Everybody has a dream to buy a car or a home. Most of the time this dream doesn’t come true because of huge debt obligations people have to deal with. For that reason, debtors need to be aware and find out ways to stay out of debt and lead a financially stable life.

Tips to stay out of debt

Here are some of the practical and beneficial tips that will help you to stay out of debt and build up an emergency fund to make your dream come true:

1. Make a list of income and expenses: Keep a record of your monthly income and expenses. By doing that, you’ll be able to know whether or not you are spending beyond your means. Once you track your income and expenses, you can easily make out a proper budget for yourself and stay within it. This in turn will help you to stay out of debt.
2. Build up an emergency fund: Always try to create an emergency fund for unforeseen circumstances because you don’t know when you may need it. If you or your family members become a victim of an accident or get admitted in a hospital, then at that time this emergency fund will provide you with a financial support. That’s why keep aside a certain amount of money every month from your income.
3. Cut down your unnecessary expenses: One of the most common financial mistakes committed by people is that they always spend more than what they actually earn. You should try to make purchases as per your needs and not wants. Segregate your expenses into two categories – discretionary and non-discretionary. Focus your budget on the non-discretionary costs like mortgage payments, utility bills, medicines, groceries, etc and reduce the number of your discretionary expenditures.
4. Pay off highest rate debt first: When you have decided to pay off your debts, then your first and foremost duty is to find out the number of debts that carry highest interest rates. This is because once you get relief from your highest interest rate debts, then it’ll become easier for you to move on to the other lower rate debts.
5. Use cash more often: Always use cash to make purchases instead of credit card/debit card. When you use credit card to make any purchase, you tend to forget the value of your money. When you’ll have to take out your hard earned dollars from your wallet against any purchase, then you’ll think twice before spending them. That’s why using cash will prevent you from making bad purchases and help you to develop a healthy saving habit. You’ll be able to stay within your budget and avoid falling into a debt trap.

Keep a track record of your total debt amount and monitor your credit report monthly to find out any discrepancy. Always be conscious about your monthly payment, because one late payment can drop your credit score by certain points. If required, you can set up a reminder alert in your cell phone or emails. Try to pay off your credit card bill first since the interest rate is too high. Otherwise one miss payment can make your life miserable. By this way, you will be able to establish your credit and rebuild your financial life once again.

Paying off your debt may require you to make some tough decisions. One of the hardest decisions you might have to make is to sacrifice your credit score for the sake of getting out of debt. Before you choose a debt relief option, consider how it will affect your credit score. Some options hurt your credit score more than others and that credit score impact may weigh into your decision. Three solutions that are often compared to each other are debt settlement, bankruptcy, and paying on your own.

Debt Settlement:

Debt settlement, if you’re not familiar, is a debt repayment strategy where your creditors accept a lump-sum payment, that’s less than the outstanding balance, and full satisfaction for the debt. After accepting your payment, the creditor cancels the rest of the debt. This isn’t something creditors offer automatically. Instead it’s an arrangement you (or a debt settlement company) makes by negotiating with the creditor.

Paying off your balance at less than it’s face value sounds like a good proposition and it is. But, the downside is that your credit score will suffer. First, you have to be late on your payments before the creditor will agree to a settlement. A late payment can hurt your credit by 60 to 110 points. The further behind you get and the more accounts you’re delinquent on, the more your credit score is affected. Debt settlement, on top of the late payments, can cost 45 to 125 points, depending on your credit score before you settle your debt.

Bankruptcy:

Through a Chapter 7 bankruptcy, the goal is to have most of your unsecured debt completely discharged. After discharge, you’re no longer responsible for the debt. The upside is that you can get out of debt and only pay the cost of filing bankruptcy, which is just a few hundred dollars. Bankruptcy is infamous for its affect on a filer’s credit score. Bankruptcy can end up costing you between 130 to 245 points. That’s a big drop.

Paying on your own:

Paying off debt on your own is often the hardest of all the solutions. It can also take the longest. But, the benefit is that your credit score can actually increase by paying debt on your own. That’s if your accounts are in good standing when you start paying your debt. However, if your accounts are already charged-off or with a collection agency, paying them off won’t benefit your score, but it won’t necessarily hurt your score either.

While some believe the credit scoring system has faults, the good thing is that a bad credit score can be rehabilitated. If you decide that debt settlement or bankruptcy is a better option for you, you can later improve your credit score by through credit repair strategies. As someone who’s goal is to get out of debt, you have to decide what’s most important – struggling with the debt and keep your good credit score or choosing a debt repayment scenario that temporarily costs your credit score.

This post was written by Eliza Collins, a guest writer specializing in personal finance topics like savings, debt relief as well as credit score improvement. You can read more of her articles at the debt settlement blog.

We welcome guest post/article in Creditmagic. It provides the viewers fresh perspectives and viewpoints beyond what we can offer. We usually publish articles that are useful to our viewers. Read on the guest post submission requirements given below.

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• Matter: We accept unique articles. The articles should written on topics related to credit, debt, personal finance, etc. The articles can be based on tips to solve credit problems, advice to the consumers, etc. News based and market oriented articles will be highly appreciated. The article should be logical and practical.

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If you have an article that fits the requirements of our website, you can send it to us at admin@creditmagic.org. Our editorial panel will scan through your article and let you know whether it will be published in our blog within 7 business days.

The situation before and after job loss, is very stressful. This can put a financial stress on you and your family. While you’re looking for a new job, it’s important to develop a strategy for dealing with your credit card bills. If you have recently lost your job or you think there may be any recent layoff, it’s important to have a plan in place to prevent your financial situation crumbling under this pressure.

Handling your credit cards efficiently

There are some basic principles according to which you should use your credit cards. However, these principals break when the job loss is looming large on you. But still you need to handle this situation and get out of this stress. There are various ways in which you can do this.

1. Use your credit cards lowly – If you have lost your job, use your credit cards lightly. With more usage the debt amount is going to grow out of control.

2. Maintain tight budget – Maintaining a budget is very important. It can save you extra expenses. Also, prioritize your expenses. Set up a list of your monthly expenses along with credit card bill payments.
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A new reform bill known as Dodd Financial Reform Bill have been passed to give better protection to consumers. The bill mainly focuses on regulations for Wall Street, and gives more power to the Federal Reserve. Also a new monitoring institution has been designed to focus on the various credit and lending institutions.

The 5 Changes are:

1. The market gets a new monitor: The market gets a new monitor, the Consumer Financial Protection Bureau (CFPB) who will monitor over the lending institutions and the process. This new agency has been created to provide added protection to the consumers. CFPB is also supposed to provide education to the consumers through the Office of Financial Literacy, and take complaints by the consumers against illegal financial practices.

2. Regulation on private student loan: Government took over the power of government student lending (subsidized government loans) in 2009 but private student lending remained mostly the same. Generally, private student loans don’t come with the same protections which government student loans provide. This bill aims to bring the private student loan industry under the thrift supervision of CFPB.

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The Federal Reserve introduced new credit card rules which will take effect from 22nd August, 2010.  These rules will limit certain fees on the credit cards and also make it possible to decrease the interest rate. The new rules addresses not only credit cards, but have outlined some rules on gift cards too. These rules will be an addition to the rules on credit cards which were introduced on 22nd February, 2010. This Act will be called Credit Card Accountability, Responsibility and Disclosure (CARD) Act.

Top 5 Rules on credit cards

1. Limit on late payment fee – Before credit card companies could charge you late payment fees as high as $39. Now, according to the new rule if you have not been late in the last six months the card company cannot charge a late fee more than $25. However, if you have been late before too in the last six months the late fee can go up to $35. Also a credit card company can charge you more than $25, in case they can show that they incurring high costs due to the late payments.

2. Late payment fee less than minimum payment – The late payment fee cannot be more than the minimum payment that you are supposed to make on your credit card. If your minimum payment on a card according to the contract is $20, the card company cannot charge you a late fee more than $20.

3. Inactivity fees – A credit card company cannot charge you inactivity fees in case of no activity on the card account.

4. Rate increase explanation – If a credit card company increases the Annual Percentage Rate (APR) on your card they are required to explain you the reason for the increase in the APR. The card company is also required to re-evaluate the rate increase in every six months, and if there are possible reasons they are supposed to reduce the interest rate within 45 days of the re-evaluation.

5. Only one fee – No credit card company can charge you more than one fee on a single transaction that violates the original card contract. Like if you are late on your payment you can be charged only a late payment fee.

Below is the rule on gift card

The credit card companies cannot inactivate a gift card before 5 years from the date of issuance or from the date of last activity on it (whichever applicable).

These credit card rules along with the previous ones will provide additional protection to consumers, and limit the profitability of the credit card companies. These rules will make paying off credit card debt much easier.

It’s great news that your cell phone can be doubled up as payment cards. According to recent reports Verizon and AT&T are together planning to bring a phone payment system, and are said to be tying up with T-Mobile to introduce smart phones as a replacement for your credit cards. In future you may be able to make your payments using your phone instead of your credit card.

Till now there are no exact details on the technicality of this process, according to market strategists customers can make the payments simply by holding their phone infront of an electronic reader. The phone will be emitting a radio wave that will connect with the electronic reader in the shop.

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A bill on medical debt  has been introduced by Congresswoman Mary Jo Kilroy. This bill is going to be known as the Medical Debt Relief Act, 2010. However, this bill handles the issue of reporting of medical debts, mainly those that has been in collections, and has later been paid off.

The main problem with medical bills in collections is that, these generally stay on your credit report even after getting paid. So, this act speaks of removing the paid medical bills which were once in collections from the debtor’s credit report. According to those who have introduced the bill, medical debts are unique as medical conditions can arise all of a sudden unlike consumer debts. So, these kinds of debts should be handled in a different way.

According to recent findings by the Congress in 2007, at least 28,000,000 American adults were contacted by a collection agency for unpaid medical bills. This also shows that hospitals and clinics are turning more towards collection agencies to retrieve payments from the patients.

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New credit card laws have come into effect from February 22, 2010. These laws will provide protections to the customers (credit card holders) by limiting the increase in interest rates, setting rule to disclose all the details in simple language, minimizing unfair billing, and even limiting the ability of the college goers under 21 to get new credit cards. To counter this, the credit card companies have already hiked their fees much before the laws could come into effect. They have increased the interest rates, added new fees, and are also drastically decreasing the credit lines.

Though the Credit Card Reform was made in the consumer’s interest, this also requires the consumer to be more efficient in handling his credit cards.

How to use credit cards

1. Know the rules – First time users, and even those using cards for a long time should be completely aware of the new rules. If any of the credit card companies violates these rules, you should immediately file complaint with the Fair Debt Collections Practices Act, and your State Attorney General.

2. Read the fine prints – Before getting any new credit cards, you should always read the fine prints carefully so that you miss no facts. Once you sign on the dotted line, you won’t be able to complain that you were not aware of this fact or that. You should read all the paperworks and all the points before signing.

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Dealing with the collection agency (CA) is one of the most dreaded things for the debtors, since collection agencies are generally known to harass debtors for collecting debts. They call at any time, and threat the debtors over the phone. However, there are laws and various ways to deal with the collection agencies.

1. Knowing the rights – the very first thing that you should do so as to deal with the collection agencies is to know your rights. They threaten you with dire consequences if you don’t pay them, they call at odd hours. If you fear to deal with them, and fall into their trap, you should know that there is a rule under Fair Debt Collections Practices Act (FDCPA) that prohibits the collectors from threatening or calling the debtor at odd hours. (Calling hours: 8 a.m. to 9 p.m.)

2. Debt validation – the collection agency can list a debt on your credit report, and may harass you for paying off the debt. However, you should know that you have the right to know whether the debt has been incurred by you. As an answer to your debt validation the collection agency is required to provide you with proof that they have the authority to collect the debt, your original contract with the creditor, and the outstanding debt amount. Most of the time CA sends an answer to your validation without the required proofs. Debtors not knowing what the CA is supposed to provide start making the payments. The CA must provide at least any two of the proofs.

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