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Ask Dr. Don

Ask Dr. Don

Today, Dr. Don discusses converting a construction loan; and coping with divorce-related credit problems.

Converting a construction loan

Dear Dr. Don,
We have a construction loan on a home that my husband and I built. Since we built the home ourselves, we have a lot of equity in the home. Do you think we should get a mortgage on the home or use an equity line to pay off the construction loan?
Jill Tradeswoman

Dear Jill,
You should take out a mortgage to pay off the construction loan. Construction loans aren't meant to be a method of long-term financing. A first mortgage is a better choice than a home equity loan because you can borrow for longer time periods, generally at a lower interest rate. A typical home equity loan is a second mortgage. It carries a higher interest rate than a first mortgage because there is more risk to the lender. That's because the first mortgage has to be satisfied before any sale proceeds go toward satisfying the second mortgage. With no other lender having priority in the event of foreclosure, you've given the home equity lender all the benefits of being the primary lender. Ask yourself, "What's in it for me?" It comes down to the loan terms. You should get better terms on a first mortgage than you would on a home equity loan.

Divorced credit blues

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Dear Dr. Don,
I've been divorced for almost four years. After the usual division of properties, each of us was to be responsible for our own debts. My continuing responsibilities include maintaining health insurance for my ex-spouse. Sometime before the divorce was finalized, my ex applied for a credit card that deals mainly with the doctor bills. At the company's request, she supplied them with information about my insurance benefits and me. She was granted credit, but unbeknownst to me, I was somehow included as being responsible for this card.

She's been delinquent many times on this card, and now it's showing up on my credit reports with all the expected consequences (loss of credit, denial of credit, etc.) I've tried contacting both the credit reporting agencies and the card company but nothing gets resolved. I'd like to get this matter straightened out, but don't know what to do anymore. Another year has passed. I just requested a credit report from a credit bureau and it has the same information on it as last year. What can I do?
Bitter Bob

Dear Bitter,
Credit bureaus are obligated to correct mistakes in your credit report. From what you've written it doesn't appear that a mistake has been made in your report since it's likely that you are as responsible for the debt as your ex-spouse.

When companies grant credit to a married couple, they expect the couple to be jointly liable for repaying the debt. Your problem stems from not closing the account after the divorce. Closing the account would have stopped the creditor from extending additional credit on the account. Because you didn't take that step, the credit extended after the marriage was dissolved will also be your joint responsibility. Think of it as co-signing a loan for your ex-spouse. So, if you haven't done it already, close the account.

If the court ordered you to provide health insurance coverage to your ex-spouse, it's important for you to know who's responsible for medical bills not covered by the insurance. If you don't know the answer to this question you need to contact the court to find out.

Experian (one of the credit bureaus) has a consumer channel on its Web site that explains credit issues and how you can start rebuilding your credit after a divorce. Being delinquent on accounts that you are jointly liable for will remain on your credit report for seven years from the date of the reported delinquency. Your best step in rebuilding your credit is to show that these claims have been satisfied.

Just because you don't consider this debt to be your obligation doesn't mean that you aren't obligated. It's time to get your head out of the sand and figure out how to clear this up so you can get on with your life. I recommend that you talk to a credit counselor to see if they can help you formulate a repayment schedule.

If you'd like to make a comment on this story,
e-mail bankrate editors.

Bankrate.com writers base their answers on our editorial content and advice of financial professionals. We make no claims or representations about the accuracy, timeliness or completeness of such content, advice or the answers provided to you. Our content, advice and answers are intended only to assist you with your financial decisions. However, by its nature such information is broad in scope. Your financial situation is unique, and our content, advice and answers may not be appropriate for your situation. Accordingly, we recommend that you get different opinions and seek the advice of your accountant and other financial advisers before making any final decisions or implementing any financial or investment strategy.

-- Posted: Sept. 1, 2000

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