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FAQ about managing overwhelming debts

In the game of credit, lenders hold all the cards. The players, those of us who use credit, have to follow their rules. Sometimes that can get confusing especially when finances are tight and you're juggling a bunch of bills.

Here are some of the more frequently asked questions about coping with credit issues with answers from the Bankrate family of experts.

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What happens when my credit card payment is late?
You will pay a late fee. How much depends on the issuer. Several major issuers charge a range of late fees based on a customer's card balance. That's good news for customers with low balances -- they catch a break on fees. It's bad news for folks with big balances -- they face the highest late fees around. The fees range from $15 to $35.

Other card companies refuse to cut low-balance customers any slack on late fees. Everybody pays $35.

In 1978, the Supreme Court ruled that a national bank could charge the highest interest rate allowed in their home state to customers living anywhere in the United States, including states with restrictive interest caps. When it comes to credit card interest rates, the law in a lender's home state rules. It doesn't matter what kind of rate cap exists in a customer's state.

The same principle applies to credit card late fees. In Smiley vs. Citibank in 1996, the Supreme Court gave national banks free rein on credit card fees as well. As long as an eye-popping late fee is allowed in a lender's home state, the lender can charge it to customers nationwide.

Because most major credit card companies are based in states with liberal or no usury laws, the sky is the limit with interest rates and late fees. The best bet for consumers is to pay credit card bills on time every month.

Another good strategy is to pay the bill as soon as it arrives, even if you can only make the minimum payment. Giving your issuer the 2 percent minimum payment it wants ASAP is a great way to guard against late fees.

And you can always send a bigger payment later on when you have more cash.

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What do I do if I'm falling behind on my mortgage payments?
If you're delinquent in your payments -- or expect to be -- the best thing to do is to contact the mortgage servicer quickly.

"They should call right away rather than waiting for a late charge notice to come out," says Tom Drennan, executive vice president for mortgages at Astoria Federal Savings on Long Island. "Part of our business is not only collecting mortgages, but also insuring that customers we deal with will be future customers."

Lenders say they're not out to get borrowers. It costs a lot of money to foreclose on a house. When borrowers suffer temporary financial setbacks, lenders prefer to cut them some slack.
Other mortgage executives repeat that message: Lenders lose money on foreclosures, so they try to avoid seizing homes and throwing out deadbeat borrowers.
(More on foreclosure)

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I need a lower car payment, but I'm upside-down in my auto loan. Should I trade anyway and be upside down in the next car too, or should I refinance what I owe?
When you're upside-down in an auto loan, you owe more on the loan than you could reasonably expect to get by selling the car. You can't pay off the loan with the proceeds from the sale, so you're stuck with the car and the payments.

Getting a lower payment on your car loan requires a lower interest rate, an extended loan term, or both. Car loans are securitized loans, meaning that the lender has a security interest in the vehicle until you've paid off the loan.

Any lender willing to loan you enough money to pay off the existing loan will have a loan that is only partially secured, since your loan balance is higher than the car's market value. That means that a lower interest rate isn't likely.

To get a lower payment, your focus should be on extending the loan term. Switching from a three-year loan to a five-year loan, even at a higher interest rate, will bring down your monthly payment.

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How do I get out of a lease or an auto deal? The monthly payments are busting my budget.
You can undo a bad auto financing decision. You'll need to tread carefully to minimize the hits to your wallet and your credit rating.

First off, how much is that monthly car payment really hurting your budget? Do you really need to drop the loan entirely, or could you get by if the payment was $50 to $100 lower each month?

Refinancing may be an option, especially if you're paying a sky-high interest rate. Refinancing makes the most sense and yields the biggest savings when a simple interest loan with no prepayment penalties is refinanced into a simple interest loan with a lower rate. Bankrate.com's article on auto refinancing will show you how to land a good deal.

Another strategy for cash-strapped auto borrowers is to negotiate a new payment plan with your lender. Take a close look at your finances and estimate what kind of monthly payment you will be able to stick to for the duration of your loan. Next, arrange a meeting with your lender. It's best to negotiate a new payment plan before you get behind on your loan.

If you're prepared to give up the car, you may want to consider turning your loan and car over to a friend or family member. The new owner will have to be approved by your lender.

You could try selling the car on your own. Because you don't own the car outright, you'll need to get permission from your creditor first. Contact the creditor and let them know you're interested in selling the car and ask about the transfer process and paperwork, including the credit application a potential new owner would need to fill out.

By selling the car yourself, you'll be doing yourself a huge favor. You'll get a much better price on the car by selling it in a private sale. If your turn the car over to your lender, the car is likely to be sold for a very low price at a repossession sale and you will still be on the hook for whatever you owe on the original loan amount. (More on getting out of an auto loan)

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We are receiving letters from companies offering to consolidate all the student loans into one loan with one payment and a fixed interest rate Should we?
Debt consolidation makes sense if you can either lower the interest rate or extend the loan term to make the monthly payment more affordable. You should be able to do both when you consolidate student loans.

The Higher Education Act provides for a loan consolidation program under both the Federal Family Education Loan Programs and the Direct Loan Program. Under both of these programs, a borrower's loans are paid off and a new consolidation loan is created.

These programs simplify loan repayment by combining several types of federal education loans into one new loan. The interest rate may be lower than one or more of the underlying loans.

In addition, the monthly payment amount on a consolidation loan is usually lower, and the amount of time to repay may be extended beyond what was available in the separate loan programs. These features should result in more manageable debt repayment schedule. You can estimate how consolidation will work by using the Department of Education's Direct Consolidated Loan Calculator.

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The past few months we've fallen behind in our credit card payments. Will a credit-counseling company get the rates lowered so we can pay them off once and for all? How does this service affect our credit?
When you use a credit-counseling service to structure a debt-management plan, the accounts included in that plan are usually noted on your credit report as "not being paid as agreed." These creditors may also report that the payments are being received through a credit-counseling service.

Credit-counseling services make the point that being in a debt-management plan shows that you're dedicated to repaying your debts, and that can be considered positive when creditors review your report. While that's true, it will be an uphill battle to qualify for new credit until you get a couple of years of solid repayment history on your credit report.

In general, credit-counseling agencies expect you to not take on new revolving credit while in a debt-management plan. Most plans are scheduled to last from three to five years. While you are in the plan your existing revolving credit accounts will be suspended or closed to new charges.

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My friend owes $24,000 on credit cards that he can't pay. He inherited them in his divorce. Some of the credit card companies want all their money now. They are harassing him at home and at work, putting his job in jeopardy. Should he file bankruptcy?
Stopping the phone calls at work is easy to do. The Fair Debt Collection Practices Act requires creditors to stop calls to the workplace once they are notified that his employer does not permit these calls. He should notify the creditor in writing, sending the letter via certified mail and keep a copy for his records.

Violation of the FDCPA by his creditors can result in fines. This FTC publication explains the provisions of the FDCPA and how to file a complaint with the FTC and the state attorney general for a creditor's noncompliance with the provisions of this act. (Insomniacs may want to refer to the full act.)

Bankruptcy may be the answer, but your friend should hire a bankruptcy attorney before filing. What was stipulated in his divorce decree isn't binding to his creditors, and if his bankruptcy causes the creditors to pursue his ex-wife for their jointly held marital debts, she may have a case against him for not following the terms of their divorce decree.

In that situation the bankruptcy court's discharge of his debts doesn't help his financial situation because the divorce court can step in and require him to pay those debts.

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-- Posted: Jan. 9, 2003

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