Welcome to the June 16th,
2007 edition of the Carnival of Debt Consolidation. In this post,
we highlight 9 superb blog posts related to Debt & Credit,
Retirement, Loans & other Personal Finance issues.
"According to the Federal Trade Commission, nearly
10 million people were victims of identity theft in 2004."
Josh presents Bankruptcy- What You Need To Know posted at My Credit Scores, saying, "If you have been on the cusp of bankruptcy as of late, you must know
this. You may be familiar with the definition of bankruptcy and
may have coped with what you think may come next. However, you
have not discovered all the ramifications of bankruptcy yet. Before
you set out to declare any legal proceeding regarding your credit
life, be sure to know fully what you're getting yourself into-
Mycreditscores is here..."
"Chapter 7. This is a liquidation which permits
you to eliminate all or most of the unsecured debt that is currently
"Very few people can purchase
a home without use of a mortgage. When financing a new home is
the only option left, there are many financing options that are
available to meet your needs. Discussed below are many of these
options that are popular today. Even if you already have a mortgage,
you can learn options to use later in life or share with others."
"When you first start building
a portfolio many considerations are probably running through your
mind. Even if you've had your portfolio for some time, you may
be re-evaluating your past purchasing decisions. But have you
covered all your bases? Your first consideration when evaluating
your position is defining your objectives. Each individual has
unique investment objectives based on your age, financial capacity,
employment situation, etc. For example a young college student."
"Many promoters in the financial
services industry have shown a strong proclivity in recent years
to invent and to market supposedly “new” investment asset classes.
These supposed new asset classes have included “commodity futures,”
“managed futures,” “precious metals,” the 57+ varieties of “hedge
funds,” and other asset class inventions. What tends to be “new”
about these asset classes is the increased effort by the industry
to sell them to “retail” or individual investors through the broker
and advisor channels. Oddly, these newly discovered asset classes
for individual investors also have been characterized by relatively
high sales charges, high broker/advisor compensation incentives,
and high ongoing professional management costs — all paid by guess
who? … You."
If you would like to transfer your credit
card debt from one card to another (also known as credit
card balance transfer) but do not know how to go
about it, use the following checklist to help you make a smooth
transition without having to pay any hefty fees or interest.
Firstly, get a copy of your old credit card's most recent
bill and agreement, as well as the new credit card's agreement
Ok now you're set. Use the following checklist,
ticking each item off after completed.
minimum payment due to old company before due date.
up for the new credit card.
the balance transfer form.
the balance is in transfer, continue making the minimum
payments due to the old credit card.
notice of balance transfer from new credit card company.
old credit card company to verify the transfer.
statement of billings from old credit card company making
sure the balance is $0.
the old credit card by phoning up the company or writing
to them. Ask the credit card company to inform applicable
Credit Bureaus that this old credit card account is now
settled and closed.
You know your credit card debt is too higher
when you have to spend more than 20% of your take-home pay
towards paying off the interest + original principal balances
on your credit cards. You must think of it in terms of your
take-home pay, because that is the amount you actually have
to spend (after paying off taxes). John Ventura, a Principal
at Center for Consumer Law (University of Houston Law School)
quotes, "If you are not able to pay a credit card off
within 12 months, which means making a lot more than the minimum
payment, then you are not financially sound in your financial
dealings. You have too much debt."
He adds, "You have to take an attitude
of aggressively reducing it, and that entails sacrifice. That
means buying just what you need instead of what you want.
You have to be really aware of what you are spending -- going
to Starbucks or buying cigarettes."
Top 10 Indications that You Carry too Much
Credit Card Debt
1) You have to make garage sales down your
basement to raise money for credit card debt payments
2) You take a Cash Advance (Payday Loan
type) from one credit card to make a payment to another credit
3) You're still paying for restaurant meals
that you cannot remember.
4) You have no money in any form of Savings
5) You rely severely on your credit cards
to help you save for retirement and put money in a 401k plan
6) You use your credit card to pay for groceries,
foodstuffs, utilities, clothing, etc.
7) You don't know how many coffees, teas
and cupcakes you purchase every week.
8) You don't remember what you purchased
on your credit card last month.
9) Your FICO score is less than 650.
10) You can't remember the last time you
had zero balances on your credit cards.
Do you indeed carry too much credit card
debt? Here are a few articles that will provide useful insight
to help you reduce debt:
With the lowest record interest rates seen
in decades, it is economically feasible for a person deep
in debt to consolidate all of his debts into 1 single monthly
payment at a lower interest rate. This is what debt consolidation
essentially does. However, that is NOT all you need to be
debt free, you have to do a lot more. You have to focus on
saving up more money by lowering your monthly expenses and
accelerating the debt repayment process.
Here are a few pitfalls that could make
your debt consolidation program fail and put you in more debt:
1) Debt Repayment Period
When paying off their debts, consumers have
their minds on only 1 thing, and that is the monthly payments.
Some debt consolidation companies will therefore lower your
current monthly payments, which is nice, but they will also
stretch your payback period. For example, say you are currently
paying $560 per month for 48 months (for a debt balance of
$26,000). Some shady debt consolidation companies will help
lower your monthly payments to something like $450 a month
(woohoo!), but they will also stretch your payback period
to 68 months! In this case, you'd end up paying $30,600!
You will basically end up paying more in
the long term for the same amount of loan, just that your
short term debt obligations (your monthly payments) will be
If your debt consolidaton company is really
out there to help you reduce your debts, they will lower your
monthly payments by lowering the interest rates and also NOT
stretch your payback period (it must remain the same).
2) Change Your Spending Behaviour
After you enter the debt consolidation program
and pay lower monthly payments, it is very important to NOT
rack up any more debt, and instead save up as much of your
money as you can. Open a savings account with a 5% interest
rate from ING Direct or HSBC Online (5.5%) and save all your
Whilst in the debt consolidation program,
you should avoid going to luxury restaurants, malls, resorts
and use your plastic to rack up more debt. If you do this,
your debt consolidation efforts will FAIL!
Carrying higher debt loads and attaching
to them your personal assets as collateral is even more dangerous.
For example, if you refinanced your debts using a home
equity line of credit loan only to use your plastic to
rack up more debt, you would be in additional debt and this
time around, there is no 2nd debt
consolidation program. You will instead lose your home!
Beware of any debt negotiation companies
that promise to reduce your debts by "50%" by negotiating
lower interest rates and lower monthly payments from creditors.
This is because most of these debt negotiation companies will
charge you enormously high fees and will ruin your credit
just to get their job done. What's more, any settlement that
you receive on your debts (any debt forgiveness) will also
become taxable income for you!
Paul Richard, Director of the Institute
of Consumer Financial Education based in San Diego quotes,
"Be very, very careful because there can be substantially
more harm than good. It's the fees, the possible liability
to the IRS after you get this negotiated and they're not doing
anything for you that you can't do yourself. These slick debt
negotiators, they smooth talk people around all these issues.
They're really taking advantage of people."
Let's explore a few of the pitfalls of dealing
with debt negotiation companies shall we?
i) Enormous Fees Charged
Debt Negotiation companies will charge you
enormous amounts of fees by using the following tactics:
-> Large upfront "down payment"
-> Fee based on amount of debt you owe or # of creditors
you owe to
-> Fee based on the amount of debt that a creditor is willing
to wipe away
Daniel Benson, a senior Consumer Attorney at the Legal
Aid Society of San Diego quotes, "There are all
these hidden charges going on." For example, a
debt negotiation company will say they will settle $6000
out of your $7500 credit card debt by negotiating with
the lender. They will ask for a 25% - 35% fair share
cut! This means you will have to pay them (25% x $6000
= $1500). You really aren't saving much are you? Plus,
you will have to pay them additional administration
fees as well as the initial upfront fee. You will actually
be losing money in this case!
One of Benson's clients portrays a good example of
the above. Benson's client was 82 years old and owed
about $2200 of debt. The debt negotiation company charged
her an initial $250 application fee, and after the debt
was settled, charged her a $1350 in settlement fees.
That's $1600 paid just in fees to settle a small debt
The reason for such high growth of consumer
debt? The answer is credit card companies! Previously, credit
card companies issued credit only to responsible people who they
knew will be able to repay their debts in a reasonable period
of time. Now, credit card companies are shoving these cards to
sub-prime borrowers who will continously charge up debt on these
cards way beyond their means. I mean I used to see long tables
full of credit cards on display at my first year in college. These
lenders were targeting 18 year old 1st Year college students,
who will indulge in impulse buying and rack up debt way beyond
their means. And credit card companies love this fact! They know
that if a young 18 year old racks up $20,000 worth of credit card
debt, he will pretty much be locked in for life in paying off
these debts. This means more and more interest revenue for the
credit card companies.
In this article, we will show you the difference
between Good Debt and Bad Debt. Here's a tabular summary:
Business / Commercial
Real Estate Loan (Home
Equity Line of Credit
School Student Loan
Credit card debt
Store credit cards
Mortgage Loan - Best Form of Good Debt
The best type of debt to borrow is a mortgage
loan. Value of houses have increased 6.5% per year over the last
30 years. Since you cannot pay 100% cash for this house, you can
take out a home mortgage loan. For example, say you purchased
a $300,000 house in 2007. This house goes up 6.5% every year.
What will the value of this house be in 2010?
of House in 2007 = $300,000
Increase in Value in 1 Year= (6.5% * 300,000) = $19500
Increase in Value in 3 years = $19,500 * 3 years = $58,500 Value of House in 2010
See how your wealth increased a whopping $58,500
in a matter of 3 years!? However, if you would have purchased
that $50,000 BMW, you would have LOST atleast $25000 in a matter
of 3 years! Which is better do you think? Eh?
About 40% of people in America are renters.
Now here's what's surprising. Bach says, "The average renter
has a median net worth of $4,000, and the average homeowner has
a median net worth of about $150,000." And what's the best
time to borrow a mortgage loan? Now! Why? Because of low interest
mortgage loans (5% - 6%, 25 year fixed mortgages) or home refinance
loans using your home
equity line of credit.
I was in a financial crisis in the earlier stages
of my life that pretty much ruined my credit. In an effort to
rebuild my credit history, i took out a $300 limit credit card
that has a $6.50 monthly fee and an Annual usage fee of $150.
The interest rate charged on this credit card was a whopping 25%!
I want to cancel this credit card immediately, but if I do this,
my credit score will be negatively impacted? Remember, the point
of me taking out this credit card is to rebuild my credit history!
My question therefore is, should I cancel the card immediately,
or wait till its fully paid off and then cancel this? How will
my credit score be affected under both of these scenarios?
Consider your scenario to that of a dating relationship
where the other party is costing you a lot of money, and you are
going nowhere with the relationship. Would you still continue
on with it? Definitely not! Apply the same analogy to your situation
and you will know the answer!
The type of credit card that you are stuck with
(the $300 limit credit card) is known as a "Sub-Prime
Credit Card." Sub-Prime credit cards carry huge
hefty annual fees with ripoff style interest rates. I assume the
$150 annual fee is taken directly from your credit card, essentially
lowering the credit limit you have available from $300 to $150
($300 - $150 fee). These types of credit cards are not really
meant to help the borrower establish his credit, they are more
like payday loans where the lender is trying to make a quick buck.
Thus, you should immediately terminate the credit card and stop
A better option for people like yourself trying
to establish a good credit history is a low or no-fee secured
credit card. This secured credit card is attached to your Savings
account, and the balance in your Savings is pledged as collateral.
Thus, if you go broke, the credit card lender can withdraw the
amount from your savings to recover his loss. In order to establish
a good credit history with secured credit cards, treat them just
like unsecured credit cards. Make necessary purchases with them
(such as grocery items) and pay them off before the grace period
ends. Once you make regular on-time monthly payments for a few
months, credit card lenders will like your creditworthiness and
offer you a higher credit limit, with lower interest rates.
My spouse and myself are working very hard to
pay off our current credit card debt by atleast 80% and then build
up a good solid down payment for the purchase of our first home.
We currently owe over $25,000 in credit card debt, student loans
and auto loan debt. My question to you is, should we focus on
paying off this big debt first before buying our house, or should
we just make the minimum monthly payments on the debt and build
up a larger down payment? Currently, we have saved up about $25,000
for the down payment on our house. The house we plan to purchase
is valued at $275,000. I want to avoid having to pay Private Mortgage
Insurance and build up a down payment of atleast 20% (which is
equal to $275,000 x 20% = $55,000).
You have to balance out between saving for the
initial mortgage down payment and paying off your $25,000 debt.
You should probably focus on paying off the $25,000 debt as soon
as possible, before purchasing a home. For example, consider your
You and your spouse have an after-tax monthly
take home pay of $5000. After paying off all the necessary expenses
every month (including rent, groceries, utilities, student loan
payments, car loan payments, entertainment expenses, etc), you
have $1000 to save. Take a 5 year time horizon:
Scenario i) We assume you
are paying 14% Annual Percentage Rate (APR) interest charge on
your $25000 debt. Here is the amortization schedule assuming a
fixed payment schedule. Your payment towards your debt is $625
/ month and your savings every month equal $1000 - $625 = $375.
Over the last decade, we have seen very low
interest rates that entice many consumers to take on many different
forms of debt consolidation loans (see below) to pay off their
existing debt. These types of debt
consolidation loans range from Home Equity Lines of credit
to Zero Percent Credit Card debt etc. The goal of these debt consolidation
loans is to take multiple monthly payments that have high interest
rates into 1 low monthly payment with a lower interest rate. It
doesn't get any simpler than this huh? Watch out! What you're
doing by taking out a debt consolidation loan is a temporary quick
fix to your debt problems, you are not treating the CAUSE of the
debt; you are merely working on relieving the symptoms.
To prove the above point, we interviewed Chris
Viale, GM at Cambridge Credit Corp. in Massachussets, USA. He
says 70% of American citizens who take out home equity or debt
consolidation loans to pay off their existing credit card debt
end up with similar debt loads (if not higher) almost within 2
years! By taking out 1 more loan together with the tons of debts
you already owe, you are merely adding "more fire to the
burning fuel" (Chris Viale). What's even worse, most debt
consolidation loans that are advertised out there on the market
are meant for people with good credit history and a good credit
score. Thus, if you have a huge debt load, this means your credit
score will be lower and you most likely will not qualify for these
low interest debt consolidation loans. Below, we will describe
a few types of Debt Consolidation Loans that consumers can take
out, their pros and cons and how exactly they work.
A home equity line of credit is a line of credit
borrowed with your home as collateral. Therefore, if you fail
to make payments on the borrowed credit amount, you will forfeit
your home as it has been pledged as collateral. Because your home
is probably the biggest asset you will ever own, most people use
a home equity line of credit to pay for large education bills,
home improvement costs and unexpected big medical bills. A home
equity line of credit is not used for your day to day living expenses,
that's just stupid.
To add to the definition, a home equity line
of credit can also be used to take out 1 bigger debt consolidation
loan to pay off large credit card debt balances. The biggest risk
to this is that you could literally lose the biggest asset you
ever own, your home! Diane Giarratano, Educational Director at
Garden State Consumer Credit Counseling in New Jersey quotes,
"Some hardship occurs and now they have double the debt and
if it's secured by their home, they could lose it."
The advantage of taking out a home equity line
of credit to consolidate
debts is that the interest you pay on these loans is tax deductible.
Ofcourse, tax breaks are always a nice thing! If you apply for
a home equity line of credit at any bank, they will determine
the total amount you can borrow taking into account the value
of your home, what % of your home you own (and what mortgage you
have left to pay off). Diane Giarratano, Educational Director
at Garden State Consumer Credit Counseling in New Jersey says,
"Banks will tell you how much you can borrow. That doesn't
mean you should borrow the total amount, but that's what people
Peter has an after-tax monthly take home pay
of $2000. After paying off all his expenses every month, Peter
has $450 remaining to pay off any debts owed. He should therefore
allocate this $450 towards paying off debt that has the highest
Annual Percentage Rate (APR). This is the fastest way
to reduce your debt.
For instance, imagine you as a college student
owe the following hypothetical debts (in random order):
Loan @ 8% APR
Card Debt @ 18% APR
Loan @ 7% APR
Loan @ 13% APR
Purchas Loan @ 10% APR
Most Debt Consolidation & Financial experts
will recommend to pay off the above Debts in the following order:
Card Debt @ 18% APR
Loan @ 13% APR
Purchase Loan @ 10% APR
Loan @ 8% APR
Loan @ 7% APR
As you can decipher from the table, most financial
experts are asking you to pay off Debts that have the highest
APR. The $12000 credit card debt has the highest APR of 18%, followed
by $3000 personal loan with APR of 13%, $1500 furniture purchase
loan with 10% APR, etc. This makes perfect sense mathematically.
By paying off debts with the highest Annual Percentage Rate (APR),
you are minimizing the interest charges you will pay over the
longer term. However, does this method work for everyone? No!
I once owed $12000 in Credit Card debt that
had an APR of 18%. I was making $500 per month payment towards
it, although psychologically, I felt i was making no progress
at all! I was paying $500 per month for many many months and the
debt didn't seem to come to an end at all! This made me felt more
depressed and financially defeated. I'm sure there are thousands
of Americans out there who are in the same boat. We as human beings
like to make progress at each step of our lives, and paying $500
per month for many months didn't seem right! This is because the
debt was always there, it didn't seem like the debt would vanish
The fastest way for you to eliminate
credit card debt is to eliminate the big profit generator
for credit card companies, and that is, late credit card payment
fees and over-the-limit fees. Yes that's right, did you know
that in the fiscal year 2006, 31% of the the credit card industry's
profits or operating income came from late payment fees and
over-the-limit credit card fees? Are you part of an average
American family? Then you probably possess $8000 worth of credit
card debt and guess what? If you make only the minimum monthly
payments required on the debt, it will take you a whopping 30
years to pay off only $8000 worth of credit card debt! What's
more, you will end up paying more than $22,000 in interest rate
The fastest way for you to eliminate credit
card debt is to increase your minimum monthly payments and make
sure you do not have any late payments. Here are 3 simple steps
that will help you eliminate credit card debt very fast:
1) No New Debt
Do not rack up any new debt on your credit
cards, period! Hide your credit cards in a safe place which
is not easily accessible. Integrate this simple mathematical
equation into your life:
Will Purchase Something on my Credit Card -> "ONLY
IF" -> I Have Enough Cash to Pay For It!
2) Set Your Mind
Post this message in your bathroom or your
cutting down our unnecessary expenses, we will raise enough
cash to pay off our debts in ____ months instead of the
original ____ months. The $____ we save in Interest Charges
will be put into our Savings account so that we can raise
enough money for down payment on a house, and live the
American dream as opposed to renting!
Use our Debt
Pay Off Goal calculator to see by how much you need to increase
your monthly payments towards a particular debt, in order to pay
off that debt at a specified future point in time.
Debt collectors are nasty when it comes to collection
of debts. They will call you late at night or at work, will send
you unpleasant letters and make your life a living hell. You can
make this even more worse by committing any of the following mistakes:
1) Avoiding Their Phone Calls: If
you avoid picking up the phone, they will call you even more.
Be man enough to answer your calls or ask them to stop calling
you. You can legally ask them to stop calling you by sending them
a Stop Calling Me Letter. We discuss this more at: Stop
Calling Me Letter to Harassing Debt Companies
2) I Already Sent the Payment: Do not lie! If you tell them that you already sent the payment
or the payment is in the mail while it really is not, this will
make matters even worse. They even have the right to sue you for
lying, so don't!
3) Automatic Bank Debit: Sometimes
the debt collection agencies will intimidate you into giving away
your checkings or savings account # with your bank. Never give out your checking/savings bank account #!
4) Don't Be Afraid: Do not
allow the debt collector to intimidate you. Like Eleanor Roosevelt
says, "No one can make you feel inferior without your consent."
5) Issue Bounced/Dishonored Checks: If you do not have money to pay the debt collectors,
ask for an alternate debt settlement plan. However, do NOT issue
bounced checks that could be dishonored. First, you will be charged
a Non Sufficient Funds fee by your bank. Furthermore, the debt
collectors will get so angry at you that they will most likely
sue you for both lying and issuing bounced checks.
Our article on 10 crucial debt
reduction mistakes was posted on the Don't Mess with
Taxes blog at: www.dontmesswithtaxes.typepad.com and it has become quite popular in terms of viewership. However,
the point we made needs further elaboration and explanation. In
this article, we will do just that!
Is forgiven debt really a taxable income?
Suppose you owe your credit card company $12000 in credit
card debt. You carry out a debt negotiation process with
Visa or MasterCard and get them to reduce your credit
card debt balance from $12000 to $7000. While Visa has
lost $5000 ($12000 - $7000), the IRS has earned itself
taxable revenue of $5000. That's right, this $5000 balance
which you did not pay is known as Discharge of
Indebtedness, or DOI income and you will be taxed
on this amount! As a matter of fact, the debtor will issue
you a Form 1099 which will detail the debt reduction benefits
that you received.
What if the debtor forgets to send you
a Form 1099? Does this mean the reduced debt amount you
received (i.e $5000) is not taxable? No! Even though the
debtor hasn't sent you a Form 1099, the taxable income
may have been reported to the IRS. This means you will
have to be honest and include this income in your tax
return, at the end of the year. Barbara Weltman, a Tax
Attorney and Author of J.K. Lasser's Tax Savings
in your Pocket quotes, "Any debt that is
forgiven is counted as income, and you owe taxes on the
amount that's forgiven."
Steve Rhode, Co-Founder of MyVesta (a
debt consolidation & credit counseling firm) says,
"It's a great way for the IRS to make money."
What does this mean for you both as a taxpayer and as
beneficiary of debt reduction? Should you therefore not
let your credit card company reduce your debts because
you will have to pay extra tax if they do so? Well it
depends, you have to look at it from different angles.
Barbara Weltman says, "What you have to do is recognize
you'll have to pay taxes and factor that into your negotiations
and your financial planning." Will the extra taxable
income you receive push you into a higher tax bracket,
thus forcing you to pay even higher taxes? Or will you
still be in your current tax bracket and be able to handle
the extra tax payments you will have to make?
There are 3 situations under which forgiven
debt is NOT included in your taxable
i want to define "DEBT" for you. Debt is when you owe INTEREST to a lender, as simple as that. Now for you
my friends who are first time home buyers
thinking "Oh Boy, its an asset!",
it is really a form of debt! Why? That's because
you owe interest on this
house! And the interest that you owe is for
360 months, or 30 years. Some of us finance
our houses with 0% down, but what you really
want to put down is 20%! For some of us in
Silicon Valley, it's impossible! With townhouses
and condos selling for $700,000 it really
is hard. Remember again, when you buy your
house for the first time, it is NOT
an asset! It is a debt!
It is a liability because you owe the lender,
an Interest. Whatever that interest is, you
might be lucky to get a 6% mortgage interest
while others may not be so lucky because they
may have got 9% mortgage interest rate.
* Please be patient this video takes
time to load *
Video Host says: Welcome to the Afro
Mega Seminar Series Online. Today what we're
going to be talking about is, Get
Real and Get out of Debt. Many of
us worry about our FICO score and we believe
that having a FICO score can lead to good
credit. As a matter of fact, a good FICO score
CAN lead to good credit. But here's the thing;
many of us shop till we drop. In other words,
we use our credit cards and charge huge amounts
of debt on them, with interest at 23% and
up! I mean 15% is very bad and 9% is still
bad. So having debt, is NOT really the way
you want to go. Let me tell you one thing
I know many
couples who have been married for less than
6 months breaking up because of credit card
debt. If you charge $8000 on your credit card,
it could literally take you 30 years to pay
it off!! And a lot of people have a misconception
about what assets are. Some people think that
a car is an asset. Especially us the Afro
community, we will quickly get inside a Chrysler
300 or a Mercedes and install $10,000 rims
on it. Now let me tell you, in 5-10 years,
that car is going to lose a tremendous value,
I'm talking about almost 80% of the money
you put on the car. You'd probably put down
$10,000 - $15000 down payment on a Mercedes,
especially if you have a FICO score of less
than 650. Although the Mercedes costs only
$50,000, you'd probably end up paying a total
of $75000 with interest included! And especially
if you have bad credit, you could see a rate