Archive of Debt Consolidation Posts

Humans beings are impatient. Just like the process of losing weight, many people try to rush through their tasks of debt reduction and make costly crucial mistakes that ruin their entire debt reduction or debt management plan. In this article, we will explain those 10 debt reduction mistakes that you should avoid:

1) Forgiven Debt is Taxable Income

If you have had a debt settlement agreement with your debtors where they wrote off your debt, this automatically creates taxable income for you! According to IRS Form 980, if you receive a debt settlement of $600 or more, it will automatically be reported to the IRS and the beneficiary of this settlement will have to include this forgiven debt in his taxable income. Therefore, if you have had a large portion of your debt forgiven, you should not be totally happy because you will have to pay tax on this amount!

2) Destroying the Plastic

Some people burn or tear down their credit cards while other close them down in an effort to stop racking up more debt on them. If you absolutely cannot prevent yourself from impulse buying, then this is a good action. However, beware that incase you lose your job or have an emergency such as an accident that makes you temporarily disabled to work, you will not have a credit card to bail you out. Ofcourse, you would only need a credit card in this instance if you do NOT have any savings left over.

Also know that closing down your credit cards will temporarily lower your credit score, as your debt ratio will appear higher and the length of your credit history will be shorter. Furthermore, if you were to ever make a debt negotiation or debt settlement agreement with creditors, they would only consider open credit card accounts and NOT closed ones. Thus, do not totally burn or destroy your credit cards. Try to hide them in a place which is not easily accessible, so as to prevent impulse buying.

3) Statute of Limitations on Debt Collection

You can read more on this topic at Statute of Limitations on Debt Collection.

4) Pay This Bill, Ignore That One

When people become overwhelmed by their debt loads, they will pay one credit card bill this month, and leave many others unpaid. Then in the following month, they will pay the unpaid credit card bills from the last month, and ignore the credit card statements arriving in the current month. While this sure ruins your credit score, it also creates many late payment fees that you have to make, on top of the original debt you have to pay. If you check the right sidebar of this website under the header "Debt Consolidation Facts", we present the following fact:

If you miss 1 or 2 payments on your credit card debt, the issuing company will skyrocket your interest rate to a whopping 27% - 30%!

Posted In: Debt Consolidation Articles | Entire Article| Comments |

---

Many people with huge debt loads to pay off will probably try cutting down on their spending and put more emphasis on paying off their debts. They will also keep a close watch on their spending habits and cut down on unnecessary purchases. Just like losing weight, some people will be successful in debt reduction all by themselves. However, there's many other people who need the help of a personal trainer, or a professional credit counselor to be precise. Here are 15 signs indicating you need help from a professional credit counseling firm:

1) Your credit card debt load increases every month, while your income is falling. You have more and more debt to pay off each month, while little or no savings.

2) You are making only the minimum required monthly payments on your credit card debt.

3) You apply for new credit cards and make use of cash advances (payday loans) from these cards to pay off existing credit card balances.

4) You have a wallet full of credit cards, probably more credit cards than a Gambler with Poker chips.

5) You are maxing out your credit limits on your multiple credit cards each month. Or, you are very close to reaching the limits.

6) Each month, you charge more debt to your credit cards than make payments towards them.

7) You work extra long hours (overtime) to keep up with your credit card debt payments.

1) Pay Off Your Debts

To get good mortgage loan terms, you need to have a credit score in the 700 - 720 range. The expected national average is 723 according to Fair Isaac. What's the best way to increase your credit score in the short term? The best way is to pay off any high debt balances on your credit cards which could increase your credit score by a whopping 60 - 80 points overnight! Credit Bureaus look at how you handle credit card debt, whether you try to pay it off as fast as you can, or you are the type of person that only meets the minimum payment schedule. If you are determined to pay off your high credit card balance, this will reflect on your credit score and will net you favourable terms with mortgage lenders.

2) Never Use More than 50% Of Your Credit Limit

If you spend more than 50% of your credit limit every month, this indicates to the Credit Bureau that you do NOT have enough cash on hand to meet your monthly expenses. This will term you as a high credit risk and will actually reduce your credit score by 60 - 70 points overnight (according to Craig Watts working at Fair Isaac). You need to minimize your credit limit usage and keep your credit balances owed very low for atleast 3 months before applying for credit or a mortgage loan.

3) Don't Close Old Credit Cards

In the above bulleted list, we mentioned "Time Length of Credit History." If you have credit cards that are 4-5 years older, then it's NOT a good idea to close them down. Use those to maintain your credit history and use them responsibly! Furthermore, do NOT go out applying for new lines of credit at any retail store or bank, and do not go out asking for an auto loan, because that will decrease your credit score by a few points instantly.

4) Ordering Your Credit Report or Seeking Credit Counseling

Here are some myths that do NOT affect your credit score in any way.