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Shortly after graduating from New York University with a Master’s degree, Melanie Lockert turned to food stamps, as she worked her way out of $81,000 in student loans.

“There were a lot of emotions around carrying that debt. It caused a lot of stress and depression and anxiety for a long time,” she shared with me recently during an interview on my podcast.

The student loan crisis in America has reached epidemic proportions. With households across the country carrying $1.26 trillion in student loans, it is the second largest category of debt following mortgage debt.

For the class of 2016, the average student loan balance is $37,172, up six percent from the previous year, according to a new analysis by student loan expert Mark Kantrowitz published in the Wall Street Journal.

If you’re struggling to make ends meet due to student loans or wondering how you’ll ever pay off the debt in a timely manner, here are some key steps to support you along the way.

Never Pay Late. Ever.

Whoever likes to call student loans “good debt,” has probably never faced a late payment. “Falling behind on payments can cause federal loans to enter default, triggering expensive fees and collections,” says Heather Jarvis, attorney and student loan expert.

If you miss several payments and are in default, federal loan borrowers may also seize your wages, tax refunds and possibly social security benefits. And you can only imagine how all this can damage your credit score. (Keep reading for advice on what to do if you’re already in default.)

To avoid ever paying late, sign up for automatic payments with your lender. Doing so could also earn you a reduced interest rate (usually 0.25%), which could save you hundreds of dollars, maybe more, over the life of your loan.

Extend the Term

Speaking of your loan’s life, extending the term from 10 to 15 or 20 years could provide you with some payment relief since when you extend the term, your monthly payments decrease.

Bear in mind that since your interest rate remains the same this strategy may mean you’ll end up paying more to pay off the loan over time.

One way to avoid paying too much more interest is to take advantage of the smaller monthly payments for only a window of time. As soon as your finances strengthen place more than the monthly minimum towards your balance to help you get out of debt closer to your original term. Be sure to place extra payments directly towards the principal to knock down the debt even faster.

Tap Government Assistance

If you have federal student loans you may qualify for Income-Based Repayment (IBR), a government program that helps qualifying borrowers cap loan payments to a percentage of income, typically 10% of their income. The program will also forgive any remaining student loan debt after 20 or 25 years of making payments.

The Department of Education also has a program called Public Service Loan Forgiveness (PSLF). If you work full-time for a “public service” employer such as not-for-profits, AmeriCorps or PeaceCorps, the military or a government agency, PLSF may forgive your remaining federal loan debt after 10 years of employment.

If You’re Already Behind…You Have Options

If you’re in default, Jay Fleischman, a student loan and bankruptcy attorney, says you may be able to consolidate your loans under the U.S. Department of Education’s Direct Consolidation Loan Program, which is free and does not depend on creditworthiness.  “You could also rehabilitate by making nine agreed-upon monthly payments over a 10-month period of time with the collector assigned to the account. Those payments may be adjusted based on your income, and payments can be as low as $5 per month,” he says.

For private student loan borrowers, “the situation is markedly different because there is no right to consolidate or rehabilitate unless the lender has a specific program to do so,” says Fleischman. Contact your loan servicer and learn about ways you may be able to reduce or eliminate payments until you get back on your feet, he says.

If your lender won’t budge, you may choose to remain in default until a settlement opportunity presents itself or until the statute of limitations for collection expires. As a last resort, you may also consider bankruptcy as a way to wipe out other debts and repay your student loans under court supervision. “Though bankruptcy may not wipe out your student loans except in limited circumstances, many people opt for bankruptcy as a way to get more control over the ways in which your loans get paid,” says Fleischman.

Tap Home Equity…With Caution

Homeowners may be eligible to use a home equity line of credit (HELOC) to pay off their remaining student loan balance. This allows them to pay off the student loan with the existing equity in their home and save money if the HELOC has a lower interest rate than the student loan.

There’s also a new program offered by online lender SoFi called the Student Loan Payoff ReFi that allows some homeowners to pay down student debt using their home’s equity.  SoFi refinances the total amount of your student loans and existing mortgage at a lower rate. Through that process your student loan balance is paid off directly to the loan provider.

To qualify, SoFi says borrowers need healthy credit scores (check your free credit score to verify you qualify), a debt-to-income ratio that’s 45% or less (calculate debt-to-income ratio to see if you fall under this number) and a loan-to-value ratio that’s 80% or less (meaning you can’t be underwater on your mortgage). You can calculate your debt-to-income ratio with Turbo, and

Just keep in mind that when paying off your student loans with home equity – be it through SoFi or another lender – if you default on the consolidated loan the lender has the right to use your home as collateral and foreclose on the property. It’s a serious risk if you don’t have enough in savings or stable income to help you get by during tough times.

Remember to Deduct It

Student loans are no fun, but paying them can yield lower taxes. Each year the IRS lets borrowers deduct up to $2,500 in student loan interest from their taxable income.

Maybe Your Employer Can Help?

A growing number of companies are helping employees squash their student loans as an added perk like a 401(k) and health care.

Gradifi is a Boston-based start-up that’s working with over 200 employers to set up its student loan pay down plan, including PriceWaterhouseCoopers.

It’s a trend that’s likely to grow over the years with more than 50 percent of student loan borrowers saying they would rather receive student loan benefits than heath care from their employer.

Start a Side Hustle

While it’s important to cut back on spending to make room for paying down debt, that move alone isn’t always enough. “Pinching pennies and cutting back is really useful as an initial strategy, but at some point, there’s only so much you can cut back,” says Lockert, whose now chronicled her debt payoff strategies in the book Dear Debt: A Story About Breaking Up With Debt.
Through a series of side hustles over the years, including housecleaning, event assisting and pet sitting, earning $10 to $50 per hour, Lockert managed to not only afford her living expenses, but also erase five figures worth of student loan debt.

Depending on your interests, you can find relatively easy gigs at sites like TaskRabbit, Tutor.com, GigWalk and Care.com.

Have a question for Farnoosh? You can submit your questions via Twitter @Farnoosh, Facebook or email at [email protected] (please note “Mint Blog” in the subject line).

Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.

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Everyone knows the story.  Unemployment is up. FICO scores are down.  Home values are down.  And because home values are down, home equity has disappeared for millions of homeowners.  And since home equity was the financial safety net millions of consumers used to pay off their credit card debt, well, you know the rest.  Let’s just agree that, right now, millions of consumers have no way to pay off all of their credit card debt.

There are a variety of ways to get out of credit card debt, right?  You can budget your way out of debt.  You can file bankruptcy.  You can enroll in a debt management plan (DMP) through one of the member organizations of the National Foundation for Credit Counseling, commonly referred to as Consumer Credit Counseling Service (CCCS).  You can work with your credit card issuer directly and seek help through one of their hardship programs.  You can attempt to settle the debt on your own.  Or you can enlist the services of a debt settlement company.

Opinions vary on these options.  They all have their pros and cons.  The purpose of my article isn’t to explore each option.  I’ll do that soon.

The purpose of this article is to explore debt settlement as an option.

Settlement is quite an easy concept to understand.  You agree to pay your credit card issuer an amount of money less than what you really own them and they consider the debt to be paid in full.  So, if you owe John Ulzheimer’s Bank $10,000 and I agree to accept $5,000 as “full payment” then you have settled your debt with John Ulzheimer’s Bank.  The bank reports the settlement to the credit reporting agencies and sends you a 1099 for the forgiven amount.  Settlement, incidentally, is considered one of FICO’s Seven Deadly Sins.

Settlement can be accomplished by working directly with your bank.  You do not have to hire someone to do this for you.  That’s a myth. In fact, many credit card issuers won’t even work with debt settlement companies so you have no choice but to deal with them directly.  This is okay because all creditors have their version of a “Remediation” department, which is where you’ll likely end up if you call them asking for a settlement deal.

Now, let’s move on to the debt settlement companies.  You’ve all seen their commercials.  Distraught couples staring at their credit card statements magically turning into happy families playing with puppies in their front yard, all thanks to ye ole friendly debt settlement company.  Heck, there’s even a version that has excerpts from one of President Obama’s speeches and a picture of a government building in the background.  It’s clearly intended to come across as a governmental program.  Of course, it’s not a government program.

Here’s how they work.  First they find out how much debt you have.  This is to determine if you’re even worth doing business with.  If you have too little debt then they won’t make enough money working with you.  That’s why their ads contain statements like “If you have more than $10,000 in credit card debt call now…” If you have enough debt, in their eyes, then they’ll sign you up.

When you sign up they’ll tell you to stop communicating with your credit card issuers.  I’m not kidding, they really tell you this.  That means no more payments and no more return calls.  The hypothesis here is to get your credit card issuer so desperate for payment that they’ll accept a settlement offer.

At the same time you’ll be asked to make monthly payments to the settlement company.  Why?  Because you’re creating a war chest that serves two purposes.  First, this is where their fees will come from.  Second, this is where the settlement offer will come from.

After several months, or longer, there will be enough money for them to make some sort of offer to the credit card issuer.  The issuer may accept the offer, or they may decline the offer.  Either way, your fees to the settlement company have been paid.

So what happens during the period of time you’re paying the debt settlement company (and ignoring your creditors)?  Well, since that’s not a part of the commercials I’ll have to be the one who breaks the bad news.

1. Your credit will be trashed.

The credit card issuer will report the ascending level of late payments to the credit bureaus, which remain on your credit file for seven years.  Now the debt settlement guys will say “well, your credit is probably already trashed so no big deal.”  Wrong, new (and numerous) late payments help to lock in lower scores for additional time.  And it gets worse…

2. The card issuer will likely enlist the services of a 3rd party collection agency to collect the debt.

This means a brand new collection will be reported to your credit files. Again, this remains for seven years.  And, these guys can pull your credit reports to find you and determine your ability to pay them.  That means you’ll have to explain collection inquiries.  You’re supposed to ignore these guys as well.  And it gets worse…

3. That knock at your door…yeah, that guy is called a process server. 

Your credit card company or a collection attorney has sued you for nonpayment of the debt.  You can’t ignore him like you’ve been ignoring your credit card issuer.  If you do choose to ignore the summons you’ll lose by default for not showing up to court.  This is called a default judgment.  And yes, the judgment can show up on your credit report for seven years.  And it gets worse…

4. Become familiar with the term “Writ of Sequestration.”

In English this is either legal garnishment of your wages or seizure of your assets.  If your wages are garnished your employer will now be made aware of your defaulted debt problems because they’re the ones who will hold back a portion of your salary.

You’ve totally lost control of the situation because you chose to ignore your creditors, at the request of a company trying to profit off of your debt situation.  Smart?  Or not?

And, just to tie a nice bow on the top of this one, the Attorneys General in the states of Florida and Alabama have shut down major debt settlement networks because, and I quote, “they’re a scam because consumers get no value for their fees.”  I’ll write soon about the DSCPA (Debt Settlement Consumer Protection Act), which will put most of these guys out of business.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and the author of the “credit history” definition on Wikipedia.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  He has served as a credit expert witness in more than 70 cases and has been qualified to testify in both Federal and State court on the topic of consumer credit.

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Debt settlement, which is also referred to as debt negotiation or debt arbitration, is a process whereby a creditor agrees to reduce the total amount of debt owed and in return, the borrower pays the rest in a lump sum. 

This typically involves the creditor waiving interest and fees on the debt. Debt settlement can benefit both parties, as it allows the creditor to recover some of the debt owed, rather than losing it altogether. For the borrower, it provides financial relief and possibly, an alternative to filing for bankruptcy.

How Does Debt Settlement Work?

Debt settlement can be accomplished through a debt settlement company or by the consumer themselves (DIY). Typically, it involves negotiating with credit card issuers to reduce the total amount of debt owed, though it is possible to resolve other types of unsecured debts as well. 

When considering using a debt settlement company, it is important to proceed with caution as there are risks involved. It is crucial to thoroughly research the company before making any agreements.

 Additionally, it is paramount to review your finances and stay up to speed with the timetable for the payment as well as all associated costs and fees. Being well-informed and cautious can help protect you from potential drawbacks in the debt settlement process.

That being said there’s a good and a bad side of debt settlement as discussed below.

Pros of Debt Settlement

Alternative to Filing for Bankruptcy

When considering options for managing overwhelming debt, many borrowers choose between debt settlement and filing for bankruptcy. While it can have a negative impact on a borrower’s financial situation, some experts consider debt settlement to be a better alternative to Chapter 7 or Chapter 13 bankruptcy.

Both debt settlement and bankruptcy will stay on a borrower’s credit report for several years (typically 7 to 10 years). However, bankruptcy can have a more severe impact on a borrower’s creditworthiness, since you may have to fill in whether you have filed for bankruptcy when applying for credit cards, loans, and even jobs. 

Relief from Overwhelming Debt

If you are struggling with overwhelming debt, finding a solution that allows you to settle for less than what you owe can be a great relief. Debt settlement can be a relatively quick option compared to other debt management options such as debt consolidation, credit counselling programs, or bankruptcy.

Debt Won’t be Sent to a Debt Collection Agency

When debt is sent to a collection agency, it can result in unending calls and letters, which can be stressful and overwhelming for borrowers. By settling the debt directly with the creditor, borrowers can avoid the need to deal with debt collection agencies and the associated stress. 

It is important to note that, if it has already been sent to a collection agency, debt settlement may not be an option.

Cons of Debt Settlement

Debt Settlement fees

While the Debt Settlement Consumer Protection Act prohibits the debt settlement providers  from charging most other fees, you may incur charges in the form of enrollment fees, monthly maintenance fees, and fees based on the amount of debt settled.

The fees can be relatively high and may counteract some of the benefits of debt settlement. With the additional costs, it is possible to end up paying more than you owed to begin with.

The Creditor is not Obligated to agree to Debt Settlement

Creditors may choose to reject the offer and continue to pursue the full amount of the debt. Additionally, debt settlement companies may not be able to negotiate a settlement for all of a borrower’s debts, which means that some debts may remain outstanding.

Tax Implications

When a borrower settles a debt for less than the full amount owed, the creditor is required to report the forgiven debt to the IRS as income. The borrower may be required to pay taxes on the forgiven debt depending on how much it is.

Impact on your Credit Report

When a borrower settles a debt for less than the full amount owed, the creditor may report the settlement to credit bureaus as ‘paid-settled’ which negates the original agreement of paying in full. This information will then appear on the borrower’s credit report for up to seven years and may put off potential borrowers.

The Takeaway

Debt settlement is one of the channels you can use to manage your debt. While it can be a good option if you are struggling financially, it is advisable to examine every aspect of the process to ensure that the benefits outweigh the risks.

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Alternatives to a debt consolidation loan

Home equity

One popular way people pay off debt is to use the equity in their homes. Home equity loans and home equity lines of credit (HELOCs) let borrowers use their homes as collateral in exchange for financing. Just be sure to factor in the risks if you’re considering this option. The lender can seize your home if you can’t make the payments.

Who this is best for: Borrowers who have built up equity in their homes.

Who this is not good for: Those unsure of their ability to maintain the monthly payments. 

Home equity loan versus debt consolidation loan: Home equity loans and HELOCs may offer lower rates than debt consolidation loans, though they come with more risks, since your home is used as collateral.

Debt relief services

Debt relief services, including debt settlement companies, offer another way to deal with your debt if you can’t qualify for a consolidation loan. These companies reach out to creditors and debt collectors on your behalf and try to settle the debt for a lesser amount.

If you decide to pursue debt relief services (perhaps as an alternative to bankruptcy), be aware that the fees these companies charge can be steep. Take your time to fully research fees, reviews and other details before applying. It’s also wise to compare multiple debt relief companies before you commit.

Who this is best for: Borrowers who are experiencing financial hardship and cannot pay their debt.

Who this is not good for: Those with a thin credit history or less-than-stellar credit score.

Debt relief services versus debt consolidation loan: Unlike debt consolidation loans, debt relief services aim to eliminate some of your debt without you having to pay it. With that said, pursuing debt relief is a risky move, and it can damage your credit score.

Credit counseling

Another option that can help you get debt under control is credit counseling. Credit counseling companies are often (though not always) nonprofit organizations. In addition to debt counseling, these companies may offer a service known as a debt management plan, or DMP.

With a DMP, you make a single payment to a credit counseling company, which then divides that payment among your creditors. The company negotiates lower interest rates and fees on your behalf to lower your monthly debt obligation and help you pay the debts off faster.

DMPs are rarely free, though, even if they’re done by a nonprofit credit counseling service. You may have to pay a setup fee of $30 to $50, plus a monthly fee (often $20 to $75) to the credit counseling company for managing your DMP over a three- to five-year term.

Who this is best for: Borrowers who need help structuring their debt payments.

Who this is not good for: Those with little wiggle room in the budget. 

Credit counseling versus debt consolidation loan: With a debt consolidation loan, you’re in control of your payoff plan, and you can often apply with few fees. With credit counseling, a third party manages your payments while charging setup fees.

Balance transfer credit card

With a balance transfer card, you shift your credit card debt to a new credit card with a 0 percent introductory rate. The goal with a balance transfer card is to pay off the balance before the introductory rate expires so that you save money on interest. When you calculate potential savings, make sure you factor in balance transfer fees.

Keep in mind that paying off existing credit card debt with a balance transfer to another credit card isn’t likely to lower your credit utilization ratio like a debt consolidation loan would.

A debt consolidation loan is also going to offer higher borrowing limits, enabling you to pay off more debt, as well as fixed monthly payments, which make it easier to budget and stay disciplined with paying off debt.

Who this is best for: Borrowers who can pay off existing debt quickly.

Who this is not good for: People with a young credit history or a less-than-average score. 

Balance transfer credit card versus debt consolidation loan: Balance transfer cards are often the best choice for borrowers who have the means to pay off their debt within 18 months, which is a standard 0 percent APR period. If you need longer to pay off your debt, or if you have a lot of debt, a debt consolidation loan is a better choice.

Source: thesimpledollar.com

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Credit Card Debt Relief: 6 Strategies – MintLife Blog

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$1 trillion in credit card debt, there must be a sustainable option to lessen the stress of carrying large debts month over month, year over year. Credit card debt relief is a way to not only get out of seemingly endless debt but also to perhaps bring about a little bit of mental—and ultimately, financial—peace.

Rather than just assuming you can entirely write your debt off with little impact otherwise, it’s important to know the various credit card debt relief options that are available and the different impacts each approach will have on your credit and financial health over the long term.

Keep reading to learn six credit card debt relief strategies, or use the links below to navigate the article.

How to Pursue Credit Card Debt Relief

Seeking credit card debt relief can be an ideal option for those experiencing hardship from life’s unexpected happenings, whether that’s medical bills, a sudden loss of income, or debt that has become excessively difficult to manage. Before deciding on a course of action, it’s important to know the differences between each approach.

Here are six strategies to consider for credit card debt relief:

1. Do-It-Yourself

Credit card debt relief may be able to be reached through a resolute commitment to aggressively paying down debts as quickly as possible. Do-it-yourself options to credit card debt relief require discipline and may not offer the degree of immediate debt relief desired.

If you have a particularly good credit score, you may be able to negotiate a lower interest rate on your cards through individual credit card companies to lessen the burden of debt.

While you’re not necessarily entitled to a lower interest rate, explaining your hardship and mentioning the length of time you’ve been with the credit card company could help secure a better deal, making debt repayment more manageable.

You might also consider taking a new approach to paying down debt by:

  1. The debt snowball approach — paying off the credit card with the smallest interest rate first while making minimum payments on other debts.
  2. The debt avalanche method, which allows for accelerated debt repayment as you put extra money towards the debt with the highest interest rate, while paying the minimum on all other outstanding debts.

The snowball method costs more but can boost confidence in being able to fully tackle paying off one card before moving onto the next.

2. Consolidation

Consolidating debt means combining all outstanding debts you owe to different lenders into a new loan.

Credit card consolidation, while not a method that outright eliminates debt, can be a strategy to help you pay down debt faster. With this option, you’ll only be making one payment a month instead of several— potentially making it easier to keep track of what you owe.

By taking out a low-interest rate loan through a lending institution, you may be able to pay off the majority, if not all, of your high-interest credit card debt.

Another option for consolidation is to do a balance transfer from a high-interest credit card to a credit card with a lower or no interest rate to lessen the burden of interest charges. It’s important to note that this option may come with a fee and doesn’t simply get rid of debt, but it could make the credit card debt relatively easier to pay down.

3. Credit Counseling

Seeking credit counseling, which is usually a free service provided through nonprofit organizations and independent financial agencies, may help lead you in the right direction to achieve credit card debt relief.

  • How it works

Trained counselors can guide you through repayment planning by reviewing your budget, analyzing your debt, and offering recommendations to help find a sustainable debt relief solution.

Counselors simply offer suggestions, making the service free unless you opt to use their help in pursuing a course of action, such as enrolling in a debt management program.

4. Debt Management Program

If you decide to sign up for a debt management program (DMP) through a credit counseling agency, you’ll make a single monthly payment to the agency, and the agency will in turn pay your creditors. With this option, you’ll likely be able to pay off your debts within three to five years, as outlined in your specific debt management plan.

  • Considerations

By enrolling in a debt management plan, you won’t be able to obtain new credit until your debts are paid off. In fact, the credit counseling agency will close your active credit accounts while you complete the plan.

Closing your credit card accounts could negatively impact your credit score in the short-term, but by making regular monthly payments (that you can actually afford), debt management programs may help you find credit card debt relief over time.

5. Debt Settlement

Debt settlement means negotiating with your creditors to pay less on your debt than the amount you actually owe. This agreement is typically arranged by a third party—a debt settlement company—that acts as an intermediary between you and your credit card companies.

  • How it works

In this scenario, you cease making payments directly to the credit card companies and instead pay the debt settlement company, which in turn offers a lump sum payment to appease the creditors.

  • Considerations

This avenue is typically a poor choice for credit card debt relief because as you stop making payments to your creditors, your credit score will not only deteriorate, but credit card companies can also come after you with penalty fees and even legal action for failing to make payments. There could also be tax implications if a large amount of debt is forgiven, because the IRS may consider cancelled or forgiven debt as taxable income.

6. Bankruptcy

Bankruptcy should be reserved as a last resort in extreme cases of credit card debt hardship, as it has serious implications on your credit score.

  • The two most common types of bankruptcy are:
  1. Chapter 7 which forgives your debts on the condition that you liquidate some of your assets to pay creditors.
  2. Chapter 13 in which you enter into a court-arranged debt repayment plan that lasts three to five years, after which your debts are dismissed.

Chapter 7 bankruptcy is the only true way to avoid paying your debts, as it essentially wipes out outstanding debt entirely and offers a clean slate. Creditors still receive some means of repayment, whether in assets or through the repayment plan, and bankruptcy can offer a way out of otherwise inescapable debt.

Effects of Credit Debt Relief on Your Credit

Depending on which approach you pursue to achieve credit card debt relief, effects on your credit could range from nonexistent to severe damage. Since credit utilization (the amount of outstanding balances you have compared to your credit limit) makes up 30 percent of your credit score, carrying high credit card debt month after month is likely to have a damaging effect on your score.

The self-managed approach to reducing debt may not necessarily hurt your credit, so long as you continue to make regular payments. Credit card consolidation may help you tackle debt faster, possibly leading to a better score in the long run. Credit counseling won’t have a direct impact on your credit unless you decide to act on the advice given, such as signing up for a debt management plan. Depending on the parameters of the specific debt management program you sign up for, DMPs could have either a positive or negative effect on your credit.

On the more extreme end, opting for debt settlement through a third-party has the potential to hurt your credit when you stop making regular payments to credit card companies. Similarly, filing for bankruptcy could critically weaken your creditworthiness and should only be a last resort option, as a Chapter 7 filing stays on your credit report for ten years, while a Chapter 13 will remain for seven years.

The Bottom Line

The best approach to credit card debt relief depends entirely on the individual level of hardship you have in paying back credit card debts. It’s essential to consider the different options to reducing the strain of credit card debt that will work for your lifestyle. Whether you opt to take the do-it-yourself route or find yourself filing for bankruptcy, taking a committed approach to minimizing your debt could lend itself to better financial health in the long run.

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In an ideal world, your monthly cash flow would cover all your expenses — both expected and unexpected — and enable you to reach your financial goals. But financial situations are rarely ever that simple and straightforward.

What happens if something comes up in your life and your monthly budget nor your cash savings can handle the expense? There’s always the option to borrow, and while being in debt isn’t ideal, there are situations where it may make sense.

Before you take out your credit card and rack up a balance, look into other options. A personal loan might be a better financial bet.

What Is a Personal Loan (and Why Get One)?

A personal loan is a type of unsecured loan. “Unsecured” means you don’t put up collateral against the loan. When you take out a personal loan, you’ll typically receive the amount borrowed in a lump sum with fixed payment terms and a set interest rate.

Personal loans may be better options than credit cards because they offer better interest rates. Costing you less can be the biggest benefit, but a personal loan is also a different kind of credit account than a credit card. Managing various types of credit is one small action you can take to improve your credit score.

Keep in mind this is only true if you manage accounts and loans wisely. Here’s how to do so.

How to Manage Your Personal Loan Responsibly

Again, in an ideal world, you wouldn’t need to borrow money or wait a very long period of time to save up to buy what you want. But in real life, things happen and timelines shift. Taking out a personal loan can be an option. You just need to plan and act responsibly with the sum you borrow.

Don’t request more than you can reasonably afford to repay — and don’t take out a loan for a greater amount that what you truly need the money for. Not only do you need to pay that money back, but you’ll need to pay loan origination fees and whatever the interest rate on, making this option more expensive in the long run than simply using cash.

Create a repayment plan and stick to it. Know how much you need to allocate toward repaying your personal loan each month, and make it a priority in your budget. You may need to cut back on some discretionary spending, like meals out and shopping trips, in order to knock that loan out on time.

And before you take out any loan, make sure you fully understand the terms. Understand all the fees associated with the loan, and ask the lender if there are penalties for repaying the loan early.

What About Consolidating Debt with a Personal Loan?

Remember how it may make sense to take a personal loan over racking up credit card debt, thanks to a potentially lower interest rate? If you already have credit card debt across multiple cards and a high debt-to-income ratio, it may make sense to consolidate that debt with a personal loan.

This might be beneficial if you can get a lower interest rate on the personal loan than what you’re paying on your credit cards, and if you could afford the monthly repayment on the personal loan.

Like most other financial products, personal loans can be useful tools — but only if you wield them wisely and responsibly. Before applying for a personal loan, consider your overall financial health with a free credit score and report and consider if this is the right move for you.

Kali Hawlk is a freelance writer and the co-founder of Off The Rails, a free mentorship platform for creative women. She’s passionate about helping others do more with their money, their work, and their lives. Get in touch by tweeting @KaliHawlk.

From the Mint team: Everyone has different needs and desires as it relates to their financial situation. Mint’s new Loan Center has select personal loan and student refinancing options that may suit your needs (and have passed our sniff test!).

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There are legitimate ways to stop payday loans and cancel or pay less, depending on your specific situation. Here are some options to consider:

Negotiate with the lender: You can try to negotiate with the lender to work out a payment plan that is more manageable for you. Explain your financial situation and offer to make smaller payments over a longer period of time.

Consider debt settlement: Debt settlement involves negotiating with the lender to settle your debt for less than the full amount owed. This option can be risky and may impact your credit score, but it can provide relief if you’re struggling to repay your payday loans.

Talk to a Debt Pro: Consider talking to Damon Day about your situation. He’s a talented debt coach that gives people custom plans and solutions based on individual circumstances.

Seek credit counseling: Credit counseling can provide education and guidance on budgeting, debt management, and financial planning. A credit counselor can work with you to develop a plan to repay your debts, including payday loans, and provide support and resources along the way.

File for bankruptcy: Bankruptcy can provide legal protection from creditors and may allow you to discharge or reorganize your debts, including payday loans. However, it’s a serious decision with long-lasting consequences and should be considered only after all other options have been exhausted.

It’s important to note that there is no one-size-fits-all solution for payday loan debt, and the best approach will depend on your individual circumstances. Consider consulting with Damon Day or other debt solution providers to help you evaluate your options and determine the best course of action for your situation.

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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Source: getoutofdebt.org

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Alternatives to a debt consolidation loan

Home equity

One popular way people pay off debt is to use the equity in their homes. Home equity loans and home equity lines of credit (HELOCs) let borrowers use their homes as collateral in exchange for financing. Just be sure to factor in the risks if you’re considering this option. The lender can seize your home if you can’t make the payments.

Who this is best for: Borrowers who have built up equity in their homes.

Who this is not good for: Those unsure of their ability to maintain the monthly payments. 

Home equity loan versus debt consolidation loan: Home equity loans and HELOCs may offer lower rates than debt consolidation loans, though they come with more risks, since your home is used as collateral.

Debt relief services

Debt relief services, including debt settlement companies, offer another way to deal with your debt if you can’t qualify for a consolidation loan. These companies reach out to creditors and debt collectors on your behalf and try to settle the debt for a lesser amount.

If you decide to pursue debt relief services (perhaps as an alternative to bankruptcy), be aware that the fees these companies charge can be steep. Take your time to fully research fees, reviews and other details before applying. It’s also wise to compare multiple debt relief companies before you commit.

Who this is best for: Borrowers who are experiencing financial hardship and cannot pay their debt.

Who this is not good for: Those with a thin credit history or less-than-stellar credit score.

Debt relief services versus debt consolidation loan: Unlike debt consolidation loans, debt relief services aim to eliminate some of your debt without you having to pay it. With that said, pursuing debt relief is a risky move, and it can damage your credit score.

Credit counseling

Another option that can help you get debt under control is credit counseling. Credit counseling companies are often (though not always) nonprofit organizations. In addition to debt counseling, these companies may offer a service known as a debt management plan, or DMP.

With a DMP, you make a single payment to a credit counseling company, which then divides that payment among your creditors. The company negotiates lower interest rates and fees on your behalf to lower your monthly debt obligation and help you pay the debts off faster.

DMPs are rarely free, though, even if they’re done by a nonprofit credit counseling service. You may have to pay a setup fee of $30 to $50, plus a monthly fee (often $20 to $75) to the credit counseling company for managing your DMP over a three- to five-year term.

Who this is best for: Borrowers who need help structuring their debt payments.

Who this is not good for: Those with little wiggle room in the budget. 

Credit counseling versus debt consolidation loan: With a debt consolidation loan, you’re in control of your payoff plan, and you can often apply with few fees. With credit counseling, a third party manages your payments while charging setup fees.

Balance transfer credit card

With a balance transfer card, you shift your credit card debt to a new credit card with a 0 percent introductory rate. The goal with a balance transfer card is to pay off the balance before the introductory rate expires so that you save money on interest. When you calculate potential savings, make sure you factor in balance transfer fees.

Keep in mind that paying off existing credit card debt with a balance transfer to another credit card isn’t likely to lower your credit utilization ratio like a debt consolidation loan would.

A debt consolidation loan is also going to offer higher borrowing limits, enabling you to pay off more debt, as well as fixed monthly payments, which make it easier to budget and stay disciplined with paying off debt.

Who this is best for: Borrowers who can pay off existing debt quickly.

Who this is not good for: People with a young credit history or a less-than-average score. 

Balance transfer credit card versus debt consolidation loan: Balance transfer cards are often the best choice for borrowers who have the means to pay off their debt within 18 months, which is a standard 0 percent APR period. If you need longer to pay off your debt, or if you have a lot of debt, a debt consolidation loan is a better choice.

Source: thesimpledollar.com

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It’s a question that many people have on their minds as they begin to seriously consider their finances: how do I raise my credit score, or how do I fix my credit? Though credit scores may seem shrouded in mystery – how they’re calculated, which ones are used – consumer credit scores tend to follow a few common principles.

In this post, we’re explaining some simple tricks to raise your credit score. 

Raising your credit score can take time. After all, credit scores are a measure of how trustworthy of a borrower you’ve been over the years. The good news? You can get started on these credit tips today. 

Let’s start with the basics of how to improve your credit score.

How to raise your credit score

Raising your credit score is important, but you might not have a solid idea of what exactly your credit score is. Don’t worry; it’s not as complicated as you might think.

Your credit score is basically a measure of how reliably you pay back money that you’ve borrowed.

There are two main models that credit reporting bureaus use to measure your credit:

  • FICO
  • VantageScore

The three bureaus that do the reporting are:

  • Experian
  • Equifax
  • Transunion

Each of these bureaus receives information from various financial institutions you’re involved with, and that information is what determines your credit score.

You’ll generally have a better score if you’ve:

  • Consistently paid off loans.
  • Kept your credit usage low.
  • Stayed on top of all your financial responsibilities.

Both metrics range from 300 to 850, with most scores above 700 considered good to great. If your score is below that — or significantly below that — it can be difficult obtaining a loan at a good rate, or even obtain a loan at all.

Here’s what you can do to boost your score if you do find yourself with a lower rating than you’d like. 

1. Ask for (and receive) a credit limit increase

If you’ve been regularly making required payments on your credit card, you may want to try asking the credit card company for a credit limit increase.

What to consider before moving forward:

  • You wouldn’t necessarily want to do this to finance a purchase you otherwise wouldn’t have been able to make.
  • But if your monthly balance is relatively steady, you could decrease your utilization rate (a good thing) by increasing your credit limit.

For those who may not know, the credit utilization rate is the amount of credit available to you that you’re actually using. It’s basically your balance divided by your credit limit. So, if you increase your credit limit and keep the balance the same, the utilization rate will be lower. And that can translate into how to improve your credit score.

2. Pay your bills on time

One simple way to get started building solid credit is to start paying bills on time. Among the many different sources of data that major credit reporting bureaus use to assess your creditworthiness, whether you pay for regular expenses on time is pretty important. 

It’s not hard to see why: if you have a good track record regularly making rent payments, that probably means it’s more likely that you’ll be able to make regular payments on a loan. 

The trick, however, is that you may need to connect your bank account to one of the credit reporting agencies’ services. If you’re curious, call or visit the website for Experian, Transunion, or Equifax to see whether you can have your regular bill payments factored into each of these bureau’s tabulation of your score. 

*Pro-tip: if you have a hard time managing your bills:

  • Make a central list where you itemize each bill you have — rent, water, gas, electric, internet — and what day each one is meant to be paid.
  • Or, even easier, just download the Mint app, which can remind you about upcoming bills and keep track of the money you spend on bills each month. 

3. Show you can handle different kinds of debt

It’s probably not a good idea to run out and take on additional debt for the sake of it, but if you’re in need of a type of loan you haven’t used before (say, an auto loan for a new car, or a personal loan to consolidate credit card debt) consider taking it on and make regular payments on it; you may see a bump in your score.

Lenders want to see you can handle different types of debt, so adding another type of loan and paying it down could have a positive effect on your score.

Here’s an example. If you’ve been paying down student loans (generally, these fall into the “installment loan” category) but don’t yet have a credit card (generally, these fall into the “revolving credit” category), you could see a score increase just by opening that credit card account and paying off your balance regularly.

4. Open a new account and make on-time payments

If you need additional credit, opening a new account and handling it responsibly (making on-time payments on it, not borrowing more than you can afford) can have the effect of increasing your score.

Remember, though, that opening a new account you can’t handle (where you miss payments and/or take on more debt than you can afford) will likely have the opposite effect: a score decrease. So, it’s a good idea to proceed responsibly.

How to keep your credit score high

Once you’ve got your credit score near where you want it, it’s important to do your best to keep it in good standing. By keeping up the habits listed above, you can ensure that your credit stays relatively stable. However, it’s good to note that, in some cases, credit can fluctuate. 

Don’t be surprised if you see your credit score dip, then raise up again from time to time.

For example, maybe one month, you use a higher amount of your credit utilization due to a few unforeseen expenses. This isn’t the end of the world, and with continued responsible debt management and credit usage, your score should recover. 

In general, however, here’s what you can do to maintain a high credit score once you’ve got it. 

1. Close accounts with care and caution

“I have too many credit cards” is something you may have heard someone say or even thought to yourself. And for many, that may be the truth. But having several credit cards, in and of itself, won’t necessarily lower your score. 

Though closing credit card accounts or doing a balance transfer may seem like it would boost your credit score because it’s simplifying your life or making things more organized, it can sometimes have the opposite effect. That’s because when you close an account, two things happen:

  1. You lose the entire line of credit you had, which may decrease your utilization rate (see the 1st tip above).
  2. You’ll stop having that account continue factoring into the average age of your accounts.

Typically, scores want to see you’ve held several accounts open and in good standing for a long period of time.

Here’s a big caveat, though: there are still plenty of good reasons to close accounts, credit cards or otherwise:

  • Maybe you can’t afford the annual fee or the rewards just don’t make it worth it anymore.
  • Or maybe you’re struggling with credit card debt and want to consolidate it into a personal loan.

The important thing to remember is this: if there’s no good reason to close an account, it’s sometimes wiser to keep it open. 

If you do want to close an account, however, don’t worry; the ding to your credit will likely be minor, and it’s likely to recover with time after continued responsible use of the other lines of credit you do still have open. 

If you’re considering moving your balance, shop balance transfer credit card deals and personal loan offers from our partners.

2. Stay on top of your personal finances with Mint

Your credit score is just one metric that helps you measure your personal finances.

You should also keep tabs on other important aspects of your financial well-being, including:

  • Healthy credit
  • Well-kept budget.
  • Solid debt-to-income ratio
  • Steadily growing savings

Mint allows you to do that. By aggregating your financial information — including everything from investments to upcoming bills — into one convenient dashboard, you can have a bird’s-eye view of your financial health.

Knowing when rent, bill payments, credit card payments, and loan payments are due each month can help you raise your credit score and stay on top of it while also knowing how much you have leftover to budget for other areas. 

Remember, there’s no one magic bullet to build your credit score fast. The above credit tips are just some of the ways you might raise your credit score over time and keep it high. However, lasting, meaningful score increases come from showing consistently strong credit habits.

In other words, don’t forget the fundamentals: pay your bills on time, don’t take on more debt than you can afford and be careful about applying for too many accounts over a short period of time.

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