What Can a Debt Counselor Do for You?

March 28, 2009 by  
Filed under Debt Handling

Eliminate Debt Fast!

If you are finding you are in the midst of troubling financial conditions, the services of a debt counselor may be just what you need to get back on the right track.

Many companies will approach you with options to reduce your debt quickly and lower your monthly outlay, but some of these programs are nothing more than schemes to take more of your hard-earned money. A debt counselor can help you wade through this information and choose the best legit program for your individual situation.

It’s important when approaching something as important as your personal financial records to have a third-party view of the situation. They may even be able to help you identify and avoid the reasons you incurred this massive debt in the first place, as well as develop good habits like saving for a rainy day.

If you don’t have the willpower to start and stick with a debt consolidation program, a debt counselor can help you stay the course. It’s sometimes easy to fall off the horse and start spending again without someone on the outside to hold you accountable for these actions!

Debt counselors can help you to maintain your commitments to pay off credit card debts, bad debts and even business debts to reach your personal goals. They’ll help devise a plan that works for you long-term, as well as set attainable goals that won’t frustrate and disappoint you.

All this in mind, counselors will serve no good if the debtor isn’t prepared to commit and stick with it. You need to be prepared to accept responsibility for your personal financial decisions, face the problem head-on, and change your nasty habits that got you here in the first place.

Money management skills are extremely important for long-term health and profitability, and these can be learned if you apply yourself. A debt counselor can help you devise plans to pay off debt, buy a house, and even retire earlier than you once thought.

Counseling services will help to determine your monthly budget by taking your income and set expenses, and outline a plan to reduce your unnecessary spending. Cutting out that latte every day may just come up with enough funds to pay your debt off several years sooner!

The road to becoming debt-free is a long one, but it is possible to see short-term results as well. If your debt counselor negotiates lower interest rates, payments or balance forgiveness, you will see drastic short-term gains. Your credit score and net worth will automatically increase, but you’ll need to stay away from new unsecured and unnecessary credit lines.

If you have several credit cards to pay off, you’ll have the advantage of regularly seeing balances decline and eventual zero balances along the way. Debt counseling services will help determine the best way to approach your situation to get you debt-free sooner, decrease your stress and financial obligations, and improve your outlook on life by reaching your goals.

Understanding Your Debt to Income Ratio

March 26, 2009 by  
Filed under Debt Handling

When developing your debt reduction plan or seeking new credit for a large purchase, you must determine not only how much debt you can afford on a monthly basis, but a safe level of debt dependant upon your income level. There are no black-and-white guidelines to follow for this purpose, but there are a few points to take note of before taking any action that affects the level of your debt.

Every credit card offer you receive in the mail is based on complicated computations considering your credit history, current interest rates and any past defaults. Any granting of credit is based on whether the lender considers you a good calculated risk for repayment.

When applying for credit, you need to consider your personal situation with a little more care and control. You are likely to be much more conservative than the credit card companies, but will put you in a better position in the long term.

Besides factoring in the estimated payments into your monthly budget, you need to consider your net worth and long-term wealth building. This means that your assets should always exceed the amount you owe to creditors, including your home and auto.

If you have a negative net worth, this is not good! Obviously, the larger your net worth is, the more comfortable you will be able to live on a daily basis and in the future.

The other reason this number is important is that if you should lose your income or fall on hard times, you will still be able to sell all of your assets to pay existing creditors. Although you may not be left with much, you will still be in the black and not have to file for bankruptcy – always the best option!

Some experts suggest that your debt to income ratio should never exceed 1:2. This number, however, would exclude your mortgage or auto loan; it is assumed that these debts are less than what the security is actually worth should you need to sell it.

This means that if you have student loans and credit card balances, the total of these should not exceed 50% of your annual income. If you make $50,000 per year, your outstanding balances on these types of debt should be less than $25,000.

On the same note, consider this number before ever applying for new credit or a new loan. If you are already at the 1:2 ratio level, pursuing additional loans is not advised until some of the existing debt is paid down. This will increase your chances of being approved, the likelihood that you can pay the debt, and result in a lower overall interest rate.

Using these considerations can significantly reduce your impulse buying habits that result in high credit card balances and added hardship in the future. When considering buying an item, it’s best to force yourself to wait for a week or two before moving forward. If you find that you stop thinking about it or find something else you’d rather have, you probably never needed it in the first place!

Paying Off Your Debt Can Help Fund Your Retirement

March 24, 2009 by  
Filed under Debt Handling

Eliminate Debt Fast!

Borrowing money to buy things which you could discipline yourself to save for and delay your own gratification has huge implications when considering your long-term wealth and savings plans. When you are paying huge minimum payments on your existing debt, it’s much harder to save for a rainy day or even retirement. Most of this outlay could easily be earning you interest in a savings account or other investment vehicle, but instead it’s going to the credit card companies.

Paying off your debt as soon as possible will only put you and your family in a better position long-term. You can start saving your money to pay cash for all the things you want and need, and apply these funds toward your retirement. An Individual Retirement Account (IRA) is a great vehicle to accomplish this.

There are two different types of IRAs: a Traditional IRA and a Roth IRA. There are income limits for each type, but the Traditional IRA will allow for a tax deduction for any contributions up to the annual limit. A Roth IRA does not allow for this deduction, but is not taxed in 20 or 30 years when you reach a certain retirement age, providing a great cushion against inflation.

Any type of savings provides the opportunity to make your money work for you through the wonder of compounding interest. The sooner you start the better, with even the smallest amounts or interest rates you’re earning.

It’s relatively easy to find a compounding interest calculator on the Internet to input imaginary amounts and estimated earnings on those dollars over time. You’ll be amazed at how large even a small $500 contribution can grow over time!

Usually, the government requires that you wait until you are 59 ½ years old before withdrawing from your IRA account, no matter which type it is. However, there are special circumstances which will allow you to take the money out free of penalties.

If you are buying a home, paying for college or have extenuating health circumstances, the federal government may allow you to withdraw these funds before the legally required age. Each situation is different, so you’ll need to consult a tax professional before taking any action.

Employer-provided 401k plans also offer a great retirement savings vehicle. Your portion of the contribution is withdrawn from your paycheck before taxes, and is often so small you won’t even miss it; but over time you’ll enjoy the growing balances!

Ask your place of employment about their matching contributions and how many years of service are required to claim 100% of them. Start contributing the maximum amount they will match any part of – this may match your money dollar for dollar, or at 50% – either way, it’s essentially free money and padding your retirement plan.

Finding the motivation to pay off debt and start saving for special purchases and retirement will be different on a case-by-case basis, but one thing’s for sure: the sooner you start, the better you’ll be off in the long run.

Inflation’s Effect on Interest Rates

March 22, 2009 by  
Filed under Debt Handling

Inflation can seem like the big, bad wolf when it comes to the value of future dollars that you’ve worked so hard to earn and save over the years. This is why many of us turn to borrowing, especially at low interest rates. Interest rates are charged by lenders to compensate for the use of their money, knowing that each month’s payment represents less value than the month prior.

When prices of consumer items rise, including housing and automobiles, many have no choice but to borrow in order to buy them. In return, interest rates rise even more with increased demand. These interest charges are simply the cost of borrowing money.

Inflation and changing values of the dollar are directly affected by the policies practiced in our governments. If they borrow aggressively from other countries, spend when they can’t afford it and start printing more money, the value of the dollar greatly declines. However, there isn’t much that citizens can do to change this vicious cycle, other than remain aware of what actions their government may be taking that will directly affect household borrowing and budgets in the future.

Conversely, the government also has the ability to deflate the economy and increase the value of a dollar. This action requires reduced spending and lowering interest rates to make borrowing a more sound option. However, these dollars will continue to rise in value in this situation; this means that your debt payments are worth more if you hang onto these dollars for future use in this type of economic environment.

Considering possible changes in the economic climate during the life of a loan is beneficial to both a borrower and a lender. This consideration helps to determine the proper interest rate to both implement and seek out to better everyone’s situation.

In the past, many looked to the changing value of gold or silver as an indication of what the value of the dollar was doing. However, this is no longer necessarily true.

Today, commodities such as oil and bond options are better indicators of what interest rates are likely to do in the near future. Oil is directly related to many production industries, and rising rates will lend a clue to inflation.

Bond options will increase in price when professional money managers invest in them assuming that interest rates will rise in the near future. These indicators can help you to determine if it is best to borrow today or wait a while – or better yet, just save your money, earn the interest on it, and pay cash for whatever it is you want or need.

Considering what a loan will actually cost you in the long run requires taking inflation and/or deflation into account. If you’re borrowing money, you want to spend it today. However, you’re also planning on paying it back in the future, and you need to consider the possible change in the value and worth of the dollar. Taking these values into account will help you make a sound decision when seeking a loan and determining if it is absolutely necessary.

How to Reduce Your Debt Using the Snowball Method

March 20, 2009 by  
Filed under Debt Handling

If you find yourself smothered by a ton of credit card debt and other bad debts, you’re probably researching ways to reduce your monthly payments and total balances owed. Paying down your debts sounds like an easy thing to do, but where do you start? One method, known as the “snowball method”, is easily applied to anyone’s situation as an effective way to rid yourself of any and all debt in a fraction of the time than if you simply continued with minimum monthly payments.

The idea behind the snowball method is relatively simple. Gather all of your debts and monthly bills paid to outstanding lines of credit, and grab a piece of paper and pen.

Next, list your debts in order, starting with the highest interest rate down to the lowest. The plan is to apply any extra funds you can spare to the highest interest debt first, and maintain other loans with only the minimum payments. This method will significantly reduce the amount of interest paid on your debt, and will also drastically reduce your payoff period.

Applying even just an extra $50 to $100 dollars a month will create great results in a short amount of time; you’ll start to see the balance on that highest-rate card decrease with each monthly bill you receive, which will motivate you to continue.

Another form of this method to paying down debt will pay off the smallest debt first, then move to the next one as each debt is paid off. This allows for great short-term results and the feeling of greatly reducing your debts, but you may be paying more than necessary.

This is due to the fact that if you have three balances that charge the same interest rate, the highest balance will cost more in interest than the other two. For this reason, some debtors choose to pay off the highest balance first.

However, this plan can be difficult to stick with since it takes longer to notice results. If you are the type that loses faith easily, you may want to start paying off the smallest debts first.

No matter how you approach paying off your debt, you simply must pay down your balances one way or another. All methods will work, but you have to be able to stick with them to reach your goals.

Another option is to call all of your creditors, explain your situation and that you’re trying to reduce your debts, and ask if you can qualify for a lower interest rate or payment. This will allow you to place even more money toward the debt you choose to pay off first, as well as save in charges and interest in the long run.

After reaching your goal of paying off your debts, you must alter your spending habits to avoid getting into that situation again in the future. Re-examine your monthly budget, and start saving the money you once spent on debt payments for a rainy day or special purchase. You’ll be surprised how quickly it accumulates!

Handling Debt Collectors and Agencies

March 18, 2009 by  
Filed under Debt Handling

If you’ve come upon hard times and have not been able to keep up with your current debts, your phone is probably ringing at all hours of the day, and your mailbox is full of strongly-worded letters looking for payment. Don’t fret, however – there are options that will help you to curb some of this contact and deal directly with the debts you owe.

Legislators designed the Fair Debt Collection Practices Act just for this reason. Passed into law to protect your rights, this piece of legislation outlines how an agency is allowed to contact you and try to collect a debt.

Some of these requirements include that a debtor can only call you between the hours of 8 a.m. and 9 p.m. They may also not disclose the debt information to third parties like extended family members or your boss. These collection agencies are not allowed to threaten or harass you, and must not continue to contact you via phone if you request them to stop.

A “cease and desist” letter can be sent to any agency you feel has violated the law or harassed you when attempting to collect a debt. If you know the debt is valid, however, you may want to open the lines of communication to deal with it and find some way to pay it off. Your credit score will thank you in the end, and this is the first step in addressing your debt management plan.

You may have the option to settle the debt for less than you actually owe, or negotiate a lower rate to save money in the long-term. Another option may be to seek the services of a credit counseling or debt consolidation company.

The advantage to actually dealing with the annoying collectors is that they will stop contacting you as long as you hold up your end of the deal. However, if you don’t follow through, the calls will begin again, no doubt.

When dealing with the companies, keep a personal log of all calls made and received, the person you spoke to, and what was discussed. When an agreement is reached, ask for something in writing from them, and always keep confirmation numbers or receipts from any and all payments you make.

If the collection company doesn’t maintain their side of the agreement, this information can all become legally viable in the court of law. However, if you are honest about your situation and let them know exactly why you’ve fallen behind, they will be more likely to create a payoff plan that actually works for you.

During negotiations, don’t forget the effect the debt has and will have on your credit report; negative information can stay on your personal report for up to seven years, so ask that the company immediately report any payments you make. If you settle the debt, your report will most likely state this, but will still show that it has been paid. Of course, if you don’t want to handle these negotiations yourself, you may want to retain the services of a credit counseling service to manage any and all debt you owe.

Debt Management Plans Require Consideration of Taxes

March 16, 2009 by  
Filed under Debt Handling

You know the old saying: death and taxes are the two sure things you’ll encounter in life, and the same is true when dealing with your debt. Too many try to focus on only paying or getting rid of their debts as quickly and easily as possible, without ever considering the tax implications of any option they may choose.

Some of these tax implications are beneficial, however. For instance, the interest paid on your home loan is tax deductible, which is quite a large percentage of your payment during the first few years of the loan. This deduction results in less tax owed each year, putting more of your money back in your own pocket.

However, this isn’t always the case with interest payments on debt. Usually, you want them to be as low as possible and eliminated sooner rather than later.

A home equity line of credit, or HELOC, is a common second mortgage that is used to finance remodels and improvements, additional purchases, or paying off credit card debt. These can be of great use, and provide the same tax deductions available on your first mortgage.

This can be of great benefit if you’re looking for a way to pay off old debts as well as reduce your taxable income. Interest rates are lower than credit cards or other unsecured loans, reducing your monthly outlay as well.

Loan calculators found on the Internet are also available to provide the tax calculations for you. You need to be aware of every cent your new line of credit will cost you in the long run, so compare these different vehicles before signing on the dotted line.

Large medical bills are another reason to seek additional credit. Using your trusty credit card is an extremely expensive way to pay these off. You may be able to pay the institution you owe directly at a lower interest rate than an additional loan with cost – some medical expenses and medical-related debts may also be tax deductible.

Student loans also carry the added advantage of tax deductions. When considering how you will finance your formal education, you should consult a tax professional to study these different options available. In some cases, you will be able to deduct interest paid on the loans; in others, you may be allowed to deduct the entire payment.

Financing any large purchase – a home, car, medical costs or even your education – should come only with careful consideration. Not only should this added debt be considered in your long-term debt management plan, but you’ll need to consider the regular and real costs to your bank account.

Interest rates and terms will vary between different types of loans and applicants, depending on the type of financing and the applicant’s history. Before taking the plunge, you need to ensure you can afford monthly payments, but should also account for possible tax reductions as a result of taking on the new debt.

Accepting Responsibility and Learning to Handle Your Debt

March 14, 2009 by  
Filed under Debt Handling

Debt can become a very bothersome issue for anyone, and must be dealt with accordingly. Too many in trouble tend to ignore or downplay the fact they are in way over their heads, but it’s important to implement a debt management solution by being honest with yourself about your current situation.

First, you have to calculate or find your current balances owed, as well as monthly payment and interest costs. Unfortunately, too many people focus only on interest rates they are being charged. This is an important piece of information, but doesn’t mean much when compared to dollar costs that are easily put into perspective.

If you’re not sure how to calculate this amount, look at your most recent bill from your creditors. There should be an area showing your last payment, and the amount applied toward the principal and the interest. If you can’t find it, simply call the customer service line and ask them to calculate it for you.

Any debt management company will tell you that you shouldn’t be paying more than a few percentage points of your monthly take-home pay for interest charges. To calculate this number, divide your monthly interest costs by your monthly take-home pay.

For example, if you bring home $5,000 per month and pay $250 per month in interest to your outstanding debts, this accounts for 5% of your income. This means you are essentially throwing away $250 a month that you otherwise wouldn’t if you paid that debt off.

The problem with many debts, especially credit card debt, is that very little of even the minimum monthly payments is applied toward the principal of the balance. This allows the company to continue to make money on a larger principal balance for several years.

When planning your own credit card management plan, ensure you are always paying more than just the minimum amount due each month. This is because even if you only pay an extra $10 or $15, any amount over the minimum will be applied to the principal to pay it down. This drastically reduces your overall cost of the debt and shortens the amount of time needed to pay it back.

Being honest with yourself about your spending and borrowing habits is a huge part of developing your debt management program. Once you’ve decided to get a handle on your current situation and better your future, make the resolution to stop living above your means and learn to pay cash for everything. You’ll appreciate the things you do buy much more – or possibly find that you decide you don’t really want them that badly!

Design a budget that is both realistic and comfortable, but requires you to address your outstanding debt. Cut down on costs wherever possible, then apply these discretionary funds toward either your highest balance or highest interest rate first. This will dramatically reduce your payoff timeline, as well as save you thousands in interest in the long run.

Choosing a Secured or Unsecured Loan

March 12, 2009 by  
Filed under Debt Handling

When you need financing for a purchase or improvement to existing property, you’ll be faced with the question of whether to apply for an unsecured or secured loan. In addition, the proposed lender will need to determine whether to require security against the loan in order to approve it. There are pros and cons associated with each type of loan, and you need to be familiar with them before going forward.

Secured loans are issued with the guarantee of some type of property. This may be a home, automobile, or other item of value like jewelry or a computer. With this type of financing, the lender has a claim against ownership of the property should you ever default on or fail to repay the loan.

However, this doesn’t simply mean that if you’re late on a payment your bank will come marching to your door to kick you out of your home. Foreclosures and repossessions of properties cost money and require a very long, drawn-out process, so don’t fret if you have a difficult month or so.

When a borrower defaults on a loan, the lender is likely to start sending strongly-worded letters looking for payment. At this time, it may be possible to work some type of payment deal out with your lender, but you should realize that they still have a claim against your property should you ever sell it. When you sell a property that is used to secure a loan, the loan must first be paid off before you get to profit any proceeds. This is referred to as the equity in your home or auto.

Unsecured loans are the complete opposite. They are issued on your good name alone, and are typically only available to those with great credit histories and a positive current financial position. There are many advantages to being able to obtain this type of loan.

If the lender is confident you have the means and ability to repay an unsecured loan, they will be more likely to issue it. A lender may also look at an application for an unsecured loan and require you to provide security as a condition of issuance.

Unsecured loans are much like credit card debt, in that the lender has no legal recourse should you default. They can send you to a collection agency and ruin your credit rating, but can never take possession of anything you own as a condition of the loan.

However, rates tend to be lower for unsecured loans versus credit cards. In addition, secured loans will provide lower rates than unsecured loans due to reduced risk. It is always best to pursue an unsecured loan for unforeseen expenses due to this fact; obviously, a home or auto purchase will require a secured loan.

In order to protect your credit rating and maintain a positive debt management program, always apply for an unsecured loan before using a credit card for unexpected or planned for expenses. If you can’t get approved, you should probably just avoid the expense at all cost.