Smart Money: Time, on-time payments best way to repair credit

Bruce Williams is a national radio talk show host and syndicated columnist.

Dear Bruce: After graduating a few years ago, I made some mistakes. My car was repossessed, and I got behind on credit cards. I am now caught up, but my credit file is still marked lousy. I can get a home mortgage, but they want a big down payment and 11 percent interest! Why should I still be penalized? T.P., Terre Haute, Ind.

Dear T.P.: Credit can be destroyed in a short period of time, and it takes time to reestablish it. Somebody probably took a beating on your repossessed car. Lenders realize that people who allow repossessions are poor credit risks. There are companies that specialize in loaning money to folks like you. Their experience shows that they will have more defaults, therefore they charge considerably higher interest rates. Unfortunately, that's going to be with you for some period of time. The only way to overcome it is to bite the bullet, pay your bills on time and show that you have become responsible.

Dear Bruce: We purchased a houseful of furniture from a large company. Their advertisement said, "If paid in one year, there would be no interest charged." They didn't tell us that the several thousand dollars of interest would be calculated as an ordinary time purchase, and that if the payment didn't reach the company by the agreed date, all back interest would be due. My husband and I went on a trip, and I suddenly realized that the payment was due the next day. I called the company and explained that I was out of the country and couldn't make the payment until I got back the following Monday. They said that they were sorry, but if the money wasn't there, they would charge the entire year's interest. Considering I notified them, don't you think they could have accepted that as an excuse? L.P., Cleveland, Ohio

Dear L.P.: I sympathize, but you signed the contract, and they are holding you to the letter of the contract. You should have called someone at home, if possible, and had him or her make the payment for you, or called your bank and had them wire the money. You can try to negotiate, but I think you'll find that the lender is going to be adamant. You defaulted on the loan and, under the terms of that loan, the accrued interest became an obligation.

Dear Bruce: I'm about to inherit $10,000 in gold coins. I'm thinking about just sitting on them with the world situation the way it is. What do you think? J.P., via e-mail

Dear J.P.: There are a number of ways that you can look at this. First of all, it's important to determine what the $10,000 represents relative to your assets. If this is all you have, then keeping it in gold is probably not the wise thing to do. Gold has spiked a good deal in the last few months given the world situation. When things are uncertain, precious metals increase in value.

That said, it is reasonable to conclude that when stability returns, the value of these coins will reduce. Gold is not to be considered an investment in my opinion. It is a speculation and requires stewardship.

Dear Bruce: I want to know which is better using a debt consolidation loan from a local bank secured with equity in my home, or using one of the many debt consolidation and counseling services I hear advertised. I have had to pay for a wedding and two years of college tuition. I used my teacher's union loan service to help out. Our daughter has applied for several scholarships and grants but so far has not been successful, so Dad has had to help out. B.S., via e-mail

Dear B.S.: Given the fact that you have equity in your home and are solvent, it's unlikely that the debt negotiating services can do a whole lot for you. Ordinarily, until such time that you default, your creditors are not going to be amenable to reducing interest or terms. Your choice of paying for a wedding and two years of college may be commendable, but it may have been unwise if you have to consider the options above. Given this scant information, I suspect that you are better advised to take a second mortgage (often called home equity loans) to handle your debts. You didn't mention your age, but the closer you get to retirement, the more hazardous to your financial health this type of activity can be. Given the things that you have already done, I don't see that there is a better choice.

Dear Bruce: My daughter is expecting a child, and I would like to form a savings plan for my grandchild. I only have $25 a month to invest. What form of investment would you suggest? Christine, via e-mail

Dear Christine: I applaud your desire to help out your grandchild. However, there are many circumstances that make it unwise to put the money in the youngster's name. I would prefer to see it in your daughter's name. Given the very modest amount of money that you are talking about, you might want to consider U.S. Savings Bonds. While I am not a particular advocate of this type of savings arrangement, since interest rates are so incredibly depressed right now and the amount of money is so modest, a savings bond in your daughter's name (not the child's name) might be an appropriate way to begin. As conditions change and the amount builds, other avenues will be more appropriate.

Dear Bruce: I read the letter about the couple who has been married for 59 years and all accounts are in the husband's name. I recently obtained a copy of the credit reports from all three agencies for my husband and me. We have only one credit card, and it is in my husband's name. I applied for one in my name and was turned down because of "too few bank revolving accounts and insufficient bankcard credit history." Could you please explain this? - Bewildered

Dear Bewildered: One of the perplexing things is that no credit is sometimes worse than bad credit. The problem is that everything has been in your husband's name. In the event that your husband passes away, the bank may lift all your credit. It is not an uncommon experience. If you use a bank that issues credit cards, and you have a good record there, it's possible that you could open an account in your name, which you should do. In the unlikely event that you can't get that done, consider opening a collateralized card in your name and paying it on time. The time to do this is now. Don't wait until you have to have credit and find out it may not be available to you.