why not utilize them to help add to the expense reduction?

Tackle the highest interest rate credit card debt first. Assuming you used a credit card to pay for the holidays, pay the minimum for the lowest interest rate card, and use any other extra amount on the highest interest rate card. Upcoming tax refund? Unexpected windfall? Chug them toward the debt on the highest interest rate card.

Negotiate your credit card rates. Yes, even during difficult economic time where companies are raising interest rates, you can still ask them to maintain or lower your rates. This is especially easier when you have favorable credit worthiness and better or comparable offers from other credit card companies. Simply state that you have some low-interest balance transfer offers and ask your current credit card company if there’s anything they can do. You might not get an interest rate reduction, but a quick phone call is well worth it if you can knock even a few percentages off.

Finding ways to tackle the debt is all well and good, but being able to avoid the same situation again the following holiday season will be even better. What are some things you can do to you prevent another holiday spending binge?

Consider what’s more important for your family? At the end, the ability to provide shelter, food, and necessities should always outweigh excessive gifts under the tree.

It seems entirely appropriate to scale back on gift giving during tough economic times. The recession is in full force and family and friends should especially understand if you limit your gift giving.

I’ve personally told my other family members and friends that I’ll be only be giving gifts to my parents this prior year (which I’ve split with my sister). Oh, BillShrink Guy, you’re such a cheapskate, you might be saying.  Well, no harm done if they are true friends and family! You can always suggest a day together with close ones in lieu of gifting. Trip to the local museum, picnic at the park may seem corny, but time spent together should always beat out materialistic things.

You can also consider setting expectation at appropriate level come next holiday season. Many experts agree that the hard times will not be over anytime soon, so why not let your family know that Christmas this year may not be the same?  You don’t necessarily have to say “There will be no Christmas this year” but think of alternative ways your family can spend time together without the associated consumerism.

At the end, regardless of what the television advertisements may say during the days leading up to the next Black Friday, remember what’s truly important: our family and friends (don’t tell mine I said those things or my painstakingly-built cool persona will be destroyed!).

photo credit: bensonkua, w_yvr, and afsilva.