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When Going Into Credit Card Debt Can Be A Good Thing

What You Can Learn From Successful People About Debt FreedomIt’s obvious that there are people who have too much debt. For that matter, one recent study revealed that the average US household has more than $15,191 just in credit card debt not including other debts such as a mortgage, personal loan, business loan or medical debts. And college graduates are now carrying an average of $33,607 in student loan debt.

But did you know there are people who actually have too little debt?

Should you live cash only?

It might sound like a good idea for you to shred all of your credit cards and pay for everything with a debit card, check or with cash. But if you live like this, it can trip you up. The problem is that if you have no debt, you don’t have a credit score. And this can complicate your life considerably.

Credit scores

Your credit score – if you have one – is created from monthly reports that lenders send to the three credit reporting bureaus. It will reflect how many creditors you have, how much money you owe, how quickly you pay, the size of your lines of credit and any defaults. Plus, it will have information from the courts such as tax liens and bankruptcies.

Why credit scores are important

Credit scores are important because lenders depend on them to determine how likely you are to repay a loan. The credit score that is used most widely comes from the company FICO. It ranges from a low of 300 to a high of 850. If you have a score of 750 or above, you generally can get a new credit card or borrow money on the best possible terms. If you have a score of 700-plus, you will still be able to get a competitively priced loan. However, if your score is below 620, don’t bother even asking. And of course if you have no score at all, you don’t even exist – at least so far as lenders are concerned.

Understanding your credit score

While no one except FICO itself understands the algorithm used to create credit scores, it is known that they are made up of five components as follows: your credit history, credit utilization, length of credit, types of credit and recent applications for credit. Of these five, your credit history and credit utilization are the most important as together they make up 65% of your credit score. As you might guess your credit history is just that – how you have used credit in the past. Since it is, well, history there is not much you can do about it. But credit utilization, which makes up 30% of your credit score, is something that you do have some control over. The way it’s calculated is to take the amount of credit you’ve used and divide it by your total credit limits. As an example of this, if you have total credit limits of $10,000 and have used up $3000 of it, your credit utilization would be 30%. Most lenders would see that as good. However, if you had used up $5,000 of your available credit, your credit utilization would be 50%, which would be much too high. You can calculate your credit utilization yourself. If it turns out to be above 40%, there are two things you could do to get it down. First, you might be able to get more credit or second, you could pay down some of your debts.

Here, courtesy of National Debt Relief is a short video with more information about understanding credit scores.

Open some new types of credit

You could also influence your credit score in a positive way by opening some different types of credit. In addition to a credit card, you might open a personal line of credit or take out an auto loan. The fact is that potential lenders like to see that you’ve had some different types of credit and have used them sensibly. But do keep in mind that this accounts for only 10% of your credit score so don’t go hog wild in applying for new types of credit.

Your score could disappear

Let’s say that you had credit cards or loans in the past. In this case you might assume that you always have a credit score – despite the fact that you are currently operating debt free. Unfortunately, this is not so. If you had no activity on at least one line of credit in the past six months, your score could vanish. And this is according to FICO’s Anthony Sprauve.

The disadvantages of being a member of the un-scored

If you find that you don’t have a credit score, this might not bother you – especially if you voluntarily gave up your debt and credit cards. Unfortunately, your credit score will affect your life in a number of other ways. If you don’t have a score or a high enough score, you might not be able to get a discount on your homeowner or auto insurance. When you sign up for utilities such as gas or water, you might have to make a higher deposit. In the event you need to rent an apartment, your landlord will probably require a good score before giving you a lease. Credit scores are even often checked to get cell phone service or cable.

Marrying a credit score

Did you know that if you’re married you get a credit score by by sharing a debt with your spouse? As an example of this, you would get a credit score if you apply jointly for a credit card. In the event that one of you dies, shared credit cards are generally canceled. This means to keep them you would need to reapply. Otherwise, you would lose your credit score.

One isn’t the loneliest numberwoman thinking while holding a credit card

You might remember that song from the 1969 about one being the loneliest number. Well, in the case of credit cards one isn’t the loneliest number – it’s enough. No financial advisor or expert will suggest that you get a mortgage or take out a car loan just to make sure your credit score stays alive. All you really need is just one active credit card. For that matter, if you want to get a good credit score you don’t even need to have multiple credit sources. One card is enough assuming that you’ve had it for several years and use it once or twice a month – at least for small purchases such as gas or groceries – and then pay in full when the bill arrives.

Is it still good?

If you’ve been using cash, checks or a debit card to pay all of your expenses but have one credit card you’ve been keeping in a drawer for emergencies, you need to get it out and make sure it is still good. If you haven’t used the card for 12 to 18 months, the credit card issuer could lower your credit limit or even close your account. If you want to reactivate that card, it’s possible you would have to apply for it all over again.

For those with too much debt

Credit cards can be a trickier issue if you have too much debt. For example, should you cut them up or not? You would be at a danger point if your payments were more than 40% of your monthly income. Among adults aged 55 and up who carried debt in 2010, 8.5% hit that dangerous mark. People age 65 and up are carrying debt and in larger amounts than was true 15 years ago. And here’s an awful statistic – bankruptcy rates have risen to new heights especially among those 75 and up. If you’re trying to dig your way out of debt than cutting up cards might make sense. But make sure you keep one and use it at least once a month to keep your credit score alive.

Save More Money Or Pay Down Debt? Ay, There’s The Rub

stressed old manIn his play “Hamlet, William Shakespeare wrote, “To die, to sleep;
To sleep: perchance” to dream: ay, there’s the rub…” But a better question today might be “which comes first to save more or to pay down debt, ay there’s the rub.

10% to 20% – seriously?

Financial advisers say that we should be saving 10% to as much as 20% of our income. But the latest data from the Federal Reserve Bank of St. Louis is that the United States’ savings rate is just 4.2%. Why do so many of us have a tough time saving money? In most cases it’s because we’re deeply in debt. If you’re facing the double curse of high cost debt and little in the way of savings, what’s better? Should you put your money into savings or pay down your high interest debts as quickly as possible?

Put first things first

The simple fact is that if you have high interest debt and are trying to save money it’s like trying to swim when you have a cement block tied to your feet. Paying down high-cost debt should always come first before trying to save money. Here’s why. Let’s suppose that you are carrying $10,000 in credit card debt at a 15% interest rate. If you make just the minimum payments each month, it will take you nearly 30 years to pay off that debt and it would cost you about $12,000 in interest. As you can see from this example, your number one priority should be paying down debt before you do anything else, including putting money into savings. That’s because this will have a much bigger impact down the line – especially if you’re dealing with credit card debt.

However, most experts also say that before you start using money to pay down your debt you need to put a little bit aside as an emergency fund. Ideally this should be three to six months worth of living expenses. Unfortunately, that’s not easy to do if you’re carrying thousands of dollars in credit card debt. So instead of this, you might try to start with $2000 so you would have some money to cover unexpected bills.

Get a guaranteed return

The biggest benefit of paying down credit card debt is that it gives you a guaranteed return on your money. You can precisely determine and quantify a guaranteed rate of return by using your interest rate, balance and payment plan. While you would be lucky to earn 2% these days on a certificate of deposit, you could get a guaranteed 15% or more by paying down your credit card debt – making this a very good deal.

Save a fortune

When you pay more on your debt you will not only get out of debt faster, you will save a fortune in interest. Plus, once you pay down that debt you will be able to put a lot more money in your savings.

Back to the previous example

If you go back to the example given above of the $10,000 in credit card debt let’s assume that you increase your payments to $400 per month – instead of making just the minimum payments. In this case, you’d pay off your debt in three years and your interest costs would be only $2000. That would be a savings of $10,000 that you could then add to your savings account in subsequent years instead of your bank getting the money.

$9600 in just five years

In this example if you did increase your payments to $400 then continued to save that $400 per month once you paid off the debt, you’d not only be debt-free you’d have $9600 in the bank in just five years.

get out of debtPaying off that debt

One way to get out from under credit card debt is to get a home equity loan or home equity line of credit and pay it off. This would dramatically reduce your interest rate, which will reduce the amount of interest you will end up paying. However, there is a danger to this and you should tread very carefully with the equity in your home. The problem is that you would have a new loan and if not careful, could very well rack up new credit card debt. This would leave you in a worse situation because you would now have a home equity debt as well as credit card debt. For this to work, you need to have a tremendous amount of discipline and personal commitment because if you don’t, you could easily end up in even worse shape than before you took out the loan.

Another option

Another way to get credit card debt under control would be to do a balance transfer from your high interest cards to one with a lower interest rate. There are still cards available that give new cardholders anywhere from six to 18 months with 0% interest. However, before you rush off to get one of these cards make sure that you read the fine print as some have balance transfer fees of 2% to 3%. Plus, you must pay off the credit card before your promotional period expires or you’ll be hit with more interest that could be as high as 18% or even 20%.

Snowballing your debt

Third, you could use the snowball strategy to pay off your debts. The way this works is that you start by paying off the card with the lowest balance because this will give you a psychological boost to continue paying off your debts. And when you get that first credit card paid off, you will have more money available to begin paying off the debt with the second lowest balance and so on. Where this strategy gets its name is because as you pay off that first debt you will begin to gather momentum just like a snowball rolling downhill. Many people have paid off as much as $25,000 or $30,000 in debt in just two to three years by using this strategy. It was invented by the financial guru, Dave Ramsey who explains more about it in this brief video.

The worst option

There is yet another option for getting out of debt that is sometimes called the “nuclear” option. It’s to file for a chapter 7 bankruptcy. If you can qualify for one of these bankruptcies you will get all of your credit card debts discharged (eliminated). If you have medical debts, a personal loan or personal line of credit, they should also be discharged. But there’s a good reason why this is often called the nuclear option. A bankruptcy will stay in your credit file for at least seven years. It’s likely that you would not be able to get any new credit for the first two or three years after the bankruptcy and when you can get credit it would come with a very high interest rate. Plus, there are some debts a chapter 7 bankruptcy can’t discharge, including student loan debt, alimony, child support, a mortgage or auto loan and any debts incurred through fraud.

Marked for life

The worst consequence of a chapter 7 bankruptcy may be the fact that it will stay in your personal file for the rest your life. Fifteen years from now you could get turned down for a really great job when your prospective employer saw that you had a bankruptcy. Many employers now routinely check credit reports as part of their hiring process. And like it or not, some people will always hold a bankruptcy against you because they believe it shows that you’re irresponsible when it comes to handling your personal finances. Your chances of getting that dream job may also be reduced if that prospective employer sees other negative items in your credit report such as late payments, defaults, accounts that have gone to collection and charge offs.

The best policy

What this all means is that the best policy is to get your debts paid off as quickly as possible. This should always come first before putting money into savings. It will pay off big in the long-term and when it comes down to it, what’s better – to be in debt or debt free? If you were to pose this question to that group of kids sitting around a table in those commercials that are currently running, we’re sure they’d all yell “debt-free.”

3 Ways That Debt Management Can Make You Rich

man carrying a credit cardDebt management can refer to two different things. One is the debt relief program that can help you achieve debt freedom. The other involves the habits that will help you manage your credit so you can keep yourself from being ruined by the credit that you have taken on.

Debt had always been given a bad image. It is viewed to be a source of misery for a lot of families. Being in debt is the epitome of a financial crisis. When you have too much credit obligations, you will end up with a very restricted budget. Since you have to pay off your debts, you will be left with a smaller amount for your basic necessities. In most cases, you are compelled to sacrifice a lot about your life in order to meet all the required debt contributions on a monthly basis.

Based on the credit card data from the NerdWallet.com site, the average household credit card debt is at $15,270. This is when you divide the total debt of $856.9 billion with indebted household alone. But we all know that most of us have more than credit cards to take care of. We also have mortgage loans and student debts to take care of. Not to mention the medical bills that usually drive people to declare themselves as bankrupt.

Without a doubt, debt management is something that we need. Whether it is the debt relief program or the skills to manage your debts, it remains to be a useful solution to your money woes. But did you know that it can also make you rich? Although we have just explained how too much credit can rob from you, it can also help you build your wealth.

How does credit management help you get debt freedom

Of course, before debt can propel you towards wealth, you have to learn how to get rid of debt first. It is the whole debt experience that will make you rich – at least, if you do it correctly.

Step one is to take control of your debts first. While there are many options to get out of debt, we will be focusing on debt management. All of the available debt solutions are effective but you need to be qualified for it. Not only that, they all have different processes and effects in your finances that you may want to consider how you want your financial situation to end up when you finally achieve debt freedom.

Debt management is a great alternative to debt consolidation loans. Instead of relying on a loan to pay off your debts, you will restructure your debt payment plan so you can afford the monthly payments without sacrificing too much of your basic necessities.

Here are the important facts of this debt solution that will get you out of your credit problems.

  • It involves a credit counselor who has the expertise to analyze your debt and financial situation. They will scrutinize how much you owe and what you are capable of paying on a monthly basis.

  • For maximum amount of $50 per month, they can help you create a debt management plan and assist you in implementing it.

  • A debt management plan contains your proposed monthly payment that is usually lower than what you used to contribute. This is done, not through debt reduction, but by stretching your remaining balance over a much longer payment period. This results in a lower payment scheme.

  • The credit counselor will also try to negotiate for a lower interest rate on their balance. This can help lower the monthly payments even further. Of course, this will never be guaranteed by the counselor because the final word will come from the creditor. But still, you should know that they will make their best effort.

  • The monthly payment in this debt solution will allow you to simplify your plan. Although the credit accounts will not be combined, your payments will be. Part of the service of the credit counselor is to help distribute the monthly payment that you will make. You do not have to put too much effort in tracking your due dates and making sure that your money arrives in time in your credit account.

If you follow your debt management plan, you will find yourself out of debt soon enough. But with all of these processes, how can this debt solution make you wealthy?

3 things you gain from this debt solution that will make you wealthy

The thing that will help you become rich is the attitude that you will gain when you implement the effective debt management tips that will be imparted by the credit counselor.

Here are the three important learnings that you will have through this debt relief program and how each of them will help you increase your personal net worth.

Financial Literacy

The first learning is financial literacy. People get into a financial crisis because they did not know how to manage their money wisely. They got themselves into debt because they failed to understand what it will cost them. According to the survey published by the National Foundation for Credit Counseling through the NFCC.org, 40% of Americans think that their financial knowledge only merits them a C, D or F (2013). This proves that financial literacy is one of the ways that we can avoid putting ourselves through a debt crisis. You cannot find financial success when you lack the knowledge to manage your money. This is something that debt management can help you with.

All debt management programs will begin with credit counseling. The counselor will educate you and give you the materials that you need to help you understand how money should be spent. You will be taught how to budget, save and how to make smart decisions about your finances. Your knowledge is what will propel you to explore opportunities that will grow your money.

Discipline with Money

Another learning that you will get from debt management is discipline with money. It is very important that you learn how to control your finances because that is where the discipline will be honed. The most important manifestation of that discipline will be shown in how you spend your money. If you are reckless in your spending and you cannot follow a plan, then you will have no hope of controlling where your money should go to. You will be bound by compulsive buying habits that will eventually lead you to be in debt.

Through the watchful eye of the credit counselor and the rules in your debt management plan, you will be trained on how to implement your financial plan. This discipline will also be forced into you because when you fail to follow the plan, your creditors will terminate it and you will go back to paying the bigger amount that you used to make.

A plan, whether it is a business plan or budget plan can only be effective if you learn how to implement it. By having the discipline, you can get the fruit of the goal that you are trying to reach through your financial plans.

No Shortcut for the Debt Solution

The last learning is knowing that there is no shortcut. In debt management, there is no reduction of what you owe. You will end up paying for everything that you have borrowed – up to the last cent. You are only restructuring your payment plan to make it easier.

This is an important lesson that we all have to learn. When we have it easy, we sometimes tend to take things for granted – especially the lessons that we should have learned from our mistakes. If you fail to realize the mistake and take in the lesson, you can get into another financial crisis. We have mentioned before that being in debt will keep you from achieving financial wealth. So the patience that you will get from this debt solution will help you develop the perseverance that will make you rich.

An Action Plan For Getting Out Of Debt

woman drowning in debtBeing in debt can feel a whole lot like being in jail as it can have an effect on almost every aspect of your life. You could wake up dreading every day or wishing that you had not committed the crime of creating so much debt. This can be bad if you’re single and even worse if you have a growing family. So what can you do to dig yourself out of that pit of debt? Here is an action plan that could help.

Shred those credit cards

If you’re over your head in debt, the first thing that you need to do is stop using those credit cards. In fact, you should shred all of them but one and you might freeze it in a tub of ice. It would then be available to cover a financial emergency but not so easy to access that you would be tempted to use it for some impulse purchase.

Do a personal financial inventory

If you can learn why it is that you got into debt, this can help you find the right ways to get out. Sit down and determine what you owe and how much you’re spending. This should help you determine where you could trim your spending in some areas to get the money that you need to repay your debts.

Talk with a financial counselor

If you meet with a financial counselor, he or she will assess your situation and give you advice that would help you get out of debt. He or she would even help you develop a budget if necessary so that you would have extra money to pay down your debts.

Call your creditors

If you believe you will have to skip some payments, call your creditors. Ask for more time. If you make that call before missing any payments, your lenders are likely to be willing to work with you.

Pay off the high interest debt first

If you have multiple credit cards, you need to work on paying off the one that has the highest interest rate first. Make a goal to pay a specific amount towards that credit card debt each month, while still making the minimum payments on your other cards or loans. When you get that high-interest debt paid off, you will then have extra money you can apply to the debt with the next highest interest rate. In time, you should be able to pay off all your debts and save a lot of money in interest charges.

Send in your payments early

Make sure you pay your credit card statements a few days before their due dates. In fact if possible, mail your payment at least a week before your bill is due. This is very important. Credit card companies generally post payments to your accounts by a certain time of day or on your due date. If your payment is not posted by then, they will charge a late fee. This means it’s important that you mail your credit card payments early so they will be posted on time. If you make a payment over the Internet or by phone, be sure to ask when it will be posted to your account. Late payments will not only cost you money, they will hurt your credit score. In fact, some experts believe that a late payment will lower your credit score by as many as 60 points.

Go to a consumer credit counseling agencycouple talking to a counselor

There is probably one of these agencies near where you live. If not, it’s easy to find one on the Internet. Just make sure that it’s a legitimate non-profit and that its fees are reasonable. When you go to one of these agencies or companies you will be assigned a counselor who will help you develop a budget and, if appropriate, a debt management plan. He or she will also work with your lenders to get any fees waived and your interest rates reduced. In most cases if you stick to your debt management plan, you should be debt-free in four or five years. Many credit unions, colleges and universities also offer these services so be sure to check this out.

How can you choose a good credit counseling service. This video offers a 7-step program that could help.

Avoid credit repair scams

It is just not possible to get out of debt quickly or repair a bad credit report. Be sure to avoid any debt settlement companies that require upfront fees or “voluntary contributions.” Be especially wary about any of those companies that say they can make your debts go away. Also make sure to stay away from any company that tells you to stop communicating with your creditors or that requires credit card information or other personal information before sending you information.

Think about bankruptcy only as a last resort

There are people who believe that when their debts become too difficult to manage that bankruptcy is their only option. However, there are actually several others. If you are considering filing for bankruptcy, talk with a financial counselor or explore other options such as a debt consolidation loan or debt settlement. Bankruptcy should be absolutely your last resort as it will have long-term consequences and may not even provide you with 100% debt relief. For example, a chapter 7 bankruptcy won’t get rid of child support, alimony, student loan debts or debts obtained through fraud. It can also not do anything about secured debts – or debts where you were required to provide collateral – including mortgages and auto loans.

8 Credit Cards Things To Avoid Like Swine Flu

You probably wouldn’t want to contact swine flu. It’s a nasty disease whose symptoms include fever, cough, sore throat, body aches, headache, chills and fatigue. Credit cards are like this in that if you don’t use them responsibly, you could end up experiencing headaches, body aches and feeling fatigued. To keep this from happening, here are eight credit card things you need to avoid like, well, swine flu.

1. Don’t fall for marketing hypeman holding multiple credit cards

When choosing a credit card, don’t pick one because it has a great sign-up offer, has your favorite team’s logo or comes with rewards points or cash back. Choose one instead that has a low APR and that fits how you spend money. Would it be accepted at all your favorite restaurants and retailers? Does it have an annual fee? These are more important things to consider than rewards or great bonuses and it’s critical that you think about them.

If you’ve had credit problems in the past, you might be tempted to apply for one of those “pre-approved” credit cards. Unfortunately, these are often a marketing gimmick where you might meet some sort of criteria but pre-approval does not guarantee that you’ll actually get the card or that it would be right for you. Think carefully as to how you would use the card and research your options to get a card that would best fit your lifestyle and needs.

2. Don’t skip the fine print

While the 2009 CARD Act eliminated some specific credit card fees and requires the credit card companies to be more transparent about other fees, don’t make the mistake of thinking you’re totally protected from any and all credit card fees. These laws don’t protect you from everything. Before you sign up for any card, be sure to read its terms and conditions so you will know exactly what to expect. For example, with some cards if you miss a payment, your nice interest fee of 12.10% could automatically be jumped to a no-so-nice 19%.

3. Don’t make just the minimum payment

All credit card statements include a minimum payment or the amount you will need to pay to keep from missing a payment. You don’t want to ever make just that payment. Here’s why. Let’s suppose you have a balance of $1200 and your minimum payment is $42. You think, piece of cake. If I just pay the $42 I will still be good on my credit card. But this is not so. Your balance would still be $1200 and you would be charged an extremely high APR. For example, if your APR was 18% and you made only the minimum payment of $42 you would end up paying $$713.79 in interest payments and it would be 89 months before you were out of debt. And when you carry a balance forward on a rewards credit card you will probably be charged a higher interest rate than with a regular card that offers no rewards.

Here’s a video that uses a glass of water to demonstrate what happens if you make just the minimum payments on your credit card bill.

4. Take no cash advances

If you take a cash advance or do some other type of cash-like transaction, you will be charged interest from the minute you make the transaction. Plus, cash advances usually come with higher interest rates than when you make regular purchases. You might be tempted to use your credit card at an ATM or use one of those “convenience” checks but just tell yourself “no.” Both of these transactions will likely have high interest rates and extra fees.

5. Ignoring your statements and notices is a very bad idea

Credit card statements sometimes include what are called “gray” charges. While these charges are technically legal, you may not have authorized them. This could be membership fees from a health club you thought you had canceled or charges for downloaded ring tones that were tacked on by your cell phone company. Whenever you receive a statement be sure to review it carefully looking for those gray charges. If you find one, try to first resolve things with the retailer. If that doesn’t work, dispute the charge or charges with your credit card company. You need to carefully go over every credit card statement to make sure there are no fraudulent charges and none that you don’t recognize.

6. Never max out a card

When you use up all your available credit, this will not only cost you money but may damage your credit score. This is because 30% of your score is based on your credit utilization – or how much credit you’ve used vs. the total amount you have available. This is expressed as your debt-to-credit ratio. If you had a total of $2,000 in credit available and had used up $1,000 of it, your debt-to-credit ratio would be 50% (amount of credit used divided by total amount available), which would be too high. Most experts say that your debt-to-credit ratio should be no higher than 30% and the lower the better. When you have a debt-to-credit ratio of 40% or more it makes it look as if you were desperate and that you needede credit to just subsist. Since the credit card companies don’t like to see this, they may raise your interest rate or try to reduce the amount of credit you have available – to rein in your spending and reduce their risks. If you do have a debt-to-credit ratio of 40% or higher, try to pay down your debt as this would lower your debt-to-credit ratio and could boost your credit score.

7. Don’t miss a due date

Every credit card has a grace period or the amount of time between when your billing cycle ends and your payment is due. If you miss a due date this can lower your credit score by as many as 60 points and will probably trigger an increase in your interest rate. Your due date is really your due date. If you have a problem remembering when it is, put a reminder on your calendar to make sure you don’t miss it. We use a calendar that allows us to set a reminder on a certain date and it will then pop up on that day every month. If you use multiple credit cards, you might contact your card issuers and have your billing dates changed so they all hit on the same day. An even better idea is to set up automatic payments so you won’t be derailed by a check that got lost in the mail or because you forgot a payment. We use online banking and whenever we receive a statement from one of our credit card companies the first thing we do is go online and schedule a payment for a few days before it’s due. We do this because that eliminates the possibility of missing a payment and gives us more flexibility than if we had automated it.

8. Don’t get in the habit of chasing miles or points

If you have a card (or cards) that come with points, miles or cash back, it can be very tempting to use it to buy stuff you don’t really need. If you need a new tablet, buy it because you need it and not because you want to earn points. And if you’re trying to earn enough points to get a $300 plane ticket you will end up spending several times that amount to get the equivalent in points or miles. In fact, in many cases you would be money ahead to just buy the plane ticket. There have been studies done that showed people spent more when paying with a credit card than with cash and even more when paying with a rewards card. These cards are designed to get you to buy more and can be very enticing. But be very careful and don’t run up a lot of charges believing that getting those points or miles will make it all worthwhile.

What do those numbers on your credit card really mean?

Every credit card has a 16-digit number. Have you ever wondered if those numbers meant something and if so, what? Here’s an infographic that “cracks the code.”

4 Pitfalls Of Debt Consolidation Loans

When you are considering consolidating your multiple debts, one of the first options that come to mind is to use a loan. Although debt consolidation could also mean debt management or balance transfer, it is defined by Investopedia.com as “the act of combining several loans or liabilities into one loan.” That refers mainly to debt consolidation loans.

That simply means you, as the debtor, will take out a master loan that is enough to cover your multiple credit obligations. The goal is one of two things: a simple payment plan or a lower monthly contribution cause by either a lower interest rate or a longer payment period.

In most cases, people who have no idea what debt relief is all about immediately consider this process as a viable solution. It seems like the logical way to put some order into a seemingly difficult debt situation.

4 risks of using a loan to consolidate debt

burning house of cashBut while debt consolidation is a great option to get out of debt but there are a couple of pitfalls that you need to think about. It is proven that debt consolidation loans can fix your multiple problems with debt but you have to take note of these 4 risks.

  1. False sense that you have solved the credit situation. When you get your loan, your next task is to pay for your multiple debt obligations. After all, that is how you consolidate your debt. However, some people get the false sense that they already paid off their debts. When you think about it, you only shifted your debts around. The money that you used to pay for the multiple credit account is still debt. You have to pay that back. Unless you have to paid for the debt, you should not feel that you have already solved your credit problem.

  2. Opting for a high interest rate loan. When you use debt consolidation loans, you have to target a low interest rate. If you cannot do this, you will end up paying more in the long run – as compared to getting a lower rate. It defeats the purpose of using this type of debt solution as it will not make your situation better. It could simplify your debt payment but it will not really save you any money.

  3. Endangering your personal assets. For people who do not have a good credit score to qualify for a low interest rate, they opt to put their personal assets on the line to get a secured loan. While this will guarantee the low rate, it will endanger their homes, cars or other valuable assets. If they cannot pay off the loan, the lender could get these collateral as alternative payments.

  4. Temptation to get more credit. Most of the time, the multiple accounts that you are paying off immediately are credit card accounts. Once you have paid this off with the loan, the temptation to use them again will be very high. You should not give in to this urge because you still owe the same amount of debt. It is just consolidated under one lender.

If you really want to use debt consolidation loans as your means to get out of debt, you have to be very careful of these pitfalls. When you know the risks, you can plan your debt solution to try to avoid them.

How to avoid the pitfalls of credit consolidation loans

Now that you know what you should avoid, you can construct your plans so that you can make this debt solution effective. Here are three things that you can do to guarantee success.

  • Create a debt payment plan. The pitfall that this will address is the first and the last. You want to make sure that you have a plan for the payment of the master loan. This plan will keep you from forgetting that your debt is still technically, not paid. This plan can also help you gain direction on your quest for debt freedom.

  • Check your loan options. It is very important to choose the type of loan that you will get. For instance, you have unsecured or secured loans. You also have peer to peer lending or family loans as your option. These all have their pros and cons and you can make a smart choice about your debt solution if you know your options.

  • Know if you qualify. If you do not have a good credit score or a collateral to make your loan interest rate low, you need to reconsider if this is the right debt solution for you. There are other options like debt management that will not require you to have a good credit score or a collateral. But you can still benefit from the single payment scheme and lower monthly contribution of debt consolidation.

Like all debt solutions, debt consolidation loans can only be effective if you know how to treat it properly. You want to make sure that you understand the processes and rules so you can maximize the benefits that will help you gain faster debt freedom. Not only that, you want to be able to know the tools that will make the journey bearable. Go on a road to self education. You need to start learning how to manage your money properly. That is how you can really move past your debt crisis.

What To Do If You Can’t Qualify For A Debt Consolidation Loan

frustrated womanYou’re having a hard time with your debts and you’ve tried to get a debt consolidation loan. Unfortunately, you don’t have enough equity in your home to get either a home equity loan or home equity line of credit. You applied for an unsecured loan at your bank or credit union but were turned down. You’re receiving calls from a debt collector nearly every day and you’re at your wits’ end. So what can you do? Here are eight suggestions for what to do when you can’t get a conventional loan.

Look for a bad credit loan

There are companies that specialize in loaning money to people who have bad credit. You can find them by going online and searching on the term “bad credit loans.” In fact, there is even a website the www.badcreditloans.com as well as www.247lendinggroup.com. Other sites with loans for people with bad credit include Springleaf Financial and Avant Credit. Be forewarned that most of these sites won’t loan more than $5,000 and their loans usually come with very high interest rates.

Try for a peer-to-peer loan

Peer-to-peer lending is where you borrow money directly from a person or group of people with no third-party financial institution involved. The number one site for this type of lending is www.lendingclub.com, which offers unsecured (personal) loans up to $35,000. Another popular peer-to-peer lender is www.prosper.com. If you have poor credit, you may not be able to get a peer-to-peer loan but it would certainly be worth trying.

Get a payday loan

If you’re short only a few hundred dollars and have steady employment, you could get a payday loan. This is where you write a check to the lender for the amount you need, plus its fee and get cash in return. The payday lender will then cash the check on your next payday – hence the term payday loan. This means you will need to have enough money in your checking account to cover that check or your loan will be automatically rolled over and you will be charged another fee.

Tap friends or family members

This isn’t a very popular option because it’s difficult to go to a family member or friend and basically beg for money. However, it is definitely a way to get a loan when you have bad credit. If you go this route just make sure that you treat the loan just as if it was a bank loan. Write out a contract spelling out how you will repay the money and the interest rate you will pay – because you actually do need to pay interest on that money. The good part of this is that you certainly won’t have to pay as much interest as if you had a bad credit loan. And do make sure that you pay back the money as you had agreed to and on time.

Pawn something

Again if you only need $500 or less you might be able to pawn something. The advantages to this are that you get the money immediately and that you could get the asset back by paying off the “loan” – usually within 30 days.

Look for a second jobWhat You Can Learn From Successful People About Debt Freedom

Could you take on additional shifts where you now work? If not, you should be able to get a part-time job. The food service and hospitality industries are almost always looking for people who would be willing to work 15 or 20 hours a week. These types of jobs rarely pay much more than $8 or $10 an hour but if you use all the money you earn to pay off your debts you could be debt free in maybe two years or less.

Try to settle your debts

If you’re nearly six months behind in your payments, you could contact your lenders and attempt to settle your debts for less than you owe. To do this means contacting each of them individually and making a settlement offer for 40% or 50% of what you owe. In many cases you will be able to negotiate a favorable settlement because the lender would rather get “half a loaf” then see you declare bankruptcy where it would get nothing. You have to be a reasonably good negotiator to pull this off. Your lenders will want immediate payment so you also need to have the cash in hand to pay for your settlements.

Hire a professional debt settlement company

Most people choose to hire a debt settlement company instead of attempting to negotiate settlements themselves. There are two important reasons for this. First, a debt settlement company like National Debt Relief has skilled and experienced counselors that are almost always able to negotiate better settlements than you would be able to do yourself. And second, this removes the need to have the cash available to pay for your settlements. What would happen instead is that the debt settlement company would settle your debts and you would then have a monthly payment plan that should have you debt free in two to four years.

Start rebuilding your credit

Whichever of these options you choose, it’s important that you also start rebuilding your credit. One way to do this is by getting a debit card tied to your checking or savings account. If you use the card sensibly this will be reported to the three credit bureaus and will eventually have a positive effect on your credit score. If you elect to get one of these cards just make sure that how you use is reported to the credit bureaus.

You can do other things to improve your credit as revealed in this video.

Tips For Dealing With A Financial Emergency

shocked man looking at documentsMaybe that fortunate 1% doesn’t have to worry about financial emergencies but the other 99% of us do. Whether we like to believe it or not we will all be faced with some kind of financial emergency in the next couple of years. The transmission might fall out of our car, you could be hospitalized with a serious illness or your ceiling could collapse from water damage. And of course, the biggest problem with a financial emergency is it’s just that – an emergency. It’s not something you can plan for outside of having an emergency savings fund.

Note: If you don’t have an emergency fund at all, here’s a video showing how to build one.

Don’t panic

The worst thing you can do in times of a financial emergency is panic. Sit down, get control of yourself and assess the situation. What often scares us the most is the unknown. Don’t start running around like a headless chicken. Think about the situation rationally. There’s a solution to every problem if you just keep calm.

Assess the situation

Your next step should be to rough out a plan. How much has this cost you? Do you have to pay for it immediately or could you spread out the payments over several months or years? Could you pay for it yourself out of your regular income or would you need extra money? Do you have credit cards you could use? Would you be able to get terms – in other words would the hospital, garage, construction company or whatever allow you to pay off your bill over a period of time or will it require immediate payment? While hospitals are often willing to negotiate payment plans, auto repair shops usually won’t.

Decide how to pay for the emergency

You need to decide how you could pay for your emergency as quickly as possible so you could get back into good financial health. There are basically two ways to do this. You or your spouse could get a second job and use the money to pay for that emergency or you could borrow the money. The best option is to get a second job, as this would prevent you from having to pile on new debt. Our economy has been bouncing back over the past year and one of you should be able to find a part-time job. It might not pay more than $8 or $10 an hour but if you use all of the money to pay for your emergency, you should have it paid off in practically no time at all. Alternately, you might be able to start a home-based business and earn what you would need to pay for that emergency.

If you have to pay for your financial emergency immediately so that you would not have enough time to pay for it with a second job or home-based business, you will need to borrow the money.

Why a credit card(s) could be a bad option

The way most people pay for an emergency is by using their credit card or cards. For example, suppose that the transmission had fallen out of your car at a cost of $3500. You could probably put this on just one of your credit cards and your problem would be solved – at least so far as the auto repair is concerned. But you’ve now added debt – that might be at a very high interest rate. Do you pay 19% interest or even more on that credit card? Then using it could be a very expensive option.

Tap your retirement account

Do you have a 401(k) or some other type of retirement account? You could borrow from it but you need to pay back the money as quickly as possible. There is a good reason for this. When you borrow money from your retirement account it’s no longer growing in value so that you’re missing out on the power of compounding interest. And if you don’t ever pay the money back, you will ultimately be taxed on it as ordinary income and may even have to pay a penalty.

Ask friends or family members

Could you borrow from friends or family members? This can be a bit embarrassing but it might be your best alternative. If you can borrow the money, make the transaction very businesslike. Write a contract with your friend or family member just as if you had borrowed the money from a bank or credit union. It should spell out how you will pay back the money and, of course, the interest you’ll pay.

Consider a debt consolidation loanStamp Shows Consolidated Loan approved

If you have other outstanding debts, you might be able to get a debt consolidation loan and pay them off as well as for your financial emergency. Depending on the total amount of your debts, you may be able to get an unsecured loan. Or if you have a fair amount of equity in your home, you could get a secured loan such as a home equity loan or homeowner equity line of credit, which should have a much lower interest rate than an unsecured loan.

File for bankruptcy

If your financial emergency was an illness or accident that ended up costing you thousands or even hundreds of thousands of dollars in hospital bills, you might think about filing for a Chapter 7 bankruptcy. This would get all of your unsecured debts discharged in probably six months or less. For that matter, medical bills are now the number one reason why people file for bankruptcy. But before you take this step, do understand that there are long-term consequences to a bankruptcy that would haunt you for years to come.

How Budgeting Can Help To Stop Debt

Is A Frugal Budget Really HelpfulIf you think being in debt is fun, you’re the member of a very small minority. In fact, it might be a minority of one or just you. Most people who are struggling with debt don’t think it’s any fun at all. Being deeply in debt can cause stress, which, in turn, can actually cause physical issues such as heart and stomach problems, headaches, insomnia, constipation, bladder infections, arthritis and high blood pressure.

Start tracking

There’s a simple reason why you’re having a problem with debt. It’s because your spending exceeds your income. But the question is by how much? Are you spending 10% more than you earn? 20%? 30% or more? The only way that you can answer this question is by tracking your spending for at least 30 days. You will need to write down every penny you spend – for clothes, food, entertainment, dining out – everything. You could do this the old school way with a notebook and a pen or with one of the many smart phone apps now available. There are several good ones that are even free such Expenser, PocketMoney Lite and BudgetPulse.

Add up your spending and your income

Next, you will need to add up all of that spending and all of your income. This will answer the question as to how much more you’re spending than your income. Knowing this, you can then get started on doing something about it, which means making a budget.

Creating your budget

Since you’ve been spending more than you earn, your first step should be to reduce your spending until it’s less than your income. This will mean creating a budget and then determining where you can make some cuts and maybe even some sacrifices. For example, you may find that you need to cut your food costs by $100 or more a month as well as your spending on entertainment and eating out. We can’t tell you precisely where to make cuts but here’s an example of how you might budget by category.

  • Savings 5 to 10%
  • Debt repayment (loans) 5 to 10%
  • Food 5 to 15%
  • Utilities (heat, water, telephone, etc.) 5 to 10%
  • Transportation (automobile, public
  • transportation, taxis) 10 to 15%
  • Clothing 2 to 7%
  • Leisure and education 5 to 10%
  • Housing (rent, mortgage, taxes,
  • insurance) 25 to 35%
  • Health (insurance, dentist, medication, etc.) 5 to 10%
  • Personal 5 to 10%

Have an emergency fund

You must start saving a small amount each month as soon as possible to create an emergency fund. In fact, most experts feel that you should create an emergency fund before you start saving money for retirement or any other goal. Your goal should be to contribute 5% to 10% of your net monthly income until you have the equivalent of three months’ living expenses. The reason why this is important is because you will definitely have an emergency of some kind within the next one or two years. Your car could break down, your house could need emergency repairs or you could be hospitalized. If you don’t have an emergency fund, you would probably have to use a credit card, which means creating more debt rather than stopping it.

If you need help developing your budget, here’s some good advice from financial expert Dave Ramsey

How much do you owe?

If you haven’t done this already you need to add up your debts to determine how much you owe. The best way to do this is by using a spreadsheet program such as Excel or Google Docs. You should have four columns – one for the name of your creditors, one for your balances, one for the interest you’re paying on each debt and one for your due dates. The reason why it’s best to use a spreadsheet is that once you enter this information you can sort it several different ways. You could reorder your debts so that the one with the smallest balance is at the top or the one with the highest interest rate.

Paying down your debtstack of paid bills

There are two schools of thought regarding the best way to pay down debt. The first is called snowballing and the second is creating a debt avalanche. What the snowball strategy calls for is concentrating all your resources on first paying off the debt with the highest interest rate. The idea behind this is that it saves you the most money to begin paying off the debt with the second highest interest rate and so forth. Conversely, the avalanche strategy calls for first doing everything you can to pay off the debt with the smallest balance. The experts who favor this approach believe that it works better because when you see you have been able to pay off one of your debts fairly quickly, you will stay motivated to continue paying off the rest. Whichever of these you choose, be sure to continue making the minimum monthly payments on all of your other debts.

The other side of the equation

If you find that it’s just not possible to cut your spending enough to both pay down debt and save money, you may have to work the other side of the equation, which means finding ways to increase your income. One simple way to do this is to get a second job.
Our economy has been rebounding and you should find it relatively easy to get part-time work in the hospitality or food service industry or some other retail area. You might not earn much more than $9 or $10 an hour but if you work an extra 20 hours a week this could be $600 or $700 a month. Since this is not income you would be using to cover your living expenses, you could apply all of it to paying down your debts. If you combine this with either the snowball or avalanche strategy, you could be debt free in just two or three years even if you owe $30,000 or more.

There is no time like the present

The most important thing is to begin taking action now. There’s the old question of, “How to you eat an elephant with the answer – one bite at a time.” The same is true of stopping debt. No matter how much you owe, you can eliminate it by starting with just one step today. You could begin tracking your expenses, make a list of your debts or just download a smart phone app for budgeting. It really doesn’t matter what you do so long as you do something.

5 Frightening Paths That Can Lead To Damaging Debt

Stress over credit card's billDo you watch a lot of scary movies like Halloween II, II or III? Or maybe those Nightmare on Elm Street films? While you might be frightened by these movies, there are financial things that could happen to you that would be even more terrifying. These are things that could leave you and your family hurting for money or even penniless. What is the top five of these horrible paths?

The nasty effects of identity theft

How about this for a horrible scenario? You receive a harassing phone call from a debt collector about a debt that you never owed or see your car being repossessed or your cell phone service turned off because of a “delinquency.” Or even worse, you miss out on a potential job because the employer does a background check and finds that there is a warrant for your arrest for a crime you never committed.

If you think this can’t happen to you, think again. There was a survey done recently that revealed the fact that there were more than 12 million victims of identity fraud here in the US just in the year 2012. This equates to about one victim every three seconds. And the most damaging thing involved Social Security numbers.
How can you prevent this from happening to you? Be sure to protect your personal information. Don’t leave credit cards, your Social Security card or monthly bills lying around the house or in your wallet. Keep them someplace safe. When you get applications for credit cards or if you have cards you no longer need, shred them. In the event you are victimized by identity theft, contact your creditors immediately. And be sure to notify all three of the credit reporting bureaus – Experian, Equifax and TransUnion.

Hackers and scammers

You could be victimized by scams that range from sophisticated online thievery to phony charities. Their objective will be to get your credit card number. When it comes to donating money to a charity, your heart could be in the right place. But do your homework so that you won’t be scammed. Whether you’re solicited by phone or via your front door, research the charity first to make sure it’s a legitimate and reputable organization. Even more threatening are online scams. The creepiest of these is what’s called keystroke-logging malware that steals your personal information off your computer or other electronic devices. Malware can be unwittingly downloaded when you click on tainted websites, emails or links. Your information then goes to the identity thief who uses it to empty your accounts, open credit cards or even get loans in your name.

There are many other types of scams you need to watch out for and here’s a video that reveals 25 of the most popular.

The nightmare of co-signing

If you find yourself tempted to cosign for a loan with a family member or friend, make sure you understand it could turn out to be a nightmare if the person does not make good on the loan. You may not realize this but when you cosign for someone and he or she defaults on the loan, you will be responsible for repaying the debt. This can put your own credibility, finances and credit standing in danger. This may not only increase your debt but if you can’t pay back the money, you could see your bank account frozen, your credit score lowered or even your wages garnished. If you do decide to cosign on a loan, be sure to set ground rules about repayment so you can be confident that the person will do the right thing and make timely payments. If not, you will not only end up with more bills but with a ruined relationship as well.

Helpers from hell

These are people who arrive at your most defenseless moments like after the death of a spouse or divorce. Unfortunately, these people are not helpers at all. They are con artists with a scheme that works like this. A kindly and charming stranger approaches you after you were just divorced or widowed. This person offers ideas that are designed to help you overcome your grief and resolve your financial worries. The con artist showers you with attention when you are at your most vulnerable point. The con artist eventually says that he or she has run into financial problems and you feel obliged to help even though this may jeopardize your own financial situation. If you’re not careful, the person will gain more control of your finances as he or she moves closer to you.

You could be the most horrifying monsterSurviving Debt Despite Unemployment

You should not only stay on the alert for what other people can do to your life but also what you can do yourself. If you’re not careful you may be guilty of doing things that are slowly draining the money from your finances like some kind of a fiscal vampire. As an example of this, you may be paying fees from your bank that you don’t even realize. Numerous banks offer free checking and savings accounts but with conditions. You must keep a minimum amount of money in the account or make regular direct deposits. If not, you will be charged fees. If you are unaware of this, you could very quickly rack up a lot of fees without even knowing it. Another way to drain the lifeblood from your finances is by taking out too many credit cards. If you have multiple credit cards and you lose track of your statements, you could miss a payment or find yourself burdened with too much debt. The solution? Carefully monitor your credit card statements. And if you do have multiple credit cards that have varying due dates, you might call each credit card company and get your due dates changed so that they would all hit on the same day. This can help lower the risk of missing bills and payments, which you don’t want to happen as this could ultimately have a dire effect on your credit score.

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