Jean Chatzky's New Debt Advice

What I'm about to say may surprise you, but hear me out: Debt, believe it or not, isn't always a bad thing.

I know. You've seen how fast the interest piles on to your credit card balances. But that's not what I'm talking about here. Credit card debt is bad, yes. You want to avoid it, and you can do that by paying your balance in full every month, or, if you don't trust yourself, locking those cards in a drawer where you can't get to them. 

But there is such a thing as good debt. A mortgage falls into this category because it generally carries a low interest rate and helps you build equity in your home. Very few people can afford to pay for a house upfront, and even if they can, mortgage rates are so low—particularly now—that they'd often do better if their money was in the market. Student loans also get filed in this box, especially federal loans carrying low interest rates. Like mortgages, student loans allow you to build value. You're making an initial investment that will come back to you in the form of a better job and a higher salary.
 
So now you know the difference between debt that hurts and debt that helps. But there are no doubt other aspects of the debt game that still have you confused, and it doesn't help that over the past few months we've seen shifts in the mortgage, student loan and credit card worlds nearly every week.
 
Here are the answers to just a few of the questions that are no doubt on the tip of your tongue.

If you're in this situation, you want to look toward the government's Making Home Affordable plan, which was announced earlier this year as a way to help borrowers with loans securitized or owned by Fannie Mae or Freddie Mac. At the plan's onset, you were eligible to qualify if you were current on your mortgage payments and your mortgage didn't exceed 105 percent of the current market value of your property.
 
But in the beginning of July, the Department of Housing and Urban Development (HUD) announced that it were expanding the program to include borrowers who were up to 125 percent underwater.
 
That means that if your home is worth $240,000, you can owe as much as $300,000 and still qualify. Melanie Roussell, press secretary at HUD, says that because the change hasn't been fully implemented, it's too early to tell how many new borrowers may qualify to refinance. But it's certainly worth a call to your lender.

You've always been able to choose among a few repayment plans when it comes to federal student loans, and the options can vary your monthly payment amount significantly.
 
But on July 1, 2009, a new repayment option was introduced, called income-based repayment. This option basically caps your monthly payment based on income. Anything you earn above one and a half times the federal poverty level for your family size is considered discretionary income, and your monthly payment will be 15 percent of that amount. Even better, after 25 years of repayment, any remaining balance is forgiven.
 
To figure out if you qualify, and what your monthly payment would be, use the calculator on FinAid.org.

This is a good question, and one I've spent a lot of time researching recently. For years, I've advised consumers to call and ask for a reduction in interest rates. It works about half the time—and I've seen studies that back this up. And after talking to Nessa Feddis, vice president and senior counsel at the American Bankers Association, my advice still stands. "I have talked to card companies, and none of them are raising rates or cutting credit lines because of this. I think people's perception is that their interest rates were hiked because they called, but they just happened to call when interest rates were being hiked. The letter was already in the mail," she says.

So go ahead and call, but be careful what you say. Don't give them any indication that you're struggling to pay your bills or that you've lost your job—until, of course, you truly are struggling to pay your bills, and by that I mean a few months behind. At that point, it's always better to be upfront. More than ever, Nessa says credit card companies are being aggressive about trying to help people.

They are out there, but the good ones, with low transfer fees and long 0 percent introductory periods, are few and far between.

"Card issuers know that everyone is at a greater risk of losing their job than they were last year, and so they're probably being a little more selective," Nessa says.
 
They are also charging higher transfer fees—sometimes up to 4 percent or 5 percent with no cap—and the introductory periods have been cut back from a year to nine or six months. That means if you're looking for one of these offers and a good one hits your mailbox, run the numbers to see if it's worth making a move (there's a calculator on BankRate.com  that can help).
 
If it is, snatch it up, because Nessa says she wouldn't be surprised if these offers disappear completely after the new Credit CARD Act of 2009 goes into effect in February 2010.

The FICO score ranges from 300 to 850. I'd aim for 760 right now, but as always, the higher the better. Paying your bills on time, having a variety of different kinds of credit—a mortgage, student loans, auto loans and credit cards—and keeping your debt load low should get you there.



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