How do I start building credit?

One of the most commonly asked questions here is “How do I start building credit?”. Obviously, a solid, long-term history of on-time payments generally yields the best credit score. But getting your foot in the door can sometimes be troublesome without lenders willing to take a chance on you.

Below, we’ll examine the best way to get your file started up, given different scenarios. Your mileage may vary, but hopefully this post will give you the resources to assist you in getting a solid base of credit history, as well as good financial habits.

Step #0: Assess your financial situation.

Your financial health comes first. Your credit score is not everything; it is only a supplement to your financial activity. Your first priority is always going to be ensuring that you are already practicing good financial habits.

This start-up kit will contain recommendations to obtain a credit card. While there are benefits to credit cards, there are also severe dangers. I do not recommend this tutorial to anyone who:

  • Has no emergency fund.
  • Plans on living beyond his/her means.
  • Does not have an income.
  • Has spending habits that have not been dealt with.
  • Does not have a budget.

If you do not fit into any of the bullet points above, then you’re likely safe to go on to the next step.

Step #1: Pick a Card.

See the scenarios below and pick one that best fits your situation. When you are done finding a card, go to Step #2. Do not skip Step #2.

For your first credit card, a general note is to avoid cards that have an annual fee. You do not need to pay a dime in interest or fees to obtain a fantastic credit score.

I am a student or graduate who has student loans, and is looking to build credit.

Since you already have student loans, you likely already have a decent (but short) length of history on your file. In this case, I would look at what is generally referred to as a “starter card”. A couple of the most recommended in this situation are the Chase Freedom and the Discover It. There is also the CapitalOne Quicksilver (Do not confuse this with the Quicksilver One, which has an annual fee).

I would also take a look at this list for other suggestions. You may also want to look at the bank where you currently have a deposit account; you are more likely to be approved for a credit card if you’re in a position where the institution can clearly gauge your financial health.

If you are a student who cannot get approved for a “starter card”, there are still plenty of student cards that are available for your situation.

I am a student who does not have student loans, but I am looking to build credit.

This means your file is completely empty. But since you are a student, you have plenty of financial institutions willing to take a chance on you. I would take a look at possible student cards to get started.

I am not a student, but I also have no payment history. Where can I start?

You may want to look at a “starter card” first, and see if you can get approved anyway. Once again, there are suggestions on Nerdwallet. Many of the options listed above (Freedom, It, and Quicksilver) are good at taking chances on thin or new files.

Again: You may also want to look at the bank where you currently have a deposit account; you are more likely to be approved for a credit card if you’re in a position where the institution can clearly gauge your financial health.

Try for a few starter cards first. If you are having bad luck, see below:

I can’t get approved for any cards listed above. What do I do?

Since you’ve exhausted all of the above options, you can try to get approved for a secured card. This is a card where you lay down a security deposit, which becomes your credit limit.

Usually, within 6-12 months of on-time payments, you can call your bank and request to move from a secured card to an unsecured card, or do a product change to a different card entirely.

I can’t even get approved for a secured credit card. What now?

If this is the case, it’s likely something is keeping your credit file back. Do you have an account in collections? Could there be a mistake on your credit file (which happens frequently)? At this point, please check http://annualcreditreport.com to pull a report. You may or may not have to do a mail-in request to obtain your report. If you need further direction or support, you can always ask for some.

If there are any inaccurate items, and they have been disputed successfully, you may wish to go back through your denials. Call the bank and ask them to reconsider your application.

Step #2: Understand The Rules for Using your Card:

  1. Use your card only for planned expenses.
  2. Do not change your spending habits simply because you are using credit instead of cash. Rewards are nice, but spending a dollar to earn a penny is foolish.
  3. Always pay your statement balance in full by the due date. No exceptions.

Using the rules above, a typical billing cycle will look like this:

  1. You charge a planned expense, sticking to your budget and not changing your spending habits.
  2. The bank will sum up all of the activity in 1, and will send you a statement, or a summary of the information it believes to be correct.
  3. Review your statement for errors, and pay your statement in full by the due date. As long as your statement is paid in full, you will not pay interest. Any charges that you made that were not listed on the current statement will appear on the next one.
  4. Go back to 1.

If this seems confusing to you, consider an analogy to your Electric bill. Your institution monitors your charges (pun intended), and sends you your bill. As long as you pay your bill in full, there are no interest or late fees.

 

Frequently Asked Questions

Does paying rent or bills help my credit score?

No, unfortunately. Bills and rent are not tradelines, or lines of credit. However, if you don’t pay, it will affect your score negatively.

Should I care about APR?

No. If you are paying your credit card statement in full every month, your effective APR is 0%.

For my first card, why should I avoid an annual fee?

Your first credit card’s history is one of the more important factors in your FICO score. Closing your first credit account has been known to be detrimental to your credit file (moreso than canceling any other card you may acquire later). This means if your first credit card has an annual fee, and you’re looking to open up a loan or mortgage, you may have your credit score held hostage by it.

There are ways out of an annual fee card that won’t affect your history, however; the most common is calling the institution for a product change to a non-fee card. You can also call yearly and request to waive the fee. These, however, exist as options for most consumers, and are not guaranteed.

Should I take out a loan to improve my credit history?

Never. You do not need to pay a dime in interest to help your credit. You should treat these “starter loans” as if they were scams.

Do I need to use a certain percentage of my credit limit a month?”

There is only one credit utilization adage that matters: the lower, the better. Some of the best scores only have utilization between 1 and 9% (rounded up).

Utilization does not have any memory, so it’s pointless to force yourself to spend above or below a certain amount to get a higher score in a month that you’re not applying for new credit. In addition to this, your credit score will not factor the amounts paid on revolving accounts; the only thing that matters from month-to-month is whether you paid on time.

Simply focus on sticking to only regular expenses, and pay off your statement in full every month.

What to do if debt is in collections?

Collection agencies exist because businesses cannot let “bad” debt linger on their books for longer than ~180 days. By letting a bill go overdue for this long, you run the risk of your creditor either assigning or selling your debt to a collection agency/debt collector. Before jumping into it, it’s important to know that there is an important difference in how debt is handled if it is assigned or sold:

Assigned Debt – Debt that is transferred to a collection agent in order for them to work on getting you to pay. Your original creditor (OC) still owns the debt and the collection agency will receive a percentage of whatever they get you to pay.

Sold Debt – This is debt that has been sold to a debt collector who now legally owns your debt. You now owe nothing to the original creditor but you are still liable for the debt under the terms of the contract you had with the OC. Debt collectors usually buy debt at a deep discount and get to keep everything they get you to pay.

So let’s say you get a letter in the mail/phone call one day from a collection agency saying you owe them money. What’s your best course of action?

  1. Call the original creditor – Maybe you let your final utility bill from your old apartment/house go unpaid, which is a relatively common occurrence for debt collectors, you need to give that utility company a call immediately. Their representative can tell you whether or not the communication you received was legitimate (if they did sell or transfer the debt) and what needs to be done in regards to paying it. In most cases, they are going to tell you to pay the debt collector whether it was sold or transferred. Don’t acknowledge the debt is yours, just say you’d like information about who holds it. It doesn’t hurt to ask if they can pull the debt back from the collector if it has been assigned. It’s always best to pay your original creditor, preventing a collection agency from touching your credit report, and keeping the debt as being reported as “charged-off”.
  2. Collection agencies that call you before any other contact is made are required by the Fair Debt Collection Practices Act (FDCPA) to send you a letter within five days of that initial phone call. The letter needs to have some basic information regarding the debt and who owns it, as well as a notice about your rights as a consumer. Assuming the debt collector has your correct address, you should receive the letter within about a week. If they do not have your correct address, and your mail isn’t being forwarded, you may never get the letter. Collection agencies can send their notice to your last known address and be alright under the FDCPA. Living at the same address for a long time and not receiving the letter is a violation and you can claim up to $1,000 for it. (More on that later)
  3. When you do receive their notice in the mail, it should have information on it regarding what needs to be done if you dispute the validity of the debt (if it is just a letter saying how much you owe and giving you options to pay, with nothing else, that’s an FDCPA violation). Within 30 days of receiving the letter, you will need to write to them requiring them to validate your debt. These are some good examples of debt validation letter templateswhich cover all of your bases. It is best if you send your letter via certified mail with a return receipt requestedfrom the receiver. This acts as proof that they got your validation letter.
  4. When they get your validation letter they must immediately stop trying to collect from you until they send you validation paperwork. This means all phone calls must stop, lawsuits must stop, letters must stop, everything must stop EXCEPT they can still update your credit report (there is a caveat here as well). Receiving a letter that was already in the mail by the time they got your validation request does not go against the FDCPA but you don’t have to respond to it. A popular misconception about debt validation is that because you have 30 days to dispute the debt, they have 30 days to respond to it. This is untrue (except in Texas where state law DOES mandate they have 30 days to validate your debt), they can take as long as they want to validate it, provided they do not attempt to collect in the meantime.
  5. Perhaps you receive a letter in the mail validating the debt, this lets them restart their attempts to collect from you. They might try calling but if you want, you can withdraw your consent for them to call at anytime. The best way to do this is to either tell them all calls are inconvenient for you when you send the debt validation letter or in a separate letter after you receive validation. Calling you (more than once) after you revoke consent puts them in violation of the FDCPA and Telephone Consumer Protection Act (TCPA)
  6. They’ve validated the debt, you know where the debt is from, you just want it to be off of your credit report. Your first option is to obtain a Pay-for-Delete agreement with the debt collector. In order for this to work, you’ll usually have to make a payment in full, possibly that day but for sure within a short amount of time. This used to be a popular option if you owed money to a collection agency since they would normally be happy to get paid and remove the information. In the past couple of years, credit reporting agencies have clamped down on the practice since it makes their reports “less accurate”. Now, if a certain company starts putting in too many requests to remove an account, they will be flagged for a review. If the credit bureau finds that they are basically agreeing to everyone who wants to pay for a delete, the bureau will stop that company from reporting to them, depriving the collection agency of a very powerful tool to help them collect. Experian and Transunion are much more strict with collection agencies than Equifax, which is why you sometimes see a collection account on only one credit report (usually Equifax). At least you know if you only see the account on one bureau’s report, there is a good chance a Pay-for-Delete agreement will work.
  7. Collection agencies will usually let you setup a payment plan to let you pay off your debt over time. After you make the last payment, you will want to get something from them which shows that you have paid what you owed. You can also negotiate how much you’re willing to pay a collection agency, though this works better if you can afford to make a lump sum payment that day. Some agencies or creditors will forgive a certain amount of debt, but if it ends up forgiving more than $600, they will likely give you a 1099-C tax form for the amount that was forgiven. This will count as income for tax purposes.
  8. For debts deemed big enough, there is a chance that the debt collector will sue you. This usually only happens either with very large debts, or if a big debt collector holds your account and you live in an area with many other account owners. You’re probably safe from a lawsuit if you owe $300 and live in an extremely rural area, but you may be at a much higher risk of a suit if you owe $5,000 and live in Los Angeles. If you get served papers, SHOW UP TO COURT, do not let them get a default judgement against you. You can often talk with the attorney to work out a payment plan, or you can attempt to fight the lawsuit. (More on this later)
  9. Having a ton of debt and few assets may make bankruptcy your best bet. This is basically the nuclear option since it can wipe out all of your dischargeable debt (not student loans) but you are going to look super-risky to lenders for the next couple of years. If there are no major purchases (house or car) in the near future, it may be worth looking into. Forgiven debt under a bankruptcy is not counted against you as income under bankruptcy. Chapter 13 bankruptcy reorganizes your debt while and lets you keep most assets while Chapter 7 lets a trustee sell non-exempt assets but wipes debt away completely.
  10. After seven years (7 years, 6 months in practice, but it depends on the state) from the date of the first delinquency, credit reporting bureaus must remove bad information about you from their reports. At the same time, if you dispute a debt with a credit bureau and they receive no response from the business listed on the account for 30 days, they must remove it from your credit report. Some states have laws that get bad marks off of your credit faster but federal law says seven years. Shady collection agencies might try to tell the credit bureaus that you “made a payment” or “acknowledged the debt”, which will restart the ~7 year waiting period. This is a violation of the Fair Credit Reporting Act (FCRA) and you can collect awards from debt collectors and credit report bureaus breaking this, as well as the FDCPA and TCRA.

It’s sometimes best to wait out the statute of limitations, especially around the 5-6+ year mark if you don’t have any big purchases in the pipeline. What that isn’t feasible, after a couple of years, the impact that negative information has on your report does start to drop off by quite a bit. It’s why you won’t see your credit score rise much, if at all, by having a 7 year old collections debt fall off as opposed to getting a 6 month old collections account deleted.

How to Re-build Bad Credit and Improve Credit Score

Depending on how serious your situation is, you may or may not need to know a few important bullet points. This is not legal advice; if you are seeking legal advice, you should speak with a lawyer versed in the FCRA and FDCPA.

How to Re-build Bad Credit and Improve Credit Score

  • Bad marks, such as late (30, 60, 90 day) payments, liens, judgements, collections accounts, and chapter 13 bankruptcy will fall off your credit report at the 7.5 year mark from the Date of First Delinquency (DOFD) or the judgement date.
    • Note: Debt cannot legally be re-aged. All delinquencies must be dated from the DOFD or the judgement date.
    • If you have a Chapter 7 or Chapter 11 bankruptcy, you will need to wait until the 10-year mark for the public record to fall off of your report.
  • Creditors and collections agencies are obligated to comply with both the FCRA and the FDCPA. If you believe these laws are being violated, you should speak with an attorney.

 

Challenge Creditors to Fix Credit Score

  • The burden of proof is always on the creditor. Always ask for documentation. Period. Even if you know the debt and know you owe on the debt. When you pay off a debt in collections or under a judgement, you should always demand and keep proof of the payment.
  • Look up the statute of limitations of debt for your state. Please note that the link provided may or may not be completely up-to-date, and may or may not contain accurate information. Verify this with your state through your attorney.
    • Just because your statute of limitations is up doesn’t mean that a creditor is required to remove it from your credit report. The latter is governed by the FCRA, whereas the former is state law. It may, however, give you leverage against collections agencies and other creditors.

 

Things to do right away to rebuild credit score

  1. If you have various collections accounts or potential fraudulent accounts, pull your credit report from annualcreditreport.com. Dispute any inaccurate information. Obtain contact information regarding collections accounts that own your debt.
  2. If you have any revolving debt, reduce it to below 30% of its limit. 30% is usually the “red flag” threshold for debt. While 10-29% (rounded up) is not ideal for creditors to look at, it’s manageable and it doesn’t set off any red flags.

 

 

Handling your collections accounts to improve credit

Paying for delete of debt accounts

Negotiating with collectors can be tricky. Luckily, some of them are willing and able to negotiate a settlement offer in exchange for deleting the item from your credit reports. This exists as an option for a collections agency, and is not an obligation, so it may not always work. However, you miss 100% of the shots you don’t take, so it can only be beneficial to do this (assuming you do it correctly and carefully).

 

Goodwill letters for late payments

Some creditors are willing and able to remove 30, 60, and 90 day late notices from your credit report, assuming that you have been a solid customer for a long time since the derogatory mark. This can usually be done by contacting your creditor with a goodwill letter, or a request to remove the derogatory mark from your report from a consumer who has otherwise had a solid relationship with the financial institution.

Please note that This exists as an option for creditors, and is not an obligation, so it may not always work. However, persistence is key on this

 

Keep making on-time payments

Over time, bad marks and delinquent accounts (if you have any) will fall off at the 7.5 year mark from the DOFD. Bankruptcies will disappear at the 10 year mark. These two factors will also count against you less and less over time.

In addition to this, most creditors (as well as FICO) weigh your most recent 24 months of activity more heavily than the rest of your report. Your most recent two years of activity are a big enough indicator of risk (or lack thereof) for some lenders. Your mileage may vary.

 

Other Tips of Rebuilding Credit and Improving Credit Score

 

1. Time is the ultimate factor in credit building, so your response should be patience.

As was mentioned above, your age of accounts, combined with your payment history, account for 50% of your credit score. It goes without saying that letting time pass will allow both of these factors to become better established.

Over time, bad marks and delinquent accounts (if you have any) will fall off at the 7.5 year mark from the DOFD. Bankruptcies will disappear at the 10 year mark. These two factors will also count against you less and less over time.

In addition to this, most creditors (as well as FICO) weigh your most recent 24 months of activity more heavily than the rest of your report. Your most recent two years of activity are a big enough indicator of risk (or lack thereof) for some lenders. Your mileage may vary.

Don’t be discouraged with the time factor. With the exception of getting negative items removed from your report, the fastest way to build credit is at the regular speed of time, and the number one way to prove your creditworthiness is toactually be creditworthy.

 

2. Credit is not the end-all-be-all of finance.

Despite what some conventional wisdom might have you believe, your credit is not priority one. Your first priority in finance should be having enough for food and shelter for yourself and the people you provide for. Your second priority should be balancing out your cashflow with a budget, as well as paying down debt and saving for retirement. Once these are handled properly, only then do we get into credit, which really only needs to be optimized if you’re planning on a major loan in the near future.

 

3. Monitoring your credit can be important, but you should only do it for free.

There should be some emphasis placed on monitoring your identity, as well as knowing a ballpark figure for your credit score. But there should not be any circumstance where you should pay for your credit score and/or report. There are plenty of services that will give you a ballpark figure for free, and http://annualcreditreport.com is also there to provide you with an annual credit report every 12 months, as required by federal law.

Debt Collection Myths When Dealing with Collection Agency

There are hundreds of myths involving credit reports, scores, and collection agencies. Here are some of the most common myths we’ve run across:

Common Debt Collection Myths

“If I don’t pay the debt(s), I will go to jail
Ok, maybe if we lived over 100 years ago! This is one of the most ridiculous myths out there by far, and the worst thing about this myth? Collections Agencies  use this as a terror tactic to get debtors to pay. Now, you will hear about people in the news who have gone to jail stemming from debts owed, but if you look at the case closely, it’s not that they didn’t pay their debts that landed them in jail, it’s that they defied a judge’s order to pay said debts.

“The person I talked to said they were a lawyer and therefore wasn’t governed by the FDCPA/FCRA”
No wonder lawyers get a bad rap, they make it themselves! This is FALSE. The FDCPA states that ANY person/lawyer or firm that is hired to collect on a debt, is considered a debt collector and thus falls under the rules of the FDCPA.

“Talking to a collection agency resets the statute of limitations/collection clock”
This is incorrect. Simply talking to them does NOT reset the SOL/collection clock. However it’s what you SAY that can make a difference. If you make a partial payment, verify the debt as yours, or infer that you CAN make a partial/full payment, THAT resets the SOL/collection clock.

“The creditor charged-off the amount owed, so now I don’t owe the debt!”
A charge-off doesn’t mean the debt isn’t owed, or that it goes away, it just simply means the creditor has given up on collecting. . Any CA can purchase the debt and attempt collections. An additional ramification to this is that you may get a 1099 from the OC for the amount charged off. The IRS deems this as income, so you may owe taxes on it!

“I have a debt incurred in another state across the country. Recently I received a call from a CA, in the current state I’m in, regarding the debt I owe in the other state. They said the SOL regarding the debt “travels” with the debtor, thus I have to go by the SOL in the state I currently reside in”
This is a common ruse used by CAs. They know the majority of debtors don’t know the rules and their rights afforded them. This is false. The SOL on a debt is taken from the state the debt was incurred in. If you have a debt in OR, and moved to TX, where TX has a longer SOL on certain debts, the SOL doesn’t “travel”/”update” to the state you reside in, but stays with the state the debt was incurred in.

“If I pay a debt owed in collections, it will be removed from my credit report”
Paying a debt owed on your CR does NOT remove the negative mark. It stays on there! The only thing that will change is that the debt will be updated to say “paid in full” or something similar. The DOLA will also change to the date you paid the debt.

“If I pay a debt owed in collections, my credit score will increase”
Again, no. A paid debt in collections is no better than a debt owed simply because the damage is already done by the negative item showing on your report. The ONLY way to increase your score is to remove the negative item by doing a “pay for delete”. However if you’re going to be making a large purchase, like a house, the lending institution/bank may want to see the debt paid before they will lend monies. Thus a paid debt on your report would be beneficial. Again, the DOLA would be updated, BUT your score would not increase.

“When I applied for credit, the bank said I had a zero(0) credit score, and therefore was denied”
This is impossible. You either have a credit score or you don’t have a credit score. If you don’t have a credit score, it’s because there isn’t enough information in your credit file to determine a score. However, lending institutions may have their OWN method of calculating a credit score, or they rely on another credit scoring system(other than FICO) to generate a number for you.

“It’s been 10 years since I’ve last heard from a collection agency on a debt. Today I get a call from a different collection agency saying I owe the debt”
Nothing prohibits a collector from calling about it, nor do they have to cease attempting to collect on a debt. In most states, the amount is still owed, but the collections agency is simply not allowed to sue. Reference the FTC guidelines on time-barred debts.

“If I pay a debt owed in collections, and it has been removed from my report, I will never see/hear about the debt again.”
This is one of the most contentious myths out there that confuses a lot of people. Sure, in a perfect world, you paid a debt and it SHOULD NOT come back on your report. However a month, two months, a year or maybe even longer, you get your report and there is that damn debt again! How can this be? You paid the debt, but it’s still there! The problem is that there is NO database that CAs keep or follow that shows which debts are paid and which debts are owed. So your debt can literally be sold over and over and over, which means it will show it’s ugly face again and again and again on your report. It is than up to YOU, as the debtor, to provide the necessary documentation that the debt was paid, or that it is past the SOL. The good news is that if you can prove the debt has been paid, or past the SOL, the negative item can be quickly removed.

“I missed a payment than brought my account current for several months, than missed another payment and have not made a payment since. What is the date of first delinquency, the first time I missed a payment, or the last time a payment was made?”
The DOFD is the last time a payment was made and the account was never brought current. So if you missed Jan 1 payment, that would be the DOFD. However, if you brought the account current Feb1 and made several on-time payments but missed the May 1 payment and never made another payment, May 1 would be the new DOFD.

“I’ve disputed an error on my report and have proved the information is wrong, yet the CRA hasn’t removed the negative item. Oh well, I guess it will stay there”
Part of the FCRA is that you have a legal right to dispute incorrect information on your reports, and if the information contained in it is incorrect, you have the right to request it be removed. The FCRA also states that the CRAs are required to fix any incorrect information or face legal action. In many cases, the CRAs are understaffed and move like molasses. Hiring a lawyer may be the best option, plus if you can prove you suffered damages, you can sue.

“I requested a ‘pay for delete’ from a CA and they refused, insisting I pay the full amount. Aren’t they legally required to accept a ‘pay for delete’?”
No. A pay for delete is an option a debtor has, however the CAs are NOT REQUIRED to accept it. In fact, they may not be allowed to accept it if the debt they are collecting on is assigned debt and the OC wants the full amount. More on that in the “Pay for Delete” heading below.

“I received a call from a CA for an amount owed to the OC, but they’re adding “X” amount to the original debt as interest and fees, can they do this?”
Typically, NO. Not unless your original contract with the OC allows for this, or your state law allows for this. Otherwise, they cannot add on any interest, fees, or other charges.

Common Debt and Credit Repair Terms

Knowing credit repair terms is essential. Dealing with debt collections agencies can be very frustrating for many consumers. One of the most difficult parts of dealing with a debt collection agency including the debt collection vocabulary that they are using. Below is a list of most commonly used terms, their abbreviations and their meanings in alphabetical order of common credit repair terms.

 

What is Assigned Debt?

Assigned Debt This is the most typical kind of medical debt, and usually the easiest to negotiate a settlement offer. Not 100% sure as to why it’s so easy to settle, I think it’s because the hospitals just want to get anything they can. This is when a creditor “gives” or “assigns” the debt to a collection agency for them to collect. The collection agency gets a percentage of the amount collected or a set amount, by the creditor upon a successful collection. Collection Agencies take their cues from the original creditors, if the original creditor won’t allow a settlement offer less than 100% of the amount owed, the collection agency can’t offer or accept anything other than 100% of the amount owed. Simple as that.

 

What is Purchased Debt?

Purchased Debt This is the most common type of junk debt that collection agencies purchase. It can be literally any type of debt that a collection agency purchases to attempt collections on. Typically credit cards, etc..

 

What is Bankruptcy?

Bankruptcy The legal proceedings to discharge your debts owed under the various chapters 7/13 (or Chapter 20 as some call it when people do a 7 followed by a 13 a bit after). A bankruptcy stays on your credit report for 10 years before it will fall off. Chapter 7 is a “clean slate” where almost all your debts are forgiven. Chapter 13 is a payment plan program where you make a set amount of payments for a set amount of years. Failure to abide by the payments and payment dates can toss the proceedings as well as any fraudulent activities. Many of the other credit repair terms are related to bankruptcy.

 

What is a Charge-Off?

Charge-Off  This is the accounting term a creditor uses when they have decided to move your debt owed off of their books to the “bad debt” ledger. You will most likely get a 1099-C form listing the debt owed as income from the IRS. Why, because the IRS deems the forgiven amount as income! Another important thing to remember is that a charge-off does NOT mean the debt is forgiven, or that it disappears! It just means the creditor has decided it is no longer worth their effort to collect and is then sold to collection agencies as junk debt.

 

What is a Collection Agency?

Collection Agency These are firms that specialize in buying junk debt, and pursue collection activities against debtors. Some follow the rules in collecting, but the majority do what they can to collect.

 

What is a Collection Clock?

Collection Clock This is in reference to the amount of time a debt can be collected on, tied with the statute of limitations listed below. This term is interchangeable with the statute of limitations term because each state is different in regards to the amount of time allocated for various debts. This also is tied with collection agencies as depending on what you say to them, it can reset the collection clock/statute of limitations on said debts owed. More on that in the examples to follow. Also tied to the Date of Last Activity.

 

What is a Credit Reporting Agency?

Credit Reporting Agency(CRA) These are in reference to the big 3 reporting agencies: Equifax(EQ), TransUnion(TU) and Experian(EX;) that list, and report your credit history. Make sure you understand credit reports and that your report is accurate.

 

Who is a Creditor?

Creditor. This is the bank/lending institution(or a personal acquaintance in bankruptcy proceedings) that a debt is owed to.

 

What is a Credit Report?

Credit Report Just as it states, given by the big three credit reporting agencies.

 

What is Certified, Return Receipt requested(CRRR/CRR)?

Certified, Return Receipt requested(CRRR/CRR) Actually two terms in one. Certified Mail, and Return Receipt requested. This involves delivering mail through the USPS. This is very important when communicating with collection agencies and the credit reporting agencies, as letters sent CRRR are physical proof of your attempt to contact/deliver correspondence and they are literally impossible to refute.

What is Date of First Delinquency(DOFD/DFD)?

Date of First Delinquency(DOFD/DFD) Just as it states, the date the credit line was FIRST delinquent. This is often confused with the Date of Last Activity(DOLA) but it is VERY important to be able to differentiate between the two. This affects the date to which the negative credit line will remain and eventually fall off your report. IT CANNOT BE CHANGED, except if a judgment has been issued against you! Many collections agencies try to change this as it affects how they can collect on delinquent accounts, but it is ILLEGAL and is known as re-aging. Debts fall off your report 7.5 years from the DOFD.

 

What is Date of Default (DD)

Date of Default(DD) The date the original account became 180 days past due. Debts fall off your report 7 years from the DD.

What is Date of Last Activity(DOLA)?

Date of Last Activity(DOLA) Again, just as it states. This refers to the date that any activity, whether it be a partial payment, full payment, etc. or debt validation was made on the credit line. As with the DOFD, collection agencies use this as a way of collecting, and it affects their collecting practices. This is tied with the statute of limitations/collection clock.

 

What is Debt Validation(DV)?

Debt Validation(DV) The process by which a collection agency MUST, BY LAW, validate the debt they are attempting to collect on. More on this below.

 

Who is a Debtor?

Debtor – This is the individual(for this purpose) that owes a debt to a creditor.

 

What is the Fair Credit Reporting Act(FCRA)?

Fair Credit Reporting Act(FCRA) In a nutshell, the law/act that controls the behavior of credit reporting agencies(CRAs) and specifically outlines what they can and cannot do, plus your rights.

 

What is the Fair Debt Collection Practices Act (FDCPA)?

Fair Debt Collection Practices Act (FDCPA) This outlines what collection agencies CAN & CANNOT do to collect on a debt. This is VERY IMPORTANT and I urge everyone to read up on their rights. In a nutshell it determines WHO they can contact about a debt owed, WHAT they can and cannot say, WHEN you can be contacted, and HOW you can be contacted. Keep in mind that violations can lead to legal claims against the collection agencies. Fair, Issac & Company(FICO) Started by a mathematician and engineer in 1956, they provide analytic and decision making services, primarily credit scores, for financial lending institutions. In a nutshell, they guesstimate how much of a credit risk you are based on past credit/lending practices. Scores range from 300-850. One either HAS a credit score within the range, or THEY DON’T have a credit score. One CANNOT have a ZERO(0) credit score.

 

What is a Judgement?

Judgment This is closely tied to the statute of limitations, the collection clock, and the various forms of bankruptcy. When a judgment is issued against a debtor, it means a judge has listened to both parties(collection agency & debtor) and found the debtor liable for the amount asked for by the collection agency. The original debt amount may include attorneys fees, interest, filing fees, etc, anything related to suing the debtor. This AUTOMATICALLY resets the Date of First Delinquency to the date the judgement was issued, and is the ONLY thing that can change the DOFD. The new reporting time is now 7 years from the date the judgement was issued. Judgements stays ”active” for 10 years, and in some states 20 years. This means a collection agency has 10 years to garnish your wages, put liens on your property, seize bank accounts, etc. to collect the judgement owed. If they fail to do so within those ten years, most states allow a judgment to reset for another 10 years, and they allow the collection agency to continue resetting the clock indefinitely, thus literally making the debt never go away.

 

What is a dormant judgment?

If a judgment reaches the 10 year limit, IT DOES NOT GO AWAY, it becomes dormant. The good news is that while the judgement is dormant, it cannot be collected upon! The collection agency has to file to re-activate the judgment before they can attempt to collect on it. However any collection attempts on a dormant judgement can lead to monetary fines against the collection agency. If a person is ever summoned to appear in court, do not ignore it. This is the single most important thing you need to make sure you don’t miss! Failure to answer a summons means an automatic default judgement against you!

 

What is a Junk Debt Buyer?

Junk Debt Buyer These are ALL the charged-off accounts that creditors deem unworthy to collect that are bunched together and sold for pennies on the dollar to whichever collection agency will buy them. The collection agency will then turn around and attempt to collect from the debtors, often for the full amount or a settled amount.

Who is the Original Creditor?

Original Creditor The creditor to whom the original debt is owed to. This is VERY IMPORTANT when dealing with collection agencies.

 

What is Pay for Delete?

Pay for Delete The process where you pay an agreed upon amount with the original creditor OR a collection agency, and in return they remove the negative mark from your credit report. Note that collection agencies are NOT legally required to accept these, an in cases of assigned debt, they may not be allowed to.

 

What is Re-Aging?

Re-Aging  This is the process where the collection agency lists an old debt, past the collection reporting period, with a newer date on your credit report in order to try and collect on said debt. THIS IS ILLEGAL, and CANNOT be done. The collection agency can be fined if they continue to report the debt after they’ve been informed its past the reporting clock.

 

What is a Debt Settlement?

Settlement  The monetary agreement that a debtor and a collection agency arrive at, to satisfy a debt is a common credit repair term. This could be for the full price, half price or a fraction of the full amount.  This is the amount of time set by a state(for this purpose) that determines the amount of time legal proceedings may be brought up against a debtor to collect on a debt. In other words, the amount of time a collection agency can legally collect on a debt. This is tied with the collections clock and the statute of limitations, and CAN BE RESET if the wrong words are used when communicating with a collection agency.

 

What are Time-Barred Debts?

Time-Barred Debts This refers to debts that are PAST the statute of limitations and therefore CANNOT be legally pursued. This does NOT mean the debt ISN’T owed, just that a collection agency cannot legally pursue collections.

Tips for Dealing with Collection Agencies FDCPA and FCRA

What is the FDCPA/FCRA, and how does it relate to dealing with collection agencies?

In a nutshell,  the FDCPA and FCRA were laws put into effect in 1977 (about when credit cards were available to the masses) that creditors collecting on debts could not burden a debtor for life. Thus the 7.5 year reporting time and the statute of limitations were implemented. Basically stated, creditors have a set limited amount of time to report and collect on legally owed debts. This provides protection to consumers or debt because there is a defined period of time when a debt can no longer be enforced by a creditor. Read about should you default on credit card debt?

Remember, that this is your credit report you’re dealing with, and anything negative listed can/will affect your job, housing, banking, loans, education, and general overall health. Having a correct report is vital! Again, this is a viable tool afforded to you in dealing with debts, whether you think it’s moral or not. Know your rights can give you enormous leverage when dealing with debt collections agencies.

 

Collection Agency Laws: What is the Fair Credit Reporting Act (FCRA) and the Fair Debt Collection Practices Act (FDCPA)?

It was also decided that to protect debtors/consumers, a set of rules and regulations were needed to protect them and to control what could and couldn’t be reported on their credit reports. There are also many collection agency laws that must be followed in the collection of debt. This came to be called the Fair Credit Reporting Act or FCRA, and was implemented in October 1970. It was also decided that collection agencies had to follow a set of rules and regulations when attempting to collect. This was called the Fair Debt Collection Practices Act or FDCPA.

These collection agency laws mostly apply to third party debt collectors, and not original creditors. However some states have similar consumer protection laws that mirror the FDCPA. The FDCPA covers debts by consumers, and not businesses. Every time a debtor uses credit from a lender, both debtor and the lender are subject to the rules and laws of the FDCPA and FCRA. Fair debt collection must take place or there could be significant penalties.

 

Tips on Dealing with Collection Agencies

Dealing with collection agencies can be very hard for most consumers. Remember, Collection agencies have one goal in mind: to get as much money from you as they can. It doesn’t matter to them how they do this, and in cases of unscrupulous Collections Agencies, it doesn’t matter what they say to achieve their goal.

Collection agencies do not care about your hardships, or that your spouse was in an accident and was the sole earner. They do not care that you got sick and missed two pay checks and thus fell behind on bills. They want the money.  Is some cases, as in assigned debt, the faster they collect from you the higher their commission. Typically, they’ll pay pennies on the dollar but will still want all of the debt owed.

 

Common Tips when Dealing with Collections Agencies

This is merely a guideline, and everyone has a unique situation. If you think your situation is particulary complex or confusing, make sure to reach out to a lawyer or credit counsleor who may provide lots of assistance in dealing with collection agencies. However, there are a few basic points that are common for everyone:

 

Send Certified Mail to Collections Agencies

All written communication should be sent Certified Mail, Return Receipt Requested with the collections agency.  Sending a written dispute letter (and keeping a copy for yourself) provides you with the date the letter was accepted by the debt collection agency. This not only creates a paper trail, but also starts the clock to which a Credit Reporting Agency or a Collections Agency must abide by.

If you’re having trouble disputing a mark with Credit Reporting Agencies (or CRAs, like TransUnion, Equifax, Experian), it’s often recommended to send your dispute via Certified Mail, Return Receipt Requested. This is in contrast to online dispute letters via the Reporting Agency’s website.

 

Fair Debt Collection Laws

Know your rights under Federal debt law This is where looking up the Fair Debt Collection Practices Act (FDCPA) helps you. It allows you to retaliate if the Collections Agency is using abusive, unfair, or deceptive methods to collect from you. It also provides the guidelines for when and how they can contact you. Debt collections agencies must adhere to the following guidelines when contacting you:

  • They are not allowed to contact you before 8 AM, or after 9PM unless you agree to it.
  • They are not allowed to contact you at work if you have informed them, via writing or orally, that you are not allowed to get calls there.
  • You are allowed to request the Collections Agency to stop contacting you via phone, and they will be required to continue only via written communication.
  • They are not allowed to share the details of the account with anyone except the debtor.

If you wish to cease communications via phone, get their address, send them a letter via Certified Mail (Return Receipt Requested), and specifically tell them to only communicate via writing. Keep a copy of the letter for future reference, as well as the number the USPS uses to track the letter.

 

Possibly Record Calls with Debt Collectors

Know your state’s telephone recording laws. When you can, record the conversation. Some states require that only one person needs to know that the telephone conversation is being recorded; in that case, it would be you. This is to keep track of the Collections Agencies to ensure they are not infringing on your rights. If they do, you can pursue them for damages. There are recording apps for most smartphones that you may wish to look into.

Recording does two things: It informs the collections agency that they are being recorded (which may encourage them to cooperate), and the record becomes evidence that can be used in a court of law.

If you cannot record, due to state laws (or you just don’t have the capability to do so), keep a log book of your interactions with the collections agency. Write down the time, the date, and what was said. Write down what they requested, what you responded, and so on. A log book can be used as evidence. Let them talk. Let them go through their spiel. Write down everything if you aren’t recording: for future reference, and to check against your records (it could simply be that they have the wrong person).

Tell Debt Collectors to Stop Calling You

Request the collections agency mailing address. Repeat it back to them to confirm. If you don’t want them to contact you again via phone, inform them. Be very clear about it. Repeat it in the certified letter you send to them. You may also inform them to not contact you at your work too. Repeat that in the certified letter as well. Once they have been informed they cannot contact you at your place of business or your personal number, they can only contact you to inform you that they won’t contact you again (or if they are informing you of legal action). Any other contact contact via phone is a violation of the FDCPA.

Have Debt Collectors Mail Information

Request they send the account information via mail. This is important! You are requesting they send all the information about the delinquent account to you in writing. This is will allow you to have the documentation in your hands, where you can look at each piece versus trying to remember it in your head. It also prevents you from saying something that can hurt you legally: Admitting you owe the debt (even if you’re not sure), agreeing to make a payment, or inferring that you can make a payment. All these things may hurt you.

 

Fair Debt Collection Laws: Request a Debt Verification Notice

Request a Debt Verification Notice. You should clearly state something along the lines of “This is not an admission of owing the debt, but I need the information regarding said debt to verify whether or not it is indeed mine. Please send me a validation notice. Please send the information to […].” A validation notice is just that: it notifies you of the amount of the debt owed, the name of the creditor to whom the debt is owed, and directions on how to proceed if you think you don’t owe the debt. The collections agency must send the validation notice to you within five days of the initial phone call. Failure to send it is a violation of the FDCPA, and if you’ve recorded the call, you can use that in court.

 

Debt Collector Harassment

If at any point the Collections Agency becomes aggressive, rude, or keeps repeating the question of when you can make a payment, just hang up. Simple as that. If by this point you have not requested they cease calling you, make sure you inform them the next time they call. (And they will call again!) Even if you have to talk over them, keep repeating yourself. Again, if you are recording the call, this can be used as evidence.

 

Debt Validation Letters

Once you receive the validation notice, even if you know you owe the debt, send a debt validation letter within 30 days of receiving the Collection Ageny’s validation notice. If you believe in good faith that the debt is in error, send them a dispute letter stating the debt is not yours. Even if you know you owe the debt, the collections agencies must prove that you owe the debt. Failure to provide these important details means the agency is not legally entitled to collect said debt. They should be able to answer the following questions:

  • Is the amount shown the actual amount owed?
  • Has there been any interest or other charges added, and are the interest and the other charges added legally?
  • Where is the original contract stating the details of the terms of the debt?

 

Validating a Debt with a Collections Agency

It is your lawful right to request that the Collections Agency validate a debt they are trying to collect on. Once you have requested a debt validation, by law, the Collections Agency must stop collection attempts. If they continue to do so, the debtor can sue. A debtor can dispute all (or a portion) of said debt, and it all begins with a collection notice.

Once a collection notice has been received, the debtor has 30 days to respond. Failure to respond verifies said debt automatically. If a notice to verify said debt is sent within 30 days of the initial collection attempt, than the Agency must stop collection attempts until the required information verifying the debt is provided.

 

Debt Collector Harassment

There is no time requirement within which a Collections Agency needs to validate the debt. They could take a week, a month, a year, or longer; but during that time period, collections must cease.

The first step a CA has to take when attempting to collect on a debt is to verify that you indeed do owe said debt(s). Unfortunately, there are only two things that a CA needs to provide:

  • The name of the creditor to whom the debt is owed to.
  • The amount of the debt owed.

Collection Agency Harassment

One should always request a Collections Agency to verify the debt, as well as request the address to the Original Creditor to whom the debt is owed to. Once again, all communications should be in writing, sent Certified Mail, Return Receipt Requested via the USPS.

Please note that there are certain instances when verifying a debt could cause more damage than intended. For instance, it makes no sense to request a verification on a debt that is at or near the Statute of Limitation or that is at or near the reporting clock. Doing so only increases the chance that Collections takes legal action while they still can.

 

What Happens if a Collections Agency Sues you?

DON’T PANIC! You MUST answer the lawsuit! Failure to do so (failure to show) results in an automatic default judgment against you! This judgement wrecks your score and it can literally take years for it to go away. See “Judgment” in the terms listed below for additional information. I would highly suggest you retain the services of a competent lawyer at this point.

When do debt collectors sue a debtor?

Typically one gets sued over a very high amount debt, and as a last resort when the SOL is nearing on said debt. I liken it to the “Hail Mary” play in football. The CAs know that time is running out and there’s just enough time left to get one last play in. What is the “Hail Mary”? It’s a trick play. Just like it is in football, so it is in collecting. I typically find that the CAs DON’T have the required documentation to prove the debt belongs to the debtor. So much so that before entering the court room, the CAs attempt to get the debtor to pay something to “avoid the unpleasantries of a court battle.” However when asked for proof of the original contract, or to provide the debtors signature, etc. they’re all thumbs! It’s their last scare tactic.

Should you ever default on credit card debt?

What happens if you default on your debt to credit card companies?

Default on credit card debt consequences can vary dramatically. In case you’re unclear on what defaulting on a credit card means, let me explain what this means. After you’ve failed to make a payment on your credit card for 180 days, your credit card issuer assumes you’re probably never going to pay them. At this point, the credit card issuer will close your credit card, write off what you owe as bad debt and sell your account to a collections agency. Read some more about what it means to default on a credit card.

The banks will go nuts for the first 180 days. When they call, tell them that they have the wrong number. Or change your number if possible. You can also screen your calls and then call the company’s general number and complain that they’re leaving messages for someone who had the number before you. Collections are aggressive, but they’re not the sharpest knives in the drawer. Don’t feel bad about lying to them because they will lie to you. If they get really nasty, take them to small claims under the FDCPA. You can win up to $1,500 if they violate the FDCPA.

 

Will banks sue you for defaulting on credit cards?

No, you won’t be sued. And even if they do, I’ll tell you how to handle it later. They rarely sue because that involves a few thousand to a lawyer and there’s an old saying in the biz, “don’t throw good money after bad.” Getting a judgment is easy. Collecting a judgment is an expensive pain in the balls. Anyone they send after you to collect judgment will probably want 50% and, after the lawyer’s costs and everything, they usually end up further in the hole. Which is why they rarely sue.

 

What happens after you default on credit card debt?

OK, you’ve defaulted. Do not worry about your credit score. Yes, it will go down, but that can be fixed. I’ll get to that later. You don’t need it unless you’re buying a house or car or something big. You don’t want to open another credit card, that’s for sure, so it’s not a big deal if it takes a hit.

After 180 days, GAAP requires banks to take bad debt off the books. This is a charge off. Statistically, when debt is over 180 days, the recovery rates are somewhere below 1%. It’s dead, and then your debt gets shuffled off to collection agencies. Bad debt gets traded around in portfolios. People buy it for pennies on the dollar (it’s worth less the older it gets) and the person who buys your $6k debt might only have $200 or $300 into it. If they can’t collect, they then sell it to someone else.

 

Default on credit card debt consequences

This is where you can cut a deal. I’ve seen some go as low as 10% to pay off a debt. Usually, you’re looking at 40%-50% or so. This is where your savings come in. Go to whoever holds your $6k card and offer them $2k to settle it. If they only have a few hundred into buying it, that’s a good deal for them. That’s a profit and they know they’re not going to get the whole thing. They’re used to these deals and 95% of the stuff they’re chasing has no money in it at all.

 

What happens to credit card debt when you settle with bank after defaulting on credit card debt?

When you settle, you can also include a provision requiring them to remove all negative credit information. Most will agree because it costs them nothing, means nothing to them, and – hey – they get paid if they agree.

What you want is Nolo’s book on bankruptcy and credit repair. Nolo is good and they will have all the correct letters and forms for you. Use it and be sure to follow up with the credit reporting agencies.

Do this and you’ll get out of debt in 12-18 months and have a perfect credit score. It’ll cost you $3k-$5k total. You will then have to begin the long process of rebuilding your credit score and coming back from defaulting on credit card debt.

 

Should you feel morally bad if you default on credit card debt?

Morally? Look, you guys have paid so much interest that you’ve already paid the bank back. Get your statements and add it up. You’ve probably repaid the debt already, so don’t worry too much about their bottom line. Further, even if they take a loss, who cares? Banks don’t pay any taxes and get to borrow at 0% from the fed, so they’re making huge profits at taxpayer expense. Do not feel bad for the banks. They get every possible advantage while holding your face down in the mud. Default is legal and this is what happens when you default. Default might be your best option.

What happens if a bank sues you after you default on credit card debt?

Oh, forgot to cover what happens if they sue. Like I said, this probably won’t happen. But if they sue and win, the judgment rate will be lower than your usual rate! Most courts have a low interest rate for judgments, often 5% to 10%, simple interest. The freakin’ court will give you a better interest rate than the banks do! So the absolute worst case scenario is that you will end up paying less than you are today!

Also, courts everywhere are backed up like crazy. If they do file suit, file a reply and the trial date will probably be 12-36 months out. Yeah, really. So that would be 12-36 months where you could save up and make offers to settle. They will settle. Further, the court will have some kind of mediation system where you can go in and bargain. So, really, do not worry about being sued. Even if that happens, you will be better off than you are today.

Seriously, default is a no-lose scenario. No matter what happens, you’ll be better off. More people should do this.

The Looming Consumer Debt Crisis: Can You Avoid Drowning?

consumer-debt

Economist John Maynard Keynes caused a bit of a revolution in economic principles back in the 1930s, when he noted that a robust economy is built not so much upon the actions of investors, but rather upon the actions of consumers – in short, that the health of an economy is based upon consumers having enough money to actually purchase things.

 

The Looming Consumer Debt Crisis: Can You Avoid Drowning?

This is reflected by the economies of many countries. Consumers and consumer debt are a driving force of their economies.  He felt that government intervention in a free market was essential if extreme cycles of prosperity and depression were to be avoided. His theories are once again being discussed among economists who align themselves either with the free market or the call for a more tightly regulated economy.

 

Debt and the 2008 Economic Crisis

Following the most recent economic crisis, consumer spending is rising sharply, but in a way that should point to an essential element of Keynes’ principles: that consumption needs to be primarily funded by disposable income rather than debt. Consumer debt in the UK is a perennial cause for concern amongst economists, policymakers and debt charities alike, as well as being a growing problem in millions of UK households. As consumer debt continues to rise dramatically, we are left to ask ourselves, is the British economy being kept afloat by consumer debt, or being drowned by it?

Many observers lean towards the latter view, and consumers who are struggling with their own debt crises are searching frantically for a lifeboat. However, if you’re having a hard time keeping up with multiple credit card payments, debt consolidation may be a strategy worth considering. Different credit counseling agencies may offer some debt relief. Their debt consolidation programs, called debt management plans, can help you get back on track — but they can also be unnecessary and even detrimental when done through a poorly run organization or for the wrong reasons.

 

Red flags: Consumption outweighs productivity

In a healthy economy, consumer spending rises in reasonably similar proportion to manufacturing output. In the UK, however, manufacturing output is falling, even as consumer consumption fueled by debt is increasing to the point where it represents an average 145% of income. While much of this debt is in the form of mortgages, the portion represented by credit card debt continues to rise as people use credit cards not only to fund purchases but to pay for recurring expenses such as bills and even groceries.
In a March 2015 report by PricewaterhouseCoopers, it was projected that total non-mortgage debt in the UK, which includes personal loans, credit cards, and overdrafts, would rise to £10,000 per household by the end of 2016. Given the above-projected increase in credit card debt in particular since that report was published, £10,000 would seem to actually be an overly conservative figure.

It’s a straightforward and time-proven equation: When borrowing costs more, people borrow less. Yet the reality is more complicated. Crank up rates too fast and overstretched borrowers could struggle with the higher loan payments that go along with increased rates.

 

Expected increases in interest rates will compound the problem

The American Fed has announced that it is raising interest rates, albeit by only one quarter of a percent, but that it expects to implement modest incremental increases in the not-too-distant future. The general assumption is that the UK will follow suit with similar modest increases in order to try to normalise the economy here. Just to give an idea of what even modest increases will entail, a 30-year fixed mortgage on a £100,000 house would increase by roughly £42, should the interest rate increase from 4.5% to 5%.

Given the fact that interest rates charged on credit card accounts are significantly higher than those charged on mortgage loans, the percentage of increase on those non-mortgage debts would obviously be even more significant. Most consumers are not getting too concerned at this point. That said, Peer-to-peer (P2P) lender Zopa reported in early 2015 that the number of Brits consolidating credit card debts using long-term loans through Zopa had increased by 57 per cent year on year, an indication that there is some pressure being felt by consumers. Their concern is likely to be elevated significantly as the larger monthly bills, driven by increases in interest rates, start rolling in. In short, changes in interest rates could have profound effects for families who mortgages and other consumer debt.

 

Debt Consolidation Tools

While these debt consolidation loans can be helpful in working toward reducing your indebtedness, as well as reducing the total amount of your monthly payments, you need to both do your homework in determining whether debt consolidation will benefit you, and strengthen your resolve, so that you don’t eliminate your monthly savings by going even deeper into debt with the ensuing surplus in your budget. It could well make the difference between staying afloat or trying to swim with an anchor chained to your leg.

 

Consolidating Credit Card Debt

Consolidating your credit card debt can mean a few different things to consumers with debt. Most of the time it essentially means combining all of your debt into a single loan or paying your creditors through a single monthly payment. There are many different debt consolidation services that will set this up. It is important to read about different methods, because there are many different ways and terms to consolidate debt.

For example. you can consolidate credit  card s by taking out a consolidation loan or using a debt consolidation or management company. Debt consolidation is a form of debt refinancing that entails taking out one loan to pay off many others. The way you get out of debt is by changing your habits. You need to commit to getting on a written game plan and sticking to it. Get an extra job and start paying off the debt. Live on less than you make. It is not rocket science, but it is emotional

 

Important Facts About Debt Consolidation

Remember, that by consolidating all of your debt, at the end of the say you are still paying 100 percent of your debt obligations to creditors. This is quite a bit different from discharging them in a bankruptcy or settling the debt.When you file bankruptcy or settle with creditors, you are often paying a much reduced amount.

In addition, after a debt consolidation, your credit report can take a negative hit if your monthly payments are less than what you would normally pay. Also, while consolidation is not factored into a credit score, some creditors notate that you’re paying through a third party, which can be a red flag to a lender or anyone else looking at the report.

Good Debt Versus Bad Debt or How Should Young People Should Use Credit?

Good Debt vs Bad Debt - How should young people use credit?

It’s possible to live completely debt-free, but it’s not necessarily good advice for the average young person. Very few people have or can earn enough money to pay cash for life’s most important purchases: a home, a car or an education. The most important consideration when buying anything on credit or taking out a loan is whether the debt incurred is good debt or bad debt.

 Good Debt Versus Bad Debt or How Should Young People Should Use Credit?

Good debt is seen as an investment, you are buying an asset that will grow in value or maybe generate long-term income. This means that the debt will be paid off and you will profit by owning an income producing asset.

Getting a Mortgage Can be Good Debt

Obtaining a mortgage to buy a home is usually considered good debt; firstly you need somewhere to live so instead of paying rent you are paying down the debt owed against the home.  The ideal situation would be that your also home increases in market value over time, so not only are you reducing the amount owed each month by making the payments the property is also increasing in value.  Mortgages also generally have lower interest rates than other debt as the lender holds the asset as security.

 

Student Loans Are Good Debt

Taking out student loans to pay for a college education is also deemed an example of good debt as student loans typically also have a low interest rate compared to other types of debt and a college education in theory increases your value as an employee and raises your potential future income. In my mind there are many caveats to this and a lot of thought has to go into the future earning potential in the field you are studying vs the cost of education vs is it truly a field you want to spend your working life and how transferable is the education.  I could talk about this subject in a lot more depth and how a lack of planning before taking out a student loan is a common problem, but this is a topic for another article.

 

An Auto Loan May Be Good Debt

An auto loan is another example perceived as good debt and it can be categorised so if the vehicle is essential to doing business and earning and income but vehicles are a depreciating asset so it is not in the buyer’s best interest to pay interest on a loan against an asset that is declining in value if it can be avoided.

Loans are not inherently bad, but almost everyone will tell you they are. If you can afford this loan and it will lower you gas expense and also be less than you would be saving and finally having a low interest rate I really see no reason not to take the loan out. You can also make additional payments to the loan and pay it off faster minimizing your interest since you said you will be paying less than you were anticipating saving as well as spending ~$100 less a month in gas. Assuming a 5 year loan and estimating paying $200 extra per month you could significantly reduce the amount of interest you pay since you could turn that 5 year loan into just under a 3 year loan (34 Months) and only paying about $433 in actual interest on the loan which is essentially nothing.

 

What is Bad Debt?

Bad debt is debt incurred to purchase things that have no value or quickly lose their value.  Bad debt is also debt that usually carries a high interest rate, such as credit card debt. The simple rule to avoid bad debt is if you can’t afford it, don’t buy it.

Bad debt includes debt you’ve taken on for things you don’t need and can’t afford and one of the worst forms of debt but often the easiest to come by is credit-card debt, since it usually carries high interest rates and relatively low monthly payments meaning the temptation is to stay current by making the minimum payments and never paying down the debt.

 

Payday Loans are Bad Debt

Payday loans/Cash advance loans are the worst kind of debt. Basically the borrower decides the amount he wants to borrow, a fee is then added to that amount and the borrower has until his next payday to pay back the loan amount, plus the original fee and any interest incurred over that period of time. Interest rates for payday loans are very deceptive and can be very misleading as the time period of the loans are so short it is only truly clear what is being charged if the interest and fees are actually annualised the same as other lending product so they can easily be compared, pay day loan annualised rates can be as high as 300 percent.  If you fail to pay back the amount by your next payday, the loan basically rolls over and you incur additional fees and more interest on top of the fees and interest you have already been charged.   It’s a slippery slop and hard to get out of once you are in the cycle.

 

The most effective ways to stay out of debt.

Practically speaking it’s almost impossible for most of us to live debt-free, we can’t pay cash for our home, our cars or our children’s college educations. But easy access to credit means too many young people let debt become unmanageable.

Ideally, your total monthly long-term debt payments, including your mortgage, car loans and credit cards, should not exceed 36% of your gross monthly income. This is one metric mortgage lenders and bankers call TDS (total debt service ratio) and is always consider when assessing the risk of a potential borrower.

Of course, avoiding debt at any cost is not smart either if it means depleting your cash reserves completely. The challenge is learning how to judge which debt makes sense and which does not and then wisely managing the money you do borrow. A student card is a good place to start if you’re in school. I suggest Capital One Journey (which you can later upgrade to Quicksilver) or Discover IT. Both have low requirements.

Otherwise, without credit history, you won’t be approved for much. You may need a secured card, which means you put a deposit down which is your credit limit, and after a few months of responsible use you can be upgraded to an unsecured card and get your money back.

 

When to take on good debt?

Taking on sensible debt can include financing items you absolutely need but can’t afford to pay for up front without wiping out cash reserves or liquidating all your investments. In cases where debt makes sense, only take loans for which you can easily afford the monthly payments. Consider the following when taking on sensible debt:

  • What is the interest rate/terms on other loans?
  • Do you have a full emergency fund?
  • What other debts do you have?
  • Have you taken advantage of employer 401k match, if any?

So based on the above it may seem logical to use every dollar you have available to keep you debt down as low as possible, even on good debt as it will reduce the interest payments and mean you can pay off more principle, but it’s not always the best move. You need to take into consideration your need for cash reserves for emergency expenses and also what your investments are earning.  If you deplete your cash reserves you become reliant on short term, easily available credit to meet unforeseen emergency expenses and the short term easily available credit is usually the highest interest rates.

Staying out of Debt and Creating a Budget

The key is to first create and accurate and realistic budget. Creating a budget you can follow will reduce stress, increase savings and mean you are not reliant on high interest credit for unexpected bills.

Make budgeting easy and part of the family daily routine. Keeping track of expenses, think about how to save money and plan what to do with your savings is all part of gaining control over your financial situation and are life lessons your children will learn by how the family deals with money and aren’t skills that are taught in school but ones that will stay with them for the rest of their lives and skills they learn by being involved in the family budget and decisions on how to spend money.

The best way to understand how to budget is to understand what you are spending your money on. There are no short cuts to becoming financial accountable for your lifestyle choices so save all your receipts and add them all up at the end of the week. This now matches your budget with your lifestyle. It doesn’t matter what your lifestyle is as long as you create a budget that fits with your income and allows you achieve your financial goals.

The goal of any good budget is to figure out ways to maintain your current lifestyle by spending less money. This allows you to enjoy the things that give you pleasure in life but ensures you aren’t using credit to fund them.

Some expenses are easier to reduce than others. Things like car loans, rent or mortgage payments and credit card payments all have set payment plans making them hard to change. The goal is to focus your attention on your discretionary expenses, the ones that you make a choice on every day and understand how those choices effect you long term financial goals.

 

Monitoring and maintain your credit score.

This is an important part of your overall financial plan. Understanding how to read your credit report and maintain a good credit score will allow you to access good credit at the lowest rates possible meaning less overall cost to acquire appreciating assets but also means even ‘bad credit’ is available at favorable rates in the case of emergencies ensuring it is paid of sooner and before it becomes unmanageable.  Far too many people experience difficulties and sometimes embarrassment because of having bad credit and this could be avoided through proper monitoring of your credit report. See more information about learning what goes into your FICO credit score.

 

Establishing a Good Credit History

Establishing a good credit history is important, even if you aren’t planning any large future loans/purchases. Car insurance companies use your credit score to determine your rate, and employers use your credit score to determine your trustworthiness as an employee. As mentioned, fraud protection gained by making purchases via credit card has significant value, as some the sometimes available extended warranty that some cards offer.

If you prefer not to use credit cards at all, it’s still a good idea to open a credit card account (with one that doesn’t charge an annual fee) and use it once per year for a minimal purchase, just to keep it active.

As an aside, it’s very possible that you will decide to make a purchase in the future that will benefit from your decision to get a credit card now. Personally, I feel it’s important to leave as many future options open, rather than delude yourself into thinking that what you feel/think/believe today will be what you feel/think/believe at some point in the distant future.

 

Choosing Good Credit Cards

Check out American Express Blue Cash (1/2/3% cash back, no fee) or the Capital One Quicksilver Cash Back (1.5% everywhere, no fee).

Some specialty cards are also worth it, I’d say – I’ve got a Target card that gets me 5% savings on everything there, with no fee. Since I do plenty of shopping at Target, that’s worthwhile for me.

For other paid cards, you can often look up the break-even point. (For example, AmEx has an upgraded Blue Cash card that’s 2/4/6% cash back, but costs $75 per year. I think you break even if you spend $6k or more per year on groceries.)

Just set up an auto-pay in full for whatever card you choose, and you’re essentially always saving a percentage point or two off of everything you buy with it. If you have good credit, no plans for mortgage/car payment etc., you can use your credit worthiness to get a lot of free stuff. Free hotel stays, free flights, gifs cards & money back. I’ve personally flew to Vegas twice for free, have gotten multiple Marriott hotel stays for free, and still have plenty more travel points left to spend on JetBlue, Southwest, and Marriott.

Chase Sapphire Preferred, and Chase Southwest Premier are two popular cards that always get brought up in the credit card forums. You have to do some digging though and find the best offers. A good sapphire preferred offer would be 40k or more points ($400 cash value) and only get the southwest card if it offers 50k southwest miles (good for two round trip flights at normal fares).

Gotta be careful though. The cards have minimum spend requirements (must spend $1000 in first three months to get bonus, etc.) so you need to make sure you can meet the requirement. If you fail to meet the spend requirement you won’t get the bonus.