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Last week we explored the impact defaulting on loans has on your credit reports and credit scores, and how it can leave you on the wrong end of a collection lawsuit. You can read that article here.
Today I’m closing out this 2-part series by exploring the impact of letting your auto loan and your home go into default.
Transportation
Unless you live in a city where rapid transit is a viable transportation option or you can ride your bike to work, you’re probably going to need a car. And no, public transportation isn’t really a realistic alternative in most large and expansive metropolitan areas. You’re going to need your car to get to work, chauffeur the kids, do your shopping, etc.
If you stopped making your car payments today, your car would be gone in 60-90 days. That’s a much faster response from a jilted lender than you would see with any other type of loan. It normally takes 6 months for a credit card issuer to charge off your balance. And, you’ll see below that not paying your mortgage lender doesn’t lead to immediate homelessness.
Bottom Line: In my opinion, defaulting on your auto loan is going to leave you with more problems than any other loan default. You can live without a credit card, but you can’t live without transportation to earn a living and take care of your family.
Housing
I know what some of you are probably asking, “Why wouldn’t you pay your mortgage first? You need a place to live, right?” You are absolutely correct. You do need a place to live. The good news is that even if you stop paying your mortgage today, you’ll have a place to live for probably the next 12-24 months.
It’s taking forever for lenders to begin foreclosure proceedings and even if/when foreclosure proceedings do start, it doesn’t mean you’re getting kicked out of your house. That’s the next step.
I’m sure we’ve all heard the stories of homeowners refusing to pay their mortgages and living rent-free for years before the lender has them evicted. In fact, there are even examples where the mortgage lender or the investor who has purchased the home out of default actually pays the former owner to leave.
I’m not suggesting this is the right thing to do; I’m just pointing out the realities in the mortgage default world right now.
Bottom Line: Defaulting on your mortgage is going to eventually cost you your home. But, that’s going to take some time and you may be able to use the extra money from the mortgage payment you’re not making to pay down/off other more expensive credit card debt.
Financial Burden
Financially, any default is going to sting, but the pain is variable across loan types.
For example, if you default on a car loan, the lender is going to pay to repossess the car and then probably liquidate it at auction. You’ll be held liable for any deficiency that remains after the car is sold. That could be as little as a few thousand dollars, unless you borrowed a ton of money to buy a quickly depreciating model.
Defaulting on a mortgage loan is going to lead to the same type of financial burden, just a much larger dollar amount. Once the house has been liquidated, likely for much less than you owe on the loan, you may or may not be liable for the deficiency balance. It’s not that cut and dry though, and you’ll want to speak with a lawyer and even a tax advisor about it.
Defaulting on a credit card is a different animal. There is nothing to repossess, which means there’s nothing to liquidate and apply toward your balance. You owe it all, plus interest.
Even when you default, the credit card issuer can still charge you interest and apply late fees. When they finally sell the debt to a collection agency, they can also charge interest. And, if they are successful getting a judgment against you, then yes, more interest can accrue, too. Use Mint’s loan calculator to see how long it will take to pay down each liability.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling. 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. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.
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Just when you think you’ve got this whole credit thing down, some new credit-related phrase creeps into the industry’s vocabulary: DTI ratio, APR, amortization, and the list goes on . Let me introduce you to the world of mortgage credit reporting, which is very different than just “regular credit reporting.” There’s an entire world of intermediary credit reporting companies called Mortgage Reporting Companies that service the massive number of mortgage lenders and brokers. Follow me…
How Mortgage Lenders Gather Your Credit Data
When you apply for a credit card or an auto loan, the lender will buy one of your three credit reports directly from one of the three credit reporting repositories; Experian, Equifax or TransUnion. They’ll then use that information, and the score they bought at the same time, to make their approve/deny decision and set the terms of your new account. That process occurs tens of thousands of times every single day.
When you apply for a mortgage loan, the game changes. Mortgage lenders don’t typically buy one of your credit reports — they buy all three of them. And, if you’re applying jointly with a spouse or someone else, the lender will buy all three of their credit reports, too. So, that’s 6 credit reports and 6 FICO scores (FICO is still the score used in the mortgage industry) of which the lender or broker will take possession.
What is a Residential Mortgage Credit Report (RMCR)?
Now, that’s a lot of credit reports and a lot of pages. It’s also a ton of redundant information. Think about the joint credit card you have with your spouse. That likely shows up on all 6 of your collective credit reports. Does the mortgage lender really need to see the same account 6 times? Of course they don’t.
Because of the large amount of credit report data required by mortgage lenders, the need for an intermediary service exists. This service accesses all of the credit reports required by mortgage lenders from the big 3 credit bureaus and then consolidates them into one easier-to-read credit report. This credit report is called an “RMCR,” or Residential Mortgage Credit Report, and the companies that provide them are referred to as mortgage reporting companies.
These companies act as brokers or resellers of the data maintained by Experian, Equifax and TransUnion. The mortgage lender will subscribe to their services and commonly request a credit report on a mortgage applicant or applicants. The mortgage reporting company will then go to the big 3 credit bureaus on behalf of the mortgage lender and buy the applicant’s credit reports and FICO scores.
But before they deliver this large amount of information back to the mortgage lender, they’ll combine the information into one RMCR. The credit score information will be displayed in one section, the negative data will be displayed in another section, and things like inquiries and personal identification information will be displayed in their own sections. This merged credit report (often called a “Tri-merge”) is considerably easier to read than reading six separate credit reports is.
How Can I Get a Copy of My RMCR?
If you’ve applied for a mortgage-related loan, you probably have your RMCRs in your closing paperwork, as mortgage brokers and lenders will often give you a copy. It’s a very valuable aggregate of information because it’s a comprehensive study of all of your credit reports and it includes your actual FICO scores, along with the 4 reasons why each of them wasn’t higher.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling. 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. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.
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John Ulzheimer, a MintLife personal finance expert, is answering questions straight from fans of the Mint.com Facebook page. Here’s what he has to say about short sales and credit scores:
Q1: How exactly does short selling your home impact your credit and for how long?
A short sale is a more recently popular way to dispose of an underwater mortgage, which is a mortgage where you owe more than the home is worth. According to some sources, about 30% of mortgages are currently in this situation, including the mortgage belonging to yours truly, a humbled credit expert.
A short sale occurs when a buyer makes an offer on your home but that offer doesn’t cover the amount of loans taken against the house. So, if you owe $250,000 but are offered only $200,000, then you’ve been made a short offer. If your lender agrees to accept the offer to dispose of the home, then the home has been sold short. The good news is you’re out of the loan and don’t owe that $50,000 deficiency balance.
The news isn’t all good. Short sales are reported to the credit reporting agencies as a settlement, which is an accurate depiction of the loan. The lender settled for less than your really owe, hence the settlement credit reporting. And, yes, settlements are considered to be derogatory by credit scoring systems.
Don’t believe the marketing by real estate agents that short sales are better for your credit than foreclosures. That’s not true. Settlements will remain on your credit reports as long as foreclosures do and they have the same impact to your credit scores. The only difference is if the lender doesn’t report the deficiency balance along with your settlement. If that’s the case, then the impact to your credit scores isn’t quite as bad as a foreclosure.
Q2: Why does not paying our bills drop our credit, but paying them does nothing? I shouldn’t have to have debt to get credit, it seems stupid and backwards!
I appreciate your frustration when it comes to credit ratings/scores. They are maddening if you expect them to function like common sense suggests. This isn’t going to change your mind but credit scores are completely driven based on what’s predictive of your risk as a borrower. Some things matter and some things don’t.
Now, having said that, your comment about having debt being necessary to get credit is absolutely incorrect. In fact, not having debt is much better because of the infamous “DTI” ratio. DTI, or debt-to-income, is the amount you pay each month to satisfy debts, relative to your income. The fewer debts you have, the better your debt-to-income percentage and the more likely you are to be approved for large loans, like mortgages.
Additionally, I can assure you as someone who spent seven years with his hands deep inside the FICO scoring system, that paying your bills is handsomely rewarded by FICO. The most important factor in your FICO score is your payment history. The absence of negative information, which means you always pay your bills on time, is worth 35% of the points in your scores.
The issue of having debt in order to have a good credit score or get more credit is widely misreported, mostly by people who simply don’t understand credit scoring. You don’t have to have one penny of debt (or ever had one penny of debt) to have FICO scores well into the 800s. FICO scoring has no memory, so they don’t know what your debt was yesterday, the day before, or 5 years before.
Now, I know what you’re thinking: When you apply for credit you’re getting into debt. That’s incorrect. Every single credit card you have ever opened starts off with a $0 balance. And, if you pay your bill in full each month, then you never have credit card debt.
Taking out loans, such as mortgages, auto loans, student loans or personal loans, certainly does mean you’re getting into debt. However, this is certainly considered a very different type of debt than that vile credit card debt, which, incidentally, is much less as a country than our student loan debt. And, FICO weighs that installment form of debt very differently than it weighs credit card debt. It’s quite easy to have great FICO scores even with large amounts of installment debt.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling. 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. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.
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Whether you like flashy sports cars or practical minivans, shopping around for cars can feel like a fresh start. The problem is, most people can’t afford to pay out of pocket.
So how do you get a car loan to help turn your motorized dreams into reality? Like most big purchases, creating a thorough plan is a must. Understanding all your financing options, how a car loan will affect your credit, and how you can get the most bang for your buck will save you headaches—and debt—down the road.
Have a specific question in mind? Use the links below to get straight to the information you need:
What Are the Steps for Getting a Car Loan?
Throughout the financing process, remember that you’re shopping for two different products: the car and the car loan. Before setting foot on a dealership, take the time to weigh all your options so you feel 100% certain that investing in a new car is the best decision for your financial health as a whole.
Start with a Budget
If you don’t have a monthly budget, it’s time to create one. Assess all the monthly debt payments you currently have—such as rent, student loans, and credit card bills—and then figure out how much you’ll be able to afford on a monthly car payment.
Your car payment calculations should include not only the amount paid back to the lender, but also gas, insurance, and maintenance fees. If you come up with a number that won’t work with your income, consider saving for a larger down payment so you won’t have to take out a large car loan.
Check Your Credit Score
Request a copy of your free credit report to determine how your score will affect the loan shopping process. When doling out the best rates, lenders look for a score of 760 or higher and will give you a better deal the higher your score. Payment history, debt-to-income ratio, and the history of your credit lines all affect that magic three-digit number.
Start by fixing any inaccuracies you find on your report that could be dragging down your score. Within a month or two, you should see the mistakes removed which may make your number rise. If you aren’t in a rush to purchase the car, work on bringing your score up to help you get more favorable loans when it does come time to apply.
If you don’t have the time or ability to raise your credit score before purchasing the car, you could find a co-signer for the loan. Consider asking a parent, friend, or family member with a good score to co-sign. It’s important to remember that the co-signer is responsible for paying back the loan if you’re unable to make the monthly payments, and the credit score of both you and the co-signer will be affected by late or missed payments.
Explore All Your Loan Options
There are two main ways to get a car loan: direct lending and dealership financing. After picking out the car you want to buy, consider which option makes the most sense for you.
Direct Lending
Direct lending entails receiving a loan from a bank, credit union, or online lender. You’ll agree on the amount of the loan and the finance charge, or interest rate, that you’ll pay on the loan. Some things to note about receiving direct lending:
Banks often offer competitive interest rates but are more exclusive about who they offer a loan to. It is more likely you will need to have a good or excellent credit score to obtain a desirable loan from a bank. You don’t usually have to be a member at the bank to apply for an auto loan or get pre-approval.
Credit unions may have an easier loan application process and lower interest rates. However, you must be a member to apply for a loan.
Online lending websites often contact several lenders at the same time so you can easily obtain competing loan offers. Just like a bank or credit union, you will determine the terms of the loan with the lender. Make sure to always do background research on each lender you contact to ensure they aren’t predatory lenders.
Dealership Financing
Some dealerships offer on-site financing, which means you agree on the loan amount and interest rate with the dealer. Here are some things to keep in mind:
The dealer will gather all your information and send it to one or more prospective auto lenders, who will then give the dealer a “buy rate.” This could be higher than the interest rate you negotiate because it could include a compensation fee for the dealer handling your loan.
Because you are treating the dealership as a one-stop-shop for all your car needs, you might be offered special deals or rebates that include low interest rates.
Get Pre-Approval
Whichever financing option you decide to pursue, don’t just take the first loan offer that comes your way. Take the time to shop around and get competing rates through the pre-approval process. This entails asking multiple lenders to look at your credit report and draft up the loan amount and interest rate they’d be willing to offer you.
Pre-approval may give you more bargaining power with a dealership than if you went in without a financing plan. You also might be able to hunt down the best deals because lenders are competing for your business. Remember, just because you receive pre-approval from a lender doesn’t mean you have to take their offer.
An important element of loan shopping is keeping your pre-approval applications and final loan applications within a short window of time. Every time a lender looks at your credit report, it triggers a hard inquiry. If you build up too many hard inquiries, it could lower your credit score.
Fortunately, Turbo uses VantageScore, one of the common scoring models, which offers a 14-day grace period. If multiple hard inquiries are made during this time period for an auto loan, it will only be counted as a single inquiry—thus protecting your score.
Negotiate the Total Cost
Once you’ve found a lender that you want to finance your car loan, consider negotiating the final deal. This includes:
Length of the loan. Typically, a shorter loan will have higher monthly payments but lower interest rates. A longer loan will have smaller monthly payments and higher interest rates.
APR and interest rate. Depending on your pre-approval offers, you might be able to negotiate for a lower interest rate. This means you’ll pay the lender less to borrow the money over the length of the loan.
Additional add-ons. Extended warranties or additional insurance can raise the total cost of the loan.
Special offers or discounts. If you’re getting your loan through a dealership, use the negotiation process to ask about any manufacturer rebates that could get you a lower price on the car, therefore reducing the amount of money you need to borrow.
Close the Deal
Before driving off into the sunset, make sure to tie up any loose ends that could impact your car loan. Per the federal Truth in Lending Act, lenders are required to provide you with important information about your agreement so you can verify all the terms match what you discussed.
Sign all paperwork before taking your new car home, and make sure you have multiple ways to contact your lender if you ever have any questions. Whether you make online or by-mail monthly payments will be discussed during the negotiation process. It’s crucial that you pay these back on time every month to avoid severe late fees or repossession of your brand new set of wheels.
Will Trading In my Car Affect an Auto Loan?
If you plan to trade in your current car before purchasing a new one, it could lower the total cost of your car loan. The credit or cash you receive from the trade-in can be put to use as a down payment, thus reducing the amount you need to borrow from a lender.
Before trading in, make sure you know whether the total amount you still owe on your car is less than what it’s worth. Carrying an old auto loan onto a new auto loan may raise your interest rates and limit your options for the best deals. While trading-in can significantly help some buyers, it may not always be the best option if you want to get a favorable loan for your new vehicle.
Can I Get a Car Loan with Bad Credit?
Despite many lenders being wary of borrowers with poor credit scores, there are still options available to obtain a car loan. As mentioned earlier, paying off any existing debt, finding a co-signer, or saving for a larger down payment are all ways to help offset bad credit.
However, if the purchase can’t wait, lenders may still offer you a loan—but likely at a high price. Interest rates and additional fees skyrocket for borrowers with less-than-ideal credit scores, and it may dig you into a deeper hole of debt than you started with.
If you think you might be late on a payment, contact your lender immediately to discuss the possibility of adjusting your payment plan. While most of the original terms you negotiate will likely stay the same, you may be able to make a delayed payment. But if you consistently default on your payments, the lender is allowed to repossess your car, sell it, and use the money to pay off your remaining debt.
Despite its complexities, getting a car loan can be a straightforward process if you make a strategic plan. Assess your current financial health, loan shop, and negotiate a deal that suits your needs; in no time you’ll be able to hit the streets with a shiny new toy and feel confident in your abilities to manage debt.
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Credit cards can do a variety of things: Buy items, facilitate auto-billing, earning rewards, and more. Some might even call them the Swiss Army Knife of the financial world.
But, can credit cards be used to help build a retirement nest egg? The answer is, yes.
There is a small handful of credit cards with rewards programs structured to allow you to deposit cash rewards into retirement accounts. These rewards are in lieu of cash back, airline miles, or points.
These cards, while relatively unknown, are very attractive products because they offer what no other rewards program offers: Wealth building capabilities.
Unfortunately, the number of cards that offer retirement rewards is very small. In fact, I was only able to find five of them. The cards offer rates and terms comparable with garden-variety rewards cards and some offer slightly higher credit limits than their non-reward peers.
American Express and Fidelity Brokerage Services
American Express has a partnership with Fidelity Brokerage Services and backs three such investment credit cards.
These cards allows the holder to convert the rewards points earned into cash deposited into a brokerage account, a 529 college savings plan or other retirement accounts, like an IRA. They also pay 2% cash back for your retirement account compared to only 1% for traditional cash back rewards programs.
Visa Signature
If you frequent merchants that don’t take the American Express card, then no worries. Visa partnered with Fidelity to offer an investment rewards card, Visa Signature credit card.
This card is more like a traditional cash back card and pays 1.5 points for every dollar you spend up to $15,000 and then 2 points after. This Visa card can be used to fund brokerage accounts, 529 accounts and IRAs.
And, my favorite thing about these American Express cards and the Visa card? No annual fees.
Upromise, Barclays Bank and MasterCard
For those of you who live and love Upromise, you’ve got an option too. Barclays Bank issues a Upromise branded MasterCard with tiered cash back rewards, depending on where and how you use the card.
The cash back can be deposited into a Upromise 529 college savings plan, into a high yield savings account or can be credited toward a Sallie Mae serviced student loan.
Credit Card and Retirement Savings Rules Still Apply
When choosing whether or not to use any credit card, including the aforementioned investment reward cards, be aware that the card issuer will go through their normal underwriting and approval process. These rewards cards tend to be reserved for people who have strong credit reports and credit scores.
When using the cards you’ll want to try your best to spend responsibly. If you revolve a balance, then you’ll start paying interest. When you pay interest on a rewards credit card you’re essentially funding your own rewards program with the interest fees.
Finally, these investment rewards cards are great for supplemental retirement efforts. They are not designed to be your only means of retirement funds.
Fifty dollars here, fifty dollars there will add up over a long period of time but it’s not enough to be your nest egg. And, while these investments can grow over time, they can also lose value because you’re going to be choosing what stocks or funds to buy with the value deposited into an IRA or a brokerage account.
If you’re not comfortable with risk or red numbers then stick to standard cash back credit cards.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling. 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. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.
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Agreeing on a single set of goals as a couple can be challenging. While it’s possible that you’ve managed to settle down with someone that happens to be your exact money twin, what’s more likely is that you and your partner will have different money philosophies. As you work towards building your life together, you’ll have to learn how to mesh those differing viewpoints so that you can create joint financial and life goals. These tips will help you do just that.
Commit to Complete Financial Honesty
If you want to create financial goals that work for you both as a couple, you are going to have to be completely honest with each other about money. That means talking about your current financial situation, like how much money you make and how much debt you have. Even if you plan to manage your finances separately, your financial state will have an effect on each other’s lives. It’s better to be honest from the beginning than to have to deal with unexpected surprises later on.
It also means being honest about lifestyle goals and preferences like whether you want to have kids, where you want to live, and how often you like to go on vacation. Your partner should know what a good life looks like to you and vice versa. That way you start to have an idea of what you both want and why you want it.
If you aren’t used to having these kinds of raw conversations about money, it might be uncomfortable at first. But the more #RealMoneyTalk convos you have with your partner, the easier it will get.
Be Prepared to Compromise
If you have a partner, chances are you are already used to doing this, like whose parents’ house to visit for Thanksgiving each year. Deciding on joint financial goals as a couple works the same way. As much as we all wish that we could fit in all of our financial goals in one shot and never have to choose, the reality is that we have to prioritize. There will always be limits to what we can feasibly accomplish financially especially in the short term.
You and your partner will likely have some differing ideas of how you want to spend your money or how quickly you want to accomplish your goals. Even something as simple as where you want to live can be a source of disagreement that you will have to work through. The key here is to be open to modifying your original expectations so that you can fit in the things that matter the most to both of you.
Outline Your Life Goals as Individuals and as a Couple
Taking the time to figure out what you both want as a couple and what you want as individuals helps give both of you perspective. Before you get together to agree on your joint financial goals, you should each take some time separately to write down your goals beforehand. Each of you should make a list of your own personal goals and the goals that you are hoping to accomplish as a couple. The more inclusive the list is, the better. You can always cull the list later.
Using your two lists as a starting point, get together and start talking through your goals. Do you have any goals in common? Are there goals on there that surprised you? This exercise is a great way to learn some new things about your partner that you might not have known about.
Remember that while you’re only working on financial goals, you’ll want to consider things that may not seem like a financial goal. Many of the things that we think of as bucket list items or life goals, like climbing Kilimanjaro or cruising in retirement, are actually financial goals in disguise. It will cost money to actually make them happen. So be sure to include the not so obvious financial goals in your discussion.
If you find that you and your partner are worlds apart, don’t fret. Figuring out where you both stand is just the beginning. You can always choose to compromise later. Financial goals change over time and the key is to keep them growing and changing together.
Decide Which Goals Are Most Important to You
Once you have a comprehensive list of goals that you’re both working from, it’s time to start prioritizing. That means you are going to each have to rank which goals matter the most to you and which matter the least. You’ll also want to consider the urgency of the goals and how long it will take to accomplish them.
Prioritizing your goals make it easier to decide which ones to focus on first. It also makes compromising a lot easier because you can choose what is most important to you and what you are willing to give up in order to have it.
Starting from a place of wanting to fit in as many of each other’s top priorities as possible will make it that much easier to decide on your joint financial goals. And if you aren’t able to fit in some of your high priority goals right at the beginning, it gives you both something to work towards as a couple.
Use Real Numbers to Define Your Goals Where Possible
As you work through deciding which financial goals you want to focus on, take some time to estimate exactly how much those goals are going to cost. It’s really easy to get carried away with goals and underestimate how much money or time it will take the accomplish them.
Taking the time to attach a real number to your financial goals makes for more realistic goals.
Use those real numbers in your actual budget to see how your financial goals will affect your day to day lives. A goal that seemed reasonable in theory could turn out to be unbearable in practice because of how it affects the rest of your life. If you set both of your expectations in advance, it will make it a lot easier to stick with your financial goals.
Have Regular Check-Ins to Make Sure You Are On Track
Deciding which goals you want to prioritize as a couple and fitting them into your budget is just the beginning. As time goes on, you might want to add new goals in or you might find that one or both of you don’t actually want the things that you thought you wanted when you initially set your financial goals. That’s okay. People change and goals change too.
Having regular check-ins with each other about your goals will help you adjust your goals as you go so that they continue to reflect your financial goals as a couple.
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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:
The debt snowball approach — paying off the credit card with the smallest interest rate first while making minimum payments on other debts.
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:
Chapter 7 which forgives your debts on the condition that you liquidate some of your assets to pay creditors.
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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Are you tired of having credit card bills? Do you wish you could get out of debt once and for all?
If you want get out of debt permanently, first consider this: Debt is not a financial problem. Hard to believe, but true.
Debt is actually a personal problem that masquerades in financial clothing. That is why so many people have persistent problems with debt. They look outward for financial solutions, when the true solution is found by looking inward.
Planning a Permanent Debt Solution
Defining your debt problem correctly is critical to solving it.
That is where most debtors run into trouble. They mistakenly define debt as a financial problem and develop financial solutions. That is why their debt returns shortly after paying it off. They fail to identify the root cause of debt, opening the door to repeating the vicious cycle.
For a debt solution to be effective your plan of attack needs to be based on principles that actually work. Unfortunately, when you just pay off your balances you relieve the pain, but the underlying condition that put you in debt in the first place still lurks under the surface, ready to return.
Let’s face it, the real causes of overspending are your personal habits and attitudes. In other words, the true solution is personal — not financial. That is a key, and understanding this principle is what will make or break your success in slaying the debt monster for good.
Masking The Problem
When you get a headache what is the logical response? You reach to the medicine cabinet for immediate pain relief. Unfortunately, the various pills do nothing to cure the underlying disease: they merely treat the symptom. The cause could be excessive stress, brain cancer, dehydration, eye strain, or any number of other issues. By taking a pill you’ve treated the symptom — not the underlying cause.
The same is true with debt. Everyone knows they need to make more and spend less to solve their debt problems. So they pursue financially driven solutions to relieve financial symptoms. It seems logical on the surface.
Whether you choose to consolidate your credit card debt to lower interest rates or you choose any of the quick-payoff strategies (inheritance, gift, sell an asset, bankruptcy, home equity line of credit, or refinancing), the reality is you are treating the symptom and not creating a lasting cure.
Your financial problems are merely the accumulated reflection of the many small financial mistakes you are making on a daily basis — often without knowing any better. That’s why teaching a debtor to spend less and earn more is like telling someone to lose weight by eating less and exercising more. Everyone already knows that is the answer. The difficult part is not knowing what to do, but actually getting it done. The solution lies in your daily habits and attitudes.
[Related Article: 3 People Who Dug Out of Deep Debt]
Money Breakthroughs
I first discovered this approach to debt recovery in my work as a money coach. I started out making the same mistakes as everyone else. I thought debt problems were financial, so I coached my clients to financial solutions. The lackluster results proved it was the wrong approach.
The breakthrough came when I noticed my wealthy clients had mirror opposite attitudes and behaviors compared to my get-out-of-debt clients. For example:
My wealthy clients viewed their financial situation from a position of self-responsibility, whereas my debt clients were victims of their finances.
My wealthy clients planned their finances, but my debt clients had no plan.
My wealthy clients organized their plans around delayed gratification, whereas my debt clients pursued instant gratification.
My wealthy clients associated their self-worth with intrinsic values, while my debt clients associated self-worth with extrinsic stuff.
These are just 4 examples from a long list of opposing traits. They are guidelines or tendencies that generally hold true. While there may be personal variation, on the whole the patterns were unmistakable. These mirror opposite attitudes produced mirror opposite financial results in life.
[Related Article: 7 Ways to Avoid a Debt Relapse]
Amazingly,when I applied these principles, coaching habitudes instead of specific financial actions, the debt problems solved themselves over time.
This is obvious when you think about it. Your daily financial decisions result from your habits and attitudes that drive those decisions. For example, consider the following choices and their obvious financial implications:
Do you buy fancy coffees throughout the day or do you make a pot of your favorite coffee in the morning and bring it with you?
Do you lease a new car every few years or maintain your reliable used car?
Do you dine out frequently or cook healthy meals at home?
Are you a minimalist or do you desire the latest designer fashions?
Do you shop to get what you need or do you shop for pleasure and recreation?
When you focus on financial solutions, you treat the symptom instead of the cause. When you focus on your attitudes and habits, you focus on the cause, and the symptom takes care of itself automatically without any self-discipline.
Let me be clear — this isn’t a quick fix. The results you produce from this approach will occur gradually over time. Just as it took time to accumulate the debt, it takes time to unwind it when you work with root causes.
However, the solutions are as permanent as the new attitudes and habits you adopt — and that makes all the difference.
The truth is the financial results of your life aren’t dependent upon how much money you make. Instead, they depend on how well you manage the money you already have. This article series will show you the easiest way to adopt wealthy habits and attitudes and be smarter with your money so that you can get out of debt — permanently.
[Related Article: 5 Ways to Get Out of Debt: Which Will Work for You?]
Todd Tresidder is a financial coach and consumer advocate. His unconventional take on worn financial topics has appeared in the Wall Street Journal, Investor’s Business Daily, Smart Money magazine, Yahoo Finance, and more. He’s authored 5 financial education books including How Much Money Do I Need To Retire?, Variable Annuity Pros and Cons, and the 4% Rule and Safe Withdrawal Rates In Retirement.
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Teenagers tend to have few financial obligations. They may need to work a part-time job to earn spending money, but generally, no one is expecting them to put food on the table or manage important assets. It’s usually understood that high schoolers don’t yet have the life experience or maturity for those kinds of responsibilities.
And yet, we allow them to take out tens and even hundreds of thousands in student loan debt before they turn 18. That’s a financial obligation on par with buying a home, entrusted to kids who can’t even rent a car. Unfortunately, it’s a reality for most young people looking to get a degree.
That’s why every student needs to be prepared for the harsh reality of borrowing so much money. The more prepared you are to pay back those loans as soon as possible, the less likely you’ll be struggling financially in your adult years. A strong repayment approach can mean the difference between a debt-free life in your 20s and a lingering debt burden in your 30s – and thousands in owed interest. Using a loan calculator with amortization schedule will show you how much your payments need to be in order to pay down the loan in a given time frame.
If you’re about to take out student loans or already have them, here’s what you need to know.
Know What Kind of Loans You Have
Student loans often get lumped into one group, but they can vary widely. The two main types are private loans and federal loans. Like their namesake, federal loans are offered by the federal government. A private loan is a loan offered by a private bank or credit union. Most students have federal loans or a mix of both federal and private.
Federal loans are considered a better option than private loans because they have more repayment and forgiveness options. They also tend to have lower interest rates.
Private loans often require a cosigner, someone who will take on the responsibility of paying off the loan if you default or can’t make payments. Most students have their parents act as the cosigner.
Write down what kind of loan you have, the account number, the interest rate and the amount you originally borrowed.
Know How Much You’re Borrowing
Many students sign up for student loans assuming they’ll be able to pay them off easily after graduation. Most don’t realize how much they’re borrowing until they’ve graduated and the loan comes due.
The best thing you can do for your future self is to look at how much you’ve borrowed so far, how much you’re taking out currently and how much you’ll need for the duration of your time in school.
In 2012, Indiana University started sending out letters to current students explaining how much they owed and how much they would have to pay each month after graduating. Those letters proved to be very effective, reducing how much students borrowed by more than 10%. Three years later, the Indiana General Assembly passed a bill mandating that all state schools release similar letters to their students.
Knowing how much you’ve borrowed will make you more aware of your financial reality, and motivate you to find alternate ways of paying for school. You may try to take more classes per semester and graduate early or apply for more scholarships and grants. Even working a few hours a week in the student library or behind the front desk at your dorm can make a significant difference.
Most students borrow the maximum amount they’re allowed, but that’s not always necessary. Do a projection of how much your expenses will be this semester, including rent, groceries, transportation, utilities, parking, books and other fees. If you end up needing less than you anticipated, tell your loan provider that you’d like to take out less. If you need the same, then stick with that amount.
Looking at your loans on a semester-by-semester basis can help you borrow more or less depending on your circumstances. Create a budget each semester and stick to it, so you can be confident in the amount you’ve chosen to borrow.
Know Your Interest Rate
Every loan has its own interest rate which depends on the kind of loan, when you borrowed and other factors. Interest rates for federal student loans are determined by the government, but private lenders are allowed to charge as much as they want. Currently, federal interest rates for undergraduate loans are 5.05% and graduate degree loans are 6.6%. In 2017, the average variable interest rate for a private student loan was 7.81% and the fixed-rate average was 9.66%.
Know You Can Pay Back Your Loans Early
If you have federal loans, you can start repaying them while still in college. If you borrow too much or find a lucrative part-time job, you can use some of your income to pay back your loans. Doing that now will mean lower payments after you graduate.
If you have private student loans that don’t allow early payments, you can still save money in a savings account and put that toward your loans once they become eligible for repayment.
Know If Your Parents Took Out Student Loans for You
It’s not uncommon for parents to take out loans either from the federal government or a private lender. Some parents do so without telling their kids, because they want to help fund their education. Even if your parents don’t expect repayment, it’s always good to have an idea of how much they’ve sacrificed to get you there.
Other parents take out student loans and expect their children to repay them, as well as any individual bonds they borrowed. As a student you won’t have access to your parents’ loan information, so you have to ask them for the specifics. If you know you’ll eventually be on the hook for any debt your parents took out, you need as much information about the loans as possible.
Ask Your Parents if Any of Their Financial Information Will Change
How much grant and scholarship money you’re eligible for is often dependent on your financial need. Your parents’ income is the single most important factor in determining that eligibility.
If your parents’ income doesn’t fluctuate, you’ll generally receive the same amount every year. If your parents get divorced or your single parent remarries, then your FAFSA could look quite different for the coming year. When my friend’s dad lost his job, she immediately qualified for more need-based grants the following semester.
Know When Your Loans are Due
Even if you’re a freshman in college, it’s important to know when your student loans will come due. Federal loans give you a six-month grace period after graduation, so you don’t have to start repayment until the fall if you graduate in the spring. Private loans have their own system determining when the first payment is due, which varies from lender to lender.
If you’re a senior in college and plan to graduate this year, it’s not a bad idea to look up when your first bill is due. You don’t want to graduate May 15 and find out you owe $500 on June 1. Knowing when that first payment will hit can save you months of worry, and help you create a repayment plan in anticipation.
Know That Student Loan Debt is Real Money
When you first take out student loans, it’s easy to feel like the amount you borrow is just a number. You won’t be forced to deal with it for years, so that $50,000 total doesn’t actually feel like $50,000 dollars. For a teen used to making minimum wage at a coffee shop, that amount is hard to wrap your head around.
But make no mistake, that money is very real – and you will have to pay it back eventually. Acknowledging the reality of your situation can help inform the decisions you make about applying for grants and scholarships, working a side job and managing expenses throughout the year.
Talk to a friend or family member who graduated college with student debt and ask them about their experience. They may be able to shed some light on the reality of living with debt after graduation.
Where to Find Help
The financial aid office at your university can help you suss out where your loans are coming from, how much you’ve borrowed and how to contact your lenders. Once you know who your lenders are, you can reach out to them for more specific information.
You can find a list of the loans you’ve taken out by checking your credit report, which you can do via AnnualCreditReport.com. There are three credit bureaus that publish credit histories, so you’ll want to check all three if it’s your first time looking at your report.
Some lenders may fail to report student loans on your credit, so don’t rely on that exclusively. However, if your credit report shows student loans or other loans that don’t look familiar, contact that lender. It’s possible for lenders to report student loans to the wrong person if you have a similar name or social security number.
If you know you’ve taken out student loans and don’t see them on your credit report, that doesn’t absolve you of the debt. Mistakes made by the lender will still affect you, so be vigilant.
The views and opinions expressed in this content are those of the author and do not necessarily reflect the opinion or view of Intuit Inc, Mint or any affiliated organization. This blog post does not constitute, and should not be considered a substitute for legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.
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Zina Kumok is a freelance writer specializing in personal finance. A former reporter, she has covered murder trials, the Final Four and everything in between. She has been featured in Lifehacker, DailyWorth and Time. Read about how she paid off $28,000 worth of student loans in three years at Conscious Coins. More from Zina Kumok