debt consolidation Why Debt Consolidation Doesn’t Work

Why Debt Consolidation Doesn’t Work

I’ll be clear to start out. Debt consolidation does not work well for the majority of people and their debt. Debt consolidation as it applies to this article does not include federal student loan debt consolidation which is generally a good move if possible for students recently out of college.
For most people the lure of using a debt consolidation company comes in the form of promises. Promises that debt collectors will stop calling, promises that your monthly payments will be lower, and promises that you’ll get out of debt.

But are these promises true?

Will the calls stop from creditors if you use a debt consolidation company. Sure from the creditors it may stop, but if you fall behind even a little bit with the company that now handles your debt payoffs, you’ll likely get a ton of calls, letters, damages to your credit score, and higher rates.

Lower monthly payments are possible. If you have a lot of credit card debt or unsecured debt and you can’t make your minimum monthly payments, debt consolidation companies claim that they’ll lower your monthly payments. They may ‘lower’ them for you, but really you are paying them to use their money to appease the credit card companies and others that you owe. As such, you are basically paying them extra money to make it seem like you are paying less a month.

Like a smoke and mirrors scheme, debt consolidation for high interest debt management simply moves around who you are paying interest to. The company will use it’s money to make your minimum monthly payments on your debt (or whatever amount they agree to that will ‘get you out of debt’). For this service, you’ll pay them a set amount from month to month some of that goes towards your debt, the rest is their profit. Often times the first payment to them is just for service fees and month after month you’ll be paying them money only of which some goes towards your actual debts.

Your monthly payments to them may be lower then your minimum monthly payment if you have a lot of unsecured debt especially on a credit card. You may be thinking ‘well my credit card payments will be less’ this way. Less money out of your pocket per month, but more money spent in the long run to get out of any debt.

Getting out of debt with debt consolidation programs is simply increasing the amount you’ll owe. Debt consolidation firms are good at working out deals with your creditors because the less money they have to pay out to them, the more they can keep from your ‘low monthly payment’ to them.

Other risks of debt consolidation programs include incurring late fees on your credit card itself. Sometimes the companies take a while to process your request or to actually start paying your debt off for you. This can lead to miss payments on your debt leading to lower credit scores and even more money paid out in fees and interest.

Should I get help from a debt consolidation program if I can’t make minimum payments?

This article is telling you that debt consolidation does not work, but you are sitting there wondering how you’ll pay your next minimum payment. Debt consolidation programs should be a last resort.

Instead consider the following before ever calling a debt consolidation company:

– Call your creditors. Say you have a credit card with a monthly payment you can no longer afford or can barely afford. Call them and be honest about it. If you’ve made payments on time for a good period of time, they may be willing to listen. After all, getting some money is better then no money. You may be able to lower your interest or reduce your monthly payment.

– Transfer balances – If your credit is good, consider transferring your balances from high interest cards to lower interest cards. Many banks offer balance transfers to a new card, just read up on the terms of the transfer such as interest and balance transfer fees.

– Pay as much as you can – If at all possible, just keep paying down your debt. Don’t spend anymore on that credit card until it is paid off. Sell some things, pick up some extra hours at work, do whatever you can to keep making the minimum payments.

If you still can’t make the minimum payments and your creditor won’t cut a deal with you, a debt consolidation plan may help you for now. But again, debt consolidation companies should be a last resort. You may pay them a flat rate less then what you were paying, but consider how little of that payment is actually going to your debt. Debt consolidation companies really just offer a way to avoid damaging your credit history while making a lot of money doing so.… read more

credit score How is a FICO Score Created?

How is a FICO Score Created?

A lot of people are wondering what they have to do in order for their score to be generated on a credit report with a credit reporting agency. As it turns out the process is not that difficult at all. Just because you have started a new credit file two weeks ago it does not mean that you will automatically have a credit score. Your credit report has to have certain qualifications.
First of all you must have one trade line, which is the same as saying you must have one account which has been on file with the credit bureau for at least six months. Anything less than this time frame will disqualify you from having a credit score. Another qualification is that you must have one account on your credit file which has not been disputed for any reason within the last six months. If you only have one account and you have some type of dispute going on with that creditor within the last six months you will be disqualified from receiving a credit score until that situation is corrected.

This last qualification is important as well. There cannot be anyone on your credit file that has been reported to the credit bureau as being deceased. If someone else is on your file and they are deceased this too can stop you from receiving your FICO score. If another person on your credit file is now deceased you may want to contact the credit bureau and have them removed. They will probably need some type of verification such as a death certificate.

These are safe guards put in place to help consumers. You must have some type of established credit on file and six months appears to be the time frame to get that done. Once you have your FICO score it is so important to do the things necessary to protect your score. Always pay your debts on time and keep your credit card balances low because using up too much of your available credit can lower your score. You may want to establish some different types of credit such as a line of credit, automobile loan, credit card and a mortgage. When you have a variety of different credit types it serves to increase your credit score.

Make sure you dispute any items on your credit file that don’t belong to you. Any derogatory credit whether it is yours or not will serve to bring your credit score down and ultimately cost you money in terms of more finance charges with other credit products.… read more

401 Personal finance tips that will save your life

Personal finance tips that will save your life

As I approach retirement I am so glad, as a young man, I made the decision to stay in a lower income lifestyle and give some of every paycheck to an IRA or a 401(k) as these funds have appreciated and allowed me to finance a great lifestyle and help my family.
It is very hard in your twenties or thirties to see the advantage of investing into retirement but when you are looking at retirement on the horizon you realize the importance of regular investment for your later years.

401(k) Plans

You are limited to what you can investment in when you hold a 401(k) but if your employer is contributing based on your contributions it’s important to take advantage of the free money they are offering. I know you need to stay 5-7 years to become fully vested but it’s still worth the effort.

I would just invest in a S P; 500 Index. Almost all the plans offer them. That way you will beat 85% of the mutual funds in the marketplace without the outrageous fees. It’s about as safe as it gets in stock buying.

A pitfall to avoid is investing more the 10% of your contributions in company stock. You will see people do it, but resist the temptation because more people then you realize have lost everything when the high flying company goes bust and they get laid off. Think about Enron.

Self Directed IRA’s

If you believe you will be leaving in say the next year invest in a self-directed IRA. Learn the ropes of stock investing so you can stay away from mutual funds or other basket type investing that doesn’t do as well over the long haul as you are told. Also they drop like a rock when the market starts down.

Start by investing in large cap stocks you are familiar with and that pay at least a 3% dividend. That way if they drop you are still being paid something. Reinvest the dividends in the stock so you are growing your position as well as your dividend.

Think about the world around you and read everything you can get your hands on so you can learn about investing and theories behind investing. This will help you understand how to buy low and sell high, which is how you make money in the market.

Stay away from tips as they rarely pan out. You are smart enough to invest in what you know. If you are a doctor look at healthcare stocks and understand were you think the healthcare trends will take this sector over the next 5-10 years and invest accordingly.

Themes are another way of investing. Smart phones have been a great theme for a couple years. Invest in manufacturers, retailers, and parts suppliers to offset some of the risk. Other themes I follow now are oil suppliers, drillers and engineers that stand to make money off oil that is rising thanks to our middle eastern brother raising chaos in the desert.

What ever you decide do it now and don’t procrastinate. You someday will wake up and say wow that was a smart move.

More from this contributor:

Economic Chaos Will Drive Bernanke to Stimulate Economy with QE3 This Summer

3 Tips for Boosting Your Portfolio’s Returns

Discover the Truth Behind Using Annuities for Retirement Savings… read more