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Credit cards have gotten a bit of a bad rap. With so many people drowning in credit card debt, and with penalties and fees piling up to keep them there, it’s not too hard to understand. But that doesnít stop us from applying for cards and using them.
Credit cards themselves are not so bad. In fact, they have many good points. They make it possible for us to buy things and use them right away, and make payments later. They keep us from having to carry large amounts of cash when we plan on making big purchases. And they provide a way to build up our credit scores. When used responsibly, they can be an asset rather than a liability.
Unfortunately, many consumers fail to maintain control of their charging habits. They use their credit cards to make impulsive purchases. They pay only the minimum payment each month, resulting in greater interest charges. They keep their cards perpetually maxed out. Or they obtain multiple cards and juggle debt instead of paying it off.
To get the most out of credit cards, its best to start out on the right foot. Shopping around for a card with low interest and no annual fee will help minimize costs from the get-go. And if you resist the urge to go out and buy anything and everything you want, you can avoid accumulating an overwhelming amount of debt in the first place.
Here are some tips for keeping a leash on the credit card monster:
* Pretend your credit limit is about 25% of the actual amount. This is the optimal balance for keeping your credit score at its best. It also helps keep your debt much more manageable than if you utilize your entire credit limit.
* When using your card to purchase non-necessities, pay the balance in full each month. Or at the very least, make sure you can afford to pay the purchase off within a few months and avoid charging any other wants until you do. Charging lots of stuff we do not need is a trap that too many cardholders fall into. By charging only what we can afford to pay back quickly, we can avoid getting in over our heads.
* Always make more than the minimum payment. If you only pay what you are required to pay, it could take years to pay off even a small balance. Try to put as much money as you can toward your bill each month, and you could save yourself a small fortune in interest charges.
* Avoid impulse buying. When you see something you want (or feel that you need), give yourself some time to think about it. For small purchases, a week should be sufficient. For more expensive things, give it a month. By then, the urge may pass. If it doesnít, make sure you can afford to pay off the balance in a reasonable amount of time before you take the plunge.
* Resist the urge to use your card to pay bills, unless you are paying the balance in full each month. If you cannot afford to pay your bills without the plastic, you need to re-evaluate your budget. Charging them to your credit card will only leave you with loads of unnecessary debt.
When used improperly, credit cards can be a real nightmare. But when used responsibly, they can make our lives easier. By charging with prudence from the start, you can avoid the debt trap and maintain a good credit score.
If you’ve ever been hit with an unexpected expense, you know that you need some source of funding to fall back on at all times. A savings account makes the most sense, because it gains interest. But many consumers use their credit cards as a safety net, even though they know it will cost them more in the long run.
Those who are saddled with credit card debt, either because of using them for emergencies or simply overusing them, are painfully aware of how interest and fees accumulate. They swear that when they get out of debt, they will start saving money to avoid having their finances fall back into ruin. And if they’re serious about it, they might put every spare dollar toward paying down that balance.
Paying off high-interest debts has definite advantages. Most importantly, it can save you lots of money over paying just the minimum payment each month. It also frees up your credit line so that you can use it if you have to. But is paying down credit card debt more important than building up savings?
There is some disagreement among financial experts. All agree that your bottom line is positively affected by paying as little in interest as possible. And some find that to be reason enough to put money toward paying down your balance before you try to save up. But others feel that the importance of having an emergency fund trumps the money saved in interest charges.
One argument against paying off credit cards before starting to save is that it leaves no resources to use in case of emergency except for the credit card. If you’ve paid down your balance sufficiently, you may be able to use the card if something comes up. But you’ll also experience a setback in paying it off. That means you’ll pay more in interest, and it will be longer before you can start that savings account.
By the same token, using a credit card for emergencies is one of the habits that those with debt issues need to break. Putting yourself in a position in which you have no choice but to do so is a step in the wrong direction. By saving up an emergency fund, you can avoid using credit until you’ve eliminated the debt you already had.
Choosing between paying off credit card debt and building up a financial cushion can be difficult. But if unemployment or some other major financial problem is a possibility, building up your savings is usually the best option. Putting away at least a months salary before you start paying off your debt will allow you to breathe easier.
Credit cards offer a number of benefits. They give us easy access to credit in emergencies. They make it easy to pay for the things we need and want. And when used responsibly, they can build up our credit. But they can also be very expensive, especially when we have to pay penalties.
Credit card companies issue penalties in various forms. These include:
* Late fees : When we’re late paying our phone bills or electric bills, the company often tacks a late fee onto our next bill. The same holds true for credit card companies. The difference is that the fees from credit card companies are usually much, much higher. It’s not unusual for them to charge late fees of up to $39.
* Overlimit fees : Most credit card providers will not allow debtors to charge purchases in excess of their credit limits. But if your card is maxed out, interest charges could push your balance over the limit. For each month your balance is over the limit, the creditor can impose an over limit fee.
* Penalty interest : Most credit card contracts include a provision that allows the company to raise your interest rate if you are late with your payment. In most cases, interest will not be raised until you’re late twice in a 6- to 12-month period. But the default rates are often two to three times your normal interest rate.
* Universal default : A growing number of credit card companies are raising interest rates for customers who are late with payments not only to them, but to other creditors. This is called a universal default rate. Even if you pay your credit card bill on time every month, a misstep on another debt could result in a rate hike.
* NSF fees : If you make a payment and it doesn’t clear your bank, your credit card company can add a non-sufficient funds fee to your bill. This is in addition to late payment and over limit fees that may result from the denied payment.
* Annual fees : An annual fee isn’t technically a penalty, but it is something to watch out for when you apply for a card. Some creditors charge annual fees of $50, $75 or $100 or more. There are plenty of cards out there without annual fees, so in most cases it’s best to just pass the ones that do charge them by.
Knowing the Penalties for Your Credit Cards
Credit card issuers are required to disclose all penalties and fees that are or could be charged on credit applications. They may also send a copy of this information to new cardholders. And this information should also be provided on each credit card statement. You will have to read the fine print, but creditors are required by law to provide this information.
If you incur a penalty, you may be able to get it reversed. If it’s the first time you’ve been late with a payment or a bank error has occurred, a call to the credit card company may resolve the issue. But if you habitually make late payments or exceed your credit limit, the creditor is unlikely to be helpful.
Penalties can cost you a great deal of money. Whether they’re one-time fees or interest rate increases, they can eventually add hundreds or thousands of dollars to your balance. Paying attention to these fees and making a conscious effort to avoid them will enable you to pay off your balance much sooner and allow you to keep more of your hard-earned money.
The sub-prime mortgage crisis that began in 2008 was the catalyst that left many homeowners in foreclosure. It caused the stock market downturn, which decreased or wiped out retirees savings; led to the insolvency of banks; and caused the Treasury Department to institute emergency bailouts of banks, major corporations and one very large insurance company in particular which, if it had filed bankruptcy, would have caused a ripple effect that would have devastated the financial markets here and abroad.
Homeowners and individuals who have been caught in this credit trap have had to make major changes in their lives. While recent legislation has allowed for the revamping of home mortgages for those who are in foreclosure, the recession has caused a major effect across the nation and the world.
With unemployment currently at 8.5%, small businesses as well as large corporations have had to make drastic changes in order to survive this recession. As a result, every facet of our worsening economy has had a direct affect on individuals across the spectrum.
We now know that the sub-prime mortgage crisis was a credit trap. It allowed future homeowners to purchase mortgages with no money down and eventually spiraled into a high-interest rate debt that could no longer be managed.
In addition, banks stopped lending and consumers with credit cards faced a sudden increase of higher interest rates even though they had good credit and paid their bills on time. Moreover, student loans and car loans became more difficult to obtain.
Banks raised the standard of lending to consumers and unless an individual had a FICO score of 720 or higher, the chances of obtaining a loan were nil.
Today, this financial crisis has left many individuals struggling to meet their debt obligations. It is no wonder, then, that many are turning to debt consolidation, credit counseling and repair and, in some cases, bankruptcy.
While the events that unfolded over the last year are unprecedented and were a direct result of the sub-prime mortgage crisis, this report will address one aspect of this crisis: credit traps.
We will explore and offer suggestions on how to avoid such traps as: credit cards, mortgages, and loans that affect everyone from homeowners to teens. In addition, we will offer recommendations on how to pay off credit card debt; what to look for when applying for credit, mortgages, or loans; and the resources that are now available due to the government’s intervention.
The good news is that the recession will not last forever. Economists assess that we may see some positive results by the end of this year. In the mean time, we all need to begin the task of paying down the debt we have and avoid incurring new debt, with all its trappings.
Credit Cards
Universal Default Clause
One of the most insidious credit card traps has to do with banksí Universal Default clause. This clause allows banks to increase interest rates on credit cards if you make late payments to other accounts unrelated to your credit card such as utility companies, for example. Currently, there is legislation that will prohibit these excessive fees incurred by banks.
0% APR
Perhaps you have received dozens of credit card offers in the mail that invite you to apply for a credit card with a 0% APR. It is important that you read the fine print as this low rate usually expires within six months.
Interest Rate Increases
Many banks have been sending out notices to credit card holders stating that interest rates will be increased. While you may be paying your bills on time, they have nonetheless changed the terms and you can either agree or close your account. The rate increase, in some cases, has been as much as 13% and the bank has the ability to apply the increase to the entire balance, and not merely to the new charges
Late Fees, Annual Fees, and Payment Fees
Making a late payment on your credit card can increase the interest rate as much as 23%. Some banks charge an annual fee for their credit cards. They can cost up to $50.00 a year. If you make credit card payments online, there may also be a fee of up to $10 per month.
Cash Advances on Credit Cards
Banks usually send out notices with blank checks to allow for the consolidation of other debts. This is considered a cash advance and has a higher interest rate. Furthermore, since you now have the cash advance interest rate and the regular credit card interest rate, most banks will only apply payments to the cash advance or lower interest rate before it is applied to the remaining balance. Thus, the remaining balance on your card will continue to multiply.
It is important, therefore, to read the terms and agreement section of the credit card before you apply. While it has been said that the language can only be understood by lawyers, you can still ascertain what penalties, fees, and other charges will be incurred using this card.
Look for these particular sections:
* Annual Percentage Rate (APR) for Purchases
* Other APRs
* Variable Rate Information ñ See Important Notice Regarding Change in Terms
* Annual Fee
* Grace Period for Repayment of Purchases
* Minimum Finance Charge
* Transaction Fee for Purchases
* The Default Clause listed under Summary of Terms
* Late Payment Fees
* Cash Advance Fees
* Fees for Issuance or Availability
* Method of Computing the Balance for Purchases
* Non-Usage Fees
* Fees for Purchases Made Outside the US
It is widely agreed that most credit card terms are ambiguous at best. But it is still important to learn as much as you can by reading the terms and agreement section so that you will be able to avoid any traps in the future.
Credit Cards for College Students
There has been and still is an on-going campaign by companies to aggressively market credit cards on college campuses. The methods used to entice students to apply for credit cards may include free items and other coercive tactics.
Studies show that over 50% of 18-year-old college students obtain a credit card for the first time and that more than 70% actually own one credit card with a balance of more than $2000.
This is a credit card trap that requires a student to ask some very hard questions before signing on the dotted line.
* Do I need a credit card?
* Can I afford a credit card?
* How will I use the credit card?
* Will I be able to make the payments each month?
For most college students, the answers may determine whether or not they are willing and able to take on this added responsibility.
In order to avoid this trap, college students should investigate different credit card companies and consider the following:
* What is the APR rate?
* Does the card carry an annual fee?
* What is the default interest rate?
* What are the policies as it relates to Change in Terms?
* Does the card carry a Universal Default clause?
After they have researched the terms and conditions thoroughly, then and only then should they make the decision whether or not it is worth it to apply. Once the card is received, it is important to use the card wisely. This requires that the student:
* Pay off the balance each month
* Do not exceed the credit card limit
* Avoid cash advances
* Keep track of purchases and payments
Credit Cards for Teens
Debt not only affects adults, but it has trickled down to teens as well. For those teens that have not been taught how to handle money in a responsible way, they become trapped too early and incur debt too young.
From an early age, children have no concept of money or how much things cost. Therefore, educating children is the first step in learning fiscal responsibility. Beginning with the simple task of putting money in a piggy bank to opening up their first savings account to eventually having their own checking account is the basis of what will be their introduction to understanding the process.
One of the many recommendations offered to help teens become more financially responsible is to set up a prepaid credit card. Since the amount on the card will be limited, the teen will be able to make reasonable purchases. It will help them to assess the difference between what they want and what they can afford.
If they exhibit responsibility using the prepaid credit card, perhaps then they will be ready to apply for a regular credit card. But in the interim they will fully be prepared for, and become more knowledgeable about, the utilization of a credit card and know how to use it in an effective and responsible manner.
Getting Out of Credit Card Debt
Before the recession, consumer credit card debt was the highest in the nation. Today, it has become the bane of every consumer who owns a card. With banks raising interest rates, late payments and defaults have become the norm rather than the exception.
If you have credit card debt, here are some suggestions to help you pay down the debt.
1. Make a list of all credit card debt with the highest interest rate card at the top.
2. If your budget allows, double up on payments towards the first card on the list.
3. Once the top card has been paid off, use that same amount to pay off the next card.
4. Follow the same method to pay off the remaining cards.
If you cannot afford to pay off the credit cards, call each credit card company and explain your situation. They may either lower the interest rate or reduce the minimum payment.
Recent reports have suggested that seeking out debt consolidators is not a good idea. They charge a fee and utilize the same process mentioned above. Moreover, this practice will lower your FICO score which, in turn, can hurt your overall credit standing.
Bankruptcy should be the last resort. If you need assistance, talk to family members to ascertain if they can loan you the money to pay off the debt. If you own a home, you may wish to look into a refinance loan. Filing bankruptcy will be listed on your credit report and remain there for ten years.
Finally, under no circumstances should you withdraw money from any retirement fund such as a 401K or IRA. Doing so would incur a hefty penalty.
For information on consumer debt, credit reports, and other resources, check out:
http://www.myfico.com/Default.aspx
https://www.annualcreditreport.com/cra/index.jsp
http://www.ftc.gov/bcp/consumer.shtm and http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.shtm.
Mortgages
The sub-prime mortgage crisis is a perfect example of a mortgage trap. Unscrupulous lenders would offer mortgages to clients with no money down. While the initial interest rate was acceptable to the client, eventually the mortgage was sold to a third party and the interest rate skyrocketed, leaving the new homeowner facing foreclosure.
Here are some suggestions for new homebuyers.
1. Choose a lender that is well-known, such as a bank or private institution.
2. Acquire a list of the fees that will be incurred.
3. Ask if there are any pre-payment penalties (these usually occur with ARMs)
4. Obtain the lowest interest rate possible by comparing several banks and lendersí rates.
5. Be prepared to place a minimum of 20% down.
6. Compare the adjustable rate mortgage against a fixed rate mortgage.
7. Watch out for mortgage discounts as they may include a hefty fee.
8. Research a reverse mortgage thoroughly before you consider it.
9. Inquire about insurance fees.
10. Have the home appraised by a qualified and approved appraiser.
With so many homes in foreclosure, there is another scam that has become pervasive especially among homeowners that are close to losing their home. It works like this:
Letís assume the bank has notified you that your home is being foreclosed upon. An individual offers you a deal to keep your home. He sells the home to another party and asks the owner to sign a paper which turns out to be a lease agreement for a specified period of time. When the homeowner is in a position to buy the home back, the amount is so high the original owner cannot afford to purchase the home. Meanwhile, the scam artist has made a hefty sum.
The moral of this story is to make sure the lender you are dealing with is a well-known institution with a solid record, and avoid the pressures by real estate agents.
One can make the same analogy when purchasing an auto. Dealerships have an in-house finance unit in which they pressure you into utilizing an insurance company of their choice. You may already have a very good insurance company, but if faced with a choice of saving a few hundred dollars using another car insurance company, the trap may be unavoidable.
No matter whom you deal with, research the company before you set up a meeting with them and take a few days to make your final decision.
Loans
Whether you are seeking a loan to buy a car, a college loan, or a home equity loan; there are just as many traps in this area as well.
To avoid these traps, you will need to begin research different banks and lenders to compare the following:
1. What is the APR?
2. Are there any fees if you pay off your loan early?
3. What is the insurance rate on the loan?
4. What is the interest rate and how is it derived?
5. What is the default fee?
Just as with credit cards, applying for a loan can have its disadvantages and traps. For example, a consolidation loans either through credit card companies or home equity loans prolongs long-term debt.
In addition, if you make a late payment or default, your credit rating suffers and your FICO score is reduced to the point that any future loan may be impossible.
Now that the Federal Government is taking over student and consolidation loans, go to: http://www.govloans.gov/govloans_en.portal?_nfpb=true&browseLoans_1_actionOverride=%2FBrowseAllLoansFlow%2Freport&_windowLabel=browseLoans_1&browseLoans_1currentSubType=5&browseLoans_1bid=602&_pageLabel=gbcc_page_browse_loans.
In addition, you will find information on all types of student and business loans at:
http://www.govloans.gov/govloans_en.portal?_nfpb=true&_pageLabel=gbcc_page_browse_loans&_nfls=false.
Let discuss consolidation loans for a second. Assuming you need a loan to pay off your credit card bills or other debts, it is important that in doing so cut up all credit cards and keep one just for emergencies.
Keep in mind, however, that the interest rate of the loan may be higher even though you are reducing the amount you pay each month.
Furthermore, since most banks are hesitant towards lending, your FICO score will have to be in the high 700s for the bank to even consider giving you a loan.
How do you increase your FICO score?
1. Obtain a copy of your credit report. Clear up any errors on the report. Then go the website address given in this report and obtain your FICO score. Once you have this information, you will be able to make adjustments to increase your score.
2. Call the credit card companies and ask to have the interest rate lowered. Make more than the minimum payments on credit cards each month.
3. Cut up all credit cards except one. Pay for items with cash. If you cannot afford the item, you can’t buy it.
4. Save as much as you can by re-examining the family budget. Make appropriate adjustments to it so that you can put away a specified amount each month.
5. Begin to pay down credit card debt using the example given under credit cards.
6. Avoid late payments.
7. Don’t borrow from Peter to pay Paul. In other words, don’t apply for a 0% APR credit card to pay off a high-interest rate credit card.
8. Ensure the credit card debt is less than 20% of your take-home pay.
9. Put aside at least three to seven monthís savings for emergencies.
10. Read the terms and conditions for each of your credit cards so that you know exactly what charges can be incurred based on specific conditions.
Know your rights as a consumer. Go to the Federal Trade Commissionís website at: http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre18.shtm. Here you will find information on debt collection agencies and their practices.
Credit traps have become more prevalent during this recession. Scammers and schemers have invaded the lives of many homeowners and seniors. Even today, the predatory mortgage lenders are out in force once again.
As the Federal Government continues to devise new methods to counteract these problems with legislation and information made available to the consumer, there will always be a scam that falls through the cracks.
To help you in this endeavor, you can find a list of free publications from the FTC at:
http://www.ftc.gov/ftc/contact.shtm#publications.
Finally, it should also be noted that identity theft has increased significantly. To this end:
* Ensure that you change your online passwords monthly;
* Never give out any personal information online or via telephone;
* Make copies of all credit cards (front and back), passports, social security cards, and keep them safe at home;
* Keep telephone numbers of all credit card companies accessible in case of theft;
* Be mindful of people behind you when using an ATM machine;
* If you purchase items online, make sure the website has the gold lock in the lower right hand corner and has encryption services;
* Use the ìFraud Alertî service available for most credit cards;
* Use only those accredited online sites such as Pay Pal and others that have the URL beginning with ìhttps.î
Thus, becoming more aware of what is going on through internet news, government websites, and the latest scams also posted on websites will give you the knowledge you need to circumvent these credit traps before they occur.
Credit card debt is one of the most wide spread financial problems throughout many countries of the world. The convenience of using credit cards, combined with the special offers, discounts and reward systems offered by the credit card companies make this method of paying for goods the number one favorite for hundreds of millions of people. However, irrational spending or simply gradual uncontrolled spending habits can lead to a lot of accumulated debt. Preventing this is essential, as it is much easier to avoid credit card debt problems before they grow strong, instead of battling them when they are already at maximum intensity.
The temptation to use credit cards repeatedly a fact that is also supported by the reward systems and lower monthly payments – will often lead to debt problems. Here are a few tips that will help you use your credit cards more wisely and enable you to prevent the unpleasant situations of having to pay off credit card debts: Set your budget create a framework for a monthly budget, as this will enable you to get a better sense of what your earning and spending balance is. Much notice that they simply can’t stick with the planned budget in this case you should leave your credit card at home when going shopping, and use cash instead. Try to pay as much of the balance for each month. Don’t settle for the minimum payment, as that will gradually develop into credit card debt as you are loosing quite a lot of money to interest rates.
Always remember that your credit card is a cash substitute, nothing more. You can either carry a balance, which comes with a high interest loan or you can make the minimum payments. Although the amount of the minimum payment seems insignificant (it is usually around 3% of the entire balance), this approach will gradually put you in debt. The credit card company accepts such low payments because they get their money back from keeping you in debt for an unlimited period by using high interest rates.
Many studies have been carried out on the psychology of the credit card owner. We tend to spend more than we can afford, own things that are above our financial reality levels and gratify an immediate need with a debt that might take years to pay off. Try to adapt your spending habits to your life style and earnings. If you can’t pay off the balance on a monthly basis, then you are going into a vicious circle of overspending and credit card debt. Don’t use the credit card anymore, until you pay off the outstanding balance. You should also make sure to pay it off on time, as there might be late fees and different other financial penalties that will further complicate your debt problem. Your credit record will also get damaged if your payments are inconsistent and you are often late with them.
Prevent credit card debt by making sure to keep your finances simple. Use only one or two credit cards, if possible. The more cards you have the higher are the chances that you will not be able to pay them off in time. Never pay off one credit card balance with another credit card. If this happens, you need to drastically change your spending habits and come up with a good credit card management plan. Cash advances might sound attractive, but the truth is that they come with higher interest rates and you don’t get a grace period. There are also transaction fees to worry about.
The credit industry is extremely dynamic, and credit card issuers are always trying new ways to convince more people to sign up with their services. Different forms of rewards, life insurances, protection plans or point systems were created to make the credit card plans more attractive. Make sure you don’t let your emotional side dictate when you make a credit card related decision. Getting free gifts or free air miles sounds amazing, but is it really worth it? Try to base your choice on hard facts and a realistic financial plan, not on an advertising created fantasy.
Some people pride themselves on having a good handle on their finances. They pay their bills in full and on time each and every month. They manage their credit cards expertly, and even though they could get all the credit they want with ease, they refrain from opening new accounts that they don’t need. But if they do not have an emergency fund, they could still find themselves struggling at any time.
No matter what your income level, having an emergency fund is of the utmost importance. You just never know what could happen. Here are some potential scenarios to consider.
* You could lose your job. There is virtually no such thing as job security any more. Layoffs happen daily, and often with little or no warning. If you don’t have a financial cushion, job loss could render you unable to afford basic necessities.
* You could incur large medical bills. Accidents and unexpected illnesses happen to the best of us. If you have to have emergency surgery or spend some time in the hospital, you may end up owing a hefty sum and lose income from being out of work. Without an emergency fund, that double whammy could be financially devastating.
* The car could break down. Car repairs are rarely cheap. If you do not have any money put back, you could end up without transportation for a while.
* A major appliance could tear up. Having appliances repaired is often costly, and replacing them can cost a small fortune. But ovens and refrigerators are not things we can easily do without.
* Home repairs may become necessary. Some may be covered by homeowners insurance, but many are not.
* A family member could become ill. If it’s your child, you may need to take time off work to care for him. If it’s your spouse, he or she could lose income. Having an emergency fund can make such situations less stressful.
Some argue that they do not need an emergency fund because they have credit cards. It’s true that credit cards can be useful when something unexpected comes up, but you will have to pay interest on any amount you charge unless you pay the balance in full right away. If you’re on a tight budget, the last thing you need to do is rack up more debt.
So how much should you keep in your emergency fund? Most experts recommend a goal of three to six months’ pay. That sounds like a lot, but job loss or disability could keep you out of work that long or longer. It will take some time to build up such reserves, but it can be done with consistent saving each month.
When the unexpected happens, having an emergency fund can prevent it from sending your investing into chaos. By including a set amount of savings in your monthly budget, you can have a financial cushion to fall back on if needed.
Sometimes people end up with more debt than they can handle. Often it is not due to irresponsibility, but to circumstances beyond one’s control. Job loss, unexpected medical expenses and other such situations can cause finances to take a sudden turn for the worse. When such things happen, bankruptcy can ease the financial burden.
Bankruptcy should only be used when all other alternatives have been exhausted. It remains on your credit record for ten years, making it difficult or impossible to obtain loans and other types of credit. But in some cases, it is a debtor’s only hope for relief. If you’re considering bankruptcy, it’s important to know which type is best for your situation.
Chapter 7
Chapter 7 is the most common type of bankruptcy for individuals. It requires the debtor to turn all non-exempt property over to a trustee. The trustee then liquidates the property, distributing the proceeds to creditors to lower the debt. The remainder of the debt is usually discharged, as long as it doesn’t fall into categories that are ineligible for discharge.
Those filing for Chapter 7 bankruptcy must pass a means test to show that they are unable to repay their debts. Generally, they must have a total income below the mean income for their family size in their state. Those who do not qualify for Chapter 7 usually qualify for Chapter 13.
Chapter 11
Most Chapter 11 bankruptcies are filed by businesses, but individuals are also eligible for this type of bankruptcy. This type of bankruptcy is costly and complicated, and is only appropriate for individuals under certain circumstances that involve large amounts of debt and assets.
In Chapter 11 bankruptcy, the business (if applicable) may continue to operate. A repayment plan must be written and approved by creditors and the bankruptcy court. A trustee is not appointed unless there has been some sort of wrongdoing by the filing party.
Chapter 13
Chapter 13 bankruptcy is the second most common type of bankruptcy filed by individuals. In order to qualify, debtors must have an adequate amount of disposable income and their debt must fall below limits set each year.
Instead of turning over assets and having the debt remaining after their liquidation discharged, the debtor proposes a repayment plan in which he will repay creditors over a period of three to five years. Creditors may object to the payment plan, but the bankruptcy court has the final say as to whether it is accepted. The debtor is allowed to keep his property, and he pays creditors a reduced amount.
Bankruptcy is not something to be taken likely, but sometimes it is necessary to help debtors get a fresh start. A bankruptcy attorney can help determine whether you should file, and if so which type of bankruptcy is appropriate for your situation.
Our credit scores play a big role in determining the results when we apply for a credit card or loan. A good credit score can help us get the credit we need at the best possible rate. A poor credit score could result in a higher interest rate or denial of credit. It is in our best interest to make sure our credit scores are as high as possible.
The credit bureaus keep the exact method for figuring credit scores a mystery. But there are a number of factors that are known to impact our credit scores. Here are five things you can do to improve yours:
1. Keep an eye on the information contained in your credit report. Sometimes the bureaus make mistakes, and identity theft can also wreak havoc on one’s credit report and score. Federal law requires each credit bureau to provide one free report per year to any consumer who requests it online, by phone or in writing, and we are also entitled to a free report if we are denied credit. So check your report regularly, and if you find any inaccuracies, dispute them in writing.
2. Always pay your bills on time. Even if you’ve made payments late in the past, keeping current bills paid on schedule will help raise your credit score. The longer your history of keeping payments current, the more it will improve your credit score.
3. Keep credit card balances low. Just because you have a $10,000 credit limit, that doesn’t mean you should use it all. A good rule of thumb is to keep each credit card balance at or below 25 percent of the limit. Even if you have a perfect payment history, carrying too large of a balance can adversely affect your credit score.
4. Avoid opening too many accounts in a short time frame. This is especially important if you have a short credit history, but it also applies if you have well-established credit. Opening lots of accounts in rapid succession raises concerns that you could get in over your head, hence lowering your credit score.
5. If you pay off an account, keep it open. This will help by lengthening your credit history. It can also reduce your balance to credit limit ratio, unless you transferred the balance to another card.
Improving your credit score is not as difficult as you might think. A few simple adjustments can really make a difference, but it does take some time. If you are planning to apply for credit, start working on your credit score a few months ahead of time. This will increase your chances of getting the loan or credit card, and it could save you lots of money on interest.
Sometimes unforeseen circumstances can take a toll on our finances. We may get into more debt than we can comfortably repay. Or we may experience health problems or job losses that leave us with less money. Bankruptcy may seem like the only answer, but is it?
Many consumers who are having trouble paying off unsecured debts seek credit counseling. The process often involves analyzing your financial situation and determining how you can best pay off your debts while preventing further damage to your credit. While some who seek credit counseling still end up filing for bankruptcy, others find that it is just what they needed.
How Credit Counseling Works
The first step in credit counseling is the consultation. This is often free, but some agencies charge fees. Debtors must make a list of their debts, balances and payment amounts for the counselor to work with. Depending on your individual situation, the counselor may help you rearrange your budget to accommodate your current payments, suggest debt management classes and/or help you develop a debt management plan.
A debt management plan is often suggested for those who are truly in more debt than they can pay. It involves negotiating with creditors to obtain lower interest rates and monthly payments. The credit counselor does this on your behalf, and once negotiations are complete, determines your total monthly payment and length of time it will take to pay everything off.
If you agree to the plan, you start making a single payment each month to the credit counseling agency. The counselor then forwards the appropriate amount to each creditor. Fees may be added to the payment, or they may come out of the amount you’re paying your creditors.
Good credit counseling agencies will offer more than just debt management programs. They realize that while these programs work for some people, they are not for everyone. Some merely need help creating and sticking to a budget. Others would be better off filing for bankruptcy. Even those for whom a debt management program is a good fit should be strongly encouraged to work on their money management skills.
There are a few things to look for when considering a credit counseling agency. First of all, agencies must be licensed to operate in your state before they can work with you. They should tell you their fees up front and offer free information about what they do. Their counselors should be accredited or certified by an outside organization, and should also be required to have extensive education in finance.
For some, bankruptcy is the only way to put their debt behind them. But other consumers can benefit from credit counseling. A reputable agency can help you pay off your debts while still having enough money to live on and improving your credit score.
Bad credit can haunt us for a long time. Late payments we made years ago can affect our chances of getting a loan or credit card now, and possibly for years to come. Many people face this dilemma, and that is why credit repair has become such a hot topic.
The offers are enticing. For a few hundred dollars, or sometimes more, firms offer to erase bad entries from your credit report. But if it were that easy, wouldn’t more people be doing it?
Unfortunately, a great many credit repair companies are nothing more than scam operations. They promise to remove every negative entry from your credit report, and then they do something that you could have done yourself at very little cost: they write dispute letters to the credit bureaus. This will only help if those negative entries are inaccurate, incomplete or unverifiable, or if they have been on your report for more than seven years (ten years for bankruptcy).
Some credit repair firms also advise their clients to do things that are illegal, such as attempting to create a new identity. They instruct clients to apply for an Employer Identification Number (EIN) or a new Social Security Number, alter their names and addresses, and apply for credit using this information. This could subject you to both criminal and civil fraud charges.
Not every credit repair firm is bad, though. There are many that operate within the law. They help clients dispute only items that are erroneous, and use legal tactics to persuade the credit bureaus or the creditors themselves to remove those items. It is important to remember, however, that any consumer can write the required letters himself instead of paying someone else to do it.
What to Look For
When considering a credit repair firm, there are several things to consider. Those that are out to take your money usually bear a few red flags. These include:
* They guarantee to remove all negative entries from your credit report. No one can legally remove legitimate entries.
* They discourage you from contacting the credit bureaus or your creditors on your own. Often they are afraid that if you do so, you’ll realize that you could remove the same things yourself that they want you to pay them to remove.
* They advise you to use illegal tactics to improve your credit. If you’re in doubt about something they ask you to do, ask questions. If you’re not satisfied with the answers, speak to a lawyer about it.
It is entirely possible to do your own credit repair. If there is inaccurate or old information on your credit report, you can often take care of it with a single letter. A good credit repair firm may be of use if you do not have the time or inclination to do it yourself, but they cannot do anything for you that you couldn’t do on your own.
