Reducing Consumer Debt: Balancing Results with Consequences
Consumers appear to be learning some lessons about buying now and paying later. BusinessWeek reports that U.S. consumer debt decreased during December for the 11th consecutive month. If you’re ready to eliminate your debt, it can be tempting to respond to advertisements and solicitations offering “instant debt relief,” “credit repair,” and to “settle your debts for pennies on the dollar.” Carefully evaluating your situation and potential solutions can help avoid scams and decisions that can have long term consequences. Here’s a rundown of debt management options:
- Balance Transfers: If you have several credit card balances, review the terms of each account and identify the annual percentage rates (APR) from highest to lowest. The highest APR debts are costing you the most. Transferring credit card balances from high APR cards to lower APRs can reduce the number of payments you make, but read the fine print concerning transfer fees. Balance transfers can work if you have several small debts and one low APR card with a higher credit line. If you have good credit, you may qualify for balance transfers at low or no interest for an initial period. Ideally, you can pay off balances transferred before the APR increases.
- Consumer Credit Counseling and Debt Consolidation: Certified credit counseling services can help you formulate a cash-based budget and negotiate affordable repayment with your creditors. When your creditors approve a plan, you pay a specified amount to your credit counseling service and they pay your creditors. Fees for credit counseling vary; non-profit services typically determine cost based on ability to pay.
- Debt Settlement: If you’re facing a large credit card debt that you cannot pay, debt settlement companies can offer a solution just one step ahead of filing bankruptcy. These companies attempt to negotiate settlement of debts that are several months past due and have no hope of being paid. Debt settlement companies may instruct clients to stop paying their debts and to save the money to pay the negotiated settlement amount.
- Bankruptcy: If you have no hope of repaying your debt, bankruptcy is an option of last resort. It’s important to understand that although reducing or eliminating debt can bring financial relief, bankruptcy severely damages your credit standing and remains on your credit reports for 7 to 10 years. This can impact your ability to find work, qualify for future credit, and can raise your insurance costs.
Before deciding on debt management options, it’s a good idea to talk with a financial advisor who isn’t selling debt relief services. This can help you find a debt relief plan that best meets your circumstances.
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Loading ...Are Americans Getting Smarter About Debt?
When looking at some recent financial data, it appears that more Americans are shunning debt.
Credit Card Debt Declines
Outstanding consumer debt has fallen over the past year, most recently at $1.59 trillion in November, according to data from the Federal Reserve. Revolving debt, which is mostly credit card debt, was $874 billion.
Personal Savings Rate
The declining numbers do indicate that some people are embracing the trend that it’s hip to be frugal and are paying off debt. The personal savings rate was at 4.5% in November, according to the latest figures from the Bureau of Economic Analysis (BEA). It was near zero before the economic crisis.
But a recent article at TheStreet.com makes the point that the lower overall debt level is probably due in part to credit card debt and other loans being written off, bankruptcies, and loan forgiveness programs. The article concludes that many Americans really haven’t learned their lesson about taking on too much debt.
Debt Reduction Strategies
The fact is that consumer debt levels have dropped, and there are ample opportunities to get help with debt to improve your finances.
So what can you do to dig your way out of a financial mess?
- Negotiate a debt settlement with your creditors
- Get debt help from a reputable debt counseling firm
- Consolidate credit card debt to lower the amount of interest paid out
- Stop buying stuff you don’t need and can’t afford
Credit Debt Relief
In the end it doesn’t matter what other people are doing. It’s up to you to secure your own financial future, and dumping debt and boosting savings can help you do that.
(No Ratings Yet) Loading ...Credit Card Legislation Doesn’t Provide Full Protection
Consumers paying credit card debt continue to face obstacles to becoming debt free. It’s important to open and read all correspondence from credit card companies to keep up with their efforts to confuse and keep you in debt. Legislation governing credit card practices becomes effective in February, but it doesn’t provide consumers with all of the protections needed to prevent problems with credit card debt.
Debt Management: New Law Doesn’t Cover Everything
Here’s what the law will do:
- Retroactive rate hikes prohibited: This means that higher interest rates cannot be applied to balances incurred before the interest rate change becomes effective.
- Statements must be mailed a minimum of 21 days before payment due dates: Consumers tend to budget for paying bills on a monthly basis; sending statements a few days before payment due dates can cause late payments and additional fees. You can avoid additional charges by paying credit card bills on receipt and setting up payment reminders on your computer or calendar.
- Payment due dates can’t be shifted without sufficient notice: Another trick some companies use is changing payment due dates. Missing a payment by as little as one day can accrue a late fee, which is added to any balance owed. Open or read statements immediately and check due dates.
- Wake up call on making minimum payments: Credit card statements must include information about how much interest you pay and how long it takes to pay off your balance based on making minimum payments.
- Minimum requirements for change in terms notification: A minimum of 45 days notice must be provided to change the terms of credit card agreements. If you don’t accept the change in terms, you can notify the company prior to the effective date, but your account is then closed. This can negatively impact your credit scores; if you’re trying to improve your credit scores, it’s better to pay off your balance without closing your account.
No Limit on Interest Rates, No Help for Small Business
Unfortunately for those carrying balances, no limits were placed on the interest rates that credit card companies can charge. Many credit card companies are increasing interest rates in anticipation of the new regulations that are becoming effective. Credit cards issued to small businesses are not protected under the new legislation; if you have small business credit cards, beware of rapidly increasing interest rates and fees. Knowledge is your best defense against increasing credit card costs; if you’re having problems making payments or need help with debt management, debt consolidation and consumer credit counseling can help with debt management.
(No Ratings Yet) Loading ...5 Things to Remember About Debt Management
Debt management companies advertise aggressively on TV, radio, the Internet, and in newspapers. Many of these companies promise the moon and the stars when it comes to debt reduction. Before signing up, here are five things to remember about debt management.
- Debt management companies can help you with credit card debt, but you’ll pay a lot of fees. Generally, you’re required to sign up for a debt reduction plan that involve making regular payments to the debt management firm. The debt management company negotiates lower payments or a payoff amount with your creditors, and makes the payments to them. Read the rest of this entry »
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Financial Experts Recommend New Bankruptcy Option
Black Rock, the world’s leading asset management company, suggests that consumers befallen by falling home values and longstanding unemployment need a new bankruptcy option. Under current U.S. bankruptcy laws, consumers can file Chapter 13, Chapter 7, or in some cases a Chapter 11 bankruptcy. None of these options allow for modifying the terms of a primary mortgage loan. Mortgage lenders can petition the bankruptcy court for permission to foreclose a delinquent mortgage loan; this typically occurs within a few months of filing, so homeowners don’t receive lasting protection under existing bankruptcy laws.
Financial Experts Recommend New Bankruptcy Code: How it Would Help
Although unsecured debt and mortgage loans for certain types of properties can be modified, homeowners struggling with high mortgage rates, falling home values, and long term unemployment cannot receive permanent relief from home mortgage problems by filing bankruptcy.
In response to failed “cram down” legislation that would allow bankruptcy judges to reduce mortgage balances at will, Black Rock asserts that under its “Great Recession” bankruptcy plan, judges would formulate mortgage balance reductions using a formula. This would ensure fairness and predictability in mortgage principal reductions instead of allowing judges to modify mortgage amounts at will.
Reducing Mortgage Amounts Essential to Foreclosure Prevention
Unfortunately for struggling homeowners, amendments to the federal bankruptcy code could take years, but financial analysts are beginning to understand that reducing mortgage balances may be the only way to keep homeowners who owe more on their mortgage loans than their homes are worth from walking away.
The U.S. Treasury reports that only 7% of homeowners have converted temporary mortgage modifications approved through the Home Affordable Modification Program (HAMP) into permanent modifications. Problems with the HAMP program include the practice of adding delinquent interest and fees to mortgage balances, which can increase monthly payments on a go-forward basis. This does not help upside down homeowners or those who remain unemployed or under-employed. A group of state leaders is calling for federal programs designed to assist unemployed homeowners.
Mortgage Loan Refinance and Debt Consolidation
Even if you’re not having financial problems, refinancing to current low mortgage rates can provide protection against future problems. Minimizing your monthly mortgage payment obligation provides extra cash for savings or paying off high cost credit card debt. If you have enough home equity, another option is combining mortgage loan refinance and debt consolidation using a cash out refinance mortgage. Discussing options with a financial advisor can help you find debt consolidation options suited to your situation.
(No Ratings Yet) Loading ...Can I Go to Jail for Credit Card Debt?
Even if you have thousands of dollars in credit card debt you can’t go to jail for not paying it. But not paying off credit card debt can get you in other kinds of financial hot water.
Harassment from Debt Collectors
It’s best to get help with debt before accounts are turned over to a debt collector. Because once your credit card debt goes into collections, expect to be harassed. Although it’s illegal, debt collectors may use intimidation or even threats to try and get you to pay up. Read the rest of this entry »
(No Ratings Yet) Loading ...Credit Card Debt? 5 Tips for Escaping
Your debts are piling up, and you’re having problems making minimum payments on time. Those banks, those credit card companies…if only they hadn’t raised your rates. If only they hadn’t added a late charge to your balance. If only…
Moneywatch blogger Ray Martin points out that some consumers fail to assume responsibility for overspending on credit cards. Carrying revolving balances incurs interest charges, and once you approach your credit limits, credit card debt can lead to additional fees and/or increases in your interest rates. Although an estimated 60% of personal bankruptcies are allegedly caused by health care expenses, that leaves 40% that may result from overspending. Here are some steps for gaining control of your spending and getting the help you need to return to financial sanity.
- Accept responsibility for your debt and spending: Taking ownership of your debt and resulting problems puts you in the driver’s seat. Set goals for becoming debt free, and make a plan. Tracking progress is a great incentive for sticking with your plan.
- Stop using credit cards: If you’re carrying balances on your credit cards, it’s costing money. In the current economic climate, credit card companies are less willing to accept exposure to risk. Customers who carry high balances or make late payments can find their interest rates climbing. High interest rates and fees increase your debt and make it difficult to reduce your balances.
- Put your cards away: Don’t carry credit cards and keep them away from your computer. Shopping online can be fun, but it can also lead to the same problems as making a date with your friends at the shopping mall. Get a debit card that displays a major credit card logo. These cards are accepted the same way as credit cards, but the funds come out of your bank account. This is typically enough to curtail most if not all impulsive purchases.
- Establish and keep a cash based budget: Whipping out credit cards for weekend pizza, car repairs, and a trip to the veterinarian is OK if you’re paying off your credit card balances in full each month, but most of us don’t do that. Work out a cash based budget and pay cash or use your debit card; you don’t want to slow down paying off your credit card debt by adding more.
- In too deep? Get help: If you can make it through the month without relying on credit cards for essential expenses, or if you’re skipping one payment to make another, it’s time to get debt help. Debt consolidation and credit counseling agencies offer affordable solutions for getting out of debt. If you owe several months’ payments, debt settlement can provide an alternative to filing bankruptcy.
Get started toward debt freedom today. Credit counselors can help evaluate your circumstances and recommend appropriate solutions fitting your situation.
(No Ratings Yet) Loading ...Should You Freeze Your Credit Report?
No one plans to become a target of identity theft. Having your identity stolen can seriously damage your financial situation, not to mention take a toll on you mentally. Freezing your credit report is one way to combat ID theft.
Check Credit Report for Activity
You may already be on a schedule of checking free credit reports from the three major credit bureaus each year. Go a step further and ask for a credit freeze. This basically seals your credit report and requires you to give a PIN number to thaw it for a short period of time when you apply for credit.
A credit freeze is free if you’ve already been a victim of identity theft. Otherwise it costs about $3 to $10 depending upon where you live.
Help with Debt
Not only can freezing your credit report keep away ID thieves, but it could help with debt you already have. You may be less likely to apply for a lot of credit if you have to go through the hassle of paying a fee (up to $10) each time you want to unfreeze the report. That can keep you from taking on new credit and give you more motivation to pay off existing credit card debt.
If you plan to apply for a mortgage, auto loan, or other type of credit soon, it may make sense to hold off on doing a credit report freeze until after that. Contact each of the credit bureaus when you are ready to freeze your report.
(No Ratings Yet) Loading ...Debt Management: Is Debt Consolidation Good?
Getting out of debt is easier said than done, but debt consolidation can help under the right circumstances. When used as part of a comprehensive debt management plan, a debt consolidation loan or program can help you streamline bill paying and track your progress as your debt decreases.
Debt Management: What’s involved?
Debt management doesn’t work unless it includes these approaches for managing, repaying, and eliminating your debt:
- Establishing and keeping a cash based budget: Knowing how much income you have and how much you must pay out each month to meet living expenses and pay your debts is the starting point for revamping your finances and managing debt. Credit counseling and debt consolidation programs also emphasize the importance of emergency and long term savings.
- Tracking what and who you owe: Setting up a spreadsheet or other tracking system helps you prioritize, pay, and manageyour debt. You want to list who you owe, how much, the annual percentage rate (APR), and minimum monthly payment for each debt. Schedule payments for a few days prior to their due dates to avoid penalty fees. It’s also important to keep track of payment amounts and dates.
- Know where you are: If you find that making minimum payments puts your cash budget into the red, it’s time to get debt help. Consumer credit counseling services can help you work out a debt consolidation plan with affordable payments based on a cash budget.
- Know where you want to go and how to get there: Freedom from debt can require time, effort, and sacrifices; you have to give up instant gratification to stay on track and live within a cash budget. Credit counseling and debt consolidation programs typically require closing all credit card accounts as a condition of participating in their programs, but if you can’t pay off your debt without help, these services can help you get and stay on track toward managing and paying off high cost debt.
- Avoiding trouble along the way to being debt free: Desperation can lead to making poor debt management decisions; taking out new credit to pay off old bills can easily lead to more debt. Credit card balance transfers can help with debt consolidation only if you monitor low introductory rates and can completely avoid making additional credit card purchases. Contact a certified credit counselor for help with unmanageable debt.
There is no shame in asking for help with getting out of debt. The sooner you begin a debt consolidation and/or credit counseling program, the sooner you can be debt free.
(No Ratings Yet) Loading ...Do-It-Yourself Debt Settlement
You’ve probably seen ads for companies offering to settle your debt. But most people don’t need to pay someone else to put together a debt settlement program. Here are five things to remember about negotiating a debt settlement.
- Not everyone qualifies for debt settlement. Most creditors won’t discuss debt settlement with people who aren’t in serious financial trouble. If you ran up credit card debt and earn enough money to pay it back, don’t expect to qualify for a debt settlement program with your creditors. Read the rest of this entry »
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Reducing Consumer Debt: Balancing Results with Consequences
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Chris Rocks is the Regional Director of the National Credit Federation (NCF). NCF is a nationwide membership-based organization that assists consumers recovering from a financial difficulty and those who need a significant increase in their credit score.
Chris began his financial services career as a Financial Advisor helping young families with risk management and asset accumulation strategies. It was during that time that Chris realized that many of these young families also needed someone to guide their choices with regards to debt management.
He made the transition into the mortgage industry where he first worked as a loan originator and later the Vice President of a small mortgage company. As Chris came across clients who had suffered through financial challenges and saw the difficulty they had in re-entering our credit driven economy, he discovered there was a real opportunity to leverage his unique background and help others.
He can be contacted by visiting his personal site, GoodCreditLiving.com.
Francine L. Huff is the Publisher and Editorial Director of Super Savvy Publishing, LLC, which provides editorial and publishing services. She is a gifted author, freelance journalist, and motivational speaker who has entertained and motivated a variety of audiences through workshops, panels and keynote addresses. Francine is the author of The 25-Day Money Makeover for Women, which has inspired and motivated many readers to rein in poor financial habits, become good stewards over their money and work toward a debt-free life. She has appeared on a variety of TV and radio shows. Francine previously worked for the Wall Street Journal, where she was the spot news bureau chief, a news editor and a copy editor. She has interviewed a variety of financial professionals about financial issues and strives to present information about managing money in an easy-to-understand format that is accessible to people of all backgrounds and income levels.
Karen Lawson is a freelance writer with more than 15 years of experience working in mortgage banking and loan servicing. She holds BA and MA degrees in English from the University of Nevada, Reno.
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