Debt Free

Yes, you can still consolidate mortgage debt, or get a mortgage to consolidate debt, even though the number of available lenders seems to be....well that seems to be consolidating too, as this lender and that either goes out of business, or rethinks their strategy altogether. Are we going to have any lenders left??

I was in a Bank of America branch the other day and overheard one of the bank managers explaining to a prospective mortgage refinance customer why Bank of America was in no danger of having the same sort of troubles as IndyMac or any of the other recently (or soon to be) departed. What was his reason for this revelation? He went on to explain that Bank of America was more selective when choosing their mortgage customers, and avoided those with credit problems that would go on to plague so many other lenders.

Upon hearing this bit of salesmanship, my first thought was “If that's the case, and it's worked out so well for you, why the hell did you buy Countrywide?” Seems like good old BofA would stick with what had worked so well in keeping them off the mortgage default express, rather than dumping $2 billion in cash and another $4 billion (at the time) in stock into the sick, California based, mortgage lender, Countrywide. Oh well, maybe the deal could still pay off for Bof A down the road. After all, greater minds than mine concocted it.

If you're looking for mortgage debt consolidation, you're after one of two things, depending upon your interpretation of the term. Either you have a first and a second mortgage and you want to combine them into a single loan, or you have high interest consumer debt, typically of the unsecured variety, and you'd like to roll it into a single, secured loan with a lower aggregate payment that all the little loans that preceded it. Either way, you'll be consolidating multiple loans into one (hence the term consolidation loan).

Here are some pitfalls you'll want to watch out for when getting one of these loans.

Mortgage Debt Consolidation Flag -

Using a small, unheard of mortgage company.
Don't do it. As we've recently seen, merely being a behemoth is no guarantee of safety, either. However, when you're consolidating loans, and anytime you're playing around with your mortgage in general, using a reputable company is of paramount importance. Make sure that their sterling reputation precedes them.

Mortgage Debt Consolidation Flag -

The “Pay Up Front” loan scam.
This loan scam is used for all sorts of personal loans, not just mortgages. It targets those with bad credit or folks with no equity in desperate need of a refinance; basically those debtors with no place else to turn. The legality of absolutely guaranteeing someone a loan never enters into the equation. The scam works like this. The lender claims they'll guarantee you'll be approved for the loan, but they require 2 or three months of payments in advance. Don't write the check!! You'll get no loan, and they'll be on a beach, earning 20% (on your money).

Mortgage Debt Consolidation Flag -

High, hidden, and inflated fees -
You could well be required to pay some fees when getting one of these loans, but in many cases the fees go far beyond reasonable. On many occasions you'll be asked to pay points, but also many other fees, most of which go directly to enriching the lender. If you're getting a loan from a broker, and your credit is decent, don't pay an origination fee.

You may not know this, but the broker is already getting a fee from the lender for your loan. Don't facilitate the broker's double dipping by paying origination fees on your consolidation loan.  If your credit's good, they didn't have to do all that much to get you the loan. On the other side of the coin, if your credit is shot, you could reasonably expect to pay a fee, because the broker probably had to work their tail off to get you financed with a decent interest rate.

Don't pay a separate application fee, credit report fee, and appraisal (don't forget to get a copy of the appraisal, they have to provide you one by law) fee. In most cases the application fee will contain the costs for the appraisal and the credit report. If you pay all three, you're just lining the lender's pockets (or sending their kids to Harvard). Another trick used by some lenders is marking up the fees that they're asking you to pay. You should pay fees such as wire transfer fees or title fees, but you should not allow the lender or broker to mark them up.

Mortgage Debt Consolidation Flag -

The Over Eager Lender –
If your lender seems too over the top, especially of you have bad credit, take a step back and look at all the details one more time. You may just have the employee of the year at your disposal, but you could also be headed for trouble. This type of lender or broker can often be leading you into a trap known as…

Mortgage Debt Consolidation Flag -

The Old Bait and Switch –
Mortgage lenders aren’t the only businesses to be guilty of this little scheme. One thing that could tip you off that your lender may be a bit sleazy is if they treat your loan papers as a “living, breathing document”. That’s to say that the loan you negotiated may not be the one they set in front of you on the closing table. Even though you agreed to certain terms verbally, or got an offer sheet, it is still incumbent upon you to be sure the loan documents you’re signing reflect the same loan you agreed to.

If you have really crunched the numbers (all of them), feel that a mortgage debt consolidation is the right financial move, and are comfortable putting your house on the line, than go for it. If you’re just consolidating more than one mortgage into a single mortgage, you house was already collateral any way. If you’re consolidating high interest, unsecured debt, think it through a few times before committing your house full of family memories (and possibly substantial equity) as collateral for a dent consolidation loan.

In any case, you should only get one of these loans if the financial situation that caused you to go into debt has been erased. If you had an extraordinary event, such as a auto accident or medical problem, that’s one thing. If you just can’t seem to stop hoppin’ in the Jag for trips to Westfarms or the Fair Oaks, spend a bit too much time at the casino, or think nothing of rolling in at 4:30 after dropping a wad at Marquee on a regular basis, that spending pattern’s got to stop. Unless you can reign in a pattern of excessive spending, you have absolutely no business getting a debt consolidation loan. You’ll just run up your debt level again and then where will you live?

Posted by debtblog at 06:23 AM | Permalink | Comments (0) | TrackBacks (0)

Effective debt management will minimize extraneous fees and other charges that chip away at your financial well being, and competently managing your debt will allow you to keep a high credit score. The importance of a high credit score cannot be understated, especially in the really ugly credit situation that has developed over the past couple of years. Don't get me started on that, please.

What is the right debt management solution for you? Determining that requires looking at your financial situation and taking stock of not only where you are, but how you got there. Debt management is one of the things that, to put it bluntly, many people screw up royally. Get it right and you could be living in fat (phat?)city. Get it wrong and bankruptcy could be a few short stops down the line.

One of the biggest problems is that too many people simply don't manage their debt at all. They don't look at what's causing them to be in debt, and they put little or no planning into getting in debt or getting out of it. They're not proactive, they just react to their next Visa bill with a mixture of fear and derision. You can avoid being part of that vicious cycle by actively planning what level of debt you'll take on, and why. Include a percentage for emergencies. How much emergency debt you'll provide for varies depending on your financial situation.

Here are some debt management rules that will help you develop a personal debt management solution -

Debt Management Rule 6
Avoid going into debt for depreciating assets. Unfortunately few people can manage this step as they use one of their largest depreciating assets to get them to work everyday. As the average price of a new car has gone above $25,000, few people can afford to purchase one without an attending rise in their debt level.

There are some ways to mitigate this. You can purchase a used car. Depending on the car, a large percentage of depreciation is gone after the first 2 years. Buying a car that is 2 to 3 years old will still get you a solid, reliable car, with years of trouble free service ahead, and much of the depreciation behind it. The wrench in this works is very low or zero percent financing. You can get low interest, incentive financing plans with some manufacturer's certified used car programs, and promotional financing offers change daily, so check into these before you take on more car debt.

Other depreciating assets are nearly anything besides your house or certain investments. That is where many people make a huge mistake. Not only do they go into debt purchasing depreciating assets, they also violate debt management rule number 5.

Debt Management Rule 5
Don't go into debt for non-essential items. Sadly, much of America (and the rest of the world) completely ignores this debt management rule, treating the next sale at Macy's or Bloomingdale's as a date not to be missed. In the majority of cases, this pilgrimage to the pillars of modern consumerism is financed entirely by debt. Not just any debt mind you, but the 17%, plus a hefty annual fee variety. Although many would argue vigorously the other way, that new sweater just doesn't qualify as an essential item.

Debt Management Rule 4
Time your debt correctly. Timing of debt is very important. Too many people put something on a credit card or other type of credit account when they could have waited one or two days and paid for the item with cash. This is poor debt management. You're increasing your debt levels unnecessarily, and in most cases it is magnified by simultaneously violating debt management rule 1 or 2 (possibly both).

Debt Management Rule 3
Make your debt payments automatic. This automates a good part of your debt management tasks. It will help prevent you from making your payments late or forgetting to make a payment; two of the sins of debt and credit that can follow you around for years. Not only that, but it's a heck of a lot easier than writing all those checks every month.

Debt Management Rule 2
Make money on your debt. Only go into debt when you will earn a higher return on your debt than it costs you. If you go into debt at 7%, you should earn at least 8% on the debt. If you can do this, you've won the debt management game and debt is your friend. You can go deep into debt and come out ahead; way ahead. Unfortunately the majority of people are never able to put this rule into effect, and suffer instead form years of oppressive credit card and other high interest consumer debt that costs, rather than pays, them money.

Debt Management Rule 1
The number one rule of debt management is spend less than you make. That will allow you to follow all the other rules, and use debt rather than having it use (and abuse) you.

You may not be able to effectively develop or implement a personal debt management solution. You may have to retain the services of a debt management professional. There are all sorts of pros, and like any other profession, some are very good, and others border on criminal. Due to the circumstances surrounding individuals seeking debt management services, the industry can attract more than its share of the latter, so be careful. There are definitely benefits to using a good firm. They can get you out of debt comparatively quickly and help increase your credit score.

Keep in mind that there are two definitions to debt management. Some debt management firms negotiate down your debt with the credit card companies or other creditors. After they've done this, they then put you on a strict payment plan through the debt management agency itself. While this can result in your getting out of debt much more quickly than you would otherwise, be prepared to take a fairly large credit score hit, and heaven forbid you should miss a payment or two. You could lose much or all of their fees or other money you've paid in.

Other debt management firms are more akin to credit counseling agencies. Here's what to look for if you're contemplating using a debt management solution company. Although this is not a hard and fast list, and there may be some excellent firms that do not meet some of the criteria, it's a great place to start.

Make sure the company is a member of the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. Although it's not mandatory, look for non profit firms (Don't ever confuse non-profit with free). Make sure they show exactly what will be required of you and give you a list of their fee structure. Get from them exactly what services they provide and when they'll provide them. In most cases paying for all their services in advance is huge red flag and you should run like the wind should they ask you to do so.

One thing a good debt management firm can do for you is to get your account 're-aged' where it no longer appears as past due on your credit report. This takes some sweet talking to the creditor, but if they have a good relationship with said creditor, it is often done.

Debt management and a good debt management solution can often be the difference between coming out on top financially and slogging through years of huge Visa bills. It's up to you.

Posted by debtblog at 04:08 PM | Permalink | Comments (0) | TrackBacks (0)

When shopping for a house many people are payment shoppers, just as they are when shopping for cars. It's all about the monthly payment. That's why so many people are attracted to the adjustable rate mortgage loan; it keeps their monthly mortgage payment lower than a conventional, fixed rate mortgage product. The problem is that that's only true for a while. Eventually the mortgage payment will rise, and with it will go the home owner's blood pressure. This is because, as the name suggests, the ARM's interest rate adjusts. In case you had any illusions, it adjusts up, and so does the mortgage payment.

When looking at an ARM, you'll be confronted by a set of numbers used to describe the terms of the loan. They'll be stated in fractional looking terms, such as 3/1, 5/1 or 7/1. This is simply the number of years that the initial mortgage interest rate stays the same, and how often it will adjust after that. A 3/1 ARM will stay at the initial rate for 3 years. After that it will adjust every 1 year.

Just how does an ARM adjust? Do the lenders sit around the bar at the country club and pull interest rate numbers out of their....well, you get the picture. Actually the loan's interest rate is tied to an index, which is simply one of several reference interest rates used by major financial institutions. Depending upon the specific index, it is set by the federal government or the applicable financial institutions.

The most common indices used to compute the mortgage interest rate on an ARM are the London Interbank Offered Rate (LIBOR), the Prime Rate, the Cost Of Funds Index (COFI), and 1, 3 or 5 year U.S. Treasury note rates. Ah, but you won't just pay these rates, you'll pay the index rate plus what's called a margin. The margin is just a percentage over the index rate. So, if you have a 5/1 ARM that's tied to the 1 year LIBOR, and your margin is 3%, when your ARM adjusts, you'll pay the current 1 year LIBOR rate plus 3%. Currently the LIBOR is 3.29%, so you'd pay 6.29%. That rate would hold until the next adjustment period, when it would adjust again. In the case of the example 5/1 ARM, it would adjust in 1 year.

There are several other important things to look at in an ARM. One of these are the caps. An ARM cap is simply that, a cap on how much the interest rate can go up. Typically the loan will have lifetime caps and periodic caps. While caps can be beneficial, they can also work against the borrower if there is what's called a carryover provision in the terms of the loan. A carryover lets the lender carry over interest rate increases they couldn't apply because they exceeded the cap.

For example, if your ARM adjusted upwards but was capped at a 2% increase, your lender could only increase the interest rate upwards by 2% in any given period. If the index went up by more than that, say 3%, a carryover provision could let them carry over the extra 1% increase to future adjustment periods and apply it then. So if the index increased 3% this year, but only 1% next year, the lender could increase your mortgage interest rate 2% each year, because the 1% over the cap they couldn't apply in the first year would be carried over and applied the next. Got that??

People love ARMS, especially when they're starting out in their careers, because as they earn more money they can afford a larger payment. The other common strategy, in fact the one that many people counted on, is to refinance the ARM into a fixed rate mortgage loan before the dreaded adjustment occurs. If you have a 5/1 ARM you have a 5 year window to enjoy the low, introductory rate before the loan adjusts (also called resetting) to a higher rate. Most people thought it would be no problem to simply refinance their mortgage before they got caught with the higher rate, because as home values rose, they'd have enough equity in the home to qualify for a fixed rate mortgage with a low interest rate.

That's how so many people got into so much trouble with ARMs. They did two things that came back to bite them. They got too much house, and they thought real estate appreciation would continue unabated, or at least until they could refinance. The problem arose because in many areas the real estate markets were showing double digit annual appreciation for the better part of a decade. People forgot that that's not really how things work over the long term. Eventually the chickens will come home to roost; and they'll crap all over the coop when they do so.

Here's a common example that occurred in many areas. First of all, you'll note that this was a classic example of “the bigger they are, the harder they fall”. Most of the big problems happened in areas that saw the largest and fastest home value appreciation, such as Las Vegas, south Florida and Southern California. If a borrower got a 5/1 ARM tied to the LIBOR for $400,000 in 2003, in 2008 their ARM is due for a reset. If their initial interest rate was 4.75% their monthly P&I payment would be about $2,087 per month. Now, when their mortgage resets (if it was calculated today), they'll be paying $2,473 per month.

Now $390 a month isn't chicken feed (the price of chicken feed's going up, just like everything else), but it could have been even worse. Many people used special mortgage products, like interest only loans to buy their properties. That keeps the monthly payment low, because you're only paying the interest for the first part of the loan. As with the standard ARM however, the interest only loan will eventually reset, leaving you holding the bag for both the principal and the interest. The increase is compounded because the interest rate can also adjusts upwards at the same time, depending upon the terms of the loan. So, you could be hit with the added costs of repaying the principal, but also an increasing interest payment at the same time.

How the majority of people got into trouble with their ARMs, was they either neglected to refinance in time (very stupid financial decision) or their home's value dropped to the point where they couldn't refinance because they owe more on the house than it's worth (that also had it's roots in a stupid financial decision, although not nearly as poor a decision as neglecting to refinance before it was too late). When this happens, you can't get a new mortgage for enough to pay off the ARM because the value of the collateral used to secure the new loan (your house) isn't enough to cover the loan.

To compound matters, many lenders are skittish that home values will continue dropping in many regions, so they are requiring higher down payments than in the past. If they want a 20% down payment, you'll need 20% equity in your house in order to refinance it. This is something many people just don't have.

So, there you go. That's what an adjustable rate mortgage loan is, and that's how so many home owners got into so much trouble with them. Here's to helping you get debt free, and have a great weekend.

Posted by debtblog at 01:37 PM | Permalink | Comments (0) | TrackBacks (0)

Well, although you won’t get anywhere near the best interest rates on a mortgage, chances are you’ll still be able to get one, even with a foreclosure on your credit. You will pay between 1.5 to 4 percentage points in interest above what you’d pay if you had good credit. Often it pays to get your credit score up even a few points because it will put you in the next higher credit score range. For more on that, see a post I did a few months back on credit score ranges, and how only a single point in your credit score could save you thousands of dollars.

There are some things you can do to help yourself though. First of all, make sure your credit is only as bad as it needs to be. Clean up your credit report and get rid of any inaccuracies. The foreclosure is going to be the sore thumb on your report though, there’s no denying that. Concentrate on paying every single bill on time from this point forward. You want to rebuild your credit to minimize the interest rate on your next loan.

If you wait 2 years after your foreclosure, you should be able to get an FHA loan. You’ll only need 3% down for most FHA (technically FHA insured) mortgages, but starting in July you will pay more with lower credit scores even with FHA loans. There is an upfront risk mitigation fee and an annual fee for those with poor credit. This will go up as the credit score down. Even if you are backed by the FHA, your credit should be 580 – 600 before you go for an FHA mortgage. Many lenders are still skittish, even with the government’s blessing, ad some won’t even loan on credit scores under 580.

This shows the need to spend your 2 years wisely, rebuilding your credit and saving a down payment. Although you can get an FHA loan with 3% down, including buyer paid closing costs, you’ll want to know that the actual down payment must be only 2.25%, but 3% of the funds in the transaction must be contributed by the buyer. Unlike a conforming mortgage, FHA lenders don’t really care where you got the 3% because they’re not required to. There has been some discussion in congress about raising the down payment for FHA mortgages, possible to 3.5%.

So, if you’ve looked foreclosure in the face, smelled it’s wretched breath, and some out of the whole thing ready to start anew, there is hope for you. You can get a mortgage after you’ve had a foreclosure, and your best bet may be with an FHA backed mortgage.

Posted by debtblog at 07:56 AM | Permalink | Comments (0) | TrackBacks (0)

To decide weather or not you will keep your home or put it on the market, you have to look at the circumstances that caused your financial difficulties. If you have a very good chance to make your house payments in the future, you can aim toward keeping your house. To determine the likelihood of making your house payments, you'll need to make an honest and realistic budget. With a little luck and some skill, you may be able to make one of a few things happen that could make keeping your home easier.

To keep your home, you'll need to either get a refinance (if you have sufficient equity and good enough credit), or workout your foreclosure through one of the following methods; mortgage modification, forbearance, or a deferment. These will help you improve your financial situation and make it easier to make your monthly mortgage payment. A hardship letter is but one step in the process toward making this happen.

To write a hardship letter you need to remain honest, but give your lender a true picture of why you are in your current financial situation. You'll need to show them what caused your current financial problems and how they caused you to become delinquent on your mortgage payments. You'll need to do your best persuasion job in the letter, because the whole reason you're writing it is to convince the lender that you're worthy of a second chance. If you're in sales, now's your time to shine. Heck, maybe you can craft such a good letter that you can actually start a business writing them for others.

The thing to remember is that you want to be convincing, but honest. Remember that lenders see many such letters and they can smell the stench of BS for miles. Before you write your letter, you'll need to workup a complete household budget. Don't leave anything out. This will be used by your lender as the basis for a mortgage modification or payment plan. Be careful, because since you will be required to submit this to your lender, they will probably hold you to it and may not allow you to change it.

In the budget, you have to show them how your ability to pay their mortgage fits into the budget that you've submitted. It's very important that you actually can fit realistic payments into the budget, because if you can't, selling your home may be your best option. Hopefully you'll be able to get your mortgage modified so that you can get payments that you can afford from this point forward. Be realistic though. If you owe $200,000 on your home, you aren't going to get a 3%, 30 year fixed mortgage, so if those are the only payments you can afford, you may have to look at other options.

After you've completed your budget, you can write your hardship letter. Here are some of the key components you need to include. All the vital statistics, such as your name, property address and best contact phone numbers. Be very cordial and simply explain to the lender exactly what hardship circumstances you've experienced. Don't lie or tell any tall tales, because they will backfire on you. Explain the circumstances (example:death in the family, medical problems, injury, military service, divorce, etc.), tell them it was a temporary situation, and that you are now able to make the payments on your mortgage. A few paragraphs will be fine. Don't get too lengthy. You will want to include the dates of your hardship in the description. Also include a statement that you believe that the facts contained in the letter are true to the best of your knowledge.

Although you can do this on your own, it's not a bad idea to seek professional assistance in fighting foreclosure from experts (which I am not). The difference between losing your home and keeping it could be a slight one, and it would be a shame to lose your home when you could have saved it. Remember that ignoring it will not make it go away. That's the worst thing you can do when facing a foreclosure situation. You need to be proactive and contact your lender as soon as you think there may be a problem. If it gets that far, writing a hardship letter to stop foreclosure will be but one step in the process. Good luck.

Posted by debtblog at 01:10 PM | Permalink | Comments (0) | TrackBacks (0)

They are offering a way to roll all your outstanding high interest rate debts into a single loan, typically with a lower payment than the combined payments of all your debts before (obviously if you have debts that have a lower interest rate than the offered rate for the consolidation loan, you would just retain that existing loan(s) for it's(their) original purpose). A debt consolidation loan is usually just a cash out refinance, or home equity line of credit that you use to pay off all your other outstanding debts. Despite what some of the radio ads say, they don't eliminate your debt, they just move it, and possible allow you to eliminate it faster than you otherwise would have.

There's one thing to be aware of before you begin to solicit offers for a loan. There is a scam that's becoming much more prevalent with the rising tide of credit problems and foreclosures called the advance fee loan scam. You'll be asked to pay huge fees in order to secured a guaranteed loan. Here is the FTC warning on these scams -

“Advance fee loan scams prey on consumers who may be under financial duress and may be seeking quick and easy loan approval and funding. The scam typically involves the lender making false promises to arrange for a loan in return for fees paid upfront by the loan applicant. Scam artists may even design Web sites and online loan applications giving the appearance that the company is legitimate. “

Make sure that the company that you are dealing with is a bona fide financial services firm with a proven track record. There are hundreds of real lenders in the marketplace, so finding a good one should not be difficult, just be sure and do your due diligence's.

So, how do you go about separating the wheat from the chaff when you're looking for a consolidation loan? Can one of these loans really help you get debt free? Will you pay less in interest and fees with one of these loans than you will if you just paid for your credit cards (and other debts, but the majority of these loans go to pay off credit cards) and didn't get a loan? You'll certainly want to answer these questions before you get a loan.

First of all yes, typically you will pay a lower interest rate if you transfer your debt from credit cards, which are unsecured, to a debt consolidation loan, which is secured. The mere fact that the consolidation loan is secured, typically by the borrowers home or other real estate, means that the lender faces lower exposure to risk, which is reflected in a lower interest rate to the borrower. Many people get confused by the fact that they are paying a lower interest rate, however.

Just because you are paying a lower interest rate doesn't mean that you'll pay less in total interest. That is because the term of a debt consolidation loan is much longer than the term to pay off most credit cards. If you make the minimum payment and stretch out the payment schedule to the maximum allowable time, you could actually pay more in total interest. This is because, while each interest component of each payment is lower, you will make many more payments. So, one key to getting the best debt consolidation loan is to not only search for the best interest rate, but to make the payments in such a way that you really do pay less in total interest payments.

Carefully compare the fee structure of the loan offers you receive to help determine which are the top loans. There are many fees that you may be charged, such as origination fees, processing fees, appraisal fees, credit report fees, and other fees. Not all loans will charge the same fees and not all fees for the same thing will be at the same rate between the different loans. The only way to determine which loan has the best fee structure is go through the fee schedule with a fine toothed comb.

If you have outstanding credit you can get a personal loan you can use for anything you'd like, including debt consolidation. With a personal loan you will not have to put any security up for collateral, so you won't be in danger of losing your home should you run into unforeseen financial problems. You will usually pay more than you would for a secured loan, but less than you're paying on your credit cards this way. This solution is only available for borrowers with premium credit. Keep in mind that you will also not be able to receive any tax benefits with a personal loan, as you may be able to receive if you got a cash out refinance or home equity line of credit to use for debt consolidation.

One note here, and it is a very important one:

• Make sure that the circumstances which caused you to go into debt have been eliminated, because you'll rapidly get into serious financial trouble otherwise.

In short, here is how you can be sure you are getting a top loan when you're shopping for a debt consolidation loan:

• Compare interest rates, including the simple interest and the (APR), which takes into account interest , fees and other charges.

• Compare fees – Look at the total amount of loan and service fees you'll be charged, and when you'll be required to pay them. Remember that any fees that you roll into the loan will accrue interest over the live of the loan, multiplying them substantially.

• Look at the total interest in dollars you be charged over the life of the loan

• Verify if the loan offers any tax benefits – Refinances or some home equity loan products will offer these benefits. To be sure, check with the IRS.

• Check the lender's track record. How long have they been in business, and do they have a good reputation?
  
  

One of these loans may or may not be the best solution to more quickly get you out of debt. This guide should help you get one of the top debt consolidation loans. But remember, getting debt free is up to you.

Posted by debtblog at 01:48 PM | Permalink | Comments (0) | TrackBacks (0)

On the way in this morning I sat behind a brand new, back convertible Bentley Continental. You know, the one with the 550hp twin turbo 12 cylinder. While the guy driving that car was probably not all that concerned with the recent increases in the price of fuel unless it affects his business or investments, he's probably one of the few to share that sentiment. Most of us are pulling up to the pump and trying not to retch into our cup holders as we're confronted by the most recent fuel price increase.

If this describes you, and you're leasing a vehicle, investigating one of the firms that allows you to either swap your lease to drive a different vehicle, or just get our of your current car (so you can take the train to work) may be worth doing. One benefit for those who'd like to get into a newer vehicle, is that in many cases you can do it with no money down, and a comparatively low payment. It's kind of the automotive equivalent of buying a distressed property. Here's how the whole lease take over process works.

Getting out of an existing auto lease.
You go to one of the companies that specialize in lease take overs and sign up for their service. You'll typically pay a listing fee, just as you would if you ran a classified ad to sell your vehicle. When an interested lease assumer decides they love your old car and want to take over your lease, they're credit checked to ensure they're able to take over the lease. Depending upon the service, the buyer and seller will then usually negotiate the applicable terms and come to an agreement. In many cases it works out very well for the one taking over the lease because the original lease holder has offered some sort of incentives. Even if they don't, they have already paid all the fees and deposits at the inception of the lease, so the party taking over the lease can just step in and begin making payments.

It is also great for the original lease holder because they can get out from under a lease that they can no longer afford, or a vehicle that no longer suits their needs, without paying an early termination fee to do so. Those fees can be oppressive, and a huge barrier to getting out of lease early. Letting someone else take over your existing lease will avoid the whole issue, as the lease isn't terminated, just “borrowed” until the term is completed.

Taking over an existing lease.
Just as getting the drain of a vehicle that you can no longer afford the lease payment on, or is killing you at the pump can be a weight releasing experience, so can stepping into a vehicle by just assuming the payments. A further benefit is that, since you'll only be assuming the existing lease, the term is in most cases fairly short. If you want to “try before you buy” this may be just the ticket. You can make relatively small monthly payments for terms of as short as 4 – 6 months before deciding if the vehicle is right for you. There's nothing like living with a vehicle for an extended time to make sure it's really the car that you'd like to be driving. You just can't make that evaluation in the 15 minute test drive you get at the dealership.

In some cases the lease listing agency will charge a transaction fee, and in other cases, they'll only charge a listing fee. In addition you may have to pay a fee charged by your leasing company, but in many cases these fees may be avoided. Remember that many lease terms, such as the monthly payment and allowable mileage are set in the lease terms and cannot be changed, although other terms can be negotiated between the assumer and the assumee, such as additional funds or assets that can be included in the transaction. Take note that many of the vehicles listed are fairly expensive vehicles that people are no longer in a position to afford. In addition, some of the vehicles have higher mileage so one of the reasons that people were getting out of them is that in order to stay within the maximum mileage, they can only average 800 – 900 miles per month for the remainder of the lease. Some people cannot do this.

Looking at some of the sites that specialize in the lease transfer market, I've seen some interesting vehicles such as a:

2003 Acura RSX - $145/ mo for 17 months – nice, 4-cylinder (pretty good gas mileage) performance coupe.
2007 Ford Focus – $229/ mo for 18 months
2008 Mercedes Benz R350 (Mercedes Mini-Van / SUV) $380/ mo for 26 months
2006 Mercedes Benz SLK-350 $541/mo for 14 months – Want to drive a small, but pretty quick Mercedes convertible for the summer? Here you go.

The whole lease take over marketplace is one that many people just aren't aware of. Since awarenes of the secondary market is so low, most people don't think about doing this when they're either saddled with a vehicle that they'd rather be rid of, or when looking for a new one. Taking over a lease or giving one up may not be the best choice for you, but it bears looking into if you're in either position. One of the leaders in the lease trading or take over industry is swapalease.com. You can find out more about the process, and see if it is an alternative that could work for you here. They've been featured in many national publications and are Better Business Bureau accredited.

Posted by debtblog at 01:42 PM | Permalink | Comments (0) | TrackBacks (0)

For example Essex, Suffolk, and Norfolk counties in Massachusetts showed an average year over year increase in their foreclosure rates of almost 44% in Q2 of 2005. Consulting firm Global Insight prepared a report in mid 2007 estimating the foreclosure problem, coupled with declining home values, could cost the U.S. as much as 1% of the GDP, due to decreased economic activity.

A group of banking industry regulators and 10 state AGs calling themselves the State Foreclosure Prevention Working Group has been working on the problem for over a year now. The have discovered some interesting aspects to the problem that can go a long way to help understanding foreclosures. It's interesting to note, for example that:

• Payment resets on hybrid ARMS have not been the primary cause of foreclosure problems in many areas. Despite the news coverage that could lead one to believe otherwise, mortgage holders with resetting ARMs was not the cause of many foreclosures. In fact, many (the report didn't mention the exact number, only that it was a significant percentage) sub-prime borrowers were behind on their mortgage payments before their ARMs reset.

  That says to me that many of these mortgage borrowers took on loans which were beyond their abilities. Weather that was due to fraud on the part of the applicant, lenders pushing prospective borrowers toward mortgages that were beyond their capabilities from the outset, or more recent economic factors, such as job loss, is unknown. It could possibly be a combination of those factors and more.

  For all the hand wringing and hollering by the media and consumer groups, it seems as though many homeowners simply wanted a more expensive home than they could really afford, and were willing to bet that continued real estate appreciation would render their decision a good one. For too many that was simply not the case. For these homeowners taking advantage of record low mortgage interest rates and conventional 30 year fixed mortgages, coupled with homes that were more within reach would have been a much better choice. Now the piper has come a calling.

• Refinance options have, as the report so eloquently states, “nearly evaporated”. One thing that the media has gotten right is that refinancing out of a rising house payment is not an option that remains open to very many borrowers. In the past it was a relatively simple matter to grab a lower house payment by refinancing. That's no longer the case.

• 45% of homeowners that have taken the step of contacting their lenders are working toward some type of mortgage modification. That speaks volumes. It isn't in the best interest of the lender to enter into foreclosure. They lose money on every one. As with any business, they're not in business to lose money. Instead of foreclosing on a home, they'd rather get a long term stream of interest income.

  The fact the almost half of all mortgage holders that have spoken to their lender were able to work toward some type of mortgage modification shows why contacting the lender early is so important. Unfortunately some lenders will only agree to such steps once your loan is already in default, but early contact, not avoidance is still the most important step that you can take if you feel foreclosure is imminent.

  There may be some pending legislation that can help with mortgage modification. Currently H.R. 5579, titled the “Emergency Mortgage Loan Modification Act of 2008” is being debated in Congress. It has been placed on the calender, but is still in committee and has yet to be voted on. According to it's description it is “To remove an impediment to troubled debt restructuring on the part of holders of residential mortgage loans, and for other purposes “ what exactly that impediment is, I am unsure.

  It's possibly the treatment of the forgiven portion of debt as income by the IRS. Currently if a portion of your soon to be foreclosed upon home's mortgage is forgiven by the lender the IRS treats that as ordinary, taxable income. It's their equivalent of hitting you when you're down.

  Since the report was released a few months ago, more lenders have taken the step of allowing borrowers to modify their mortgages so the 45% figure is probably higher now. Mortgage modification could be the “new refinancing”.

Nationwide the firm RealtyTrac reports that foreclosures are up 112% year over year for Q1, 2008. The top 5 states in terms of foreclosure filings were:
1 – Nevada
2 – California
3 – Arizona
4 – Florida
5 – Colorado

The bottom 5 were:
46 – Mississippi
47 – South Dakota
48 – West Virginia
49 – North Dakota
50 – Vermont

You'll notice that the top 5 were those states that experienced a rash of investors trying to capitalize on skyrocketing property values, now not so skyrocketing. The bottom 5 on the other hand experienced lower property value gains over the last 5 years. Because they were not as attractive to investors, who ostensibly would be much quicker to become over extended and then jump ship, they have higher foreclosure rates. The other reason is that in certain areas property values went up so fast that the average homeowner had to resort to all manner of unconventional mortgage products to simply buy a home at all. Maybe renting would have been a better idea, but hind sight is 20/20. Hopefully this will provide a bit more information to help in understanding foreclosures. For more help, see my previous post on how to avoid foreclosures.

Posted by debtblog at 01:58 PM | Permalink | Comments (0) | TrackBacks (0)

That is part of the reason for the economic troubles we’re facing these days. People want to get mortgages to buy houses, they have shown that they are trustworthy and historically are fairly unlikely to miss payments. However, many lenders (or their investors) are so skittish that these folks are being denied the opportunity for a mortgage in many cases.

If you are one of those that gets through the net and is in the position to be offered a mortgage, you shouldn’t just take whatever then lender is offering. There are some questions you should be asking first, even though you may just feel damn lucky to get a mortgage at all.

Here are mortgage questions to ask when analyzing your mortgage offer.

Mortgage Question to Ask – 1
What is the interest rate?

That is numero uno. The interest rate will have the greatest impact on how much you’ll pay every month and how much you’ll end up paying over the term of the loan. (For mortgages of the same amount, obviously.)

Mortgage Question to Ask – 2
Is this an ARM or a fixed rate mortgage?

In a survey of mortgage holders last year, over 30% of respondents were unsure of what type of mortgage they had. That amazed me so much I did a post on it. (Type of mortgage post) How so many could fall into this situation still amazes me, but don’t end up being one of these borrowers.

If you don’t know the difference between the different types of mortgages, here it is in a nutshell. A fixed rate mortgage is basically what the name implies. The interest rate will stay the same over the term of the loan. On the other hand, an adjustable rate mortgage (ARM) will change, or adjust, the interest rate at various times throughout the term of the loan. Rest assured the interest rate adjustment will be up, and so will your monthly payment. For more on this, see a post I did last year on how to select a mortgage.

Mortgage Question to Ask – 3
Are there prepayment penalties?

This is of huge importance. The majority of borrowers keep their mortgages for 5 years or less. That means you’ll pay off the mortgage and either get another one for your existing home, or you’ll buy a different house. In any case you’ll hold the mortgage for less than the full term. If you are charged a prepayment penalty it will cost you a hefty premium to do this.

Prepayment penalties are charged by lenders to help mitigate the risk that they’ll not get the entire revenue stream provided by the loan going full term (sounds like a pregnancy). Typically prepayment penalties expire after the first 2 – 5 years, but in some cases can persist longer than that. The penalty is monetary, you’ll not be asked to pledge your first born or classic ’57 T-bird. The normal prepayment penalty is about 2 – 3% of the outstanding balance at the time of the loan payoff.

You may be offered some consideration for agreeing to a prepayment penalty, such as a lower interest rate. On the other hand, you may be required to agree to one if you have bad credit, although at the present time few borrowers with really bad credit are able to get a mortgage at all, unless they have absolutely huge down payments.

A prepayment penalty may apply to a refinance only, in which case it is termed a “soft” penalty. If it applies to both a refi and a payoff of the mortgage, it is called a “hard” prepayment penalty.

Mortgage Question to Ask – 4
How much will this mortgage cost me in addition to the principal and interest?

Paying fees and closing costs for your loan are completely normal. There are a myriad of fees associated with securing your loan, such as appraisal fees, title insurance, documentation fees, recording fees imposed by the county for recording the deed, prepaid insurance, notary fees, application fees (try to negotiate your way out of that one), and so on.

You are required by law to be informed of any and all such fees and closing costs within three days of your loan application being received by the lender. These fees and closing costs can vary widely so it bears checking up on. Be aware that any such fees that are rolled into your mortgage will cost you a substantial amount of money after you’ve paid interest on them for 20 – 30 years.

Mortgage Question to Ask – 5
How long will it take to close the loan?

Closing is when you actually receive the proceeds for the loan. When it closes can affect your house deal, so you have to know how long it will take to happen. About 3 – 4 weeks is normal.

Mortgage Question to Ask – 6
Are you charging me points?

Points are an interest rate buy down. If you are charged points, you will pay a fee to the lender in exchange for a lower interest rate on the mortgage. It’s important to know this when comparing different mortgages, because if for example, one lender quotes you a 5.9% mortgage and another a 6.4% mortgage, you aren’t making an apples to apples comparison if the lower rate was obtained by your paying points to buy it down.

Points on a mortgage are equal to 1% of the mortgage amount. So a point on a $350,000 mortgage would cost you $3,500 up front. See the specific term of the offer to see how much each point is worth in terms of rate reduction. Normally it’s only a good idea to buy points if you are going to stay in your home and not refinance for at least 5 years, probably longer, otherwise you will not have time to recoup your added costs.

These are some of the most important mortgage questions you should ask when comparing different mortgages and before you sign your loan agreement. Before going into the process, make sure you have all your ducks in a row, they’re easier to shoot that way. Get all your required documentation in order, such as bank statements, tax documentation, check stubs, and anything else the lender may ask for. Also, you should have any offer reviewed by a good real estate attorney before you sign it. Here’s to hoping you get that mortgage!

Posted by debtblog at 01:56 PM | Permalink | Comments (0) | TrackBacks (0)

What are some of the dangers of reverse mortgages?

Reverse Mortgage Danger Num. 1 -
Well, in the first place you should be aware that the amount you receive will probably be less than you are shown in the initial calculations. This is because unlike a traditional mortgage, where the taxes, insurance, and fees are paid by monies you paid into an escrow account when you write your mortgage check. With a reverse mortgage on the other hand, it actually works, drum roll please, in reverse. The money for those items is subtracted from the amount the mortgage holder receives for their monthly payment, thereby reducing the net amount of the money you'll get each month. Be aware of this when you are making your calculations.

Reverse Mortgage Danger Num 2 -
Another danger of a reverse mortgage goes to the actual structure of the loan. As it is stated in most of the loan documentation, you will retain use of your property as long it is your primary residence. The problem is that, as reverse mortgage holders are senior citizens, the chances are fairly great that they may do one of two things that could cost them their home.

One is to be confined to an assisted care facility. At this point the home is no longer their primary residence and the bank will come for their money. If the balance is less than the home equity, the home will be sold and the equity beyond what is owed on the reverse mortgage will be given to the homeowner. If the balance is greater than the home will simply be forfeit to the lender to satisfy the terms of the loan.

The other condition that could trigger the primary residence provision is that the homeowner could move for much of the year to a second home. This is very common for seniors living in northern states. They will purchase second homes in warmer climes, such as California, Florida or Arizona, where they can relax in the sun. If they take their relaxing a bit too seriously however, they could find themselves in a situation where their home is no longer considered their primary residence.

Reverse Mortgage Danger Num 3 -
Another danger of a reverse mortgage is getting sucked into paying high fees or getting bad ARMs. Many reverse mortgages are adjustable rate mortgages. Many people are well aware of the dangers of these type of mortgages as they've occupied more than their fair share of the evening news for the last year. The same problems can apply for reverse mortgages as for traditional mortgages. You can easily be risking your security with the uncertainty of a reverse ARM. Personally, I may just be too conservative, but I like the old fashioned way, fixed.

Another point to be aware of is that the FHA will charge a 2% fee to insure reverse mortgages. But the real thing to watch out for is that you may be asked to pay even higher fees and closing costs than you would with a traditional mortgage. Don't do that, because many lenders will offer basically the same fee structure with a reverse mortgage.

Reverse Mortgage Danger Num 4 -
Another danger of reverse mortgages is that they let you spend your home's equity on just about anything you want to. This could cause a problems if you need those funds for an emergency down the road. While there's nothing wrong with living it up a bit in one's golden years, be aware of the temptation to splurge with all your reverse mortgage payments on trips to Mexico or a new Prevost to impress the folks in Arizona. Keep your eye on the future and remember that the money from the reverse mortgage could allow you to keep your independence at home should you or your spouse's health take a turn for the worse in the future.

A reverse mortgage can be a great financial vehicle to carry you through your golden years in relative financial security. Just be aware that there are dangers to reverse mortgages, just as with any other financial products

Posted by debtblog at 02:03 PM | Permalink | Comments (0) | TrackBacks (0)

These days times are tough and probably no one is experiencing that more than small business owners. According to the 368 page SBA report on small business released in December of 2007, there are over 6 million non-farm small businesses. That means well over 6 million of you out there are small business owners. Because so many are owned by more than one person, it's probably closer to 10 or 12 million.

Many of these entrepreneurs are constantly operating on the ragged edge of profitability and trying to keep their heads above water, so uncollected accounts can threaten their very existence. Few small business owners have the expertise, time or temperament to be effective debt collectors and yet allowing the debts to remain uncollected can sink their ship. Speaking from past experience, the financial stress of irregular cash flow can keep you awake at night, especially when you're staring payroll in the face. One position you never want to be in as a business owner is having to tell your valued employees that they'll have to wait to deposit their paychecks.

In the majority of cases, the cash flow problems are created by debt you can't collect in a timely fashion. Late and delinquent payments will ruin your cash flow. You may be profitable on paper, but your accounting won't pay your bills, only an influx of cash can do that. As a business owner there are times when you may have to hold your own paycheck in order to pay your employees. That doesn't go over too well on the home front, I can assure you.

You have some alternatives. You can just hope your accounts will pay, which sometimes just isn't very realistic. After all, in many cases your accounts are other small business owners just like you, and they're having their own financial problems. You have to make sure paying you becomes one of their top priorities. When cash gets tight, most business owners will pay their employees first, then the lease, and then vendors and other debts. Key vendors get pushed to the front of the pay line, while less important vendors are moved farther back.

If you don't have the skills to get your account moved to the front of the payment priority line, you'll need to hire someone who does. As I mentioned before, that expertise can come with a hefty price tag. An alternative is to use one of the online debt collection agencies that have come with the dawn of the Internet. For many of the same reasons other industries can become low cost service providers by becoming virtual, so can debt collection agencies.

This alternative can offer some advantages to you as a business owner. Typically the cost will be lower than a traditional debt collection agency, which helps preserve much need cash for you. In addition, you will usually have to pay no up front fees, which you may be in poor position to do. Basically the online agency will send collection letters from an official source for a set fee per letter, typically from $5 - $30. As you may have noticed, that's far lower than the 30% - 50% fee you may face when using a traditional debt collection agency. To be fair, a traditional agency will normally have a larger breadth of services available than does an online collection agency. For example, they may add phone calls to their repertoire.

You can have the entire process handled by an online debt collector, which could provide you with substantial cost savings. If they are unsuccessful you will have lost only a very small amount, and can turn to more traditional agencies. If they collect your outstanding debt, the money will be sent directly to your business. You will have much needed cash and can concentrate on what you really want to do, running your business, not collecting debts.

Posted by debtblog at 01:37 PM | Permalink | Comments (0) | TrackBacks (0)

A foreclosure is a proceeding that occurs when a mortgage loan is in default. Default means that the lender hasn't received a payment on the loan for a specified time period, usually 30 days after the payment due date. Typically the borrower will be assessed a late fee after the first 16 days with no payment, but the loan will not actually be declared in default until the 30 day mark has been reached.

The First 30 Days of the Foreclosure Process
Once the mortgage is in default the lender will make attempts to collect the past due balance, normally by initiating a series of phone calls to the borrower. You will also get one or more late payment notices sent by mail from your lender. Be aware that as soon as the 30 day period is reached and collection proceedings begin the lender will begin to assess additional fees and charges for collection and legal proceedings. This means that not only will you owe the past due balance on your mortgage, you will also have to contend with late fees, collection charges, and possible legal bills.

The Second 30 Days of the Foreclosure Process
The second 30 days with no payments received is where the foreclosure process begins in earnest. The lender will send a formal notice of default. This is usually done by certified mail. The notice of default will demand payment in full for the amount the loan is in arrears and any outstanding fees and other charges. There will be a specified time period by which the mortgage must be made current. Some lenders will accept partial payments, while others will demand payment in full. Many mortgages have an acceleration clause that allows the lender to demand full payment once a certain number of payments have been missed or amount time has passed with no payment being received.

This is when the lender will pass the defaulted mortgage from their collection department to their legal department. This means that you will owe even more fees before your mortgage will be considered current again. The purpose of sending the defaulted mortgage to the legal department is so that formal foreclosure proceedings can begin.

The Third 30 Days of the Foreclosure Process
The lender's legal department will forward the information associated with your mortgage to an attorney that will begin the actual legal foreclosure proceedings. Specific things must happen once this stage is reached. A notice of the impending foreclosure must be advertised in a public place, such as a local newspaper. You will get a Notice of Intent to Foreclose by certified mail.

There will be a court hearing to determine the validity of the lender's claim of non-payment. If their claim is upheld by the court, the lender will be permitted to foreclose on the property. A date for the foreclosure auction is set. At this point in the process another notice will be advertised, this one of the actual foreclosure sale of the property.

It is important to realize that you are not legally compelled to move out of your house at any point in the foreclosure process. Only after the property has been sold at auction will you receive a formal notice of eviction. This notice is normally sent within 72 hours after the sale. If you fail to abide by the notice, you can be forcibly evicted by the sheriff's department. In some cases the new owner will allow you to pay rent in order to remain in the home for a longer period of time. If you fail to move, eventually the sheriff will evict you by force and you can be arrested. This can take 6 – 10 weeks from the time you are sent the formal eviction notice, but in some locations can be as little as 1 week. Normally the new owner must go in front of a judge to actually have you evicted from his new house, but you can appeal the decision, granting you even more time.

The most important thing you can do to avoid such unpleasantnesses is to never let it get this far. Do not ignore the lender's communications. They will have little to gain from beginning the foreclosure process against you. They're a lender, not a real estate company. See my previous post on how to avoid foreclosure for more on how to keep your home.

Posted by debtblog at 01:50 PM | Permalink | Comments (0) | TrackBacks (0)

Actually yes, there are debt relief programs that can help you do that, but it's not really that simple. After all, you don't get something for nothing, although it could be argued that if you get a portion of your debt eliminated, you actually did.

There is some confusion among many debtors about the differences between the various debt relief programs. Are debt settlement, debt relief and debt counseling all synonymous? Actually no, they're not. They actually mean different things, and if you choose to avail yourself of one of these options to handle your debt, the option you actually choose could have long lasting effects on your credit and future financial picture.

Debt settlement is a term that most often refers to the process of negotiating with creditors to only repay a portion of a debt. Although that may sound like a fantastic option to many creditors, remember the whole free lunch thing. Using debt settlement services will impact your credit in a negative way and affect your ability to secure future credit, and the interest rates you pay for years to come. There are a few basic ways that these programs work, and before you enter into any such program you absolutely must go over any agreement with a fine toothed comb, preferably with the advice of an attorney who's well versed in such matters. It may seem like spending money to seek the advice of an attorney may just be compounding your debt problems, but a few hundred dollars up front may save you thousands of dollars and some financial migraines later.

Some debt settlement firms will simply charge you a flat fee for their services, but the more common scenario is for them to charge you either a percentage of the total outstanding debt or a portion of the savings they provide through the negotiated settlement. With most debt relief negotiations, the debt relief company will negotiate a settlement with each of your creditors that will represent between 40% - 50% of the original debt amount. They must negotiate independently with each credit card account. Debt relief companies can handle other types of debt as well, but credit cards are far and away the most common. Typically only unsecured debt is negotiated through this process, as unpaid secured debt will be satisfied by the creditor repossessing the security for the debt, such as a vehicle or land.

As the debtor, you will be required to set up a debt repayment plan for the agreed upon amount with each open account. This will include the payment to the debt relief company, the creditor, and the time frame for the repayment plan. You will then make payments either into an account set up by you, or an escrow account set up by the debt relief company. Once you have accumulated the requisite amount your debt will be satisfied. The process repeats with each debt until all your debts are paid at the individually agreed upon amount.

This is one of the places where things can go wrong for you as the creditor. Stories abound of less than scrupulous debt settlement companies simply keeping all the funds you've already paid should you miss a payment. This does happen, and needless to say that could cost you a bundle. If you feel that you realistically will not have the money to maintain such a settlement plan, you may want to consider another option, but even more important is to thoroughly evaluate any such agreement before you enter into it.

This highlights the importance of having a qualified, independent party look over the contract before you sign it. If you sign a contract that permits the firm to keep any funds paid to date should you miss a single payment, it's really your fault for such a debacle. If you feel such a clause is worth it in order to secure a substantial reduction in the amount of your debt, that's a decision only you can make. Remember that you will have your debt reduced a substantial amount, but there is also the debt company's fee to consider when calculating your total savings. In total, the savings may not be as large as you think.

The process lasts from 1 – 4 years in the majority of cases. It is exceedingly rare for the debt relief company to offer any sort of guarantee for their services. The key is that you should be using this technique as a way to avoid bankruptcy.

Debt Settlement Pros -

• Debt settlement / relief / negotiation can help you avoid bankruptcy.

• Debt relief companies can make creditors stop hounding you.

• Debt relief companies can get you debt free in less time than if you simply tried to repay your debts on your own.

• Debt relief will improve your credit in the long term because you will have no outstanding debt. It's up to you to stay debt free, however. Since about 30% of your FICO score is your amount of outstanding debt, reducing it to zero will improve your score.

Ah, but with anything there is also the not-so-bright.
Here are the -

Debt Relief Cons -

• Debt relief will give you a big drop in your credit score in the short term, however it will not be as bad for your credit as declaring bankruptcy.

• Debt relief programs require you to pay as agreed. If you fail to stick to the debt relief plan, you could lose every cent you've paid to date. Think of the rent to own scenario. Miss a payment, and there goes your TV. If you don't have the requisite amount of money in a single lump sum, it's time for some negotiation of your own. Before you enter into the debt relief arrangement, have the contract stipulate an installment payment system.

• You will owe more taxes to the IRS and possible the state department of revenue. In a spectacular example of hitting you when you're down the IRS views forgiven debt as taxable income. For example, that means that if you are in the 10% tax bracket and owe $18,000 in credit card debt, of which $9,000 is forgiven through the debt relief settlement, you will incur a $900 income tax liability. This will be reported to the IRS with a 1099 form. If you've ever been an independent contractor, you'll be familiar with such a form, as it's the same one used by those that hired you to report the income they paid you. Make sure you figure the increased tax liability into your calculations when deciding to use a debt relief or settlement company's services. This is an area where consulting a professional is vital, because you may be able to eliminate all your tax liability due to your financial status.

• The same process used by the debt relief companies to make the credit card companies stop hounding you, will also prohibit them from contacting you for anything positive. You may be able to do some debt negotiation on your own, but try this before you make the decision to use a debt relief company, because they will probably prevent the creditor from initiating any further contact with you.

Debt settlement or debt relief is not the same thing as credit counseling. Credit counseling is usually a precess whereby you meet with a person or team who looks at you financial state and makes recommendations about how you can improve it, and get debt free. There are for profit and non profit credit counseling services, although the non profit services are not necessarily free. See a post I did last year on non profit credit counseling for more information. It details 6 questions you must ask a credit counseling service to help make sure you're making the right decision.

Your credit is nothing to mess around with. There are pros and cons to any decision and the decision on weather or not to use a debt relief company as a solution to your financial problems is a mighty big one. They may be just the solution you've been looking for. On the other hand they could plunge you deeper into a financial pit of despair. Just make sure you go into a debt relief agreement, as with any of life's big decisions, with both eyes open. Don't make such a decision on emotion. To help avoid an emotion based decision it's sometimes better to take a few days to make your decision.

Here's to getting debt free, no matter what plan you use to get there.

Posted by debtblog at 01:22 PM | Permalink | Comments (0) | TrackBacks (0)

There are 2 possibilities; they could be trying to collect a debt that never existed, or one you’ve already paid. The second is much easier to dispute because you can show documentation that you paid the debt in full and their request is invalid. Trying to prove a negative on the other hand is much more difficult.

Rest assured, you wouldn’t be the first to be informed that you were in default on your debt for your Sears card that you owed $2,100 on. But, what if you didn’t actually owe the money? You either never made the purchase, or didn’t have an account with the firm in question. The first thing you do is jump on your trusty computer and fire off a letter to the collection agency and the merchant, disputing the debt. Want to do this as soon as possible. Use fake legal letterhead to make it appear even more impressive…..just kidding, definitely do not do that, however tempting it may be. Do, however provide every shred of documentation (copies only, please) supporting your position.

You will have to send the credit reporting agencies and the collection agency a letter disputing the debt. For reporting that you have a debt that you don’t actually owe, they can be in violation of section 623(a) of the Fair Credit Reporting Act (FCRA).

This provision of the FCRA states the following:

Duty of furnishers of information to provide accurate information.

(1) Prohibition.

(A) Reporting information with actual knowledge of errors. A person shall not furnish any information relating to a consumer to any consumer reporting agency if the person knows or has reasonable cause to believe that the information is inaccurate.

(B) Reporting information after notice and confirmation of errors. A person shall not furnish information relating to a consumer to any consumer reporting agency if

(i) the person has been notified by the consumer, at the address specified by the person for such notices, that specific information is inaccurate; and

(ii) the information is, in fact, inaccurate.

(C) No address requirement. A person who clearly and conspicuously specifies to the consumer an address for notices referred to in subparagraph (B) shall not be subject to subparagraph (A); however, nothing in subparagraph (B) shall require a person to specify such an address.

(D) DEFINITION- For purposes of subparagraph (A), the term `reasonable cause to believe that the information is inaccurate' means having specific knowledge, other than solely allegations by the consumer, that would cause a reasonable person to have substantial doubts about the accuracy of the information.

According to the same section, but in subsection (b), creditors, agencies and any other party who furnishes or reports information about your credit or transactions, have a duty to correct and update your information. They are also required to report that the entry(ies) are in dispute if you have disputed them.

First, check your credit report with the major credit reporting agencies (not the collection agencies, you owe them, and should give them nothing, or to quote motivational speaker Matt Foley, give them “Jack Squat”) to ensure they have all your updated information regarding address and phone number. In some cases these are problems of mistaken identity. If, for example you have a fairly common name, there could be another person with your name living on the same street in your city. If you work at a large company, they could even work there as well. If you’ve moved several times in the past, they may have an incorrect address and you could be mixed up with someone who actually has the debt. So, make sure the credit reporting agencies (CRAs) have deleted all your former addresses and updated your current one. When your information with the CRA is accurate, you can more easily get your dispute resolved, if the debt is really invalid.

One quick note; if someone from any agency calls you and requests personal information, such as your bank account number or SSN, DO NOT GIVE IT TO THEM. You could be at risk for identity theft, because you really have no idea if the person on the other end of the phone is in Moscow, Russia or Moscow, Idaho. If they are legit, they’ll already have your SSN, and if it’s incorrect, you’ll se as much in your report. You can call them at their customer service number if you feel the need.

Next, check to see that the collection agency in question is licensed and properly permitted to do business in your state. It’s kind of a long shot, but you can strike gold here. It gives you a lot of leverage you can use against them. Most likely they’ll just transfer the collection to another agency, but any leverage you have is good.

When you send out your letter of dispute, you usually want to send it Certified Mail Return Receipt Requested, understandably abbreviated as CMRRR. This will allow you to more easily document your efforts in the event that legal action is necessary in the future. You can also fax your letter of dispute to the collection agency; it’s easy, fast, and cheap. Now may not be the time to save $5.00 however. Some experts advise first sending your request handwritten on regular paper, and only proceeding to the use of a CMRRR in the event things are not rapidly resolved. The theory is that a handwritten letter gets more attention from the collection agency personnel.

Be sure you include copies of all your supporting documentation when you send in your debt dispute letter. Legally the agency has 30 days to respond to your dispute or the incorrect item must be removed, but that’s often not as easy as it should be. On the flip side, you have to respond to their allegation within 30 days as well. It’s very important that you do file your dispute in the allotted time frame so you maintain all your legal rights.

Knowledge is power here. Too many consumers don’t know their rights in this area and have never heard of the FCRA. You’re no longer one of them, so don’t take this lying down. Hit all parties concerned over the head with section 623(a) as hard as you can. Of course, in many cases, they’ll reply that according to their records, you really do owe the debt, and demand payment in full. Most of these companies are used to people trembling in fear or ignoring the situation entirely, so the mere act of firing back a response that sounds like you know of what you speak will take them a bit by surprise. Keep in mind that all parties trying to collect a debt are covered under the Fair Debt Collection Practices Act, which limits their actions. See my previous post on What Debt Collectors Can't Do under the act.

The CRA does have, according to the law, a “general duty to investigate a dispute when notified by a consumer.” So legally they just can’t shine you on. They have to make an attempt to resolve the issue, but all too often the attempt isn’t to resolve it in your favor.

They need to validate your debt, which if the debt isn’t truly yours, they will be unable to do. They may however send you an affidavit of the debt, which is not the same things as actually validating the debt, it merely states that they believe that you owe the debt. They need to provide something demonstrating that you actually owe what they claim, such as an invoice with your signature. If the debt is invalid, they will be unable to do so. It is imperative that you send them a CMRRR disputing their affidavit as soon as possible. Lack of response on your part can be taken as your approval of the debt according to the terms stated in the affidavit.

Unfortunately, you may have to threaten them with, and eventually pursue, legal action. First you’ll want to file a complaint with your state’s Attorney General, the BBB and the Federal Trade Commission.  It may cost you some money to get a competent lawyer with experience in resolving credit disputes. Sometimes that is what it will take to get the collection agency off your back.

One more thing; if you really do owe the debt, just pay it. Don’t pretend you don’t owe it and go through all the rigmarole of sending dispute letters. That’s the definition of insanity, not to mention fraudulent. If you really can’t afford to pay it, call your creditor before it goes to collection and make payment arrangements. In many cases they’ll be open to your attempts to resolve the situation. After all, what they really want is your money, and remember, a collection agency is going to take around 50% of your debt as a fee, so it behooves the creditor to work with you to resolve the whole thing.

Posted by debtblog at 01:42 PM | Permalink | Comments (0) | TrackBacks (0)

FICO, the folks who brought you the whole credit scoring system you either love or hate, are having a big sale. From now until the end of April you'll save 25% on any of their myFICO credit management or credit protection products. Click on credit sale for your savings.

Posted by debtblog at 01:09 PM | Permalink | Comments (0) | TrackBacks (0)

How to get out of debt fast isn’t rocket science, or missile science, as one of my friends once said. It is like a diet, but with your finances. If you take in fewer calories than you burn, the caloric deficit will result in weight loss. Similarly, if you take in less money than you spend, the deficit will result in debt. So, the trick to getting out of debt is to reverse the trend.

As with any equation, there are at least two sides. You can either reduce the money going out, or increase your income, preferably both. The key to getting out of debt is to optimize the combination of income and spending. Here are the keys to get out of debt fast:

Before you change anything, contact one of the three credit bureaus and get a copy of your credit report. It’s free once a year from each of the major credit reporting agencies. You can stagger these reports to get one every 4 months. You can also get a more comprehensive service from FICO, the fine people behind whole credit scoring system, that includes neat graphs and charts with your score from all three agencies at the same time and such niceties as real time credit monitoring. This isn’t free, but it is pretty inexpensive and does provide much more information in a timely fashion. You can get a free trial here.

Once you get your report(s) go over them with a fine toothed comb to make sure that all your debts are, in fact your debts. Only once you’ve done this can you be sure you’re not starting the debt dig out procedure from a hole that’s deeper than it should be. Start that process first, and while you’re waiting to get your information, jump into the rest of the steps (with both feet).

Get Out Of Debt Fast Key #1
Control your spending. This is the single most important thing you can do to get out of debt. The average American consumer is about $11,450 in debt. You have to spend at pretty fierce clip to amass that much debt. This debt calculation counts those all Americans age 18 and over as consumers. There are about 220 million Americans in that age group and the total amount of consumer debt in the U.S. is about $2.524 trillion. Controlling your spending as a means to get debt free is important on two fronts.

First of all, the majority of those who exhibit high levels of consumer debt, not including mortgage or emergency medical debt, got that way through poor spending habits. Here are some things you can do to help control your spending, and most importantly developing a lifestyle that precludes excessive spending.

1.      Control your spending by developing a sensible budget. – This step to getting debt free is numero uno. You can’t plan if you have no basis for it. Many people have a poor idea of how much money they really spend on various items. To prevent those seemingly insignificant expenses that really add up to significant ones, a budget is a must. I posted on how to make a budget recently.

2.      To control your spending, check every expense to make sure it is legitimate. - It’s a real pain the backside, but you’d be amazed at how much money you have that you give away unintentionally. Look at receipts and billing statements closely to ferret out all those charges that maybe shouldn’t be there. In addition, make sure that actually get those sale prices at the store that you’re supposed to. It’s fairly common to have the price in the computer not agree with the promotional sale tag on the shelf.

3.      Control your spending by reconciling all your medical bills with your insurance statements. - Most medical insurance plans limit the amount health care providers can charge for certain procedures for those on preferred plans. The allowable cost will be listed on your insurance statement for each procedure. Make sure that you are not being charged more than the allowable amount for any of the procedures you’ve had performed. If you’ve checked the cost of medicine lately, you realize that it’s gone up. No, really, it has. Being overcharged for a single procedure can easily cost you hundreds of dollars, so it’s worth it to take steps to prevent it.

4.      Control your spending by putting as many of your recurring bills as possible on auto-pay. Make sure you set this up so the money is withdrawn from your account at a time when you have money in there. Setting up your finances this way reduces the time you spend paying bills, but not as much as you may think, because you still must check everything to ensure the proper amount was debited from your account. The real reason to setup auto-pay for your bills is that it prevents you from paying financial institution fees and charges associated with late payments. A strong secondary reason for doing so is that helps protect your credit score from the effects of late payments.

Get Out Of Debt Fast Key #2
The other side of the equation is how much money you bring in to feed your budget beast every month. A two pronged approach to get out of debt fast requires you to not only control your spending, but increase your income as well. There are myriad ways to increase your income. These range from increasing the income you make at your current job, to starting an second job, to plunging into your own business on the side. As with getting out of debt, it’s best to take a multi-pronged approach to increasing your income.

Since there are so many opportunities available to accomplish the goal of increasing your income, it’s silly not to avail yourself of more than one. For example, try to increase how much money you make from your current job and investigate home business opportunities (many great ones, even more scams). The advantages of a home business are flexibility and almost unlimited possibilities. The disadvantages are risk and the possibility of sinking endless hours into something that may not pay off as well as you would like.

To maximize your income, it’s usually best to create multiple streams of income. These would include your primary job, side business(es) and investments. One caveat here; it is very easy to get yourself torn in many different directions when developing multiple income streams, so it’s important to approach this with some semblance of planning.

The other advantage of creating multiple streams of income is that diversification of your income, as with diversification of your investments, provides you with some measure of protection. You won’t be as effected by things such as outsourcing, your company going out of business, or company mergers if you have a secondary or tertiary source of income. You’ll not have all your eggs in the same basket. At some point you’ll have multiple baskets, each with more eggs than you started with.

Get Out Of Debt Fast Key #3
How should you go about paying your debt down, once you begin doing so? There are multiple schools of thought on this, but I prefer a combination approach to paying down debt. As with the snowball approach, you’ll pay off your highest interest obligations first using as much money as you can dedicate to doing so, while paying only the minimum payment on all your other debts. After you pay off the highest interest debt, you’ll use that money toward the second highest rate, and so on.

With the hybrid approach however, you’ll first pay off any cards that are at, or close to their credit limits. Why would you do this? The reason to get all your cards at a target of about 60% of their individual credit limits is to improve your credit utilization score, a measure of what percentage of your available credit you’ve used. Having a few credit cards at or near their limits decreases your credit utilization score and lowers your overall credit score.

If you can raise your score, you’ll usually qualify for lower interest rates on your credit cards. You won’t be given this lower rate out of the goodness of the lender’s hearts though, you’ll have to ask (beg??) them for it, so get on the damn phone!! Lowering your interest rate will obviously lower your monthly payments and allow you to get out of debt even faster.
 

Debt Freedom Tip:
Talk with your accountant, tax professional or financial planner to make sure your tax burden is as low as legally possible. If you haven’t done a very good job in this regard, you may free up enough income from this alone to propel yourself toward debt freedom more quickly than you could have imagined.

Posted by debtblog at 02:32 PM | Permalink | Comments (0) | TrackBacks (0)

Interestingly enough, we are going deeper into debt at a highly disproportionate rate. According to the same Fed report, overall consumer credit increased at an annual rate of 3-1/4 percent in January, revolving credit jumped at an annual rate of 7 percent, and non-revolving credit increased at an annual rate of 1 percent.

Think about that for a second. U.S. consumers are increasing their levels of revolving debt at a rate that's 7 times greater than their level of non-revolving debt. Non-revolving debt is for loans that are taken out once, then paid down over time, such as car loans and mortgages. Revolving debt is an account that can be borrowed against and then repaid repeatedly, such as general credit and store credit cards. That means Americans are increasing their levels of debt for major purchases at a level far below that of inflation, while their debt levels for credit card purchases are forging ahead at levels almost double that of the inflation rate.

This is problematic for consumers on a few levels. One is that revolving accounts tend to have far higher interest rates than non-revolving accounts. This means consumers are spending a larger percentage of their money on something for which they receive nothing in return. Actually the latest Fed consumer debt statistics indicate that as of December 2007, the average credit card interest rate was 12.16%. As a way of comparison, the average 48 month new car loan was only 7.59% (corrected from the Jan, 08 report), and the latest 30-yr fixed mortgage interest rates (according to Bankrate.com) were lower still, at only 5.73%.

Who are we borrowing this huge amount of money from? Well, the usual suspects, of course. The largest credit card issuers, in order of outstanding credit are:
Bank of America
JP Morgan Chase
Citi
American Express
Capital One – Apparently, they are in your wallet!

Eveybody's Not Really Drowning in Credit Card Debt!
Although you may feel as though you're right in there with everyone else, drowning in credit card debt, it's actually not true. According to the U.S. Federal reserve, just over 50% of U.S. consumers either have no credit cards (GASP!), or pay off their entire balance every month. Furthermore, according to FICO, the folks that bring you the credit scoring system, 40% of consumers regularly carry a balance of $1,000 or less. FICO also reports that only 15% of credit card users regularly carry a balance of over $10,000.

Of concern for some consumers is that the credit card issuers are willing to let consumers have so much credit available. Credit balances are increasing, but credit limits are increasing even faster. The aggregate credit card limit is now $19,000. This actually helps your FICO credit score because if you have higher limits as a percentage of your outstanding balance, your credit utilization score will be lower. A lower credit utilization score will raise your credit score. However, this gives consumers the ability to charge absolutely huge amounts at a relatively high interest rate, something that's not good for their personal finance picture as a whole. Thankfully, relatively few consumers actually do this, but it could spell problems ahead for the economy if the trend changes.

According to FICO the typical American has 9 credit cards of all types, including gas cards, store cards and such cards as Visa and Master card. If you cross this with the Fed information that about 25% of the population has no credit cards, that indicates a small percentage has about a dozen cards, which I'm sure most financial experts would agree is far too many.

Hopefully these credit card statistics will give you a bit better understanding about the state of credit cards in the U.S. and where you fit into the picture.

Posted by debtblog at 01:49 PM | Permalink | Comments (0) | TrackBacks (0)

So, what are you to do? Where are you going to get the money it will take to put yourself behind the wheel? First you’ll have to wrestle with the lease vs. buy decision. That’s a subject for another post, I’m going to assume that you’ve already made the decision to buy your car, and leave the leasing to someone else.

Car loans are available from a number of sources. Most traditional lenders, such as banks and credit unions, offer car loan products. In addition, you can finance through the dealer, if you’re buying your car there. You can also get a loan from one of the many on line vehicle loan providers. All have their advantages and disadvantages. Rest assured, you can get a good loan, and with the average price of a new car for 2008 hovering at around $28,000 according to Edmunds.com, you’re probably going to need one.

First of all, negotiate the price of the car down as low as possible. One way to pay less in interest payments is to just finance less. Pretty basic, but it bears repeating.

Car Loans Through the Dealer –
Rule number one; secure your financing before you ever go near the dealer’s lot. Even if you don’t use it, and for some reason you do finance through the dealer, having your loan secured from an outside source gives you a hefty advantage at the negotiating table. Dealer financing has its advantages for you as a customer, however most of the advantages lie with the dealer. Many car dealers make a large percentage of their profit through the financing they provide. Many car dealers are on the up and up, but there are those that aren’t, and even those that are reputable are out to make as much profit as possible. For more info, here's a post I did some months back on car dealer scams. 

One possible advantage by getting a loan from the dealer is one of the low interest incentive programs offered by many auto manufacturers. You have to run the numbers however, as many of these low, or zero interest loan programs are offered in lieu of a substantial cash rebate. Look at how much you stand to save by foregoing the discount and financing at the low interest rate, versus taking the discount and getting a good loan somewhere else.

Here’s an example:
GM is trying to rid itself of some excess inventory that burns a bit more fuel than some would consider desirable, so they’re offering 0%, 60 month financing on Silverado pickups. You can also choose a $2,000 rebate, if you’d rather have that. Now this is a nice truck if there ever was one, and if you can afford to feed it, more power (and it has up to to367hp) to you.

0% Car Loan
Where do you end up after you analyze this loan? A Silverado extended cab 4x4 with the 5.3l V8 fetches about $33,000. If you financed at zero percent it would cost you $33,000, but it would effectively cost you less, due to the time value of money. Your real cost is closer to $30,000 after the effects of 3.5% inflation is calculated on your payment stream.
 

Cash Rebate in lieu of 0% loan
If you took the $2,000 discount and financed $31,000 at 6.75% for 60 months, your payment would be $610 per month for 60 months, vs. the $550 you’d pay for the 0% loan on the $33,000 loan. Your total of payments would be $36,600. The present value of the payment stream is roughly $31,165. That $610 you pay for your last payment in 5 years is only worth about $512 in today’s dollars.

So, in real terms you spend about $1,165 more for the cash rebate plus the third part loan. If, however, you invested the $2,000 at 10% for the 5 years, you’d end up with about $3,300. That’s enough math for one Friday, I think. Just remember to bring your financial calculator to the F&I office with you and don’t take the F&I manager’s word for everything. Remember, they are all about getting you to say “yes”. So when they say, “If I could, would you”, just say no! (At least until you’ve run the numbers yourself)

You can get a good car loan. They key is to look at all the alternatives. Weather you finance through the dealer, get a loan at your bank or credit union, or get a loan from a on-line car loan website, just make sure you compare all the offers, and make the best choice. Don’t just grab the first loan to come your way.

Have a great, Debt Free, weekend!

Posted by debtblog at 12:18 AM | Permalink | Comments (0) | TrackBacks (0)

In most cases they will cut off access to your credit line with no warning. You'll continue to write checks against your credit line as you always have, but all of a sudden the checks will be returned, unpaid. In some cases, banks will send out letters to inform credit line holders that their line has been terminated or suspended. Countrywide Home Loans has reportedly sent out about 125,000 notices to borrowers indicating their home equity lines were being frozen. Other banks freezing home equity credit lines include Indy Mac, Chase and WaMu, but not as many as Countrywide so far.

Many people assume that if their home values decrease, their equity will drop and their line of credit limit may be reduced accordingly, but that's not what most lenders have been doing so far. For most people with HELOCs, banks are just freezing or terminating them completely. People who live in areas with rapidly declining real estate values such as Florida, southern California and Nevada are more likely to get letters of death about their HELOCs, although King5 news in Seattle, an area with relatively strong home values, is reporting this phenomenon as well.

What can you do if this happens to you, or to determine if you're at risk of having your credit line frozen? The first thing you can do is to call your lender. They may just reverse the freeze by you asking them to do so. In most cases, however you'll have to get an appraisal to determine weather the value of you home has indeed declined. (Be aware that home appraisals are not free) If if the value hasn't declined or if it has only gone down slightly, you may be able to get them to reinstate your credit line.

People with homes whose loan to value is above 90% are in more danger of having their line frozen. At such LTV numbers it only takes a relatively small drop in home values to erase all the home owner's equity. It obviously scares lenders that the security on the credit line could disappear, hence their propensity to freeze the borrower's credit. If you have 50% equity in your home, you're much less likely to be in this predicament.

Posted by debtblog at 02:40 PM | Permalink | Comments (0) | TrackBacks (0)

It wouldn't be a bad way to go for the consumer, but many consumers are not ready for the dozens of phone calls they'll get after signing up with such a service. Does it work for the lenders? In some cases, yes, and very well. The more information the lead generation site gets, the better, in theory, they can match the lender with the applicant. Different lenders are looking for different types of borrowers, and given enough information, they can do a pretty decent job of creating a match between the two. The problem is that many people on-line have the attention span of a gnat with ADD. The amount of information required to give a good match necessitates a fairly long form. That will, in many cases drive people away from the site, even though it would be beneficial for the lender to have more information.

The other problem with sites that require more information is that many people feel some trepidation about having all their personal information floating about on the Internet. The greater the amount of information, they larger their goosebumps. That concern can have some validity, especially when it seems like every other day there is a news story about a stolen computer or compromised database.

If you do use one of these sites to get a mortgage or refinance, make sure you are getting all the information. Remember, in addition to the interest rate, you need to include the fees and points that may be included in the offer when you are making your calculations. Before you can determine weather or not you're getting a good deal, you need to include all the pertinent information. Make sure you get all the necessary information, especially regarding an ARM, including the rate index, caps, maximum interest rate, and adjustment date. These sites will not offer this information in most cases. You'll have to get it from the actual lender yourself. Don't forget to do so.

So, remember that these mortgage lead generation services are a business. As such they have to get paid. Their employees, vendors, and investors would like to be paid, you know. They way they get paid is by selling your information to those who value it, in this case mortgage and refinance lenders. It's worth big money, too. They'll get from $100 - $500 per lead, per lender, depending upon the quality of the information, your demographics, and their contract with the individual lender. That means your information could be worth $2,500 to them, depending how many lenders they sell it to. Not to say that's a bad thing, but you should be aware of it.

Posted by debtblog at 03:16 PM | Permalink | Comments (0) | TrackBacks (0)

PMI has been required on homes with an equity level of below 20%. This protects the lender from default by the borrower. PMI reduction of risk for the lender has been instrumental in allowing first time homebuyers and others without the ability to scrape together a 20% down payment, the ability to finance a new home. Now however, as the result of the high level of defaulted mortgages, PMI providers are rethinking their level of exposure.

A few have decided to make changes that will make it more difficult to obtain PMI, and that, in turn, will make getting a mortgage more difficult. On Feb 11^th the PMI group announced they would no longer be offering PMI to borrowers with less than 97% loan to value.

On March 3^rd Mortgage Guaranty Insurance Corporation (MGIC) sent out a letter indicating they’d no longer provide PMI for borrowers with credit scores below 620 and if buyers had loan to value ratios of over 95%, they would now require a FICO score of 680. They had already announced they would no longer be approving insurance for borrowers having a LTV, no matter their credit score, who are living in certain real estate markets where prices have recently been declining. This includes the entire states of Florida, California, Nevada, and Arizona, in addition to 25 other real estate markets throughout the country.

What can you do as a consumer to mitigate the risk that these changing rules among PMI providers could affect your chances of getting a mortgage? There a few things;

1)                  How to Avoid Paying PMI  - Make sure your credit score is as high as possible. That will not only give you the widest range of options by ensuring that you’ll be above prospective insurer’s cut offs, it will give you lower interest rates on your mortgage and a wider array of lenders to choose from.

2)                  How to Avoid Paying PMI  - Some lenders will let you avoid PMI, but will charge you a higher interest rate to compensate for their increased risk. You can work with one of these lenders, and then refinance your mortgage when your home appreciates such that your LTV falls below 80%.

You’ll definitely pay for the privilege and in some areas of the country there’s no telling how long until real estate appreciates to the point where you’d have enough equity to refinance. This would mean you could be paying the higher mortgage payments for quite some time, rendering this a very expensive option.

3)                  How to Avoid Paying PMI - Increase your down payment to exceed the 20%. This isn’t an option many people will be able to take advantage of, but look at all your alternatives here. You may be able to borrow enough from other sources that you can make this work.

4)                  How to Avoid Paying PMI - Look at a cheaper property. If it’s possible, set your sights a bit lower so that you have the required 20% down payment. This may not work for your particular situation, but evaluate where you sit to find out if you can get an acceptable home for a lower price. It may be worth revising your expectations for your new home downward a bit so you can not pay PMI.

5)                  One popular way to avoid paying PMI has been what’s known as an 80/20 mortgage, where you actually get 2 mortgages, one for 80 % of the home and another for 20%. With the recent problems in the credit and mortgage industries, these are very hard to find now, as lenders have dropped many of their more creative financing options.

Bottom line: You can avoid paying PMI, but some of the options of doing so can end up costing you more money than just paying it until you no longer have to. Look at your individual situation to determine what works best for you.

Posted by debtblog at 02:54 PM | Permalink | Comments (0) | TrackBacks (0)

For example, the 90 point range from a FICO score of 760 – 850 currently nets you an average loan rate of 5.457%. Stepping down a bit into the next range, which falls from 700 – 759 will put you at an average interest rate of 5.679%. As your credit falls, credit ranges shrink, and their effect on your credit score becomes much greater. That’s why, when your score is relatively low, small moves can pay off for you big time. At the bottom end of the FICO score range it’s actually fairly shocking how much lower your interest rate becomes by raising your score 20 points or so.

The lowest range is between 500 -549. If you have the misfortune to find, or have put yourself, in this range score range you’ll currently be looking at an average interest rate of 10.479%. The next range up is only 29 points wide and gives you an average interest rate of 9.910% a reduction of .569 percentage points. Moving up, the next score range is also smaller, only 19 FICO points this time, from 580 - 599. The interest rate reduction is a drop of .404 percentage points, to 9.506%.

Another 19 point score increase will reward you with the 2^nd largest drop in the whole scoring ladder, a .571 percentage point reduction to 8.935%. That’s nothing, compared with the reward you’ll receive for raising your credit score into the next 19 point range, from 620 – 639. That must really give the guys in the scoring algorithm and risk department the warm and fuzzies, because that 19 point boost in your FICO score moves you from the aforementioned 8.935% rate all the way down to 7.046%! What that means is that a 21 point increase in your FICO score, from 599 to 620 will lower your average loan interest rate down about 2.5 full percentage points.

To give you’re an idea of the impact that could have on your finances, your payment on a $250,000 30 year fixed rate mortgage at 9.506% will cost you about $2,103 for P&I. Raise your credit score 21 points, from 599 to 620, and your payment will drop to $1,671. 21 points difference on a mortgage this small saves you about $500 a month, for 30 years. It's definitely something to think about.

This all points to the importance of knowing your credit score at all times. In this example, if you were trying to get a mortgage or car loan, some work on your credit score in the months before you applied for the loan would pay huge benefits. If you weren’t aware of what your credit score was, however, that blissful ignorance would be expensive indeed.

Remember, you are eligible to receive a free credit report once a year from each of the three major credit reporting agencies. You should definitely take advantage of this, if nothing else. If you stagger your requests, you’ll get a report every 4 months. You’ll be far more informed than most Americans about your credit worthiness, and that should be the minimum that you do. The information from each agency is a little bit different, but you’ll still have a pretty accurate picture of your overall credit health.

If you would like to be a bit more up to date on your credit, and that’s never a bad idea for one who’s concerned about their financial well being, you can check out the services offered by Experian, among others. They are very affordable and will monitor your credit activity and score daily. To ensure you are as informed as possible about changes in your credit score, they’ll send you email and/or wireless alerts when something changes. This alone could easily save you thousands of dollars when financing vehicles or getting a mortgage, but it will also make sure you get the best deals on credit cards and other financing as well. Remember, a small change in your credit score can have a very large impact on your interest rates, depending upon where you start. That’s why you need to know where you stand at all times.

A further benefit of this sort of monitoring is that it helps protect against unauthorized use of your credit, something else that can be extremely expensive. See how you can help yourself get the best rates on financing by ensuring your credit score is optimized when you apply; go here.

Posted by debtblog at 02:04 PM | Permalink | Comments (0) | TrackBacks (0)

Here are some of the ways that this act can help you when dealing with creditors. According to the act a creditor may not do the following when attempting to collect a debt:

1- Use or threaten violence. While it may be obvious that using leg breaking tactics to collect a debt would be illegal on many counts, some of the more dubious debt collectors used to threaten or imply this type of fate for difficult creditors. If this happens report them at once to your local police and the FTC.

2 – A debt collector may not use obscene or profane language when communicating with you in any way, including speech, or any written communication. Once again, this is prohibited and if the jerk on the other end of the phone starts cussing at you, no matter how far your debt is past due, they are breaking the law.

3 – Harassing you with repeated phone calls. The act even views “causing the phone to ring” as a phone call, so the collector may not call your house at 3:00am and hang up or engage in any other such shenanigans. A debt collector may not call you“repeatedly or continuously with intent to annoy, abuse, or harass any person at the called number. “ although at times, it may certainly seem that they are doing that. Remember that if you are receiving debt collection calls from debt collectors for different debts, and from different collection agencies, that does not apply.

4 – If a collector is calling someone besides the debtor in order to collect a debt, they are severely restricted in what they can and can't do. They can call a 3rd party in an attempt to get your address or telephone number, but they cannot reveal to a 3rd party that they cannot state that you owe any debt, or use any language on the envelope of written communication that may reveal that they are in the debt collection business. They cannot communicate with a 3rd party more than once, unless that person specifically requests that they do so, or they legitimately think that person is lying to them or withholding information. Also, post cards are a no-no. If anyone gets a post card from a debt collection agency, send one of your own to the FTC.

5- If the debt collection has been informed that you are represented by an attorney in the debt collection matter, they must communicate only through your attorney. They cannot call you again after they have this knowledge. Again, if you get a phone call from the collector after you've informed them they should speak to your lawyer in the matter, drop a line to the FTC. The only way they can speak to you again is if your attorney ignores their attempts at contact. For $200 an hour, you'd hope they can answer the collection agency's communications.

6 – Unlike the police during the interrogation of a suspect, a debt collector cannot lie to you or misrepresent themselves in any material way. They can't say or do any of the following:

a. Say or imply they are with the government or affiliated with any government agency

b. Say or imply that you'll go to jail for nonpayment of any debt. Debtor's prisons don't exist in 21st century America. If, however, you fraudulently obtained a credit card or any other financing, you are in violation of the law, and can be imprisoned for fraud, but not the actual debt itself.

c. Say they are an attorney, when in fact, they are not.

d. Lie about the debt or how much you actually owe.

e. Indicate or imply that you have committed a crime regarding the debt you owe.

f. They cannot threaten any action, such as wage garnishment, unless they actually expect to take such action. Making empty threats in order to collect a debt is a violation of the act.

g. Send fake court documents making any claims regarding the debt. This seems so logical, you wonder why the government even had to include it.

h. Not disclose that they are attempting to collect a debt and any information they receive will be used for that purpose. They have to state this in their first communication with you, weather it is written or oral.

i. Using a business name other that the true name of the collection agency that they work for.

You can download the full text of the Fair Debt Collection Practices Act here. 

If anyone is using any of these tactics in order to collect a debt from you, they are violating the law. This is true weather or not you are the biggest deadbeat this side of the Mississippi. It doesn't matter how large or small the debt is, or how long you have owed the creditor money. There is certain conduct and certain actions that are prohibited under this act. If a collection agency is trying this on you, politely inform them that you know about the Fair Debt Collection Practices Act, and that they are in violation of it's statutes. That will usually make them clam up. Stay Debt Free

Posted by debtblog at 03:17 PM | Permalink | Comments (0) | TrackBacks (0)

In addition to the above debt statistics, only 51% of those in the study were able to completely pay their credit card bills every month. That means that 49% of Americans, if the study accurately represents the entire country, are going deeper into credit card debt every single month. That stands to reason, as 33% reported that their non-mortgage debts exceeded $10,000. Because the majority of Americans finance their vehicles, that could account for a large portion of the $10,000, but the study isn’t specific about this. It’s frightening nonetheless.

So, what are your options to legally eliminate debt if you find yourself in this distinguished company?

Option to legally eliminate debt #1-
Pay it off. This is the responsible thing to do, and probably what most people would choose if given the choice. If the debt is of your own making, i.e. fueled by excessive trips to the mall, clubs, casino, or eBay, it’s definitely the right thing to do, but it may require a bit of reorganization and reprioritization.

Weather you’re trying to lose weight or get out of debt; you will do well to implement a complete lifestyle change. Actually, losing weight and losing debt require many of the same things. You need to develop and implement a strict budget, weather you’re talking food or finances. Come to think of it, your food budget can really help your financial one. Evaluating your victual choices can really help in paring back the family budget.

Obviously eating out is a no-no, except on the most special of occasions. Look at your diet. In most cases you can make food choices that are less expensive and healthier for you. The health aspect is very important when it comes to keeping yourself out of health related debt in the future. A glance at the debt study numbers reveals that this is a big concern of many Americans, so a change of diet can help put your mind at ease, in addition to stemming the outflow of your hard earned dollars.

You should also look at where you shop. No more high-end markets for you. It’s off to the warehouse food store. Don’t worry, your stuffy friends (who are also deeply leveraged) will never see you there, they’re too busy trying to find a spot to park the Lexus at the Whole Foods Market. You’ll have the last laugh though, because your grocery bill will shrink by about 30%.

To eliminate your debt by repaying it, you’ll need a plan. One method that works very well is the roll up debt repayment plan. It’s pretty simple, yet effective, especially if you have a large amount of credit card debt. Stop using all your credit cards except in the direst of emergencies, and I don’t mean the Labor Day Sale at Macy’s. Once you’ve done that, here’s how the repayment plan works.

Pay only the minimum payment on all your debts except the one with the highest interest rate. Bring all your financial resources to bear on that debt. Pay as much as you can squeeze out of your budget (you did make one, didn’t you??) toward this debt. When it is paid off, switch all the money you were using to pay off this debt toward repaying the one with the next highest interest rate. With each successive debt you repay, you will put more toward repaying the next one, because you not only have the money in your budget for debt repayment, but the minimum payment you were using for all the previous debt you’ve repaid.

Option to legally eliminate debt #2-
Bankruptcy. Ouch! That’s usually the absolute last option and it’s even less attractive since the new bankruptcy statutes went into effect in October of 2005. There are 2 main types of personal bankruptcy; chapter 7 and chapter 13. Chapter 7 is able to be used for both personal and business bankruptcies. It’s the worst kind of bankruptcy with respect to your credit. There’s no going back. Your non-exempt assets are sold, and the proceeds are sued to satisfy your creditors to the extent the proceeds of the sale will allow it. The advantage to the Chapter 7 is that your debts are eliminated, not reorganized.

All your debts are eliminated, except of course, if you happen to owe the IRS anything. They always get their money, so be aware of this if your primary debt is tax related. Tax related debts are given what’s called priority status, meaning they are exceedingly difficult to get out of paying. The IRS will not go away by merely filing bankruptcy, and many state departments of revenue work the same way. It’s best to reach a settlement with the IRS to reduce as much of your back tax bill as possible because eventually, you’ll have to pay it.

In addition to eliminating your debts, a chapter 7 bankruptcy will pretty much eliminate your creditworthiness for the next 10 years. That’s a heck of a long time, but that’s how long a chapter 7 will stay on your credit report. You’ll still be able to get credit of course, especially after a few years have elapsed, but it will cost you much more, and you will have fewer options than before you filed. After all, if you’re making good money, and are fairly debt free after your bankruptcy, there are definitely creditors who’ll want a piece of your pie, so they’ll loan you money, you may just have to pay more for the privilege.

A chapter 13 bankruptcy is also called reorganization. In this type of bankruptcy, debtors pay off a large portion of their debts over time. The chapter 13 stops collection actions and prohibits collections action for a 5 year period. It freezes your debt at current levels. It requires a bankruptcy plan that’s approved by the courts. It will spell out in detail how you plan to repay your debt. You have only 15 days after you file your bankruptcy petition to complete this plan to the court’s satisfaction and have it on file.

The largest reason to file a chapter 13 over a chapter 7 is that you can save yourself from losing your home to foreclosure. After the bankruptcy however, you will have to make all your mortgage payments as per the terms of the bankruptcy plan, or you will risk losing your home anyway. Another advantage is that all creditors are paid by the bankruptcy trustee (the trustee is an impartial individual appointed by the court as the administrator of the bankruptcy), so you make a single payment, similar to what you would do with a debt consolidation loan.

After the Bankruptcy legislation of 2005 a larger percentage of your debt is required to be repaid than before. There is now a means test to help determine the debtor’s ability to pay off their debt. The legislation also required chapter 13 to be used if the means test shows that you are able to repay your debt over time, because your income is greater than your expenses.

Option to legally eliminate debt #3-
Debt settlement or debt elimination. With debt settlement or elimination, your debt is negotiated down by professionals. They basically get the credit card companies to agree to accept a fraction of the original debt and then consider the debt paid in full. The credit companies do this because if you file bankruptcy, they may receive little or nothing that you owe them. I can hear some of you thinking now; “Wow! That sounds great. How can I sign up for that?”  Slow down. Do you really think there’s no catch to that sort of thing?

There are a few catches. First of all you’ve got to be ever vigilant for debt elimination and debt reduction scams. The Internet is rife with such nonsense. In fact these types of scams are so prevalent, the Board of Governors of the Fed has sent out warnings about it. One popular debt elimination scam uses fake financial instruments to claim the debt is invalid. Think about it for a second. If you charged up that Virgin Islands vacation on your Visa card, do you really think you can question its validity? Come on! You still have the tan, you have to pay the credit card bill.

The scammers charge large up front fees, claiming to be able to get the debts eliminated by showing they are, in fact, invalid. You’ll be sucked in by a tremendous amount of logical (on the face of it) and official sounding documentation. It’s all total crap. After you pay the scammers their large up front fee, you’ll be left holding the bag, and deeper in debt than ever before.

The other catch to debt elimination and debt reduction programs is that they can hurt your credit score. Lowering your credit score can make it more difficult to secure new credit, especially now, when lenders are skittish about giving out mortgages and refinance loans without spotless credit.

The last catch is rarely talked about, especially by the debt settlement companies. Ever hear of a 1099? If you are an independent contractor, you are well familiar with these IRS forms. These are the IRS forms for non employee income. If you receive any non employee compensation for work performed such as contracting, the contracting firm will document this with a 1099. That way they can deduct what they paid you from their income, and the IRS is notified of yours. Well, guess what, the IRS considers a creditor agreeing to reduce your debt as compensation paid to you. The creditor will send you a 1099 and you will have to pay takes on that income, as sure as if it showed up in your paycheck. The problem is that nothing was withheld from your paycheck to cover the income noted on a 1099, it’s just added to the income reported on your annual W2.

So, be aware of the catches of this method of legally eliminating debt; possible scams, implications to your credit, and more taxes owed by you. If you look at all the options, you may still feel that debt elimination or debt settlement is the right choice for you. Then again you may not.

Posted by debtblog at 02:18 AM | Permalink | Comments (0) | TrackBacks (0)

Just how do you calculate debt to income ratios anyway? For that matter, after you calculated it, what is an acceptable debt to income ratio? Calculating your debt to income ratio is fairly simple, You merely divide your monthly gross income by your outstanding debt. To calculate the ratio, you have to take your annual gross income and divide by twelve. I know, you were told there would be no math, but it's pretty darn simple, really. This calculation gives you your average monthly gross income. Here's where you wish you'd claimed all those tips and side jobs you've been gloating about. If you haven't reported them, you'll have a harder time getting your lender to believe you really have that level of income.

After you figure out your average monthly income, you'll need to look at two different percentages. If you are going to get a conventional mortgage, you'll use 28% and 36%. If you are getting an FHA or VA mortgage, you'll use slightly higher percentages; 29% and 41%. What do those percentages mean? The first is the percentage of your gross income you can use for housing expenses. That will include your house payment, all your housing associated insurance, and interest. These expenses are abbreviated PITI, for Principle, Interest, Taxes, and Insurance.

If, for example, your W-2 income was $55,291 last year, you'd divide that by 12. The result of that calculation is your average monthly income: $4,607.58. Depending upon the type of mortgage you'll be getting, that will give you the amount of house payment you can be approved for, all else being equal. In this example, you'd be able to afford a house payment of $4,607.58 x .28 for a conforming mortgage. $4,607.58 x .28 = $1,290.12. As you can see, that's not too much house in many metro areas. For example that house payment will allow you to technically afford, at this week's average 30 year fixed mortgage rate of 5.52%, a mortgage with a balance after your down payment of $227,000. You might want to avoid the mistake made by too many people leading up to our recent credit problems, and finance less than that.

Wait a minute, what about that second percentage? What does it mean? That 36% or 41% is the amount of house you can afford according to the standard debt to income calculation, after you include all your other recurring debt. This is where you include your credit card bills, car payments and store charge card payments. This is why your loan officer is telling you to pay down some of this type of debt. You can qualify for a larger mortgage if your recurring debt is lower.

Let's look at the above example, but assume you have only one car, a 2005 Honda Accord LX. That's a nice, sensible, family sedan with a price when it was new of about $22,000, depending upon the option level. Say out the door, with taxes an license, you're into it for $24,000. If you financed this car when it was new, and got 4.9% financing, your monthly payments would be about $450 per month. Let's also assume that you have the national average credit card debt of about $8,500, depending on whose statistics you look at. If you are also paying the national average gold card interest rate of 11.73%, your monthly minimum credit card payment amounts to somewhere around $260. (You can take heart in knowing that if you make only the minimum monthly payment on your cards that it will take only about 15 years to pay off the $8,500 and you'll pay about $4,000 in interest on the $8,500 principle amount!).

If you include your car payment of $450, and your credit card payment of $260, your recurring monthly expenses are $710. $710 added to $1,290.12 gives you a nice, round $2,000. Your mortgage lender will let you have 36% of your monthly gross income be consumed by PITI and recurring monthly expenses. Your current gross monthly income in this example is $4,607.58. 36% of your monthly gross is only $1,658. In this example, you're way too high after adding in your monthly expenses, to qualify for your house. Now you see why you see so many used car ads that read “Must sell, buying house”. With this level of monthly recurring expenses, you can only qualify for a house that's $948/ month. You'll be staying above the garage.

Posted by debtblog at 03:04 PM | Permalink | Comments (0) | TrackBacks (0)

The problem is that for most people that have bad credit, credit cards were how they got there in the first place. Looking for a credit card if you used them to get your personal finances completely screwed up isn't going to make things any better. Too many people think that they can reverse the situation if only they can just get this one more card. Then, they'll turn things around, and everything will be okay. Only you and I know that in most cases, it won't be okay because the underlying causes of the problem still exist and until they are corrected, it's only going to be like giving a fifth of Jack to an alcoholic, who thinks “I'll just have one more and then I'll stop.”

In many cases it happens gradually. The problem is that few people actually track their finances, so they have little clue about exactly where the money goes, only that it's gone. To those that aren't financially savvy, use budgets, track their expenses, and go over their billing statements, it seems that one day they're simply blindsided. They wake up and realize they're in way over their head and have little hope of reversing the situation. If this sounds all to familiar, you're not alone. It can be a case of keeping up with the Joneses, being just a bit too social, gambling, or myriad other causes of excessive spending.

There are times when people with bad credit may need a credit card and it's not a bad idea. You may fall into one of these categories. If you had one time, extraordinary expenses or income loss that put you over the edge, such as job loss or medical bills, you may fall into this category. These experiences can destroy the credit of someone who previously was a prime credit risk. These people tend toward the financially responsible, but just got into a bad situation. In this day and age, living completely sans credit card can be a difficult proposition especially if you travel or purchase things on line (another addiction that can get you in trouble in a hurry).

You can use a credit card to help reestablish good credit, but it's essential that you've done all the groundwork first. Job 1 is to reign in your spending. If you're still spending more than you make, getting a new credit card is the last thing you need to be doing. Pay off any outstanding debts on existing cards, if you have any. If you have existing credit cards, don't get new ones. Just pay off the ones you have and lock all but one of them away somewhere. Keep the accounts open, because those aged accounts, and the availability of more credit, will help improve your credit score over time. This strategy will only raise your credit score back up if the accounts are in good standing and have low or no balances. Maxed out, or close to the limit cards will detract from your credit score.

You should only use new credit cards to help reestablish your credit if you have lost all your previous credit cards. In that case, you'll need to have some type of credit account to begin a successful track record of making timely payments. Two of the things that the FICO scoring system looks at is how much credit you have, and your credit profile. You want to have a balanced mix of credit types, such as personal loans, revolving credit (credit cards are a type of revolving credit), and mortgages.

The Three Types of Credit Cards for People With Bad Credit
Here's what to look for if you must have a credit card and your credit is not so hot. You'll have 3 basic choices; secured, unsecured or prepaid cards. Secured credit cards, as the name suggests, require some security against the the possible credit limit, limiting the lender's exposure to risk. This enables those with bad credit to qualify for credit cards they'd otherwise not have a prayer of getting. Typically the security is cash, the amount of which determines the credit limit for the new card. You'll usually be charged a fee for the privilege of having such a card.

One of your key tasks is to shop around for the best fee structure. Fees are one of the card issuer's main profit centers. Many people fixate on the interest rates they're paying and forget about the fees, which can be substantial. Make sure you check both. In addition, make sure that the card issuer reports your activity to Exeprian, Trans Union and Equifax, not just one or two of them. If you're using the card to rebuild sour credit, you want to get what you're paying for (and you are paying).

If you do well with this secured card, in time your card company will offer you a real, unsecured credit card. At first you'll probably have to live with higher interest rates, but make sure you inquire about lowering your interest rates. They may say “no” at first, but ask again every 3 to 6 months. As your credit improves, you'll qualify for better rates. If not from them, you'll be able to get a card from another company. Just don't start on the same death spiral that got you in such a mess in the first place.

Your other option is a prepaid credit card, typically either a Visa or MasterCard. These are really just a glorified debit card. With a pre-paid card, you deposit money into an account for security as with a secured card. The difference is that as you spend, it just depletes the money you deposited. With the secured card, you are actually using credit. The security money is just there in the case of a problem.

Have a great, Debt Free Weekend!

GO COUGS - #4 (15-0)

Posted by debtblog at 11:15 PM | Permalink | Comments (0) | TrackBacks (0)

The fact remains that this single, 3 digit number has a greater affect on your finances than any other. It almost single handedly determines the interest rate you'll pay for credit, weather you can get credit at all, and a slew of other, seemingly unrelated things in your life. Some of the other things that your credit score impacts these days include your eligibility and rate for insurance and rental housing.

What is a good credit score?
FICO credit scores range from 300 to 850, with higher being better. You'll see few at either extreme, just as you'd expect. The majority of U.S. consumers (27%) have a score between 750 and 799, and 58% have a score of 700 or greater. The average credit score varies with time, but is usually in the low 720's. Most lenders consider a score of over 750 very good, and that should make you eligible for good rates on loans and credit cards. Exactly what is considered a good credit score varies by lender, and in many cases by product, so the best policy is just to get the damn thing as high as possible. Recently, due to the problems in the credit markets, lenders have been getting a bit more skittish about who the lend money to, so where you could have easily gotten a good loan with a 705 last year, this year the same lender may be looking for a 745.

What makes up your credit score?
Your credit score is determined by 5 things; past payment history (35%), amount owed (30%), length of your credit history (15%), new credit (10%), and the type of credit you use (10%). Take note here, people, the single most important thing that FICO looks at when calculating your credit score is your past payment history. They consider the most reliable indicator of your inclination and ability to repay creditors your history of doing so in the past. The score is weighted so that recent late payments (the last 24 months or so) are more important than those in the more distant past. About 2/3s of Americans have no late payments showing on their credit reports whatsoever, so if you do, it definitely puts you in a minority you'd be better off avoiding.

The next most important aspect of your credit considered by FICO is how much you owe. This is not just the total amount of your debt, but the amount of your available credit you have used. This is also termed your credit utilization score, and is a very important component of your overall score. To increase this number your should pay off debt, especially revolving accounts, such as credit cards. The CUS is why you can adversely affect your credit score by closing unused accounts. Doing so will decrease your total available credit, and thus your score. The amount owed on revolving accounts is weighted more heavily than is debt from installment loans, such as car loans or mortgages. FICO actually looks favorably on installment loans that have a good payment history, so if you have a car loan that is 50% payed off, and you've never been late, that will help your credit score.

To prevent you from just applying from every credit card under the sun, and then not using them, as a strategy to raise your CUS, and with it your overall credit score, you'll note that another component of your FICO score takes into account any new credit you've opened. A large number of new accounts will decrease your credit score in the short term.

The length of your credit history is important in the grand scheme of things. Experience breeds contempt, but also a better credit score, in the eyes of the powers that be. How long you've been a creditor is also a reliable indicator of your risk for future creditors, so is included in your credit score. That is why you should get a credit card the day you are able, and begin building a credit history. In keeping with the larger components of the FICO scoring system and financial prudence, make all your payments on time and keep the balance fairly low.

Last but not least, FICO looks at what types of credit you use. They are concerned that you have multiple types of credit, so having a credit card and a car loan, for example will serve to raise your credit score. Ironically, your lack of a credit history will probably cause you to pay a higher interest rate on a car loan at first, but will repay you by allowing you to get a higher credit score, and lower interest rates on subsequent loans.

So, what does not affect your credit score?
How old you are isn't taken into account, so that is another reason to begin building a credit history early. If you are 25 years old with a 7 year credit history, you will score higher than a 25 year old with a 3 year history, all other factors being equal. They also don't factor in race, color, creed, or any other such nonsense, as well they shouldn't.

A common misconception is that the amount of money you make is included in your credit score, but is not. Salary or compensation isn't used as one of the determining factors in your credit score. Apparently there are just as many deadbeats making $100,000 a year as there are making $30,000. Something to note is that lenders themselves may look beyond your FICO credit score to consider your income, as when they calculate your debt to income ration when you are applying for a mortgage.

Something else that isn't included are all types of credit inquires. Some are included (hard pulls) and some aren't (soft pulls). When you check your own credit score, something you should do regularly in addition to getting a copy of your credit report, that will not affect your credit score in the slightest. If you are attempting to open a new account, that inquiry will give your credit score a minor ding (about 5 points) for 12 months, although it actually stays on your credit report for twice that long.

Your credit score will not take into account the interest rate you're paying on other financial obligations, so if you have a credit card that you're paying 22% on, that won't automatically lower your credit score.

So, to raise your credit score you should do the following:

1. Get a copy of your credit report. You are able to do this for free once a year from each of the 3 major credit reporting agencies; Equifax, Experian, and TransUnion. Stagger your requests so that you get one every 4 months. Look through it with a fine toothed comb and contest any inaccuracies that you find.

2. Make sure you make no late payments. If you have any delinquent accounts, clear them up at once. The sooner you clear them, the sooner they will fade far enough into the past so as not to adversely affect your credit score.

3. If you have no credit history, begin building one as soon as possible. The length of your credit history is very important to your score, so the earlier you get credit, the longer your history will be.

4. “Piggyback” This is way for you to use someone else's credit to bolster your own, and is especially powerful to increase your credit score if you are young and have little or no credit history. This is why it is a great idea for you to get attached to one of your parents credit cards if they have good credit. That card's history will be reported on your credit report and increase your credit score. Due to recent abuses, such as people renting their credit histories to those with abysmal credit, this technique is in danger of being eliminated.

5. Analyze at your credit profile. Do you have 22 maxed out Visa cards? Keep a healthy balance of credit types and, this is very important, do not close accounts you no longer use and have paid off. These old, paid off accounts are pure gold for your credit score. The increase the length of your credit history, and because they have no balance, they decrease your credit utilization score.
   

Hopefully this will increase you understanding of that all-too-important financial statistic, your credit score, and allow you to raise it so you can take advantage of lower interest rates, and better loans.

Posted by debtblog at 03:08 PM | Permalink | Comments (0) | TrackBacks (0)

Lets say, for the sake of argument, that you currently have $10,000 in outstanding credit card debts at an average interest rate of 15%. You want to see all your favorite bowl games in their requisite HDTV splendor (and impress your friends with the spectacular picture quality of the large screen HDTV in your family room). That being the case, you trot your self over to your laptop to check the ratings on the latest 52” LCD and 50” plasma TVs. After a bit of research, you settle on a new Samsung LN-T5281F with dynamic LED back lighting (a marvel of technology, that) or a Pioneer PDP-5010FD Kuro plasma (the best plasma image I saw at the recent CEDIA show in Denver, although Pioneer cheated a bit by using custom produced demo material).

These are both truly fine,1080p displays that will wow even the most jaded video critic, so your drunken friends should be suitably impressed as you gather to watch the Fiesta bowl. So, what is the cost to impress your friends and enjoy a bit of HDTV bliss? The best is never cheap, and these TVs certainly aren't, but you're going to pay it off right away using your Christmas bonus, so what's the problem? The Samsung LN-T5281F is $4,499 over at Abt Electronics, one of the few web retailers to offer this high end model. The Pioneer PDP-5010FD is an even bigger stretch, at a whisker under $5K over at OneCall, again, one of the few places on line to carry it. (Yes, if you actually order one of these, I'll get a (very) small cut. It helps with the bandwidth costs.)

One note here about purchasing electronics on line – There are many unauthorized retailers out there where you can find products. However most manufacturers have only a select number of on line retailers that are actually authorized to carry their products. Failure to purchase through one of the authorized retailers will bring with it a host of problems, including loss of warranty. Not a great deal on such an expensive product. In addition, many of the products are either grey market goods (goods for other markets transshipped to the U.S.) or aren't really in stock. Upon ordering at the too-good-to-be-true price, you'll be steered toward another product.

Back to the question at hand regarding purchasing by the indebted. Spending your Christmas bonus on one of these fine TVs, while bringing untold amounts of enjoyment to you and yours, comes at a cost of failing to retire an equal amount of debt at an average interest rate of 15%. If, for example, you spent $4,499 on the Samsung, apart from helping the economy of South Korea, you are paying that 15% on an equal amount of debt that you still have, because you chose to buy a cool, new HDTV instead of losing the debt. So, in reality, the TV costs you $4,499, plus 15% a year until such time as that amount of credit card debt is paid off.

So, make sure you think about the debt you aren't paying off the next time you make a purchase instead of getting rid of some of your debt. Have a great weekend.

Posted by debtblog at 02:53 PM | Permalink | Comments (0) | TrackBacks (0)

The single, most important thing you must know is why you're in debt. That knowledge is vital in order to determine how you'll proceed. If you're in debt due to unforeseen, extraordinary circumstances you'll take a different course of action than if you have a pattern of spending in excess of your income. According to Bankrate.com the most common cause of excessive debt is failing to reduce expenses when your income is reduced. Growing one's expenses to match one's income is one of the most natural personal finance patterns. It can be seen almost every time someone's income rises. Almost invariably their expenses will rise right along with it.

The problem here is twofold. One, by allowing expenses to rise, you are depriving yourself of valuable retirement and investment contributions. Two, you are reducing your margin for error in the event of an income reduction. The second situation happens all too frequently, and is disastrous for your finances. You lose your job and your next one pays less, or you are working on a project that allows consistent overtime pay and it ends; whatever the reason, a reduction in income will put you in a real financial hole if you allow yourself to grow your expenses with your salary.

f you spend more than you make, for whatever reason, you have established a pattern that guarantees long term indebtedness, and there's little you can do about it unless your spending habits change. That's priority number one if you're seeking debt relief; get your spending under control, or all your actions will be for naught. Gambling (debt reason number 5) is a surefire way to find yourself with massive debt. That is even more likely if you are one of the 2.7% of the U.S. population that has a gambling problem (State of CT Department of Mental Health and Addiction Services).

If you are in debt due an extraordinary event such as divorce (the number 2 cause of excessive debt) or medical problems (the number 6 cause of debt) than you will be more successful by using a debt consolidation or other program to secure debt relief. Entering a debt relief program if you are one of those that has a spending problem, whatever the source, is a recipe for disaster. Priority number 1 in this instance is to cure the root cause of the spending imbalance. Only then can you reign in your debt problems.

One of the first things you should find out in the debt relief process is your credit score. That will help you lay out your options. The higher your credit score, the more options you have, and the more you have to lose by screwing the whole thing up. You should know your credit score in any case, because it's just good, personal finance common sense.

The next thing to determine is weather or not you have any assets that can be used as security. If you have assets for collateral, primarily real estate, you can get a debt consolidation loan. This is only acceptable if you have no spending problems. I'll repeat that once again for those that are reading this early in the morning, before they've had their coffee. Under no circumstances should you ever get a debt consolidation loan if you have a pattern of spending in excess of your income. One of these loans isn't always the best solution even if you have no spending problem. Like any other financial instrument, it is only a tool to be used when the situation warrants it. Just when does the situation warrant it, you may ask?

If you have exhibited financial responsibility, consistently pay your bills on time, but are saddled with several high interest credit card or other debts, a debt consolidation loan will allow you to make a single payment while saving substantially on interest payments. Be advised that you can actually pay more in total interest by using a debt consolidation loan, even if the interest rate is much lower than the loans you're paying off. How the heck is that possible? Two possibilities. One is that many of these loans have fees that you'll be required to pay. While not technically interest, the fees still contribute to the APR of the loan. The second reason is that many of these loans have long terms. When you stretch the repayment of your loan over a longer term, you're naturally paying interest for a longer period of time. It adds up, and you can actually pay more in interest over the long term.

The other thing to consider is that you can lose whatever you are using for security on the loan. That security is why debt consolidation loans have a lower interest rate than credit cards and store charge cards. The loan is secured, and so represents a lower risk for the lender. The lower risk translates directly into a lower interest rate. Be that as it may, it won't make much difference to you if you default on the loan and your collateral is repossessed. The overwhelming number of people use their primary residence as collateral, so if you default, it will be foreclosed upon. You'll be living at that big underpass on the 5, next to that guy with the blue tarp. That's serious business, so go into any such loan with both eyes open.

You may also consider credit counseling services as a way to find debt relief. There are two varieties of credit counseling. In the first one, the counselors will go through things with you and help you plot a course of action to steer your way through your debt minefield, hopefully plotting a course that results in your being debt free. It can be an excellent way to help you decipher all the subtleties that can affect your financial future. When you're finished, you'll have a financial action plan to eliminate your debt. Since 1998 FICO ignores the fact that you're visiting a credit counselor when calculating your credit score.

The other variety of credit counseling involves counselors too, but they actually negotiate with your creditors to allow you to pay back only a portion of your debt. They will also stop most of those harassing collection calls, if you've let the situation get that far. This is also called a debt management program. So, now you're saying “Wow! This is great. I can pay back only a portion of my debt and stop those nasty phone calls? Of course I'd rather go that route.” Not so fast, Bucko! That kind of debt relief will come at a cost; namely to your credit rating, which will typically plunge it's way into the financial toilet for a while, although not nearly to the extent that a litany of missed or late payments will do.

The last form of debt relief is through bankruptcy. If your credit score is already atrocious, say under 550, you obviously have less to lose by declaring bankruptcy. You should be fully aware however, that you'll have that bankruptcy on your credit report for a decade and it will make getting any sort of loan much more difficult and expensive during that time. In addition a pattern of poor spending habits will only continue after you've declared bankruptcy, unless you take steps to correct it. Once you've declared bankruptcy, you can't just do it again, either. You have to wait for 7 years before you can do so again (Chapter 7).

There are many options for debt relief. They all have their advantages and disadvantages. Carefully choose the best option for your situation.

Posted by debtblog at 03:18 PM | Permalink | Comments (0) | TrackBacks (0)

So, it's likely that if you've graduated from college in the last couple of years, you'll have substantial debt to deal with. How do you balance that with the need or desire to buy a home? You'll have to take on a mortgage. Due to the recent, well (over??) publicized problems in the mortgage industry, especially the portion of it serving the more credit challenged in the audience, you may think getting a home may have to wait. It may, but you should evaluate your financial situation to determine if it is worth pursuing. There's a good chance that you'll find that purchasing your first home does make sense for you after all.

If your analysis reveals that buying a home is for you, and you can find someone to give you a mortgage, chances are you'll get a pretty favorable interest rate on it. Although many lenders are a bit averse to actually lending money at this point, when you can talk them into it, you'll probably get a pretty fair mortgage.

As an aside, it's a shame that so many lenders are so squeamish about actually doing business these days. There are still a tremendous number of people out there that want to borrow money, and are fantastic credit risks, yet lenders are reluctant to give them a mortgage. Too bad for the borrower, the lender, and the economy. Yes, they should shy away from those that legitimately have little chance of repaying the loan, but guide your lending with common sense, not fear, please.

So, if you have a student loan, or more likely a few of them, how should you proceed? First of all, if you have multiple student loans, you should look at student loan consolidation, especially now,with interest rates so low. It will make debt management a much easier task, and reduce your monthly payment. Not only will that help your cash flow and make life easier, but when lenders look at your financial picture, you will be a bit more attractive to them.

Okay, you've consolidated, now what? Since the days of zero down mortgages are behind us for the most part, you'll probably need to come up with a down payment for your house. Here's the question; if you have money for the down payment, should you use all of it as a down payment, or should you pay off some of your student loan?

If you're fortunate enough top be in the position that you can ask yourself this question, congratulations! You're doing something right. So, which is it? Pay off some student loan debt, or increase the down payment on your house? You'll have to look at the interest rate on both loans first. The rate on your consolidated student loan will be based on the results of the 91-day T-Bill Auctions and are set on July 1^st. You should not have to pay a fee for consolidating your loans, either. Your mortgage interest rate will, of course be dependent on many factors, such as your credit rating, lender, and so forth. I've done a few posts in the past on how you can improve your credit score, and how to get a better mortgage. Look at them for steps you should take before and during the mortgage process.

If the interest rates are similar on the the consolidated student loan and the mortgage, you'll usually be better served to pay off the student loan, and minimize the down payment on your home due to the tax advantages a mortgage provides. Remember your mortgage interest still provides a nice tax deduction, despite the efforts of some in congress to eliminate it. That usually swings the answer in favor of using as much of your money as possible for paying off student debt, which provides no such tax advantages. This assumes a fixed mortgage at a good interest rate. If you have some unconventional mortgage product with all sorts of schedules, rate adjustments and fees, you're probably still better off if you put your money toward paying off your student loan, but with something that complex, you're on your own.

Have a Merry Christmas, and Happy, debt free Holidays! I may make another post between now and Christmas, but with all the loose ends left to wrap up before then, there are no guarantees. Here's to family, friends, and all those in the world that are less fortunate. I hope you're having a great holiday season!

Posted by debtblog at 02:35 PM | Permalink | Comments (0) | TrackBacks (0)

If you are one of those that does have excessive debt, weather you fear it or not, a debt cure may be in order. Curing debt is easier said than done in many cases. Sure, it's simple to spout such platitudes as “Just put 10% of your pay toward your debt until it's paid off. You'll never miss the money.” Weather or not you would, in fact, miss the money is academic. To find a cure for your debt, you'll need to analyze it and determine what will be the best course of action to eliminate it.

Debt Cures – Strategy 1 - Step by Step

Debt Cure Step 1 –
Get a copy of your credit report from at least one of the three credit reporting bureaus. You need this not only to establish a baseline credit score, but for debt elimination purposes, you need to be sure if all your debts are valid. Your credit report will show you if you have any debts you are unaware that may be invalid. If you have any debts you feel are in error, you can contest these while you move on to the next steps required to cure your debt problems.

Debt Cure Step 2 -
List all your debts. Put down the creditor, the type of debt, the balance owed, the monthly payment, any past due balance, the interest rate, and if it is a fixed term loan, the payoff date.

Debt Cure Step 3 – Analyze your debts. Why are you in debt? Determining the root cause of your debt  is absolutely essential. You can have debt from a pattern of overspending, or from an extraordinary event, such as natural disaster or medical problem. If your debt is caused by overspending, you must cure the root cause. If you’re spending beyond your income, you’ll be doomed to a life of indebtedness.

Debt Cure Step 4 -
When you have all your debts listed and categorized, sort them by the interest rate. Now it's time to plan your debt elimination strategy. Usually you'll work on paying off the highest interest rate obligation first. There are some exceptions to this.

If you have any past due debts, you must satisfy these first. There are two reasons for this. One, they are probably charging you a late fee every month you are late. Second, past due debts devastate your credit score. Lowering your credit score can actually make the interest rate rise on some of your other debts, in addition to making sure any new credit you receive will be more expensive. The farther past due the debts are, the greater the detrimental effect they have on your credit score. So, if you do have past due debt, make sure that is taken care of first. Make the minimum payment on your other debts until you have satisfied all your past due debts.

Once you’ve taken care of any past due debt, it’s time to begin eliminating current debt. Make the minimum payment on all your debts but the one with the highest interest rate. You can use some discretion here. For example, if you have a credit card with a $12,000 balance and a 21.9% interest rate, and another card with a $1,250 balance and a 22% rate, you should probably pay off the 21.9% card first. The amount of interest you’re paying every month on the larger card far exceeds the interest you’re paying on the smaller card, so you should eliminate that debt first.

When that debt is gone, take the money you were paying on the now retired debt, and shift it toward paying off the next highest interest rate debt. You’ll have more money to use for this because you’ll have the minimum payment from the retired debt and the extra money you were using to pay for it as well. You’ll add those two amounts to the minimum payments you had already been making toward debt number 2. When number 2 is gone, you’ll repeat the process with debt number 3, and so forth, until you’re debt free. Yipee Ki Yay Motherf….

Strategy 2 –

Using strategy number one will get your debt paid off, but you will take an interest rate hit. After all, the entire time you’re paying off the debt, you’re also paying interest, and at a fairly steep interest rate. You can use another strategy to pay less in total interest if you do it correctly. There is much more risk with this strategy if you do it wrong, however. Strategy number 2 is to get a debt consolidation loan. Unlike what the shills on the radio will tell you, A DEBT CONSOLIDATION LOAN WILL NOT GET YOU OUT OF DEBT!!! You get yourself out of debt by making payments on the darn thing.

The advantages to this strategy are that you’re only making one payment, so it is much more convenient, and you’re far less likely to inadvertently miss a payment. The interest rate is typically much lower as well, so in theory you’ll pay less in total interest.

The disadvantages are that although the interest rate is lower, the term of the loan is much longer, so if you only make the minimum payment, you can actually pay more in total interest by using a debt consolidation loan, than you would have if you’d just paid the debts off using strategy 1 above. The other disadvantage is, and this one is huge, you must use collateral to get that lower interest rate. What collateral? In the vast majority of cases, it’s not your comic book collection. Typically the lender will want your house as their collateral. Now if you fall behind, you not only screw up your credit, you have to find a new place to live. If you have to do that with no money and poor credit, I imagine it’s no easy task.

The other problem with using a debt consolidation loan is that in many cases, the problem that caused the indebtedness is not fixed. You can easily find yourself in a situation where you are back in debt from credit cards, vehicles, and now, a debt consolidation loan as well. Not a pretty picture, that.

Remember there are debt cures, but no magic potions. Here’s to getting debt free.

Posted by debtblog at 05:41 PM | Permalink | Comments (0) | TrackBacks (0)

CDOs are also what’s known as structured securities. This refers to the way the debt is set up. Not all participants face the same exposure to risk in such a financial instrument. Picture a CDO as a high rise building, with different risk exposures on each floor. The lower floor has the highest risk, and the highest floor has the lowest risk. Each floor is like a condo. It’s is purchased by different investors.

Why would these investors not all seek to purchase those levels on the top of the CDO, with the great view and the 12 foot ceilings (and the lowest risk)? Because, in the typical risk / reward relationship of investment instruments, the top levels of the CDO don’t receive the best return. Those at the lower levels, facing the highest risk, also enjoy the highest interest on their investment. At these lower levels CDOs can be extremely risky investments, and investors can lose everything they have invested. They are compensated for this risk by returns that regularly (until recently, for many) well exceeded 10%.

Who are these investors? They are much the same as with any other large debt instrument; pension funds, mutual funds, corporate and government retirement plans, insurance companies, large private investment funds, and banks. As you can probably guess from the types of institutions involved, we are dealing with absolutely huge amounts of money here. The 3-06 Fed report listed the total amount of outstanding debt backed securities in the U.S. alone at almost $35 trillion! Contrast that dollar amount with the equity markets, where approximately $50 trillion is in play in all of the world stock markets combined (data from the global trade association for stock exchanges).

These CDOs are one of the actual vehicles used by investors to acquire the mortgage debt made so famous in the media over the last few months. The investors, many from overseas, or as noted earlier, part of large financial groups, don’t just go out and buy somebody’s home loan. They buy securities (bonds) backed by the mortgages, including CDOs, which are made up of these bonds (securitized groups of many hundreds or thousands of such mortgage loans), packaged with other collateralized debt.

For a look at the actual math involved in a CDO (If you’re math averse, put your brain on ice first), check out this informative post by Accrued Interest

Why you should care about CDOs –
You should care about them because they are a foundation cornerstone of the mortgage backed securities market. As such they can have a large impact on the credit market as a whole. In addition, some observers feel that CDOs, because of their structure, are difficult to effectively risk analyze, and the risk can be mis-priced. That means the price doesn’t adequately reflect the associated risk assumed by the investor. That can lead to investors acquiring securities with a negative expected return.

Why would a large financial group or institution ever purchase a security with a negative expected return? After all, one would assume they would be in a much better position to analyze potential investments than your average person. They are, but due to the inherent complexity of a CDO, even some of the large investment groups sometimes have trouble  getting it right, because even they simply don’t have the depth of understanding required in these matters.

It gets better –
It has been theorized by some analysts that this lack of understanding has been capitalized on by some hedge fund managers. In order to generate their fund’s profits, they have been using a technique called credit arbitrage. That means they profit from the difference in two markets. More difference means more profit for the funds (grossly oversimplified). In order to maximize their profit they want to maximize the market difference. They can either seek to grow one side or shrink the other, possibly both. With arbitrage, risk is minimized by using simultaneous, or near simultaneous transactions.

A technique used by these managers to accomplish this Herculean task is to shake the confidence in the markets. Since credit market pricing is, in a large measure, based on confidence, lowering confidence creates a price collapse. With lower prices on one side of the equation, an arbiter can generate greater profit. That has been done in the case of the credit markets, according to some observers and insiders. So basically, a few fund managers aimed to destroy the world credit market for their gain, at your expense. For a more in-depth look at this phenomenon, take a look at this column in MSN money by Jon Markman.

Now that you’re good and pissed off, have a happy Thanksgiving (ignoring the whole genocide aspect of Thanksgiving for those of you unfortunate enough to have children in the Seattle school district).

Posted by debtblog at 02:56 PM | Permalink | Comments (0) | TrackBacks (0)

In a single day Google gets what I found to be a very surprising number of searches that pertain directly to the mechanics of perpetrating credit card fraud. For example, the search term “credit card generator downloads” got 873 searches, “credit card generator” got 407 searches, and the term “credit card reader / writer” got 1010 Google searches. This is in one, single, day! That means that on a single search engine (admittedly, the world's largest) for only three search terms on how to get the tools to perpetrate credit card fraud, there were 2,290 people actively trying to steal money from you, your credit card issuer, or from their perspective, preferably both. Perhaps I'm a bit naive, but I found that frightening.

Here are some things you can do as consumer to help prevent credit card fraud:

• Sign your card card as soon as it arrives.

• Don't keep your cards in your wallet. Keep them in a zippered compartment or a business card holder.

• Record of your account numbers, their expiration dates, and the phone number and address of each company. Keep the record in a secure place.

• Watch your credit card during a transaction, and get it back as soon as possible.

• Void all incorrect receipts.

• Destroy carbons created by non-electronic processing.

• Compare your card receipts with billing statements.

• Reconcile your card accounts monthly, just like your checking account.

• Report any questionable charges promptly and in writing to the card issuer.

• Notify card companies in advance when you change your address.

Merchants can help prevent credit card fraud on their end with some relatively simple strategies. As this sort of fraud is omnipresent and expensive for business owners, it's something they should be actively engaged in preventing. Here are some things that business owners can do to head off credit card fraud before it strikes.

1. Address Verification System (AVS) - This checks to determine if the card's billing address and the ship to address, or the address listed by the person trying to use the card match.

2. Checking ID – I'm always surprised by the number of employees that fail to perform this very simple step when I make a purchase. When I was a business owner this was grounds for disciplinary action. From the customer's perspective, it isn't a hassle. Most customers will be thankful that their ID was checked before their credit card was charged.

3. CVM – this is that extra 3 digit number on the back of the card. The trick is that this number is found nowhere in the mag strip information, so if the card is swiped by one of those fraudsters that steal your card by illicitly using a card scanner, they will not get the number. In theory, you actually have to have the card in your possession to have the code number. Most online merchants will demand it. If you aren't asked for it when you're placing an online order, shop elsewhere. If you're a business owner, you are crazy not to use this verification technique.

4. Payer authorization programs add an extra secret password that must match before the card will be approved. It does add an extra step in the checkout process, but if you, as a customer, don't have an extra few seconds to help prevent this growing problem, shame on you.

Hopefully these steps can help both merchants and consumers avaid credit card fraud.

Posted by debtblog at 03:08 PM | Permalink | Comments (0) | TrackBacks (0)

Upon a brief conversation with the bank's CSR, it became a bit more clear. In order to pay extra and have your auto pay debit your bank account by the normal amount, your check for the additional amount you wish to pay must arrive at the credit card issuer after the auto pay date, but before the closing date of the credit card statement. Go that?

It's pretty important, because if you have your credit card set up to debit your account for the amount of the minimum credit card payment, and you want to pay extra, you have to ge3t your check in during the proper window. If not, you will only succeed in reducing the amount of your auto pay debit by the amount of your extra payment. If your check for the extra amount you wanted to pay was greater than the amount of the minimum payment due, you would only ending up paying the amount your check was for and nothing would be debited from your account for the auto pay.

Hope that makes it a little more clear than mud.

Posted by debtblog at 07:48 PM | Permalink | Comments (0) | TrackBacks (0)

Credit Card Practice to Watch For #1 –
Foreign exchange fees – These fees are charged any time you purchase something on your card from another country. The exception to this is Capital One, who currently does not charge it’s customers a currency conversion fee. The conversion fee averages a little less than 3%, so they can add up in a hurry. Weather you’re traveling or ordering something online from a company whose e-commerce website is set up outside the U.S., or wherever your credit card account is based, these fees will be added to your purchases. The bank charges you a fee for currency conversion, and you pay handsomely for the service. If your account is U.S. based, the fee is based on the U.S. dollar value of the purchase, after conversion.

To avoid this you can use your card as little as possible when traveling overseas. Exchange your currency at your bank and use traveler’s checks. For some travelers, the fee is worth the added convenience and protection offered by using their credit card. If you are one of these consumers, you should be aware that you are paying for the privilege.
 

Credit Card Practice to Watch For #2 –
High priced credit card insurance and monitoring – With the high instance of large credit card balances, credit fraud, and identity theft a large market has been created for customers that are looking to protect their good names, and more importantly, bank accounts. This has given rise to a huge number of products offered by credit card issuers to guard against loss in the event of credit card fraud, ID theft or the card holders inability to pay their credit card bill due to some unexpected problem, like stepping in front of the #17. The operator from your credit card company can be pretty persuasive on the phone when they are seeking your enrollment in one of their credit protection services, so hold your ground and at least make sure that the one they are offering is the best choice for the job.

While these services can have undeniable value, they can also be fairly expensive, especially if the benefits are limited to the issuing company’s products. Many credit card companies charge between $7.00 and 10.00 a month, or a percentage of your outstanding balance for the service. There are a variety of independent services available that guard against such losses, but are effective for all a consumer’s credit products. Look into one of these if you are of a mind to secure some protection.

Credit Card Practice to Watch For #3 –
Changing interest rates – many times a credit card issuer will change the rate their customers pay on their cards, and do so with no warning, explanation or special indication. They’re sure as hell not going to send you a letter calling your attention to their little profit increasing tactic. In fact, many consumers, typically not as vigilant in these matters as they should be, will fail to notice for months, if at all. This is a practice you need to watch for.

Look at the interest rate for both purchases and cash advances (don’t get one of these from your credit card company, unless you need it for life saving surgery) on every statement. If you see the rate rise for no apparent reason, you need to call their customer service department and find the reason for it ASAP. In many cases you can get them to reverse it, and maybe even get the rate reduced to lower than it was before. In order to make this happen, you obviously must have had no late payments and be in good standing on your account.

Credit card companies are a business and are looking to maximize their profit. With the increasing number of people in credit distress, they are looking to make money from those that do pay every month in order to maximize their revenue. If you’re one of those that pay, make sure you’re only paying your fair share.

Posted by debtblog at 01:43 PM | Permalink | Comments (0) | TrackBacks (0)

So how can you ensure you get the best deal on a credit card without getting stung by unfavorable terms? There are some things you need to do to make sure this happens.

1 Way to Get Good Deals on Credit Cards – Look past the teaser rate on the offer sheet. Often the junk mail you receive is emblazoned with low, but very temporary teaser rates. After the introductory period expires, you'll get stuck with the real rate, often very much higher.

2 Way to Get Good Deals on Credit Cards – Read everything so you can avoid paying excessive (any) fees. The next most popular way for the credit card companies to get your money is by attaching fees to the agreement. You need to shop around for low, or preferably no fee offers. If you do the math and look at the fee as an extension of the interest rate, you'll be amazed at how much worse that makes your card. The less you spend on your card, the worse fees are as a percentage of what you've spent, hence they increase the apparent interest rate you're paying. For example, if your card has a $50 annual fee, and you charge $1,000 a year on it, the fee effectively added 5% to your interest rate. So now that 9% card is a 14% card.

3 Way to Get Good Deals on Credit Cards - Look at the grace period. That's where you can really get hurt. If you have a short grace period and you pay by regular mail, you can get stung badly if your check gets delayed or returned. The extra day or so may be all the lender needs to not only charge you a fee, but raise your interest rate. Once they've jacked up your rate, it'll be at least 6 months before you can negotiate it back down in most cases. In addition, if you don't ask them to lower it, they'll leave the rate high forever. Look for at least 25 days after you made any purchase. Something else to watch for is the length of time between the bill arrives at your house until it's due. In some cases you'll ahve only days to mail the check, so if you do your bills once a week or 10 days, you may miss the cutoff date.

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First of all there are two kinds of mortgage points, origination points and discount points. In this case we’re referring to discount points. A discount point is just a way you can pay a fee at the beginning to lower the interest over the life of the loan. You are, as it’s referred to, “buying down” your mortgage interest rate. Origination points, on the other hand, are a fee charged by the lender to originate the loan. A single point (back to origination points) is a fee equal to 1% of your initial loan balance. So, if your mortgage was for $200,000, 1 point would be a $2,000 fee. You pay this fee up front, at the time the loan closes. This will then lower your mortgage interest rate over the entire term of the loan.

Should you pay discount points on your mortgage? It depends primarily on how long you’ll keep your mortgage loan for. Because the lower interest rate will save you money over the life of the loan, while the fee you pay is paid up front, it will take some time before you will make back the initial money you paid. That is known as the “breakeven point”. After you’ve passed the breakeven point you are actually saving money. Before the breakeven point you’re just repaying yourself the fee you paid the lender for the points when you got your loan.

That means that if you plan on staying in your home (and keeping that mortgage) for a length of time, usually over 10 years or so, points may be a good idea, while for shorter time period you’d be better served investing that money elsewhere. Most mortgage points calculator fail to take into account the value of the money you paid for the points as an investment, only as cash. If you do include the fact that you could easily be earning a return on that money that could possibly exceed the interest savings on the mortgage loan, it changes the equation yet again.

For example, if you have a $200,000 outstanding balance on your mortgage, and you paid 2 points for the interest rate to be reduced from 6.1% down to 5.7% you’ll save approximately $52 a month. How long, at $50 per month, will it take you to recoup your initial investment? Again, that will actually depend on the rate of return you could earn on the money you paid to buy down the mortgage had you invested it instead of using it to pay points.

In this case, if you paid 2 points for the buy down you’ll save about $620 in interest that first year. That $4,000 would have to be invested in a vehicle that returned 14.4% (compounded daily) to earn an equivalent amount. In this example, you’d reach the breakeven point for the loan with points in about 5 years and 8 months. If you held the property and the same mortgage for 15 years, at the end of the 15 years you’d have saved about $5,600, assuming you are in the 35% tax bracket and could have invested your money at 4%. If you earn 5% on your investment or savings, the breakeven period stretches out to 5 yr / 10 months.

I hope this helps you figure out the points / no points question. Have a great, Debt Free weekend. 

Posted by debtblog at 01:07 PM | Permalink | Comments (0) | TrackBacks (0)

Funny, both of these events had one thing in common; a terribly flawed business model. With the e-commerce bubble it was the “gain market share at the expense of anything resembling profit” business plan; all the while buying $50,000 granite water features and custom carpet with the corporate logo for the lobby of the hopelessly large offices. With the sub prime mortgage fiasco it was the “Just loan money and let appreciation sort everything out” mindset that proved to be the industry’s undoing. Okay, now that everyone is on the same page, repeat after me “Our business model has to be self sustaining and show long term profit potential, without rewriting the rules, in order to be valid.” Got that? Great!

Now that most of the calamity has befallen us, there are still many people out there who’d actually like to buy a home. Lenders and their investors are so jittery, they’ve forgotten that many people actually will repay their loans. These prospective borrowers are earning a decent living, have equity in their homes, and aren’t leveraged to the hilt in other areas. These are well qualified buyers and represent pretty good credit risks, all things considered.

If this is you, you’re probably wondering just how in the heck you’re supposed to get a mortgage these days. I have a few friends with houses on the market right now, and they report that, while many people would like to fork over the required price to buy their home, many are unable to actually get a mortgage to do so, even though they seem qualified.

Here’s what mortgage lenders are looking for these days in order to let one of these precious mortgages slip through their fingers. You’ll be hard pressed to get a mortgage with a credit score much below 650. If you can get one, you’ll pay a pretty penny. You’ll probably not be able to get a no down payment loan, either. Be prepared to have a down payment of at least 10% for a conforming loan from most lenders. The exception would be someone who has a very nice sized down payment, such as in the 25 – 30 % range. Credit would be less of an issue for these borrowers. Remember, $417,000 is the maximum loan amount purchased by Fannie Mae. Loans above that amount are classified as ‘Jumbo Loans’ and are more difficult to get. Lenders are usually not loaning any more than 80% of the home’s value for these loans.

For God’s sake, stay away from ARMs. Have y’all learned nothing? As we speak there is little to be gained by going with an ARM. Bankrate.com reports that there’s about a 0.2% spread between a 30 year fixed rate mortgage and a 5/1 ARM. Last week there was basically no difference at all. So, for right now, stay with the security provided by a fixed interest rate mortgage.

Despite what’s been so widely reported, it’s still possible to get a mortgage for the majority of people. Lenders are just being more cautious and you may have to look a bit more thoroughly in order to find a loan, but they are still out there, so don’t’ give up just yet. It’s more critical now than ever to make sure your credit score is all it can be, and that you have all your ducks in a row.

Posted by debtblog at 11:35 PM | Permalink | Comments (0) | TrackBacks (0)

If you felt like you spent more time in you college's financial aid office than in class, you're not alone. Federal spending on student loans has increased by over 40% since the start of the decade. It now sits at $23,000 per U.S. household. Think about that the next time you think the feds are spending nothing on education. Sadly, that has barely kept pace with the increased costs of getting a college education. But federal spending for student aid of all types for parents of students, including loans, has jumped by, now sit down, 400% since 2001! If you're looking to help increase these numbers, here are the types of loans you'll be going after.

The 3 types of federally guaranteed student loans are the following: Stafford Loans, PLUS loans, and Perkins loans. Here's how they stack up.

Types of Student Loans

PLUS Loans - These loans are for the parents of eligible, dependent, students. Who are exactly are these eligible students? To be eligible for such a loan, you must be enrolled at an approved institution of higher learning, in an approved program, on at least a half time basis. The exception to this rule are that Graduate student are now eligible to receive PLUS loans. PLUS loans are provided through both the Family Friendly Education Loan (FFEL) program and the Federal Direct Student Loan program. As the name suggests, direct loans are available directly through the U.S. Department of Education, while FFEL loans are obtained from an approved private lender, such as bank. The parents will need to submit to a credit check to receive PLUS loans through either program. If the parents have marginal credit, they can use a cosigner to help get the loan approved.

A student can get up to the cost of school attendance, less other financial aid less other financial aid received for the term. It's easy to apply, simply submit the appropriate application. These are available from your college's financial aid office, or in the case of an FFEL loan, they can also be picked up at the lender's location. A completed FFEL application and promissory note will need to be returned to the school, who is also responsible for filling out a portion of the application. Once approved, there will be a check sent directly to the student's school.

The responsible parties are required to begin repayment of PLUS loans within 60 days of the time the check is sent to the school. Sorry no grace period, those responsible have to begin paying of the loan long before the efficacy of said payments are determined. The interest on these loans is fixed for new loans, although it was variable in the past. Currently, the rate sits at 7.9% for direct and 8.5% for FFEL loans. Prior to 2006, the interest rate was variable and re-indexed each July1st.

Perkins Loans – Perkins loans are for both undergrads and graduate students who can demonstrate exceptional financial need. (Really, don't all students have an exceptional need for money?) Perkins loans are made by, and repaid to, the student's school. Unlike with PLUS loans, there is no half time enrollment requirement for Federally guaranteed Perkins loans. Undergraduate students are eligible for up to $4,000 per year, while graduate students can get up to $6,000. The total available for the student's academic career is $40,000. Not all institutions of higher learning participate in the Perkins Loan program. You'll have to check with your particular school to verify their participation. Currently the interest rate for Perkins loans is 5% and they can be repaid over a 10 year period (the repayment period is subject to the total loan amount).

Stafford Loans – Loans de Stafford are also available in two flavors, like PLUS loans. As in the case of PLUS loans, both are available through either the U.S. Dept. of Education (direct) or private lending institutions (FFEL) and are available for students attending school at least half time. The difference is that Stafford loans are for the students themselves, not their parents. As with PLUS loans, there is a 10 to 30 year repayment period for direct Stafford loans, but it's possible to get Stafford loans in either subsidized or unsubsidized varieties.

Subsidized loans are for students that can demonstrate financial need. On these loans the government pays the interest until either 6 months after the student graduates or until 9 months after the student drops below half time enrollment status. It is also possible to request a payment deferment for Stafford loans, if a student feels they are currently unable to begin repayment of their loan obligation.

Unsubsidized loans are available to students without the requirement to demonstrate financial need. However with an unsubsidized loan, the government will not pay the interest. If a student takes out loans in excess of their determined financial need, the loans beyond the amount of financial need must be unsubsidized loans. Effective on July 1^st, 2007 the limits on Federally guaranteed Stafford loans are $20,500 ($8,500 subsidized) for grad students. For undergrads, the limits differ for dependent students and independent students. Independent students are eligible for $7,500, $8,500, and $10,500 in their 1^st, 2^nd and 3^rd - 5^th years, respectively. For dependent students, Stafford limits are $3,500, $4,500, and $5,500.

Posted by debtblog at 01:41 PM | Permalink | Comments (0) | TrackBacks (0)

The study had some interesting conclusions; to wit – There isn’t a correlation between the state’s cost of living and the level of debt carried by students when they graduate. In addition, North Dakota, a state with a fairly low cost of living was number 3 in the level of student debt. Iowa, another state with a low cost of living, ended up in the number 2 spot on the list of indebted students.

You’d think that going to a state school would be less expensive and help avoid graduating with a boat load of debt, but no, that’s not always how it works. In some states, North Dakota and Iowa among them, but also Kentucky, Delaware and Tennessee, you could easily end up with greater levels of debt than those who attended private schools, according to researchers.

There is also not a direct correlation between the cost of tuition at a college or university and the debt level of its graduates. Some schools with very high tuition had relatively low levels of debt among graduates. That could be because a large number of students attend the private schools on scholarships and thus pay no tuition, or because they come from relatively wealthy families that could afford to foot most or all of the bill for the student’s education out of their own pocket. In addition, some schools and states with high tuition costs have better financial aid programs to offset some or all of the student’s costs.

Student loan provider Nellie Mae reports that the average undergraduate debt upon graduation is now up to $27,600. If you’re one of these students with crushing student loan obligations what can you do? You can just gut it out and pay off your loans, or you can default and leave your lender hanging. Okay, so you’re probably trying to avoid the second choice in this scenario. The fact remains though, that high levels of student debt can set you back substantially when it comes to building a solid retirement account, buying a home or, ironically, setting up a college account for your own kids.

One way to reduce your loan payments is to consolidate your student loans. Much like any other loan consolidation program, a student loan consolidation program allows you to use a single, large loan to pay off many smaller loans, in theory at a lower interest rate. As with consolidation loans for other types of debt, such as credit cards, you’ll substantially reduce your monthly payment by doing so. You’ll also make your life more convenient by paying a single loan, instead of a myriad of smaller ones.

The major difference between consolidating a student loan and your credit card debt is that you won’t have to put your house on the line when you consolidate a student loan, as you would with credit card debt. This holds true for federally insured student loans, but typically is not the case if you got a personal loan to help pay for your education.
 

There are some huge benefits to student loan consolidation, such as dramatically reduced monthly payments, but it’s a little different than rolling your credit cards into a single loan. When consolidating student loans, you have a deadline for application each year. In the last few years there have been several changes by the U.S. Department of Education regarding how you proceed with consolidation.

Student loan interest rates are determined by the 91-day T-bill auction. To receive the current year’s rates, and this is important, your completed consolidation loan application must be received by the lender, and they have to confirm the loan before July 1^st. If the loan isn’t approved by July 1^st, you’ll pay the following year’s rates. In years gone by, there was a grace period that would allow people to skate in past the deadline as long as their complemented application was in the lender’s hands. Now they must have completely processed the loan request and approved the loan by the deadline. You can thank the 109^th Congress for that.

Unlike your credit cards, you should almost always consolidate your school loans, if they are federally insured and you can drop the aggregate interest rate. Another difference is that you won’t have to submit to much of the documentation required with other types of loans, such as credit checks or any other such nonsense. Your school's financial aid office can be a big help with your consolidation efforts. One last thing; verify if your lender will give you an interest rate reduction on your consolidation loan if you have your payment automatically withdrawn from your checking account.

Posted by debtblog at 04:50 AM | Permalink | Comments (0) | TrackBacks (0)

So, how the heck are you supposed to get to the point where you can drive around in your realtor's Lexus without wasting your time, theirs, or the sellers? Don't laugh, it happens. I have a friend who's selling their home and Realtors actually brought a few prospective buyers who were not pre-approved. Why? It's anyone's guess, but if you haven't reached that step in the process, your home may be out of reach. You won't really know (unless you can pay cash for the property or you're pretty damned confident in your financial wherewithal).

Step 1 in Getting a Home Loan -
Step 1 in getting a loan for your new home is to get all your financial information and supporting documentation in order. Key among this is a copy of your credit report, and documentation supporting your income. You need to do this well in advance of actually looking for your loan. Why?

Because, especially in the credit market in which we find ourselves, having a good credit score will enable you to get a favorable mortgage. The days of getting financed with a FICO score of 525, $25,000 in auto and credit card debt and a stated income of $40,000 are probably behind us for a while, as far as most lenders are concerned. You'll need to be able to actually verify your income by gathering 2 years worth of W-2's or tax returns, and proof of employment, such as recent paycheck stubs.

You should  get a copy of your credit report, not only to determine your credit rating, but to improve your score if at all possible. I've written several posts on the steps you can take to improve your credit score. Just increasing your score a few points could make the difference between getting a loan and sitting on the sidelines of home ownership. In addition, the better your credit score, the more favorable interest rate you'll be able to get, lowing you mortgage payment and saving you many thousands of dollars over the life of the loan.

Step 2 in Getting a Home Loan -
The second step in getting a home loan is to locate a lender. These days that may be a mite bit more difficult than it was only a few short months ago, but relax, there are still plenty of folks out there with money to lend. Your task is to find one. That's a process in itself. First, you should  call around to local mortgage companies and ask talk to them. Ask friends who they worked with when they bought their homes. A referral from a few satisfied friends, especially if they're financially savy, can be worth quite a bit here. Check your bank or credit union as well. If you've been a good, long term customer, you may do well, but don't just go to your bank and take whatever they give you (if they'll give you anything, the big banks are getting a bit gun shy lately).

Step 3 in Getting a Home Loan -
Your third step in obtaining a home loan is to evaluate the different lenders you met in step 2. Although requirements have been getting more stringent, many will still let your qualify for more house than your income can really support. In this situation you can end up being house poor. House poverty is a sad situation where too great of a percentage of your annual income goes into supporting your mortgage payments and home maintenance. Don't let it happen to you. Make a realistic budget to determine how much home you can afford, keeping in mind to have some income in reserve, and stick to it.

When evaluating loan offers, you'll want to consider the interest rate, fees, term of the loan, and how much total money you'll pay ever the life of the loan. Remember, you'll pay interest on all the fees and closing costs associated with the loan, so any costs outside the mortgage itself that gets rolled into your loan will cost far more than their initial dollar figure by the end of the loan. Look for the lowest total cost over the life of the loan. Total includes everything. The annual percentage rate (APR) stated in the good faith estimate you get from the lender will help here. Be advised however that APRs are kind of like a good guideline. There are no consistent standards that the APR value must stick to, so they may not be directly comparable between 2 different loans.

You want to then get pre-approved status from your lender of choice. Pre-approval should not be confused with pre-qualified, although it sometimes is. Pre-approval is a more thorough process and your credit will be checked so you’re ready for a real mortgage, hence the reason for step 1 above. Once you have your pre-approval, you can go find a Realtor. Good luck!

Posted by debtblog at 12:11 AM | Permalink | Comments (0) | TrackBacks (0)

First of all, check your mortgage documentation if you are unsure what type of mortgage you're committed to. Really, this is one piece of financial information you shouldn't be in the dark about. I'm not making this up about Americans not knowing. According to a survey (I've referenced it in previous posts) conducted by Gfk Roper, 34% of Americans actually don't have a clue about what type of mortgage they pay every month.

If you have an adjustable rate mortgage, there are some terms you should be familiar with. If you don't know what type of mortgage you have, you probably don't know what these mortgage terms mean, either, so read up.

Mortgage Term Definitions:

Index: By definition, ARMs adjust, You may not know how this all happens. There are various interest rates used in the financial community that are, for the most part, used by financial institutions for determining how much interest is charged for interbank lending. These are used as an index to base your ARM upon. As the index changes, so will the interest rate you pay for your mortgage. Every so often (exactly when is spelled out in the terms of your loan that you probably didn't read if you're unaware what type of mortgage you have) the appropriate index is used to calculate your mortgage interest rate. Some of the most popular indices are the 1 year treasury rate, COFI (Cost Of Funds Index), the LIBOR (London InterBank Offered Rate), and the MTA (Monthly Treasury Average).

Margin: This is a killer for ARMs. Margin is the number of percentage points the the lender adds to whatever index applies to your ARM when determining your interest rate. The total of the Index and the margin is the interest rate you'll be paying. The one thing not known by most consumers is what the margin their lender uses for this calculation. However, your lender is not required by law to disclose you ARM's margin in the loan disclosure documentation.

Cap: This is the maximum number of percentage points that your ARM can adjust. Even if the sum of the index and margin are greater than the cap, your mortgage can only adjust by number of percentage points allowed by the cap. There a various caps that will apply to your ARM. There is a periodic cap that determines how much your mortgage can adjust at each adjustment period. There is also a lifetime cap that states the maximum percentage your mortgage interest rate may be. Sadly for mortgage holders, the is also a floor cap that tells how much the lowest interest rate your lender will charge.

Teaser: Here's where so many mortgage holder's get into trouble. The teaser rate is an artificially low interest rate used in the initial period to keep the payment, well, artificially low. The thing is that too many mortgage holders rely on this dollar amount when determining how much home they can afford, only to find out they really can't afford their home after all. You usually aren't able to these artificially low payments for very long, only about a year in most cases, so your joy may be short lived.

Posted by debtblog at 01:58 PM | Permalink | Comments (0) | TrackBacks (0)

If you’re facing foreclosure, or fear it could be in your near future, you must avoid foreclosure at all costs. It’s even more important to avoid foreclosure, than it is to keep your home, although both would be nice. Too many people put off the inevitable, thinking it will go away, because they’re paralyzed with fear, or are suffering from analysis paralysis. Get on the stick, people! Foreclosure will impact your credit, and not in a positive way, either. It will dramatically hurt your credit for 7 years. That’s a hell of a long time to have compromised credit. This is especially true in light of tightening credit markets. Interest rates for those with blemishes on their credit, if they can get loans at all, will be dramatically higher than for those with great credit.

So, what can you do if you’re one of those in this pickle? There are 4 broad strategies you can use to avoid foreclosure; pay your mortgage current, sell your home before it falls into foreclosure, rent out your home, and mortgage modification.

1 - How to Avoid Foreclosure – Pay your mortgage current. This is a great solution if you can do so. Unfortunately, it’s often the most problematic. After all, if you could just pay it current, you wouldn’t be in a default situation now.

2 – How to Avoid Foreclosure - Sell your home. This is often tried by many as a strategy for foreclosure avoidance. The problem in many real estate markets is that real estate values have tumbled by 5% - 25%. Too many people are unable to sell their house for what they owe on it. In addition, there is a backlog of homes on the market, and it’s taking longer and longer to sell.

This is the crux of the whole foreclosure problem. Not to preach, but too many people grabbed mortgages they shouldn’t have, purveyed by brokers and lenders with the institution’s (and their own) short term interests at heart, instead of the long term health of the creditor, the lender, and, ultimately, the economy. That was compounded by too few people refinancing into a more favorable long term mortgage product before disaster struck. Now it’s not as easy to refinance, and to many people are stuck in a home that’s worth les than they owe, in a tight credit market, with a mortgage that’s adjusted into one they can no longer afford.

There are options for selling outside the traditional real estate market. No doubt you’ve seen the signs posted to telephone poles throughout the land, like posters for some sick circus, announcing “I’ll Buy Your Home For Cash!” These are typically the taglines of foreclosure investors. Unknown to some, these amateurish, handwritten sighs are, in some cases, actually put up by huge, national corporations. In other cases they are nailed up by small time investors that will purchase pre-foreclosure homes for cash. Either way, going with one of these operations is a better option than having your house foreclosed upon by the lender. You’ll get to retain some of the equity in your home if you have any, and keep a foreclosure mark off your credit. The downside is that typically the investor will only give you a percentage of market value for your home. On the other hand, if market values keep sinking, as they are in some locales, if you wait a few months, the investor’s offer may be right on target!

Therein lays another problem. If you are upside down in your home now, you need to get the maximum sales price you can. You are already going to have to cut a check to the bank for the difference between the selling price of your house and the payoff balance of your mortgage. If you haven’t the cash to do that, you’re in a spot o’ trouble.

3 – How to Avoid Foreclosure – Rent your home to others. If there’s a brisk rental market in your area, you may consider renting. The cash you receive for the deposit and first and last month’s rent may cover your arrears with your mortgage lender. If the market is strong, the monthly rental payments may cover your mortgage payment and even leave you with cash to spare. Even if they don’t quite cover your mortgage, the total of your apartment rental (you’ve got to live somewhere until everything gets back on the up and up) and the rental shortfall may still be less than your mortgage payment. This will obviously improve your monthly cash flow.  Remember though, you’ll still be on the hook for insurance and maintenance, although you will receive some tax benefits as a landlord.

Look at the rental rates for similar properties in your area. Make a budget and include all the costs associated with renting your property. Use this to estimate your monthly cash flow and determine if renting your property is a valid solution to your problem. If you do decide to rent out your house, make sure you screen your tenants. Run a credit check and use an appropriate screening service to check the prospective tenant out thoroughly. You don’t want your money problems to go from bad to worse by having a meth lab or some other criminal enterprise operating on your property. One last thing; don’t forget to check the landlord – tenant laws in your area. Make sure you abide by all these in your foray into being a landlord.

4 – How to Avoid Foreclosure – Mortgage Modification. This may be the best way to go for many. The key here is to be proactive. Call your mortgage company before your mortgage goes into default if you see a problem on the horizon. If they send you letters demanding payment, or statements indicating your loan is about to go into default, for God’s sake, don’t ignore them! Now’s your best chance to take action to save your home, but act you must.

Most lenders really don’t want your house, they’ve got bigger problems to deal with, especially now. They’d rather have some cash flow and another good loan on their books. Their loan portfolio probably looks bad enough already. You may be unaware of this, but Fannie Mae and Freddy Mac, the largest mortgage paper purchasers, and many other investors, actually require lenders to try hard to work things out with you. It makes good sense, investors don’t make any R.O.I with a portfolio full of bad loans and foreclosed properties. You, however, must be aggressive. You will be in a much better position to stave off foreclosure if you are less than 2 payments behind on your mortgage, so get things done before things get that far. Make sure you document all your efforts, and when calling your lender have all your information ready. They’re going to want to see proof of any financial hardship, so have it ready for them.

The bottom line is that you should call your lender at once, before things go too far, to make alternate arrangements for your mortgage. You may even be able to get them to agree to actual mortgage modification, where they’ll change the terms of your mortgage to help keep you from foreclosure. Unless you try, however they won’t go the extra mile. You can also check with the FHA to see if you are able to do what’s termed a partial claim. In a partial claim you get a one time, interest free loan from your loan guarantor to bring your mortgage current. To qualify, you must have an insured mortgage, such as an FHA loan, and be 4 – 12 months behind in your payments, without already having lost your home to foreclosure.

Some other things you should do to keep foreclosure at bay: Make a budget. Stop paying other bills if you absolutely have to. That’s a last resort, but it may help you keep your house. If you really have dire financial problems, your credit cards are unsecured, your mortgage is secured by your house. Not paying your credit cards will mess up your credit, but you’ll still have a roof over your head and credit card default will not stay on your credit as long as a foreclosure. That is a very last resort, however.

Hopefully you’ll never be in a foreclosure avoidance situation, but if you find yourself there, remember there are strategies to help you keep your home.

Posted by debtblog at 12:35 AM | Permalink | Comments (0) | TrackBacks (0)

Now, I'm not saying there aren't advantages to getting a debt consolidation loan for high interest debt, mainly of the credit card variety. In fact, it can be a solid financial choice for some. However, it's also a choice that could send you straight to financial hell if you aren't careful. You're probably well aware of the benefits of these types of loans, so lets touch on the seedy underbelly of the whole debt consolidation idea.

Reason Not to Get a Debt Consolidation Loan #1
The reason you get a lower interest rate with a debt consolidation loan than you have for most credit card debt is because the lender has some collateral to ensure the security of the loan. In the world of finance, when the risk for a lender is lower, the interest rate tends to as well. In most cases the security they'll have for your loan is real estate. For 99% of the people who get such loans, that real estate is their home.

That's right, the place where you raised your kids, threw the football around, taught them to ride their bikes and have so many fond memories is the collateral for your loan. That means, should you default on it for any reason, you will lose your house. That's a pretty huge reason to think long and hard before entering into such a loan agreement. If you don't have the financial problems behind you that caused you to amass such a large pile of debt in the first place, you'll be putting yourself at major risk for living under the overpass, or at very least having your house sold out from under you to satisfy the debt. This is so vitally important bears repeating. Get your financial house in order, most importantly your spending habits, before you even remotely consider a debt consolidation loan.

Reason Not to Get a Debt Consolidation Loan #2
Even though the interest rate is, in most cases, substantially lower than you have with your credit cards, you amortize the credit card debt over a 4 or 5 year term, where the debt consolidation loan is much longer, usually 10 – 30 years. This, coupled with the lower interest rate, is why your monthly payments are so much lower. While this may greatly improve your monthly cash flow situation, it will most likely cause your total interest payments to be much larger than they would have been had you simply paid off your credit cards in the shorter term required by your credit card agreement. This supposes that you actually stop using your credit cards, however. In many cases, people simply won't do this, causing the disastrous financial side effect in reason number 1 above.

Before you consider a debt consolidation loan there are other steps you can take to help yourself financially. The first is to call all your credit card companies and negotiate lower interest rates and a better fee structure. If you aren't in default and you have a good payment history with them many will do this, especially if you threaten to take your business elsewhere. Never underestimate the power of a big stick in your negotiations. In many cases, this alone will result in dramatically reduced monthly payments. The secret is to continue making the original payments, if you can afford to Now you'll be on track to become free of that pesky credit card debt in a much more advantageous time frame.

Next, see if you can get an unsecured loan to repay the credit card debt. If you can do so at a lower interest rate than your credit card companies are charging you, you'll be ahead of the game. Even better, you will have gotten there without risking your house or landing yourself on a lengthy amortization schedule. Another benefit of this form of consolidation is that you gain the convenience of a single payment, which is far easier to manage and reduces the likelihood of a missed payment, and all the problems one can cause. In any case, you should have your credit cards on auto pay to eliminate the risk of a missed or late payment, which can send your card's interest rates skyrocketing, not to mention the fees you'll incur.

Have a great weekend, and good luck on your quest to get debt free.

Posted by debtblog at 01:37 PM | Permalink | Comments (0) | TrackBacks (0)

There are, however, some government programs that can help you repay your student loans. The catch is that you'll have to put that fancy Wall Street or corporate career on hold for a while and eat from the public trough for a while. That's right, in most cases, you have to get a government job in order for Uncle Sam (or any of the states) to assist with your student loan repayment.

Civil Service Student Loan Forgiveness
Here are some of the places you can get government help to pay back some of the student loans you have accrued in your quest for enlightenment. Which type of student loan you have will help determine which repayment or forgiveness program you're eligible for. If you're feeling charitable and want to see the effects of your generosity assist others around the world, you can join the Peace Corps. By so doing, you'll be eligible for deferment of Stafford and student consolidation loans, but your real benefit from a student loan perspective would be the ability of Peace Corps volunteers to have up to 70% of Perkins loans forgiven. The actual forgiveness amount depends upon your length of service, and accrues at 15% per year.

If you want a job where you can sleep in your own bed every night, without worrying about mosquito netting, there are many other government programs that can help with your student loans. If you are a clinical researcher, the National Institute of health offers a series of loan forgiveness programs. One catch is that you must have a doctoral level degree and work for at least 20 hrs a week per quarter on various types of research, including pediatric, contraception and infertility, and clinical. If you meet the conditions, you be eligible for a substantial $35,000 per year repayment of your federal student loans. For all 5 NIH repayment programs, see here.

Teacher Student Loan Forgiveness
You can get some great student loan forgiveness benefits by entering the education field. In some cases you'll need it. As with research positions, forgiveness from the Department of Education is determined by which type of student loan(s) you have. Many of the programs give benefits for teaching in disadvantaged or low income schools. In many inner cities or small, rural communities, this includes just about any school you'll work in.

Another student loan forgiveness program available through the Dept. of Education includes the Teacher Loan Forgiveness Program. This one makes available up to $5,000 in student loan forgiveness for direct and FFEL loans. It’s mainly targeted at teachers in the fields of math, science and special education, as teachers in those disciplines can be eligible for up to $17,500. The conditions of eligibility include receiving your loan after October 1, 1998 and being employed full time as a teacher for 5 consecutive years. To read the full list of qualifications and eligibility, click here.

Military Student Loan Forgiveness
Another place that you can seek federal aid for your federal aid is by joining the military. A noble and difficult profession, you’ll not be greatly financially rewarded by such a career choice, so some help repaying your outstanding loans would probably be welcome. In many cases, you must be aware of the programs before you enlist to be eligible, so check up on them first. There are many government programs that will forgive part of your loan, or in some cases discharge it altogether.

One is for loans received under Title 4 of the Higher Education Act. This makes those serving in the military eligible for partial loan forgiveness if they served in an area of hostilities for at least one year and have a Perkins loan or a National Direct Student Loan. Of course you’ll need to fill out a government form to see if you are eligible for forgiveness. You’ll need to send a copy of your discharge papers and a letter of explanation to your loan servicing agency, where it will be reviewed, and then sent to that room at the end of Raiders of the Lost Ark for storage.

Other loan forgiveness programs for military veterans include the Army repayment program. This is part of the Montgomery GI Bill enacted at the end of WWII. In this case the Army will repay a portion of your student loan directly at the rate of 1/3 of your outstanding balance for each year of eligible service. This applies if the loan was not in default when you entered the Army, that you enlisted after 30 September 1982, that you enlist in a critical military occupational specialty, and that you have a valid high school diploma at the time of enlistment. Stafford loans, Perkins loans, SLS, William D. Ford loans and PLUS loans all qualify. Even consolidated student loans are eligible if they are in the student’s name.

If you have a personal loan, an equity loan, a loan from an educational institution, or if you consolidated your student loans in someone else’s name (such as your parents), you are not eligible for the Army program. Check to see that you loan is covered under parts B, D, or E of Title 4 of the Higher Education Act before you sign your enlistment agreement if you want the Army’s help in repaying your loans. Make sure you go over the terms of your loans and their repayment completely with your recruiter before putting pen to paper. You don’t want to enlist with the idea that the Army will be repaying all or part of your loans, only to discover that you’re still on the hook for the monthly payments, and you are now on a 2^nd lieutenant’ salary.

Chapter 1606 and 1607 of the GI bill apply to reserve and National Guard members. Chapter 1606 provides for monthly repayment of education expenses regardless of service, while 1607 gives increased benefits for those who served in the Guard or reserve for over 90 days of active duty ($400/month) or 1 year ($600/month). If you are eligible for educational assistance under chapter 1607, but stop drilling, you will revert to the money paid under 1606 for the length of your deployment plus 4 months.

Other Student Loan Options
There are many other government programs that can either repay or forgive all or part of your student loans. I’ll address some more of them in a future post. In addition, you may benefit from student loan consolidation. As with other loan consolidations, you’ll have only one payment to worry about, and you could get a better interest rate. That will obviously lower your monthly payment and possibly allow you to quit that second job you’re saddled with now.

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I was not looking to maximize the value of my house in the hope that its value would continue to appreciate, netting me a handsome profit in the future. This would occur after I had my house payments held artificially low through the use of an option ARM or interest only mortgage. It appears as though many homebuyers, in the interests of getting into the largest house they could manage, simply did so without any thought as to what would happen when their mortgage adjusted, or their balloon payment came due.

Now we’re in a situation where we have to have a massive, taxpayer subsidized rescue effort in order to keep the real estate market from being flooded with foreclosure properties. The Fed’s rumored to be dropping the federal funds rate from 5.25% to 5%, or possibly 4.75%. This would give some measure of protection for those who haven’t yet had their homes go into default because it would drop ARM payments. Maybe help for mortgage holders is on the way.

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There are some legitimate reasons for leasing your next vehicle. For instance there are tax advantages associated with leasing if you own a business. Some people just prefer to drive a new car every 2 – 3 years, depreciation be damned. Cars and trucks are making major advances in safety, economy, drivability (impressive, considering what porkers many vehicles have become), and content (a major cause of the added pork) in that time period, so there may be something to be said for that train of thought. There are also some folks who like the idea of keeping the monthly cash out of pocket low, even if that means a lease and it doesn’t happen to be the best financial course of action.

On the other hand, cars today last longer than ever. Remember 25 years ago, when a car with 100,000 miles on it was all used up? That’s definitely not the situation anymore. These days vehicles with that many miles are just reaching middle age. They drive great, have no squeaks or rattles, the interiors and exteriors look almost new, and there’s not a hint of smoke from the tailpipe. Unless your requirements have changed, why would you need to replace them with something newer?

If you are determined to lease, you should at least know what the F&I guy at your local car dealership is talking about when he starts into his pitch. There are some terms associated with leasing that would behoove you to know. Here are some lease terms:

Money Factor –
Not the interest rate of the lease. To get the approximate APR, multiply the money factor by 24.

Residual Value –
The value of the car at the termination of the lease. This is an estimate only. When you lease you are effectively financing the difference between the Purchase price and the residual, so this will have a major effect on your lease payment. They are always calculated as a percentage of the vehicle’s MSRP. It doesn’t matter how great of a negotiator you are. Even if you get the salesperson down to a dollar, you’ll have to congratulate yourself later, as the residual value of your leased vehicle will still be determined using the MSRP. That percentage however, can be set at virtually whatever the leasing company would like.

The higher the residual value is set, the lower your lease payment will be. Cars that have traditionally good resale values have higher residuals. These are often better choices to lease than those vehicles that lose a higher percentage of their value and thus have a larger difference between MSRP and the residual.

Closed End Lease –
This type of lease allows you to walk away from the vehicle at the end by dropping off the keys and paying any associated fees, such as excess mileage charges. If you have a closed end lease, you can purchase the vehicle for the residual amount at the termination of the lease, so there is a bit of incentive on your part to choose a vehicle where, in your area, they tend to have a high resale value. If you are able to end up with a vehicle that’s worth more at the end of the lease than the residual value, you can get a great deal, as you can buy it for the residual value, even though it’s worth more than that. If it’s worth less, it’s no skin off your nose, you just walk away from the vehicle.

Cap Cost – This is the amount the leasing company purchases the car for from the dealership. Here you can negotiate for a lower price on the car, and it will make a difference.

Cap Cost Reduction –
What it sounds like, except that you have to pay for the privilege. You are basically helping the leasing company buy the car by kicking in some cash of your own at the inception of the lease. So much for “No money down.” This amount can be thousands of dollars.

Vehicle Leasing Fees to Avoid –
There are some fees associated with vehicle leasing that you should fight tooth and nail to avoid paying, although you may get stuck with some of them anyway. Two of these are the acquisition fee or origination fee, and the disposition fee. The first is basically a fee paid by the car lessee for taking out the lease. That’s crazy, and pure profit for the leasing company, as if they’re not making enough off of you. Refuse to pay it. They may insist on it, but hold your ground or get the dealer to absorb it. You don’t need the car that bad, in most cases.

The disposition fee is another fee you should refuse to pay, but since you’ll not have to pay it until the end of closed end lease if you don’t buy the car, you may be completely unaware of it. That’s why you should actually read all that fine print mumbo jumbo in the lease contract. It’s almost always in there. Make them take it out, unless you’re pretty damned sure you’ll be buying the vehicle at the termination of the lease.

One leasing fee you’ll probably have to agree to is the early termination fee. Unlike the prepayment penalty on your mortgage, you most likely can’t get out of agreeing to this one before you sign the lease. Early termination fees are huge, so be aware of them. If you have to end the lease before the term is up, but near the end, it may actually be cheaper to keep the thing in your driveway, rather than turn it in and take the bath.

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Pearlstein Business Column

It’s sure to be only one of many plans floated in the next few weeks as government officials attempt to placate homeowners (voters) and minimize the economic impact of the credit market implosion. Pearlstein’s proposal brings the considerable influence of Fannie Mae and Freddie Mac to bear on the problem, something that may have to occur before investors consider returning to the market for mortgage debt secured products. It’s sad, because many homeowners have little chance of defaulting on their mortgages. If lending standards were sensibly (not with the strong knee-jerk reactions we’ve seen in recent weeks) revised to exclude the highest risk loans, and some of the very creative mortgage products were eliminated, the problems would fix itself fairly quickly.

All but the highest risk borrowers need to be able to refinance their balloon payments or high interest ARMs into a normal fixed interest and fixed term product. This would stabilize payments and allow homeowners to continue fitting their mortgage payments into the monthly budget, and spend for other consumer products at the same time. Other business owners would appreciate this continued ability for homeowners to contribute to the economy. The Pearlstein proposal addresses this and tries to minimize the distaste associated with a complete government bailout (funded by taxpayers, of course, as government bailouts are by necessity), as some others have proposed.

Even if his plan may be, in a way, distasteful, a collapse of the real estate market precipitated by an additional hundreds of thousands of foreclosed homes hitting the market, and the price erosion that would create, would probably be more distasteful. A cornerstone of his plan if for liens to be created that represent 90% of the difference between what the homeowner owes on the property and its’ market value (who determines this, exactly?). The lien would allow refinancing, whereas without it that would have been impossible due to negative equity in the property.

He ‘s proposing refinancing into a 40 year mortgage, coupled with the aforementioned lien, in lieu of foreclosure. The longer term mortgage would help lenders offset losing some of the value they would otherwise experience, because they could collect greater total interest. 40 year mortgages are not the hot ticket for homeowners in most cases, but an exception would be made here. The liens and mortgages would be kept by investors, or (more likely) sold and repackaged packaged into securities by Fannie Mae and Freddie Mac. These would then be released for consumption by investors.

Would it work? Possibly. It certainly seems better than some of the alternatives, especially considering the cost of failure. The market needs a correction, and this may provide it, without the total collapse many predict is in progress without it. It’s also possible that the credit industry downturn isn’t going to be as harsh pr prolonged as many are predicting, and that the naysayers (of which there are many) are over reacting. One thing is for sure, problems in the mortgage industry will have ripple effects that extend into every other area of the economy.

In the U.S., this is especially true due to the sheer volume of money pumped into consumer’s pockets as their home values skyrocketed in the last 5 – 7 years. Many pulled out newly created equity for all many of projects, from new SUVs (stupid use of home equity) vacations (ditto) to home improvements, remodels and new homes. That’s driven all areas of the economy to greater heights, and while a fun time for all, bound to correct sooner or later. It was, as the environmentalists say about our consumption of consumer goods, unsustainable.

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These loans are like many other financial products; they may be the perfect solution for some people and a financial curse for others. It all comes down to your reasons for being in debt, your current income, the stability of that income, and your financial discipline. It’s that last one that’s the key to the puzzle. If you have relatively poor financial discipline, a debt consolidation loan is almost certainly a recipe for disaster. All you’ll accomplish is to erode the equity in your home and end up deeper in debt than when you started.

Oh, you may end up with a memorable vacation or new plasma TV too. How is that? Well, in the case of creditors with an inability to restrain themselves, the lower monthly payments provided by the debt consolidation loan give a euphoric feeling of financial well being. It’s kind of like financial crack. Since the borrower’s monthly cash flow is reduced, they feel like their financial position is so improved that they can afford to spend some money. That is almost always a huge mistake.

They (it’s “they” again) don’t let you in on this little secret, do they? Spending control is vital to any financial security program. Reigning in spending to a level where it lags income is the only way to get out o’ debt, mate. A debt consolidation loan will reduce monthly spending. If you stay there, it can really help. They can give the illusion of financial good fortune, however. Remember how you got in debt in the first place. Frequent trips to the mall, club or eBay have got to stop before you end up right back where you started, but with a new debt (the debt consolidation loan) to boot.

Lowering interest rates is always a good thing. Any time you can pay less for your money, you should do so, all else being equal. Just remember that other things go along with that lowering of the interest rates. If you get such a loan, make sure there are no prepayment penalties, just like a mortgage. In most cases there won’t be any, but if the lender thinks they really have you over a barrel, there may be one of those dreaded clauses in the contract. Make sure you really read the damned thing!

Debt Consolidation Loan Secret 1
Your total interest payments may, in fact, be higher than the credit cards you’re replacing. Then again, they may not be. It’s up to you to determine this. Look at the amount of the loan, the interest rate and the term. If the loan’s term is long enough, you could wind up paying more in total interest, even though the interest rate and monthly payment is lower.

Debt Consolidation Loan Secret 2
You don’t always get a realty low interest rate on one of these loans. It depends on your credit score. If you have too many credit cards and you’re struggling financially, there’s a good chance you’ve missed payments, had late payments, and your credit utilization score is too high. This will mean your credit score is probably pretty low. Now you’re at the mercy of the lender. They can charge you pretty much whatever they want to. Because a debt consolidation loan is a secured loan, the interest rate will probably lower than your credit card interest rate, but if that’s 18% - 29%, that’s not saying much, is it?

Debt Consolidation Loan Secret 3
If you have no collateral, such as real estate, you are probably not going to get a loan. On the radio ads, they may make it sound as if anyone can just “lower their monthly payments and eliminate debt”, but that’s because you are going to secure your debt with significant collateral. If you haven’t the means to do so, you’ll probably not find a lender willing to loan you any money.

Think about it from the lender’s perspective for a second. If you’ve gotten yourself overextended with numerous credit cards, you probably represent a substantial credit risk. Why would any investor want to loan you money at a favorable interest rate? You may find a loan, sure, but the interest rate may border upon usury.

Debt Consolidation Secret 4
You can easily lose your home if things turn ugly. This isn‘t really a big industry secret, but too few people really consider the full import of putting their home on the line when they get one of these loans. The next time you’re cruising down the 405, look at those prime accommodations in the shadow of any overpass and think about the whole thing again.

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The problem for many people is that in quite a few major metro areas, $417,000 does not a mansion buy. Far from it. That's basically the amount you'll spend for a decent 3 bedroom, 2 bath within 20 miles of downtown. Bostontonians, Serattleites, SoCalers, San Franciscans, and DCers know exactly what I'm talking about. If you've managed to amass some equity in your existing home, you could easily need the use of a jumbo to get a home in the $600,000 - $750,000 range. Again, a home in this price range, while a definite step up from an entry level, or “starter” house, isn't anything remotely mansion like in many areas of the country, even taking into account the recent market corrections. That range house would be just a step up from your first home.

Not wanting to be left out of the party, jumbo's have been in the news lately, just like, it seems, every other mortgage related product. Jumbo loans have always been more expensive than other mortgage products, but now they're getting harder to come by as well. It's gotten to the point where some banks, such as IndyMac, have indicated they'll not be selling them on the secondary market, but keeping them in their in-house loan portfolios. That should say something to all the investors out there. Namely, that there are still attractive debt secured investments out there.

Not everybody is a foreclosure risk and it seems that many have gone a bit overboard in their risk assessment. Why the industry ever decided that stated income and no doc loans were a good idea is a question for those with sharper minds than mine. If ongoing problems in the mortgage industry spread and cause people outside the financial and real estate industries to begin losing jobs, it may actually cause more to unload their homes, and the market to sink further. Now, however, we're just experiencing a well deserved correction in the market caused by stupid loans given by the very mortgage industry that's now coughing up blood. Just what were the industry insiders thinking when they decided to revise lending standards so that anyone with a pulse, or a presence in cyberspace, was a great candidate for a mortgage? Were they looking so short term that they were unaware that money to repay these loans would have to come from somewhere?

Sure, you could follow the train of thought that homes were becoming so expensive that creative loans were necessary to actually afford one. However, if lenders weren't giving out so many creative mortgages, the buyer pool would have been smaller, and home prices wouldn't have gone quite so far into the stratosphere. Or, you may have noticed that that free and easy credit, coupled with historically low interest rates encouraged the pool of buyers to swell to the point where sellers were grabbing every dollar they could get their hands on. The problem is that in economics, like at your local bar, any time there is a really big party, and many people are getting intoxicated, on either cheap booze or money, fights will break out and people will be hung over in the morning. People act like the party will go on forever and no one will notice what they're doing.

Too many people were invited to this party and they all showed up. Now there's going to be a great opportunity for those that can be janitors, or serve those in the future that didn't throw up on the table last night. Just because money's cheap doesn't mean you don't have to be a little bit smart about who you give it to.

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The next time you're sitting in your mortgage broker's office, there are a couple of things you should know about the mortgage you're about to commit to. One important fact that you should know right up front is that your broker is getting paid. Nothing wrong with that, fish gotta swim, birds gotta eat, after all. It's how they're getting paid that you should be fully aware of. You should know that your mortgage broker is not only getting paid by you, in the form of fees tacked on to your loan (you can, and should, negotiate these down in most cases), but by the bank as well. If you weren't aware of this, consider yourself enlightened.

The money the broker makes from the bank or lending institution is actually, in most cases, far greater than the pittance (If you did a good job of negotiating) they'll receive from your fee. The bank's payment to the broker is referred to as the 'Yield Spread Premium'. What you may also not be clued in to is that this fee actually rises with the interest rate of your mortgage! That's right, the worse the loan for you, the better it is for your broker. A conflict of interest? Possibly so, but it drives home the point about the importance of finding a trustworthy mortgage broker. Don't worry, there are plenty of them out there, but it's up to you to find one. Just make sure you ask them about the yield spread premium, and how much they stand to make from your mortgage. You should be able to find it on your good faith estimate under the heading 'YSP', or possibly 'POC'.

The other little fact that most brokers don't clue you in on is that, like the F&I guy (or gal) you have to sit with when you buy a car, they usually get paid on all the extras and contract clauses that are advantageous for the bank or lender, but less so for you. Typically many of these clauses can be eliminated for many classes of mortgage. On big one is the prepayment penalty. Banks love this penalty, because it helps protect their investment. They count on receiving a certain amount of interest from you before you either pay off your loan during the term, or eventually refinance it. To ensure you actually pay them what they want, and help ensure they can count on a certain amount of interest income, they insert a penalty clause in your contract. That means they get a monetary penalty from you should you get out of the loan early. It sucks for you and can keep you from refinancing into a better mortgage product should the need or opportunity arise.

So, you need to:
1 – Trust your broker, but verify

2 - Know what fees will be rolled into your loan and negotiate them down, preferably to 1% or less. Then, make sure they don't back out on the negotiated fees prior to closing. I have saved thousands of dollars negotiating lower fees like this, and you should too. This doesn't include the application fee, which you should NEVER pay.

3 – Ask about the broker's pay structure, the yield spread premium, and how they're incentivized for the various contract items along the way.

Look at the possibility of asking the broker to agree to a set fee up front, in lieu of the hidden fees they typically receive. Some do this now, but not many.

There are fewer lenders out there by the day, due to the problems in the mortgage industry. As the competition thins out a bit, you may think you'll be unable to find a good mortgage. Most likely you'll do just fine, but you've got to be your own advocate. Don't be a wimp. Many people are simply too chicken to actually ask the tough questions. They feel bad or find it distasteful. Well it may be, but so is getting stuck with a crappy mortgage, and that pain could last for 30 years.

Posted by debtblog at 01:32 PM | Permalink | Comments (0) | TrackBacks (0)

Here's a way to help raise one of the components of your credit score; your credit utilization score. Credit utilization is nothing but the percentage of your aggregate outstanding balances on revolving credit accounts compared to total of their limits. With that in mind, there are two ways to improve your credit utilization, and thus your overall credit score.

You can either pay down your outstanding balance or increase your total credit limit. In most cases it's far more expeditious to get your credit card companies to increase your limits. Why? Well, unless your outstanding balances are relatively low, or you have a sudden influx of cash, you stand a fairly small chance of paying them down in the short term to the extent they'd positively impact your credit utilization score.

They danger here is readily apparent to most of you. Once your credit limits begin to grow, it's a standing invitation to charge, charge, charge. If you're trying to get debt free and find financial prosperity, restraint here is vital. This technique is not for those with little financial discipline. If you're unable to restrain yourself from using your credit card, don't get the limit increased. If you are able to take advantage of this score raising technique, there are two basic ways to get a limit increase.

One way is to simply ask your credit card issuer. In many cases, if you have a solid, on-time payment history, they'll be all too happy to comply. After all, they make their money charging you interest on your purchases. The more you spend, the more they make. Another way is to engage in behavior that will cause them to give your limits a kick in the pants. How can you do this? As we've seen, the credit card companies make their money when you carry an outstanding balance; the larger the better (for them, not you). You need to entice them to raise your credit limit by showing them you can be trusted, but more importantly, you need to make them try to get you to carry a balance on a full time basis.

The way they'll try to get you to carry a full time, outstanding balance, is to, you guessed it, raise your credit limit. Their hope is, with that new, larger limit, you'll be encouraged to make use of it. To make them automatically raise your credit limit you can do the one thing that will accomplish both of the above two actions, and that's spend money on your card. I know earlier I said that you don't want to do this. The key here is to pay the card off in full every month. If you can't do that, you shouldn't be engaging in this strategy.

Charging up your card to high relative levels every month, then paying off the balance in full will keep you from paying interest on your purchases, but it will also make the card issuer raise your limit. They'll do their best to get you to leave some money on their card so they can make that interest income. You'll do your best to charge all you can for a couple of months, paying off the balance in full. You'll most likely be rewarded with an increased credit limit and an increased credit utilization score.

A few months ago I had another post that can help you quickly raise your credit score. Check it out for more info. 

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The thing is that American Home Mortgage, although lending in the sub-prime market, really specialized in mortgages for those with less than perfect credit, not even the true, sub prime market. In theory, these borrowers are much less likely to default on their mortgages than sub-prime borrowers and should have somewhat insulated AHM from the problems in the sub-prime mortgage industry. Could this be a big sign of things to come in the mortgage industry?

Their problems began because they sold the mortgages they originated, a practice known as “selling the paper”, to investment banks and other investment groups. If the price these investors are willing to pay drops too low, it spells trouble for the mortgage originator. It's really a type of self fulfilling prophesy. If the price paid by investors sinks, it forces the mortgage originator to restate the value of their loan portfolio downward. That, in turn, causes the creditors that lend money to the mortgage company to demand more money in reserve to guard against default. If the mortgage company is unable to comply with their demands, the creditors can call their credit lines. Recently, American Home Mortgage seemed to be in a pretty strong position to deal with any problems, as they were sitting on over $800 million in cash at the end of March. Unfortunately for AHM, that was deemed an insufficient amount of cash to protect them against defaults by their borrowers.

So, what does all this mean for you, as a homeowner and mortgage holder? What if the mortgage company you used to finance your home goes out of business, an event that seems increasingly likely? Are you off the hook altogether? “WhooHoo, I got a free house!!!” Hold your horses! It doesn't work that way, as much as you'd like to get a free house. Your mortgage most likely wasn't even held by the originator anymore. In the majority of cases, it was packaged with hundreds or thousands of other mortgages, and sold to an investment bank or group in the form of a bond. Many investors actually hold the bond. Ironically, if your 401(k) or mutual fund is invested in the bond that your mortgage is a part of, you could actually, in some small part, be paying for your own retirement with your mortgage payments. Think about that for a second!

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What can you do if you need help paying medical bills? Well, there are some places you can find help and some ways you may be able to reduce your medical bills. First of all, there are some things you should not do in this situation. If you have mounting medical bills, do not try and avoid them. They are like any other outstanding debt, and will not go away on their own, like so many puffs of smoke. They will negatively impact your credit rating and will be reported as an outstanding debt on your credit report. Some people are under the mistake assumption that medical expenses aren't going to hurt their credit, but this is just not the case. In fact, about 80% of bankruptcies in the U.S. are due to medical expenses.

If at all possible, you don't want to file bankruptcy die to medical expenses, however. On top of the social stigma, it will stay on your credit report, just like any other bankruptcy. Future employers and potential creditors will see it just as if you'd gone on a spending binge you couldn't afford. In most cases you should not get a standard debt consolidation loan to pay off medical debt, either. You could lose your home by doing so. In addition, you'll start paying interest on your medical bills, something your weren't doing in most cases.

If you need help paying medical bills, you should contact your creditors. Almost all hospitals and doctor's organizations will allow you to set up a payment plan. Many will allow you to pay minimal monthly payments with little or no interest. You should definitely avail yourself of such a plan if one is offered by your medical creditor. You won't know about one however if you don't ask. Hospitals have an office of patient relations or patient finances. Go meet with the representative and discuss your debt.

In addition to a payment plan, many hospitals will forgive a substantial portion of your debt if you contact them before things get out of hand. You can easily get 25% - 75% of your medical bills waived. This is usually income dependent, but you can make a hardship case that will get you a further reduction. Almost all medical facilities will offer this. (If you got male enhancement surgery or a hair transplant, you're probably out of luck.) They will usually let you list any financial hardship you have recently suffered and will take them into account when figuring your forgiveness. They will be much less likely to do this if you wait until your bills go to collection. In fact, by then it's most likely too late, so act sooner, rather than later. Usually, doctor's associations aren't as likely to offer such programs. Medical school loans have to be paid, you know. Sometimes the doctor's school loan payment is bigger than your mortgage. It doesn't hurt to ask, however.

Before you take the trip down there for your meeting, look over every bill you received for accuracy. It is all too common for medical bills to be chock full of errors. You may be overcharged for procedures and medications you received, or charged for those you did not. Both situations are unfortunately all too common when dealing with medical bills. Be prepared for some long nights. Medical bills are notoriously difficult to understand, and there may be hundreds of line items to go over. This step is essential to prevent being overcharged, however. You'll probably want to contact the medical facility or doctors office and find out what exactly some of the items are.

The next step is talk to your insurance company if there are any portions of the bill you think should have been covered. In some cases you'll be able to get them to pick up the tab for things they originally didn't. Even if they didn't pay for certain items, you should be sure you should have to pay them. In some cases there are procedures and medications that you cannot be billed for, or the bill was submitted too late. You insurance company will be able to determine such things. So, even if you were denied by the insurance company, check with them to determine if you should be the one writing the check. If the doctor's office submitted their bill to the insurance company late, and it was denied, you should not pay for their mistake.

There are companies that will negotiate for you and also offer consolidation loan services that don't require you to use your house as collateral. This is obviously a far better option than risking your home or, in most cases, declaring bankruptcy. Look for such companies in your state, but check them out carefully before you do business with them.

Hopefully your never find yourself with overwhelming debt due to medical expenses, but if you do, make sure you go through the steps to make sure the debt is valid, then reduce it as much as possible. Once you've taken those steps, it could be a good idea to consolidate it, but only if you are not risking your home, and if the fees you are charged are not excessive. Here's to getting debt free.

Posted by debtblog at 01:55 PM | Permalink | Comments (0) | TrackBacks (0)

They are both technically security instruments used to finance property but the difference comes down to which state you live in, or more acurately, wher the property is located. Something else to consider is that a mortgage is treated differently depending upon weather the property is in a title theory state or a lien theory state. In a lien theory state the buyer holds the title during the term of the loan, in a title theory state, the lender keeps the title. Got it? Great, now it’s clear as mud.

Mortgage – 2 parties are involved; the creditor and the debtor.

Deed of trust loan – 3 parties are involved; the creditor, the debtor, and a trustee. The purpose of the trustee is to hold title to the property until the debt is paid in full. Depending upon the state in which the property is located the trustee can be either an attorney or a representative of a title company that deals in such matters.

Mortgage – When a property is foreclosed upon due to delinquent payments there is a court proceeding called a judicial foreclosure. After this is complete, the mortgage holder may sell the property and claim their portion of the proceeds.

Deed of trust loan – In most cases foreclosure is much simpler when a deed of trust loan is involved. The lender can simply document the delinquency to the trustee and the trustee can then sell the property to satisfy the outstanding loan balance. No messy and expensive court proceedings are required.

This will only matter to you if you live close to the border of two states that use different system, or are a real estate investor on a national scale. That’s because you can’t choose which you’d like to choose. That was done for you, a long time ago, by the state in which the property is located. Check with your state to determine how they handle real estate financing transactions.

Have a great 4th of July Independence Holiday. The Declaration was signed on the 4th, but Independence was actually declared on July 2nd. Now there are two reasons to celebrate. Be Safe! 

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Mortgage Mistake #1
Quitting your job? For god’s sake, wait until after your mortgage funds. Some of you will have the occasion to either change jobs or just up and quit entirely. Maybe you’re thinking of joining the ranks of the crazy, self employed entrepreneurs. Whatever the reason, get your priorities in order. Your employment will be verified as part of the mortgage process when you get pre-approved. Some people make the mistake of thinking that this is the last time they will have their employment verified. In many cases they are mistaken.

Most lenders will verify the employment of a prospective creditor immediately before the loan funds. If you have changed your employment status (to unemployed) without informing them, and they discover this fact, you could derail your chances of getting your mortgage. If you tell a little white lie by telling them you are employed, when in fact you aren’t, it could be considered fraud. In that case, you will have found another way to take of your housing worries. The state will provide housing for you, free of charge.

Mortgage Mistake #2
Failure to get your credit in order before you apply for your mortgage is a mistake made by too many loan applicants. This actually applies to any major purchase, not just mortgages. As I said in other posts, a significant reduction in interest rates can be  had by raising your credit score only a few points. In many cases this is not difficult and can be done in less than a month. It's another reason why you should know your credit score at all times.

Mortgage Mistake #3
Another mortgage mistake made by many applicants is the failure to ask for a better deal. That’s right, in many cases you can just ask for a better deal on your mortgage and your broker or lender will give it to you. Ask for fees to be reduced or eliminated. In many cases there’s no reason to pay these unless you want to enrich the lender. It will depend on the lender, your credit and their policies concerning such things.

If you have great credit, obviously you’ll be in a better position to get a fee reduction or elimination. When you’re dealing with someone who’ll be selling the paper, they are going to make quite a bit of money on the sale and you will be in a good position to ask for a reduction. I saved over $1,000 on my mortgage by simply asking. It’s not just the initial savings. Remember that you pay interest on these fees for the term of the loan. At the end of the 30 years, with my 6% mortgage, that $1,000 fee would have ended up costing over $1,100 in interest. It pays to ask. You can also negotiate for interest rates and other loan costs to be reduced or eliminated.

If you’re in the U.S., have a safe Independence Day holiday. Happy Birthday!

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First, the catches to the use of these cards –

#1 - It only allows you to purchase merchandise from the vendor who issued the card.

#2 – You have to pay a fairly large deposit on the merchandise you purchase using these cards. It's usually a catalog or website, and the prices can be somewhat less than competitive. Another problem is that some of the companies that issue these cards tend to fall on the wrong side of the tracks. You should choose carefully. It's essential to check them out carefully before applying. Don't worry about actually getting the card however, because when they say you absolutely can not be turned down, they're not kidding. If you can fill out the app, you'll get the card.

Ah, but the benefit can be huge. The cards are looked at by the credit agencies as is any other revolving account. In addition, their limits tend to be rather large. So, for the purposes of calculating your credit score you have, a revolving credit account with a relatively high limit. That raises your aggregate credit limit while only raising your outstanding limit a small amount. If your credit utilization score is too high, this will help bring it back in line. In addition, it will show up as a revolving account with a “paid as agreed” notation on your credit report. The key is to use it only for the purposes of raising your credit score, not as a card with which to by things. If you've had problems in the past with restraint, this may not be the strategy for you.

This is another strategy, that can fairly quickly raise your credit score, but, as happened with the piggybacking technique, it could one day be eliminated. There are signs that some of the credit reporting agencies are looking at not including the effects of this type of credit the way they do now.

For some more “underground” credit improvement techniques, see the Credit Secrets Bible. It will help you get a better understanding of how credit really works and some great ways to improve your score that can save you thousands of dollars on mortgages and other major purchases by getting you lower interest rates on the loans.

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It’s on the verge of collapse for much the same reason as any other business goes away; their business model was flawed to the point where it wasn’t really viable on a long term basis. Once the assumptions that the model was founded upon changed, the whole thing collapsed like Galloping Gertie. In this case lenders were too easy with credit and weren’t asking for enough money down to ensure there was at least some equity in the property. In addition, too many of these mortgage banks had virtually nothing in reserve to tide them over in the case their default rate got a bit out of hand for a while.

Many of these mortgage lenders used up most of their working capital repurchasing bad loans from their investors. Presto! - another mortgage lender out of business. This problem is being compounded by the reluctance of the remaining lenders to give mortgages to buyers with bad credit. The result of this is a reduced pool of homebuyers. With fewer buyers homes take longer to sell and tend not to bring as much money. Ironically, a percentage of these homes are those that have been foreclosed upon by the banks that got stiffed. If they foreclose on too many properties that take an extended period to sell, their financial worries deepen.

Where does that leave you? If you’re a homeowner with bad credit, it may leave you in the rental market, due to the difficulty finding a mortgage lender willing to take your business. If, however you’re a real estate investor with an eye on the long term, you may be finding the silver lining in this cloud. According to the latest Mortgage Bankers Association report, the number of loans entering foreclosure in Q1 2007 was up 14 basis points from the previous quarter and 20 basis points from the same quarter a year ago. Furthermore, FHA loans, typically used by those in the lower end of the lending pool set a new foreclosure record last quarter.

This points to a nice opportunity for the foreclosure and pre-foreclosure investor. You’ll have a large number of properties to choose from. If you’re in position to expand your portfolio, now could be a great time. You may have a larger pool of renters to rent your properties to as well, due to the number of people renting rather than buying.

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There are several techniques that work well to raise your credit score. One of these is called piggybacking. As you might have guessed from the name, piggybacking refers to the practice of using someone else’s credit to help your own. It works best in situations where you have very little credit history. In suchb cases, your credit score will be fairly low, because payment history comprises roughly 35% of your credit score, and how long you have used credit makes up an additional 15%. So, if you haven’t used credit much, either because you’re young, or because you’ve been married and most of your credit has been in your spouse’s name, about half your credit score can be helped by just adding something. Anything. Really.

You just need to have a credit history that your score can be based upon. Piggybacking is typically used by getting added as an authorized user on someone else’s credit card or other revolving account. When you try this, make sure you check with the credit card company to be sure your payments will be reported.

This technique has worked so well that companies were started just to match up people in piggybacking relationships (for a fee, of course). It’s gotten so popular that the popularity of this credit boosting technique could very well be its downfall. FICO has indicated it is going to deemphasize piggybacking effects from their credit scores on it’s newest credit scoring algorithm. That will get rid of those who have been getting a big boost to their credit scores by essentially renting other people’s credit histories, but it will also tank legit users of the piggybacking strategy, such as college kids being authorized users on their parent’s credit cards. This has been done for years to help kids develop a solid credit history. What to do now??

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So, if you are one of those that got a HELOC in the last few years to use for paying off high interest credit cards, real estate investing, the kid's college, or just fun money (not a great idea), what should you do, if anything, as the Fed raises interest rates? Because HELOCs are an indexed, variable rate, financial product, that has caused rates on home equity financing to steeply climb, with the interest rates on some borrower's credit lines increasing by 2 points or more. According to HSH Inc, the nation's leading publisher of consumer loan information, the average HELOC rate has jumped up from 6.75% in 2004 to the current average as I write this of 8.71%.

If you find yourself with a HELOC in such an environment, how should you handle it? You can run screaming through the neighborhood, but that might frighten your neighbors and probably won't do much to help your financial situation. You do have some options.

HELOC option #1
Refinancing – You can refinance your HELOC into a fixed rate product such as home equity loan. That will stabilize the interest rate you're paying and help stop the bleeding. Another HELOC refinancing option is to refinance your mortgage and pay off all or part of your outstanding credit balance. There are some things to remember if you pursue the refinancing strategy, however. The main thing is that you'll lengthen your mortgage.

When you refinance, you are resetting the mortgage clock back to the beginning. If you've paid down a substantial portion of your principal, you will end up paying up more in total interest due to the new, longer term of the loan. Something else to think about is the possibility of a prepayment penalty. Look at your loan agreement to see weather or not you you are eligible to pay the lender their bonus or not.

HELOC option #2
Sit tight and keep your HELOC just as it is. If you have relatively low balance on your credit line, it make more sense to just hang on for a while. The rates for many other forms of financing has risen in recent years as well, so a HELOC is still a comparatively inexpensive form of financing. If you plan on using your line of credit for home improvements, you should investigate the availability of companion programs offered by various retailers. These will give you discounts if you have a HELOC with certain lenders. If you have a HELOC and you're contemplating a remodel or other home improvement project, check with your lender for the availability of such programs. You could get substantial savings on need products.

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Debt consolidation is great because it allows you to use a secured loan, with subsequently lower interest rates, to pay off higher interest financial obligations. Debt consolidation sucks because the reason the interest rates are so much lower with a debt consolidation loan is because it is a secured loan. A secured loan represents a much lower risk for the lender and that is reflected in the interest rate. That security is, more often than not, your humble abode. You also have to be aware that the longer term on some of these loans can have you paying more in total interest payments even though the interest rate is much lower.

As you’re using your home for the security on your loan, you had better be damned sure the circumstances that conspired to deliver you into your current deep debt situation are resolved. If they rear their ugly head again, you could be living under an overpass on US1. It comes down to debt management. Proper debt management draws from a toolbox in which a debt consolidation loan is but one tool to be considered. According to many industry insiders, many people who avail themselves of a debt consolidation loan find themselves worse off than when they started. By some estimates, this number tops 75%. Why?

Why, you ask? It’s simply because they thought they could make the debt problem go away by using a debt consolidation loan. As I noted above, that only works if you’re financial habits are good ones and you’re spending less than you make. Many debt consolidation customers just don’t have the financial discipline to rein in their spending hence they wind up in the financial dog house once again.

Before you jump onto the debt consolidation bandwagon, you need to make a solid debt management plan that you can follow to get yourself permanently out of debt. Yes, it’s true, you may have to skip a few sale days at the mall, but hey, you just went to all the Memorial Day sales last weekend, what better time to quit? So, maybe a debt consolidation loan is the best course of action but you better really have your ducks in a nice, neat row first.

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If you actually do have a credit history, here are three mistakes you can make with your credit that will hurt your credit score:

Increase Your Credit Score – Avoid Mistake #3
Trying to get too much credit, too fast – Every time you apply for new credit, it generates what’s referred to in the credit industry as a “hard pull” on your credit report. A hard pull is an indication that a prospective creditor pulled your credit report. A hard pull does adversely affect your credit. You can also get a “soft pull”, such as when an existing creditor is checking up on you, or if you check you own credit. These inquires have no adverse impact on your credit score. In fact, they aren’t even visible on your credit report.

Hard pulls, a different story. Too many hard pulls in too short of a time will send your score plunging lower. Each hard pull will lower your credit score by approximately 5 points. You can see how a trip to the mall could cost you 25 points in a single day if you’re tempted by those “Just fill out this application and you’ll save 5%” offers. It could cost you way more than that when if your FICO score drops. The good news is that in about 6 months the credit ding will be gone. Try to limit your new credit applications to those you really need, such as for a mortgage or an auto loan.

Increase Your Credit Score – Avoid Mistake #2
Improper credit utilization – That doesn’t mean don’t use your credit card to purchase round trip tickets to London and a new Tag Heuer for the missus. “Utilization” is a credit industry term that indicates the percentage of your revolving credit you are currently taking advantage of. If, for example, you have credit cards with limits totaling $20,000, and currently have balances on the cards totaling $15,000, you have a revolving utilization score of 75%. Not too good! That’s why you should keep credit accounts open when you pay off the balances. Closing the accounts will adversely affect your credit utilization scores. In addition, after 7 years that card will no longer appear on your credit report. A card that has no balance and reads “pays as agreed” on your report helps your credit score.

Increase Your Credit Score – Avoid Mistake #1
No surprise here. The one thing you absolutely, positively must avoid to increase your credit score, or more accurately prevent its deterioration, is have no late payments. Payments over 30 days late are devastating to your hard earned credit score. The frequency, recency and severity all come into play when your credit score is calculated. Each has different statistical weighting according to a complex formula derived by the credit reporting agencies. They’ve found that each of these affects you credit worthiness differently.  Recent late payments, those in the last 24 months, count against you much more that a late payment you made 5 years ago. The same goes to the frequency of your late payments. If you were late once last year, it will hurt, not the same as if you are a habitual offender. If you are one who always pays over 30 days late, even if you always eventually pay, you are costing yourself a ton of money. Stop it! The severity indicates how late your payments were. Anything over 30 days late is bad, but stretch a late payment to over 90 days, and you’re in deep trouble credit score wise.

Avoiding these 3 credit score killing mistakes is a necessity. Keeping your credit score high will save you money on every credit purchase. That goes for that portable DVD player you got on Sale at Best Buy for $99, to your mortgage. As an example, current mortgage interest rates for creditors with FICO scores over 760 average 5.78%. Slip just a bit, to a still good credit score of 759, and you’ll be paying an interest rate of 6.002%. That seemingly insignificant increase could end up costing you plenty. With a 6% mortgage, you’ll pay about $1,500 a month and $289,000 in interest over the life of a 30 year mortgage. Drop your interest payment to the 5.78% figure and your payment drops to $1,463 a month. Moreover, you’ll only (!!) pay $277,000 in interest over the term of the loan. That one credit score point could cost you $12,000 in interest payments over 30 years. Drop under 700 and your interest rate will climb to 6.286%, with a commensurate monthly payment on the same $250,000 mortgage of $1,545.

Remember, avoid the mistakes and keep you credit score high and your payments low!

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Bad Credit Mortgage Option – The 2/28 ARM
Chances are one of the first options your mortgage broker will trot out for you is something called a 2/28 ARM. This is an adjustable rate mortgage whose interest rate is fixed for the first 2 years (the number before the slash in ARM notation is always the number of years for which the interest rate is fixed), then adjusts upward according to an index. The interest rate you’ll pay is the index rate plus what’s called a margin. Make sure you’re well aware of what that is and how it will affect your future payments.

2/28 ARMs usually have a  2 year prepayment penalty, meaning you’ll be unable to refinance for the first 24 months of the loan without paying a stiff one to the lender. That’s probably okay, as you’ll use this time to rebuild your credit so you’re able to qualify for a better loan. The prepayment penalty can make a huge difference in how you proceed in the future however, so it’s vital to verify the terms of the penalty, if it exists.

2/28 ARMs are known in the industry as ‘B’ paper loans, denoting their lower credit requirements than ‘A’ paper loans. Something to watch for with this, or any ARM, but especially those targeted at the sub-prime market is the interest rate cap. They can be quite high, and if you keep this mortgage beyond the initial 2 years, you could (and probably will) see the monthly payment escalate substantially, especially if the indices used by lenders , such as the FED prime rate or LIBOR, continue to rise.

Bad Credit Mortgage Option – FHA loan
If you have a history of poor credit, but are on your way to recovery, you may be able to take advantage of the FHA loan. The FHA loan is a fixed rate mortgage. FHA loans are federally insured, reducing the risk to the lender and allowing the homebuyer to get a mortgage they would perhaps be unable to qualify for. This program was started by the federal government in 1934 to help would-be homeowners stung by the Great Depression. FHA stands for Federal Housing Administration. It’s part of an even larger government agency (there are so many), the Dept. of Housing and Urban Development (HUD).

The FHA is attractive for first time homebuyers due to the low down payment of 3%. FHA loans are also available for manufactured homes and mobile homes. The credit requirements of FHA loans are somewhat more relaxed than the requirements for a normal mortgage. You need a stable income and employment history for the past two years. If you’ve had a bankruptcy, it must be at least 2 years since the discharge date and a foreclosure must be at least 3 years behind you. You must have fewer than 2 30 day late payments in the previous 2 years.

In some areas of the country an FHA loan will be unable to secure a home for you, due to the 30% mortgage payment / income guideline. If you make $60,000 annually, you’ll be looking at a house payment of $1,500/ month. If you live in Boston, New York, Seattle or LA, that’s a stretch for a 3 bedroom / 2 bath home. In these and some other locales, such homes are typically well over $300,000. (in King County Washington for example, only 14% of homes on the market are less than $300,000). That’s great if you bought one a few years ago, not so good if you’re looking to get into such a home now.
 

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What are some of these common credit mistakes that can conspire to sabotage your pristine credit score? Glad you asked; here they are, actually in no particular order:

(These are not to be confused with things you can do to actively ruin your credit score on your own, like pay bills late, or default on your mortgage.)

Credit Report Mistake #1 – Using different names when applying for credit.
An example of this would be if you applied for credit under both Mike and Michael. This can cause some of your credit to be missed and not be counted. If you are paying bills late or otherwise neglecting your obligations, this may not be such a bad thing, but for those of you with great credit, you want a large, well documented credit history with lots of “pays as agreed” notations on it. Be consistent.

Credit Report Mistake #2 – Credit report has information about the wrong person.
As crazy as it sounds, your credit report may actually contain someone else’s information. This may get easily missed, especially of you’ve got a fairly thick report. All this information is entered by a human somewhere and it’s definitely not unheard of for either social security numbers to be inaccurate or some letters of a name to be incorrect. You could be Bob S. Miller, and have report information about a loan to Bob D. Miller or Rob Miller on your report. If your handwriting is uh, not what it should be, or you’re practicing to be a physician, it’s not much of a stretch to see how someone could misread your information.
 
Credit Report Mistake #3 – Payments are applied to the wrong account.
Another mistake is made when loan or credit card payments find their way into the wrong account. This can easily happen when you have multiple accounts with the same lender. Your payment for the account that ends in 4994 is mistakenly applied to the account that ends in 4995 or 9449. If you normally pay extra on your accounts, you may not notice the mistake because you never get behind enough in your payments to trigger a notice from your bank.

These kinds of credit report mistakes can go undetected, yet can slow down loan applications and cause you to pay a higher interest rate on credit than you’re eligible for.

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Should you grab the cell phone, pull over for safety, and call that number right now, just like the ad says, even if you don’t really need a new mortgage? Probably not, but you should see what those catchy phrases really mean, so you can decipher what’s going on when you are going for your next mortgage.

The one that really gets me is the “No payments for a year” or it’s cousin, the “Vacation Mortgage”. What they fail to mention is that you may be out of the payment business for a year, but your mortgage interest isn’t on the same vacation plan. That’s right; it’ll accrue interest, just as it always does. The difference is that you get to pay interest for 31 years now, instead of 30 years. Typically, those 12 payments you missed are just added to your loan balance as well, where you can pay interest on them, too.

If you’re really lucky, you can get one of these bad deals at the same interest rate as a 30 year fixed rate mortgage, but don’t count on it. These types of loans are usually a few tenths higher. Talk about kicking you when you’re down. You’ll pay more initially and for the long term. You’ll get the thrill of paying for that mortgage “vacation” for much longer than that ill advised cruise you put on your Visa card a couple of years ago. So if you do that, and then invest the cash, as they suggest in the ad, you’d better get a hefty return or you’ll be going backwards, not the financial direction your supposed to be traveling.

What about the claim you’ll hear bandied about of “Mortgage rates have never been lower” Is it true? Well, that’s an easy one to check. There are literally hundreds of lenders where you can check what they are offering for various types of mortgages on any given day. A great resource is bankrate.com. You can go to the various financial websites, such as MSN Money or Yahoo Finance and see what the various financial indices are, and their histories. You’ll be able to tell if mortgage rates are, in fact, at their lowest rates in years, like the ads claim. If they’re not, you know those behind the ad really only care about your money vis-à-vis it becoming their money, not for your financial well being.

What about the old “We have no commission loan officers” There are so many ways around this one. Although you may be dealing with a reputable company that pays its mortgage officers on salary, that alone doesn’t guarantee impartiality on the part of the loan officer. There are many ways to offer incentive pay that aren’t necessarily called commission. Have you ever heard of a bonus? How about a company car if you keep your closed loans above a certain amount? In point of fact, a loan officer paid on commission is often more likely to bring you a loan you like. After all, they won’t get paid until your loan closes, so they are quite likely to make sure it does. If they’re on salary, they get the check every two weeks, no matter what.

What you really want to find is a reputable mortgage company that cares about its customers and gets a steady stream of referral business. When all is said and done, if they have consistently made your neighbors and others in your community happy, chances are they’ll do the same for you as well. Oh, and you should run when they start talking about a “4% Fixed Payment Loan”. That isn’t the same as a 4% fixed rate loan. You can’t really believe you’re getting a 4%, 15 or 30-year fixed rate mortgage, can you? They can keep the payment the same and vary the interest rate, every month in some cases. You want to be sure you’re comparing apples to apples, or 15 year fixed rate mortgages to other 15 year fixed rate mortgages, for example.

Now, turn on your radio again, and forget those stupid ads.

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Recognizing you are going to pay more for a loan if you have bad credit, how do you know when you are being scammed? Is it a scam, or are you just getting the normal fee and interest rate increase you can expect because of your bad credit? Here are some common tricks tried on loan applicants with bad credit. Do any of them look familiar to you? In no particular order:

Bad Credit Loan Scam #1 - The Advance Fee Loan

If you need a loan, why would you pay for it up front? Seems like a bad deal to me, but they know you may have few options for new credit. This scam works when you are guaranteed a loan if only you pay an upfront “processing” fee. The fee ranges from a hundred to several hundred dollars. The really bad deal is that, in most cases, the crook just disappears with your advance loan fee.

This scam is tried not just on individuals, but on small businesses. The scam artists know that many business owners will go to great lengths to try and save their businesses. They prey on this. The bottom line is never send any money to a loan organization as a pre-condition to getting your loan.

Bad Credit Loan Scam #2 – Information Mining Scam

In this scam, you identity and bank information is stolen right out from under you. It works like this: Your credit is bad and you are approached for a loan by a legitimate sounding company. In some cases, the crooks will even appropriate a legitimate financial institutions logos and other official looking paperwork. You are faxed a “loan application package”.

As is typical for loan application packages, it contains a request for all you private info, such as bank account numbers, addresses, balances and your SSN, birthdate, and address. If you send this back, you are screwed. Now someone in the Ukraine or Bulgaria has your most secret information. They aren’t after your credit, it’s bad enough to be of little or no use, but they do have your bank account information, and soon there’ll be no money in your account, either.

Bad Credit Loan Scam #3 – Contractor / Home Improvement Loan Scam

You’re credit’s hovering in the low 600’s and you weren’t really thinking about remodeling the kitchen and adding on a few hundred square feet to your humble abode, but the guy at the door was so persuasive. “You’ll increase the value of your house”, he claimed. The roof needed some work and the floors were terribly worn and creaky, so you put aside that nagging little voice and signed a contract to get he work done. The guy was really nice, and he even said he’d help get you financed using the large amount of home equity you’d amassed over the years.
 
This has grown increasingly common over the years for people with very low incomes that own their homes outright. Your credit doesn’t matter because they’re really after that equity in your home. In many cases the work will be performed in a substandard fashion, if you’re lucky(?) enough to get it done at all. In many cases the home improvement loans made by these operators are at interest rates that can be as much as 10% above market value. The contractor is just a foot in the door to your home equity. These lenders are playing you to get to your equity. They rather hope you lose your house, actually. One finance company, Resource Finance in Boston actually had 80% of the homeowners in their loan portfolio have their homes foreclosed upon.

Don’t let any of these loan scams happen to you. Hopefully, you can work your up to being debt free, and not be so concerned with loan scammers plying their trade on our nation’s highways and byways. Just remember, don’t answer the phone during dinner.

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Oh, one more thing – I noticed one of the (millions of ) mortgage company radio ads changed from claiming you can “eliminate debt” with one of their debt consolidation packages to now saying you can “escape the pressures of debt”. I guess someone in legal finally got the message to them that taking out a new loan doesn’t constitute eliminating debt.

Before you do anything else, get a copy of your credit report. It’s free and each of the major credit reporting agencies will let you have one once a year. You don’t have to join or sign up for anything either. This means you can stagger your requests to each agency and get a free credit report ever 4 months.

Money Mistake #1 – A debt consolidation loan is a popular solution to help Americans manage their debt. Did you know that about 2/3 of Americans that take out a debt consolidation loan to pay off high interest credit or other debt actually end up worse off within a few years. Why, you ask? Well, they foolishly don’t change their financial patterns and behavior. Here’s an interesting fact: A recent study revealed purchases made on a credit card averaged 14% higher than similar purchases made using cash. It's easier to spend more when you don't have to actually have the money up front. Don't make the same money mistake.

Money Mistake #2 – Credit card agreements are there to protect and maximize profit for the lenders and credit card companies. They could give a rip about you, except that they want to keep you as a long term customer. Something about customer acquisition costs vs customer retainage costs. Purely a business decision, I assure you. Far too many people get their sparkling, new credit card and actually use as the credit card companies intended, to buy almost everything. No, no, no. You’ll get your balance too far in the stratosphere. Once the card’s balance is way up there, too many people only make the minimum payment. At that rate, it’ll take 20 years to pay off a 15% credit card with a $15,000 balance!

Here’s the part the credit card companies really love. By the time you get the card paid off, you will have paid almost the same as the original credit card principal in payments. In pre-tax dollars, you’ll have to make almost $50,000 to pay off your original $15,000 debt. Did you enjoy that ultimate set of tools you bought? That doesn’t mean you shouldn’t use credit cards to help out in emergencies. In the majority of cases though, credit cards will hand you a major set back in your quest for financial independence. Some people have mastered the art of ping-ponging the balances between 0% or very low rate cards, but that can be a trick for only the most organized, depending upon how many offers you happen to be juggling.

Money Mistake #3 – If you do get multiple credit cards, the risk of accidentally making a late payment goes way up. It’s essential that you make no late payments, ever! Why? That’s one money mistake that could profound ramifications for your finances. The way many of those credit card agreements are structured, you can be considered late if your payment arrives even a few hours late. To avoid this pay online, where you can see all you bills laid out for you in a nice column. Even better, have all you cards put on autopay for the minimum payment, then pay whatever extra amount your debt elimination plan calls for on each card.

What happens if you do have a late payment? Well, the board members of the lending institution get their profit bonuses for the quarter, that’s what. One late payment can easily cost you thousands of dollars in interest over the life of the card. That rate will stay way up there for an extended time period. Depending upon the particular credit card, that can be either from 6 – 12 months, or forever.  Heaven forbid, if you forget a payment for a month, don’t think, “Oh, well, I’ll just pay more next month.” It’s not that simple. You can’t go back and make it up if you’re more than 30 days late.

Two problems can be caused by your one little late payment; One, a 30-day late will go on your credit report for all to see. Any future credit you obtain will cost you more because of the late payment. Problem two, because many cards and debts have a universal default clause, many of your other cards may raise your interest rate. They can do this even on cards from other lending institutions. Don’t make this money mistake. It’s one of the most costly for the average person.

Posted by debtblog at 01:56 PM | Permalink | Comments (0) | TrackBacks (0)

Credit affects so many aspects of your daily life. Many people use it for a myriad of purchases, while others confine credit to cars and mortgages. In any case, even for those who only use credit for major purchases such as vehicles and real estate, knowledge of credit will be vital to get the best interest rate and fee structure. Given the level of debt of the average American, you can never know too much about credit. Here are 3 things that you should be aware of when shopping for credit.

Credit Knowledge Point #1 – APR does NOT indicate the true cost of your credit.

Many consumers are under the mistaken assumption that APR reflects the true cost of the credit they are applying. Well, you know what happens when you assume…….. In any case, APR does give a better picture of how much your credit is costing than the interest rate alone, but to give the most accurate reflection of how much a particular debt will cost for a year, you should use the Effective Annual Rate (EAR). EAR takes into account the interest, fees and compounding effect of the interest. To calculate EAR (you’re forgiven if you hate this part), use the formula EAR = ((1+APR/n)^n)-1. You’ll not that you need the APR to arrive at the EAR. This will give a better indication of your total cost of credit per annum. The difference between EAR and APR is more pronounced on longer term loans, such as mortgages and vehicle loans.

Credit Knowledge Point #2 – Your FICO score will not determine weather or not you get a loan.

It can influence weather or not you get a particular credit account, however it’s only one piece of the credit puzzle. Lenders will use it to give a general picture of your credit worthiness, distilled to a single, 3 digit number. All other things being equal (and you know they never are) a higher FICO score will get you a better rate on a particular loan, but typically it will not determine, in and of itself, if you get the loan or not.

Credit Knowledge Point #3 – Your credit score is not reduced every time you apply for credit.

There are two types of credit inquires, also known as “pulls”, hard and soft. Soft credit inquires will not affect your credit score in any way, no matter how many of them are requested. These are common when someone is getting your information for a pre-approved credit offer (junk mail), when you are opening a bank account, or when current creditors are evaluating your ongoing credit worthiness. Checking your own credit, which you should do a few times a year, also counts as a soft pull.

Hard credit inquires, on the other hand, will come into play when your credit score is being calculated. Every had pull will ding your credit score by approximately 5 points, and will stay with you for about 6 months. You have to approve any hard inquiry on your credit, but you may approve it without even being aware of it. Make sure you check in the bowels of any contract you sign to verify weather or not you’ve given permission for your credit to be checked. You’ll have a hard pull the next time you apply for a credit card, make a major purchase on credit or get a mortgage. 

These are three things you should be aware of regarding your credit. A little knowledge here will help you save money and ultimately get debt free.

Posted by debtblog at 06:39 PM | Permalink | Comments (0) | TrackBacks (0)

By law, the reverse mortgage is limited to those over 62 years old. It can be a boon to senior citizens on fixed incomes. In many cases, their retirement, pension, and social security allows them limited financial freedom, but they are sitting on hundreds of thousands of dollars in home equity. That equity does them no good if they don't want to move out of their homes. A reverse mortgage will allow them to tap that home equity for necessities, medical care or to improve their standard of living.

The downside to reverse mortgages is that closing costs tend to be higher than traditional mortgages, on the order of 5%. Don't worry, I'm sure we'll start hearing those infernal mortgage company radio ads any day now where they offer to pay your closing costs. We can only hope we get a bit of a reprieve in this area for a while, at least. It can really help in many cases, because, since the creditor isn't required to pay back the loan until they're out of the home, there'll be no mortgage payments. In fact, there will be, but they'll be coming to the homeowner. A nice change, no?

I got's to get paid! Normally there are several options available when it comes to receiving the money from a reverse mortgage. According to HUD, the federal agency that insures reverse mortgages, you have the following payment options:

• Tenure - The borrower recieves equal monthly payments. You can continue to receive these payments as long as at least one borrower lives and continues to occupy the property as a principal residence.

• Term - equal monthly payments for a fixed period of months selected (The term).

• Line of Credit – This is like a HELOC, where the borrower gets unscheduled payments or in installments, at times and in amounts of borrower's choosing until the line of credit is exhausted.

• Modified Tenure – This an option to receive both a regular, monthly income and be able to tap greater amounts of home equity when desired. It's a combination of line of credit with monthly payments. The borrower will receive the monthly payments for as long as at least one of them resides in the home.

• Modified Term - combination of line of credit with monthly payments for a fixed period of months selected by the borrower.
  

For many senior citizens the reverse mortgage can be a godsend. In many cases real estate taxes are taking a larger and larger bite out of their fixed incomes. If they want to stay in their beloved home, a reverse mortgage may be the only option. If your kids don't mind you spending their inheritance, it's probably a good one, just watch the fees.

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Then, after you’d left college a decade behind in your rear view mirror, you got a collection call about an unpaid debt. The call was from a collection agency that had purchased the debt from the original creditor. This is actually a fairly common practice. Old debts will be purchased form the original creditors for pennies on the dollar, with the expectation that most will remain uncollectible, but some will bear fruit.

What happens in this instance? Well, if your conscience nags at you sufficiently, you can write a check, but don’t do it because the collection agency is doing the nagging. Once you’ve passed the statute of limitations of the debt going into default, you are legally home free, and have no obligation to repay the debt. When that is, precisely, varies by state and the type of debt you incurred. Typically, unpaid debts are classified for this purpose as Oral Agreements, Written Contracts, Promissory Notes, or Open Accounts.

The average for the statute of limitations is about 6 years, but it varies widely by state. For example, Rhode Island and Wyoming have a 10 year statute of limitations on open account (such as credit card and revolving account) debt, while Washington, North Carolina and New Hampshire let you off in 3 years. Some vary by the type of debt, while others have the same statute of limitations no matter what type of debt is concerned. The ‘M’ states of Maine, Massachusetts, Michigan and Minnesota have a 6 year statute of limitations for all types of debt.

Usually written contracts and promissory notes have the longest statute of limitations, with some states, such as Ohio, Kentucky and Rhode Island allowing such debt to be legally collectible for a full 15 years after it has gone into default. Oral agreements have the shortest statute of limitations before a debt is legally uncollectible. In California, if you can avoid repaying the debt for only 2 years after it’s gone into default, the statute of limitations on the debt will expire, and you’ll be free, if you can live with yourself.

So, if you get one of those collection calls you though you’d escaped from, especially if it’s about 6:30pm, just as you’re about to enjoy another spoonful of peas, think about just how old that debt is. You can mention the words “statute of limitations” to the person no the other end of the phone. Maybe that’ll keep them from calling back, but the can be pretty persistent and intimidating. Maybe you could try a different angle, tell them the statute of limitations on the debt has expired, but the one on what you’ll do to them if they call back again will never expire, and you never want to hear from them again. That may be the only thing that will work.

Posted by debtblog at 01:22 PM | Permalink | Comments (0) | TrackBacks (0)

In one of the most shocking survey results I've ever seen, a Bankrate.com survey released yesterday found that over 30% of U.S. mortgage holders were unaware of what type of mortgage they had. You've got to be kidding! How could anyone enter into a contract of that magnitude, with their residence and possibly financial future on the line, and be unaware of the terms of their mortgage? I can hear consumers now: "What do you mean our mortgage payment's going up $300? Why? Oh, the interest rate changes! How does that work?"

That really shows the need for consumers to have at least a smattering of financial education these days. It's not like the information's not out there on the Internet, just waiting for people to find. There are probably 1,000 PF blogs and countless other financial websites where one could go to find out a little nbit of information about something as important as a mortgage. These are probably the same people that check the receipt at the grocery store to make sure they didn't cheated out of $1.00.

I can't imagine how such people are ever going to get debt free, when their largest debt is such a mystery to them.  Other findings in the survey included this gem; 34% of those who knew they had an ARM admitted they didn't know what they'd do when it adjusted! Excuse me, I've got to sit down now.

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The problems have arisen when the loan applicant's names have similarities to names on the list. Due to the extreme penalties levied by the federal government against companies for conducting business with those on the list (another great idea), some businesses have taken a “better safe than sorry” approach if a name pops up, even if it's not an exact match. In some cases, such as the one cited in the Post story, lenders get cold feet even when it can be easily proved that the person on the list isn't the same as the loan applicant. That's a case of the “better safe than sorry”strategy being taken too far, and business should apply some common sense to their selection process.

If that happens to you, you'll be denied the loan for no apparent reason, as the businesses in question are loathe to reveal the reason for your denial. If this occurs, check your credit report (you pulled one before you applied, didn't you?). Chances are there'll be a red flag, in the form of an OFAC alert, on there. You can try to contact the lending institution to clear things up, or just take your business elsewhere.

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Currently, initial credit card interest rates are some of the lowest in history. That changes when you look at the average interest rate people are actually paying. According to the most recent U.S. Federal Reserve credit report (February, 2007), the average credit card interest rate is a rather hefty 15.09%! That's the average! That means that many people are paying interest rates far in excess of this. As you've no doubt ascertained, this is an extremely profitable state of affairs for creditors, less so for consumers. If the average American consumer wasn't addicted to credit like a tweaker is hooked on meth, it would be easier to get this situation to change.

It's absolutely vital to get all your credit card accounts switched to auto pay. It's about your only defense against higher interest rates and fees. Indeed, some consumers have reported that there is almost no time from when they receive their bill and when it's due. Read your credit card terms very carefully so you'll know exactly when your funds must be received by the lender. Often there's a time associated with it. Since you've no idea when the mail actually arrives at their P.O. Box, you should make sure your payment gets to their office at least a day early, preferably two or three. Why? Well, because the bill will be considered late unless it's actually posted by the date and time on the agreement. You have no idea how long it'll take them to post your check, so better to be safe than sorry. In addition, you can see they have no incentive to post your funds in a timely fashion.

Another smart move, if your bills aren't on auto pay, especially for important accounts such as mortgages, is to send the funds using receipt confirmation form the U.S. Postal Service. This way you can be sure when the check arrived in their office. It's saved me from a late fee on more than one occasion. Make sure you waive signature confirmation, because mail delivered to a P.O. Box has no one present to sign for it. That's important, unless you want your check to sit in limbo for a while and eliminate the very reason you used the service in the first place.

Remember, the creditors have a financial disincentive to make it easy for you to pay your credit card debts on time. In fact, their best customers are those who always pay their bills, but are a few days late once in while. Those customers are the real meat for them. Talk about a profit center. There is very little risk they'll default, but a very large opportunity for the bank to generate additional interest and fee income. If you're one of those customers, look out. Hey, it can be hard enough to get debt free. There's no need to help the finance companies, banks and other credit card companies Hoover even more of your hard earned money out of your wallet. You can at least make it as difficult for them to increase their revenue as they make it for you to keep yours.

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The good doctor uses consumer satisfaction surveys that show American consumers are generally very satisfied with their purchases of goods and services. Well, that’s all fine and dandy, but how are people supposed to continue their spending spree if the economy slows down and they have less disposable income? It’s sort of a chicken and egg predicament in a way. Consumer spending drives the economy, which continues to grow, providing more jobs, more income for consumers to spend, and so on. Somewhere there has to be a base upon which to rest this house of cards.

If, as seemed to be the case today, it only takes a few words from the esteemed Mr. Greenspan (Chinese markets notwithstanding) to bring the whole gravy train to a screeching halt, how secure are we anyway?  Are investors and consumers really so worried and unsure of what the future holds they’ll sell like mad on the word of a single economist and a soft housing market? Apparently so. The market, according to many experts, is overdue for a correction, with stock prices outpacing economic reality. Well, consider us corrected, I suppose; unless we can expect more of the same tomorrow.

Professor Fornell expects our love of consumer goods and they elation they bring us to continue fueling the prosperity we’ve been enjoying. He also claims our good feelings toward retailers help to fuel our growing consumer spending. The professor cited retail giant Costco as one of the standouts on the consumer satisfaction chart, with an 81 rating (out of a possible 100). Ironically, this comes only days before Costco changes it’s return policy for consumer electronics products.

I think a look at statistics will shed even more light on the subject. It seems it is the American consumer’s attitude toward debt that is really giving the spending boom a kick in the rear. Americans are definitely not afraid to deficit spend their way to a new plasma TV, Viking stainless steel barbeque, or even a Gauge Mecha 1 BMF watch. If we feel entitled, by God, we better bolster our collection of whatever we want, right this instant. Internet shopping only facilitates the whole thing. By the way, Internet retailers have some of the highest satisfaction indices in the Professors Data, with Amazon.com scoring an 87.

We are even more in debt than ever before. With regard to the aforementioned statistics, American consumer credit grew 4.5% in 2006 to the highest seasonally adjusted level in history, $2.4 Trillion! That’s a lot of Visa cards. Americans financed a record $26 billion worth of motor vehicles at auto finance companies alone. The average term on an auto loan is now about 62 months. We’re going deeper in debt to finance our autos, and taking longer to get out of debt too.

Are we really just plunging ourselves into debt because we like to feel satisfied? That satisfaction overrides the reality of being in debt for many people. Consumer debt has lost it's stigma for many American consumers, and they expect to exist in a state of indebitedness. Many now look at saving with a bit of disdain, a far cry from our views in the not too distant past. Satisfaction with consumer products may be driving our nation’s consumer spending, but ever increasing levels of debt are fueling it. Are we able to stop the debt merry go round without derailing our economy in the process?
 

Posted by debtblog at 02:03 AM | Permalink | Comments (0) | TrackBacks (0)

Your credit score is important even if you never again get another credit card or buy another vehicle on credit because so many other organizations use your credit score as a way of measuring risk and personal reliability. While it may not be fair in all cases, that's the way it is these days, so get used to it. It's not going to change any time soon. As with anything else, you can whine and cry about it, or use the system as best you can to your advantage.

So, how can your credit score cost you money, even if you're not using any credit? Here are some common examples of how having a low credit score can cost you money in everyday life:

1 – Renting a house or apartment – Nearly all landlords will run a credit check on potential tenants. If you find some that don't, start a website entitled “nocreditchecklandlords.com” It'll be inundated with bad credit renters looking for a new pad. For the rest of you looking for a new place to call home, be prepared to give up your credit information, and thus your FICO score. Too high and you'll not be accepted as a tenant. As it is illegal to discriminate against potential renters on the basis of such things as source of income, the credit score and report is one of the last ways a landlord can use to legally separate the wheat from the chaff.

2 – Auto Insurance Rates – Here's a biggie. Most insurance providers now incorporate your credit score into their risk assessment formula that's used to calculate your insurance rates. The insurance rates you pay will be, in some way, directly proportional to your credit score, all else being equal. Someone with a FICO score of 755 will pay less than someone driving the same car, with an equivalent driving record, and a FICO score of 600. Unfair, you say. Perhaps, but unless you own State Farm or GIECO, you're unlikely to get it changed in your lifetime, so recognize it and move on.

3 - Life Insurance Rates – Some actuary, somewhere, found a correlation between your credit score and your propensity to file a life insurance claim. Interesting, only the bad credit die young, I guess. Be that as it may, life insurers are now using your FICO much as auto insurers are doing, to asses risk. They'll charge you a higher rate, or deem you uninsurable, based in part on your credit score.

4 – Existing Credit – You may not take on any new debts, but a change in your credit score for the worse can prompt existing creditors to ratchet up interest rates you're paying now. Don't let that happen to you. It will raise the minimum monthly payment you're paying and put a crimp in your monthly budget. In addition, it'll be that much longer before you're debt free.

5 – Getting a New Job – Obviously, one of the best ways to get debt free is to earn more money. It's one of the legs of the financial triangle. Obviously, one of the primary ways you can accomplish an increase in income is to land a new job. Here's another area where a low credit score can work against you. The Society for Human Resource Management conducted a study of employers in 2004 and found that 20% pulled a credit report on 100% of their job applicants, not only applying for financially sensitive jobs, as was common in the past. Some state legislators are introducing bills to ban the practice of using a job applicants credit score as a screening technique. That's sure to be vigorously opposed by employer groups. On the other side of the coin, you'll have worker advocate groups and labor unions fighting to ensure such bans are enacted. How it'll end up is anyone's guess. One wonders how a credit freeze would affect a job application. Since many states allow you to freeze your credit report so no one can access it, would a potential employer deny you employment in such an instance?

These are some of the ways your low credit score can cost you money and slow your progress toward debt freedom.

Posted by debtblog at 02:34 PM | Permalink | Comments (0) | TrackBacks (0)

Given that you’ll find it difficult getting along in the world without credit, even if you’re loaded (rich, not wasted), here are some credit precautions you shouldn’t leave home without. Actually they have nothing to do with travel, but are at more of a macro level.

1 – Relying Strictly on Joint Credit - First of all, if you’re a married woman, and, like many, you have joint credit with your husband, look out. If he leaves, so will your credit. You actually have no credit on your own, as sad as it may seem. It doesn’t matter how long you’ve been paying bills on time if your credit is joint with your husband. As far as the husband goes, it’s not just a problem if he’s no longer around. You should have independent credit even if you have a fantastic relationship and will probably stay married until your 90. Why? Think what would happen if something untoward were to befall the husband, such as job loss, gambling addiction, or disability. If his credit were to suffer as a result, the family would have to rely on the wife’s credit.

2 – Adding Your New Beau to All Your Credit – Hey, it happens, you meet that special guy, fall in love, and get married or move in together. Congratulations! But wait! Not so fast. If your credit is spotless, do you really want to compromise that by letting your new man in on the fun? Actually no, you don’t. It’s much safer to keep as much of your excellent credit yours as possible, lest a mistake on Mikey’s part affect your credit too. Before he runs out and picks up that new Rough Country suspension for his Jeep, or hangs that new 50” plasma on the wall using your Visa card, nip it in the bud. He keeps his cards in his name, you keep your cards in your name. If something bad happens in the future, you’ll be glad you did.

3 – Not Taking Advantage of Your Husband’s Credit - Think about the flip side for a minute. You have little credit, but your husband’s has fantastic credit. Use it! I’ve written many times about the principle of leverage. Here’s another place where it can be used very effectively. Leverage your husband’s golden credit to build up yours. Again, it’s better to have both partners in a marriage have excellent credit. Here’s a way you can facilitate it. Using credit leverage in this way can get you good credit faster than you can get there on your own.

Hopefully, these little credit pointers can help some women out there avoid credit mistakes of others, lest you end up deep in debt, sadled with bad credit to boot.

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Oh, wait! They can't. At this time, other banks require a social security number in order to get some plastic satisfaction. Obviously that will change in a heartbeat if other lenders and financial services firms see that BofA does well with this little venture. Will they allow just anyone to walk into a bank branch, and open an account without giving an SSN? Who knows? If they will, you can just open a new checking account without an associated SSN. The next step is to avoid boingoing a check for 90 days. That seems like a fairly lenient requirement for giving a credit card to someone whom you should suspect has a reasonable probability of being a lawbreaker. That makes me suspicious that the interest rates associated with these new credit cards will be, shall we say, extreme.

They may try the strategy pioneered by such credit card issuers as Capital One as well. Give out a card with a very low credit limit, say $1,000. When the creditor reaches the limit, rather than simply raise it, a new card is issued. This make sit much easier for the bank to generate a nice revenue stream of fees. After all, they can charge twice the total fees for two $1,000 limit cards as they do for a single, $2,000 card. As the initial provider of credit cards to the under-the-radar market they'll achieve great market penetration and build a substantial customer base, even if competition arrives fairly soon. You know that's just what the execs at BofA are counting on.

Posted by debtblog at 01:48 PM | Permalink | Comments (0) | TrackBacks (0)

Given that you may not be one of those successfully using debt to their advantage, what are the signs that you can look to as early warning markers? These will tell you in advance when debt is about to become a real financial problem for you. They are the “Red Flags of Debt”. Pay heed, so you can spot debt trouble before it's too late.

1 – Debt accumulation rate – Are you adding to your debt every month or paying down your debt? If you're adding to your debt, at what rate are your debts mounting? If you just took advantage of a 0% financing deal to festoon your wall with a new 42” plasma TV so you could enjoy watching Rex Grossman give up the ball (again and again), that may be okay. Watch those kind of deals though. Typically they'll include a provision that will charge you a ridiculous amount of interest if you either make a late payment or miss the payoff date. Many have been stung by failing to pay off the balance in the alloted time and getting stuck with the entire interest amount. If buying that plasma TV was really just an aberration, you're probably not in trouble, but look at weather you're steadily accumulating debt on a consistent basis. If it's a trend, that's a red flag of debt.

2 – Minimum monthly payments are excessive. If the total of those payments exceed more than 10% of your net income, watch out. You're setting yourself up for trouble. That's another red flag of debt. As you may be aware, the minimum monthly payment is a wonderful little device used by creditors to keep you in financial indentured servitude for decades. Yeah, decades. It will take most people between 20 and 100 years to pay off their debts by using the minimum monthly payment method. Here's a thought, sucker; put all your credit cards on autopay for the minimum monthly payment only. That way you'll not be late or miss a payment. Oh, they love that! It's a convenient excuse for the creditor to jack up your interest rate and charge profitable fees. After setting up autopay, pay whatever you can afford, but preferably at least an additional $100 on the card with the most offensive interest rate. That's a little secret for automatically getting debt free.

3 – Negative Savings Rate – Look at your savings rate. Are your savings or retirement accounts growing? If so are the growing by more or less every month? If it's less, and it's consistently heading that way every month, you guessed it. No savings, or a consistently shrinking savings rate is another red flag of debt. If you are using more of your income every month to service debt, and saving or investing less, it's a warning sign there's a storm coming.

4 – Frivolous Spending – Just had to get the new dub dubs for that '95 Camry your drivin'? Come on! What the hell are you thinkin'? If you do things like get rims for your car that cost what the car's worth, that's a prime example of frivolous spending. Ditto for Carribean cruises or anything else where you're spending money on nonessentials when you have substantial credit card debt. Buckle down, ace! The little things add up too. Try switching from Grey Goose to whatever's on the gun. You're friends won't care, really.

Watch these debt warning signs. You can use them to spot and avoid a debt nightmare before you living it.

Posted by debtblog at 02:38 PM | Permalink | Comments (0) | TrackBacks (0)

There are five major areas where Americans get themselves into debt;

• student loans

• unsecured consumer loans such as store charge and credit cards

• mortgages

• medical expenses

• vehicle loans.

In part the mentality of immediate gratification is because everything's so damned expensive these days. Your basic new car is $12,000 to $15,000. There's a whole argument about weather the cost of consumer goods is driven by inflation alone or the higher content demanded by consumers today. You can't find a new car without power windows, A/C, 6 airbags and a CD player. Ditto for the average new home. People demand higher content and more amenities today than they did in the 1960's. The average new home in 1965 was about 1,300 square feet. Now it's about twice that. Slab granite counter tops were once exclusively the province of the rich. Now they're ensconced in every middle end suburban development in the country. Security systems, high tech wiring, built-in appliances, and garbage disposals are the norm.

So, not only do we want it now, we want more of it. Our incomes have risen dramatically. In 2004 dollars, according to the U.S. Census Bureau, household income increased from $43,232 in 1974 to $54,061 in 2004. This is impacted to an extent by the number of multiple earner families now versus in 1974. Many consumer products have gotten far less expensive as well. Remember the $1,000 VCR? Still, even with the increase in real purchasing power, American consumers struggle to keep up with their desires.

The cost increases in other areas, such as health care and higher education, has also contributed to the continued indebtedness of the average American. Looking at many American's introduction to massive debt, student loans, we find that the amount of the average student loan debt has increased substantially. In constant 2003 dollars, the average student loan debt increased from $12,100 to $19,300 between 1993 and 2003. Furthermore, the percentage of students graduating from college with debt levels exceeding $25,000 increased from 7% to over 25%. Wow, that's a big jump, but you probably knew that already!

The two key components that contributed to this increase are the increased cost of post secondary and graduate level education, and the increasing number of students seeking advanced degrees. Heaven help you if you're one of the 20% of students that get a student loan but leave school diplomaless. You're still on the hook to repay the loan, but your employment prospects are definitely not as bright as if you'd stayed in school. According to one report, the percentage of students that indicated that student loan debt had caused them to delay either having children or get married has doubled in the last decade. On balance, that may be a good thing. Get your financial house in order, then have kids. On the other hand, are you ever truly ready for the little munchkins?

Where do young people turn when they find themselves in the huge student loan predicament? Why credit cards, of course. The 2004 study of consumer finances found that, between 1991 and 2000, the level of credit card debt among those under 35 years old had nearly doubled. Obviously, not all of that increase was not caused directly by student loans, but that figure, combined with the previously cited statistics, helps illustrate the debt picture faced by many younger Americans. The Fed says that of the same group, Americans under 35, about a fourth of their income is spent to service debt. Ouch! Even worse, last year, according to the U.S. Census department, only 43% of people in that age group were homeowners. Large debt levels without homeownership do not a good combination make. If statistics were available for those under 30, the picture would no doubt be much bleaker, as fewer in that age group likely own their domicile.

More on this soon, when I'll look further into student debt, but also into the other debts that are dragging down so many Americans....

Posted by debtblog at 02:42 PM | Permalink | Comments (0) | TrackBacks (0)

The propensity of banks and other financial institutions to just begin charging fees willy nilly whenever the feel they can get away with it has got some in Congress a bit riled up. I guess someone in congress got one of those letters from their credit card company too. In one of its first orders of business in the new session, the Senate Banking Committee began examining the credit card industry and their business practices. Credit card providers have been changing to a more fee oriented business model. As such, they are looking to maximize fee revenue. The firms have started to be fairly aggressive about their fee structure and when said fees are imposed.

It was only a matter of time until they began to push things a bit too far and consumers started to get a bit upset. That time is now. If you have credit cards, you've no doubt noticed some of the tactics credit card companies are using in an attempt to extract the maximum amount of cash from card holders. The committee chairman, Senator Christopher Dodd, D-Connecticut issued the following statement, aimed squarely at the credit card companies: "If you currently engage in any business practice that you would be ashamed to discuss before this committee, I would strongly encourage you to cease and desist that practice."

Strong words, but will the Senate actually back them up? Only time will tell.In an effort to get to the bottom of the situation Senators questioned execs from Chase Bank USA, Barclays Bank and Capital One Financial Corp. Cap1, in particular, has a reputation for pursuing some pretty aggressive tactics to maximize revenue, while targeting sub-prime credit card holders. Maybe those tactics, which include offering borrowers multiple low limit cards, instead of a single card with a higher limit, have finally reached the point where they're about to be reigned in by a higher power; the Senate Banking Committee.

Another tactic the committee found that is being used by several credit card providers can only be described as unscrupulous. Actually, several other descriptions spring to mind, but hey, this is a family blog. The committee found that the companies have been charging card holders interest on debt they've already paid! Nice, huh. Imagine if that happened when you went for lunch. “Sir, that burger will be $1.98.” “But I already paid for it” “Too bad, pay again, or we'll charge you for the fries too” As the problem gets worse, consumers just go deeper down the debt well. Don't let it happen to you.

Posted by debtblog at 02:18 PM | Permalink | Comments (0) | TrackBacks (0)

Given that a debt consolidation loan actually can be a valid solution for some, however, here are some problems you should avoid when pursuing the debt consolidation loan option. It actually does have some advantages, such as the convenience of only making one payment. This alone can be worth it to some, especially if it keeps you from having a late payment on one of your credit cards. You may also throw away substantially less money on interest than you would if you tried to pay off all your credit cards with minimum or close to minimum payments. Be advised however that the debt consolidation loan approach can also be fraught with peril for the unaware or undisciplined. As with many solutions, it's perfect for some, and perfectly wrong for others.

1 – You can't really get the loan you thought. Because many people who need a debt consolidation loan are deep in debt, and possibly have a late payment or three in their not too distant past, they may not qualify for the low, teaser interest rates that are being promoted in the ads. Once that is discovered it is tough for many folks to back out, even if it's still technically possible. It's like walking out of the F&I office in your car dealership, and turning your back on the car of your dreams, when you find out you didn't qualify for quite the payment terms you thought you would.

2 – Ending up in just as much, or more, debt. By some estimates about three quarters of those who get a debt consolidation loan with the intention of eliminating debt end up deeper in debt within two years. This is because of the tendency to do two things; get too large of a loan and/or fail to reform your spending habits. If you are deep in debt due to uncontrollable circumstances such as medical bills or job loss, that's a different story, but many just got there from overspending on cool, new stuff.

3 – You can actually end up paying more total interest. Because the term of the debt consolidation loan is so long, you can actually end up paying even more interest. That of course depends upon many factors, such as your total consumer debt and the interest rate on that debt. If your total payment is lower because you're getting a very favorable interest rate, that's great. However some debt consolidation loans have an interest rate that's only slightly lower than you're probably paying now. The decrease in the total payment comes because the term of the loan is so long. You need to check this out thoroughly. If the interest rate is only slightly lower and you stretch the loan out longer, you'll end up paying more interest. This is especially true if you succumb to the temptation to take out a loan that exceeds the total of your debts.

4 – You could get stuck with excessive fees . Something that can contribute to numbers 3 and 4 above are the fees that some lenders add to your loan. Watch for this. It's no use getting an interest rate that's 8 points lower than you're paying now if they are going to raise your indebtedness a substantial amount.

5 – You could lose your home. Here's the elephant in the freakin' closet. It's like your brother with a heroin addiction or your sister who's in prison because she chopped off her husband's head with an ax. Nobody wants to bring it up. As far as the loan companies go, the less the mention this fact the better. You, however, had better be damned well aware of it. The main reason you're able to get such a favorable interest rate on a debt consolidation loan is the fact that it's a secured loan. In the vast majority of the cases, the security just happens to be your treasured domicile. This where you can end up in foreclosure if you're not extremely careful. If you're in financial trouble due to chronic overspending and you fail to reform your fiscally irresponsible ways, you could be giving some foreclosure investor his kid's college fund.

A debt consolidation loan may be the perfect solution to get you back on the path to financial nirvana. It could actually help you get debt free, in time. Just go into it with both eyes open, nay, with your lids pinned to your forehead.

Posted by debtblog at 02:11 PM | Permalink | Comments (0) | TrackBacks (0)

Maybe you’re feeling that you’ve bitten off more than you can chew, and you’d just like to declare bankruptcy and start over after a nice vacation in Bermuda for a few weeks. Hell, you could just stay there and do your “Cocktail” impersonation. Sling some drinks, relax for a few years, and stay under the radar. Most, however would rather find a way to get back up on top the financial heap and put away a few bucks at the same time. This is all the more important if you’re responsible for a family. Sometimes it can be overwhelming, with all those responsibilities on your shoulders.

If you decide to forego Bermuda or the Virgin Islands to focus instead on getting your financial house in order, congratulations! You’ll thank yourself for it later. Here are a few of the things you need to keep in mind when making evaluating your credit repair options.
 

1)      Stay close to home – If your credit restoration firm is located in your state (not flustered and anxious), you’ll get two important benefits. The first is that the correspondence will be addressed and postmarked from the same state you live in. Failure to take this precaution can possibly get your correspondence marked as frivolous by the creditor. The second advantage is that you’ll be able to work more closely with them and keep things moving along so your disputes get resolved in a more timely fashion. You know the saying “Out of sight, out of mind.”

2)      Stay Informed – You need to know the tactics they’ll be using in your behalf. Failure in this regard could potentially land you in a bit of hot water with the gendarmes. You don’t want to end up keeping company with a very large man in a very small room for a few months or years. In the eyes of the law, you can be held liable for illegal credit repair tactics used to clear your credit or raise your credit score.

3)      What have you done for me lately? Well, not me, but someone. Get references from the companies you’re considering. Optimally you’ll get references from someone you know, and more importantly, trust. They don’t have to be large firms either. Often you can get fantastic, personalized service with a small company. Some people swear by the small company route. You may not spend the least money in the short run, but in the long run, you could easily come out ahead.

So, make sure you keep the fine points in mind when looking to find debt help.

P.S. - Good job, Serena in your round of 16 win down under!

Posted by debtblog at 08:40 AM | Permalink | Comments (0) | TrackBacks (0)

Probably not, but that brings up an interesting question. Why do some people seem to consistently overspend? What is the psychology behind such behavior? Why is the pattern of overspending so difficult to correct? Stay tuned for the next half hour, as we look into these and other fascinating questions. In truth, some overspending is driven by behavioral disorders such as gambling addictions or alcoholism. I just spent 4 days in Las Vegas for a trade show, and can attest to the fact that some people definitely gamble too much and seem unable to control it.

What about those that just plain spend too much? They’re buying those new Edlebrock aluminum heads for that ’68 Nova in the driveway, or picking up their fourth pair of Loeffler Randalls. Is it self esteem? You know that these days it seems that a lot of emphasis is placed on self esteem. Perhaps you don’t realize that when you whip out that Visa card, you’re actually spending real money. According to some experts, it seems that for some, there actually is a disconnect between associating credit cards and spending money. You’d think that would evaporate about every 30 days or so, but maybe not.

Getting back to the whole concept of self esteem issues driving consumer’s deficit spending, it’s ironic to realize that trying to bolster self esteem by spending money to acquire material positions and have fun doing things such as traveling, can actually further the very problems that contribute to the self esteem problems in the first place. Some people have low self esteem due to what they perceive as lower income than they feel they deserve or lower than others in their social circle. Spending to purchase what others are buying helps to generate a feeling of equality and raise the individual’s self esteem.

The irony here is that, by deepening the individual’s debt, they are denying themselves the very financial success that they seek in the first place. As they sink deeper into debt, they are just that much farther away from that place among their peers that they desire to emulate. Weird, huh?

As I stated in a post back in September about a budget being like a diet, you need to change your lifestyle to be successful in beating the debt death spiral. What I mean is that you need to identify the root causes of your spending habit and fix them, just as you would if you were attacking a weight or health problem by revising your diet. Here then are some of those root overspending causes you may want to take look at:

1 – Medical or psychological problem such as gambling or alcoholism

2 – Spending disconnect when using a credit card

3 -  Low self esteem

In addition, a 1993 study of consumer debt by Webley, Lea, and Levine at University of Exeter in the UK found that other psychological factors possessed by those in serious consumer debt included the following:

1 - Nonconformist, Agnostic or Atheist religious outlooks

2 – More permissive toward debt, but also were more likely to hide the fact they were in debt from others

3 – Knew more people who were in debt than did the non indebted study group and identified with them

Hopefully this will help you recognize such factors in yourself, if they exist, and change them for the better. After all, when you’re trying to get debt free, you need every advantage you can get.

Posted by debtblog at 12:25 AM | Permalink | Comments (0) | TrackBacks (0)

First of all, I'm writing this on a new Lenovo laptop equipped with Microsoft Windows Vista, my first experience with the new Microsoft OS. I'll let you know how I feel about it later in the week, after I've logged some more hours on it. Sadly, the machines not mine, just a loaner, but at least I'll be able to give a bit of evaluation to those of you out there.

What if you're not doing as well you'd have liked in your serarch for fgreedom from debt? Are still getting those infernal calls from the "non profit" credit counseling agencies offering their services? Did you know that non profitorganizations aren't obligated to abide by the federal do not call list? Well, it's true. They aren't. That may explain why some organizations repeatedly call you during dinner, even though you are on the list. Those bastards! Furthermore, some of these organizations are being looked at pretty carefully by the Internal Revenue Serivce. In fact, several credit counseling services that are supposedly non profit have been informed by the feds that they're losing their tax exempt status because they have repeatedly failed to abide by Federal tax exempt guidelines. In fact, last May, they revoked tax exemption from 41 such credit counseling agencies and indicated they were investigating still more. At the time, IRS commish Mark W. Everson even went so far as to term several of te industry's participants "Bad Actors".

As far back as 2003, the IRS was advising folks in need of credit counseling to be cautious, and even issued a consumer alert on the subject.Bankrate.com even listed the problems with Credit Counselors in its article on "12 Ways to Lose Money" last year. So, as I advised in my post last month on the subject, thouroughly check out any such credit organizations before you use their services. The money you save will be your own.

Posted by debtblog at 10:27 PM | Permalink | Comments (0) | TrackBacks (0)

1- Credit card companies are sometimes giving you less time between when you receive the bill and when it's due. This is very easy for them to accomplish. They just send you the bill a few days later. Giving you less time to get them the payment is a great way for them to increase revenue. It's the financial industry's equivalent of the tactic used by red light camera companies. Those little bastards, in the guise of public safety, have been known to actually shorten the duration of the yellow light to as little as 3 seconds. Why? To increase the likelihood you'll fail to clear the intersection before the light changes to red. Then, of course, they can mail you a profitable citation, which they make money on in a revenue sharing arrangement they have with the county or municipality. Nice, huh? Public safety? More like public (and private) profit!

As some of you may know and others may not, your credit card payment is usually considered late if it's not posted by the company before the due date. It can arrive in their P.O. Box on the agreed upon date and still earn you a late payment charge. Worse still, they can use this as a way to increase your interest rate. Permanently. Depending upon the balance you typically carry, this could end up making the $29.95 late charge seem like peanuts. Remember, if they do stick you with a rate hike, call every so often and request they lower it. Often you'll be able to make this happen, but you'll get no such reduction automatically, you've got to ask for it.

2- Tricking you into getting a different credit card than you requested. They ply you with a fantastic offer with all sorts of attractive sounding rewards attached (you'll find out these aren't as nice, or easy to achieve or redeem as they sound, but that's a story for another day). They then send you a different card, claiming you didn't meet the requirements for the card you applied for. The moral of this sad story is read th agreement carefully. Sadly, however, those tend to be akin to software EULAs, full of very fine print and seldom read completely, if at all.

3- Sometimes the CC companies will pop you with a late fee if you are beyond the TIME stated in your card's agreement. Some credit card agreements actually state that they must have the check in their dripping paws by a certain time on the due date. If this is the case for you, you should treat the due date as actually D-Day +1. Subtract a day from the due date printed on your account statement, and send your payment a day early. This is another great reason to set up your minimum payment for auto-pay. That will render this little bit of trickery ineffective.

4- Raising your card's interest rate just because they can. In many cases, they can raise your rate because they just want to increase revenue. While pretty damn nice for them, it sucks for you. This is another reason to check your statement carefully. It just happened to me. A rate on one of my cards went from went from 8.9% to 9.9% with no late payment, change in spending habits, or any other discernible reason. Thankfully, card has a very low balance on it. Make the call and demand the company change your rate back. If they fail to do so, avail yourself of one of those shiny balance transfer offers that shows up with sickening regularity in your mailbox.

Hopefully none of this will never happen to you. In today's market, I wouldn't count on it though. Be vigilant and don't be afraid to call them on their shenanigans. If you are trying diligently to get, and stay debt free, you don't need any little curves in your road to impede the process.

Posted by debtblog at 02:47 PM | Permalink | Comments (0) | TrackBacks (0)

Given that sliding someone a few Jacksons is less likely to facilitate getting you what you need these days, you might need a credit card or two, even if you strive to keep the balances low, or better yet, stay debt free except for the occasional card use while traveling or other spending anomaly that may crop up. The better your credit score, the more likely you'll be to get a card with favorable credit terms. In addition, when you get any other credit, such as a car loan or mortgage, you'll do so at much more advantageous terms (to you, not the lender).

Here is a technique that can work to help get you those extra points on your FICO score you're looking for. It's known as advanced credit profiling. Your FICO score, as most of you are aware, is the score used by lenders to judge your supposed credit worthiness. One of the components of your FICO score is what type of credit you have. This is known as your credit profile. The more well rounded your credit profile, the better risk you present to a prospective lender, and that is reflected in your score. Different types of credit need to be present in your profile in the correct proportions to maximize your FICO score. Refining your credit profile to more closely reflect what lenders are searching for will give your FICO a bit of a boost. How much of a boost you get will depend upon your current credit profile and how much room for improvement you have.

Other things are determinants in your credit profile as well. Lenders are very sophisticated today and look at multiple factors when determining the prospective creditor’s profile. According to Jay Peters at the Credit Secrets Bible , they even take into account things such as professional publications you may be subscribed to. While such subscriptions will not actually raise your credit score, the subscriber lists from some such publications are used by lenders as another factor to determine whom to offer credit. Your credit reporting agency information is checked against other factors to give the prospective lenders a more complete picture of your finances. Professional journal and association subscriptions and membership is just one other such factor. The makeup of one’s credit profile is a key determinant in who gets what credit offers and when.

Other information used in your credit profile, also known as your credit risk profile, are things such as your occupation, age, gender,  neighborhood, homeownership status, types of credit you have, etc. The number of variables used by some companies can run into the hundreds. Companies use sophisticated data mining software (and you thought the NSA had the good stuff) to perform the multiple cross references required to make credit risk assessments. Obviously factors such as age and gender are difficult to change, in the short term anyway. The key is to do what you can to improve your credit profile, such as make sure your credit accounts are distributed to different types of accounts. Each lender is different with respect to exactly what they are looking for with respect to your credit profile, but most will want to see some sort of balance i.e. multiple types of credit.

This may be just another tool in your box to help your credit picture and another step closer to becoming debt free.

Posted by debtblog at 12:43 AM | Permalink | Comments (0) | TrackBacks (0)

In some cases a great tactic to regain good credit and become debt free is to find a credit mentor. Many people won't have someone they can turn to for something so personal, or won't feel they have anyone can share such intimate financial details with. If, however, you do have such a person available, by all means, let them help you! If you've a parent, business partner, friend or relative that's financially savvy, let them show you the way to become financially solid again.

If you're really fortunate, it will be someone who's gone through the same debt problems you're experiencing now, and has come through them all to rise again.. Any time you can follow in somebody else's footsteps it's so much easier. They'll be able to relate with your troubles and relate some solutions that were successful to them. You may be able to copy their solutions or adapt them to your specific situation.

Posted by debtblog at 02:55 PM | Permalink | Comments (0) | TrackBacks (0)

Have you ever noticed that, no matter the credit rating of the individual, almost everyone has new credit card offers stuffing their mailbox these days. It seems even those with marginal or worse credit aren't immune from the offers of shiny, new credit cards. Have you ever wondered why? Why would a company give new credit offers to individuals who've proved their inability to handle credit cards? Ahh, why indeed! Because it fits into their business plan, that's why.

It seems that, in an effort to maximize profits, many credit card providers have turned toward a heavily fee based business model. In addition to the hefty credit card interest rates the firms charge sub prime borrowers, the lenders are trying to maximize fee derived income. What better way to increase fees than to increase the number of credit cards held by debtors? Well, actually there are ways to go even further, if you are looking to maximize profits, and that's to encourage those who are already over extended to take advantage of new credit card offers. Why? Because with new credit card offers come another round of fees, some of the most profitable being the inevitable over the limit fees that will accompany the numerous credit cards cards. Now there's absolutely nothing wrong with businesses making a hefty profit. I'm all for it. But you should be very aware of this new trend.

You might expect that with numerous credit cards you'd have enough available credit that going over the limit wouldn't be that much of an issue, but that's the beauty of this subtle system. The credit card companies carefully structure the credit limits of the accounts so that none are very large. Instead of letting the creditor have a single credit card with a $7,500 limit, they'll give them a single card with a $1,500 limit, and then follow it up with a few more. In the end, the borrower will have five credit cards, instead of only one. This way it multiplies the opportunity for the company to generate fee based revenue. In addition, five cards much harder to manage than a single card, so those who are a bit disorganized, as many sub-prime borrowers tend to be, are more likely to be late on a payment. You know what late payments mean. That's right, more fees for the credit card companies. In addition, they will use that opportunity to further increase the interest rate the customer pays.

Some companies don't offer credit cards to sub-prime borrowers. According to one source, Chase and CitiGroup indicate they don't maintain the practice of giving multiple cards to such consumers. One who is guilty of the practice, and has actually elevated it to a fine art, is Capital One. The Cap will send out offers to sub-prime borrowers until every hill in the country is completely denuded. Some debtors have as many as five or six such cards.

If these offers keep ending up in your mail box, send them straight to the shredder. You want to avoid, at all costs, a situation where you fall behind on your credit card payments and are using one high interest credit card to pay off another. Hopefully you can recognize this little business tactic before you get sucked in, and manage to resist sending back the new card offer. Remember, straight to the shredder. Put your credit cards on auto pay for the minimum payment to help avoid credit card management problems that lead to late fees. If you're trying to get completely debt free, you definitely don't need more credit cards. What is in your wallet anyway?

Posted by debtblog at 02:29 PM | Permalink | Comments (1) | TrackBacks (0)

Stop already. Why this phenomenon exists is beyond me, but there are better choices than mortgaging your financial future for the satisfaction of getting Aunt Mable that espresso machine she's been pining for. Think about it for just a fleeting second, please! Swallow your pride, along with that piece of cheesecake, for a moment and talk to your friends and family about coming up with a plan so the lesser compensated among you don't fall off the debt precipice buying presents for everyone. I know it's hard, but you really can strike out in whole new direction.

One plan that may work is that you only get gifts for the kids. Unless you just have to get them a Nano or that latest PS3 game (you can resist), you can make the kids happy for about a Jackson or two each, probably much less. Christmas is really for the kids anyway. The rest of us can celebrate the real reason for the holiday without exchanging gifts with every single person we've ever met. Most kids these days probably get too much anyway. Teach them about the joys of giving. Try boxing up some of the toys and running down to the local Toys for Tots donation or something. The Marine Corps does a great thing every year with this program.

As I survey the bounty my kids receive every year, I never cease to be amazed that they get far more than I ever got as a child, yet we actually get them very little. Even if the relatives only get them one thing each, it adds up in quite a hurry.

According to the U.S. Federal Reserve Board, the average Financial Obligations Ratio (FOR) for U.S. consumers (adjusted, Q3 2006) is 19.35%. This financial ratio describes the ratio of debt payments and home owner's insurance to disposable personal income. It didn't cross 19% for the first time until Q2 of last year. For years it's been slowly climbing, taking a bit of a vacation for a while in the early 90's, but usually moving ever upward. For the sake of all that's financially responsible, don't help it!

Some other holiday debt reduction plans can include actually making gifts for family members. I realize that unless you're pretty sophisticated, you'll have a hard time pressing that DVD of 24, Season 4, but well, sacrifices have to be made, I suppose. Maybe your family is secretly wishing the madness would stop as well, and they're too scared or proud to actually initiate a conversation along those lines. Think of it. You'll be a hero if you actually start a gift reduction dialog! Everybody can actually pull back from the edge a bit, and stop trying to max out the Visa trying to impress with the coolest gift.

Have a contest to see who can give the best gift while spending the least amount of money, then give the winner a gift (ironic, huh?). Let creativity reign. Everyone can have a great holiday season without feeling the dread that can creep in knowing that you're boosting up your credit card balances to stratospheric levels. Something to think about for next year.

Posted by debtblog at 02:14 PM | Permalink | Comments (2) | TrackBacks (0)

Here's a holiday tip; deep fry your turkey this year. If you marinate it first, it tastes fantastic and the biggest turkey will be done in about an hour. It's great for saving time when you've got guests on the horizon. Use olive or peanut oil for health reasons. If you'd like to choose your bird and live on the other side of the pond, there's even a farmer in England that will let you peruse turkeys on your cell phone and pick out the one you want!

No one says you've got to eat Ben Franklin's favorite bird for Christmas dinner either. There are plenty of other choices available. Some can even save you money, provide more meat, and give you that succulent taste you're looking for. One example is a leg of pork roast. It'll only set you back about $2.00/lb. If you shop at the warehouse food stores, you may even find it for less. While you're there, you may run across a pork loin, sans bone, for around the same price. If you've got such a choice, grab it. Pork loin's really great eatin'.

If you're trying to save a few dollars stay away from those pretty, wrapped hams. They're pricey and regular ham is the same meat. The spiral cut, lean hams can sometimes be found for a good price and are true culinary greatness. Check for bodyfat, just like when evaluating the success of your latest diet and exercise plan. Pigs tend not to exercise much, so some hams are laden with fat. If it is, choose one that spent more time in the gym.

Mortgages Will be Affected by Credit Policy Shift -

If you're shopping for a mortgage, it may be a great idea to find one before the start of the new year. A recent policy change announced by two of the three credit bureaus, Equifax and Experian, means that they can, and most likely will, charge mortgage brokers for pulling your credit report for each lender they're shopping your loan to. In the past, the credit bureaus would charge the credit report fee just once, when they pulled your report for the broker initially. That could raise the fees paid for prospective borrowers substantially, as much as a few hundred dollars.

Low income, credit challenged, and younger mortgage seekers could effectively be penalized more. This is because mortgage brokers have traditionally had to shop their loan to more lenders to get the best deal for the borrower. Now, every lender they shop your mortgage to (and pull your credit report for) will require a another fee be paid to the credit reporting agency. Because more established borrowers, and those with better credit typically require fewer lenders to get a good loan, they'll incur fewer fees.

So, if you're buying a new home, and have already found the one you want, act fast.

Once again, have a great holiday, drive carefully, and I hope you're not connecting through Denver.

Posted by debtblog at 02:09 PM | Permalink | Comments (0) | TrackBacks (0)

What is this mystery that will enrich you and your bank or investment accounts? It's the magic of paying down the principle on your mortgage. Just one extra payment every year can work wonders. Take your mortgage payment schedule and look at how much mortgage interest you'll be paying during the life of the loan. Maybe you should sit down first. If you've never looked before, take note of how little principle you actually retire for the first half of the mortgage. It's kind of sickening, isn't it?

As an example, let's assume (you know what happens when you assume) that you have a $250,000 mortgage at 6%. Did you know that every month, when you pay roughly $1,500 in P&I, that only about $250 of your payment is actually paying down your loan balance? The rest goes purely toward interest for your lender. At the end of your 30 year mortgage, you'll have paid that lender almost $290,000 in interest alone.

What it all means is that, if you were to pay only $250 extra each month, you'd be saving yourself $1,250 in future interest payments, and paying off the loan an month sooner. Paying 250 to get a guaranteed $1,250 return is pretty good math, no matter how you slice it. In addition, you'd pay off your mortgage in 251 payments instead of 360. You don't have to be a math wiz to see that adds up to substantial savings. The extra 251 payments of only $250 equal $62,750. The 109 payments of $1,250 you didn't have to make come out to $136,250. Ignoring the time value of money for a second, you saved $73,500 and rid yourself of your mortgage debt 109 (9 years) months earlier. Pay an extra $350 every month, and you'd be mortgage debt free 134 months earlier!

Now, there are two sides to this coin. You can pay off your mortgage early using the strategy discussed above, and after your mortgage debt is retired use the extra money to invest every month. The other strategy is to make the minimum mortgage payment and invest the extra money every month. There are two problems with that investing strategy.

1. You would need to make a pretty good rate of return to make it pay off if you were to use that strategy, and that rate of return would need to be consistent over the long term. If you invested that same $250 per month from the example above at a pretty stellar 12.5%, in 20 years you'd have grown it to $850 at the end of the 21 years. Money invested later will give a lower figure. So, even the first extra payment you make will beat any investment you're likely to make.

2. You actually have to invest the extra money you would have paid on the mortgage principle. It's pretty to use that money for other expenses or frivolity instead of investing it.

If you can generate a high, consistent return, and you have the discipline to do so, you can make the second strategy pay off. If you're like most people, however, the second strategy is easier, and it's guaranteed to work.

Posted by debtblog at 02:53 PM | Permalink | Comments (2) | TrackBacks (0)

Given that non profit credit counseling may be an avenue to explore, what should you look for to help ensure you don’t end up in more trouble than you’re in now?  Don’t confuse non-profit with free. These services will charge you to help extricate you from the hole you now find yourself in. In some cases the fee may be substantial, so be aware. If you are investigating the possibility of paying a professional to help you, here are some questions you should be asking during the interview process.

1)      Are you licensed for these services in this state? If they are not, walk away and find another service provider.

2)      Do you offer any free services or information? In some cases you may be able to get assistance and / or information without having to eBay all your possessions.

3)      What is your fee structure? You need to know in advance how they will charge you. Make sure you ask this question during the initial interview.

4)      What type of training has your staff received? A corollary question - Is the staff accredited by anyone? Before signing any contracts, you need to be sure the organization’s staff is qualified to help get you to the debt free status you’re looking for.

5)      Does your staff receive commission or bonuses based upon sales or the number of people they counsel? If so, you should probably move on. You want to get the full attention of the counselors because they’re doing their job, not be part of this month’s quota.

6)      Do you sell, rent or otherwise distribute my personal information? You need an ironclad guarantee of privacy. In this day and age, that’s essential. Look for a privacy policy and read it carefully.

In addition to asking these six questions, make sure you read the contract or agreement extremely carefully. You are entrusting these people to put you back on the road to debt freedom. You must be sure what you are committing yourself to.

They will probably put you on a debt management program. In such a program, you’ll pay the agency each month and they will ay your creditors, after retaining a portion of your money as their fee. Now you can see why it is so important to thoroughly check out the credit counseling service before agreeing to anything. The service should give you a schedule for completion. You should know exactly how long the process will take. In many cases they will negotiate reduced interest, principal, and / or fees with your creditors. If they indicate they will do this, check with your creditors to make sure that’s possible.

Run from credit counselors that:

A)    Say they can eliminate credit card and other unsecured debt. That’s typically not possible.

B)     Ask you to break all ties with your creditors. These debts are still in your name and affect your credit, not theirs. As such, you need to stay on top of everything, even if you do enroll in their program.

C)    Say that debt management programs will have little or no impact on your credit score. They will lower your credit score in almost every case. Usually it’s worth it to get debt free, and has a lesser effect than bankruptcy, however.

D)    If they steer you into a debt negotiation, instead of a debt management program, you will still pay your creditors the reduced amount they have negotiated. In this case, you pay the creditors, not the agency. Run from an agency that asks you to pay them in a debt negotiation program.

For some people, credit counseling agencies can be a godsend. There are, as with any industry, unscrupulous operators out there, however. Check everything out carefully so you know what you are getting yourself into. As with anything, information is a huge key to success.

Posted by debtblog at 02:47 PM | Permalink | Comments (0) | TrackBacks (0)

To make matters worse, the Boeing computer’s data was unencrypted. Christ, guys, Windows XP Pro allows you to encrypt individual files or folders. You’d think the yahoos that compiled all this employee data would have at least taken that baby step toward better data protection.

Twenty five states have, or will have, beginning Jan 1, 2007 laws on the books allowing consumers to lock up their credit report. Because creditors pull credit reports when they investigate you for new credit, no credit report usually means no new account. Laws vary by state, and some states charge a nominal fee for the service, usually between $10 and $25. Typically, the freeze can be removed in less than a week, so unless you impulse shop for a new home, car or boat, you should be fine.

You’ll obviously need to remove the freeze (which may also entail a small fee) to apply for new credit accounts. So, if you wake up one morning with the burning desire to drive that new Lexus hybrid all the other guys at the studio are driving, you may have to wait until your security freeze is undone. After the freeze has been lifted, you can race down to your local Lexus dealership and open that new Toyota Motor Credit account. Come to think of it, a credit security freeze would be a great way to resist such temptations and protect your credit at the same time.

There’s no doubt that, on the path to becoming debt free, identity theft could be a big bump in the road. Look into getting a security freeze on your credit report, it may be just the ticket to a little piece of mind.

Posted by debtblog at 08:46 PM | Permalink | Comments (0) | TrackBacks (0)

These days it's a bit easier to become appraised of your financial picture via your credit report than it's been in the past. You have the ability to not only get your report and resultant FICO score on line, you can do it without shelling out the very money you're trying to protect in the first place. The three major credit bureaus, repositories of your credit history that businesses use to asses creditor risk, are Equifax, Experian, and Trans Union. Each are now required by law to give you one free copy of your credit report each year. You should avail yourself of this opportunity like clockwork.

Get a copy of your report from each of the three agencies annually, and split it so that you get one every 4 months. By doing so, you'll get a better picture of what the hell's going on out there at various points throughout the year. After you get the report, you have to actually look at it. Now is a really great time to do this. As I discussed in my post on Dec. 6^th about doing a year end financial review, you need to get a complete financial picture at least once a year, and your credit report is a key component of it.

You credit report will be divided into four sections. First will be the section with your name, rank and serial...I mean social security number. Next, you'll find the public record section with all the dirt from your past that's contained in various public data repositories. Public data includes court judgments, foreclosures, and the like. That helps creditors asses their risk before they hand over any money, or that new F-150 you've been eying. Following the public record section, you'll note the (for most people) lengthy section with all your credit history. Contained therein will be such things as credit card account history, mortgage payments, and the like. You'll find both late and on time payment information for some types of debts, such as your mortgage and credit card accounts, but only derogatory information for others, such as utility accounts and other everyday bills.

Bringing up the rear is the section on credit inquirys. When someone pulls a copy of your report it be classified in one of two ways, either a 'hard, or 'soft' request. Soft credit inquiry s don't show up on your report, while hard ones do. Soft credit inquiry s consist of things such as background checks, checks by existing creditors, identity verification and you pulling a personal credit report. On the other hand, hard inquirys do affect your FICO score. Hard inquirys are for such things as new credit card accounts, mortgages, and loans for personal property such as cars and that new Ski Centurion you've been coveting. Every time you even try to open a new account like that, it will affect your credit, and not for the better. Usually banks won't do a hard pull when you open an account, but they can do so. One common scenario is if you're asking for things such as overdraft protection on your checking account.

After you get your report and go through it with the proverbial fine toothed comb, you'll want to make a list of any suspect information you've found it to contain. It's vital you purge the report of any inaccuracies you've found. You didn't really get a $500,000 HELOC? Now's the time to get rid of that bogus information. Prepare to write a lot of letters to creditors and the credit reporting agencies, although hopefully your report will be error free, and you'll not have to.

If you do find any problems, you'll have to compose a dispute letter explaining why they don't know what the hell they're talking about, but please do it in a nice way. Send copies (copies only, please) of any documentation supporting your position. You should send the correspondence suing receipt confirmation so you can be sure it was received by the appropriate parties. Make sure you send everything to the correct address. Often it'll be different from the normal billing address. During this process, you should contact the creditor first and give them time to correct the error before you send the letter to the credit reporting agency.

With a bit of diligence, you should be able to purge your credit report of any bad data, and subsequently increase your FICO score. Good luck in your continuing attempt to get debt free.

Posted by debtblog at 02:57 PM | Permalink | Comments (1) | TrackBacks (0)

My Oh My! The FED reported today that as consumers, we actually owe less money! Fancy that! Outstanding consumer credit was reported to have fallen in October by an annualized rate of 0.6%. This is the most rapid pace of outstanding credit decline since 1992! Fear not though, credit card debt is still on the rise, so Americans can be assured of the continued indebtedness to which we’ve become accustomed. Revolving accounts, such as credit cards were climbing at a brisk 4.1%. This increase in credit is a little slower than the previous month, but a pretty rapid gain nonetheless. The overall decline was fueled by a massive drop in non-revolving credit, such as car, boat and personal loans.

Posted by debtblog at 09:59 PM | Permalink | Comments (2) | TrackBacks (0)

Actually, you should avoid all of them. There are so many, it would be impossible to list them all, so I’m going to cover a couple of the more prevalent ones. If you are trying to get debt free, as so many are in this, the ‘Golden Age of Credit’, the last thing you need is for some unethical, or downright criminal organization to relieve you of your hard earned money. Here are 2 ways they might try to pull the wool over your eyes so they can steal your wallet.

1)      The Debt Elimination Letter – You’ll lose big on this one. The basic line is that, for a fee, typically a rather large one, the debt elimination agency will send you a letter that you can show your creditors to get your debts waived. I’m sure many people would love such a letter, but it doesn’t work that way in the real world. Use the money to actually retire some debt instead. The agencies claim that many of the fees the credit card companies charge are illegal, and, as such, the entire debt is void. These dream letters will be called a “Bond for Discharge of Debt”, or some variation thereof. These can also be termed “redemption Certificates”.

Your credit score, or FICO score, is one of the prime determinants in the rate you’ll pay when you get any type of financing. Roughly 35% of your FICO score is derived from your payment history, and another 15% from the length of your credit history. Obviously, it’s important to have some credit in order to have a payment history and a length of credit history. The earlier you get credit, the longer your history, so it’s important to get at least some credit, even if you get a credit card, use it a few times a year, and pay off the entire balance in a single billing cycle. This, incidentally, is what you should do. Only use your credit cards for purchases you’d have made anyway, and, now listen up, pay them off right away.

To illustrate how this strategy can help your credit, the difference in the interest rate (as of Nov. 3, 2006) between a 30 year fixed mortgage with a FICO score in the 620 – 659 range, and the 580 – 619 range, is 7.202% for the higher score, and 8.26% for the lower range. Needless to say, this is a substantial difference, and illustrates how a seemingly minor increase in your score could save you large sums of money. It shows why you should know your FICO score before you seek financing. If you were ignorant of your score, you could be looking for a mortgage, never knowing a 10 point increase in your score could lower your mortgage interest rate over a percentage point! If your FICO was above 659, you’d do better still, at 6.392%. Those rates are reflected in your house payment to the tune of $1,880/ month at the higher rate, down to $1,562/ month at the lower rate, for a $250,000 mortgage.

Another fallacy that can affect your credit score concerns your income level. While your income can definitely affect your chances of getting a particular loan or mortgage, it has no effect on your FICO score. Too many people are under the impression that a healthy income will insulate them from the effects of a negative credit history. While that may be true to the extent that you’re less likely to need credit if you have a substantial income, it won’t do anything to raise your FICO score. Fair Isaac, the fine folks that bring you the FICO, report that a survey performed by the Opinion Research Corporation in Feburary show that 45% of respondents falsely believed that getting a higher paying job would raise their credit score.

Another interesting bit of information gleaned from the survey reflected American’s misunderstanding of their credit score in general. Only half of those surveyed correctly responded that your credit score was a measure of risk likely to be faced by your prospective creditor. The remainder mere under the mistaken opinion that your credit score was a measure of credit availability, knowledge, or debt levels.

The important thing is, in preparation for getting a mortgage or car loan, get a bit of credit first. Don’t take it too far. You don’t need a honeymoon to the Cook Islands, a bitchin’ new 50” plasma, or some of those bling-bling dub-dubs for your ’99 Accord. Be a bit sensible, get one or two cards that you use rarely, and pay off regularly. In a year or two, when you’re ready to get into your first home, or get a car loan for your first family car, you’ll be rewarded with much more favorable credit terms. In some cases, the credit history can allow you to even get the mortgage or car loan at all.

One Other Note: Rosie O’Donnell continues to set a new standard for complete ignorance of world events, and the behavior of certain segments of the world’s population. This is evidenced by her remarks on the TV show “The View” last week, when she indicated we should not be concerned by the terrorists because they are mothers and fathers. Well Rosie, you should really take a few steps back and reevaluate. Anyone with a modicum of common sense would have realized by now that it’s just as easy for those who happen to have children to strap on a nail and C4 laden vest for a trip to the market. Rosie, maybe you should actually venture out from behind the gates of your walled community, and speak to some of those in the world who are, and have been, affected by those loving mothers and fathers.

Posted by debtblog at 03:44 PM | Permalink | Comments (0) | TrackBacks (0)

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With few exceptions, we all have debt. It sucks, but it's true. How you manage that debt is one of the primary determinants for your financial success or failure. You can even use your debt to contribute to your financial success, if you do it correctly. For most people, the goal is to become debt free, and not have to worry about debt ever again. The piece of mind you get from being out from under your debt is worth not using debt sourced capital for investing.

According to the U.S. Treasury Department, at the end of August, 2006 there was approximately $2,351.9 Billion (prelim.) in outstanding consumer credit held in the U.S.. That's almost $2.5 trillion! You can max out alot of Visa cards with that much money. The amount of outstanding consumer credit has been steadily increasing for the last five years, rising from $1,876B in 2001, to its present figure.

Every category has been increasing, although we've actually been financing less, in terms of loan to value, of our auto purchases. According to U.S. Federal Reserve statistics, loan to value ratio on auto purchases has receded form a high of 95% in 2003, down to 87% in mid 2006. This is not a one time decrease, as the figure has declined every quarter since the end of 2003. During the same time period, however, the interest rate we're paying on our auto loans (48 month average term) has increased from under 7% to almost 8% at commercial banks, while actually decreasing at auto finance companies, such as GMAC and FoMoCo. In 2001, consumers payed an average 5.65% new car interest. This dropped to a low of 3.4% in 2003, and is currently sitting at around 5.2%. Much of the decrease at auto finance companies can be accounted for by the proliferation of 0% financing offers major automakers have resorted to in an effort to speed up inventory turns. In addition, in loans obtained through auto financing companies, the term of the average new car loan has increased from 55.1 months at the end of 2001, to 61.9 months.

Revolving debt, such as credit cards and store charge accounts, actually comprises a smaller portion of our consumer debt now than it did in 2001, dropping from approximately 64% to 56%. Looking at the amount of credit card debt held by so many people, you'd think that would not be the case. However, much of the change can be attributed to the disproportionate increase in non-revolving debt from the proliferation of mortgages. To a great extent, the increase has been driven by favorable interest rates. So, even though people are paying lower interest rates on home and car loans, they're paying more in total interest, because the loan terms and amounts financed are increasing.

Back to actually managing your debt. What can you do to ensure you can get rid of most or all of your outstanding debt? What about proper debt management, to enable you to use some of your debt for investing and other purposes? First of all, don't think you're going to use money from credit cards to purchase investments and come out ahead. If you're using 0% cards, maybe. If not, there's virtually no chance you'll come out ahead with this strategy. The average credit card interest rate this quarter is over 14.5%. You'll have to be a pretty astute investor to maintain that rate of return. If you fail to, you'll be heading backwards.

Here are some important things you can do to manage your debt.

1- Pay all your debts on time, especially credit cards, car loans, and most importantly, your mortgage. This is huge. One of the primary ways credit card companies make money is by keeping your interest rate high. By paying your card late, you're playing right into their hands. In your credit card agreement, there are all sorts of terms and stipulations. In case you missed it, there is one that states they can raise your interest rate if you're are late on your payments. The actual terms vary by agreement, but the increase is most likely substantial, and can kick in almost immediately in many cases. If your rates do increase, you'll be stuck paying them on your entire card balance for at least 6 months.

2- Budget carefully and stick to it. It may well require a lifestyle change. Change it. Getting over extended is a sure way to violate rule number one. You'll also make more purchases than necessary using credit if you fail to maintain your budget. Put a line item in your budget for debt payment beyond the minimum payments, even if it is only $25. I, and many other PF bloggers, have made numerous posts on how to cut the fat from the budget and save money on your required purchases. Start using these methods to stay within your budget. You may not have to cut back your lifestyle as much as you think.

3- Roll up the stick, just like the airborne troops do. Start with the highest interest rate debt, pay it off, then take all the money you were paying on that debt and roll into paying debt number two. When debt two is gone as well, use the money from that one towards debt three, and so on, until all your debt is rolled up.

4- Pay off your debts first, then start your emergency funds or other general savings. You may not have an emergency, but you will definitely have to pay interest on your credit cards and other debt. Pay off the debt first, stop paying all that interest, and then put some away for emergencies. Many experts recommend at least 6 months expenses, but for many, that is much easier said than done. You can get a million people to argue with you on the question of paying off debt versus emergency savings accounts. If your credit balance is relatively low, they may be correct. However, if you've got substantial debt, your monthly interest payment is going to sabotage your efforts to save any money anyway. You need to get to the point where you're able to retain some of your funds, not give it to the finance company or bank for interest payments. Get that debt paid off ASAP.

5- View debt consolidation loans with skepticism. For some, they may be the correct solution. You must be in a position in which you absolutely can not lose your primary source of income, however. It's sad to say, but if things ever got really bad, you could default on your credit cards and revolving accounts. Your credit wouldn't be worth a damn, but as long as kept paying your mortgage, you'd be warm and dry. If you take out a large debt consolidation loan and default on it, you're shopping for an apartment. Good luck getting one too, because they'll require a credit check.

6- If you are going to have debt, use it to your advantage. Use the principle of leverage to make your debt work for you. This is not the best plan for everyone. Some people are far more comfortable simply being debt free. If you are a little less risk averse, the money you have in your home is the cheapest you'll ever have, in most cases.

You can use this cheap money to grow into more money. Some financial experts advise using the money in your mortgage by making only the minimum payments and stretching the mortgage out to it's full, 30 year term. If you have enough to pay extra on the mortgage, don't. Use that money to contribute to your investment accounts, start a business (can be extremely risky) or invest in real estate (ditto, but not quite as). You'll benefit from this money as long as your investment return rate consistently exceeds your mortgage interest rate. You'll be getting the mortgage interest tax deduction at the same time, further extending the benefit of this strategy.

Again, this is not the best plan for everyone. Some are better served or more comfortable simply paying off the mortgage early. Do this and you'll have piece of mind, and save substantially in total interest payments.

Remember, manage your debt. You can either make it work for you, or just get rid of it. It's up to you.

Posted by debtblog at 11:34 PM | Permalink | Comments (1) | TrackBacks (0)

It's true! Debt is not always bad. Debt can be your friend if it's used correctly. The problem for most people is that they don't do so. For the majority of people, debt is a mortal enemy to be slain like a medieval dragon. It's either your financial health or your debt, only one can survive. The key to making debt your ally instead of your enemy is proper debt management. Your debt must be working for you. Used correctly, debt can indeed make you wealthy and financially secure.

It comes down to one of the three financial principles I referenced in my post on August 23^rd about strategies for financial success. That principle is leverage. You must use your debt to control appreciating assets that generate a return greater than the interest you pay on your debt. This can be used for something as simple as using 0% interest credit cards to put money in an interest bearing savings account, or as complex as using the equity in your real estate to finance other investment projects. The beauty of debt when used in combination with leverage is that the the amount of money you are paying interest on is hopefully far smaller than the amount of money that is generating a return for you.

In order for this to work successfully you must do two things. The first is to get financing with an attractive interest rate. The lower the interest rate on your debt, the easier it will be to generate value and a positive return. The second item is to put the debt into a vehicle that generates a consistently high return. I'm not talking about a new BMW, either, although they do have great resale. Typically you'll need to some sort of secured debt to accomplish this, because the interest rate on a secured debt is usually much more attractive than unsecured debt, for obvious reasons.

Clearly, the greater the asset you control, the lower the return must be in order for you to generate a positive result. The reason is simple. A small percentage increase in a large asset will be greater than a small percentage increase in a small asset. You can use your debt to generate additional net assets for you with no leverage, if you are consistently earning a greater return than the interest on the debt. However, the use of leverage will allow you to realize a substantial return even if you are paying, in some cases, a greater interest rate than you're receiving.

This can be true if:

1. You are getting substantial tax benefits from your investment. If the tax benefits are great enough, they may outweigh the additional interest you're paying on the debt.

2. The levered investment allowed you to generate additional income in addition to the investment return. This can be true for real estate or other investments, although for most people, real estate is the most like investment to allow this. Another example would be a collector car that was appreciating and also generating prize money from winning car shows (this is the definition of very risky, however). Another example would be financing a successful business. The business, if successful, would appreciate, in addition to generating a positive cash flow.

3. The amount of the levered investment is large enough. To use the real estate example again, you could pay 9% on $20,000 on order to control a $200,000 piece of real estate that the balance of $180,000 was financed at 6.7%. If, the real estate generated a 7% appreciation return, you would be generating a positive return, even though you were paying 9% on the down payment. This is because the weighted average interest rate you're paying on the property, 6.95%, is less than the appreciation of 7%. You would probably want to have a greater safety margin than in this example, however. If you combined the appreciation with a monthly positive cash flow from rental income, and some tax benefits, you'd come out way ahead.
   

So, it's possible to use debt as your friend. It can generate substantial wealth for you. You must, however, be prudent and manage your debt successfully. The key is paying the lowest possible interest on your debts and generating the best possible return from your investments. It's pretty basic, but is the proven recipe for success.

Posted by debtblog at 01:37 PM | Permalink | Comments (0) | TrackBacks (0)

The effects are very powerful. Instead of the mortgage interest being calculated on the entire balance of your mortgage every day, they're calculated on the balance of your mortgage minus the amount in your offset account. For example, if you had a mortgage with a $150,000 balance and an offset account with a $20,000 balance, you'd only pay interest on the $130,000 difference. Depending on your mortgage and savings balance, you can easily cut your mortgage repayment time and total payments in half, and this with an offset account balance only about 10% of your beginning outstanding mortgage balance. To make it even more attractive, the interest savings are not taxed as is the interest income in a regular savings account. Wow! Kylie Minogue and 100% linked accounts. Those Aussies have it all. Obviously, such an account would be extremely attractive to U.S. mortgage holders as well. Contact your congressman/woman ASAP. Your linked account would be a great use for your emergency fund.

Create a debt reduction “Count Down”. This will allow you to see exactly how long it will take you to become debt free, as long as you don't increase your debt any more. It's great to watch as the magical day gets closer and closer. To do this, you must make a chart with all your debts. Put the highest rate obligations at the top. You'll tackle these first. Pay the minimum payment on all your debts except the one at the top of the list. Set aside as much of your disposable income as possible after paying all your bills as you can. This is the additional contribution you'll make toward the top debt on the list each month.

As soon as the first debt is completely paid off, you can shift all the money you were previously paying toward that debt to pay off the second debt on the list. These monies will be in addition to the minimum payment you were paying already. When the second debt is paid in full, you shift all the money to the third, and so forth. You keep going in this fashion until you're completely debt free. You can include your mortgage or not in this program. Your inclusion of your mortgage depends upon weather you subscribe to theory of using your mortgage as relatively cheap investment funds or you'd like to completely debt free. That argument could probably start a war in some circles.

Posted by debtblog at 02:23 PM | Permalink | Comments (0) | TrackBacks (0)

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First of all, there is no actual type of bankruptcy called a “medical bankruptcy”. You won't get any special treatment because your problems were caused by medical conditions. There were slightly over 1.6 million personal bankruptcies filed in the US in 2005. These were divided about 2/3 chapter 7 and 1/3 chapter13. This number and distribution has remained relatively constant for the past three years, although the Federal bankruptcy legislation passed last year will probably change it to increase chapter 13 filings.

There are some things you can do to help ensure you don't get caught in the medical bankruptcy trap.

First of all, do whatever you can to make sure have health insurance, if at all possible. That, however, will not automatically protect you from being liable for massive medical expenses. In the aforementioned Harvard study, over 75% of the participants had health insurance. As amazing as it sounds, some of those experiencing medically related bankruptcies thought they were covered by insurance, when in fact, they were not. Before visiting a physician, you need to verify your insurance coverage is in effect. This is especially true if you've recently changed jobs.

If your insurance demands that you get a referral from your physician before seeing a specialist, make sure you follow the proper guidelines. You could get completely screwed for big money if you visit a specialist (the most expensive type of doctor, by the way) without the proper referral. You need to be intimately familiar with the requirements of your insurance plan. If your employer offers different plans, carefully analyze the plans before choosing one.

If you are able to, get supplemental insurance to cover the costs not covered by your medical insurance. This is nice because if you or a member of your family is hospitalized, your bills will continue to come rolling in, while your income may not. Even if you continue to get paid, you can incur many thousands of dollars in expenses that are not covered by insurance. Usually, supplemental insurance is fairly affordable, depending on how many different types of coverage you get. You can get coverage for hospitalization, cancer, and other conditional coverages. Check with your chosen provider. As an added bonus, in many cases, these types of insurance can be paid for using pretax dollars, effectively giving you a little premium reduction.

Once you're properly insured, and you're following all the conditions of your medical insurance, you need to make sure you're living right. Prevention is worth a pound of cure, as they say. Exercise and eat right. If you can get into a regular exercise routine, it will be better than trying to sneak in a bit of cardio whenever you can. A lifestyle change is better than a diet, and easier to maintain too. Diets seem to come and go with every new year.

Try to get involved in some type of sporting activity for cardio vascular fitness. That seems to be a heck of a lot easier for many than getting a sore ass watching ESPN on the bike at your local club. The whole thing is to stay on the right track. It goes without saying, but I will anyway; Don't smoke. If you do, quit. If you never started, well, you're feeling pretty good about yourself, aren't you? Stay away from trans fats. Some of the latest research indicates it's one of the most important diet issues in preventing heart disease. So much for that linguine at Alfredo's. Get in shape, you'll look great and feel better too. It's a lot easier to say it rather than do it. It'll be worth it, though. It's best to try and stay away from the hospital in the first place.

Posted by debtblog at 01:07 PM | Permalink | Comments (0) | TrackBacks (0)

This will be blasphemous to some. Pets are a hollowed tradition in America. We love Fido and Fluffy. They lick our hands when we get home after along day at work and generally act happy to see us most of the time. Of course, they also crap in the yard and piss on the furniture, but that's not important right now. We love them anyway. Just how much does this love cost you every year?

Peteducation.com estimates the cost for owning a 50lb dog to be $1200.00 for the 1^st year and over $800.00 every year after that, over the life of the pet. A larger dog will cost more. That presupposes Fido never bites the mailman or chews up the neighbor's prize azaleas and you wind up in court. It also assumes that you avoid any large vet bills over your pets life. It is easy for something to befall your pet that can cost you thousands in vet bills and medicine. It's tough to get the dog covered by Kaiser Permanente or Blue Cross. Obviously, if your pet is a goldfish, you won't have such worries.

In addition to the direct costs for pet ownership, you may have to pay more for homeowners insurance if you own a dog. This depends upon the provider and can be influenced by the breed. The increased costs reflect the increase risk borne by insurers that a dog will cause property damage or bite someone.

This brings us to the point of the whole discussion. Can you afford to have pets? Should you? Does their value as a member of the family go beyond their monetary cost? If you're really trying to get debt free, should you use the $800 per pet each year to pay down credit card balances? Well, only you can answer that question. Financially, it probably makes no sense to have pets while you're trying to get out from under a stack of credit card bills. Then again, it probably didn't make any sense to get under the stack in the first place.

Sometimes pets provide security in other ways besides giving us the warm and fuzzies. They can help protect our property and deter the criminal element from paying us a visit. Nothing like a 125lb Rott to keep away the meth head trying to grab your CD collection and wife's jewelery. If you live in many neighborhoods throughout this land, the $1,000.00 a year to keep that Rottweiller would be a bargain. You'd think that homeowners insurance providers would see it that way too.

If you're looking at ways to decrease your monthly cash outlflow, you need to investigate every possibility. Many people overlook their furry friend when considering where they can cut the fat. It can take a major lifestyle change to reduce debt. You may have to choose between Fido and becoming debt free. Let's hope the choice is somewhat less dramatic. Maybe you could just ditch your $4.00 morning latte. See ya Fido!

Posted by debtblog at 01:04 PM | Permalink | Comments (3) | TrackBacks (1)

We've been fortunate to have historically low interest rates for the last few years, and many people have refinanced to take advantage of them. This has saved the average mortgage holder thousands of dollars in interest. Take the $250,000 mortgage example discussed above. In the past, most people would have a mortgage interest rate of closer to 8 – 9%. At 8.75%, that same $250,000 mortgage would have cost you over $400,000 in interest! That's why so many borrowers were clamoring for a refi over the last few years.

Paying off your mortgage early will not only will save you thousands of dollars in interest, but will get you debt free sooner as well. Taking our $250,000, 6% mortgage example above, simply paying an extra $150 each month will save you over $70,000 in interest over the life of the mortgage! You'll also pay off your home 75 months sooner. The extra payments go straight to principal each month. If you look at how much you're actually paying toward principal each month in the early years of a 30 year fixed mortgage, you'll get physically ill, so don't do it. Just kidding, you really should know.

The first year of the $250,000 example, each month's P&I payments are $1,498.88. The interest portion of the payments are over $1,200, leaving only $250 going toward your principal each month. Each extra $150 payment reduces your loan's principal more than half what a regular payment does. That means it is basically saving you from making 60% of a payment later. In other words, at the beginning of your loan, each extra $150 payment saves you almost $900! That's a pretty good return.

You'll get offers from your mortgage company or bank for their accelerated program touting the advantages of early payoff. They typically have you make a half payment every two weeks instead of once a month. Since there are 52 weeks in a year, you'll be making 26 half payments instead of 12 full payments. Half of 26 is 13, so you're really making an extra payment each year that goes entirely toward principal. As you can see from the example above, any amount that you can reduce your principal at the beginning of the loan dramatically reduces the mortgage interest you pay over the life of the loan.

You can make these extra principal payments yourself, so why enter your mortgage company's accelerated program? The answer is, in most cases, you shouldn't. For one thing, it reduces your flexibility. You can make the extra principal payments every month, but you shouldn't be obligated to on the bank's schedule. If you choose to participate in such a program, be sure the bank is actually contributing the extra amount toward principal each month. Make sure your get a payoff schedule from the lending institution, noting the actual date the loan will be paid, and your total of payments under the accelerated program.

Some mortgages include a prepayment penalty clause. If you were unfortunate enough to sign one of these, you'll want to carefully examine it to find out the actual terms and consequences to your wallet. If there is no prepayment penalty, the equivalent investment yield of your additional principal payments are equal to the mortgage interest rate. Put another way, if you're paying off your mortgage early, it's the same as investing your additional principal payment in some other investment that pays the same rate as the mortgage interest rate. Given that, there is another school of thought that says don't pay off your mortgage early. Use that money for investing. At today's interest rates, you're getting very cheap money. It's not likely we'll see interest rates this low again for quite some time. You have the unusual ability to take advantage of these historically low rates. If you can earn more than your mortgage interest rate as an investment return, this school of thought says you should do so, and invest the money you would have prepaid on your mortgage. This will allow you to take advantage of the time tested principle of leverage to increase your net wealth. Because leverage is such a powerful tool, you can generate substantial wealth using it to build your retirement.

Having a few hundred thousand dollars to invest is a sure way to get a head start on your retirement nest egg. You must be able, however, to get an investment return that exceeds your mortgage interest rate for this to be a smart move. While leveraging your home mortgage into a retirement nest egg can be a wise choice for some, it ignores the value of being debt free. Being debt free obviously has an effect on your monthly cash flow and your psyche. Many people experience a dramatically increased sense of well being and security by eliminating all their debt. You should also make sure you are eliminating your higher interest financial obligations as well. These should be eliminated first, in any case. There's no sense in making extra principal payments every month to keep yourself from paying 6% interest when you're paying 15% interest on credit card accounts.

Only you can decide if it is better for you to prepay your mortgage. Do you want to retire that debt early and save the interest? Or, is more advantageous to keep your mortgage and invest the money and/or retire other debt? A case can be made for both approaches. Get all the information and go the way that works best for you.

Posted by debtblog at 07:19 PM | Permalink | Comments (2) | TrackBacks (0)

In absolute dollars, 2006 is shaping up to be the worst in federal budget deficit in U.S. history, with a projected deficit, according to the OMB, of over $423T! That's a huge chunk of change, but in terms of our GDP, it's not all that bad, compared to some years in the past. Our GDP has risen rather dramatically in the past few years, so $423T only(!) represents 3.2% of the GDP. In 1992 we spent 4.7%, in 1985 it was 5.1%, and in 1983 our government spent an astounding 6.0% of the GDP trying to placate the people!

You can look to the Feds as an example and conclude “Why not just charge up the ole' VISA, get that makeover I deserve, and head to Cancun for a couple of weeks?” The difference is that you don't print your own currency (at least I hope you don't!), don't have the support of the international banking system, and don't have the benefit of billions of dollars in international trade in which to hide behind. In addition, it's a whole lot easier for a country to get people to bend the rules a bit. In fact, it's how the rules of international finance are constructed. For years, the U.S. was able to get away with this in part because we had trade surpluses in most years. Starting in the mid 1970's that advantage evaporated. We now show a cumulative trade deficit of over $6T.

In much the same way as you feel great when you're spending money, even if you're burning plastic, on average the U.S. actually has stronger economic indicators in years that we're running larger trade deficits. Money is flowing out of the country at a prodigious rate. Just as many Americans have achieved the status of credit driven uberconsumers, America as a nation has done likewise. As a nation we can sustain that for a time. As an individual, you can too, but as an individual, your personal consequences will be much more immediate and direct.

You can cash out refinance and pay off your debt. You can get a debt consolidation loan to get rid of the high interest credit cards. You can do these, and other things, and get out of the woods for a while. There are lots of tricks for getting your head above water. One thing you should do ASAP is get out of your ARM, if you have one. That neat little gimmick for getting homeowners into the largest McMansion they can afford is going to be responsible for a wave of foreclosures when the interest rates rise. In the end, though, you must control your spending. This can't be stated emphatically enough. Do whatever is required. You may have to make a rather severe lifestyle change. It's analogous to a diet. You can't go on a diet to lose weight, you'll just go back to your old ways again. It's the same with spending. You have to make a lifestyle change.

While the country can have a policy of deficit spending, you, as an individual, cannot. It will catch up to you, and the consequences will be catastrophic. Let's hope that isn't true for the U.S.A. as well.

Posted by debtblog at 02:21 PM | Permalink | Comments (0) | TrackBacks (0)

There are many mistakes people make when aiming for that laudable goal of becoming debt free. Here are some of the more common ones.

1) Closing Accounts Once They Are Paid Off – Many people close their credit card accounts as they pay them off. Don’t do this. One of the components of your credit score is the ratio of your outstanding debt to the aggregate of your available credit limit. If you have a large amount of available credit and very little or no debt, it will add to your credit score. In addition, the amount of time the accounts have been open will lengthen your credit history, which will also help raise your credit score. If you close your accounts, you can hurt your credit score. Unless the cards have high annual fees, don’t close them. If you don’t want to use them, cut them up.

2) Not Changing Spending Habits – If the money keeps going out at the same rate that got you into debt in the first place, logic dictates the problem will continue. Use the ole noodle! You’ve got to change your lifestyle. It may hurt in the short term to not take expensive vacations or have the latest consumer goods, but those things are luxuries you simply can not afford.

You need to be creative. Go camping somewhere you can drive to in a few hours for a vacation. Look for good, used appliances if you need a new washer or dryer. It may be relaxing to have those Friday dinners out, away from your kids. You may really look forward to it all week long, as your boss harangues you relentlessly. But things like that can add up fast. Once you pay for dinner, a sitter, parking and gas, you could easily be out $75.00 - $100.00. That money would better spent right now to pay down your credit cards. Just treat your boss like that guy on the cereal commercial and don’t listen.

3) Being Penny Wise and Pound Foolish – Saving money is great and a key component of becoming debt free. After all, every dollar you don’t spend is like getting a raise for that amount. That strategy can be taken too far, however. Being a cheapskate on some things can come back to cost you big time later.

For example, don’t skimp on maintenance for your car. While such things may seem expensive, it could set you up for a whopper of a bill later. Not changing the oil or having services performed at recommended intervals could not only leave you stranded with a major repair, it could void your car’s warrantee, leaving you stuck with the bill. For example, the transmission in most modern cars will set you back $3,000 - $5,000 if it needs to be replaced. Most people don't have that kind of money just laying around. Likewise, running the tires so they're as smooth as Mr. Magoo's head could cause a major accident, so don't do it. Health care is another place where being cheap now can cost you big time later. It would be a shame to skip your checkup only to miss catching a serious health problem. Medical bills cause over half of all bankruptcies. Don’t let that happen to you, if you can possibly avoid it.

4) Choosing the Wrong Repayment Strategy – There are many ways to pay off your debt. You can get a debt consolidation loan to eliminate your credit card payments, then pay off the consolidation loan. You can use the difference to contribute to your emergency fund. You do have one of those, right? As I’ve discussed before, this method can be attractive, but is not without risk. In addition, if you choose this method, pay off the consolidation loan early if at all possible. Stretching out a consolidation loan to the full term can cost you bundle in interest, even though the interest rate is comparatively low.

Another option is to simply continue paying your debts down as you are doing now. A mistake here is not paying them down fast enough. Again, this will cost you a bundle in interest. Make sure you make a monthly budget if you choose this method. After you make the budget, stick to it! It doesn’t do any good if you just treat it as a general guideline.

If you avoid some of the pitfalls, you can get out of debt. Look carefully at your personal situation. Devise a strategy that will work for you. Most likely this will be a combination of techniques. The three main points to remember are:

1) Control Your Spending – Vitally important, this may require a substantial lifestyle change.

2) Maximize Your Income – Can be easier said than done. Work overtime, get a second job, start a small business you can begin with little money(Hard to do). Remember, every extra dollar you make and contribute to eliminating your debt is multiplies because you are also eliminating future interest payments.

3) Eliminate High Interest Debt First – You have to look not only at the interest rate, but also at the amount of the debt. For example, if you have a credit card with a 22% interest rate, but only an $800 balance, and another card with a lower, 18.9% interest rate, but a $10,000 balance, work on the $10,000 card first.

Remember, you can get out of debt. Set goals, stay focused, never quit.

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Posted by debtblog at 02:43 PM | Permalink | Comments (0) | TrackBacks (0)

• Create a budget – It's very difficult to just wing it on this one. It's similar to starting a business with no business plan, something else all to many people attempt. To really see where you spend money every month, you have to have a written budget. That Excel sheet in your head doesn't cut it. There's an old saying in business; Fail to plan and you plan to fail. It's similar here.

• Spend less than you make – It sounds pretty simple. The logic on this one is hard to defy. It's kind of like losing weight. Take in fewer calories than you burn and your weight goes down. Unfortunately, too many people use a similar strategy when spending their financial resources. It's supposed to be the other way around. Spend less than you make and your savings and investment balance goes up. It's much easier to accomplish this if you've created the budget recommended above.

  Take a good look at your priorities. Do you really need the new dub dubs for that car you probably shouldn't have bought either? Ditto the new HD-DVD player, even if the picture is fantastic. If you really must have one, at least wait until they come down in price. If you've gotten all your goseintas and goseottas actually written down, you can spot those little leaks that can fly under the radar. Some of these smaller expenses can add up to a pretty substantial number.

• Have an emergency fund - Let's face it. Sh*t happens. You may be pretty damn lucky and it hasn't happened to you yet, but the odds are it will some day. Home repairs, car repairs, and medical, job, or legal problems can all conspire to derail your carefully planned financial health. If you've got a few under the mattress, you can usually escape the worst of many of these problems.

• Take advantage of whatever retirement savings plan your employer offers, especially if it includes matching funds. - This is a real no brainer. Too many people, especially younger ones, leave this money on the table. That's completely crazy. If you're are in sales, you know you never leave money on the table, if you can avoid it. It's free money, for god's sake! Take it. If your employer offers a 50% match on whatever funds you contribute, that's a 50% return your first year, right off the top, even if the investment goes nowhere. To make it even more attractive, you get that money tax free. (You may have to pay taxes when you take it out, depending upon the investment) That rate is pretty hard to beat. I've actually heard people say “I don't want them to take that money from me every month.” You dumb ass! They're not taking it from you. They're setting it aside for you, in an interest bearing investment with your name on it, and to top it off, they're chipping in some of their own money too. It's like getting a raise. When was the last time you turned down one of those?

• Be properly insured. - Too many bankruptcies are caused by medical problems or disabilities. In 2004, over 797,000 of the almost 1.6 million bankruptcies were caused by medical problems. Having medical insurance is no guarantee against bankruptcy here, as a recent Harvard University study found that, in 2001, 68% of those who filed medical bankruptcies had medical insurance. To help out here, you can sometimes get supplemental insurance, such as AFLAC, through your employer. This is great for covering out of pocket expenses associated with lengthy hospital stays and other medically induced financial hardship. To make it even better, you can pay for this type of insurance with pre-tax dollars, making it effectively 20% - 35% more affordable. Don't neglect disability insurance either. This can get pretty pricey, but you are more likely to need this when you are young than life insurance. 12,000 people a week file for long term disability from social security. In most cases, you don't get nearly enough to live on from social security disability, so you need to supplement it with a private policy.

   There are many other things you can do to ensure your long term financial health. This is just a start. Remember. when it comes to money, you need to make it, save it and protect it. This is the key to your long term financial health.
  

Posted by debtblog at 02:49 PM | Permalink | Comments (4) | TrackBacks (0)

In order to point your in the proper direction, here is a list of some merchants with high, recent customer satisfaction scores.

One very important category, near and dear to my heart, and probably yours, is food. According to the American Customer Satisfaction Index, compiled by the University of Michigan, fast food and quick service restaurants were paced by Papa John's pizza. Now, eating out all the time is a sure way to spend far more than you have to. This is not good for long term financial success, but there are those times when you've just got to grab a quick bite and don't feel like cleaning the kitchen.

No surprise, but the American Customer Satisfaction Index (ACSI) ranks wireless telephone providers as below the national average in customer satisfaction. Be that as it may, you probably have a cell phone, and are unlikely to give it up any time soon. If you plan on switching providers soon, or just have to get the latest Motorola/Nokia/Samsung Phone/PDA/Camera/foot massager, Verizon and T-Mobile ranked highest in the ASCI's customer satisfaction index for the first quarter of 2006. Cingular ranked lowest. I guess customer satisfaction measures more than dropped calls.

Okay, so maybe financial freedom has already found its way into your life, and you want the latest blingmobile to impress the chickies at the local club. You should run down to your local Lincoln Mercury dealer and drop a wad of cash on the 2006 Lincoln Navigator. Make sure you slap a set of Dubs on it ASAP! According to auto industry research firm AutoPacific in a survey released last month, the 'Gator was tops in overall satisfaction. If you're on the more practical side of luxury, the new, 2006 Hyundai Azzera pulled in honors as the highest ranked car. If high gas prices don't bother you, or you've got to get your quad to the dunes, check out Nissan's Titan pickup. It snagged the highest customer satisfaction rating among pickups.

If you're traveling and would rather ride than walk or take the bus, know that the Market Metrix Hospitality Index ranks Enterprise Car Rental tops in customer satisfaction. Even better, they'll bring the car to you if you need to rent in your home town.

When you get to your destination, stop in to a Microtel Inns & Suites hotel. Both Market Metrix and JD Power scored them tops in their segment in the latest customer satisfaction surveys. Trying to garner as many such awards as possible, Microtel also received the 2005 "Extra Mile Award" from Arthur Frommer's Budget Travel Magazine.

If you're staying home to watch the latest episode of “So You Think You Can Dance”, we've got to have a talk. If you really must watch all the carnage, make sure the signal is finding it's way to your TV through a DirecTV satellite receiver, because they received the highest marks for customer satisfaction among satellite and cable TV providers according to the ASCI.

If you make purchases on line, you'll want to stop by Amazon.com and Netflix.com. They led the way among Internet retailers in a customer satisfaction survey of 8,500 Internet shoppers conducted by ForeSee Results and FGI Research .

Of course your freakin' call may be recorded for customer satisfaction purposes, but at least the NSA impersonation must be working at Qwest Communications, because they recorded the highest customer satisfaction scores among directory assistance providers. This is from a recent survey performed by Paisley National Directory Assistance for their Performance Index.

Hopefully this little post will assist you in determining where to spend your hard earned dollars.

Posted by debtblog at 01:57 PM | Permalink | Comments (0) | TrackBacks (0)

 Balance transfers from one credit card to another are all the rage these days. Consumers regularly take advantage of the myriad of credit card offers they receive in the mail. It gets so bad at times, you’d think the credit card issuers had nothing better to do than kill as many trees as possible to print your offers on.

It can make great sense to take the balance off one high interest credit card and put on to a different card at a zero or low interest rate. It can also cost you plenty if you blindly sign the form and mail it back after being seduced by the huge “0% for Balance Transfers” headline at the top. Remember, credit card companies are in this to make a profit, not help you out in your hour of need. A common tactic is to offer a low initial rate and then roll your remaining balance into an extremely high rate after the promo period expires.

Something else the credit card execs probably stay up nights getting hard over is the sneaky terms they slide into the fine print, like this gem seen on one card offer: "we reserve the right to change the account terms including the APRs at any time for any reason." That just proves the print on those offers is fine for a reason. They’re praying you don’t read it.

Something else a balance transfer offer can contain is transfer fees. Avoid those too. There’s no reason to pay them unless you own stock in the credit card company and are trying to help its bottom line. Maybe the CEO needs a new yacht and you’re just the one to help him get it.

There’s nothing wrong with credit card balance transfers. They can be a great tool to help you pay less for your credit. Just look before you leap. The money you save will be your own.

Posted by debtblog at 03:26 PM | Permalink | Comments (0) | TrackBacks (1)

If you're thinking about consolidating your student loans, you'd better get off your duff and get with it! Traditionally, there is a grace period so that as long as you've filed your paperwork before the deadline, you'll get the rate from the previous year. Pretty important if interest rates are rising, which, at this point, they are. Student loan interest rates adjust once every year. For the 2006 fiscal year (this year) it is at 4.7% for student currently attending school. This is set to increase to 6.8% for fiscal year 2007.

To illustrate how this can affect you, take a $45,000 example loan. Rather than enjoying the $300/month payment, you could find yourself paying almost $350/month!This year, because of the 2005 Budget Reconciliation Act, you may not get to enjoy the grace period. There is a strong chance that if you don't have the completed loan in hand by the deadline, it will just be too bad. You'll still get your loan, but you'll have to pay the increased interest interest rate from 2007. Bad news. So get off your ass and get down there man! This ain't no riddle, to me it makes good, good sense.

Posted by debtblog at 06:07 PM | Permalink | Comments (0) | TrackBacks (0)

With the price for June crude up to $72.50, and the dollar free falling like a safe pushed out a top floor window, getting your money to strech even farther every day is a challenge. As tensions with that wack job Ahmadinejad (lil' Hitler) that calls himself the president of Iran increase, refinery fires break out now and again and Nigeria develops into more of a mess every day, I don't see things improving on the fuel price front any time soon. I know you're thinking that gas prices are quite high enough, thank you, but the summer driving season traditionally brings with it the highest fuel prices of the year, so I suspect we ain't seen nothin' yet.

I know you'll be tempted to put your $80 a tank fill ups on your credit card, but please don't. If you think gas prices are high now, wait until you're also paying a 15% finance charge on top of the $3.19/ gal.  Time to switch to a Prius? Maybe so. I know where you can get a Yukon XL, cheap! Which brings up another point. Beleagured U.S. automakers, traditionally making the lion's share of their profits on SUVs and pickups, stand to be hurt  more than  foriegn auto producers by the climbing gas prices. Ford and GM announced layoffs prior to gas jumping higher than Jesse Williams on 10 cups of Starbucks finest. If you work for one of them, look out. Start looking for new income streams, being frugal and maybe shopping around for a new line of work.

Posted by debtblog at 01:32 PM | Permalink | Comments (0) | TrackBacks (0)

The Reverse the Raid on Student Aid Act of 2006,  H.R. 5150, was introduced into congress on April 13th by  Illinois democrat Dick Durban. Sounds great, but what is it really?  According to co-sponsor George Miller: “The high cost of tuition should never prevent a qualified student from getting a college education, but Republican leaders in Congress apparently don’t see it that way,” Miller said in an April 13 press release from his office. “Democrats want to take America in a new direction, and that includes reversing the Republican raid on student aid and making college more affordable for all students and families.” He may have a point, but it sounds like more of the partisan sniping we have grown accustomed to over the last few years.

In yet another area, the roles of Republicans and Democrats seem to be equalizing. In the past, Democrats never saw a spending or tax package they didn't like, while the Republicans wanted to limit government size and spending. No more. The parties are both equally adept at spending your hard earned tax dollars and growing government at a prodigous rate. In one of the only areas where they should be spending money, education, the Elephants are trying to cheap out on us.

One of the keys to America remaining competitive in the global economy is having a highly skilled and educated workforce. Now, with China and India lapping at our heels, is not the time to steer clear of providing American employers with a deep, home grown talent pool. In order for that to be possible, our young people need to be educated beyond high school. The economy demands it.

There should be special, low interest loans for students of math, science and engineering. America was built because Americans seemed to always find new and innovative ways of doing things. 'American Inventor' notwithstanding, we have seen that position steadily eroded over the past few decades. We need  new workers that can develop computer software, not just play games on it. We need researchers in the areas that will power the economy of the future, such as materials science,  nanotechnology and alternative energy. To allow American companies to develop the next generation of products, and derive the maximum benefit from them, we need American scientists in the laboratories and workstations, not just in the boardrooms.

Posted by debtblog at 12:33 AM | Permalink | Comments (0) | TrackBacks (0)

Well, it looks like the new bankruptcy legisplation is really paying off....For The Banks! Wells Fargo posted record 1st quarter earnings of over $2 billion. Likewise, U.S. Bankcorp saw record profits in the first quarter of 2006. Both banks cite the lowered cost of credit as a key component of the record levels of such earnings. Now we can see why the lobby for the financial industry were so keen to get the revised bankruptcy legislation through congress last year. With record profits all around, they're sure to get their contracts extended, and their principles will no doubt get hefty bonuses.

 
If there was any doubt about who was really benefiting from the American public's unquenchable thirst for credit, that doubt should all but be erased. It's a shame that our economy is fueled by this drive to extend our credit limits and plunge ouselves deeper into debt at the cost of our futures, both as nation and as individuals. As we bolster the bottom lines of the major financial institutions at the cost of our own, we can only hope that the engine of economy keeps chugging away, for if it falters, we'll do the same under the crushing debt loads we've subjected ourselves to over the past decadce.

Posted by debtblog at 01:20 PM | Permalink | Comments (0) | TrackBacks (0)