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The Dos and Don’t of Loan Consolidation

Stamp Shows Consolidated Loan approvedIf you’ve watched TV for more than an hour or spent any time at all on the Internet you’ve undoubtedly seen all those ads from those companies that would just love to help you consolidate your debts to “cut your payments in half,” “reduce your interest payments”, and “help you become debt free.” This can all seem very tempting especially if you feel your billfold is hemorrhaging money due to your debts. The fact is combining all of your loans or credit card debts into a new loan with a lower interest rate and better payments can make perfect sense. Sadly enough, it doesn’t always work out like that. The fact is that many people who consolidate their debts end up paying more than they would have otherwise. An alarming number of borrowers that get home equity loans end up losing their houses. In addition, many of the so-called “consolidation” programs are not really loans at all. Plus, debt consolidation has a sort of bad reputation and in some cases rightfully so. Still, if you pay attention to these dos and don’ts you might be able to benefit a lot from consolidation.

Do get your credit report and FICO score

Whether you’re aware of this or not, your ability to get a loan and your interest rate will depend on your credit reports and your FICO score.

There are three credit-reporting bureaus – Experian, Equifax and TransUnion. They are required by law to provide you with a free copy of your credit report once a year. You can get your report from these bureaus one at a time or all together on the site www.annualcreditreport.com. The reason you’ll want to get your reports is because they could contain errors that are adversely affecting your credit score. You need to go over each report very carefully. If you do find errors, you’ll need to write the appropriate credit bureau and dispute the items.

Your credit score is a three-digit number that was created by the company now called FICO but until a few years ago was known as Fair Isaac Corporation. Your FICO score is a mathematical representation of your credit reports. It’s created using an algorithm that only FICO understands. You can get your score at www.myfico.com, from one of the three credit reporting agencies or from websites such as Creditkarma.com. If you have a Discover card you’re probably getting your credit score every month along with your statement. Lenders generally look at credit scores in ranges as follows:

  • Between 300 and 499 – Bad credit score
  • Between 500 and 579 – Poor credit score
  • Between 580 and 619 – Low credit score
  • Between 620 and 679 – Average or OK score
  • Between 680 and 699 – Good credit score
  • Between 700 and 850 – Very good or excellent credit score

If you find you have a credit score of 680 or above, a consolidation loan might be a good option.

Don’t fail to investigate other options

Before you get yourself tied up in a consolidation loan with a term of seven or even 10 years, be sure to check out your other options. If your goal is to save money and you’re not in a really bad financial situation, just pay off your debts faster by prioritizing them. This is called snowballing your debts. It is where you concentrate on paying as much as you can each month on the debt with the highest rate while making sure you continue to make the minimum payments on your other debts. This has helped many people become debt free within two years or less.

Do contact your credit card company

If you have relatively good credit call your credit card company and see if you can negotiate a better interest rate. In the event that they refuse to give you a lower rate, consider transferring your balances to a credit card with a lower long-term rate.

Don’t do a balance transfer without knowing all the facts

You could transfer your high-interest credit card debts to a 0% interest credit card. This is a card where you pay no interest during an introductory rate that can be anywhere from six months to 18 months, which gives you a sort of time out during which you could concentrate on paying off your balance. If you don’t get your balance paid off before your introductory period ends, you’ll have to start paying on it and your interest rate will likely skyrocket to 19% or higher.

Husband and wife happily talking to another personDo try a credit-counseling agency

There is probably a reputable credit-counseling agency where you live. If so, it should be able to provide you with either free or low-cost advice on how to manage your debt. You will be assigned a counselor that will review your finances, help you prepare a budget and provide you with tips for getting your finances under control.

Don’t sign up for a debt management plan

Your credit counselor might try to talk you into a debt management plan. Don’t agree to this without understanding it could take you as long as five years to complete it and you might have to give up all your credit cards.

Do talk with your mortgage holder

Reputable mortgage companies will usually work with you if you’re having a temporary problem. As soon as you see that you’re having trouble, call the company. It may be willing to temporarily suspend your payments, accept reduced payments for a period of time or let you pay interest only. Alternately, you might extend your term or the amount of time required for repayment, which would reduce your payments.

However, your best bet might be to totally refinance the loan. For example, there is a federal program called HARP (Home Affordable Refinance Program) where you could refinance and lower your payments even if you owe more on your house than it’s worth.

Don’t borrow from your life insurance

If you have a whole life policy, you could borrow against its cash value. This is usually a low interest loan that would get you quick cash to pay off your debts. However, there can be tax implications on the money you borrow. Plus, if you don’t repay the loan, the money will be subtracted from the amount your beneficiary receives.

Do try to pay off your debt quickly

One of the downsides of a consolidation loan is that you may have lower monthly payments but your repayment will be spread out over a longer period of time so you’ll be paying more, sometimes a lot more, on a consolidation loan then you would have to otherwise. Figure out your budget and then set the monthly payment on your loan as high as you possibly can. The quicker you pay off that loan the more money you’ll save and the faster you’ll be out of debt.

Don’t get the wrong type of loan

It’s important to understand there are two types of debt consolidation loans – secured and unsecured. Second mortgages, home equity loans and secured lines of credit are secured loans – that is an asset such as your house secures them. These loans usually have lower interest rates than the unsecured ones. In addition, if you get a home equity loan the interest you pay on it will probably be tax deductible. Of course, if you fall behind on a home equity loan, you could end up losing your house.

Unsecured loans can be a better option because you don’t have to risk any assets such as your house. If you have decent credit you should be able to get one of these loans at a good interest rate. But if you have poor credit you may find that you’ll get a low rate only with a secured loan.

Do shop around

Finally, make sure you get quotes from several different lenders and compare the terms and the interest rates very carefully. Your best bet is often your own bank or credit union – especially for personal or unsecured loans. But it’s always a good idea to shop around. When you do this, be sure to get your quotes in writing so you can compare lenders side-by-side. And make sure you understand all the fees associated with the loans as well as their terms and conditions.

6 Common Causes of Credit Card Debt

Multiple credit cards in one handCharging purchases on a credit card has steadily been the most preferred payment  method of consumers lately. About 1.5 billion credit cards in the country are helping fuel this way of life. According to Statisticbrain.com, there are about 176.8 million consumers who has a credit card in their wallet where the average card ownership per person is 3.5. This goes to show the dependency of the US market in credit card purchases.

The expense item is still in the top four debt item in the country. It is in the league of mortgage loans, student loans, and auto loans. In a consumer driven economy, credit cards play a vital role not only in the private lives of its users but the whole economy as well. It increases the purchasing power of the consumer and extends credit for an otherwise impossible purchase.

But there are a few people that despise credit cards because of all the financial trouble they are in at the moment. Some of them were not aware of the impact of credit cards in the credit score, how late charges worked and other details that dragged them down in debt and interest payments. Though there are those that are able to live off a credit card but still manage to maintain their finances in check .

Common Credit Card Problems

It is important to note that any unfavorable details in your credit score might take approximately seven years to repair. This is in stark contrast with how a consumer can do damage on the credit score in a matter of days or weeks. What is easily put on the report will be a very hard and long battle to recover from.

In most cases, the problem lies with the user and not the card. The consumer gets in all sorts of predicament because the usage of the card was not properly observed. Here are some of the top reasons why a person could walk right into a debt trap using a credit card.

Credit card ready

Most consumers are not ready. This is one basic flaw in the system where as young as high school students get access to a credit card. When they get to college, they see credit cards as an endless source of cash. They then come home to mom and dad pleading poverty with a tidy amount of credit card bill.

It is not only students because there are also professionals who are not ready for the added financial responsibility but still get their hands on a shiny new plastic. One basic requirement of owning a credit card is a steady income to pay off the purchases. It is impossible to pay for the charged items without a good and steady source of funds. It could be coming  from an allowance, salary from employment or even returns from investment ventures. You would need to understand budgeting as well for this.

More than you can handle

Most of the consumers started with one credit card. But not all of them stop at just one. A lot of people are taking in a lot more and sometimes go way in over their head. Assigning a specific function to each credit card is a great idea but only if you can be financially mature to handle multiple cards. If not, it is better to stick to one card.

Some consumers assign a specific card for groceries, gas and other items. This is a budgeting tool that allows them to see how much each cost item is being used through the credit card bill. This is useful but requires a lot of restraint and discipline. Restraint from using the credit card just because you feel like it and discipline in using the card for specific purposes only.

Debt overcomes income

As you make purchase using a credit card, you do not see actual money exchange hands. This could be one of the reasons why overspending with the card is a common occurrence. Plus the fact that the money being used to pay for the purchase is borrowed and not actual money of the holder makes it all too easy to spend.

Consumers need to keep tabs on their expenses to know if their salary or any other sources of income is enough to meet the payments once the bill arrives. For some, it is the longest few weeks of their livers from the time the purchase was made up to the time the statement arrives. It is important to know how much you can spend in your card and keep a close eye on your credit limit as well.

Payment dispute

A late payment and non-payment are reported to the credit bureaus by the lender. But if there are any dispute on purchases on the card, it is best to talk to your lender at the soonest possible time. This is to get to the bottom of the issue and be able to investigate the incident. At this point, it is best to keep an open line of communication with your creditor and to not hold any payments due as a sign of retaliation for the error.

Major life change

Credit.com points out that major life changes affects the finances as well. Getting married, expecting a baby, moving houses and other big ticket item purchases can have an effect on the personal finance of the consumer even up to their credit cards. It is best to be able to anticipate and plan your budget around the new chapter in your life and make the credit card to your advantage rather than a liability.

Understanding the fine print

It is ideal that a consumer knows the basic details of his or her credit card. The credit limit, payment due date and interest rate are just some of the items that is needed to be remembered by the person. But there are more details about the credit card that a consumer must understand in order to enjoy the benefits to the fullest.

With a card, it is best to understand how the late fees and other finance charges work on your loan. Knowing this can alert you even before buying an off-budget item. It is a great idea to understand how the point system works and if there are any fees related to transfers of balances into or out of the current one.

Credit card use

Consumers are not asked to splurge on clothes shopping everyday or to totally stop purchases with a credit card. There should be a fine line between the two and the consumer must be able to strike the balance between too much and too little. Though there are fast credit score fixes, a consumer must not rely in this possibility to lose track of credit card spending.

Proper money management, keeping a steady income source and managing credit card expenses are some of the prerequisites for properly handling the plastic. It is a tough job but the rewards are great. Staying away from debt is one of the top reasons why people are trying to be more aware of credit card usage. Debt is already an all too common circumstance for most people but the better handling of various credit tools such as a credit card, then debt will be kept at bay.

3 Very Big Questions (And Answers) About Personal Finances

young woman looking at credit cardPersonal finances are a bit like your health. You need to keep an eye on them just as you need to watch what happens to you physically. If you’re smart you’ll have a physical exam once a year just as you should give your personal finances the occasional checkup. And you probably have questions about your finances just as you have questions about your health. Recent college graduates were surveyed regarding their questions about personal finances and here are the three that came up most often.

Why not have just a debit card?

Since credit cards can be very dangerous why have one? Why not just use a debit card instead? Yes, credit cards can be troublesome. However, they do come with some benefits. If you have a credit card and use it responsibly, this will help your credit score. Second, merchants sometimes require a credit card rather than a debit card. If your identity is stolen, undoing the damage from a stolen credit card can be easier than with a debit card. If you run into a dispute with a merchant, it’s often better to have used a credit card as your credit card issuer will help you settle the dispute. Plus, almost every credit card now comes with rewards that can be beneficial – assuming you don’t go into debt or end up having to pay high interest.

The cons of debit cards

The money comes out of your account immediately when you use a debit card. In comparison, with a credit card you get a short-term free loan and your money stays in the bank earning a return. In fact, with most credit cards you would get at least a 27-day free loan every month. Given today’s historically low interest rates this may not amount to much but interest rates will go up eventually.

Is it better to have no credit or bad credit?

The problem with bad credit is that it’s very hard to fix. If you have bad credit the first thing you must stop running up more debt. You will need to create an emergency account and a budget that will require you to do and buy only what your income will cover. In addition, you will need to pay all your bills on time and in full, and pay down your debt. This includes everything even any accounts you have that were charged off. As you can imagine, this will require a lot of discipline and commitment – no matter why it was that you developed bad credit in the first place. If you have no credit it’s fairly easy to establish good credit. The reason why you want to do this is so that you will have it when you need it to get a home, a new car or for some other major purchase. You need to responsibly handle your savings and checking account and should get a debit card with no over-limit protection and maybe a secured credit card. If you have a secured credit card and use it responsibly then after six months you should be able to get an unsecured car with a low credit limit and no over limit protection. Of course, while you’re doing this you will have to pay all of your bills on time.

Girl looking worriedWhat’s the best way to pay off credit card debts?

The first thing you need to do is create an emergency savings account to make sure that if something happens you don’t fall into more debt. You also need an honest and realistic budget so you can see what you spend your money on and whether it is a wish, a want, a luxury or a convenience that you could do without. Once you have done these things the next step is to get to work and pay off those credit card debts as quickly as you can. There are several schools of thought as to the best way to do this. The financial guru, Dave Ramsey, recommends what he calls the snowball method of paying off credit card debts. What this amounts to putting your debts in order from the one with the lowest balance down to the one with the largest. You then focus all of your efforts on paying off the one with the lowest balance while continuing to make the minimum monthly payments on your other credit card debts. When you get that first debt paid off you will have extra money you can use to pay off the credit card with the next lowest balance and so on. Dave calls this the snowball method because like a snowball rolling downhill you will pick up more and more momentum as you pay off each debt. However there are other financial experts that believe it’s best to put your credit card debts in order from the one with the highest interest rate down to the one with the lowest. You then concentrate on paying off the one with the highest interest rate first as this will save you the most money. Which of these two methods would be best for you? It really boils down to a matter of personal choice. The important thing is to pick one and then stick to it.

How it used to be

Until very recently it was easy to understand how to handle credit cards to keep from having them negatively affect your credit score. All you had to do was… • Make every one of your payments – at least the minimums due – on time every month • Be sure to keep your balances below 30% of your credit cards’ credit limits. Of course, it’s better to have an even lower percentage but the difference that 10% or 20% make to your score is really very minimal when compared to 30%. • Make sure that you apply for a new credit card only when you need it. Your credit score can be negatively affected if you have a lot of recently opened accounts.

A new factor in credit scoring

But now there’s a new factor in credit scoring as the three credit bureaus are now using the amount by which you pay down your cards each month in calculating your score. It’s likely that other bureaus and scoring companies will soon follow suit. What’s the purpose of this? It’s to differentiate between people who pay down their balances in full each month (“transacters”) and people called “revolvers,” who carry forward their balances from one month to the next. The theory behind this is that people who pay off their balances each month are likely to be more credit worthy and so deserve higher scores. A spokesperson for FICO, the company that invented credit scoring, has said that it is still studying the data and hasn’t yet changed its systems. In addition to having invented credit scoring, FICO is the company whose credit scores are used in more than 90% of all lending decisions made in the US.

How this could affect you

If companies in the credit-reference industry and FICO begin to differentiate between “revolvers” and “transacters,” the “revolvers” could see their scores being downgraded even if they always make the minimum or higher payments on their credit cards on time every month. And this could lead to a significant change in how people view their credit cards and there could soon be fewer “revolvers.”

Bad news for the credit card issuers

In turn, this could be bad news for the credit card companies. Would you use your cards to borrow if you knew that this would probably make your home, auto and other loans more expensive? For that matter, the interest that credit card companies garner from those that roll forward their balances every month is an important revenue stream. One of the best-kept secrets of the credit card business is that people that always pay their balances on time are referred to as “deadbeats,” because they generate little or no profit for the credit card companies.

How Credit Card Companies Calculate Your Interest Charges May Totally Surprise You

Hand holding batch of credit cards credit card debtIf you’re like us, you open your monthly credit card statements, note the minimum payments required and maybe the interest you’ve been charged and then file them away until a few days before your payments are due.

Credit cards can be great tools

Credit cards can be great tools when used sensibly, They can be very handy when you want to buy something but don’t have enough cash available to pay for it. If you’re typical your access to capital is limited and a credit card represents one way to get an instant line of credit that won’t have many strings attached. Of course, this doesn’t mean the money you can access with a credit card is free. If you’re not certain as to how credit card companies calculate your interest, you may be paying more money than is really necessary. It’s important that you do a good job of managing your credit card spending and that you know the terms of the agreements you have with your credit card providers.

If you’re average

What you may not be paying much attention to if you’re the average credit card user is how credit card interest actually works. Again, if you’re typical, you simply check out the interest you’ve been charged, maybe wince a bit and then move on. But to really understand your credit card bill you need to know how credit card interest really works.

Calculating your credit card interest

If you’ve ever tried to carefully read your agreement with a credit card company, you might come away with the idea that it was written to be almost impossible to understand. This can be especially true when it comes to how interest is calculated. If you don’t know how your interest is calculated, you could end up spending more than you had intended and with a huge interest penalty. Of course, you can prevent these problems simply by paying off your balances in full and on time every month. Unfortunately, many people cannot do this because they need that line of credit to make larger purchases they can’t pay for in just 30 days.

Most credit card issuers compound interest each day. Compounding your interest means that any interest charges you have that accumulate are added to your principal or the total amount you owe. To compound your interest, most credit card companies divide your annual interest rate by 365. The resulting daily interest is then multiplied by the balance of your loan to get the interest you’re charged daily. This is then added to your daily credit card balance.

It’s not compounded monthly

The mistake that most people make is to believe their interest charges are compounded monthly. But as you have read, this is not true for the majority of credit card issuers. This means that if you owe a large amount of money and don’t understand how interest works, this system of compounding can mean that your debt could spin out of control very quickly.

Here’s an example of what I mean. Let’s assume that you owe $1000 on a credit card with an APR or annual interest rate of 15%. If you divide 15% by 365 days, you’ll see your daily interest is 0.041%. This means if you carry that $1000 balance for just one day, your interest charge will be $.41. Then on day two you’ll be charged that 0.041% on $1000.41. While this may seem kind of insignificant it can become a huge issue if you owe a lot of money. This is the reason why it’s critical that you keep the average balances on your credit cards as low as you possibly can.

When you’re charged interest

A second important question is when will you be charged interest? Unfortunately, the answer to this may not be simple. Many credit cards have introductory offers that give you zero interest for some amount of time – ranging from six to 18 months. As you might guess, if you have a really good credit history you’ll get a longer introductory period. But, of course, nobody will get a 0% interest line of credit forever. After your introductory period expires you’ll be required to begin paying interest on any balance that you carry forward from one month to the next. In most cases, you can pay off your balance at the end of every month and won’t be required to pay any interest. But if you don’t pay off your balance in full, you will start seeing interest charges on your remaining balance.

How your credit card interest rate is determined?

You may understand that your credit card’s APR or interest rate has a big effect on how much you pay in interest each year. But what you might not be aware of is how credit card companies get to that APR. In fact, they use a number of different factors in assigning you an interest rate, including whatever is the prime rate, your credit score, your credit history and any credit card promotions the company is currently offering.

If you’re not familiar with the prime rate it’s based on economic variables tied to the interest rates paid by banks when they borrow from the Federal Reserve on a short-time basis. Generally speaking, the prime rate will be three percentage points higher than the federal rate. This means that when the prime rate goes up banks are required to pay more to borrow from the Federal Reserve and your card’s APR will also will increase – probably by the same amount
If you’re like us to open your monthly credit card statements note the minimum payment card or maybe supercharged file them away until a few days famous
The second factor, your credit score, affects how much you can borrow and your interest rate. As you might guess, if you have a high credit score you will get a lower interest rate. And the inverse is true. If you have a low credit score you will pay a higher interest rate.

How you have paid on credit cards and loans in the past also affects your interest rate. For example, if you were to make a late payment, this will directly affect your interest rate. Finally, a credit card company may be offering a promotion as a way to get new customers. Many of these promotions are introductory offers where, as reported above, you pay low or no interest for some period of time.

As a prudent consumer

If you want to be a sensible and prudent consumer, you need to keep abreast of how credit card interest is calculated and how your relationships with your credit card issuers affect your finances. Make sure to read the fine print in a credit card agreement before you sign up for one and understand all its details. That way you won’t have an unpleasant surprise sometime in the future when a credit card statement roles in and you find you’ve been charged an insanely high amount of interest.

Why a credit card can be better than a debit cardwoman with a laptop and holding a credit card

There are some very good reasons to have a debit card. For one thing, you can’t run up debt on a debit card. These cards are generally tied to your checking or savings account so that if you completely deplete that account, you can no longer use the debit card. However, there are also some reasons why a credit card can be better than a debit card.

The first of these is that you can build up your credit score with a credit card but not a debit card. When you use a credit card sensibly – especially if you pay off the balance on time every month – this will definitely have a positive affect on your credit score. In comparison, what you do with your debit card will have no affect on it.

Budgeting can also be easier with a credit card as all your transactions will show up on your statement at the end of every month. Good budgeting begins with tracking your spending so that you’ll know where your money’s gone. A credit card statement will help you understand this and see those areas where you might be able to reduce your spending.

Third, debit cards do not come with rewards as credit cards do. When you choose a credit card that comes with great rewards such as miles or cash back, this will help you get more bang out of every buck you spend.

Finally, credit cards give you more protection as a consumer than do debit cards. With most cards, your liability is capped at $50 if someone steals your identity or misappropriates your card. While debit cards do offer protection against fraud it could be as many as two months before you get back the money that was stolen.

Consumer Debt Indicates Confidence

happy woman with groceriesConsumer debt is a common experience for most Americans. It is evident in almost every aspect in their lives. It is a companion in almost all major decisions in a consumer’s life. Financing college dreams would most usually equate to taking out federal and private student loans. This would pay for the tuition and other fees to graduate with a degree.

For consumers buying a car, taking out a car loan is just around the corner. It helps them finance the car instead of buying the car in cash. It allows them as well to not tie up their funds in just one property. Buying a home would similarly have the same concept as getting a car. Mortgage loan is one of the most used consumer loan instrument.

From college education to buying a car and owning a house, consumer debt plays a vital role in those major life points. But even in our everyday lives, consumer debt is evident in our use of credit cards. From buying groceries, paying for the monthly bills to dining out with the family, credit card use has been playing a big role in a consumer’s life.

With all these consumer debt, people have been finding themselves deep in debt and putting together a financial routine to tame big debt. But experts are looking at debt in a different light. Oddly enough, some financial experts deem debt as a good indicator of consumer confidence.

Confidence in growing consumer debt

NYtimes.com recently shared an article on how consumer debt is indicating growth in consumer confidence. From the study, consumer debt for the first quarter of 2014 stands at $8.69 trillion. Covering the same quarter last year, this is a 2% increase in debt. And looking further down the timeline, this is the only increase in consumer debt since the 2008 recession.

The highest point for consumer debt was way back in the third quarter of 2008. Debt stood at $9.99 trillion. After this point, mortgage began a steady decline because of homes being given up due to default. Add to this the fact that few new home mortgages are being taken out for fear of the market and economy in general.

The increase in debt is being studied in comparison with a decline in delinquent payments as well. The study revealed that the delinquent payments for credit cards during the first quarter of 2014 was at 8.5%. This is the lowest percent of delinquent payments since 20013. This is a great indicator of consumer confidence in personal finance.

The study shows as well that there is an increasing number of young consumers aged 22 years old to about 25 years of age that are taking out auto loans. This holds true for those that has student loans and those that do not carry any student debt. There are a few reasons for an increase in auto loan takers such as:

  • Stable fuel prices. A steady performance of fuel prices has been generally a great contributor in the increase of auto loans. Thedetroitbureau.com even reported that because of stable prices of fuel, there are shifts in consumer preference in car brands.
  • Interest rates. The rates for car loan are relatively low and this encourages consumers more to buy that car that they need.
  • Credit availability. This is an example of an economic supply and demand ratio. As more people are looking for lenders for an auto loan, more banks are offering the loan instrument. Extending the service to cover the consumer market that are on the lookout for auto loans.

Talking more about consumer debt,  mortgage had quite a decrease in the 27 years old to 30 years of age market. The survey even pointed out that a lot of it has to do with people struggling with student loans.

Student loans are affecting mortgage loans

Carrying big debt can lead to terrible things to  your family. Debt is is both prohibitive and limiting in nature. This does not limit itself to just mortgage loans, credit card and auto loans. In fact, one of the bigger industries at the moment is student loans. The industry has seen phenomenal increase over the past few years.

Westernherald.com shows that in the past 10 years, there has been a 300 percent increase in student debt. The industry is now at $1.2 trillion and growing. In 20013, the student debt stood only at $253 billion and steadily climbed up. In fact, if grouped with other consumer debt such as mortgage loans, credit cards debt and auto loans – student debt kept at increasing in a steady pace.

This year, there are about .85 college students graduating with a bachelor’s degree. Simple straight computation would indicate that each one of them would have an average of about $26,500 a college graduate. Even with lower delinquent payments for student loans, there are still about 30% in default for federal loans. This indicates that there are quite a large number of borrowers struggling with payment.

This is in fact one of the things that experts are looking at as a cause of a decline in new mortgages for possible borrowers with student loans. Simple logic dictates that having a big student debt puts stress on a borrower to pay. The chances are they send in  late payments or worse, delinquent payments. This would reflect negatively on their credit score. And a subprime borrower would either be slapped with a high interest rate because of the risk or be denied outright. These two scenarios would lead the borrower to put off a mortgage loan until the student loan is paid or their credit score improves.

This is a dilemma knowing how a college education benefits the income. There is evidence to support that college graduates are able to land better paying jobs than high school graduate. Unemployment for college graduates are at 6 percent as compared to 13 percent for high school graduates or those who do not have a college degree.

The student loan debacle can boil down to one point, managing any consumer debt has to be done with financial literacy at the helm. From the time the loan is to be taken out until the repayment period all the way to paying it off. Having the basic wisdom if the loan is really something that is needed to the budgeting of monthly income to pay off the debt requires financial literacy.

It is one thing to qualify for a loan but it is another to make the payments to maintain a good credit score. Having a good paying job will not worth much if you delay on your payments and use the funds for unecessary expenses. Having a goal to aim for can greatly help in steering you over to the right direction. Having a  budget as well to guide you in your daily expenses will bring you closer to that goal.

The increase in consumer confidence because of an increase in debt and decrease in delinquent payments is a good sign that people are able to maintain debt and make the payments on time. They are more aware of the financial responsibilities and the effects of mismanaging the payments. It can also show the confidence people have in the economy because taking out loans are long term responsibilities.

 

Study Shows an Increase in Household Debt

House with cash on the roofHousehold debt is a combination of all loans and debt a family would have. This includes mortgage loans, credit card debt, student loans, and even credit card debt. There is nothing wrong in having most of these on your list, even all of them. The idea is to properly manage the payments to allow you to still live your life the way you want to and not just live to work to make payments.

Online.wsj.com recently shared an article illustrating that there in an increase in household debt. This is a steady increase starting from July  2013 to January to March 2014. According to the Federal Reserve Bank of New York, the current numbers on  household debt is at $11.65T from $11.521. This figure shows a $129 billion increase between January and March 2014.

Mortgage in household debt

Housing is still on top of the list of household debt. Even with tough mortgage problems, housing loans still makes up the bulk of total debt in the US household. The mortgage industry now stands at $8.2T showing strength with a $116B increase. The jump from $8.08T shows as well a decrease in consumers getting into foreclosure. This is a big factor in a decline in the mortgage industry.

More than foreclosure, the increase in the industry also shows that new loans are on a slide. It has lowered to $332 billion for three quarters straight. Part of this is how the market is being priced. Most are on still a bit more than what the mass buyers can afford. With prices still at a high level, taking our new mortgage loans are still not very affordable for would-be new homeowners.

Credit cards usage in  household debt

Credit card is next on the list but consumer habits are changing leading to a decrease in the use of plastic credit. Since 2002, it is now at $659 this quarter. This amount went down by as much as $24 billion from the previous quarter. Year on year, same quarter last year was just a few point up from this quarter. This shows that credit card use in decline.

Gallup.com also confirmed this with a study that shows the decrease in the reliance of a credit card in the US economy. The study revealed that 48% pay the full amount when their bills come in. This is one perfect example of financial literacy. Making the credit card work in your favor. This is an 11% increase compared to data last 2004. Back them, only 37% paid their credit card in full.

This data also goes to show that the number of people leaving balances in their credit card has gone down. It is now only at 33% compared to 45% in 2004. Less and less people are putting off payment for the full amount. This is most likely because of the awareness on how interest payments and other finance charges are blowing up their payments more than it should be

The data also shows that more and more people are dumping excess credit cards and learning how to live off on a few plastic credits. The survey revealed that credit card ownership is at an all time low in 2014. From 2002, 17% of the respondents did not own a credit card. In 2014, that number went up to 29%. There was a 12% increase over the last 12 years showing steady and consistent decline in credit card ownership.

Digging deeper, it showed as well that consumers who carry 5 to 6 different credit cards went down from 12% to 9% in the same years. This again shows a steady 0.25% decrease every year from 2002 to present. Those that carried 7 and more credit cards also decreased from 11% to 7% showing a consistent decline of about .33% every year.

All these shows that from 2002, the average credit card ownership of US consumers went down from 3.3 to 2.6 in 2014. If the data was to exclude those that did not own a single credit card, the data would still go down from 4 to 3.7 in 2002.

Credit card ownership at a glance is:

  • No credit card highest in 2014 at 29%
  • Having 1 to 2 credit cards lowest again at 33% in 2014
  • Having 3 to 4 credit cards lowest in 2014 at 18%
  • Having 5 to 6 credit cards lowest in 2014 at 9%
  • Having 7 or more credit cards lowest in 2014 at 7%

Student loans and car loans

Student loans has taken up quite a big chunk of the debt industry when it broke into $1T total recently. This could even go up as Wnd.com  broke the story that government-funded student loans are about to increase according to an analysis of the the Congressional Budget Office.

A lot of college students and working professionals deal with student loans everyday of their lives. It is that one loan that you carry from college all the way as you walk to your first job interview and even up to the time you already have kids of your own. This is why a lot of debt collectors are earning a lot from student loans.

The balance for car loans grew as well to $875 billion with a $12 billion increase from the past. Getting a car of your own is just as much an American dream as getting a house is. Having a car of your own now is a necessity more than anything. And it is not cheap to get a car. Most first time car buyers forget that the cost does not stop in the purchase price. Gas cost should be a major consideration as well as maintenance cost. All these and more should be considered before getting a car loan.

Effects on the US Economy of credit card use

Financial literacy has a lot to do with reduced dependency of consumers with credit cards. Knowing how many card you have to carry and being able to pay for the purchases you charge is a sign of a being financially responsible. The lower number of credit card users who leaves balances in their statement goes to show as well that more and more consumers are beginning to understand how interest payments are making them pay more.

The financial crisis in 2008 was mainly due to the fact that people over borrowed and had little funds to pay it back. It started a vicious cycle of more borrowing because of living expenses and the need to pay off loans and getting and borrowing again to cover the same recurring expenses. It is only now that the economy is getting back up on its feet with the consumers leading the way.

The US economy is consumer driven. About 70% of the economy is dependent on the purchasing movements of the consumers. The more the people purchase, the better the economy is. Any sign of slowdown in the purchases of US consumers has a direct effect on the performance of the US economy.

The trend that has to be closely monitored is the combination of the slowdown in credit card ownership and a slow wage growth. The availability of using credit and the lack of funds to actually pay for credit purchases could have an adverse effect on consumer spending.

Financial literacy does not restrict purchase and limit household debt. It guides the consumer in making the right choices and makes them realize the importance of saving up for emergencies and retirement as well. It also shows the importance of dealing with debt payments and how it affects their everyday lives. Dealing with loans and debts and budgeting them are crucial in being able to financial freedom.

3 Facts About College That Will Set Up Your Financial Future

student holding a past due envelopIf you want to keep college debt from crippling your financial future, you need to make sure that you will act appropriately while you are in still in school. Some people make the mistake of partying all the way through college and end up living like a student on a limited budget once they start working. That is because they are already paying for the financial mistakes that they made in the past.

Study shows that what you do in college will affect your life

What you do in college have serious effects to your future. In fact, Gallup.com conducted a poll survey that proved how a students life in college affected them after graduation. It is interesting to note that your level of work engagement and your overall well being will be affected by how you acted back in college. The bottom line of the study revealed that college graduates would have been more engaged with their work and thriving in various areas of their well being if:

  • Their school prepared the for life after graduation
  • Their school were sincerely concerned about the long term success of students
  • They had a mentor in college, had a professor who got them excited about learning and cared about students as a person
  • They had an internship in college, active in extracurricular activities and worked on a project that took the whole semester or more to complete

3 important truths about college life and your future financial standing

From the above study emerges three important truths about your college life that has a significant impact on your financial future. Let us discuss them one by one.

Where you graduate is not important.

An article published on the NYTimes.com revealed an interview with Laszlo Bock, the VP of Google that is in charge of hiring people. He mentioned that the GPA and the school were a graduate came predicts nothing about how they will perform in the company. In fact, there is a growing number of people in the company that did not have any college degree. While good grades are still important, they have observed that it is not the defining factor that will make a graduate successful. What is important are the skills that the student will get from their school. That being said, you should know that you can come from a community college and avoid high student loans and still be successful in big companies like Google.

What happens to you in college will set you up for life after graduation.

In connection with the previous, the Gallup study revealed that it is experience and skills that you will get from college that will define your success in your work. In effect, that will have a profound impact on your earning potential. Business owners are attracted to people of skill, not those who graduated from Ivy League schools. If you tap into the right influences like a mentor and social skills you get from extracurricular activities, you will find yourself more engaged to your work. The dedication that you will display can be evident in your output and that will make you shine in your work.

What you spend in college will come haunt you after.

This is not really directly indicated in the Gallup study but considering that we are trying to identify the factors that will affect your financial future, we need to incorporate this fact. It can be logically assumed that student loans, credit card debt – these will haunt your paycheck for the next few years – even a decade. You need to be careful about how you will use them or if you will use them at all in college. According to an article published on Demos.org, the higher your student loan debt, the more of your lifetime wealth will be compromised. Instead of investing the money you get from your paycheck, you have to share that with your payments. This is true for both student loans and credit card debt.

Financial practices of a college student to set them up for success

Given the truths that we just discussed, you have to consider how your financial practices in college should be implemented to set up your future correctly. You can influence your financial future even as early as your high school days. If you start saving your college to avoid student loans, that will start you up on your personal wealth early in life.

But even if you failed to start while you were in high school, you still have time to correct your finances when you reach college. Here are 5 things that you can do to take care of your finances as early as now.

  • Implement a budget plan. Regardless if your parents are supporting you 100% or not, you have implement a budget in your life. This is a habit that you will need until the very end. It will help you reach your financial goals and more importantly, it will keep you from debt. Most people live on a limited income and a budget plan will allow you to point out the expenses that you need to prioritize. It will help you make smart choices about your money while in college.
  • Learn about your debts. This is true for both student loans and credit card debt. A secure financial future does not necessarily mean you do not have debt. It means you may have debt but you have full control over it. Not only that, it also means you have a backup plan in case your main source of income is compromised. To create this plan, you need to understand your debts thoroughly. Your ignorance might lead you to make mistakes that could have been avoided if you only researched about your debts.
  • Reserve your credit cards only for emergencies. Student loans are bad enough and your financial future will be much worse if you combine it with unnecessary credit card debt. You can understand how this can jeopardize your financial future. Keep your debts low and if you have to use a credit card, make sure that you have a plan to pay it off before the grace period ends.
  • Get a job. If you need to get money for your college expenses, do not use your card or go running to your parents. Get a job and finance your own expenses. Not only will it teach you to be self-reliant, it will also give you the skills that will prove to be helpful when you start applying for a job. Remember that internships and skills are major factors that Gallup mentioned you need to be engaged and thriving in your future life.
  • Live a frugal life. When you are a student, you get all sorts of discounts. Make sure that you source these out so frugality will not seem restricting. If you learn about the true practices of frugal living, you will realize that it is not about deprivation. It is learning how to have the things that you used to enjoy without spending too much for it.

Statistics show that college graduates enter the corporate world with a lot of regrets about life. You do not have to be part of this statistic. Make sure that you will learn how to set up your financial future so it will be poised to grow exponentially. If that means you need to stay away from student loans, then you should know that your skills and college experiences are more important than the expensive colleges that are popularly preferred. The quality of college education is important – not where you got it.

In case you need help with your student loans, National Debt Relief has a program that can provide you with consultation services. Their trained experts can advise you about you student loan repayment options based on the type of debt that you have and your employment situation. They will even help you with the paper work involved. This service has a one time fee that will be placed in an escrow account. When you are satisfied with the service and the documentations done on your behalf, that is the only time the fee can be released. There is no upfront or recurring maintenance fee.

Credit Card Churning – The Good And The Bad

woman with a laptop and holding a credit cardThere’s hardly a day goes by without a credit card offer showing up in our mail. They all say I’ve been preapproved; all I have to do is mail in the application and I’ll soon be able to start earning 2x cash back, airlines miles or points I could use to buy myself an exciting gift.

Those mouth-watering rewards card offers can be hard to resist. I mean, who doesn’t want to earn 2x cash back or airline miles for a great vacation?

If you’re receiving these rewards card offers and are tempted to sign up for a bunch of new cards, there are two things you need to know.

Pre-approved doesn’t mean you’ll get the card

First, just because you’ve been “pre-approved” for a credit card doesn’t necessarily mean you’ll actually get the card. Pre-approved only means that the bank’s computers have accessed your credit score and that yours is high enough that you may qualify. But when you send in your application, the card issuer will take a much harder look at your credit history. One of the most significant factors for lenders is your debt-to-available-credit ratio. This is the amount of credit you have available or your total credit limits vs. the amount you’ve used. For example, if you have total credit limits (total credit available) of $15,000 but you’re carrying total balances of $4,000 (your total credit card debt), you’d have a debt-to-available-credit ratio of 26%, which credit card issuers would look upon very favorably.

On the other hand if you have total credit available of $15,000 and total balances of $7500, your debt-to-available-credit ratio would be 50%, which would be considered too high. So you might have a good credit score but wouldn’t get that new rewards card because the card issuer might see you as too big a risk.

Credit card churning

Do you ever apply for credit cards just for the sign up bonuses they offer? This strategy of signing up for numerous cards in order to get multiple sign-up bonuses is known among credit card enthusiasts as ”credit card churning.” And true credit card devotees will go so far as to sign up for a credit card multiple times just to get the same sign-up bonuses over and over.

But is this a good idea and, more importantly, what would it do to your credit score?

To begin with, credit card churning is not easy. You must first find the cards that offer the best sign-up bonuses, apply for them and be approved. And as noted earlier in this article you will need to have a very good credit score. The credit card issuers generally look at credit scores in ranges as follows.

• Between 700 and 850 – Very good or excellent credit score
• Between 680 and 699 – Good credit score
• Between 620 and 679 – Average or OK score
• Between 580 and 619 – Low credit score
• Between 500 and 579 – Poor credit score
• Between 300 and 499 – Bad credit score

If you have a credit score of 700 or better you’d probably qualify for just about any credit card available. Conversely, if your score is lower than 619, you might have a hard time getting a great new card – unless you have a very good debt-to-available-credit ratio or some other positive factors in your credit history.

Read the terms and conditions

Your second challenge – if you were able to get all the cards you applied for – is to understand each one’s terms and conditions. Many of those rewards credit cards require that you spend some minimum amount of money within a certain amount of time before you qualify for their sign up bonuses. As an example of this, one of the credit cards from Chase offers applicants a bonus of 40,000 bonus points but not until you’ve spent $3,000 within three months from the time you opened the card.

Not so fast

Some of the credit card issuers have caught on to the practice of churning and are now limiting the number of times that a person can get the same sign-up bonus. For example, many American Express credit card offers now state that if you currently have one of their cards, “you may not be eligible for this bonus offer.”

The biggest problem with credit card churningman holding multiple credit cards

The biggest problem with rewards credit cards is that you must spend money in order to earn the rewards. Go back two paragraphs and read again what you have to do to earn 40,000 bonus points on that Chase card. You have to spend $3,000 within three months. You must be very good at controlling your spending when using credit cards to earn sign-up bonuses. Rewards cards generally have higher interest rates than those that don’t offer rewards. If you were to start building up big balances – a 4higher interest rates – you could soon be facing a mountain of debt. In fact, if you have a hard time managing your finances, you’d be much better off getting a credit card with the lowest possible interest rate and leave those rewards cards alone.

Damaging your credit score

Another risk of credit card churning is what happens when you apply for multiple cards. This will go on your credit report and will lower your credit score. Most experts say that every time you apply for credit, it “dings” your credit score by anywhere from two to five points. If you were to apply for 10 cards your score would drop by at least 20 points, which could cause your score to go from “Average” to “Poor.”

Worse yet, is what happens if you were to run up big balances on some of those cards making unnecessary purchases just to earn bonuses and were then unable to make your payments on time or were even forced to miss a payment. In this case, your credit score would drop dramatically – making it difficult for you to get a mortgage or buy a car. You would probably also have to pay more for your utilities, your car insurance and even for your house or apartment if you rent.

On a brighter note

The up side to getting multiple rewards cards is what this would do to your debt-to-available-credit ratio. Go back to our earlier example of $15,000 in credit available and total balances of $7500, yielding a debt-to-available-credit ratio of 50%. If you were able to qualify for new cards with a total of $10,000 in credit available, your debt-to-available-credit ratio would drop to 30%, which would be much better for your credit score.

What you can’t fix

Your credit score is made up of five components. We’ve mentioned two of them – your debt-to-available-credit ratio and credit applications. The third and the one that accounts for 35% of your credit score is payment history or how well you’ve handled credit. This can’t be changed because, well, history is history. So if you want to have and maintain a good credit score it’s important to always pay your bills on time and try your best to not carry any balances forward from month to month.

Should you churn?

Some financial advisors say it’s unfair to take advantage of credit card issuers by signing up for cards just to earn bonuses and those generous rewards. However, others say “all’s fair in love and credit cards” and if you can qualify for those cards why not go for it? After all, the card issuers could always choose to limit or restrict their offers. If they don’t, you shouldn’t feel guilty about taking advantage of them. Plus, you’re giving those banks the opportunity to earn your loyalty. If they treat you well and you continue to use their cards long after you’ve earned the bonuses you’ve gone from a churner into a long-time customer. And that would be a win-win situation for both you and the banks.

Could You Buy A 2004 Subaru For What Your Credit Cards Are Costing You?

frustrated looking woman looking at a laptopDid you know that if you have $30,000 in credit card debt at 19% you’re paying enough in interest in just a year to buy a 2004 Subaru WRX or a 2004 Ford Focus SVT? Those two cars were recently on a list of AOLAutos.com’s best used cars for $5000. And $5000 is what you’d be paying a year if you did owe $30,000 on credit cards.

Not good long-term loans

Don’t get us wrong. Credit cards definitely have a place in your life. They can be great for buying an item when you don’t have enough cash with you to pay for it or as a short-term loan. But credit cards should never be used as a long-term loan – due to their prohibitively high interest rates — vs. a personal loan or a homeowner equity line of credit where you’d pay something like 3.99%.

If you’re working to get out of debt

If you want to get out from under that load of debt, the first thing you need to do is get a handle on your spending. The reason why you’re in debt is simple. You’re spending more each month than you have money coming in. And the only way to fix this is to determine where your money’s going. You need to then sit down and develop a budget to get your spending under control. If you find that your budget won’t handle both your living expenses and paying down your debts, you’ll have to either find ways to earn more or to cut your expenses.

Credit card transfer vs. a home equity line of credit

In the meantime there are two ways to get your interest rates reduced while you’re working to pay off your credit card debts. The first is to transfer it to several 0% interest balance transfer cards and the second – if you own your house – is to get a home equity line of credit.

So, which would make the most sense?

0% introductory rate vs. a home equity line of credit

Transferring your high interest credit card debts to new ones with 0% introductory rates or getting a home equity line of credit would both give you a lower interest rate. And either could help you pay off that debt as quickly as possible.

The fog of war

This is a phrase that is often used to describe what happens once a battle begins. It’s a shorthand way of saying that no matter how carefully a general crafts a battle plan once the fighting begins a sort of fog sets in and things don’t go according to plan. Unfortunately, the same is true about a plan for getting out of debt – things don’t always go according to plan.

A home equity loan

As an example of this, take a home equity line of credit. If you were to get one of these loans to pay off that $29,000 in credit card debt and then pay it totally off as quickly as possible, this would be a great solution. But what happens to many people is they get a line of credit with all the best intentions for paying it back. But then a bank offers them a higher limit than they need to pay off their credit card debts. They believe that’s okay and convince themselves they won’t use that extra credit.

By the way — if you’re not familiar with home equity loans here – courtesy of National Debt Relief – is a video that explains the differences between a home equity loan and a home equity line of credit.

Twice as much debt

What happens to many people is they then run into a bunch of bad luck, use up the entire line of credit and are forced to once again run up their credit card debts. And before they know it, they have twice as much debt as before they took out the loan. The same thing can happen with 0% interest balance transfer cards. People use the money to pay off their high-interest credit cards but forget to close them. They eventually find themselves short of money and begin using the old cards again and end up having both the old cards and the new ones and their balances just keep ballooning.

Have an emergency fund

If you create a budget to get your spending under control, try to make one that includes money for an emergency fund. Ideally, this fund should be the equivalent of six months of living expenses. But if that doesn’t seem doable, shoot for at least three months’ worth. Then when an emergency hits — and trust us that one eventually will — you won’t have to use a credit card to pay for it.

To escape the debt trap

If your goal is to get out of the debt trap, there are some things you should do besides creating an emergency fund.

For one thing you should close those old credit cards the minute you pay them off — whether you use new 0% interest cards or a home equity line of credit. This will cause your credit score to drop but totally eliminates the possibility that you would be tempted to use them again.

Second, if you opt for a home equity line of credit, try to get one with a limit that’s no higher than what you need to pay off your old credit cards. Some financial experts might advise you to get the highest line of credit possible, as this would help your debt-to-available-credit ratio, which could boost your credit score. But the extra points you would earn is less important than getting out of debt. The best way to improve your debt-to-available-credit ratio is to pay down your debt and not to expose yourself to taking on even more. And if you don’t get a higher line of credit than you actually need, you will never be tempted to use that extra credit.

A 0% transfer card might be best

Between the options of transferring your high-interest balances to 0% interest cards or getting a home equity line of credit, we recommend the balance transfers – but only if you’re positive you can pay off your balances before your introductory periods end. The reason for this is the transfer fees you might be charged ($300 to $500 per transfer) will be far less than the interest you would pay on a home equity line of credit over the same time period. But you need to be really careful that you do pay off the balances on those new cards before your introductory periods expire or you could end up right back where you started or in even worse financial shape.

It’s not easy but it should be worth it

Paying off a huge pile of debt like our hypothetical $29,000 is not an easy task. It takes time and self-discipline. The reason you got into trouble with debt is because you were living a lifestyle you couldn’t afford. The only way to fix this is to change your lifestyle to match your income, which will mean you will need to make some sacrifices. You might have to find a cheaper place to live, trade in your car for a used one with more miles (and not as much pizazz), quit eating out three or four times a week or stop hanging out with friends so often.

But just imagine how you will feel when you become debt free. You’ll be able to sleep better at night, which means waking up feeling refreshed and looking forward to your day. If you’ve had debt collectors hounding you unmercifully, they will go away. You won’t be paying interest on your debts so you’ll have more money to save and invest for your long-term goals such as buying a home or for your retirement. You’ll have money for an emergency so that you won’t be wiped out when you have an unexpected medical bill or car repair. You’ll be able to face the world knowing that you’re in debt to no one and that no creditor can make your life miserable.
Wouldn’t this be worth some short-term sacrifices?

Shocking News – Your Credit Card Purchases Could Be Repossessed!

grandma looking shockedYou recently purchased a washer and dryer for $1100 and now the store wants it back? It could actually happen. Many credit cards – even some of the store cards — permit the creditor to repossess items you purchased if you don’t complete your payment. This is based on an analysis done by CreditCards.com.

What it found

What this analysis revealed is that credit cards are generally called unsecured debts. This means that there is no piece of property used as collateral to secure them. The fact that credit cards are unsecured debt is often used to explain why their interest rates are more than other types of debt like auto loans and mortgages. In comparison, these are called secured debt because they are backed up by collateral such as your house or automobile.

A security interest

However, many cards including some of those medical credit cards can actually threaten to repossess your stuff. This is according to credit card agreements that have been filed with the regulators. In fact, there is in excess of 200 card agreements that give a “security interest” to the bank on items you purchase. This does not include secured cards you would use for rebuilding your credit. But store cards from Big Lots, Costco and Guitar Center that are backed by Capitol One contain this clause. So do some of the credit cards such as the high interest Wells Fargo Financial card.

Easily overlooked

These repossession rights are one of the clauses in credit card agreements that are typically overlooked. The problem is that most people who apply for credit cards do this based on their interest rates or their rewards and skip right past their other terms. When threatened with repossession people tend to say, “Wow! I had no idea I had agreed to that.” But they do agree to this whenever they sign a credit card receipt.

How this works

If you think that if you file for bankruptcy your household goods will be protected, this may not be the case. If you purchased an item with a credit card that has a purchase money security interest, this generally allows the lender to repossess the item until you’ve paid your entire balance. However, in most credit card contracts this security interest phrase is not explained. This can leave the threat of having the item repossessed very unclear. With several store cards backed by Capital One the security interest language provides the bank with a claim on even extended service contracts and insurance as well as merchandise. This term also assigns you part of the responsibility for taking purchases back. What this security clause states is that, “If we take back any good we may charge you our costs and require you to make the goods available at a convenient place of our choice as allowed by law.” For that matter, Capital One even says that the store has the right to contact you via personal visits – at home or at work.

Rarely enforced

Fortunately, threats to seize an item you purchased with a credit card are rarely followed up on. It is difficult to resell a person’s used possessions and repo men must have a court order before the sheriff can enter your house. The reality is that nobody wants used stuff back. But the possibility of having an item repossessed is treasured as a powerful collection tactic. Collectors often use this as a way to obtain a settlement check. This is because households that are debt strapped might rather pay up than risk losing their refrigerators, laptops, HDTVs or washer-dryer combinations.

What to do if threatened with repossession

How serious the threat of repossession could be will depend largely on the amount of money involved. In other words, the threat might be a lot more in the case of a $1100 washer-dryer combo vs. a $300 laptop. One bankruptcy attorney has recommended that if you are threatened with repossession you say you will pay the value of the item as used, which will be much less than the amount being demanded. And while the possibility of having that item repossessed is very low, a debt collector could threaten civil action or possibly even criminal charges.

Credit card fees raise costs

If you carry several credit cards with balances you need to be aware that there are some changes being made in fees that can increase your cards’ costs. For example, on its general-purpose card Citi did away with a deal on late fees it was giving those of its customers with low balances. Prior to this, first-time offenders had a $15 late fee if their balances were below $100. However, this now costs everybody $25 – regardless of his or her balances. In addition, there can now be fees if your credit limit is increased whether you asked for it or not. However, these fees usually are linked to subprime cards such as one from First Premier Bank with its 36% interest rate as well as a pre-account opening fee and an annual fee.

Complex fee structures

While the CARD Act has made it easier to understand credit card agreements in general, there can still be complicated fee structures that make it tough for consumers to understand what their cards are actually costing them. In many cases, people just aren’t equipped to decide what their cards are really costing them. The card agreements themselves are now a bit easier to understand. Since the year 2008, the average credit card agreement has shrunk by about 2100 words, which is 24% skinnier and readability has also improved. Despite all this, many consumers are still shocked when they get down into the fine print of a credit card agreement. The problem is that the credit card companies will always try to bury things. This definitely puts the burden on you as you must read all the fine print in a credit card agreement before you sign on the dotted line to be sure you understand what that card will really cost you.

One good exampleHand holding batch of credit cards credit card debt

One good example of why it makes sense to read the fine print is those 0% interest balance transfer cards. On the face of it they can seem like a very good option. For example, if you’re carrying $10,000 in debt on credit cards with an average interest rate of 19%, you could transfer their balances to a new one where you would pay zero interest for anywhere from 12 to 18 months. This means all of your monthly payments would go towards reducing your balance. If you were to heavy up on those payments you might even be able to become debt-free before your introductory period expired. However, if you read the fine print you’ll find that some of these cards have a balance transfer fee of $300 or even $500. Before you sign up for one of them be sure to do the math, as a transfer fee could easily reduce the amount of money you would save by making the transfer.

Just one missed payment

It’s also important to understand what happens to your credit score if you miss just one payment on a credit card. Most experts believe that this would lower your credit score by as many as 50 points. If you had a credit score of 600 this would drop you from having an “average or okay” credit score to having a “poor” score, which would make it more difficult for you to get new credit. Plus, it would likely increase your interest charges and even the cost of your auto insurance.

Credit scores rule

Whether we like it or not, our credit scores rule our financial lives. In fact, our credit scores are so important that the Discover Card has begun putting our FICO scores on its monthly statements. So if you have a Discover card, you should already know your credit score – for good or for bad. If not, you can buy it on the site http://myfico.com for $19.95 or get it free by signing up for a free trial of its Score Watch program. Or you could go to a site such as CreditKarma.com or CreditSesame.com where you can get a version of your credit score free – though it won’t be your true FICO score.

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