These days, with so many resources available on the internet, it's not always easy to know who or what can be trusted. After all, if you can refinance your home mortgage, you should be able to do that with your credit card debt and car loan as well, right?
Dear Mary: With your guidance, I have successfully refinanced my credit card debt with a peer-to-peer loan, or P2P loan, from Prosper. I'm still surprised by how easy it was.
I have three credit card accounts that totaled $7,523. The minute the Prosper loan proceeds hit my bank account, I went online and paid each of these accounts to zero dollars.
Now I have these three credit card accounts with a zero-dollar balance, plus a new Prosper installment loan. I have two questions: How will this affect my FICO score, which was 720 when I applied to Prosper? And should I close the credit card accounts? -- Jonathan
Dear Jonathan: This move could actually improve your credit score. Because you have zero-dollar balances on your credit card accounts, your current revolving utilization rate is zero percent, which in credit-score talk is perfect. That means you are utilizing none of the credit limits on those open-ended credit accounts. That should boost your FICO score because 30 percent of your score is based on your revolving utilization rate. The lower your rate, the more points you get in that category.
Assuming you've learned your lesson about credit card debt and you will never allow debt to roll over from one month to the next again, keeping just one of the credit card accounts open and active (the one you've had the longest) should be sufficient to maintain a great FICO score. You can confidently close the other two without tanking your score -- but only if the account you keep does not accumulate debt!
I suggest you close those other two accounts over a period of time, like one next month and the other in six months.
By the way: Congratulations! You will be completely debt-free much sooner now that you have refinanced your open-end revolving consumer debt into this closed-end installment loan that is fully amortized, has a fixed rate of interest and a fixed monthly payment, and is paid automatically each month so you don't have to think about it.
Dear Readers: My e-book, "The Complete Guide to Refinance Your Credit-Card Debt," is currently available for free download on my Debt-Proof Living website. It's an easy read, and it gives step-by-step instructions. Jonathan's right: The process is easy!
Dear Mary: Is it possible to do a short sale for a vehicle? We have a 2009 vehicle on which we owe approximately $13,700. Its market value is $7,000 at most. Our payment is $326 per month.
The loan consultant gave me several options, including a two-month deferment on payments, which I accepted to give us a little breathing room.
He also mentioned a short sale, where we would find a dealer to purchase the car from us and get our loan company to accept the sale amount. That would be the end of it; we could walk away without owing anything else. This seems too good to be true. Can you tell me what I need to know about a short sale? What are the pros and cons? -- Lori
Dear Lori: I don't know what a loan consultant is, but I think you've been scammed. There is no such thing as a short sale on an auto loan. And you should be very concerned about how not making car payments for two months affected your credit score.
You need to do a couple of things right away. First, call your auto lender and see where you are and what you need to do to bring your loan current.
Next, find a buyer to purchase your car at its current market value. If you cannot come up with the difference between the sale price and the amount you owe in cash, find a way to borrow it from a family member or your credit union (your chances here may be diminished depending on your credit score).
Yes, you will have to make payments on this gap loan, but they will be considerably smaller than your current monthly payments.
In the future, wise up. Pay attention to your common sense when it suggests that something is too good to be true. I fear that it was this time.