Tag Archive for 'Debt Consolidation'

People who never had to worry about bad credit in the past are worrying about it now. If the economy dealt you a bankruptcy, foreclosure, debt settlement, or a slew of late payments and collection accounts, you probably want to know how long it will take to recover and have good credit again. The answer? It depends.

The problem is that making a payment on time doesn't add as many points as making it late subtracts. FICO estimates that a single late payment can drop a score by up to 80 points if you have a score of 680. Bankruptcy drops it by 130. The good news is that your more recent history is weighted heavily; your distant past is not. So even though a bankruptcy can remain on your credit report for ten years, after three or four it loses its importance.

Gina's credit cleanup plan goes as follows:

1. Change your habits. If you have credit cards with balances, stop using them, stop carrying them, and start paying them off. Take the card with the lowest balance and pay more than the minimum -- as much more as you can. When it's gone, do the same with another card -- preferably the one with the highest interest rate. Your credit utilization (the amount of credit used versus credit available) will drop, and that can mean an improvement to 30% of your rating. Paying on time improves the payment history (35% of your rating). Try this for six months, then pull your credit report and see how much your score has improved.
2. Get professional help. If the reason you can't pay your debts is that your interest rates are too high, a non-profit, reputable debt management / credit counseling service and help you budget and perhaps negotiate lower interest rates from your creditors.
3. Become an authorized user. If you have family or friends with good credit, ask to be added as an authorized user on a credit account or two. You don't actually get or use the credit card (you don't even need to know the account number) but the history on that account will show up on your credit and become part of your credit score.
4. Try a secured credit card. This is a card designed to help you rebuild credit. The fee may be steep, and you'll have to deposit cash with the creditor in an amount up to the card's limit.Make sure that the creditor guarantees to report your payment history to credit bureaus -- and pay on time religiously.
5. Check your credit a couple of times a year. Make sure that your good behavior is being reported accurately. If you discharged accounts in a bankruptcy, make sure they show up that way on your credit report.
6. Know your time frames. If you want to apply for a mortgage, know that FHA will consider your application if at least three years have passed since a foreclosure, or two since a bankruptcy. You can even get a mortgage within one year of bankruptcy if your credit prior to filing was excellent and the filing was due to events beyond your control, such as a mass layoff at your company or a serious illness. If your credit was less damaged, try applying once you have successfully paid your bills on time for at least a year. If your only damage is a late payment or two, make payments on time for at least six months before applying for a new mortgage.

While it may seem that it takes a long time to clean up a credit history, remember that time is going to pass anyway. And three years from now you can be sitting on a good credit rating, or you can still be a problem child -- but three years older.

Okay, I know, it's cruel to run an entry like this during the holidays. Telling people to get rid of debt just when there is all that pressure to spend like crazy. But I'm trying to save you a hangover--a spending hangover. You can thank me in January. So, starting now, we're going to get your spending utilization down and improve your bad credit.Credit utilization is the amount of credit you are using, divided by your total credit limits. So if you have 4 cards with a total limit of $10,000, and you are using $9,000 of it, your utilization is 90%. Guess what it should be for a good credit score? 30%! That's $6,000 of debt you need to unload before you can turn bad credit into good credit.

Okay, you say--I'll stop using my cards, make my monthly payments, and this time next year I'll have good credit and no debt. Not so fast. If you make the minimum payment, you will be in the same boat this time next year. Because credit card companies WANT to keep you in debt and comfortable with being in debt, that suggested or minimum payment isn't enough to cause you much pain when you write that check--and it isn't doing much to pay off your balance either. If your rate is 15% and you make the typical 2% payment on that $9,000 balance, which is $180 a month,this time next year you will still owe $8,132! And that's only if you incur no fees or late charges and your company doesn't raise your rate.

What Can You Do?

Well, you have a couple of options. If you have home equity, you may be able to consolidate your debt at a lower interest rate. If you had a 6% rate, you could wipe out that debt in 3 years by paying $282 a month! And the interest may be tax deductable. If you have good credit, you may be able to get a personal loan, or you may be able to consolidate your debts by transferring them to lower-interest cards--then pay them down like crazy while the introductory rates are in force. In just six months of zero percent financing, you could pay that $282 a month and knock almost $2,000 of your balance! You can't play that game too long, so it's best to throw as much cash as possible while your rates are down.

The Payoff

It's ironic--once you don't use much credit, everyone wants to lend to you. And they charge a lot less, too. You could find yourself paying a lot less for mortgage interest, car insurance, and other goodies. Start today, and next year's holidays really will be merrier.

Think credit reform ala the CARD Act is helping consumers? Think again! The Center for Responsible Lending (CRL) claims that card companies are doing whatever they can to add, um, whimsical price changes and interest rate increases for multitudes of customers. Here are 10 ways credit card companies are still putting the screws to their clients--even their best ones.

1. Pre-emptive rate hikes. One of the largest issuers recently hiked the rate across the board on its low risk consumers who have always paid on time to an outrageous 30%! A new Federal Reserve study on the CARD Act shows that 54% of banks have already increased or plan to increase the rates on their prime customers. But wait, there's more! 74% of banks have or will increase rates on those with credit problems.

2. Penalty rates are also going up. You can be hit with these if you pay even one day late or exceed your limit. There's a reason for the rush to screw the customer--as with regular rate increases, anybody who has an APR raised to a penalty rate before the new CARD law takes effect does not benefit from its rules on APR changes. Rate changes are permanent and will not be reversed, even if implemented the day before the reform date.

3. Issuers are reducing credit limits. They are doing this sometimes with no notice, says consumer Web site LowCards.com. This can harm cardholders' credit ratings by reducing the amount of available credit and thus increasing credit utilization, a key component of credit scoring models.

4. Getting approved for new cards is tougher than ever. The Federal Reserve study shows that 47% of the loan officers said they have raised or will raise the credit score requirements for prime customers. And for sub-prime consumers, that number is 53%. So it's harder to dump a mean card for a nicer one.

5. Increased fees. The CRL says that card companies have raised cash advance and balance transfer fees to unprecedented highs. Can you hear your wallet screaming?

6. Annual fees to be imposed. LowCards.com claims that while only about 20% of cards have annual fees, that will go up. And according to the Federal Reserve, nearly 40% of the banks had increased or will increase the annual fees on credit cards. Some Bank of America cards for existing customers now have $29 to $99 annual fees. So, they expect you to pay for the privilege of paying....

7. Variable interest rates. CRL states that card issuers are converting fixed rates to variable ones, just when prime rate is extremely low and likely to go up. Also, issuers are adding floors to the variable rates which limit how low they can go (the rates, not the card companies--there's no end to how low those guys can go!), so if rates go down, the banks' profits can actually increase because they won't have to pass on the reduction to their customers.

8. More dirty tricks with fees. When is a fee a fee? When credit card companies say it is--banks are changing the fees' definitions to trap more customers. For example, some changed the definition of an international fee to apply even if the transaction is in US dollars. Some issuers are adding fees they never had before, says CRL. For example, at least one large company added an inactivity fee. Another added a fee if activity falls below a certain level (a low activity fee). They should call it the damned-if-you-do-damned-if-you-don't fee.

9. Stingy rewards. Rewards cards are less rewarding. According to LowCards.com, some issuers are changing rewards programs, like making the threshold for a free flight or getting cash back higher. So the million air-miles you spent ten years racking up won't get you that first-class flight to Tahiti--more like a Greyhound to Bakersfield.

10. Disappearing accounts. Finally, some issurers are closing accounts, sometimes without notice, according to LowCards.com. That means you could be stranded on a trip or embarassed while taking a client to lunch--a tough way to discover that your Visa card was canceled.

Dirtbag credit card companies can sneak in all the high fees and dirty tricks they want, but they can only shaft you if you let them. If you can't just pay off your cards, now is the time to consolidate your debt with a home equity loan or line of credit. Then tell those losers to take their fees and.... Your mortgage lender can't pull dirty tricks like yanking up your interest rate and inventing fees just because. Your debt consolidation interest rate should be much lower and you may get a nice tax deduction too. Not to mention the satisfaction of telling off your bank.

There it is--in your mailbox, in the envelope with the exclamation points and smileys all over it. A CHECK! Made out to YOU! Sign a few documents, and you can replace all of your credit card payments with just one. What's not to like?

Maybe a lot. Remember, the big print giveth and the fine print taketh away. Unloading several monthly payments and making only one isn't a good enough reason to take on this kind of loan, especially if it's secured by a lien against your home. And that goes double if it makes your credit score worse instead of better.

1. Closing out accounts could downgrade the "utilization" portion of your credit score. For example, if you have 5 accounts with a total limit of $10,000, and you owe $6,000, you are utilizing 60% of your available credit–not the greatest ratio, but not really bad either. If you close those accounts out and replace them with a $6,000 consumer loan or home equity loan, guess what? You now have 100% credit utilization. Ouch. So instead, can you leave the old accounts open? Maybe--if your lender doesn't require that you close them, and if....big if...you have the discipline to refrain from spanking them to buy more things and blings, that's an option??just keep it reasonable--the bureaus can also clonk you for having too many open accounts.

2. Consolidation could cost more. A lower monthly payment isn't really savings--I know, that happy envelope says it is, but unless you are getting a lower interest rate too, a lower monthly payment is kind of an illusion. Your payment is only lower because your balance is being stretched out over about a million years. In fact, stretching out the debt over too much time can cost you more in the long run even if you get a lower rate. And if you don't...check out this way-too-typical scenario and hope it isn't you:

Ms. Smith has a $10,000 car loan at 7% that's three years old and she still owes $4,000. Her payment is $198.01 and she will have the loan paid off in two more years. Now, some pretty, rah-rah mailer with a check in it shows up, she bites and calls the 800 number, and the sales agent tells her (in a deep sexy voice!) that she can use that check to pay off the car loan and her payment will only be ONE THIRD as much!!!!! Well, yeah, if she uses that check her payment drops to $57 all right, but only because the $4000 has been stretched out into a ten year loan! The car will probably be on a scrap heap somewhere by the time that loan is paid off. And her interest rate actually increases to 12%! So read that nasty little fine print already.

3. The consolidation loan may have "teaser" clauses. No one likes to be teased. But just because your balance transfers start with a low fixed rate doesn't mean they will stay that way. Especially if your new consolidation loan is another credit card or unsecured account, the terms can probably change whenever the lender chooses to change them. Read the entire agreement and make sure you aren't jumping out of the frying pan and right into the fire.

Consolidation loans can be life-savers if you make smart choices. There is a reason people like them--the right one can indeed lower your interest rate, yield a manageable payment, and help you get some financial breathing room. The consolidation loans with the best rates are those secured by your home. Unlike many other products, mortgages are highly regulated. Rates can't be changed just because, and if you get a fixed rate loan your rate and payment don't ever change, which makes budgeting easier. Mortgages may also get you some some tax advantages--check with your tax pro to be sure. And because they are secured by property, debt consolidation mortgages are counted less risky by lenders and rates should be quite a bit lower than rates on the unsecured debt you'd replace.

Debt consolidation seems like a no-brainer. You replace high-interest credit card debt--issued by companies that can seemingly change the rate and terms of your loan at will--with a better loan. The new loan lets you lower the payment by stretching the balance over a longer term, the rate is often much lower, the interest may be tax-deductable, and the terms you sign up for are the terms you get. A fixed rate stays fixed, an adjustable rate changes according to the rules. No bait. No switch. So, what's not to like?

The reason that debt consolidation interest rates are so much lower than credit card rates is that the loan is secured. By YOUR home. If you end up filing for bankruptcy, you can tell your credit card companies to pound sand and there's nothing they can do. But if you have paid them off with a home equity loan, you're still on the hook for the money. You have changed your credit card debt from unsecured to secured--and secured debt can't be blown off, except by allowing the lender to foreclose and evict you from your home.

Before opting for debt consolidation, look at your entire financial picture. How secure is your job? Do you have medical insurance? How is your family situation? Because the top causes of bankruptcy are job loss, medical problems, and divorce. And if you are just an illness, accident, or indescretion away from bankruptcy, then debt consolidation may not be for you.

So, if there's a decent chance that you could end up in bankruptcy any time soon, protecting your home equity is more important than protecting your unsecured creditors. If your debt consolidation loan doesn't get your total payments (housing, autos, loans) down to less than 45% of your gross pay, then there's a good chance that you won't be able to make your payments as agreed. If you don't have a secure job, or health insurance, or your marriage is on the rocks, now is NOT the time to be using up your equity on debt consolidation. Now is the time for credit counseling (and possibly family counseling). Once your job, medical, and family situations are reasonably secure, it's safer to take advantage of a debt consolidation loan. Then, it IS a no-brainer.

A debt consolidation loan is heavy artillery--a serious solution for a serious problem. So you don't want to waste it by getting silly with the money you save each month. Debt consolidation is like a diet--you can make it part of a healthy lifestyle change and go on to a better life, or you can ...

It comes in the mail. It has lots of exclamation points on it, so it must be GOOD!!!! It comes with a CHECK. Pay off all your bills! Consolidate your credit cards to one monthly payment! Replacing all those credit cards and consumer loans with a single loan MUST be good for your credit, right? And ...