Is Debt Settlement a Good Idea?
Debt settlement is often portrayed by settlement companies as a magic bullet for anyone drowning in debt. But the truth is, debt settlement is only an ideal debt solution if :
- You have $10,000 or more unsecured debt
- You’re frequently late on debt payments
- You’re having trouble making the minimum payment amounts every month
- You cannot afford your debts and are considering bankruptcy
There is a difference between debt management and debt settlement, so make sure you know which one is right for you.
How Does Debt Settlement Work?
If you decide to use debt settlement to handle your debts, you or a third-party company will reach out to your creditors to negotiate a new repayment plan. This new payment plan will be based around a smaller total amount than your original debt. In exchange for paying less, you instead agree to make a single, lump-sum payment to pay the debt off completely. Once the agreed-upon amount is fully paid, your account is marked “settled” on your credit report. This process usually takes 2 to 4 years and can help you avoid bankruptcy.
Is Debt Settlement Bad For Your Credit?
Debt settlement can have both a positive and negative effect on your credit. For some strategies, your credit score may get worse before it gets better.
Many debt settlement companies advise you to skip your payments in order to save up to pay one large sum. However, there is no guarantee that your creditors will agree to this payment method, and they may begin to report your delinquent payments to the major credit bureaus. This results in a negative effect on your credit history and a lower credit score.
As you pay off the debt, your credit report will begin to show active, on-time payments over time. This shows that you are responsibly using your credit and will reflect positively on your credit score.
Furthermore, using debt settlement is one of the main ways to avoid filing for bankruptcy. While debt settlement notations stay on your credit report for seven years, bankruptcy notations stay on for 10 years. Bankruptcy has a longer-lasting effect on your life regardless of the changes you make.
Alternatives to Debt Settlement
According to a study by the American Fair Credit Council, 95% of debt settlement clients receive savings in excess of fees, with an average save of $2.64 for every $1 in fees paid. With statistics like these, you might believe that reaching out to a debt settlement company will help you get rid of debt and fix your credit once in for all.
However, debt settlement does not work for everyone. Every financial situation is unique and may require a specific way to handle your debt issues. There are several debt solution alternatives to look into before you decide on the best course of action:
Debt Management Plans
A debt management plan (DMP) is a program aimed towards helping you pay off your debt fast. Entering a DMP will give you access to a qualified coach who will help you:
- Create a budget
- Create a financial plan that fits your needs
- Track your progress
- Work with creditors on creating better payment plans
- Stop collection calls
Unlike debt consolidation, you do not need good credit to qualify for a DMP. While this program does not have any direct effect on your credit, the actions you take while in the program may have a temporary negative affect. However, if you stay on the plan and make on-time payments, your credit history will improve over time.
Debt consolidation is the act of taking out a loan to pay off multiple debts at once. This would eliminate the need to pay multiple monthly payments and instead only require you to pay one.
Ideally, this new loan would have a reduced interest rate and will help you pay off your debts quickly and efficiently.
However, not everyone is qualified for debt consolidation. You need to have a high credit score and a good debt-to-income ratio. If you’re already experiencing financial difficulties, you may not qualify for a debt consolidation loan.
A balance transfer is the process of paying off one credit card debt with a new credit card. There are several benefits to moving your debt from one card to another, including:
- Consolidating multiple payments into one payment
- Potentially receiving a lower interest rate
- Earning rewards points on a new card for repayment
However, you should be careful before you apply for a second or third card. New cards typically come with 3-5% balance transfer fees. These fees are added to any other fees you may be required to pay, including signup fees or APRs.
And while signing up for a new card may give you a better interest rate, it may only be an introductory rate. When the introductory period expires, your interest can shoot up to be much higher than the rate you paid before. This encourages you to completely pay off your transferred credit card balance before the promotional period ends.
Finally, there is the danger of falling into the moving-debt-around habit. Every time you transfer debt from one card to the next, the debt does not go away. In time, you may find that you’ve paid more in fees and added interest than the original amount owed. This path can quickly move you towards bankruptcy.
DIY Debt Negotiation
If you feel confident, you can also tackle debt negotiation by yourself. This could help you avoid having to spend any more money on third-party fees.
However, your lending company is under no obligation to provide any alterations of your loan terms. Negotiating for an alternative payment plan or lower fees may not work.
Before you talk with your creditor directly, take a look at all of your debts. Organize them by size, length, and repercussions for not paying. This will allow you to decide which debts to negotiate for first.
When you reach out to your creditors, provide alternative pay-off terms that you wish to use. This may include paying a smaller amount every month, a lump-sum settlement amount, or a settlement in installments. You can also request an end to collection calls and letters.
Remember to document every step of your process, and bring any sort of documented proof of income with you. The Consumer Financial Protection Bureau ‘CFPB’ of the U.S. Government advises that you record your conversation with the debt company (with their consent) so you have proof of the agreement.
Some people have enough money to pay the bills but struggle with handling it correctly. Luckily, the best way to determine if you actually can afford your debts is to sit down and create a budget.
To set up a budget, start by tallying up how many monthly bills you have and subtracting it from your monthly income. Keeping these bills and due dates written down will help you keep track of what you need to pay and when. It will also help you determine how much money you have leftover each month to do whatever you would like with.
Need some help setting up a budget? Take our free budgeting class. This course includes the basics of budgeting, tracking your spending and establishing goals.
Whether it’s a job layoff or a medical emergency, maxing out your credit cards when you need help can seem like the smart move. But if using credit cards is your go-to answer, credit.org offers free credit coaching that provides you with personalized financial guidance. Our coaches review your entire financial picture, including your budget and all your debts, and help create a plan that’s right for you.
Find the Debt Solution That’s Right For You
If you’re struggling with debt, you may be looking for a way to fix things fast. While debt settlement may seem like a cure-all for your needs, there may be better options available.
Don’t make the mistake by taking the wrong financial path. Reach out to one of our debt coaches and learn how you can take control of your debts and become debt-free fast. Re-start your future today.
How a Debt Management Plan Affects Your Credit: Pros and Cons
Paying off large amounts of debt can be a daunting task. If you’ve recently fallen behind on payments, have more cards than you can manage, or have payments that are too high, rest assured – you’re not alone.
But do debt relief programs like Debt Management Plans hurt your credit? Before deciding which debt relief option is best for you, be sure to explore the following pros and cons of using a debt management program.
How Does Debt Relief Work?
Debt relief (or debt settlement) is a program offered by third-party debt relief companies to borrowers struggling to make debt payments. Typically, these companies encourage borrowers to use money meant for debt repayment for savings or for other bills and obligations.
While the borrower is saving, the company attempts to negotiate with creditors for lower interest rates and monthly payments on the remaining amount is owed. In theory, this creates a more manageable payment plan for the borrower and a full repayment for the lender.
However, these programs do not always go as planned. Many times debt relief companies are not able to negotiate a lower payment for all of your debts. This can have a drastic effect on both your credit and your financial security:
- You may end up paying large fees to the third-party company
- You may incur late fees on the debts you owe
- You may burn bridges with future creditors
- You may have to pay fees in a third-party bank account
- You may have a debt collection lawsuit filed against you
- You may have a negative impact on your credit score
How Do Debt Management Plans Work?
An alternative to a debt relief program is a Debt Management Plan (DMP). Credit counseling companies such as credit.org offer Debt Management Plans to borrowers who are struggling to make multiple or high monthly payments.
Unlike many third parties, credit.org works directly with every client to determine the best ways to handle every financial situation. If you qualify for a DMP, a debt coach will negotiate with creditors on your behalf to help get you lower interest rates and monthly payments.
When you agree to take part in a debt management program, you also agree to close all of your current credit accounts. A notation is made on your credit history to indicate to lenders that you are on a DMP and cannot have any new lines of credit. This notation is removed once you complete or exit your DMP.
How Does a Debt Management Plan Affect Your Credit?
The idea of having a notation on your credit history may initially send up red flags. But while a debt management plan does have an effect on your credit history, it does not have a lasting negative effect on your credit score.
When you agree to close all of your credit accounts, your credit history stops. Lenders and credit agencies like FICO and VantageScore use your credit history to generate a credit score. A temporary pause in your available credit may have a negative effect on your score.
However, once you’ve left your DMP, the freeze on your credit is removed, and you can continue to apply and use your credit. The notation signifying your DMP activity does not have a negative effect on your score going forward – in fact, it may suggest to lenders that you actively work to pay all of your debts to the best of your ability.
Additionally, DMPs are designed to be paid off with regular monthly payments over approximately 4 years. When you sign up for a DMP, your monthly payments are automatically taken out of your bank account every month. These timely payments over the course of years will have a very positive impact on your payment history.
Credit Score Breakdown
If you’re curious to see exactly how much of an effect a DMP has on your credit score, take a look at this approximate credit score breakdown:
- 35% of one’s score is payment history, which will be positively affected as long as DMP payments are made on time every month
- 30% of the score is based on amounts owed, or credit utilization, which will be positively impacted as the balances are paid down
- 15% of the score is the length of credit history, which will suffer under a DMP when accounts are closed
- 10% of credit score is based on inquiries for new credit, which the client will not have while on a DMP
- 10% of a credit score is one’s credit mix, which is unique to each individual
You should also keep in mind that a DMP has required monthly payments. If you do not continue to follow your plan, there will be a significant negative impact on your credit history and subsequently your credit score.
Debt Management Program Pros and Cons
Debt Management Program Pros and Cons
|Doesn’t directly impact credit||Will not be able to get new credit|
|Provides debt solution without direct impact to credit score||Affects the length of credit history|
|Consistent monthly payments improve credit score||All credit account will be closed|
|Amount of debt will be significantly reduced|
|Debt is paid off significantly faster|
Enrollment in a debt management plan doesn’t affect one’s credit score. However, certain facets of the program — timely payments, closing accounts, smaller amounts owed, and changes in utilization rate — may impact one’s score in both negative and positive ways.
Ultimately, clients who graduate from our Debt Management Plan have little trouble securing new credit and loans. If you’re ready to take control of your financial freedom, contact our expert debt coaches today.
Debt Management vs Debt Settlement – What’s the Difference?
There are many situations that may make it hard to pay off your credit card bills or loans, including illness, job loss, or simply missing a few too many credit card payments. And thanks to late fees and high annual percentage rates (APRs), it’s easy to fall into a debt hole.
Debt management plans or debt settlements may be able to help you get back on the right track. Although, the two are very different and affect your credit score in different ways. Depending on your situation, one method may be more successful in helping you take control of your financial wellbeing.
What is a Debt Management Plan?
A Debt Management Plan, or DMP, is a debt relief program that involves working with a financial coach to create a personalized budget. Your coach may work with you and your creditors by:
- Forming realistic monthly payment plans
- Minimizing your current fees
- Stop ongoing collection calls
- Teaching ways to pay off debt efficiently
When entering a DMP, multiple debts will be consolidated into a single, large debt. This is a good thing — it means you only need to make only one monthly payment. Each month your payments will be electronically collected and disbursed directly to your creditors on a fixed schedule.
Debt Management Plans – Pros and Cons
DMPs come with upsides and downsides, particularly when it comes to credit scores.
Debt Management Pros
Using a DMP does not directly affect your credit score. Some parts of the plan may improve your score over time, though others may have a temporary negative affect.
DMPs are designed to be paid off with regular monthly payments during a period of time that everyone agrees is reasonable. Ongoing, consistent payments will improve your credit score over time.
Starting a DMP requires you to close all of your current credit accounts. Creditors will see a notation on your credit report that indicates that you cannot have any new lines of credit. This will prevent you from taking out lines of credit that could continue to hard your report. Also keep in mind that once your DMP is complete, the notation is removed and does not have a negative effect on your score going forward.
Debt Management Cons
However, you should be aware that lenders and credit agencies like FICO use your credit history to generate a credit score. A temporary decrease in your available credit may have a negative effect on your score. And if you stop making your monthly payment on time, a dip in your credit score is possible.
Of course, these possible drawbacks are only temporary. Talk with our coaches to find out if using a DMP to bundle your debts into a more manageable payment plan is possible, and what effect it may have on your credit.
What is Debt Settlement?
This debt solution is ideal for those looking for a way to pay off their debts quickly. To work towards a debt settlement, you or a third-party settlement company must reach out to your creditors and negotiate a more ideal payment plan. You will then be responsible for paying a singular lump sum that will be less than the total amount you owe.
It should be noted that debt settlement does not work with:
- Federal student loans
- Auto loans
Some debt settlement companies may require you to create a special savings account. The company uses this account to make settlement payments, so you can expect to have to deposit a significant amount initially.
Debt Settlement – Pros and Cons
Just like DMPs, there are both positives and negatives to debt settlement.
Debt Settlement Pros
Paying off a single lump sum will not only eliminate overwhelming amounts of debt, but it will also ensure that the creditor gets paid. If you’re close to declaring bankruptcy, debt settlement may be your best choice.
Debt Settlement Cons
Debt settlement does require some expertise and finesse to get right, though. Your creditors may not agree to negotiate a singular sum, or you may end up paying more than your original debt amount in fees. If you’re not careful, you may end up with even more debt than you started with.
That’s why it’s important to talk to an expert debt coach to make sure that settlement is the right choice for you.
How Debt Settlement Affects Your Credit Score
Unlike a DMP, debt settlements have a direct negative effect on your credit score. Although your debt will be paid off, it will be labeled in your credit history as “Settled.” Any notation in your credit history that is not labeled as “Paid in Full” may indicate that you are a high risk to creditors and can cause your score to drop anywhere between 45 to 160 points, based on your credit history.
Which Debt Solution is Right For You
The amount of debt you owe plays a role in which debt solution will help you the most. If you owe under $10,000 in unsecured debt, a DMP may be right for you. If you owe more than $10,000 in unsecured debt, debt settlement may be your best choice.
Another factor is the status of your debt. Debt settlement is typically only considered when you are severely delinquent in payments or already facing collections. Since there is no guarantee that a credit agency will accept a settlement, attempting to settle or withholding payment can backfire and bring on even more credit damage and debt.
On the other hand, a debt management plan is typically used when you are looking for a way to simplify multiple debts. You may turn to a DMP is you fail to qualify:
- Debt consolidation
- Balance transfers
- Personal Loans
Get Help Finding the Right Debt Solution
Handling unsecured debt can be overwhelming. If you’re still unsure about which way to go or want help managing your finances, reach out to our expert coaches today. Before you know it, you’ll be back on track to financial freedom.
The Ultimate Guide to Money Management
We’ve been helping people be more financially responsible for over 40 years now. We’ve boiled some of our most common advice down to some essential rules that will be your ultimate guide to money management.
PLAN YOUR FUTURE
Planning for the future is key to money management because major purchases and periodic expenses come up along the way, and when they do you want to be prepared. If you are spending all of your extra money after each paycheck on nonessentials rather than saving, when an emergency happens you likely will not be ready to financially address it. Instead, saving a little from each paycheck to plan for the future allows you to handle these emergency situations as they come without having to go into debt. It’s best to assume that you will always need savings for emergency situations, even if you end up not actually needing it. You might have a year where your car needs a lot of maintenance, new tires, and you had to take a pay cut. While all of these situations are unpredictable, saving for them will prevent you from turning to credit cards. Saving for the future and what might be to come is a great first step to arrive at financial freedom. It will teach you to budget and save each month and to secure your financial standing in the present and future.
SET FINANCIAL GOALS
Setting financial goals is another great way to manage your money properly. Determine short, mid and long range financial goals for yourself or your family. Continue to nurture and adjust your goals monthly. Writing your goals down and how you are working on reaching them will allow you to evaluate your shortcomings. Being able to visually see what methods are working and which are not in regards to reaching the financial goal you have set will teach you self discipline and will give you motivation to further reach your goals. Try setting financial goals for you to achieve each month, for the end of the year, and in 5 years. Then, celebrate your achievements! Reward yourself after each milestone–you are learning how to manage your money!
SAVE YOUR MONEY
This goes without saying, but saving your money is a surefire way to help you manage your money. Save for periodic expenses, such as a car and home maintenance. Save 5%-10% of your net income each month. Accumulate at least 3 to 6 months salary in an emergency fund. Saving for the unpredictable and inevitable will ensure you don’t go into debt or rely on credit cards when you need extra money for emergencies or larger expenses.
Check out our 10 Week Money Saving Challenge to help you cut some expenses each month to help you save for your future.
KNOW YOUR FINANCIAL SITUATION
Determine your monthly living expenses, periodic expenses and monthly debt payments. Compare outgo to monthly net income. Be aware of your total indebtedness. Living outside of your means indicates that you are not managing your money properly. Make adjustments in your day to day life to fit your financial situation to ensure that you are not spending more than you make each month. Being more aware of where your money goes and how it is spent is key in money management.
DEVELOP A REALISTIC BUDGET
Learn to budget, and follow your spending plan as closely as possible. Evaluate your budget and make adjustments in your spending habits accordingly. Compare actual expenses to planned expenses. Allocate where your money is going and leave room to save. By planning out a monthly budget for yourself according to your income and needs, you are protecting your money and yourself. Hold yourself accountable and budgeting will be a great way to achieve financial freedom and manage your money.
KEEP A RECORD OF DAILY EXPENDITURES
Be aware of where your money is going. Use a spending diary to assist you in identifying where adjustments need to be made. If you find that you are short on cash at the end of each month or don’t have enough to cover your expenses–it’s time to sit down and evaluate exactly where the money is going.
DISTINGUISHING THE DIFFERENCE BETWEEN WANTS AND NEEDS
Take care of your needs first. Money should be spent for wants only after needs have been met.
DON’T ALLOW EXPENSES TO EXCEED INCOME
Avoid paying only the minimum on your charge cards. Don’t charge more every month than you are paying to your creditors. Try to only use credit cards if you can pay the balance off each month. Getting yourself into debt means you are not managing your money properly.
USE CREDIT WISELY
Use credit for safety, convenience and planned purchases. Determine the amount that you can comfortably afford to purchase on credit. Don’t allow your credit payments to exceed 20% of your net income. Avoid borrowing from one creditor to pay another.
PAY YOUR BILLS ON TIME
Maintain a good credit rating. If you are unable to pay your bills as agreed, contact your creditors and explain the situation. Contact credit.org for professional credit and debt advice, and inquire about our credit counseling service. It’s easy to set sensible rules like these, but sometimes living by them is harder than it sounds. We’ve got counselors standing by to help you make sense of your budget, plan to pay off your debts, and answer any questions you have about your credit or personal finances. Call us today for free counseling or get started online. Look for more free tips and budgeting advice in our FIT Academy.
Financial Goals Examples and Tips
When it comes to personal finance, everyone’s situation is unique. No one has the same bills, rent, debts, or lifestyle. When you’re ready to take control of your financial lifestyle, you need a plan that will answer your specific problems, not your neighbor’s.
At Credit & Debt, our trained coaches are ready to review your unique situation and help you plan your path to financial freedom. The first step to tackling these problems is to define your financial goals.
What Is a Financial Goal?
A financial goal is a target to aim for when managing your money. It can involve saving, spending, earning or even investing.
Creating a list of financial goals is vital to creating a budget. When you have a clear picture of what you’re aiming for, working towards your target is easy. That means that your goals should be measurable, specific and time oriented.
Types of Financial Goals
There are several types of financial goals:
- Short-term goals
- Mid-term goals
- Long-term goals
Short term financial goals
These are smaller financial targets that can be reached within a year. This includes things like a new television, computer, or family vacation.
Mid-term financial goals
Typically, mid term goals take about five years to achieve. A little more expensive than an everyday goal, they are still achievable with discipline and hard work. Paying off a credit card balance, a loan or saving for a down payment on a car are all mid-term goals.
Long-term financial goals
This type of goal usually takes much more than 5 years to achieve. Some examples of long term goals are saving for a college education or a new home.
7 Examples of Personal Finance Goals
Still not sure what to aim for? Here are some personal financial goal examples to help get you started.
1. Start an Emergency Fund
Life is unpredictable, and it’s important to be prepared. Saving for emergencies is one of the only goals that is a necessity. It should be the first one you should set, regardless of your situation.
It’s up to you to decide what qualifies as an emergency. There are a lot of different situations that can fall into this category, including:
- Medical expenses
- Job loss
- Broken appliances
- Car repair
When something unexpected and expensive occurs, emergency funds are there to keep you from suffering the financial blow.
How much you save toward an emergency will vary. Statistically, it takes 9 months on average to find a new job after a layoff. With this in mind, it is in your best interest to save roughly 9 months’ worth of income for emergencies.
2. Pay Off Debt
Paying off debts is one of the most common financial goals. No one feels comfortable knowing that they owe large sums of money. And because the amount you owe is already a specific number, paying off debt can easily be translated into a financial goal.
In addition to making every monthly payment, the best way to make real progress is to stop borrowing. Adding to your debt will only push you away from your goal, so it’s important to stay strong and diligent. In some cases, this goal is probably a mid-term goal, but there are ways to get out of debt fast.
3. Save for Retirement
Saving for retirement is a goal you may be working towards your entire life. It is the perfect example of a long term investment.
It is important to consider exactly what your retirement needs are. Setting up a 401(k) or another retirement plan is the most lucrative way to save for your future. Remember, the earlier you start, the better off you’ll be in the end.
4. Strive for Homeownership
Buying a home is a common long-term financial goal. Whether you’re saving for a down payment or working to pay off a mortgage, homeownership is one of the largest financial targets to aim for.
Saving up a sizable down payment is the best way to get a reasonable home loan. And if you save enough, you can avoid the cost of Private Mortgage Insurance, which will save you even more money.
5. Pay Off the Car
Having a monthly car payment is not a staple in life. A great example of a mid-term goal is paying off a car loan. Somewhat sizable, paying off the balance should only take a few years.
Once you’ve completed paying off your auto loan, don’t run straight back to the dealership. It’s a signal that you should use those loan payments for other bills or savings. You’ve already finished one debt – there’s no reason to hop into another loan right away. It’s important to know the best time to sell or trade in your car to make the most of your investment.
Instead, continue to drive your old car until you have a sizable down payment for the next one. Make it your goal to pay for your next car in full, without borrowing at all.
6. Invest in a College Education
Unfortunately, due to the increasing cost of college, paying off student loans has become a modern long-term goal. Whether you’re a student paying off your own balance or a parent saving for your child’s education, college tuition is easily a substantial goal to base your budget on.
7. Plan for Fun
While most financial goals are oriented around being responsible, you should always try to aim for one “fun” goal. This could be a vacation, a big-screen TV, a boat or any other thing that you want that isn’t necessarily essential.
If you work hard and save diligently, you deserve to reward yourself with fun savings goals. Plus, working towards something you truly want is a great way to practice self-discipline and goal setting.
Need Help Defining Your Financial Goals?
Spending Habits Can be Changed
Many people will agree that working to improve their financial situation, repay debt, and better manage their money can be exhausting. A lot of people tend to start out enthusiastically, ready to tackle whatever problem they may be facing. But as time goes on they gradually gain feelings of uncertainty and hopelessness. We want to help you look at the bigger picture and change your habits for the better.
It’s not enough to want to improve your financial situation. You also need to change habits that are preventing you from being successful and nurture better habits that will make it possible to affect permanent change.
We’d like to encourage everyone to think about bad spending habits that can be changed, and new habits that can help improve your financial standing.
Bad Spending Habits to Break
Failing to budget.
Effectively managing your personal finances means planning. It’s simply not possible to truly control your money if you aren’t budgeting. When you budget, you’ll give every dollar a purpose—you shouldn’t spend anything you haven’t budgeted for in advance.
- Part of the budgeting process is calculating your income and writing out a spending plan for that money. But equally important is the act of tracking your spending.
- If you don’t track every dollar you spend, you’ll never know if your budget is working, or where to make smart adjustments to make your budget more effective.
- To get started, check out our free online budgeting course. You’ll also find educational guides and downloads to help you create a personal budget you can live with.
Paying too much for things.
Impulse spending is often a challenge, but the number one form of overspending is paying too much for something.
- Many forms of overpaying are obvious; if you buy something at a convenience store that you could get much cheaper at the grocery store, you’re overpaying. Convenience costs extra, and if you’re resolving to change your spending habits, it’s time to eschew convenience and be more frugal.
- There are other, less intuitive ways to overspend. If you’re driving all over town to save a few cents on sale items, are you really saving money? The costs of your time, gas and mileage on your car might just make it a loss. Part of having a spending plan is doing some homework about where to go to get the best deals without having to drive all over town chasing after a few cents.
- Buying cheaper items instead of quality might also cost you more in the long-term. For example, if you buy cheap goods, like shoes and clothing, you may end up spending more replacing them than if you’d spent more on better goods in the first place. Buying an inexpensive car that needs constant maintenance might cost you more in the long run than paying more up front for something reliable.
- This is why tracking your spending is so crucial. If you see that your attempts to save money are actually costing you more over time, you should make a different choice.
Using debt to finance purchases.
If you want to use credit, you must plan carefully to be able to pay off your balance in full at the end of the month. There are advantages to using credit cards—convenience, security, efficient record-keeping, reward programs, etc. But using credit doesn’t have to mean carrying debt. If you don’t pay off those balances, the negatives to using credit outweigh the positives.
- A big contributor to a financial crisis is spending money you don’t have. If you are prone to spending more than you have, then your best bet is to destroy your credit cards, or freeze them in a block of ice for an emergency. Also, remove the credit card information you’ve stored at online retail sites; it makes it too easy to place items in your shopping cart and check out before you’ve really thought about the purchases.
Expensive personal habits.
Not all of the things you spend money on are worthy. If you have personal habits that are costing you a lot of money, you might need to make some changes in that area as you take control of your finances.
That said, don’t go limiting your lifestyle more than necessary. If socializing is crucial to your well-being, then you have to be able to plan and budget for it ahead of time. Another common habit is dining out. It’s always more expensive to dine out than to prepare your own meals.
Ignoring your spending problem.
Unfortunately, ignoring your debts won’t make them go away and will eventually lead to a full-blown crisis.
- When creditors call, you need to speak to them (debt collectors are a different matter). When you get bills every month, open them! If you’re leaving credit card bills unread, you’re almost certainly heading for trouble. If you confront your issues as they come up, you’re less likely to keep spending and making them worse. Get in the habit of addressing your debt every time you’re faced with it. Never put off sending debt payments or communicating with your creditors.
- More Resources: What to do if a Debt Collector Calls You
- Halting your bad spending habits is half of the equation. To achieve financial freedom, you’ll also need to develop new, better habits to ensure your long-term success.
New Spending Habits to Practice
- Plan your spending. Remember, the essence of budgeting is planning. Have a plan for every dollar. Don’t give yourself permission to buy anything you didn’t plan for as part of your regular budgeting process.
- Even if you want to create a small discretionary spending category, you’re still planning for that money. So, if you can afford to have 5% of your budget go toward any unplanned purchases, you’re still creating a plan for that 5%, and you need to stay below that amount.
- Track as you go, and adjust as necessary. If you decide you’re spending too much in one area, find ways to tighten up and change your budget from month to month. Your budget shouldn’t be static—it should change often as your circumstances change.
- Communicate. Talk to everyone in your household about the family finances, and what you can all afford. Everyone has to help if you’re going to stick to better spending habits in the new year.
- Don’t hide anything—this will lead to greater conflicts and bigger financial problems later. Your partner might be spending without thinking about it, while you’re struggling to balance the budget. You might both be buying the same things unnecessarily. Part of the spending plan should include a plan for who’s buying what, so you don’t buy extra things you don’t need.
- You should also communicate with your creditors if they contact you. Be careful what you say to third party debt collectors. Communicate with them only in writing and start with a debt validation letter—but don’t ignore communication from your original creditors. You can head off a lot of problems by communicating with them when you’re in financial trouble.
- Make it harder to spend. Try to avoid using credit cards and use cash wherever you can.
- When banking, consider keeping your money in savings accounts that aren’t easy to withdraw from. CDs or IRAs that lock in your funds over time will ensure that money doesn’t get spent impulsively.
- Plan and cook your own meals. If you have a habit of stopping for fast food on the way home, dining out multiple times a week, or ordering from apps like Uber Eats, cooking your own meals can be a great new habit to get on board with. Cooking your own meals will save you tons of money, and is likely healthier as well!
- On average, it’s five times more expensive to dine out than to cook meals for yourself at home. Every dollar you spend dining out includes 80 cents you could have saved by cooking your own meal.
- Include meal planning in your budgeting process. It’s easier to control food spending if you are doing all of your own cooking, so getting into the habit of regular meal prep will make your budgeting process easier.
- Use “bonus” money wisely. Any extra money that comes along, whether a bonus from work, a gift, or tax refund, should be saved or used to pay down debt. Too many people treat their tax refunds like “found” money and spend it on indulgences. Any money you get, no matter the source, should be treated as income. Include this money in your written budget, and spend it just like you spend the rest of your paycheck—carefully.
- Related Article: Why Tax Refund Anticipation Loans Are Bad For Credit
- Even things like credit card rewards points can be used for everyday purchases. If you have the opportunity to cash in rewards on a shopping site like Amazon, then use that credit for regular, planned purchases. Don’t use your rewards for “extra” things you don’t need.
- Get help if you need it. If you find you’re struggling to keep or to develop better spending habits, get help. Professional debt coaching is available free of charge to help you create a workable budget and address your debt situation. Before you give up on your goals, talk through your situation in a personalized, confidential setting and get help coming up with a plan for success in the New Year.
How to Improve Debt-to-Income Ratio
If you’ve recently been in the market for a mortgage loan, you may have come across the term “debt-to-income ratio.” This ratio is one of the many factors lenders use when considering you for a loan.
But what is a debt-to-income ratio?
A debt-to-income-ratio (DTI) is the percentage of your gross monthly income that goes to debt payments. Debt payments can include credit card debt, auto loans, and insurance premiums.
How to Calculate DTI
In order to calculate your debt-to-income ratio, you need to determine your monthly gross income before taxes. This must include all sources of income you may have.
Next, determine what your monthly debt payments are. If you’ve already created a budget, this should be easy. Be sure to include credit cards, auto loan, mortgage, and so on.
The final step in calculating your debt-to-income ratio is to divide your total monthly debt payments by your gross monthly income. To get a percentage, move the decimal point over to the right two times.
Here’s an example of a debt to income ratio formula calculation:
Mortgage: + $1100
Auto loan: + $300
Credit card payments: + $200
Monthly debt total = $1600
Monthly income gross / $4200
1600 / 4200 = .3809
0.3809(100) = 38.09
Debt ratio = 38%
What is a Good Debt-to-Income Ratio?
Generally, an acceptable debt-to-income ratio should sit at 36% or below. Some lenders, like mortgage lenders, generally require a debt ratio of 36% or less. In the example above, the debt ratio of 38% is a bit too high.
However, some government loans allow for higher DTIs, often in the 41-43% range.
Why is Your Debt-to-Income Ratio Important?
A DTI is often used when you apply for a home loan. Even if you’re not currently looking to buy a house, knowing your DTI is still important.
First, your DTI is a reflection of your financial health. This percentage can give you an idea of where you are financially, and where you would like to go. It is a valuable tool for calculating your most comfortable debt levels and whether or not you should apply for more credit.
Mortgage lenders are not the only lending companies to use this metric. If you’re interested in applying for a credit card or an auto loan, lenders may use your DTI to determine if lending you money is worth the risk. If you have too much debt, you might not be approved.
How Much Does Debt-to-Income Ratio Affect a Credit Score?
Your income does not have an impact on your credit score. Therefore, your DTI does not affect your credit score.
However, 30% of your credit score is based on your credit utilization rate or the amount available on your current line of credit. Generally, your utilization rate should be 30% or lower to avoid having a negative effect on your credit score. That means that in order to have a good credit score, you must have a small amount of debt and actively pay it off.
What is the Best Debt-to-Income ratio?
Long term, the answer is “as low as you can get it.”
However, hard numbers are better tools for comparison. Take a look at the following DTI ranges:
- 35% or less = Good
- 36-43% = Acceptable but Needs Work
- 44% and up = Bad
If you’re trying to get a home loan, 36% is the most recommended debt-to-income ratio. If you don’t have a significant down payment saved up, 31% is a better target.
So how do you improve your Debt-to-Income Ratio?
Since the only factors determining your DIT is income and debt, this means that the only way to lower your debt-to-income-ratio is to pay down your debts or increase your income. Having an accurately calculated ratio will help you monitor your debts and give you a better understanding of how much debt you can afford to have. This is all easier said than done, though. Below are some creative strategies you can use to help improve your debt-to-income-ratio.
- Pay off your loans ahead of schedule
While loans typically have a repayment plan, you do not have to stick to this. If your budget has room for extra payments, you could pay off your debt ahead of schedule. One way to tackle this would be to adopt the snowball method, which involves paying your smallest debt first and then working your way up to the biggest. Conversely, you could use the avalanche method which involves paying off the debt with the highest interest rate first while making minimum payments towards your other debts.
- Refinance your debt with a new lender
If you are unable to pay off your loans or debt ahead of schedule, restructuring your debt may work for you. One option is to refinance if you qualify for a lower interest rate or can change your repayment terms. Pursuing refinancing may also allow you to lower your monthly payments which will also have a positive impact on your debt-to-income-ratio.
- Use a balance transfer to lower interest rates
Shop around for zero interest credit cards that offer 0% APR for a promotional period. Transferring your debt to a credit card like this can help you tackle your debt quicker while you don’t have to worry about interest fees during the promotional period. Be careful with this method, though. If you don’t pay off your debt before the promotional period is up, your interest rate could skyrocket and you may be left paying more than you were before. This could have an adverse affect on your DTI.
- Target debt with the highest bill-to-balance ratio
This strategy revolves around targeting the debt that will reduce your debt-to-income ratio the most using the least amount of cash. If you owe $200 on Card A that has a monthly payment of $40, and you owe $100 on Card B that has a monthly payment of $50, you would want to start by paying Card B because the monthly payment is 50% of your balance whereas Card A’s payment represents 20%. Using this method will have a higher impact on your DTI.
- Negotiate a higher salary/find a side gig
As stated before, increasing income is one of the two ways to improve your DTI. If you are unable to do any of the above–or even if you are– increasing the amount of money you bring in will lower your debt-to-income ratio. Asking your employer for a raise can be a great turn of events you might not have expected positive results from. Finding a side gig can allow you to allocate all extra earnings to debt and help get it paid quicker.
Avoid employing short-term tricks to lower your ratio, such as getting a forbearance on your student loans or applying for too many store credit cards. These solutions are temporary and only delay repaying your current debts.
Need Help to Lower Your Debt-to-Income Ratio?
Your DTI is an important tool in determining your financial standing. If you’re struggling to come up with ways to lower your ratio or are looking for financial guidance, our expert coaches can help you. Contact us today to learn more about how Credit.org’s Debt Management Plans can help you take control of your debt payments.
10 Warning Signs You Have Debt Problems
Many people know when they’re struggling financially. Intuitively, we feel the pressure of not having enough cash to meet all of our obligations. If you live on a cash basis, you will find yourself with no choice but to stop spending when the money runs out.
Credit and debt distort our intuitions. When you charge a credit card instead of paying outright, you don’t feel the same sense of pressure. Because they are designed for ease of use, it can be just as easy to lose track of your credit card spending.
Although money problems can feel obvious, debt problems might be harder to identify. Here are some warning signs that indicate your debt might be building to a crisis – plus, insights on how to fix your debt problems in its tracks.
1. You make minimum payments.
Lower payments are great for consumers because they are flexible. However, minimum payments are designed to keep people in debt longer. By only chipping away at the debt, you’re stuck revolving your debt month-to-month while interest racks up.
No matter your debt levels, making minimum payments is a problem. Even if your debt is relatively small, you could spend decades paying it off if you only pay the minimum required monthly payment. For larger debts, it’s even more important to pay as much as you can over the minimum every month.
- How to solve it: Start by setting up automatic payments to avoid missing any due dates. Try setting aside more money every month to help take that debt down faster. If minimum payments are all you can do for now, try looking for a side job to earn some extra income.
2. Your minimum monthly payments are large.
When debts are scattered, it’s important to add up the monthly payments to see how much you’re dedicated to this type of bill on a regular basis. Below are some steps to check if your monthly payments are too large:
- Start with a blank sheet of paper. Write down your take-home income for the month.
- Calculate the value of 20% of your income. This can be done by multiplying your take-home income by 0.2.
- Then, look at your bank account and/or credit card statements.
- After documents are open, make a note of all of your minimum payments.
- Add each of the minimum payments together.
- Compare that value to the number calculated in step 2, the 20% of your income.
- Make a decision based on the figure: If the total value of minimum payments is the same or higher than 20% of your income, your monthly payments are too large. If they’re less than that, start allocating more than your minimum payments toward your debts.
Ideally, the amount of money you’re paying towards your credit card debt should not exceed 15-20% of your income. Paying over this threshold puts you at risk of not having enough income to cover your housing, food, transportation, and other necessities.
It’s critical that you pay down your balances so the minimum required is a smaller part of your income. Keep paying 20% until everything is paid off, of course, but if you’re paying 20% of your income and barely paying the minimum required, you have a debt problem.
- How to solve it: It’s critical that you pay down your balances so the minimum required is a smaller part of your income. Keep paying 20% until everything is paid off. If you’re paying 20% of your income and barely paying the minimum required, you have a debt problem. Creating a budget and sticking to it can help you stay on track and out of debt.
3. You’re struggling with debt collectors.
In 2016, debt collection was the largest source of complaints in the Federal Trade Commission’s (FTC) database of consumer complaints, generating more than 850,000 complaints. One of the more annoying warning signs, this debt problem can only really be solved by settling your outstanding debts.
Debt collectors calling or creditors threatening you with things like wage garnishment or repossession can be hard to manage. If you have the money to pay off your debts, you should begin to make payments every month. Making payments on time will not only lower your debts, it will stop collectors from making these threats.
- How to Solve it: Be careful about communicating with collectors, as you may obligate yourself to pay balances you don’t truly owe. Get professional help from a credit counselor to learn your options for debt repayment.
4. You’re using balance transfers and refinancing to stay afloat.
Balance transfers, or the act of transferring outstanding balances from one card to another, is a common transaction for those looking to lower their monthly interest rate payments. Similarly, many homeowners refinance their homes to pay down revolving debts. But if you’re considering one of these two options regularly, you have a debt problem.
It might seem like a good idea to use a refinanced home equity loan with lower interest rates than credit cards to pay down credit card balances. However, using home equity or other methods to pay off credit cards has a high potential to end in disaster.
- How to Solve it: Before taking on new debt to pay off existing debt, you’ll need to address the root causes of your debts and change your behavior going forward. Ideally, you should focus on paying off debts that you have before taking out a new one. If balance transfers are unavoidable, try finding one with low or no balance transfer fees.
5. You rely on cash advances.
The worst way to use a credit card is to get a cash advance. Not only is the money loaned to you at the worst possible terms, it often comes with high one-time charges as a flat rate or a percentage of the amount. A $1,000.00 cash advance could have a one-time fee of $50.00, plus interest for any unpaid balances.
Plus, if you take a step back and think about what the money could be used for, it’s likely to fund an emergency or an unplanned bill. Saving for an emergency fund now will create a safety net to help offset the amount you still need for emergencies, or pay for it altogether.
- Never get a cash advance unless it’s a genuine emergency. Using cash advances for regular bills and expenses is a sign of a debt problem. If you’ve already taken out cash advances to pay down debt, make repaying this advance a top priority to avoid paying its drastically higher interest rate.
6. You’re being denied for loans or credit cards.
When it’s time to take out another loan, waiting for approval is nerve-racking. Once you’re turned down for a loan or credit card, or even if you can only get a loan under very poor terms, stop and examine your situation. If your excessive debt levels lead a lender to deny or extend further credit to you, you probably have a debt problem.
- How to solve it: Review your credit reports and correct any incorrect or outdated information. Then work to pay down balances to improve your debt-to-income ratio and increase your creditworthiness.
7. You’re not building your savings.
Every month, you should be putting money into savings. This takes many forms: build an emergency fund, save for retirement, homeownership or even your kids’ college. If your budget does not include a savings plan, start right now.
Learn More: How to Manage Your Savings Account
The point where you’re unable to save money is where you need to start examining where your finances stand. If you simply can’t save because there’s not enough money left over after paying your bills, you may have a debt problem. If your savings are decreasing instead of increasing or if you’re dipping into your retirement funds to stay afloat, you have a debt problem.
- How to Solve it: Start saving 5% of your income for emergencies and savings goals. Budget aggressively to set aside extra money to reach this amount, and as you pay down outstanding debts, increase the amount you are putting into savings to 10% of your income.
8. You’re unaware of your debt problems or have a budget.
Ask yourself: Do you know exactly how much debt you have and what it will take to be completely debt free? If you have more than one credit card, do you know how much you owe toward each one and have a plan to pay off the entire balance?
These questions should have simple answers – you should know the next steps in your plan to be free of debt. If you don’t have ready answers to these questions, you have a debt problem.
Even if you have plenty of money available, you need to leverage it to become debt-free. And if you’re going out of your way to avoid opening your credit card bills or emails because you don’t want to see how bad things are, then you already know you have a debt problem, and it’s time to do something about it.
- How to Solve it: Attend a free online budgeting webinar or take a free course, then create a budget right away. Budgeting starts with tracking your spending, which includes assessing your overall debt payment situation. Knowing where you stand is the first step toward getting on the right track.
9. You’re over-limit or getting declined at the point of sale.
Credit cards are useful for daily costs, especially when the balance is settled regularly. If you have a card that is maxed out or near its limit, you have a credit card debt problem. If you have to try more than one card at the register until one of them is accepted, it’s time to stop borrowing and take control of your situation.
- How to Solve it: It’s important to stop using credit cards for purchases until you’ve paid down your existing balance to manageable levels. Do what you can to get closer to handling that debt to have a good debt-to-income ratio.
10. Your debts are affecting your personal relationships.
Do you actively keep your partner in the dark about the household debt situation? If so, you need to take a look at your finances and find a way to become proud of them. Whether that’s being honest with yourself about your position or starting to pay down debts until you are, you’ll need to find relief. Hiding financial information from your loved ones is a strong sign of a debt problem.
- How to Solve it: If you haven’t created a household budget that includes the active participation of everyone in your family, you need to open up and get everyone on the same page. Check out our free “Couples & Money” and “Raising a Money-Smart Child” workbooks from Credit.org’s downloads page.
How to Fix Your Debt Problems
There are plenty of other warning signs to look out for with regard to financial troubles; the ten listed here focus specifically on debt. If you are struggling with debt, or showing any of these warning signs, we can help. Our coaches can help you create a budget and come up with a workable plan to address your debt situation.
10 Ways to Get Out of Debt Fast
Creating your own get-out-of-debt plan truly is possible, and it may be easier than you think. With some fundamental changes to your lifestyle, you can get out of debt fast–even with a low income.
However, turning around your financial situation doesn’t happen without some work. It requires commitment, planning, and strong self-discipline. But luckily, it gets easier over time as you build better spending habits.
Don’t wait to take back control of your life. There are many ways to get out of debt fast.
Check out these tips for paying off debt:
1. Stop Borrowing Money
The first and most important step in getting out of debt is to stop borrowing money. No more swiping credit cards, no more loans, no more new debt.
Reshaping your attitude toward money and debt is the most fundamental change that has to happen. In order to avoid digging yourself into a bigger hole of debt, you have to understand the true cost of swiping a credit card and taking out new loans.
Resolve to live on a cash basis while you make your changes. Don’t worry about debt consolidation or balance transfers at this point – you’re still in the early stages. You don’t want to trade one kind of debt for another until you understand your situation and have a plan.
2. Track Your Spending
The next step in getting rid of debt quickly is to figure out where your money is going. It can be difficult deciding where to make budget cuts without having a full picture of what you pay for and how you spend.
It’s best to track all of your monthly bills for at least a month as well as daily spending. Don’t forget to include your debt payment obligations while tracking.
There are a number of ways to track your money. Some of the most common ways include:
- Use a budget worksheet
- Keep notes in a notebook
- Download a money app
- Use banking app trackers
- Keep receipts
Whatever method you choose, make sure it is one you will remember to use every day and will help you get a full picture of just how much money you spend.
3. Set up a Budget
Once you’ve tracked your spending, it’s time to create a budget. By using your regular spending as a guide, this budget should account for all of your needs.
The tracking will also show you places to cut spending. You’ll be able to see where you’re spending too much and where you can easily make cuts without deeply affecting your life. Of course, you may also find places that need changes that you may not want to make. It’s important to find a balance between livability and a strict budget to get out of debt.
A vital part of the budgeting process is to put it in writing. It’s not enough to mentally plan how much you’re going to spend – it has to be recorded in concrete form.
It’s also important to include financial goals in your budget. Writing your goals down makes you 42% more likely to achieve them. For you, the goal to get out of debt fast is probably your #1 priority, but don’t forget building an emergency savings fund as well.
After your debts are paid off, you can come up with more goals to save. Just remember to add them to your budget in writing to hold yourself accountable.
4. Create a Plan to Pay Off Debt: Try a Debt Snowball Method
Now that your spending has been tracked and your budget is created, it’s time to implement a payoff strategy. If you need to clear debt fast, you’ll need to know exactly how to pay off debt with a plan that maximizes your payoff schedule.
One of the quickest ways to get rid of debt fast is by using the “debt snowball” approach. What is the debt snowball method? This strategy calls for you to make minimum payments from your monthly debt payment fund to all but one of your debts. This specific debt will get more than the monthly required amount and will be paid off quicker as a result.
When that debt is paid off, you choose another debt and reallocate all of the extra funds toward it. Keep repeating this process until all debts are repaid in full. Over time, the extra funds snowball, while the amount of money you dedicate to debt repayment stays the same.
For example, imagine that you are dedicating 20% of your monthly income to your debts, which comes out to approximately $300. If you have 3 debts, you would pay $50 to one, $50 to another, and $200 to the 3rd. Once the third is paid off, you’ll pay $50 to one and $250 to the other.
Remember to keep the total amount you put toward debts consistent. If you are putting $300 toward debts each month, and you pay off one of the debts, you’ll still be paying the full $300 toward debt the next month.
This method accelerates your repayment faster as debts get paid off. When trying to decide which debts to pay off first, you can sometimes focus on paying the debt with the highest interest rate first. However, which debt you choose to focus on might depend on your situation.
5. Pay More Than the Minimum Payment
If you’re trying to figure out how to get out of debt fast, you should try to put as much as you can toward debts every month. Remember the debt snowball method – every chance you have to make higher payments will bring you closer to being debt-free.
When you create your initial budget, set a minimum amount that you are putting toward debts each month. This should be around 20% of your total income. Of course, any opportunity to add more will help get you to your goals faster.
No matter what your situation, it’s important to pay more than the minimum required. Make this an ironclad habit. Even if you have a terrible month with unexpected emergency expenses, pay more than the minimum payment, if possible.
6. Consider Balance Transfers & Debt Consolidation
You may be one of the many consumers struggling to make ends meet with little to no income. If this is the case for you, how can you get out of debt fast with no money?
If you’re overwhelmed with too many payments and not enough income, you might be considering a balance transfer or consolidating debt to get rid of your extra payments quickly. However, you have to be careful about such strategies.
Transferring your credit card balance may give you a 0% introductory rate for a while, but transfers often come with an up-front fee. If the introductory rate only lasts for 12 months, you would have to pay the debt off in full before the year is up.
Debt consolidation loans might sound like an even better idea, but consolidating can leave you worse off than you started. Lumping the balances of five maxed out credit cards and seeing accounts with zero balances can be tempting. Without the strict combination of budgeting, lifestyle changes and making payments, you may find yourself with even more debt than you had before.
There are other ways to transfer debt that seem attractive but should be avoided. Specifically, using home equity loans to pay off revolving debt or dipping into your retirement savings. Why? It’s vital that you avoid trading good debt for bad.
But what is “good” and “bad” debt? Mortgage loans are good debt – they keep a roof over your head and help you build wealth steadily over time. Credit cards are bad debt – they typically have high interest rates and can easily ruin your spending habits.
Using home equity to pay off revolving debt is a short-term solution that may leave you worse off than when you started. Not only will you have put your home at risk to temporarily get your head above water, but you might also be back in debt with no equity to draw upon.
It is a better option to consolidate debt payments rather than consolidating debts. Instead of getting a new loan, use a Debt Management Plan and make one payment every month. This will keep you from incurring new debt and provide you with expert advice when you need it.
7. Renegotiate Credit Card Debt
Like many other consumers, you may be unaware that you can renegotiate your credit card contracts to pay a lump sum amount instead of costly monthly payments. This is known as debt settlement. But how do you negotiate a debt settlement?
All you have to do is ask. Give your creditors or lenders a call and request a lower interest rate on your credit cards. As long as your payment history is good, you have a chance of getting some relief.
You can also negotiate credit card fees. If your creditor is unwilling to work with you on a new interest rate, you may ask if they would be open to waiving some of the fees and recurring charges you face.
Credit cards are the only bills that can be lowered with a phone call. You would be surprised at how far a call can take you. Most companies will want to keep your business and will offer some other options to get a lower monthly payment.
Some bills that you could consider lowering include:
- Cable bills
- Phone bills
Don’t be afraid to shop around to find lower rates from competitors. Also, don’t be upset if a company tells you “no.” As long as you’re continuously making payments to all of your debts, you will see an improvement in your situation.
8. Create a Family Budget
It’s common to see one member of the family be responsible for all of the household’s finances. This often means that no one else in the household knows what’s really going on. If you’re going to be successful, it’s important to have a strict budget to pay off debt that the whole family knows about.
Come clean with your partner and family members. If they don’t know your full debt situation, then you’re going it alone. Tell them about the debts, your plan to pay them off fast and get them on board with your repayment strategy.
You need everyone in the house to participate in the tracking and budgeting steps. All the saving in the world does you no good if you live with someone who is spending without regard to the household budget. You have to involve them in this process and get them on the same page.
This might include some hard conversations. Your kids might have to accept a less-than-stellar Christmas or you may have to put off that big purchase they were hoping for.
If handled correctly, these types of conversations can be beneficial for kids. Budgeting and savings are excellent personal finance skills that may not be learned elsewhere. Keep them involved in the budgeting process and let them pick out specific goals to aim for. Focusing on this goal may make them less likely to splurge elsewhere and more helpful to you when it comes to keeping the family on a budget.
9. Create the Best Budget to Pay Off and Stay Out of Debt
Life happens in an instant, and you may not have the income bandwidth to survive an emergency, sudden change or any other altering scenarios. That is why it’s important to have a budget that is flexible and crafted specifically for you to support you in any situation.
Flexibility is vital to success and will keep you on track if things go south. If you’ve done all of the prep work and put your budget in writing, it will be easier to make the necessary adjustments.
Don’t be afraid to start completely from scratch and create a whole new written budget. If your life changes, change your plans along with it. Use what you’ve learned so far to create an even better budget than before.
There may also be times that you must adjust to a temporary budget. Sudden events that take a sizable chunk of your income may require you to have a particularly strict budget one month. Even one month of living really lean can help you catch up financially.
Don’t be too flexible, though. Any wiggle room in your budget shouldn’t allow big, unplanned purchases. The process of getting out of debt fast means making sacrifices. If you’re not committed to going without things you want, you’ll never succeed in getting rid of your debt.
10. Don’t Give Up: Get Professional Debt Help
At credit.org, we’ve provided professional debt help for consumers to become more financially literate and reduce their debt over the past 40-plus years. We know it’s possible to get out of debt no matter how tough it might look.
It’s important to remember that it’s not about how much money you make. High-income people can stay mired in debt their whole lives, and people with low incomes can live debt-free. Your spending habits can be adjusted to match your lifestyle. The sooner you develop those good spending habits, the better.
Remember, you don’t have to go it alone. There are qualified financial coaches ready to help you set up a debt repayment plan and get out of debt today.
What to do If a Debt Collector Calls You
Debt Collectors Keep Calling Me!
No one likes getting calls from debt collectors. Owing money to a group of strangers who have all of your personal information can be frightening and stressful. But why do debt collectors call?
You typically only receive collection calls when you owe a debt. Collection agencies buy past-due debts from creditors or other businesses and attempt to get you to repay them.
When debt collectors call you, it’s important to respond in ways that will protect your legal rights. Be sure to remember the following information the next time a bill collector reaches out to you.
Understand Collection Call Laws
The debt collection industry has been plagued by bad behavior from collectors for years. In order to curb this behavior, the Fair Debt Collection Practices Act (FDCPA) was passed in 1978.
This act presents a number of rules and restrictions that debt collection agencies must follow. Here is what debt collector can not do:
- Call you outside of the hours of 8 a.m. – 9 p.m., Monday-Saturday (not on Sunday)
- Call you repeatedly within a short period of time
- Threaten you with violence
- Discuss your personal information or debts with other people
- Claim false debts or false information on your reports
- Cannot lie about their identity
- Keep calling if you request them to stop in writing
Despite the legal strides to protect consumers, it’s common for some debt collectors to violate collection call laws. That’s why it’s important to proceed carefully whenever you are contacted by a debt collector.
Your response to a debt collector should be different based on who is calling.
If you are contacted by the original creditor or business that you owe money to, they are not bound by FDCPA laws. However, they may be bound by local and state laws that are similar to the federal Fair Debt Collection Practices Act.
Third-party debt collectors are also known for charging consumers with “zombie debt,” or debt that is old, past the statute of limitations or has already been paid off. These parties resurrect these old debts in an attempt to scam consumers. To avoid falling victim to these claims, there are a number of steps you can take to prepare yourself. The following are some tips you can learn to protect yourself in these situations.
Here’s what to do if a debt collector calls you:
When a bill collector contacts you, your first order of business is to take notes. Whether you prefer pen and paper, spreadsheets, or screenshots, having a paper trail and proof of their communication is one of the most valuable tools you can have when disputing charges.
Some questions and notes to consider keeping track of include:
- The name of a person who called you
- What company they represent
- When they called
- A mailing address to send written correspondence to
- What you discussed
- Any requests made
Do not overlook this step! It’s important that you document every contact you have with a collector in the event you need to protect your legal rights.
Don’t Admit You Owe the Debt
The most important tip to remember when responding to a debt collector is to avoid admitting or confirming any information without first having debt validation. Before you do anything else, start by writing a debt validation letter. If you say or do anything that confirms that the debt is yours, you may be giving up some of your legal rights.
Collection agencies often make mistakes, so it is important to confirm that the debt is the correct amount, that it truly belongs to you or it is not expired past the legal amount of time it can be held against you. The only way to confirm this is through writing.
Most delinquent debts expire and must be legally removed from your credit report after 7 years. A collector can still try to get you to repay debts older than this, but they can’t use negative credit reporting as a collection tactic.
Don’t Make Any Payments or Promises
Promising to make future payments or providing a collector with your financial information can have the same effect as admitting to owing debt. Any payment you send or offer to pay will “reaffirm” that you owe the debt and legally allow the collector to report the delinquent debt to your credit reports.
It is in your best interest to withhold any payment information until you’ve confirmed that the debt is real. Additionally, some debts asked for may be past the statute of limitations or legal time period that a business can request that the court compels you to pay your delinquent debt.
Even if you agree to pay off a debt, buy a cashier’s check. Never provide them with any documents that disclose your bank account number.
Request a Debt Validation Letter
A debt validation letter is the best way to find out what debt collectors you owe and how much you need to pay. This can include both the original debt amount and any extra fees the collection agency is adding.
When a collector first contacts you, they are required by law to follow up with a written letter about the debt they are collecting. This is known as a debt validation letter.
If the debt collectors do not respond with a written validation letter within 5 days of contacting you, you have up to 30 days to send a verification letter requesting a validation letter.
Validating a debt goes beyond the fact that you owe a debt, it also confirms the amount is correct, the age of the debt is correct and that the collector has the legal right to collect the debt. This letter is also an excellent source of information for you to use in your research on the collection company.
This validation will protect you from collectors illegally re-aging a debt to make it seem more current than it is, or changing the amount you owe by adding on extra fees. The collector must show:
- Documentation proving that you agreed to the debt
- A written agreement with your signature on it
- Information from the original creditor with whom you made that agreement
If you’re unsure about whether to request debt validation, you can talk to a financial coach who will review the situation with you and answer any questions you have.
Even if you agree to pay off a debt, buy a cashier’s check—do not write a personal check to a collector. Never provide them with any documents that disclose your bank account numbers.
Keep it Professional
How you handle collection agency calls is just as important as confirming that you owe a debt. Like any other legal or financial proceedings, keeping conversations professional and impersonal will protect you both emotionally and legally.
Do not let the collector drive the conversation to an emotional place, if they start to threaten or accuse you, shut down the conversation. Tell them you know your rights under the FDCPA and you will not tolerate any abuse.
It is also important that in these situations, you are also keeping calm. If you get heated and use strong language, it will weaken your case in the event of an FDCPA claim.
Don’t Provide Any Personal or Financial Information
Collectors will want to find out as much as they can about your finances, but you should not disclose anything until you receive validation of your debt. This will protect you from assuming responsibility before discovering whether it is legally yours or not.
However, if you’ve received the validation letter and still don’t feel you owe the debt, speak up. Even if it is unintentional, collectors may make a number of mistakes before pursuing you for debt, such as:
- Pursuing debts that have already been paid off
- Pursuing accounts that were created with identity fraud
- Charging the wrong amount
It may appear to the collector that you legitimately owe the debt, but you should stand firm if the debt was created illegitimately.
If the debt is fully valid but you don’t know how to deal with debt collectors when you can’t pay, talk with one of our trained coaches to decide which plan of action is best for you.
If the debt is fully valid but you can’t afford to repay it, you can talk about this with the collector, and try to offer some kind of settlement. Find out more about Debt Settlement.
Look Out for Debt Collector Scams
Some debt collection activity is fraudulent, and can only be spotted by following these steps. It’s important to take a hard look at every collection call you receive in order to avoid falling victim to a scam.
Scammers can be very sophisticated and may appear legitimate, even to the trained eye. Keep an eye out for any red flags, be careful what you disclose, follow up for all legal documentation and make sure that all of the information you are given is correct.
Here are signs that it could be a debt collection scam:
- They violate the FDCPA. Visit the Federal Trade Commission’s site to look over the protections offered by the Fair Debt Collection Practices Act. Never agree to work with any collector who willfully violates any part of this law.
- They demand payment on a very short timeline. If a collector demands payment by the end of the day, they’re likely to be a scammer. It’s reasonable for any collector to have a deadline for repayment, but if the timeline is very short, you should be suspicious.
- They can’t give you details about the debt. If a collector truly owns the debt, or if they were assigned the debt by your creditor, they should be able to know where the debt originated, how much is owed and any other similar details. They should also be able to provide these details in writing.
- They demand unusual payment methods. You should have multiple options for how you can repay a debt (and the only one you should use is a cashier’s check). If a collector wants you to send gift cards in the amount of the debt owed, you’re being scammed.
What to Do if a Debt Collector Sues You
What happens if you don’t pay debt collectors? It is likely that a collection agency may turn to the courts to legally compel you to pay or garnish your wages.
Here at creditanddebt.org, we do not offer legal advice. If a collector sues you for repayment of outstanding debt, get qualified legal advice from an attorney.