debt

Will credit problems move with you?

Steve BucciQuestionDear Debt Adviser,
I am 59½ years old and retired due to disability in 2008. The trouble I'm having is whenever I apply for new credit, even a credit card or line of credit, I am told by the creditor (bank) that I do not qualify because I have too much debt. This is probably because I am co-signer on my children's student loans of approximately $80,000.

Besides this, I have a mortgage with 10 years left and some open credit card accounts (balances of $8,000). I am thinking of moving south in about a year and will need to purchase a residence. Will I still have the same problem getting credit? What, if anything, can I do about this?
-- Joe

AnswerDear Joe,
Probably? Is there really any doubt in your mind that you have too much debt? Let's look at this logically. As a retiree, you are most likely on a fixed income. I don't know if you have a million dollars in a savings account or not, but since you are carrying $8,000 on your credit cards and still have a mortgage, I'm going to assume that you probably don't. So this leaves us with your current excess cash flow to pay for any credit purchases.

The use of credit, especially credit cards, means you are using money you expect to receive tomorrow to pay for a purchase you make today. That's cool as long as you have some excess income coming in tomorrow when that payment comes around. It doesn't look like you do. On a fixed income, you may well have no excess earnings. A much better idea is for you to move to a cash basis. If you don't have the income or enough saved to purchase it today, don't buy it -- unless, of course, you can cut your monthly expenses to free up additional income.

My guess is that your bank looked at your cash flow and knows that you would have trouble with any increase in your debt load, and that's why you've been told you do not qualify for any additional credit. It may seem unfair to you that the bank considers the co-signed student loans of $80,000 your debt. However, if no one has told you this before, let me be the first: It is your debt. As a co-signer, you would be responsible for paying if your children defaulted on the loans.

In addition to that, the student loan lender was concerned enough about your children repaying their loans that you had to co-sign. Therefore, any new lender would seriously consider that possible eventuality when evaluating you as a credit risk.

I'm not sure why you are planning a move south, but you may have difficulty qualifying for a new mortgage even if you sell your current home and pay off the debt you have left on your mortgage. Credit is particularly tight right now, and lenders look at mortgage loans more closely than ever before approving them. You may still have too much outstanding debt for a lender to consider you for a home loan.

If you are committed to moving, you may want to consider renting a home rather than purchasing one. Or, purchasing a home for the net cash you realize from the sale of your current home.

Here's one last consideration for you. Should you want some additional monthly income, a better idea may be to stay where you are and look into a reverse mortgage on your home once you turn 62. Contact a housing counselor approved by the Department of Housing and Urban Development to help you determine if this would be a good financial move for you.

If you haven't already, I would also encourage you to start saving for unexpected expenses above and beyond your current monthly obligations. Unplanned expenses can wreak havoc on your finances when you have a fixed income.

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