credit history Archives - Faithful with a Few

Should I Cosign For a Loan?

A friend or family member needs a loan, but their credit score is not high enough (due to terrible or no credit history, or massive credit card debt), or they don’t have a large enough down payment or some other reason. So they come to you and ask you to be a cosigner on their loan.

What Does It Mean To Be A Cosigner?

To be a “cosigner”, simply means that you agree to assume the responsibility of another person’s debt if they are unable to pay it. For example, if you are a cosigner on your brother’s $20k car loan, you have now agreed to pay the bank back that $20k (or whatever is left at the time of default) if your brother is not able to pay it back.

Many people will face this dilemma at one point in their lives. In fact, many people will actually cosign for loans even when they do not feel comfortable doing it. It is usually due to not wanting to be the bad guy, or is sometimes a genuine attempt to help someone. This is often viewed as a way to help out someone in need – such as a responsible, young person who just needs a chance to display or prove their credit worthiness; or a way to assist your child at the beginning of their “independent life”. But is this a wise thing to do?

What Does The Bible Say About Being A Cosigner?

Proverbs 17:18 tells us that,

A man lacking in sense pledges and becomes guarantor in the presence of his neighbor.

Right away we see that the bible describes one who becomes a cosigner on a loan as “senseless“! We can see that it is not a wise thing to make a pledge based on someone else’s ability to pay back a loan.

We also see such council in Proverbs 22:26,

Do not be among those who give pledges, among those who become guarantors for debts.

Not only are we instructed not to cosign for a loan, but we are also shown some of the dangers of doing so… Proverbs 11:15 tells us that:

He who is a guarantor for a stranger will surely suffer for it, but he who hates being a guarantor is secure.

So, we are actually told that we will “surely suffer” if we decide to pledge ourselves for another person’s debt; and that one way to stay secure is to “hate being a guarantor“! Those are very strong words to describe what has become such a common practice today.

Also in Proverbs 20:16 we find these words,

Take his garment when he becomes surety for a stranger; and for foreigners, hold him in pledge.

It was common to pledge a garment as security for a loan, but – according to Exodus 22:26-27 and Deuteronomy 24:10-13 – that garment had to be returned by sundown.

The idea here is that one who is foolish enough to pledge himself for the debt of a stranger will most likely never be paid back; so the one making the loan should demand the cosigner’s garment as security for the loan.

This shows the senseless and unpredictable nature of pledging your possessions or your life based on another person’s ability or willingness to pay their debts.

Also, one question that must be asked is, “Why does this person need a cosigner?”. The most basic reason is that their bank does not believe that they will pay back the loan.

They use their own experience, a few calculations and the potential borrower’s history with loans (usually expressed on their credit report) to make their decision regarding the loan.

When they request a cosigner they are basically saying, “We don’t trust this person to be able to pay us back, but if YOU are willing to take all the risk then we will give him the money!

What Should You Do If You Have Already Become A Cosigner?

Proverbs 6:1-5 gives us additional instruction. This time however, the instruction is given to one who has already pledged himself on behalf of someone else:

My son, if you have become surety for your neighbor, have given a pledge for a stranger

If you have been snared with the words of your mouth, have been caught with the words of your mouth

Do this then, my son, and deliver yourself; Since you have come into the hand of your neighbor; go, humble yourself, and importune your neighbor.

Give no sleep to your eyes, nor slumber to your eyelids;

Deliver yourself like a gazelle from the hunter’s hand and like a bird from the hand of the fowler.

As we can see from the strong language in this passage, it is a serious matter to pledge yourself on behalf of another. This is because you have essentially given up control of something that God has given to you as a stewardship, and have become “snared” by your pledge.

This situation is so serious that you must do everything that you can to free yourself from this arrangement and gain back control of your God-given resources. Look at how strong the language is here; you are told to “deliver yourself” and not to sleep until you have freed yourself (see Proverbs 22:7)! You are to act as a gazelle or bird that is about to lose their life to the hunter!

So, if you are in this situation, it should be your highest priority to free yourself from this before you “surely suffer” (Proverbs 11:15; cf. Genesis 43:9, Genesis 44:32-33).

What can you do instead if you want to help?

If you still want to help while obeying God’s word regarding cosigning, there are a few things that you still can do.

Give Them An Interest-Free Loan:

If you know the person is in need, this is one way to help them that will honor God. Proverbs 28:8 assures us that,

He who increases his wealth by interest and usury gathers it for him who is gracious to the poor.

According to Deuteronomy 23:19-20, it was against the law for an Israelite to charge interest to fellow Jews (of course, loans were only to be requested in times of extreme need and poverty – not to fund frivolous, sinful spending like we see today), but many violated this command. As we see here, giving someone in need a loan and not charging interest is a way that you can assist the one in need and please God.

Give them the money that they need.

Proverbs 19:17 tells us that,

One who is gracious to a poor man lends to the Lord, and He will repay him for his good deed.

If you are able, giving your money to one in need – and only expecting repayment from the Lord – is another way to assist a brother in need and honor God with your finances.

Final Thoughts:

As mentioned earlier, since the bible teaches that debt is slavery (Proverbs 22:7), borrowing should only be done when one has a basic need that cannot be met by their income. It was usually a short-term loan, and the Israelites were commanded to forgive all debt every seven years (see Deuteronomy 15:1-15).

Much of the borrowing that we see today represents a person’s desire to live above their means, and I do not believe that type of borrowing (or giving) is what God is speaking of. Hopefully, I will have a chance to address this in much detail in a future article.

So overall we see that God is completely against the idea of one becoming a cosigner for the debt of another, even if we are really seeking to be a blessing to someone in need. However, the bible does teach us other ways in which we can assist others.

I mentioned stewardship earlier. I realize that this may not be a term or concept that is familiar to many modern readers, but this is a concept that God expects us all to understand. A steward is one who manages another person’s property, finances or other affairs. Here are several articles that do a good job of describing the concept of stewardship:

http://onemoneydesign.com/blog/2010/01/10/what-the-bible-says-about-money-financial-stewardship/
http://www.biblemoneymatters.com/2010/04/financial-stewardship-the-forgotten-component.html

I would love to hear your thoughts on cosigning – even better would be your experiences with it. If you have any questions on this or other concepts, please leave your comment below.

photo credit: 4PIZON

How to Negotiate With Collection Agencies

By // by Kevin M

If you have one or more outstanding collection accounts you’re not alone. With unpaid medical balances becoming more common (higher deductibles, uncovered expenses, etc), and bankruptcy more difficult to file since the 2005 Bankruptcy Reform Act, more accounts are slipping into collection than ever. Can you learn how to negotiate with collection agencies?

You can’t make them go away – not until you pay off the accounts they’re collecting on – but you can keep them at a reasonable distance. You’ll need to do this for a while, at least until you are in a position to settle the accounts once an for all. Here are some ways to do this.

Collection Agencies: Don’t Engage Them!

Here’s a tip that will save you a lot of time and anxiety, even if it won’t make the collection agents go away entirely: don’t engage them at all! That means that you don’t accept or open any mail from them, nor do you speak with them on the phone. A collection agent’s job is to harass you into paying your debt, and they will not leave you alone until you do. Anytime you open a letter or accept a phone call, you are inviting harassment into your life. But you are under no legal obligation to do so.

You already know that you owe the debt – the collection agent’s barrage of phone calls isn’t going to make you pay it any sooner. In fact, it could very well have the opposite effect. At some point, they will almost certainly threaten you with legal action – most of which is an empty threat. But they will do it because they know that some people succumb to it.

By “getting under your skin” – and doing it constantly – collection agencies only succeed in wearing you down, sapping your ability to come up with the money to pay the bill at all.

Your job in the arrangement is to make sure that that doesn’t happen. You need to keep your head clear – and clear of the collection agent – so that you can concentrate your full efforts on saving up the money that will make them finally go away.

Don’t Talk To Them Unless You Are Ready To Settle

The only time that you should consider taking a phone call from a collection agent, or even opening up a letter from one, is when you are finally in a position to settle the account. Any discussions that you will have with them before you’re in this position will be completely meaningless.

When you are in a position to settle, you’ll need to go on the offensive. The collection agent will attempt to get every dollar out of you that he possibly can, so the threats may continue even as you attempt to settle. Ignore the threats, and familiarize yourself with the Federal Trade Commission’s Federal Debt Collection Practices Act, or FDCPA. Your knowledge of federal law will force the collection agent to behave, as their ability to collect on a debt is specifically limited by the law.

By the time you are ready to settle, you should make sure that the exchange proceeds as a negotiation between equals. Never allow yourself to be intimidated by the collection agent. If you are, the entire process will only go worse for you.

Be Ready To Make A Partial Settlement

Part of the reason why you will avoid any contact with the collection agent until you’re ready to settle is so that you can allow some time to pass between the time the collection agent gets the account and the time you actually settle.

The longer that a debt is outstanding, the more negotiable the collection agent is likely to be. This is because collection agents are essentially commissioned salesman. They don’t make any money on a collection until the account is paid (which should help you to see why they like to harass people).

If months or years pass, the collection agent is likely to greet any offer by you with enthusiasm. You can use this to your advantage and offer to settle the account for less than the full amount. If the amount of the collection is $10,000, and you have $5,000 to settle the account, you start by offering very low number, such as $2,000.

The collection agent will always scoff and declare the first offer to be “impossible“. That is part of the negotiation game, and since you are prepared to go higher you’re in an excellent position to press your case. It is entirely possible that by starting at a lowball number, you might end up settling for say $4,000, even though you are prepared to pay $5,000.

Why would the collection agent accept 50% or less of the debt? It’s the old saying, half a loaf is better than none. No where is that saying more in play than the collection business. The original creditor has already pulled out of the process – that’s why the collection agent is there in the first place. But many debts placed for collection never settle and simply go cold and disappear. Collection agents are aware this, which is why they are usually settled for less than the full amount.

Never Send Money Unless You Get An Agreement In Writing First

This point is absolutely critical – never sent any money to a collection agent unless you have a written agreement that the payment settles the account in full, or that it represents your complete understanding that an agreed-upon payment plan will in fact settle the account in full.

Don’t drop the ball on this step! Collection agents will use every tactic available – ethical or unethical – to get as much money out of you as possible. Never accept a collection agents verbal agreement as it is not legally enforceable. Have the agent email, fax or mail (preferred method) the written agreement before you send any money. The written agreement should not only spell out the terms of the settlement, but it should also specifically reference the debt in question as well as any account numbers connected with it, and be signed by the agent or his superior.

Also get an agreement from the collection agency that it will remove the collection from your credit report from all three credit repositories. You’ll want to get this agreement in writing as well, so that you can send it to the three credit repositories (Trans Union, Experian, and Equifax) in the event that the collection agency fails to do so.

Have you ever settled with a collection agency? How did work out for you?

4 Reasons That People Fail With Their Finances: What I Have Learned As A Credit Counselor

By // by guest

[The following is a guest post by Kevin, a credit counselor who blogs at DebtEye]

Over the past few years, I’ve met with hundreds of clients face to face who were looking to get out of debt. They come to me looking for tips & advice on different ways to get out of debt.

As a credit counselor, we must closely examine their financial health before recommending any type of debt relief program. I usually preface the counseling session with, “How did you get into debt? What happened?”

After listening to their stories, it’s interesting how you can see a pattern after speaking with hundreds of people in debt. You would probably think that a lot of them suffered some sort of catastrophic financial hardship such as: losing a job, death in family, or unexpected medical expenses, without an emergency fund. Think again!

4 Reasons People Fail With Finances: What I Have Learned As A Credit Counselor

After listening to my clients, here are the patterns I started to notice:

Huh? What does APR mean: I ask all my clients to bring in a copy of their most recent credit report, or a copy of their latest credit card statement. When I ask them what their APR is (before I look at their statement), most of them have no clue what I’m talking about. Everyone who carries credit card balance should ALWAYS know how much in interest their paying every month! Read the fine prints!

I think I spend $200 in food: If I asked you how much your mortgage was, or even your car payment, chances are that you would be able to tell me right away. What if I asked you how much you spend on food every month? Most people don’t keep track of their expenses. I know it sounds cheesy, but starting a budget worksheet will help you organize your finances.

Your mortgage is how much? : What ever happened to the 31% housing ratio rule? Do people not follow it anymore? Over 60% of the clients had their housing ratio 31%+. It’s no wonder they have no money left over every month! When you plan to buy a house in the future, do yourself a favor: Stick with the rule, or be part of the statistics (like one of the many going through a Bank of America foreclosure).

Today, today, today: Most people only care about the present. They only care about how much money they can save today. How can I lower my monthly payments this month? If I borrow money today, I can pay it back tomorrow. This is a dangerous path to follow. Stop thinking about today, and start thinking about the future!

I’m sure many of you may be guilty of some of the things I mentioned. If you’re not in financial distress, consider yourself lucky! I recommend everyone to really take a close look at your personal finance. I don’t want to see any of you in my office!

Kevin is a co-founder @ DebtEye where he helps people get out of debt by finding the optimal solution to pay off credit card debt. He is a certified credit counselor and previously owned a credit counseling company before joining the DebtEye team.

photo by Chris Sharp

Why Financial Literacy Is So Important

By // by guest

[The following is a guest post on behalf of Advisor World on the topic of financial literacy.]

How Important Is Your Financial Literacy?

Making informed financial decisions can be difficult. You have monthly bills to pay, and you might wonder where the money is going to come from. Most Americans have no idea how to control their finances. Therefore, it helps to become educated on how to better manage your finances.

What is Financial Literacy?

In order for you to be financial literate, you need to know how to deal with credit (and take advantage of credit card benefits). You should be aware of the process of saving money, and you must know how to budget your finances. You need to have a plan for how you are spending your money.

April Is Financial Literacy Month

President Obama has announced that April is financial literacy month. Financial literacy is the capability to comprehend basic economic provisions and conceptions related to your family or business. The White House wants to help Americans better understand their personal finances, so they are trying to help citizens become financially literate.

Ways To Get Started In Becoming Financially Literate

Read: Find information in books, magazines, and newspapers. Become skilled in the world of finance.
Be willing to make changes: You must be flexible. You cannot expect to spend money frivolously.
Be patient: You cannot become financially literate overnight. It takes time to get a grip on your finances.
Take a class: There are investing and financial planning classes that are offered. Check in your community to see what financial classes that you can take.
Get advice from other people: If you know someone that seems very financial literate, ask for their advice.
Look for help online: There are many online forums where you can discuss financial decisions.
Quit making excuses: Don’t complain about not having enough money. In order to manage your money effectively, you need to change your attitude and be positive.

Study Your Paycheck

Your education and job have a huge impact on your income. Therefore, when receiving your paycheck, you should know the difference between your gross and net earnings. Be aware of what you are actually bringing home.

Plan A Budget

After realizing how much money you are actually making, then you should plan a budget. Keep your checkbook balanced, so you can keep track of your money. Know exactly what you are spending, and set your goals accordingly.

Loans

You should not get a loan or borrow money unless you know that you can pay it back. You should not charge unnecessary purchases on your credit card. Interest can really add up, so keep your credit card balances low.

Save Money For Emergencies

You need to also save money each month. Sometimes, you might encounter emergency expenses, and having extra money available will keep you from having to take out a loan or put it on your credit card. Your emergency fund should cover 3 to 6 months of living expenses.

Know Your Credit Score

It is a wise decision to know your credit score. You can get a free copy of your credit report annually. You can keep track of your credit, so you can make sure it is accurate and up to date.

Being financially literate can help you secure the financial future that you deserve. You should make good financial decisions so that you can use your money wisely.

Photo by Salvatore Vuono