I saw a chart in a bill-paying notebook today that had what you would pay per day on a $100 loan with varying interest rates. It had across the top day 1, 2, 3, 4. Then along the side of the chart it had 1/2%, 1% and so on. My “trying to save money” self just couldn’t spend the $2 on the bill organizer for that chart. I’ve surfed online to no avail. Do you have something like that you could show your readers? When we started ‘totaling’ the interest we paid each year for accounting purposes we were stunned.
Autumn in Michigan

Autumn has discovered something that most consumers haven’t learned. A great deal of your hard-earned money each month goes to paying interest on the money that you’ve borrowed.

Rather than put together a chart for Autumn, let’s show her how to assemble her own.

The formula for calculating interest expense isn’t as hard as you might think. We’re going to break it down to make it extremely simple.

The formula is the amount of money borrowed X the interest rate X the length of time that the money is borrowed for.

The amount of money borrowed should be easy to determine. Whether its a mortgage, car loan or credit card balance, your statement should list the balance due (i.e. the amount owed). If it doesn’t you can call the lender and ask them for a current balance. Remember, this is not the amount that you borrowed originally. It’s how much you still owe today.

The interest rate tends to confuse people because it is stated as a percentage. And with percentages come decimal places. But, we’re not going to let a little old decimal point stop us.

An easy way to think of interest rates is to look at the percent sign (%) and see two zeros or two decimal places. So 11% would be .11 and 5% would be .05.

In the real world, most interest rates aren’t exactly even. For instance, your home mortgage might be 5 3/8% or .05375 or a car loan at 11.75% or .1175.

If you still find it confusing, try this trick. Think of 100% as the whole amount. So 100% would translate to 1.00. Which is just what you’d expect it to be.

Finally, let’s consider the length of time the money is borrowed for or how long is it between scheduled payments. Let’s use monthly since that’s the most common.

Almost all interest rates are quoted for a one year period. If we’re making a monthly statement/payment, we’ll need to factor that in. One month is 1/12th of a year or .0833.

Let’s fill out our formula. Suppose that we were borrowing $100 at 14.5% for one month. Filling in our formula we’d get: $100 X .145 X .0833. Or $1.21 in interest due for the month. Using this formula Autumn can calculate any box in the chart.

Another way to get a feel for how much interest is costing you is to look at your monthly statements. Many will tell you exactly how much the interest added to your debt since the last statement. If a statement doesn’t clearly say that just call the lender and ask them. They can tell you to the penny how much interest you’re paying.

Now Amber can make her own chart. Better yet, she can know what each loan is costing her and total them all up to find out how much extra money she’d have each month if it weren’t for her debts. For many people that’s a great motivator to getting them paid off.

______________

Gary Foreman is the editor of The Dollar Stretcher.com website and enewsletters including Financial Independence.

Related posts:

1. Techniques to reduce interest rates on your credit card debt
2. Get your credit card interest rates lower for debt relief

One of my favorite quotes comes from Henry Ford. “Thinking is the hardest work there is. That’s why so few engage in it.” Old Mr. Ford was an interesting man. He made some very good decisions (produce an affordable car for the average man, use an assembly line with interchangeable parts) and some very bad ones (sticking to old designs too long). That makes him a perfect person to help us understand an economic concept called “opportunity cost.”

What is opportunity cost? It’s a theory that states something that we already know. Sometimes you have two or more alternatives, but you can only choose one. To put it in a more scholarly way its choosing between mutually exclusive choices.

For example, suppose you were shopping for a new car. You’ve narrowed it down to a minivan and SUV. Both about the same price. You have to choose between the two. You cannot have both.

After test rides you decide to choose the minivan. That’s your opportunity. The ability to choose the van. The cost is the loss of the SUV.

A another way to think of it is ‘instead’. If I go to a restaurant, I can choose the meatloaf instead of the fried chicken. But if I’ve already eaten the fried chicken, I’ll be too full to try the meatloaf. So choosing one eliminates the other.

The theory of opportunity cost relates to both our time and our money. Let’s consider a college student. Suppose that spending a semester in college costs $6,000 (including all fees and living expenses). But that’s not the real cost. The real cost would include the $8,000 he could have earned if he were not busy in college. So the true cost is $14,000.

The same is true on a smaller scale. I can choose to clean the gutters or watch the football game. I can’t do both. If I decide to watch the game the gutters will continue to be full of leaves. Making the same decision weekend after weekend could lead to damage to the house. In effect, the cost of watching the games was the repair of a leaky roof.

But, let’s get back to Mr. Ford. What makes him such a prime example for opportunity costs?

The initial Model T Ford sold for about $500 (depending on model and which year it was purchased). People who bought a Model T could have spent that money in other ways (farm equipment, newly invented labor saving devices for the home like washing machines or vacuum cleaners, etc). The opportunity cost to buying the Model T was that they couldn’t buy the other things.

By stressing a mass market and low prices, Ford lowered the opportunity cost of his car. People had to give up less stuff to buy one. As a result Ford sold nearly 15 million cars between 1909 and 1927!

But, Mr. Ford also made some bad choices. He stayed with the Model T too long. By staying with the Model T, Ford couldn’t introduce an all new car. That was the cost of sticking with the T. It was an expensive decision. From 1920 to 1926 Chevrolet’s production went up by 400%. Ford’s decreased by 20%. Ford’s early dominant position in the industry was lost.

What can we learn from Henry Ford’s example? Mainly that we should think before we make big decisions. Often the opportunity costs aren’t that apparent. Had Ford recognized what it was costing him he probably would have replaced the T earlier.

We need to do the hard work of thinking, too. The cost of that minivan might not just be the SUV that we didn’t buy. It might mean that a change in income could force Mom into an evening job to make the payments. The cost of being away from her children could be very expensive (lower grades, teen pregnancy, gang involvement). Take the time to consider the different alternatives and how each option could play out in the future.

Henry was right. Thinking is hard work. But, it can also be very well paid work, too!

______________

Gary Foreman is the editor of The Dollar Stretcher.com website and enewsletters including Financial Independence.

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Dear Dollar Stretcher,
Is there ever a good or creative way to save or budget for a new car?
My husband’s car is shot and I’ve been entering sweeps to help him
win a new hybrid car with no luck. Any ideas?
Brenda

Brenda asks a good question. According to the U.S. Dept. of Transportation the average lifespan of a vehicle is about 125,000 miles or 12 years. Recent estimates put the average car at a little over 10 years old with 100,000+ miles. Put those facts together and that means that many of the cars we drive are rolling into their sunset years.

So while we wish Brenda the best with her sweeps entries, it’s probably a good idea if she comes up with a backup plan. That plan plan should contain three elements. One, a plan to put money aside to cover repairs on their current car and ultimately buy a newer car. Two, a decision on how to save money for the car fund. Three, a desire to maintain their current vehicle to help it last longer and increase it’s value as a trade.

The first step is to create an auto account. Preferably one that makes it easy to deposit money, but a little harder to withdraw it. You’ll want to add money each month. The only withdrawals will be for maintainence and repairs to your current vehicle or to buy a newer car.

How much should you add each month? Ideally you’d save about as much as you’d be willing to spend on a car payment. In other words, begin making a car payment to yourself. This offers a big advantage. Instead of paying the loan company interest for the money you still owe them, you’ll be earning interest on the money that you’ve already saved.

Finding money to add to the account is Brenda’s next challenge. Remember, that if you take on a car payment you’ll have no choice but to come up with the money each month. So if a newer vehicle is important to you, be willing to make some sacrifices to save for your auto fund.

For many families the best source of savings is in the area of food. Feeding the average family costs between 10 and 20% of their income. Each day most of us have many opportunities to save without making significant lifestyle changes. These small savings add up during the month.

Wherever you find the savings, make a commitment to reach your goal each month. If you miss a month it’ll be tempting to shrug your shoulders and forget about it. It’s true, you don’t need to worry about your car being repossessed. But, each month you miss will only delay your auto shopping trip.

Next, expect to use your fund for routine maintainence and repairs. A common reason that people give for replacing their car is that it has become unreliable. The best way to keep a vehicle dependable is to perform the maintainence that’s specified in your owner’s manual. Even if that means catching up on things that you should have done earlier. Having money saved should make that easier.

Don’t feel bad about using money from your auto fund for repairs. Yes, it does mean that you’re further away from that new ride. But that’s what it’s there for. To keep a good set of wheels under you.

Finally, if Husband’s car is truly shot, how would they know when it’s not worth repairing? A general rule is that you don’t want to pay more for any single repair than the car is worth. You can find out what your car is worth at Kelly Blue Book (kbb.com). Until the repair is larger than the value, it’s almost always cheaper to repair your current vehicle than to replace it.

What should you do if you’re forced to buy before you saved the amount you planned to spend on your next car? If you can find reliable transportation for the amount saved, pay cash for this car and then keep saving for your next car.

If you don’t have enough saved for a dependable car, you’ll need to borrow this time. But once the car is paid off, keep making payments to yourself for it’s replacement. It’ll take a little longer until you can pay cash for your cars, but if you persist you will get to that point.

And, in the meantime, Brenda can keep entering sweepstakes. Who knows? She just might win some day.
______________

Gary Foreman is the editor of The Dollar Stretcher.com. For more info on how to find a Low Cost Car visit the site. Or sign up for their Financial Independence enewsletter.

Related posts:

1. Help With My Car Loan
2. A Spending Plan

As one will simply leave the money go off, banks or money lender will also do not forgive you from paying the money you owe. They will try to make every effort to collect money from you.

It is not the lender only tries to collect the debt from you but many people like collection agencies can start collection proceedings fresh. It means when the lender is unable to collect the debt, it is sold to collection agency which in turn can be sold to other collection agency. Every time the debt is sold to other, they will start collection proceedings against you that may cause trouble to you.

The process of debt collection will actually start when the debt collector buys your debt is, send you a letter in mail stating that if you don’t respond to the debt collection letter within mentioned time usually 30 days they will assume that you owe particular debt and start collection proceedings.

In that case verify about the debt in your records that the particular debt, they had mentioned in mail was correct or not. As the debt collection agency deals with hundred of thousands of debt, it is possible that the letter reached you by mistake.

If the debt is correct and wants to clear the debt in full to avoid all such harassment, then it is good time to contact collection agency and negotiate debt. Start working out the debt payment plan and different options you might have to get ridding of debt.

If you cannot afford to make payments and clear the debt then see since how long the debt is in your credit report and check the statue of limitations of the state in which you incurred debt. Statue of limitation is something that saves the debtor from all the headache of collection process. It means if you have debt outstanding for last 9 and your statue of limitations state that debt can at most be collected for 10 years, then you have only one year to get the debt becomes invalid.

Having debt affect your credit report, make sure that starting the debt payments after 9 years when they will be on credit report for maximum of one more year mistake that most people make. If you do so you will bring the debt to active and will stay for total of another 10 years if you fail to pay off the debt in full.

Therefore, it is better to check the statue of limitation before contacting the debt collector.

Articles on this site have been acquired from a variety of sources. No content on this site should be considered financial or legal advice

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1. How to deal with a creditor listing on credit report
2. Know how to deal with collection agencies
3. How to negotiate with collection agencies

Sometimes we can take an idea from one field and apply it to another. For instance, there’s a concept that successful small business people know. That is that you need to cover your expenses before you begin to pay yourself. In some circles it’s known as covering your monthly nut.

It’s a key issue. Before you open your doors for business on the first of each month you know roughly how much you’ll be spending on rent, utilities, insurance, wages, licenses. You’ll have those expenses even if your sales are zero for the month.

This is your first monthly goal. To earn enough to cover the nut. After that you can worry about paying suppliers and still later about paying yourself.

The same concept applies to the average person. You have a monthly nut, too. There are a certain number of expenses that occur each month just like clockwork. Regardless of your activities that month, you’ll face those bills.

For most families the monthly nut includes rent/mortgage, utilities (electric, water, telephone), a car payment and insurance.

Many of us have added other things to that monthly nut. Missy’s ballet and Junior’s kung fu lessons. Not to mention Mom’s yoga class at the gym. And Dad’s monthly golf game.

Then there’s the minimum payment on the credit card accounts. And, the 26 months of boat payments still due. All those expenses pretty much happen automatically.

Ever wonder where your money goes? Take a few minutes now and list the commitments on a piece of paper. Total your monthly nut. It’s not uncommon for families to have $1,500 to $2,000 or more per month already spent before the month starts.

OK, so now that everyone’s depressed, what’s the advantage of knowing about a monthly nut? What can we do differently?

The first exercise is a ‘what if’ game. For instance, what if I lost my job and had to live on unemployment compensation? Would I be able to cover my current monthly nut and still have enough left over to feed myself? Or, what if my company went on a 30 hour work week? Create your own variations.

The next exercise asks the question: “is that still true?” Circumstances change. Sometimes the product or service that we needed yesterday is not necessary now. For instance, there’s a trend to dropping a home land-line as more people get cell phones. In this game you look at each item in your monthly nut and ask yourself do you still need it.

A third question for this game is “have my needs changed?” We still have a land-line at home but found that we don’t need a long distance carrier. Dropping them saves a few dollars each month. Or carrying collision insurance on an old car might be a mistake. Look at each monthly nut item and see if you would buy a different package today. If so, talk to the supplier about changing it.

The final question is “has the competition changed?” I may still need the product or service, but competition could mean that I’d save money by moving my business to another company. Insurance and some utilities are prime examples.

Remember that any savings will drop your nut each and every month. This is not a one time saving. Your effort will be repaid every month.

There’s one last tool that we can use because we understand the monthly nut. We’ve all seen it. The salesperson who says “it’s only so much per month.” And, the payment, taken alone, doesn’t seem big compared to your income.

But a more accurate evaluation would be to think of that amount added to your existing nut. You’ll have a much better perspective of the payment. And, probably be more resistant to it.

Evaluating your monthly nut is important today. Many families are running into trouble because their commitments are higher than their income can support. Reducing your nut before trouble occurs is the best way to avoid trouble later.

______________

Gary Foreman is the editor of The Dollar Stretcher.com. Check out their frugal living page and enewsletters including Financial Independence. Financial Independence is designed to walk step-by-step with you as you take control of your finances and achieve financial freedom!

Related posts:

1. A Spending Plan
2. Bi-Monthly Credit Card Payments To Lower Credit Card Debt
3. Facing Our Financial Problems

Both options have their own pros and cons. Many a time consumer get confused about which option is right for them. Therefore I decided to discuss about both options below to provide you with required information to make an informed decision and successfully get out of debt.

Debt settlement is also called as debt negotiation, which can be performed either by an attorney or debt settlement company. Even you can also take care of the process but it requires certain skills such as negotiation skills, experience in performing such tasks etc.

There are two ways to work out debt settlement process. Before approaching the debt settlement company or attorney, it is important to find out if you have funds available for the debt settlement company working for you with your lender can use during their negotiation process or the consumer must be able to deposit funds into the account reserved by the attorney or debt settlement company every month that can be used by the negotiator in its negotiation.

The benefit of debt settlement is that you can stop making monthly payments to creditors with whom, you want to settle the debt and use those funds to save, and use them during the process of negotiation. To start convincing the lenders for debt settlement, the debt settlement company require you to save at least 50 to 60 percent of the debt you owe. The debt settlement company will start negotiating with lender once the funds are in your checking account. If you have no funds in your savings account, the debt settlement company will start the procedure of debt settlement only after you have certain amount of funds your settlement account.

Credit counseling is also called as debt management. The concept behind the credit counselling services is to save the consumers time and money by combining all your unsecured monthly debt that allows you to make single payment monthly to the debt management company that is providing services.

The main difference between the credit counseling and debt consolidation and debt settlement companies is that, the credit counselling service providers do not consolidate your debt instead take on single payment from you and distribute to different creditors every month. It means, they take your headache of debt management.

The credit counselling service providers will also help you in reducing the debt by negotiating with creditors to lower interest rates and other terms that help you reducing the monthly payments.

Thus depending on your situation and the kind of action you want to take in an effort to clear the debt, have to choose between the debt settlement and credit counseling services.

Articles on this site have been acquired from a variety of sources. No content on this site should be considered financial or legal advice

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2. Things to be Kept In Consideration Before You Go In For Credit counseling
3. Debt settlement or debt management – which is right for you?

You see much in the media about federal and state government debt. Most of the reports concentrate on the big picture. How many trillions of dollars the U.S. federal government owes. Or how many billions short a particular state budget is.

But few seem to address what that debt means to the average person like you and me. How our lives are changed by the debts that our federal and state governments take on.

According to USDebtClock.org the average U.S. Federal Government debt per citizen is over $42,000. And, they calculate that the interest per citizen at $2,800 per year.

So that means that you’re paying $233 per month just to cover the interest. So it’s a little like you and your mate are making a car payment every month for the rest of your lives. Not to buy you a dependable set of wheels, but to pay the interest on the money that’s already been borrowed in your name.

For a family of four it’s like having two new cars stolen from your driveway. If you’re a car salesperson those are two cars that you can’t sell because the customer can’t afford them. If you’re an autoworker, those are two cars you don’t get to build. Government debt takes money out of our pockets that could otherwise be spent and create jobs.

Maybe your taxable income is low. In fact, maybe you don’t pay any taxes at all. So why should you care? You’re not going to be paying any of that interest. That’s for someone wealthier than you.

Well, you’re affected, too. Every time that you go to borrow money you’ll pay more because you’re bidding against the government. That’s right. The government borrows it’s money from the same places that you do. So you have to outbid them to borrow money for your mortgage, car loan or credit card account. Instead of borrowing at 8% you’ll need to pay 9 or even 10%. And, the more they borrow the worse it gets.

You don’t need to pay taxes or borrow money to be affected by government debts. If you benefit from any government service you can look forward to cuts in that service. With more of the government budget going to pay for interest, there’s less available to pay for roads, school lunch programs or any other government services.

So what should you do now to protect yourself?

Expect to see government look to save money in all areas. Be prepared to receive lower benefits on government programs. That includes Medicare, Medicaid, Social Security, even government pension benefits. You may be fortunate and not have your program cut. But, you’d be foolish to think it couldn’t happen.

The next obvious step is to pay off any debt you currently owe. That eliminates the need to compete with the government to borrow money. Plus you’ll have more flexibility so you can adjust to a changing financial environment.

Also, be prepared for inflation. Unlike you and I, the government can print more money. That allows them to repay their debts in cheaper dollars. However, there is a cost. An increase in the money supply will cause prices to go up. And, we’ll have inflation.

Some argue that government debt doesn’t matter. They say that the government doesn’t ever really have to pay back debts. Government can carry it forever. And, maybe that’s true. Up to a point. But just like your family budget, if you want to be able to keep borrowing money you absolutly must make your interest payments. Even if that means that your family can’t pay rent or buy groceries.

The same thing is true for the government. At some point the government won’t be able to pay the interest due and still perform essential government services. According to U.S. Controller General David Walker, within 12 years the largest item on the federal budget will be interest payments.

You may hear the argument that the government can’t quit spending in a recession – even if they have to borrow the money being spent. That ignores the simple fact that every borrowed dollar increases the amount of interest that we’ll pay next year and every year thereafter.

Someone might say that this article is political. It’s not meant to be. Debt doesn’t care which political party creates it. A dollar of debt created by either party will have the same effect on you. A state or country can’t continually spend money it doesn’t have. Any more than you or I could.

I’ll leave it up to you whether you want to contact your elected reps and tell them to balance any budget they’re responsible for. But, I’ll admit that paying for two non-existent cars that aren’t in my driveway isn’t very appealing. And thinking that my children and grandchildren will be paying for them too is even less appealing.

______________

Gary Foreman is the editor of The Dollar Stretcher.com. Check out their frugal living page and enewsletters including Financial Independence. Financial Independence is designed to walk step-by-step with you as you take control of your finances and achieve financial freedom!

Articles on this site have been acquired from a variety of sources. No content on this site should be considered financial or legal advice

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In such conditions, credit card users pay minimum payments to keep up with credit card payments. The minimum payments that credit card user pay hardly cover the interest charged on the debt with out wiping out the principal. As the principal stay intact that incurs more debt in the form of interest for the next month. Like wise you paying only minimum payments will benefit only credit card issuers and you being in debt for years to come.

To avoid such situation, some experts come up with credit card debt settlement where the debt is settled for amount less than what you owe. To attain best results it is compulsory that negotiations carried out by an expert in the field of finance and have best negotiation skills.

Credit card negotiation services are a process that negotiates with your lender or credit card companies and try to reduce credit card debt. Without this services it become impossible for debtors to become debt free and keep paying towards debt for years of their life to pay back the debt.

The credit card debt settlement service providers analyse the situation of debtor and try to gather all the information related to finance of the consumer. This is most important step that nay debt settlement service provider must do because without it no one can move forward and work for the benefit of the consumer.

As the creditors do not show interest towards the debt settlement as doing so will lead to huge losses. For this reason the negotiation skills of the service provider must be in high level and convince the creditor to accept the proposal made by you. To attain best results while negotiating, the negotiator dealing with creditor must have technical knowledge and must be capable to exploit the loopholes in the system.

If you want to do it yourself then here is the process:

Start collecting all the statement of credit cards before you approach the credit card issuers. It means first thing you must do is get yourself prepared to face the card issuers and convince them for the benefit of you.

Next, analyse how much you have to pay and how much you can pay to clear the debt at once. This will help you only if you can make a lump sum payment.

Once you know and have knowledge on how to negotiate with creditors it is necessary to determine how and what you want to eliminate such as debt or late fee or reduce the interest rate. This helps you when you are communicating with creditors.

After everything is clear, go ahead and make a call to lender and make your offer and the conditions leading to this.

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2. Difference Between Credit Counseling and Debt Settlement
3. Is bankruptcy is the only option to discharge credit card debt?

Dear Dollar Stretcher,
My grandson, financially overwhelmed, a corrections oficer in California, is getting paid only 3/4 of his salary due to California’s money problems. He is on sick leave due to injuries to his knee which he probably received on the job but is unable to prove it. He is to have surgery in about two to three weeks. The balance he owes on his house is more than the house is worth. He has two toddlers and his wife is a diabetic, has a pump and been advised not to work outside the home. He also has other debts. He is 32 and has never been in this type of situation. I asked him if he asked anyone for financial advice and he said he wouldn’t know where to go. I would appreciate any information you can give.
Thank you,
L.W.

Sounds like LW’s grandson has a lot on his mind. Sometimes that makes it hard to know where to focus our efforts.

Often it’s helpful to look at problems from different perspectives. We’ll begin by trying to understand each individual problem. Then we’ll look at the big, overall picture.

Based on Grandma’s email we’ll consider the following problems: Grandson’s salary, his health, his wife’s health, other debts, and their upside down home.

Grandson’s salary is likely to stay frozen for quite awhile. It’s public knowledge that California is having a severe budget crunch. So the only way to increase his income would be to find a new higher paying job.

Granddaughter, although not able to work outside the home, might be able to bring in some income. Between her health and the toddlers, work might be impossible. But it’s wise to ask the question. It’s surprising how many people bring in income with small home businesses.

While we don’t know what type of health insurance Grandson has, as a general rule county and state employees have plans that should cover all but deductibles for his surgery.

If he hasn’t already, Grandson should talk to someone in the worker’s comp office. Whether he’s eligible or not, it’s good to know for certain.

As to his home, the fact that he owes more than it’s current value probably isn’t important as long as he can continue to make the payments. Unless he’s planning on selling the house or can’t make payments there’s nothing that he needs to do.

While it may be tempting to walk away from a home that’s worth less than what you owe on it, as long as he can keep up with the payments and isn’t planning on moving he’ll want to stay in the house. Letting the home fall into foreclosure will crater his credit score. And, the bank would have the right to pursue him for any shortage when the home is finally sold. Plus, the amount of the shortfall will be added to his taxable income.

The fact that he has other debts isn’t surprising. Many young families do. But interest going to credit card companies can be especially painful if your finances are tight. Finding some way to repay those debts would be very helpful. If the credit card debt totals more than $10,000 he might want to consider credit counseling. Often then can get the interest rate reduced which makes it easier to pay down the balance.

Now that we’ve looked at each individual issue, we’ll take a look at the whole picture. It could be that when taken all together that a different picture might emerge.

There appears to be two overriding issues. Do they have enough income to support their lifestyle? And, will health issues force any changes?

Let’s begin by comparing income to expenses. If there’s a gap, Grandson will need to make some changes. The first is to increase income or reduce their standard of living. That may not be hard, but it is necessary. Putting it off now will only make it worse later.

If that’s not sufficient to close the gap he’ll need to begin credit counseling and consideration of a short-sale on their home. If that’s still not sufficient, then Grandson may need to consider bankruptcy.

Health issues could have a serious affect on their plans. Consultation with their doctors should give them an idea of whether any lifestyle changes are in their future. This is something that they’ll need to consider on a regular basis.

Grandson doesn’t need to feel overwhelmed by all the different events in his life. Looking at circumstances individually and then taking a ‘big picture’ approach will help him know what actions need to be taken to prevent big problems in the future.

______________

Gary Foreman is the editor of The Dollar Stretcher.com. Check out their frugal living page and enewsletters including Financial Independence. Financial Independence is designed to walk step-by-step with you as you take control of your finances and achieve financial freedom!

Articles on this site have been acquired from a variety of sources. No content on this site should be considered financial or legal advice

No related posts.

When is debt settlement the right choice?
Debt settlement is an option for someone who is more than 90 days delinquent (behind) with their payments and cannot afford to make their minimum payments on their own or through a Debt Management Program. Most creditors will sell off the debt to collection agencies (“charge off”) after 180 days for pennies on the dollar and write the debts off as losses for tax purposes. Credit card companies typically do not negotiate debt settlement when the debtor is current. Why would they? If you have been paying as agreed, in their eyes, you can afford the payments.
Five steps to settling unsecured debts on your own

Step One: Get organized. Write down a list of all of your creditors with the current amount owed on each account, as well as how far behind you are on payments. Order your credit reports to track possible forgotten debt.

Step Two: Start saving money. Set aside money each month and put it into your savings account. Creditors typically only negotiate if you are ready to pay today! So if you don’t have the money to settle, there’s no point starting the negotiations. Keep in mind that most creditors will settle for about 40 to60 percent of the current balance.

Step Three: Start negotiating. Once you have 40 percent of one of your balances saved, start the negotiation process. Start with a low offer – perhaps 30 percent (or less) of the balance. Low-ball offers will probably be rejected immediately, but it doesn’t hurt to ask. Be calm, clear, honest and convincing. Remember, they’re not required to negotiate with you, so crying, yelling or screaming will not motivate them to help you. In fact, it could make it harder on you. Don’t give up easily. If your creditor denies your request, explain to them why settling would be beneficial for them. Their priority is their bottom line and you must make it clear that the offer is in their best interest. If a suitable agreement has not been reached or your offer has been denied, hang up and call back in a week.

Step Four: Keep good records. It is very important to make sure you keep records of each interaction. Note the date and the details of every phone call. Copy and save any letters you receive or send out. Get the agreement in writing! The biggest mistake one can make is spending time and effort negotiating every little thing and then the company does not do what they agree to. So, once an agreement is reached, get it in writing. Do not pay anything until a written agreement is reached. Sign and date the agreement just as you would a contract. Always send by certified mail.

Step Five: Payment time. First things first… never give them your bank account information, routing numbers, checking numbers, debit card numbers, etc. Pay only with money order or cashier’s check and send by certified mail. Again, only once you have received your agreement in writing!
Understand your rights The more informed you are, the better you and your money will be protected. Contact the Federal Trade Commission, the National Consumer Law Center or your state’s attorney general for free information on what both debt collectors and debt settlement companies, if you choose to use one, can and can’t do in your area and situation. You can also review the Fair Debt Collection Practices Act.

How does a settlement affect a credit rating?
This depends on one’s individual situation or current credit rating. Debt settlement can have a negative impact on your credit in different ways. First is the reporting of late payments. In most cases, a creditor will not agree to settle an account for less than what is owed until they believe they are at risk of not receiving any of the balance. The most obvious indication of that risk is when you begin to miss payments. Missed payments are reported in increments of 30 days to as far as 180. Each 30-day increment further affects your credit score adversely.

The second is the reporting of the account as having been settled. While the account may be closed with no outstanding balance after having been settled, it still reports the fact that the account was settled for less than what was owed. The credit scoring models include this notation in their calculation, lowering your score further. The impact of debt settlement on your credit score is also largely dependent on the current makeup of your credit. Many consumers who move forward with debt settlement have already begun to miss payments, have maxed out many of their credit lines and have seen much of the damage already done. So moving forward with the settlement process would affect someone current with payments more than someone who is already behind with payments and other issues with their credit.

Negotiate your credit rating with the creditor
This is very important as a “paid” collection is as negative to your credit rating as an “unpaid collection.” All your negotiation efforts and cold hard cash will do nothing to rebuild your credit report if you neglect to negotiate your credit rating in the process. If the debt is with a collection agency, ask for it to be removed completely. If they won’t remove the account completely ask for “paid.” It still is a negative mark, because it is a collection account, but it is better than, “settled” or “paid charge-off.”
Beware of the tax man! After you have successfully settled your credit card debts, you and other consumers like you could receive* 1099-C “cancelation of debt” tax notices in the mail. Why? The U.S. Internal Revenue Service considers forgiven or canceled debt as income. Creditors and debt collectors who agree to accept at least $600 less than the original balance are required by law to file 1099-C forms with the IRS and to send debtors notices as well. Taxpayers must report that income on their federal income tax returns. Consumers who receive the 1099-C forms should immediately take them to a tax preparer or tax adviser.
*Source: Internal Revenue Service

Food for thought… Try negotiating at the end of the month. Because debt collectors’ commissions are based on their totals at the end of each month, you may be able to get them to agree to less when it’s close to deadline time.

Disclaimer:
The strategies outlined in this flier may not be suitable for every individual, and are not guaranteed or warranted to produce any particular results. No warranty is made with respect to the accuracy or completeness of the information contained herein, and DebtWave Credit Counseling specifically disclaim any responsibility for any liability, loss or risk, personal or otherwise, which is incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this flier.

DebtWave Credit Counseling, Inc.

Community Outreach Department
8665 Gibbs Drive #100
San Diego, CA 92123
Phone: (858) 751-2600 option 6
Toll Free: (888) 285-7624 option 6
Fax: (858) 751-2608
education@debtwave.com

Articles on this site have been acquired from a variety of sources. No content on this site should be considered financial or legal advice

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