Prepaid Credit Cards to Help Rebuild Credit

Prepaid credit cards are credit cards in name only. In reality, they are cards that you can use to make purchases with money you've deposited into the card account. Since you're not actually using credit in the traditional sense of borrowing money and then paying it back, they are not the best vehicles for building credit. Still, some cards have features that can help you rebuild your credit.

How Prepaid Cards Work

Prepaid cards are similar to debit cards in that you make a deposit into an account and can only use the card up to the amount you deposited. But unlike debit cards, which are linked to a bank account in the same way checks are, prepaid cards are stand-alone accounts. Most card accounts require a minimum deposit of between $200 and $1,000. When the money's gone, you need to put more money into the account in order to use it.

Credit Building Features

Some cards have specific features designed to help people rebuild their credit. Orchard Bank MasterCard, for example, reports to the three major credit bureaus -- Equifax, Experian and TransUnion -- every month to help its secured cardholders build a credit history. Others, such as the Visa Rush Card, offer online bill pay with the card and report those monthly payments to credit reporting agencies PRBC and LexisNexis, which some companies use to make credit decisions. These are not as widely used as the three major agencies, but they can help.

Fees

One downside to building credit with prepaid cards is the fees that are often associated with them. Some cards charge a fee just to join. There are also often overdraft fees, transaction fees and ATM fees, though some cards don't have these. Some credit builder services are only available for a fee.

Other Options

Some other ways of building credit trump prepaid cards because prepaid cards can be expensive and not all of them report to the credit bureaus. Instead, you can ask some creditors you've made faithful payments to, such as cell phone companies or apartment leasing companies, to report your payments to the credit bureaus. This costs nothing. You can also apply for store credit at a home supply or department store and make a few purchases you pay off each month. However, the credit scoring system doesn't look kindly on consumers who have a lot of these kinds of cards.

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How to Calculate IBR

The federal government offers student loan borrowers several repayment plans to choose from. Although student loans default to a payment plan with equal monthly payments for 10 years, students can select a different repayment plan to get a lower monthly payment. One of these, the income based repayment plan (IBR), sets the payment amount as a percentage of the borrower's household discretionary income. Estimate the amount of your monthly payment by using a simple calculation. Your lender will confirm the monthly payment amount when you apply for IBR.

Instructions

1

Look up the U.S. Department of Health and Human Services poverty guideline income for your family size and state of residence. For example, if you are married and live in one of the contiguous 48 states, the poverty guideline for your household is $14,710.

2

Multiply this amount by 1.5 to calculate the amount of your income that is shielded for use on your basic needs. In this example, the amount is $22,065.

3

Look up your adjusted gross income (AGI) from last year's tax return. If you are married, include your spouse's income as well.

4

Subtract the amount of shielded income for basic needs from your AGI to calculate your discretionary income. For example, if your AGI was $30,000, your discretionary income is $7,935.

5

Multiply this by .15 to calculate the 15 percent of your annual discretionary income that you have to put toward student loans on the income-based repayment plan. In this case, it is $1,190.25.

6

Divide the annual payment by 12 to calculate your IBR monthly payment. For example, $1,190.25 divided by 12 gives a monthly payment of $99.19.

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Will Business Debt Hurt Your FICO Score?

Businesses, like individuals, may take on large amounts of debt. As with personal debt, this business debt must be paid back to lenders on time or the business faces collection actions from creditors. Some businesses even have their own credit rating, either issued by a consumer credit reporting agency, such as Experian, or by a business credit reporting agency, such as Moody's. Unless the owner of a business takes out credit in his own name, this debt should not affect his personal credit rating.

Credit Ratings

Personal credit scores, sometimes called FICO scores, are measurements of an individual's creditworthiness, as determined by credit reporting agencies. The information used to calculate a person's credit score is contained in his credit report. All information related to loans taken out in an individual's name is included on his credit report. Credit taken out in the name of a business is not included on the report and does not affect the individual's score.

Securing Loans

Every loan has a borrower. Some loans taken out to pay for business expenses may not, technically, be borrowed by the business itself. In many cases, particularly with small businesses who have not established an extensive history, it is the business's owner who signs on as the borrower and securer of the loan. If an owner does so and the business defaults on the loan, the owner's credit score will be affected.

Different Types of Companies

Whether a business debt can harm your FICO score also depends on how the company is structured. With companies structured as corporations, limited liability partnerships and limited liability companies, the credit score of the owners is not affected by the company's debt. For example, shareholders of Ford Motor Co. will not have their FICO score go down if Ford defaults on a loan. However, owners of a sole proprietorship are considered synonymous with their company; if this company goes into debt, their personal credit scores suffer.

Business Credit Ratings

Many businesses are assigned ratings by credit reporting agencies, too. However, unlike FICO scores, which are numerical, large businesses are assigned letter grades to indicate their relative creditworthiness. These grades constantly change based on changes in the economy and the company's financial health. If a company takes on too much debt, its credit rating, like an individual's FICO, may drop based on increased fears that it will default.

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Will a Collection Agency Try to Sue Me for 1000 Dollars?

If a debt you failed to pay ends up with a collection agency, the collection agency has various methods at its disposal to help it collect the money -- including lawsuits. If a collection agency wins a lawsuit against you, most states give the company permission to garnish your paychecks and bank accounts. Some states even give creditors who win judgments the right to place liens against your personal property.

Facts

Although many collection agencies use lawsuits as a collection tool, the process is time-consuming and expensive for the company. Not all states give creditors the right to include their legal fees in the lawsuit balance. Thus, depending on your state's laws, if the legal fees the collection agency would incur by suing you are considerable, it would not be financially advantageous to the company to file a lawsuit to recover $1,000. If the collection agency can request that you pay its legal fees, however, your risk of a lawsuit increases. According to New York's Neighborhood Economic Development Project, individuals who owe $1,000 or more to collection agencies have a higher risk of being sued.

Features

All companies operate by their own sets of guidelines, and collection agencies are no different. Whereas one collection agency might only file lawsuits for debts over a pre-set amount, another may sue each and every debtor regardless of how little each owes. Thus, if the collection agency holding your debt has a history of suing debtors, your risk of facing prosecution for the money you owe is higher than if the company files few lawsuits.

Time Frame

Collection agencies can only legally file lawsuits on debts that still fall within the statute of limitations for legal action in the debtor's state. As soon as your state's statute of limitations passes, your odds of facing a lawsuit markedly decrease. Some collection agencies, banking on consumers' ignorance of the law, file lawsuits on out-of-statute debts in the hope of obtaining a judgment. If you can prove that the statute of limitations on the debt has passed, the court has little choice but to dismiss the lawsuit.

Considerations

The Fair Debt Collection Practices Act prohibits debt collectors from threatening to take legal action when the collection agency has no real intention of doing so. However, unless the statute of limitations on the debt has expired, there is no way to prove that the company doesn't actually intend to sue. Because of this, lawsuit threats are a common collection tactic that many collection companies employ. Thus, a collection agency's threat to sue doesn't mean that a lawsuit is necessarily imminent.

Benefits

A collection agency's only motivation for suing you is that the court judgment it receives will enable it to collect the debt from you through garnishment or liens. If you don't own any property and lack a steady income or your income is exempt from garnishment, such as a retirement pension or Social Security, suing you would only cost the company money it would not be able to recover. If the collection agency files a lawsuit, notifying it of your lack of assets will often result in the company's attorney dropping the lawsuit.

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Am I Responsible for Wife's Credit Card Debt Prior to the Marriage in New York?

New York state residents are not responsible for their spouse's premarital debts. Even during marriage, you can't usually be held responsible for your spouse's debts if hers is the only name on the credit card bill or the auto loan. Nevertheless, her debts and how she pays them off may affect you and your income after your marriage, or if you divorce.

Individual Debt

A spouse's individual debts are hers alone with exceptions including spouses being liable for each other's tax debt when they file a joint return. You can, however, make the choice to be responsible for your spouse's debt. For example, you can state in a prenuptial agreement that you'll pay half of her premarital credit card debt. If you take out an auxiliary credit card on her account, it's possible for the credit card company to hold you liable for all the debt if your wife defaults.

Property

If your creditors decide to take action against your spouse by garnishing her accounts or filing a lien on her property, you could find yourself involved. If you have joint ownership of a checking account or your house, that joint property is vulnerable to her creditors up to 100 percent if that's what it takes to pay the debt. The creditors cannot, however, place any liens or claims on property you own in your own name.

Bankruptcy

If your spouse files Chapter 7 bankruptcy on her individual debts, it could also affect your assets. In Chapter 7, the court will seize your spouse's assets and cash to create a bankruptcy estate with which to pay off creditors. The estate will include any jointly owned assets and accounts. New York state law exempts some items from bankruptcy, and in 2010 the state increased the exemptions. A Long Island homeowner, for example, can protect up to $150,000 of the equity in his home from Chapter 7 sale.

Divorce

If your marriage breaks up, dividing debts can be as tricky as dividing property. One issue to arise in New York courts is whether you're entitled to compensation if your spouse uses money earned during the marriage to pay off her personal debts. Rochester attorney Alexander Korotkin notes that, in 2009, a state appeals court ruled that if a spouse uses marital property to pay personal debts, the other spouse has no grounds to recoup any of the money: Courts shouldn't second-guess how money was spent to pay down debt unless there's evidence of fraud.

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Disadvantages of Residual Income

When you're paid by an employer on a linear basis, it means that you receive a set salary for your work. Residual income is a continual stream of income for work that you've already performed or produced. It is a very productive way to build wealth, but you should be wary of potential disadvantages.

Residual Income Example

One common industry where individuals receive residual income is the entertainment industry. Actors, singers and screenwriters sometimes agree to distribute work in the present in exchange for continuous residual payments in the future, also called royalties. Also, when artists allow other parties to use their artwork to sell posters or prints, for example, they receive royalties from those parties. In many cases, residual income is tied to a copyright or patent.

Hard to Prove

When an individual agrees to a residual payment structure, he is sometimes at the mercy of the distributor. He must trust that the distributor is making proper payments as agreed upon. It is often difficult to track when the residual payment provider, such as a distributor or publisher, actually makes a sale. For instance, if an independent musician has an arrangement with a publisher to receive residual income for each sale of a song, it can be difficult for the musician to confirm how many sales are made on a monthly or yearly basis.

Declines in Income

In many cases, residual payments can decrease or plateau over time. Sometimes uncontrollable external factors can negatively affect your residual payments, such as a change in economic climate or a shift in trends among consumers. In short, it is not always a reliable income arrangement that guarantees a permanent flow of money.

Suggestions

You can avoid many of the potential challenges and surprises involved when agreeing to a residual income arrangement by getting all the details in writing. Before agreeing to a residual agreement, check the reputation of the provider or distributor that you plan to work with to see how consistent the provider has been with other clients. Also, prepare for sudden drops in this income source and develop multiple income streams. Diversify.

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How Long Does it Take to Get a Release of Garnishment?

When you have a debt that you cannot afford to pay, the creditor can use a wage garnishment to force you into paying it. This involves having money taken directly out of your paycheck to repay the debt. To stop the money from being taken out of your paycheck, you will need to get a release of garnishment order.

Release of Garnishment

The creditor is ultimately the one who must file the release of garnishment with the court. When this happens, the court will then have the garnishment removed with the help of the local sheriff's office. If the creditor does not take the time to file for the release of garnishment with the local court, the garnishment order will not be removed.

Debt is Paid

Typically, the creditor will not remove the garnishment until the debt has been paid. The amount of time that it takes to pay the debt can vary significantly depending on how much debt is present and how much money you earn. The creditor can only take up to a maximum of 25 percent of your paycheck. This means that if you make a few hundred dollars per week, it will take longer to get the garnishment removed than if you make thousands of dollars per week.

Payment Arrangement

Once the creditor gets a judgment against you, it can choose to use a wage garnishment as a way to get rid of the debt. However, you can also choose to negotiate with the creditor to set up a payment arrangement. If the creditor feels that you will stick to the payment arrangement, it may be willing to get rid of the wage garnishment for you as a measure of good faith. If you are unwilling to make payments on your own, the creditor will most likely leave the garnishment in place.

Considerations

When faced with a wage garnishment, you may have the idea to quit your job and try to get another one so that the garnishment will be stopped. However, this may only work for a limited time. The creditor will most likely find out where you work and simply move the garnishment to the new employer. In some cases, the creditor can also levy money directly out of your bank account and get repaid this way.

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