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.

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.

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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.

3. Generate new income – If you are going to lose a job or may be lost it, you need to generate new income. In all probability you will qualify for unemployment benefits. Check your state laws on unemployment benefits and how to qualify for that. Unemployment benefits and the guidelines vary from state to state. It is very important to contact your local employment office.

4. Part time jobs – You can try to get some part time jobs or side jobs to pay off your credit card bills.

5. Negotiate repayment plans with creditors – With loss of income you will face difficulty in keeping up your credit card payments. So, talk to your creditors about your financial crisis and negotiate with your creditors and lower the monthly payments. If you had always been a regular on-time payer, the creditor might agree to your requests.

6. Build up emergency fund – Make minimum payments on your credit cards for some months, and lower your expenses as much as possible. Save all extra money. You need to do this when you are already aware that you are going to lose your job. Later, you can increase the card payments according to your situation.

All of these strategies can help you in dealing with the financial crisis before and after job loss.

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.

3. New mortgage lending rules: The bill requires the lenders to retain an interest of atleast 5% on the loans they give. Thus getting a mortgage will be more difficult for the low income consumers. You will have to show that you can afford to make payments on the mortgage, only then can you take the mortgage. However, this will also mean that you won’t be wrongly steered into a mortgage which you won’t be able to pay.This reform also aims at strengthening the appraiser independence so that banks can no longer influence home values.

4. Credit and debit card rules: According to the new reform you will be able to use a credit or debit card only if you make a purchase of atleast $10 or more than that. This means that merchants can refuse your credit card or debit card if your purchase amounts to less than $10.

5. Free credit score: Previously the credit score was not available for free. Now, the new reform provides free access to your credit score if you are denied a credit card or a loan. Whenever you will fail to get new credit, you will be able to get a free copy of your credit score.

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.

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.

This can have many benefits. We generally carry our phones along with us, and thus will be convenient to make payments. It is also more secure to make your payment with your phone as the electronic reader may ask for a password before the payment is made. Also you will be able to use your phone to make payments to multiple accounts. The retailers too would benefit from this as there would be no fees as those charged by the card providers.

However, there are some disadvantages too. The phone company will be able to know your banking details, and the shops you are using. There can be an extra $10 to $15 charged per handset. The retailer may have to face costs around $200. Still, if this technology does come into effect this will be the more popular mode of payment than the credit cards.

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.

As more medical debts are getting handed over to collection agencies, they are also getting listed on the consumer credit reports. This can have bad effect on a person’s credit. As a result, the consumer may not qualify for new credit, or even if they qualify, the credit card companies or lenders may charge high interests on the cards and loans.

Sometimes, such situations arise where the medical insurance of the consumer fails to cover all his medical expenses. In this situation the debt if unpaid can get handed over to a collection agency. Thus, unpaid medical can have bad effect on both insured and uninsured consumers.

According to the Fair Credit Reporting Act (FCRA) the medical bills in collections can still remain on the consumer’s credit report for 7 long years, even if paid. Thus, Rep. Kilroy has introduced this act that looks at amending the FCRA. The bill mentions that the medical bills in collections should be removed from the consumer’s credit report within 30 days of the payment of the collection account. One can hope that this Act will make it easier for consumers to have a better credit report, and a better credit score.

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.

3. Know about all credit card offers – Before getting any new credit cards, know about all other credit card offers, so that you get the best deal.

4. Know the credit card limit – The creditors are drastically lowering the credit card limits. So you should always know your credit limit. There is no rule on this. You should know that if credit limit gets lowered, the balance on your card will increase, and the credit utilization will increase too. This can adversely affect your credit score. So, you should always keep a check on your credit limit. Whenever the credit limit gets lowered, you will have to pay down the balance to maintain your credit score.

5. Keep proof of payments – It is very important to keep proof of your payments, and have all the agreements in writing, so that you can dispute any discrepancies that may rise later. If you have paid, check your credit report for the updated account status. Else, if the account status doesn’t get updated, your account will be reported as late. This can let the creditor raise the interest rate. Though they are supposed to serve you with a 45 day notice, there is no such rule which limits how high the interest can be increased. Thus, if you have no proof of your payment you won’t be able to dispute this discrepancy.

6. Maintain a good credit score – Maintaining a good credit score is very important in this new scenario. With the new credit card law into effect, it will be very difficult to obtain new cards with low credit score.

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.

3. Statute of limitations – Statute of limitations (SOL) is the time limit within which the collection agency can sue you for not paying the dues. However, once the SOL expires, even if the collection agency sues you, they may not be able to win a judgment against you. SOL varies according to the state and the type of account. So, don’t fall into their trap and start payment without checking the SOL on your debt. Once you start any paying, or use the account in any way, the SOL restarts.

4. Communicate in writing – Whatever communication you do with the CA, do that in writing. Later if any discrepancies arise, you will be able to use the written proof to dispute the discrepancy. Sometimes collection agencies agree to payment requests or “Pay for deletion” agreements, but don’t provide you with written agreements. Never ever fall into this trap. Get all the agreements in writing.

5. How old the debt is – You should know as to how old your debt is. If it is more than seven years old, the negative item will fall off from your report. However, if the collection agency changes the reporting dates, you should dispute this. As, reaging of debt is illegal.