It may seem a bit opportunistic, perhaps even heartless, but there are plenty of companies that look for people who are struggling with debt and try to exploit them for profit. While this is not true of all credit counseling companies, it is very important to do your research before signing up for one of these programs. In many cases, people end up with much worse credit after working with a so-called "credit repair" company than they would if they used a different approach.
If you think you need help to stabilize your finances, take the time to do some homework and ask questions. Find out what the business provides and how much it costs, and don't rely on verbal promises. A good credit counselor should be upfront about potential issues that might arise with your credit score and how long it might take to get the promised results. Be sure to get everything in writing and read your contracts carefully before signing.
Personal bankruptcy might also be considered, but its consequences re much more far-reaching, lasting up to ten years. Meanwhile it will be difficult to obtain credit, buy a home or even get a job. There are two main types of personal bankruptcy: Chapter 13 and Chapter 7.
Types of personal bankruptcy
Chapter 13 allows people with a steady income to keep property, such as cars and basic household furnishings, while Chapter 7 involves liquidating all assets that are not exempt. Both types of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions, garnishments and utility shut-offs, as well as harassment from creditors. However, personal bankruptcy usually does not erase child support, alimony, fines, taxes, and some student loan obligations. You must get credit counseling from a government-approved organization within six months before you file for any bankruptcy relief.
Beware of companies that offer "advance fee loans," which guarantee you a loan if you pay a fee to them in advance. Fees range from $100 to several hundred dollars and they are often illegal. Legitimate creditors may require an application or appraisal fee in advance, but they will never guarantee you get the loan, nor will they represent that a loan is likely. If you receive a telemarketing call that offers a guaranteed credit extension after a payment is received, they are breaking a major FTC rule for telemarketing sales.
Beware of "credit repair"
Another suspicious offer might come from a "credit repair" clinic. Many of these companies are specifically targeting people with poor credit histories, promising to clean up their credit reports for a fee, but anything they are offering can easily be done without their help – and without the fee. Remember, no one can remove an accurate piece of information from a credit report; all they can do is correct inaccurate information and request that the credit reporting agencies remove it. Federal and state laws ban these companies from charging money to customers until their services are fully performed.
What about debt settlement companies?
While a debt settlement company might be able to settle your debts, it can take a long time to complete the process. Such programs often require deposits into special savings accounts for three years or longer before all the debt can be settled. Before signing up for such a program, be sure to review your budget carefully and make sure you can keep the payments up for the full term of the agreement. Keep in mind that while they attempt to reach agreements with your creditors, neither party is obligated to settle your debts, so you could continue to accrue interest on some accounts before they are paid off. Plus, because the program will discourage you from sending payments to creditors, your credit could be severely damaged by this process.
If you are considering a credit repair or debt management program, take the time to carefully select the company and make sure you understand all the terms of their contract. While many of these businesses are legitimate, others are only interested in taking your money.
As a Colorado bankruptcy attorney, I hear this question more than many others. How can bankruptcy be avoided? But before a client even lands in my office for a consultation, another question might have been asked: How can I pay off all this debt? Well, there is no silver bullet, no easy answer that won't require a disciplined approach, but when one is willing to make the sacrifices there is usually a way to get that debt paid down.
According to a recent article by the Motley Fool, "9 Ways to Pay Off Debt," you can throw a lot of energy at your personal debt but it won't just disappear. With annual rates of 20 percent or more, compounded monthly – debt hovers over some individuals like a "carrion bird." As the article suggests, it cannot be wished away but it can be paid down with a lot of determination, some debt-fighting resources and possibly the goodness of a few wealthy relatives.
Here are some of the Motley Fool's suggestions:
Pay more than the minimum due.
This is an important habit, according the Motley Fool. The minimum payment is only about 2 to 3 percent of the balance due, and it is clearly calculated in the bank's favor so they can get more interest. This means less cash in your pocket. Don't fall for it. Instead, pay as much as you can each month even if it means eating at home or bringing your lunch to work. Be willing to make a few sacrifices and you will have the means to increase your payments against debt. When you see that balance going down every month it will be an incentive to keep it going.
Snowball your credit card debt.
Figure out which credit card has the lowest interest rate, and then transfer as many balances to that card as possible. If the entire balance cannot fit onto one low interest card, pay at least the minimum due on all cards except one, then make the largest debt payments on that one card. When that balance becomes zero, move to the next card and tackle it the same way.
This "lather, rinse, repeat" method is also known as "snowballing" because as the debts decrease the amount of money you have to pay them off increases. This keeps happening until all the debt is wiped out. Many people take advantage of promotional offers that banks use to entice them into a line of credit. It may be worth considering, especially when you're moving an 18% card down to 5.9%, just as long as you apply the money saved on interest into paying more against the principal. Just take the time to examine each offer closely and look out for "hooks." You may need to switch your balance again after the introductory period expires, resulting in a higher interest rate than you are paying now.
Cash out your savings account.
Many people believe that having a savings account is more important than getting out of debt. Newsflash: it isn't. Savings accounts are great, but keeping money in a low-yield account is never smarter than paying off high-interest debt. Think about it. Draining your savings account may seem scary, but if it saves you a few hundred a month in credit card interest isn't it worth it? The higher the interest rates are on your credit cards, the more attractive it becomes to choose repayment over investment. The same concept applies to investing in your 401(k). If you are trying to reduce your taxable income and nearing retirement it makes sense to keep investing, but if you're young and your income isn't that high yet, pay off your debt before increasing your investment in retirement accounts.
Ask for a loan from family and friends.
This might seem a little uncomfortable, but chances are you will get a much more favorable interest rate from family members than you would from a bank. They might even tolerate a late payment or two. But it is very important to keep your word and put your agreement in writing. The last thing you want to do is destroy an important relationship over money. Loans between family members can quickly become a source of hard feelings, so you must remain scrupulous about adhering to the payment schedule.
Get a home equity loan.
If you own your home and you have accumulated enough equity, it might make sense to get a home equity loan or home equity line of credit (HEL). This strategy allows you a few ways to save. First of all, you will trade your high interest credit card debt for a 6% to 7% interest rate. Secondly, if you itemize deductions on your tax return, home equity interest counts as mortgage interest. The only caveat with this approach is you cannot look at this loan as a windfall, or as an excuse to continue living beyond your means. Only use the proceeds to pay off debt, and resist the temptation to accumulate more debt. Many HEL borrowers fall into this common trap and then find themselves paying off the HEL on top of new credit card debt. The trick is to pay off the cards and keep them paid off until the home equity line is repaid.
For more tips on paying off debt to avoid bankruptcy, look for our follow-up article later this month.
Photo Courtesy of Stuart Miles / FreeDigitalPhotos.net
Imagine a credit card that charged a 36 percent APR, slapped you with a fee when your credit limit increased and cost you $400 a year just to own -- yet, the company tells you they're doing you a favor.
It's a reality.
Our Colorado Springs bankruptcy attorneys know that credit cards with predatory lending practices are one of the main reasons so many people get embroiled in debt. We previously discussed how many people are choosing to avoid using credit cards in order to avoid having to seek debt relief or file for a Colorado Springs bankruptcy. This card represents one of the most shameful examples of why people are backing away.
The platinum card, distributed by First Premier, (FIRST PREMIER, if you can dig it) already has nearly 3 million customers, according to CNNMoney, and it solicits another 1.5 million every month. The company's CEO claims the business is doing people a favor, because the card is aimed at people with poor credit, who might otherwise not be able to get a credit card. The fees are justified, he said, because of the risk the company is taking on.
One has to wonder, though, whether customers who are already struggling financially could possibly beneift from being slammed with such outrageous fees.
The CEO of CardHub, which allows users to compare credit cards online before applying, was quoted by CNNMoney as saying that perhaps the worst of those fees involves a credit limit increase fee, which charges the customer 25 percent of whatever amount the limit is increased by. So if your spending limit is increased by $200, you pay an automatic $50 fee. Another online credit card comparison site CEO says he knows of no other company that does that.
"While (First Premier) is bragging about helping people back on their feet, they're in fact beating people when they're down," he said.
We understand that credit cards can be very useful - they can help improve your credit score and sometimes, you can't make major purchases unless you have some credit history. But a card like this isn't your only option if your credit is bad.
One different option is a secured card, which come with lower fees because the card holder has to deposit their own money into the account. That mitigates the lender's risk, without forcing the card holder to be shackled by fees.
Our Southern Colorado Chapter 7 bankruptcy attorneys know that credit card companies have long targeted the college student demographic because of their overall impulsiveness and lack of experience.
But their tactics are becoming increasingly savvy.
Today, nearly 900 universities and colleges have partnerships with credit card companies and financial firms. These are extremely profitable to all entities involved. The ones who lose out are the students.
The gimmicks are shameless. Some involve students receiving free t-shirts or gift cards "just to sign up." But as we all now, those "gifts" cost a great deal more than what students are bargaining for.
In one example provided by a LearnVest article, a college student signed up for a card in her second month of university because she liked the silly slogan on the t-shirt. Now, 15 years later, she's struggling to pay off the $25,000 in debt that still remains from that card.
Some studies have indicated that students that are repeatedly exposed to marketing by a financial institution over a period of time will overwhelmingly cave (about 70 to 80 percent). Of course, these students aren't being encouraged to shop around for competitive card rates or instructed on how to wisely manage their spending and debt.
In fact, a recent survey indicated that only about 15 percent of college students had a clue what their interest rate was and two-thirds were not sure whether they had been charged late fees.
These mistakes can follow students for many years after they graduate.
A survey conducted by Chase Card Services indicates that 35 percent women between the ages of 25 and 32 believe their credit card debt has prevented them from attaining their financial goals.
There are thankfully some protections that have been put in place under the Credit CARD Act, a federal measure that places certain limitations on credit card companies. Among those changes:
The U.S. Federal Reserve has reported that consumer credit overall has bounced back in August, following a sharp decline a month earlier.
Southern Colorado bankruptcy attorneys know this means more people are feeling comfortable with taking on more credit card debt. This can be viewed as a positive thing in terms of our overall economy, but it can also quickly launch a downward spiral, particularly if an individual is hit with an unforeseen financial crisis, such as a lay-off or major illness.
A Chapter 7 bankruptcy in Denver is one way these individuals can find relief. The proceeding allows you to end the creditor harassment and erase most of your debts.
The Reserve reports that credit debt rose to $18.1 billion in August, which marks the highest rise since May of this year, and a marked increase from July, when credit fell by $2.5 billion.
Combine that with the fact that the country's jobless rate still stands at about 8 percent, and it's clear we're not financially out of the woods.
If you are one of those who is taking on more credit debt, consider the following tips to help you keep it in check:
Colorado Springs credit card debt is easily one of the main sources of financial upheaval.
Of course, Colorado Springs debt relief attorneys know that they can be a great asset if you use them the right way. However, when times are tough, some see them as easy access to money they don't have. But that's the problem: If you don't have the money know, chances are you aren't going to have three times the money next month when the bill arrives. This is where people find themselves in deep trouble.
1. Gluttony. Mostly, this involves maxing out your credit cards or borrowing just about up to your limit. For example, if the issuer of the card offers you a $5,000 limit, that doesn't mean you should take out $4,500 of it just because you can. What's more, when you take out that much, you risk harming your credit score. It increases your debt-to-income ratio, and makes it appear as if you are high-risk.
2. Pride. Many people simply assume that their credit score is Ok, so they don't bother checking it. However, in a lot of cases, errors are common. Sometimes, creditors mark that you are delinquent on a payment, when in fact you aren't. It's important to know where you stand.
3. Lust. This comes in the form of applying for more credit than you can actually afford. Plus, the more credit card inquiries you have, the worse your credit score will be.
4. Greed. Cash advances on credit cards are usually a bad idea. The interest rates on these transactions can sometimes top 25 percent. Take out only what you need - and know that you can pay back in a timely manner.
5. Envy. When you apply for a credit card that is above what you can afford. A lot of times, platinum or gold cards come with astronomically high annual fees. They only really pay off if you travel enough to earn the rewards.
6. Wrath. There may be a temptation to cut up all your credit cards if you've been badly burned by one company. However, this is a bad idea because it won't give you a chance to rebuild your credit.
7. Sloth. If you don't check your monthly statements, you risk the possibility that you could be paying for things that you previously signed up for and have since forgotten about.
Part of heading off serious debt problems is recognizing when you may be heading toward them.
Our Southern Colorado Chapter 7 bankruptcy lawyers have seen a number of clients who file for bankruptcy years after the warning signs started flashing.
In some cases, there wasn't much they could do about it. When you get derailed by an illness or a job loss, you may have little choice but to roll with the punches.
Other times, though, you may be able to address certain issues and establish alternatives.
One of the prime examples of this is credit card use. Credit card companies are experts at making money, and their ultimate goal is to make money off you, whether through annual fees or high interest rates or missed payment penalties.
The average consumer has three credit cards, according to credit bureau Experian. Only 15 percent have more than seven cards. Reuters recently profiled a man who had 40 credit cards - and was making money off of the cash back rewards! But the fact is, that is extremely rare. The issue is not so much how many cards you have, but rather how much credit you are using.
Typically, as long as you don't apply for too many cards at once, you could have a dozen credit cards and not be in trouble. In fact, it may actually boost your credit score if you have credit that you aren't using.
However, the problem is when you take out more credit than what you can afford. The more credit cards you have, the more tempted you will be to utilize that credit.
So let's say you have $100,000 in credit that is available to you. If you have $10,000 in credit actually charged on those cards, you have a 10 percent credit utilization ratio. FICO indicates that those consumers who have the best credit scores (generally defined as 760 and over) have a credit utilization ratio of 7 percent.
So as with anything else, the bottom line is to control your actual spending. If you can have more cards and honestly say you won't take out the credit on them, by all means, have more. However, if you worry that having access to that credit may tempt you to dig yourself deeper in debt, simply decline those offers.
You may just now be settling down with the idea that your child is actually in college.
He or she is probably getting in the swing of classes, exams and group projects. But one area of study that college students as a whole routinely flunk is credit card savvy.
Too often, our Colorado Springs Chapter 7 bankruptcy lawyers are seeing younger and younger clients who seek are seeking bankruptcy protection because they got in over their heads with credit cards.
The good news is that for a college student or someone in your early 20s, a bankruptcy filing is unlikely to dramatically impact your financial future. You have more time to bounce back than, say, someone who is facing down retirement in the near future.
That said, part of what credit card companies bank on with college students is that they won't know how to spend responsibly. The fact is, it's good for college students to have a credit card, as it can help to boost their overall credit history, which they are not likely to have much of at this point in their lives. However, the problem is that to a college student, a credit card can seem like a magical wand of instant gratification. But then, of course, the time comes to pay up.
In the interest of avoiding major headaches for your child, here are some bullet points of what you may want to discuss:
Credit cards are more and more frequently being declined - by consumers.
Recent reports out of Great Britain echo the consumer trend that has been continuing in U.S., with people seeking debt relief by unburdening themselves from lending institutions that often jack up interest rates to boost their bottom line.
While it might seem that a floundering global economy might contribute to a rise in credit card usage, what many people seeking debt relief in Colorado and elsewhere are finding is that owning a credit card simply isn't worth it.
Our Colorado Springs debt relief attorneys know that credit cards are, in fact, one of the leading causes of bankruptcy in the U.S. Most Americans, according to CNNMoney, have racked up an average of more than $10,000 in credit card debt.
USA Today reported that revolving credit, which is comprised mostly of credit card debt, fell by 20 percent in 2010, and new credit card accounts dropped nearly 50 percent from 2008 to 2010.
Often, the decision stems from exasperation over the standards by which the credit card industry governs itself, which are often seen as unfair to consumers. These include predatory lending and a tendency to hike interest rates to 20 or 30 percent at even the smallest hint of financial trouble.
Congress passed a law in 2009 that is supposed to make it difficult for companies to charge certain types of fees or raise interest rates on balances that already exist. Leading up to those changes, though, many companies aggressively increased their rates, even for customers who were paying them on time.
Now in Europe, and particularly in England, credit card usage is facing what is being called a "mid-life crisis," with more people turning instead to digital payments, payday loans and debit cards.
Even for those who have decided not to take on more credit card debt, digging their way out of the trench they are already in can be cumbersome. That's where an attorney experienced in the debt relief process can be a lifesaver.
Here are some basic tips to helping you manage your debt:
1. Some borrowing, such as for a home or college, can be beneficial. But be mindful of how much you are borrowing, and don't accept more than what you can afford to pay back.
2. Keep your spending in check. People often spend outside of their means, and quickly end up with an overwhelming amount of debt. Write down your monthly expenses, and stick to your budget.
3. Pay off the debts with the highest interest rates first.
4. Pay more than the minimum monthly balance on your credit cards. Otherwise, you'll barely be making a dent in the principal amount you owe.
5. Seek help as soon as you realize you need it. A reputable Colorado Springs debt relief counselor can help you get your bills consolidated and help you better manage your finances.