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The Dos and Don’ts of Debt Consolidation

woman drowning in debtIf you’re struggling under a mountain of debt, don’t be scared. You could get it under control and even become debt-free in a few years via debt consolidation. If you’re not familiar with debt consolidation it’s where you combine all of your debts together into one new payment. When done right, debt consolidation offers two big benefits. First, it means you would be making just one payment instead of the multiple ones you’re now making. And second, that one payment should be much less than the sum of the monthly payments you’ve been making. But before you rush into debt consolidation it’s important to know the dos and don’ts.

Do check into credit counseling

Before you do anything else you should check into consumer credit counseling. There is probably an agency or company near you that offers this service and your first visit should be free. What will happen is that you will sit down with a counselor who will spend at least an hour with you going over all of your finances. He or she will then help you develop a budget and a debt management plan (DMP). Depending on how much you owe, your DMP could have you debt free in anywhere from three to five years. Since this introductory session will probably cost you nothing, it’s a no lose situation. If you like the advice and the plan you’re given, you can continue on with the credit counseling. If not, you could just walk away and try something else.

Don’t be flimflammed

If you decide you would like to try consumer credit counseling, be very careful about the agency or company you choose. There are a number of scam artists out there who will offer to loan you the money to consolidate your debts, take your payments on the loan and then do nothing. The sad part is that it could be three or four months before you realize you’ve been scammed and by then it’s too late to do much. You will not only have lost the money you paid the crook but will now be even further in debt.

Do talk to your bank or credit union about a loan

One of the fastest ways to consolidate debts is by taking out a loan and paying them all off. As noted above this should yield a much lower monthly payment than the sum of the payments you’re now making. Paying off all of your creditors simultaneously would not only stop them from bothering you but would also get rid of any debt collectors who have are harassing you.

Don’t get a secured debt consolidation loan

Secured loans mean loans where you are required to offer up some asset as collateral. In most cases that asset will be your home in the form of a home equity loan or home equity line of credit. There are two problems with these types of loans. First, they put your house at risk. If you were to stop making payments on the loan, your lender could repossess your house and you could find yourself out on the street. Second, these loans usually have a term seven years or longer. In fact, a home equity loan could have a term of 10 to 15 years. In comparison, if you could get an unsecured loan this would not put your house at risk and you should be able to pay it off in five years or fewer.

Do try settling your debts

If you have some basic negotiating skills you could contact your lenders and offer to settle your debts for 50% or 60% less than you owe. If you are at least six months behind on your debt payments, you might find your creditors ready and willing to settle with you. While this is technically not a form of debt consolidation, it is a way to get debts under control and paid off.

Don’t try this unless you have cash available

In addition to being six months behind in your payments, you need to have the money available to pay your settlements. For example, if you were able to settle a $5000 debt for, say, $2500 you would need to have the $2500 in cash available to send to your lender. In fact, offering to pay off the debt with cash is one of the most important reasons why your lenders would be willing to settle with you.

Do hire a debt settlement companyman holding multiple credit cards

If you don’t have the necessary amount of cash available to settle your debts yourself or if you don’t believe you’d be a good negotiator, then hiring a debt settlement company could be a better option. The best debt settlement companies have debt counselors who are experienced at negotiating with most lenders including the credit card providers. This is a way to consolidate debts because once the company has settled all of them; you would be required to send it only one payment a month. Plus, you should be debt-free in just 36 to 48 months.

Don’t fall for big promises

In the event you decide to hire a debt settlement company, don’t fall for any big, pie-in-the-sky promises and refuse to pay any upfront fees. Honest debt settlement companies do not charge upfront fees. In fact, you would not be charged anything until the company settles all of your debts and presents you with a debt payment plan. In addition, no ethical debt settlement company will promise to loan you money to pay off your debts or that they can help you become debt free in just a few months. There are other red flags to watch out for when choosing a debt settlement company as explained in the following video.

7 Things You Could Do Right Now To Fight Debt

Erasing DebtDo you feel as if debt had you backed into a corner of the ring and was punching you unmercifully? Big debt can be an unrelenting opponent. The minute you feel you’ve escaped its grasp, there it is back again in the form of yet another late payment notice along with a big fee. But you really don’t have to take it anymore. You can fight back and actually knock out those debts. It may take some time but the sooner you get started the better. And as the old saying goes, there’s no time like the present. Here are seven things you could do today to begin overcoming those debts.

Cut up all your credit cards but one

Stop reading this article, go to your billfold, pull out all of your credit cards, get a pair of scissors and cut up all of them but one. The reason you’re having a problem with debt is probably because of the way you use credit cards. This means the best first step is to get rid of them. It’s acceptable to keep one but you should do as one woman did and that’s put it in a small plastic container and stick the container into your freezer. That way you would have the card to use in the event of an emergency but it would be tough enough to access that you wouldn’t be tempted to use it for some impulse purchase. A credit card can be a useful tool if you use it sensibly – which means never charging anything unless you know you can pay it off at the end of the month. Conversely, if you’re making multiple charges that you can’t pay off within 30 days and are carrying balances forward, you’re not only creating debt, you’re piling up interest charges that could keep you in debt practically forever.

Open a savings account

If you don’t have a savings account you have no way to protect yourself against emergencies such as an automobile accident or serious illness. As the old saying goes, stuff happens. And it’s inevitable that you will have an emergency sometime in the next couple of years. If you have a savings account as an emergency fund, you could pull the money out of it to cover that unexpected expenditure. If not, your only alternative would be to borrow money to pay for the emergency, which means just taking on more debt.

Get a debit card

Maybe you can’t actually do this today because your bank or credit union may be closed. But if you can’t do it today, do it the first business day. The card should be tied to your savings account so that you can’t spend any more than is in that account. A debit card works much like a credit card and can be used almost any place that accepts Visa or MasterCard. A debit card provides an easy way to track your spending. You should also be able to go online and check your balance at least daily so you will know exactly how much money you have to work with until your next payday.

Download a budget tracking app or buy  a notepad

If you have a smart phone, there are numerous expense tracking apps available for iPhones, Windows phones and Android phones. The minute you finish reading this article, go online and download one. Most of them are free. The ones we like include Mint.com and Expensify. Mint will not only help you track your spending but has numerous other features that could assist you in your fight with that old devil debt. For instance, you could type in the numbers of your bank accounts, investments, credit cards, and any personal loans. The program will then display all your important financial information together as one big picture.

Expense tracking will be a bit more difficult if you don’t have a smart phone but there is still an answer. Get a pen and notepad. Whether you use a notepad or smartphone app the important thing is to make sure you start tracking all of your spending, right down to that donut you buy on the way to work.

Write down some goals

What is it you would like to achieve in life? Would you like to buy a house? Go on a really great vacation? Get a new car? You need to sit down and spend some time thinking about what’s important to you or what are your goals. Then write them down and post them someplace where you would see them every day. This accomplishes two things. First, it will make it easier for you to stay on the budget you’re about to create and second, this will help keep you motivated as you see you’re making progress towards achieving your goals.

Make a budget

You won’t be able to make a true budget until you track your spending for at least 30 days. But today, you can get out your check book and any receipts or credit card statements you have and add up your spending the best you can. Make sure you also include your fixed monthly expenses such as rent, debt payments, and auto loan (if applicable) and so forth. Next, add up your monthly earnings and compare the two. The odds are you’ll discover that you’re spending much more than you earn.

Decide where you can make cuts

get out of debtThe only way you can start to get debt under control is to reduce your spending until it’s less than your income. In fact, it should be at least 10% less than your income. How can you do this? You need to go back to the list you made of your spending and try to make cuts everywhere you can. You might start with your “variable” expenses such as food, entertainment and clothing. These are categories where most people find they can make cuts. You also need to review your “fixed” expenses such as rent and that auto loan. Start with the idea that nothing is sacrosanct – that you should be able to make cuts in almost every category.

That’s it for today

If you’ve followed our suggestions and have done the seven things we recommend you do today, you’re off to a very good start in defeating your debt. Tomorrow, you will need to use that smart phone app or notepad to begin tracking your spending so that you can create a real budget. As we noted before, you will need to track your spending for at least 30 days then sit down and organize it into categories. This will give you a true picture of your spending and of those areas where you might be able to make even more cuts. The money you save should be divided between your savings account and paying down your debts. One of the best ways we encounter for paying down debt – especially credit card debt – is called the snowball method. Follow it, and you could be completely out of debt in two years or even less. The following video explains some other ways to get out of credit card debt you might find helpful.

Revealed –The 6 Biggest Myths About Debt Consolidation

man carrying debtHave you heard the story of the Greek king Sisyphus who was doomed to push a boulder up a hill every day only to see it roll back down so that he would have to start again the following day? If so, you may feel the same way about your debt – that there’s just no end in sight and you will never get it completely paid off. You have probably also heard about debt consolidation as a way to get your debts under control. While this is certainly a good alternative, it’s important you understand these six myths.

  1. There are companies with lower interest rates than others
  2. Credit counseling can get your monthly payments cut in half
  3. You can’t get out of debt without a formal program
  4. Some credit counseling agencies can negotiate lower DMP payments than others
  5. You will always save money through debt consolidation
  6. Bankruptcy is not a big deal

1. There are companies have lower interest rates than others

One way to consolidate debts is to get a loan and pay them off. You may have seen teaser ads for home equity loans with very low interest rates and feel this might be a good option. But the fact is you would need be on the A credit list to qualify for one of those very low rates. If you’re not on that A list, expect to pay the prime interest rate plus 4% or 5%, as well as a point or two in fees.

2. Credit counseling can get your monthly payments cut in half

What a good credit counselor can do is work with your creditors to get your interest rates reduced and any late payment penalty fees waived. This can mean a lower monthly payment than the sum of the monthly payments you’ve been making, but it won’t cut your payment by 50%. If a credit counselor tells you that he or she can get your payments cut in half, this is just a numbers fudging deal. As an example of this, if you missed two $200 payments on a $10,000 balance, your third month’s bill will be the $600 that you owe. If your counselor re-ages that bill and knocks your payment back to $200, the missing money will just be tacked back onto your total owed.

3. You can’t get out of debt without a formal program

The real truth here is that you can basically create your own debt management program. Almost all creditors, including the credit card companies, have special reduced-interest programs if you just contact them. Of course, you’ll have to make all those phone calls yourself and will need to know what to say. You will also have to be very persistent because you probably won’t get through to the company’s hardship program department on the first or even second call. And when you do get through you need to be polite, take full responsibility for your problems and be ready to request something specific such as a reduction in your interest rate.

4. Some credit counseling agencies can negotiate lower DMP payments than others

When you go to a consumer credit counseling agency, your counselor will help you create a DMP or debt management plan. He or she will contact your lenders and present your DMP for their approval. If all of them accept your plan, you will no longer be required to pay them. Instead, you will pay the credit-counseling agency each month and it will distribute the money to your creditors. However, it’s a myth that some credit counseling agencies can get you a lower DMP payment than others. The truth is that most lenders automatically move 95% of those individuals who are enrolled in a DMP into their own existing programs. This means that regardless of which credit counseling agency or company you choose, the odds are that you will get approximately the same program.

5. You will always save money with debt consolidation

If you choose to get a debt consolidation loan and you’re told this will save you money, get out your calculator and do the numbers. As an example of this, let’s assume that the lender tells you that he can get you financing with no out-of-pocket costs. In this case, make sure it’s not just rolling its fees into your loan where you would then have to pay interest on them. What you need to do is compare the total of your existing monthly payments to what your payments would be for that same amount of debt under your debt consolidation loan, including fees and any voluntary contributions. If you find that you’re not saving at least 5% to 10%, then a debt consolidation loan wouldn’t be a good choice.

It would also be a bad choice – according to this video with Suze Orman – to use a HELOC or home equity line of credit to pay off credit card debt.

6. Bankruptcy is not a big issuepetition to file for bankruptcy

Many young people are led to believe that a better answer than trying to pay off, say $7000 in debt is to declare bankruptcy. This can be very appealing because it’s possible to get an attorney to do a bankruptcy for as little as $500 – to discharge $7000 in debt. While this might sound very attractive, the damage that will be done to your credit will still be there long after you could have paid off that $7000 normally. The fact is, bankruptcy is a very severe solution and should be used only in circumstances such as cumulative debt of $50,000 on a $20,000 annual salary. The truth is that a bankruptcy will stay on your credit report for nearly 10 years. Plus, prospective employers look at credit reports and might refuse to hire you based on what they find in yours.

7 Strategies For A Good Retirement

What To Do During Your Pre-Retirement YearsHow much money do you need for a good retirement? Many financial experts will tell you that you need 100% of your pre-retirement income. This might be true for those lucky corporate executives who leave their job with golden parachutes but it’s not very realistic for most of us. You can and probably will have to retire on a lot less than this. So what strategies could you pursue for a good retirement? Here are seven realistic ones.

  • Share and share alike
  • Determine where you stand
  • Go international
  • Take advantage of those senior citizen discounts
  • Downsize your housing
  • Refuse to subsidize your kids’ lifestyles
  • Find free entertainment

How to share and share alike

You could move in with one of your kids. You should pay rent but that would certainly be a lot cheaper than having your own place. Are you single? Then you might think about sharing a home or apartment with a friend or sibling. It’s true that two can certainly live cheaper than one. You might also be able to share a car, a TV, a computer and the cost of cable or Internet access. And you should definitely learnSenior man enjoying tropical vacation to live more frugally.

Go international

There is an even more radical way to cut your cost of living and that’s to pull up stakes and move to another country. Latin America is full of retirement enclaves from Mexico to Costa Rica to Panama and Ecuador. A new favorite is the country of Belize with its hundreds of miles of great beaches, beautiful tropical forests and even mountains. Americans who choose to retire there keep themselves occupied hiking, biking, fishing, swimming trekking, and the many other outdoor activities available in this country.

The cost of living in these countries is far less than the cost of living here and some even offer special programs for American retirees. For example, if you were to move to Panama you would not be required to pay income tax on any money that you earned here in the United States.

Some Americans actually go back to the land of their ancestors in Italy or Ireland, where they can get support from family members. Other people tout the attractiveness of countries such as Thailand and Malaysia. All of these countries are relatively safe, the cost of living is very low and the local denizens tend to respect the elderly.

Determine where you stand

The firm Fidelity Investments has reported that with the stock market increase that occurred this past year, the average pre-retiree now has a balance of $250,000 in his or her retirement plan. If you have a pension, it’s likely worth that much or even more. In fact, one of the things you should do is determine the actual worth of your pension. Let’s suppose it will be $1400 a month or $16,800 a year. Now, compare this with how much savings you would need to generate this much income. That would be roughly $200,000 with an annual interest rate of 10%. And the best part of your pension is that it’s probably guaranteed vs. the money you would invest in stocks or bonds that would be vulnerable to the vagaries of the stock market. If you’re not familiar with some of the basics of investing, here’s a video that explains the rule of 72 and the different investment options available.

Also, take a look at your debts. Is your mortgage paid off or almost paid off? Whatever you do, don’t take on new debt. If the only way you could buy a new car is to get a big loan, keep your old car and fix it up.

Take advantage of those senior citizen discounts

Don’t sneer at those senior citizen discounts. You could join AARP for discounts as well as your supplemental medical insurance. Check with your city to see if it offers real estate tax breaks as well as other discounts. Also make sure that you check out senior programs like low-cost meals, free transportation and health and medical services. Many cities have programs that are underutilized just because people are not aware of them or they are too embarrassed to ask. But hey, get real. These services are available so why not take advantage of them?

Downsize your housing

One thing you definitely don’t want to do is hang on to that big suburban house. If you have a limited retirement budget, sell it and move to a smaller place in a less-expensive neighborhood. You’ll have less maintenance and lower taxes. Just because the real estate market is shaky don’t put off the move. Remember that while you may get less for the home you sell, you’ll also pay less for that new place.

Refuse to subsidize your kids’ lifestyles

Once your kids graduate from college it doesn’t help to let them settle into their old bedrooms. They need to take wings, which means learning to cook their own food and live on their own. If there is some reason why you think one of your children should live with you, have him or her contribute to your cost of living. It’s only fair to the both of you and may be an eye-opening experience for him or her.

Find free entertainment

f your choice were to cruise the Caribbean or live in London, you would need 100% of your pre-retirement income. However, most people don’t do that. You can find low-cost entertainment options right in your hometown from summer concerts to fall festivals to senior exercise classes. Your library probably offers free seminars as well as book clubs, bridge clubs, lectures and movies. You should also be able to find many rewarding activities for your leisure time through your veterans association, social club or church. And all of these should be available free or at very low cost.

Can You Really Trust A Debt Settlement Company?

question markIf you’ve searched the Internet on the terms “debt settlement” or “debt relief,” you undoubtedly got page after page of results – or companies that claim they could settle your debts for thousands of dollars less than you really owe. Since this comes under the category of “if it seems too good to be true,” this raises the question of can you really trust those companies.

How debt settlement works

If you’re not familiar with debt settlement, here’s how it works. First, you need to be nearly six months behind in payments to your creditors. When this is the case, the debt settlement company then has leverage to settle your debts for less than you owe. This is because lenders typically sell off debts they have been unable to collect after 180 days and they usually sell them for only pennies on the dollar. So when a debt settlement company contacts a lender and offers to immediately pay off the debt for, say, 40% or 50% of what’s owed, most lenders will agree as this represents a much better deal than selling off your debts to a collection agency.

You will be presented with a payment plan

When the debt settlement company is able to settle all of your debts, it will present you with a payment plan. Depending on how much you were in debt, it could require two, three or four years before you became debt free. If you sign off on the plan, you will then pay the debt settlement company and not your creditors. Your debts will have been consolidated and you would have only one payment a month to remember.

The benefits of debt settlement

Of course, the major benefit of debt settlement is what you’ve already read – that you should see your debts slashed by 40% or 50%. But there are benefits in addition to this. For one thing, when you contract with a debt settlement company you will no longer be harassed by any of your creditors because you will not be required to deal with them directly. Second, you will get your debts paid off in less time. Third, you should be able to choose which accounts you want to have closed and which you want to stay open. And fourth, you avoid the stigma of having to file for bankruptcy, which would mark you as a bad money manager.

The disadvantages of debt settlement

While debt settlement will not leave a stain on your credit reports as much as would a bankruptcy, it will effect your credit score. As we reported in an earlier paragraph, you have to be nearly six months in arrears on payments to your creditors for debt settlement to be a viable option. And any time you miss six months of payments, this is bound to have a negative effect on your credit score. Many experts believe that this would cost you about 80 points versus a bankruptcy, which could drop your credit score by as many as 200 points.

The scam artists

If you are so seriously in debt that you’re actually thinking about filing for bankruptcy, debt settlement could be an excellent option. But it’s important to choose a company you can trust. Unfortunately, some debt settlement companies are scams. They will ask for money up front, promise to settle your debts for pennies on the dollar and then never pay any of your creditors. It could be two, three or even more months before you discover you’ve been scammed and by then it’s too late to get any of your money back. Plus, you will probably have piled up a lot of new debt in the form of interest charges and fees during those months you thought the debt settlement company was paying your creditors – and they weren’t.

Here’s a video with more information about these scam artists and how to avoid them.

 

Who can you trust?

There are honest and ethical debt settlement companies. They are the ones who don’t charge any upfront fees and cost you nothing until you approve your payment plan. You can also trust a debt settlement company if it’s been in business for five or 10 years. The con artists generally open up under one name, scam as many people as they can, close down and then open up a few months later under a new name. Legitimate debt settlement companies are accredited by the Better Business Bureau and belong to organizations such as the US Chamber of Commerce and the Association of Fair Credit Counselors. These companies will also have a lot more positive online reviews than negative ones. In comparison, the scam artists usually have nothing but negative reviews.

Helpful debt counselorsYoung Man talking on the phone and smiling

An honest debt settlement company will have helpful debt counselors who will discuss your situation at length and offer valuable advice. The advisor you’re assigned will be friendly and knowledgeable and able to answer all of your questions. He or she will not pressure you to do anything.

Everything in writing

Another mark of an honest and ethical debt settlement company is that it will provide all of its information to you in writing. In comparison, a scam company generally won’t. It will rely on a lot of fast talk and verbal promises – that it will never keep.

A legitimate debt settlement company will provide you with a written contract to review and sign that will spell out the exact details of what the company will do and what you will be required to do. Naturally, you should very carefully review any contract you’re offered. If there’s anything about it you don’t understand, either ask a friend for help or pay an attorney to review it. Once you sign a contract with a debt settlement company you will be obligated to follow its provisions so it’s critical that you understand them.

Your 7 Top Questions About Debt Management Answered

What’s the most important factor in debt management?question mark

The single most important factor in good debt management is to have a plan. It’s one thing to want to get your debts under control but if you don’t have a plan you’re just wishful thinking. Trying to manage your debts without a plan is like attempting to build a house without a blueprint. You may end up with something that looks sort of like a house but the odds are that it will fall down the first time you get a windstorm.

How do I create a debt management plan?

It’s actually very simple. All you need to do is make a list of all your debts along with their balances, the date your payments are due and their interest rates. The best way to do this is with a spreadsheet program such as Excel or Google Docs. When you use one of these programs it’s very simple to then sort your debts using several different criteria to determine the best way to pay them off.

Should I snowball or avalanche my debts?

There are two strategies for paying off debts without having to borrow more money. The first is called the snowballing strategy and was developed by the financial expert, Dave Ramsey. The way it works is that you sort your debts from the one with the smallest balance down to the one with the largest. You then concentrate all of your efforts on first paying off the debt with smallest balance. Once you’ve paid it off you will have more money available to begin paying off the debt with the second smallest balance. The thinking behind this is that if you can get one of your debts paid off fairly quickly this will give you momentum to continue paying off your debts like a snowball gains momentum as it rolls downhill.

Creating a debt avalanche is much like snowballing your debts except you pay off the debt that has the highest interest rate first. This will save you the most money though you will not build momentum quite as quickly as with the snowballing strategy as it could take you longer to pay it off.

Which of these would be better? There are ardent supporters of both these strategies. So it probably boils down to the one you like the best.

Is a debt consolidation loan a good way to pay off debts?

There are both pros and cons to this. The biggest pro is that the debt consolidation loan should have a dramatically lower monthly payment than the sum of the payments you’re now making. This is due to two factors. First, it should have a much lower interest rate than your current debts – especially credit card debts – and second, you will have much longer to pay it off. However, this can also be a con. For example, if you were to refinance your home and use the money to pay off your debts, you would have a new 15-or 30-year mortgage to pay off. And even a home equity loan would probably have a 10-year payoff.

Could consumer credit counseling help me?couple with debt management consultant

Consumer credit counseling could certainly help you get your debts under control and paid off. In fact, if you were to go to a consumer credit counseling agency, they would develop your debt management plan for you. In addition, they would present your plan to all of your creditors for approval. Assuming they did approve it, you would no longer have to pay them. Instead, you would send a check each month to the credit counseling agency and it would distribute the funds to your creditors. The upside of credit counseling is that if you stick to your debt management plan, you should be debt-free about five years. The downside is that you would have to give up all of your credit cards and learn to live on a fairly strict budget.

What is debt settlement?

Debt settlement is another good way to do debt management. Companies that specialize in debt settlement are usually able to get debts reduced by thousands of dollars to help their clients become debt free in two to four years. This is also a form of debt consolidation in that once the company has settled all your debts; you would no longer be required to pay your creditors. Instead, you would pay the debt settlement company once a month. However, there is a downside to this option, which is that debt settlement would definitely leave a black mark on your credit reports.

Does it ever make sense to declare bankruptcy?

If you are so deeply in debt that you don’t believe any of these options could help then filing for a chapter 7 bankruptcy could make sense. It takes only about six months to get through a chapter 7 bankruptcy and you should be able to get an attorney to handle it for $500 or even less. If the court approves your application for a chapter 7 bankruptcy, you would see all of your unsecured debts discharged. This would include credit card debts, medical bills, personal lines of credit, and personal loans. However, not even a chapter 7 can get rid of student loan debts, child support or alimony or secured debts such as a mortgage or auto loan. A chapter 7 bankruptcy would definitely leave a black mark on your credit report that would last for as long as 10 years. You would find it very difficult to get any new credit for the first two to three years after the bankruptcy and when you were able to get credit it would come with a much higher interest rate. However, if you can’t see any other possible way out of debt then declaring bankruptcy is certainly worth considering. You should also watch the following video as it discusses the two phases of a chapter 7 bankruptcy, including what your life will look like afterwards.

Why Are Credit Card Interest Rates Still So High?

calculator with text how muchYou can get home equity loans, home equity lines of credit and new car loans at record low interest rates. The same is true of mortgages. Today’s interest rate on a 30-year fixed mortgage is hovering around 4.6%, which is not at an historical low but is still low by historical standards. Yet, the APR on variable-rate credit cards has increased from 14.56% to 15.31%. So what’s the deal?

Credit card holders are not behaving badly

This is not due to the fact that credit cardholders are behaving badly, which would justify the higher APR’s. In fact, what’s true is the opposite. The percentage of credit card accounts that are at least 30 days past due is at almost a 23-year low. For that matter, the average unpaid credit card debt is now well below what it was in 2008.

The three reasons

  • Blame the type of loan
  • Blame legislation
  • Blame yourself

Unsecured loans

Perhaps the number one reason why credit card interest rates remain high is because they are unsecured loans. In comparison, mortgages are secured by houses and car loans by automobiles. If the person with this type of loan fails to pay on it, the lender can always repossess the car or the house. But the credit card companies can’t do this. Charge-offs and defaults are typically higher on credit cards then with secured loans. This means the risk is higher for credit car companies than for a mortgage or auto lender and they charge interest accordingly.

Blame the legislation

Another major reason why credit card APRs are moving in an opposite direction from other types of loans is because of legislation passed in 2009 titled the Credit Card Accountability, Responsibility and Disclosure Act. When this law went into effect, credit card companies could no longer increase interest rates in the first year and couldn’t apply interest rates to new charges. Plus, the Act placed caps on penalty fees and certain other types of fees were either limited or eliminated, and restrictions were placed on payment and billing practices.

The department of unanticipated consequences

While this act had good intentions and did make some things better for credit card users, it had an unanticipated consequence. The credit card companies started raising interest rates and annual fees in order to recoup the income they had lost. As an example of this, in 2010 the average annual fee was $80 while last year it was $113. Since this legislation made credit cards less profitable for banks, they had to search for new ways to recover the lost income.

Maybe you should you blame yourself

While we consumers can’t have any effect on the APRs that the credit card companies assign to their cards, there is an area where we can make a difference. Many credit cards have interest rate ranges that go from low to high. And the interest rate you will be assigned will be on the high or low side mostly due to your credit score. In fact, you and one of your neighbors could have the same credit card but the two of you could have very different interest rates on it.

If you have a high FICO credit score – like above 720 – you should get an interest rate somewhere between 10% and 15%. On the other hand, if you have a credit score between 680 and 720 your APR will probably be between 15% and 20%. And if your credit score is between 620 and 680, you will likely be smacked with an interest rate in the 20s.

Contact a customer service representativewoman with headset

If you have a good payment track record on your credit card and feel that your APR is too high, call the company and ask to speak with a customer service representative. They often can reduce your interest rates by between 1% and 3%. In the event the representative refuses to help you, just tell him or her that you plan to transfer your balance to a new card that gave you an offer with a lower rate. If the credit card company still won’t budge, you’ll have to vote with your feet and actually activate that balance transfer.

If you’d like more information on getting your credit card interest rates reduced, watch the following video for some helpful tips.

The only time it matters

Of course, whether you have a high or low APR on a credit card makes a difference only if you are not paying off your balance every month. This makes credit cards different and in some ways better than an auto loan or mortgage. These types of loans have interest rates that you must pay every month. But if you do pay off the balance on a credit card at the end of the month, you will pay no interest at all.

Get your credit score

Whether or not you’re concerned about the interest rate you’re paying on a credit card, you should get your credit score at least twice a year. Virtually all lenders use your FICO score in determining your interest rates and many auto insurance companies now factor this in when calculating your premium. There is only one place you can get your true FICO score and that is at the website www.myfico.com. You could either pay $19.95 for it or get it free by signing up for a free trial of the company’s Score Watch program. You can also get your credit score free from one of the three credit-reporting bureaus – Experian, Equifax and TransUnion – or from sites such as CreditKarma.com. This will not be your FICO score but should be close enough that you will know where you stand in terms of your credit worthiness.

A Few Simple Steps To Quick Debt Reduction

debt pit with ladderHave you ever sat down and calculated your debt-to-income ratio? It’s a very simple calculation and could be very eye opening. The way you do this is by first adding up all of your recurring monthly debts — your auto insurance premium, minimum payments on your credit cards, rent or mortgage payment, taxes, student loan debt payments and any other loans you might have. Next, add up all of your gross income (not what you take home). Stop and think as this could be more than just your monthly gross pay. Do you receive gifts at Christmas, earn commissions or get a bonus? Add any of these up, divide by 12 and add that number to your monthly income. Now, divide your monthly debts by your monthly income, which will yield your debt-to-income ratio.

Lower is better

This is a case where lower is definitely better. For example, suppose you had $3000 in monthly debts and a $6000 monthly gross income. This would yield a debt-to-income ratio of 50, which would be much too high. Most financial experts believe you should keep this number to 36 or less. This means that if your monthly gross income was $6000, you should keep your recurring monthly debts to $2160 or less.

What if you have a number higher than 36?

In the event you learn you have a number higher than 36, you have some work ahead of you. You need to pay down those debts and fortunately there are ways to do this and you may be able to do it fairly quickly. Here are six tips for quick debt reduction.

  • Use a debt consolidation loan
  • Do a balance transfer
  • Sign up for consumer credit counseling
  • Borrow from your life insurance
  • Tap your retirement account

Here are more detailed explanations of these tips…

Get a debt consolidation loan

If you were able to get a debt consolidation loan, you could pay off all or most of your existing debts. The reason this would help your debt-to-income ratio is because that new loan should have less of a monthly payment than the total of the debt payments you are currently making. There are two reasons for this. First, it will most likely have a much lower interest rate – especially versus any credit card debts.

Second, if you a refinance your existing mortgage, get a second mortgage or a homeowner’s equity line of credit, you will have more years to pay off the loan. Given this, you might be able to reduce your monthly debt significantly and in just a few days. As an example of this, if you owed $30,000 in credit card debts and got a home equity loan at 5% and for 10 years, your payment would be about $312.20 a month. In comparison, if you have $30,000 of credit card debt at 19%, your monthly payment is probably around $600. So by moving that debt to a loan, you would reduce your debts by nearly $300 a month.

Do a balance transfer

There is now any number of 0% interest balance transfer cards available. Some offer an interest-free period as long as 18 months. If you qualify for one of these cards and transfer all of your high-interest credit card debts to that new card, you would have much lower payments because you would not be paying any interest. All of your payments for that introductory or promotional period would be used to reduce your balance. Trading a monthly credit card payment of $500 or $600 (or more) for a $0 monthly payment would certainly help your debt-to-income ratio.

Consumer credit counselingcredit counseling sign

Consumer credit counseling is where you choose an agency or company where you will be assigned a debt counselor. This person will analyze all of your spending and your income. He or she will help you develop a budget if you don’t already have one and what’s called a debt management plan or DMP. Your counselor will contact your creditors and negotiate reductions in your interest rates. He or she will present your DMP to your creditors for approval. Assuming that they all approve it you won’t pay them any longer. You will send the credit counseling company or agency one check a month and it will distribute the required funds to your lenders. The payment you send to the credit counseling company or agency should be a lot less than the sum total of the monthly payments you’ve been making on those debts. So again, this would help with your debt-to-income ratio.

Borrow from your life insurance

Do you have what’s called whole life insurance? This is the type that has both an insurance and an investment component so that it builds up cash value over a period of time. If you have this type of policy, you should be able to borrow from it. The really good news is that you can pay back the money whenever you like or not pay it back at all.

Tap your retirement fund

If you don’t have a whole life insurance policy, you may be able to borrow from your retirement fund. If you have a 401(k), you should be able to borrow up to $50,000 or half or what’s in your fund, whichever is less. Unlike a life insurance policy, you would have to pay back this money and within five years. And you would have to pay interest on the loan but here’s the good part, you’d be paying interest to yourself. If you had $30,000 in credit card payments and use money from a life insurance policy or your retirement fund to pay it off, your monthly debts would be reduced substantially, which should help your debt-to-income ratio considerably. If you’d like more information about borrowing from a 401(k), here’s a short video you could watch.

Because it’s as important as your credit score

It really is important that you know your debt-to-income ratio and that if it’s too high, you do something about this. It’s not only a quick way to understand how you stand financially but it can play a key role when you apply for a loan such as a mortgage, a auto loan or a student loan.

What Is The Best Alternative To Debt Consolidation Loan?

man carrying debtUsing debt consolidation loan as a debt solution is the first option that consumers usually think of when they are faced with mounting credit obligations. In truth, this is an effective option but only if you have the right qualifications and attitude towards it.

Some financial experts doubt the effectiveness of using one debt to pay for another. It is not really viewed as a solution because you are merely shifting your dues so your payments will not be as difficult as before. Instead of dealing with multiple creditors, you apply for a loan that is big enough to pay for all your other debts. That way, you will be left with only one lender and debt to pay for month on month.

However, there are a couple of things that you have to consider before you choose this as your debt solution. First of all, you must possess either a good credit score or a collateral to avail of a low interest loan. This will ensure that your monthly payments will be smaller than your current. But if you do not have both, you may want to consider other debt relief programs that can give you better results based on the qualifications that you have.

Instead of consolidating with loans, use Debt Management

If you think that your qualifications are ill-suited for debt consolidation loan, you may want to consider debt management instead. The latter is another type of consolidating debts but this time, no loan is required to make it possible. Instead of a loan helping you to combine what you owe, a credit counselor will be used instead. Here are important points that you need to know about debt management.

  • The program begins with credit counseling wherein the credit counselor will analyze your finances and debts to see how you can best solve it.

  • Once the data is analyzed, the credit counselor will discuss with you the different options that you have in terms of debt relief.

  • If you qualify for debt management, the counselor will discuss the process and the fees that you will go through.

  • When you agree to use debt management, you will create a debt management plan or DMP that will contain your suggested low monthly payment scheme. The low payment will be possible because the counselor will lengthen your payment period.

  • The counselor will give the DMP to creditors to approval and will negotiate on your behalf for the lowering of your interest rate. If they agree, that will mean more of the monthly payments will be used to pay off the principal debt.

  • Once approved, you will send the total monthly payment to the counselor who will take care of disbursing the payments to your different creditors.

The benefit of this is you don’t need to have a good credit score or a collateral. However, the lower interest is not really guaranteed – but the counselor will put their best effort to provide this.

Of course, the lynchpin here is to find a trustworthy and reliable credit counseling agency that will help you out. To find them, you may want to start your search by going to the membership list of the National Foundation for Credit Counseling or the NFCC. Reputable organizations such as this will help link you to legitimate counseling agencies that can assist you in getting out of your credit problems.

Another important reminder is you should have a steady income. There is no debt reduction here and if you cannot afford the payment, debt management will not work for you.

When making a loan to pay for debt is not enough

In case you need a debt reduction because your income is not enough, the best alternative for debt consolidation loan is debt settlement. There are several benefits to a debt settlement plan. When you decide to use this as a debt relief option, here are the things that you should know about it.

  • Debt settlement works best for unsecured debt like credit card debt, medical bills and other personal loans.

  • Debt settlement will require you to default on your payments intentionally to help convince the creditor that you are in a financial crisis.

  • The default on monthly payments will lower your credit score but will allow you to save up for a settlement fund.

  • The settlement fund will be used to negotiate with creditors. You will ask them for a debt reduction by offering an amount that is lower than what you owe. You will tell them that you can only afford to pay this amount and if they cannot accept, you will be forced to petition for bankruptcy.

  • During the negotiation, you will start with an amount that is lower than what you have on your settlement fund. This will give you room to negotiate.

  • Once you and the creditor agree on a settlement amount, make sure you hold a document that states the forgiveness of the debt balance once you have paid the agreed amount.

This program is quite stressful but you have the option to hire a debt professional to help you out. Just like with a credit counseling agency, you may want to start your search by looking at trustworthy debt settlement companies through a reputable organization. One of them is the AFCC or the American Fair Credit Council. Look at the members to see who among the companies on the list you can work with.

If you want to know more about how you can do your own debt settlement, here is a video that we have created for you. Watch it to know how you can be successful in settling your own debts.

Is Bankruptcy A Good Option For Debt Relief?

Gavel, pen and document titled Petition To File For BankruptcyDid you know that you have a constitutional right to declare bankruptcy? It’s true. It’s right there in the Constitution. Our Founding Fathers clearly understood about debt and that people should have an option for dealing with it. After all, they came from a country, which at one time actually had debtors’ prisons.

Which type of bankruptcy?

There are a number of different kinds of bankruptcies but really only two that are available to  individuals that could help with debt.  They are a chapter 7 and a chapter 13 bankruptcy. The two are very different and it’s important to understand what they are.

A reorganization bankruptcy

A chapter 13 bankruptcy is called a reorganization bankruptcy because its purpose is to give you a timeout during which you would reorganize your finances and pay off your creditors. The short explanation of how a chapter 13 works is that you create a plan for paying your creditors, which you submit to the bankruptcy court. If your plan is accepted, you will be protected from garnishments, lawsuits and other actions by your creditors. You will be allowed to keep your assets but, unlike a Chapter 7, you will not have your debts immediately discharged. Instead, you must complete the payments required by your plan, at which time your remaining debts will be discharged.
Here’s a video that explains more about what to expect if you were to chose a chapter 13 bankruptcy.

A liquidation bankruptcy

A chapter 7 bankruptcy is usually called a liquidation bankruptcy for two reasons. First, it can be used to liquidate almost all of your unsecured debts. But second, it’s to liquidate your assets so that your creditors can be paid. This is where a court appointed trustee takes control of any of your assets that are not “exempt,” liquidates them (sells them off) and uses the proceeds to pay your creditors. While bankruptcy laws vary from state to state, exempt assets usually include most or all of the equity in your house, the equity in your vehicles, your personal possessions and furnishings and any tools that are required by your job. This means that in most chapter 7 bankruptcies there are no assets that can be liquidated. These are called “no asset” cases.

Why a chapter 7 bankruptcy might be a good solution for debt relief

Most people who file for bankruptcy choose a chapter 7 as a way to achieve debt relief. This is because it will get rid of almost all unsecured debts. What are unsecured debts? They are ones where you were not required to provide any collateral. This includes credit card debts, medical bills, personal lines of credit, repossessions and collections and personal loans. Since these are the types of debts that get most people into trouble chapter 7 bankruptcies have become the most popular way to get out from under debts.

Why a chapter 7 bankruptcy might not be a good option

There are reasons why filing for a chapter 7 bankruptcy might not be the best way to achieve debt relief. These include:

  • Your credit score could plummet
  • You will be forced to undergo consumer credit counseling
  • You could lose a valuable asset
  • It will not discharge all unsecured debts
  • You will lose your credit cards
  • You will be required to pay some of your debts
  • Your interest rates will increase
  • Your auto insurance premium will likely go up
  • The court could convert your bankruptcy into a chapter 13

The affect on your credit score and your creditMan climbing credi score numbers

Probably the biggest con of a chapter 7 bankruptcy is what it will do to your credit score. Most experts believe it will drop it by as much as 200 points. If you had a decent credit score of, say, 600 going in your score might be as low as 400 after your bankruptcy. This would make it very difficult for you to get any new credit for at least two to three years.

In addition, a chapter 7 bankruptcy will stay in your credit report for either seven or 10 years – depending on the credit-reporting bureau. And it will stay in your public record for the rest of your life.

The debts that won’t be discharged

A chapter 7 bankruptcy cannot discharge secured debts such as a mortgage or auto loan. It can also not discharge certain unsecured debts including child support and alimony, student loan debts and debts obtained through fraud.

The effect on your interest rates

A chapter 7 bankruptcy will definitely have a very negative effect on your interest rates. As an example of this, if you were to get a new mortgage it could have an interest rate of as much as two percentage points higher than if you had not declared bankruptcy. Those two points may not seem like much but can add up to thousands and thousands of dollars over the life of that mortgage.

Even your insurance premium

Most insurance companies now factor in your credit score when calculating your auto insurance premium. This means that if you have had a chapter 7 bankruptcy that has lowered your credit score appreciably, you can just count on paying higher auto insurance premiums.

You could be forced into a chapter 13

If you were to file for a chapter 7 bankruptcy and had a certain amount of disposable income, your case could be converted from a chapter 7 to a chapter 13. Instead of being free of most of your debts, you would then be required to repay most of them over the next three to five years. So instead of getting a fresh start, you would three to five tough years of living on a very restricted budget.

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