1. Consumer Credit Counselling

Consumer credit counselling is one of the best resources for debt related to credit card. Most credit counselling agencies are non-profit organizations to provide free helps to consumers, they are specialized in credit card debt. After you sign up for a credit counselling service, a counsellor will be assigned to analyze your financial information including your expenses, total incomes, general financial situation and total credit card amount owed. By assessing your finance situation, the credit counsellor will propose the best debt relief solution that fits your current financial situation.  Most often, it will involve a debt management plan (DMP) to help you to clear what you owe. Generally, the consultation and education portion of credit counselling services are free of charge; whereas, DMP will involve a reasonable monthly fee, normally less that $50/month. Enrolling into a debt management plan is optional, but if you have un-managed debts, a DMP is a good option to help you get rid of it in a manageable way.

2. Debt Negotiation & Settlement

This method works well for larger debt such as multiple credit card balances, personal loans, repossessions & etc. The debt negotiation company will help you to talk with your lenders and try to get them to agree on a settlement amount. A good debt negotiation company may get your debt settled at 40% of the total amount you owed. One big drawback with this method is the fee may get as high as 15% to 20% of the amount you owe.  If you like to resolve your debt problem with a negotiated settlement amount and you want to get help from a professional to perform the negotiation on your behalf, you better search around to look from different resources and find the best deal with the lowest fee possible.

3. Debt Consolidation Company

If you have an averagely good credit score, then consolidate all your debts into a low-interest rate consolidation loan helps you to manage them more easily while saving you in term of interest. You can find a consolidation loan yourself or getting help from a debt consolidation company. Many of those companies do offer services other than debt consolidation service; they may integrate with debt negotiation and settlement to provide all-in-one finance package for their consumers.

Summary

There are many ways to get your debt problem resolved. The common three types of helps that you may approach are consumer credit counselling, debt negotiation & settlement and debt consolidation.

1. Medical Debt Negotiation

You may get drowning into medical debt if you do not have emergency fund to handle a sudden need of cash for major medical expenses. The debt can be a great burden if you don’t find a solution to resolve it. Medical providers normally are often open to working out a payment plans for their patients if the bill is beyond their financial capability. So, talk to your medical provider to find a potential solution to the medical debt. In addition, many hospitals have government funds to help patients who can’t afford in their medical care, and there are independent nonprofits that can provide financial assistance if you need helps.

2. Credit Card Debt Consolidation

Credit card debt carries the highest interest rate. It can run as high as 33% for cardholders who late in payment or have low credit score. If you owe credit card debt, it may easily hit you at overwhelming level if you do not handle it properly. The best way to avoid the high interest rate of credit card is by transferring it to a lower interest-rate loan through a process called debt consolidation. Search around to find a consolidation loan that best fit you and consolidate all your credit card debts into this loan. Today, credit crunch has led to the lowest interest rate ever. It is a good opportunity to consolidate the high interest rate credit card debts into a low interest-rate loan.

3. Mortgage Refinancing Through “Hope for Homeowners” Program

If your mortgage payment is getting hard to afford, then you should take some actions to resolve before you lose your home due to default payment. In order to recover from credit crunch situation, the government has introduced programs that encourage lenders to do mortgage refinancing for their clients if the clients are at risk of losing their homes. According to the record, there are more than 200 lenders sign up with the government-run program called “Hope for Homeowners” since it introduction and more lenders are expected to join the program. You can contact your lender to see whether it is participating into the program. If it is, then you could make a request to refinancing your mortgage under the program which has much lower interest rate to reduce your debt burden.

4. Credit Card Balance Transfer

You credit cards may have different interest rate. If clearing off the credit card balances are not possible at the moment; then transferring the balances to the credit cards with lower interest rate will be a good option to save some money. But, you must be careful about the balance transfer terms as most of the low interest rate offered in balance transfer has a due date. After the period, the interest rate will either go back to the same level or some may even higher than before. Therefore, you should carefully read the fine print of the terms and conditions to ensure the interest rate after the promotion period don’t hurt you.

Here’s what you need to know and watch out for when using a credit card:

1. Elimination of grace periods

Most people don’t aware the different between the credit card payment due date and the grace period. When we talk about payment due date, it is the date you need to make payment in order to avoid late payment fee. Whereas, the grace period is the time during which you will not be charged for the interest. The new credit card act requires the banks to allow at least 21 days for consumers to pay their bill. However, a grace period is not a compulsory term under the new act. The banks may get rid of this benefit and you need to start paying the interest once you make a purchase with your credit card. In other means, you will pay more interest on credit card usage compares to old day.

2. New kind of fees

As the new act prohibits the over-limit fees, which will cut down banks’ profit significantly. In order to continue their business and mark up the lost of revenue, banks may introduce new kind of fees. Such fees may include fees for rewards programs, and you may need to pay a service charge in order to review your balance.

In the effort of promoting credit cards and due to market competition, banks have eliminated annually fees for most of their cards. The annual fees may be re-activated to cover some of their revenue losses in over-limit fees.

In order to avoid and protect yourself against unpleasant surprises, you should always examine your credit card statements to see if there are new fees being introduced for your cards. You may also want to reduce the number of credit cards and limit the cards to one or two for convenient usage.

3. Higher interest rates

Prior to the new credit card act, banks can charge their card holders with higher interest rate if their credit rating decrease or they make late payments. Once the new act being in force, the credit card companies do not have the power to hike the rate due to any reason. This is to protect the consumers from the need to pay higher interest rate when they have financial hardship to repay their credit card balances and avoid their debt to snowball faster with higher interest rate. In other means, the risk has been transferred to the issuers. They have no choice, but introduce the credit card with higher interest rates across the board. Therefore, you will start to see most credit card rates will go back to the level of 80s when rates are somewhere between 19% to 20% range for most consumers.

Summary

The new credit card act is approved with the purpose of protecting the consumers. However, it may create more credit card traps that you need to watch out for.

The credit score is a number that measures your credit worthiness, it determines whether or not you will be able to get a new credit card, a mortgage to buy your dream house, or in many cases, whether you will be able to rent an apartment or sometimes it becomes a determination factor on whether you can get a job. So, the number has a lot of bearing in your life, you should take your own responsibility to make sure that your score is where it should be. At any time, once you realize you have bad score, you should take immediate action to restore it.

How good is a good credit score? The average American has a number around 680, which is considered averagely good. However, you should try to maintain it at 720 and above, a score that enables you to enjoy better options when you need for a credit. If you found your rating is below 620, your options to get loans are very limited; the situation gets worse if it is below 600. However, don’t despair because of the bad rating; instead, you should try to restore it and there are plenty of ways to do it, what is needed is your action to get started to work toward restoring a good credit.

Lenders heavily factor your credit rating into their approval decision for a loan application. The higher score you have, the easier it is for you to get credit with the desirable terms that can save you a significant amount on interest. For example, the monthly payment for a 30-year $200,000 mortgage could vary based on your credit score. If you have a score below average, you may only get a home loan with an interest rate at 10%, so your monthly payment would be $1755; but if you have good rating, you may find a better deal with interest rate at 7.5%, making your monthly payment to be $1398. You may be offered with the best interest rate, as low as 5% by the lenders if they find you have excellent credit score, making your monthly payment to be $1074. Do see a high score can mean big savings? You can save thousands annually by qualifying for low interest rate mortgage and loans. That’s why you should restore a good credit.

Summary

The credit score has a lot of bearing in your life. Hence, if you have made mistakes that damage your credit score, you should always take immediate action to restore it.

In order to have a better picture on the true cost that you need to spend to clear your credit card debt by just paying the minimum amount of the monthly balance, let’s use a case scenario with a few assumptions:

Case Scenario:

John Hudson has 3 credit cards with balances. The amounts & interest rate for these three credit cards are as below:

1. Card 1: $5,000 balance with 12% interest rate.
2. Card 2: $3,500 balance with 18% interest rate.
3. Card 3: $2,000 balance with 16% interest rate.

John is paying the minimum amount on each credit card. For ease of calculation, we assume John did not add more debt into the existing credit card, but keep paying only the minimum amount due each month to meet the 5% requirement in the credit card contract.

One day, he has decided to calculate the cost to clear his credit card debt and he was surprised with the findings.

The True Cost:

By paying just the minimum, which 5% on his credit card balances, the interest and the time required to clear each credit card is as below:

1. Card 1: $5000 balance with 12% interest rate
John will take 8.5 (102 months) years to clear the debt and paying a total of $1224.27 on interest.

2. Card 2: $3500 balance with 18% interest rate
John will take 8.75 years (105 months) to clear the debt and paying a total of $1453.88 on interest.

3. Card 3: $2000 balance with 16% interest rate
John will take 7.17 years (86 months) to clear the debt and paying a total of $688.71 on interest.

The calculation results show that John need 7 to 8 years before he can become debt free and he needs to spend $3366.86 (32% of total debts) for his $10,500 debt if he is paying just the minimum amount to meet the credit card contract’s requirement.

This is just simple case scenario. In the real life, most people tend to pay the minimum while continuing using their credit cards that make more debts into the existing balances. Hence, the true of costs in terms of dollar and time will be much higher than this simple calculation.

Summary

It is very costly by just paying the minimum amount on your credit card debt. You need to pay much more in interest (over 30% of the total debt as the above example) and need a long time (7 to 8 years in example above) to achieve a debt free life.

Here a few tips that can help you to eliminate debt:

1. Consolidate Debt To Lower Interest Rate Loan

You can take advantage of debt consolidation benefits that enable you manage it effectively while saving some money in term of interest. If you have averagely good credit score, the recent government action that involves the interest rate debt may benefit you. The ever lowest interest rates are now available in the finance market. It’s a good time for you to consolidate your multiple debts into a low interest-rate consolidation loan to enjoy the benefits.

2. Pay At Fixed Payment Above The Minimum Amount To Get Rid of Debt Faster

Most people tend to pay just the minimum amount statement in their credit card statement. This payment method will take forever to clear the credit card balances. Unless you are really can’t afford to pay more than the minimum amount, you should always pay more because it will help you to be debt free faster. For example, if you have $10,000 credit card debt with interest rate at 10%, if you pay just pay the minimum amount based on 5% requirement every month you receive your credit card statement, it will take you 8 years to pay off the balance, but if you make a fixed payment, say $500 a month constantly, you can be debt free in 20 months. Can you see by paying at fixed amount above the minimum payment requirement, you can pay it off within 2 years.

3. Pay More On High Interest-Rate Debt First

You probably have multiple credit cards with different interest rate and each one carries a balance, which debt to be paid first when you have extra money? Basically you can choose to pay more on the credit card with smallest balance first or focus on paying highest interest-rate debt with the extra dollars you have. But, if you want to get rid of it fastest and paying the least interest, then focusing on paying high interest-rate debt is the way to go. 

4. Eliminate Optional Expenses

You can’t get rid of debt totally if you keep adding more into the exiting balances. Therefore, it is important for you keep the expenses within your budget. If you list down your monthly expenses and carefully review them, you should find some of items are optional, which can be eliminated to save money. The money you have saved can be used to pay toward your debt so that you can get rid of it faster.

Summary

Bad debt can become a financial burden if you do not manage it properly. If you have created it, it is important to get rid of it as soon as possible so that it won’t become a road block to your wealth creation.

There is no right or wrong answer; it depends on what you want. Most debt relief guides will go for the approach of paying the highest interest-rate debt first. In fact, this is a better approach because it will save more money and helps you to get rid of it faster. But, psychologically it is a more stressful approach as you will feel that there is no movement in reducing your debt during the process of paying it because all debts still remain. On the other hand, if you choose to pay off debt with smallest amount first, then psychologically you will feel that you are getting rid of them one by one. So, whether you should pay more toward smallest amount debt or focus on paying the highest interest-rate debt depends on your choice. However, let’s explore each approach by example so that you have better picture on which approach suit you better.

However, most of these consumers who choose to go for bankruptcy filing may rescue themselves from debt without the need to go for this worst option. Unfortunately, they are making decision without knowing that there might be other better options which may save them from overwhelming debt problem without a bankruptcy.

Bankruptcy is not advisable to be the preferred solution if you have a better option. The consequences of this option does not stop once you complete the filing, instead, it will follow you for years. A bankruptcy status will stay on your credit report for a minimum of seven years. During this period, you may find it difficult or almost impossible to obtain credit. Therefore, it should always be your last option when you can’t find other alternative to get your out of debt.

Sometimes, you may feel you can’t find a solution to your debt problem, but in actual fact, this may not be the case. Since, you are in a desperate condition, you may not have patient to fully explore the potential solutions for your debt problem. If you are at this situation, then getting helps from professional such as consumer credit counseling service is the approach you should go for. A counselor will be assigned to analyze your debt problem and get to understand the details of your financial situation before he proposes solutions that may resolve your debt issue.

Statistics found that most cases where consumers choose to file a bankruptcy as their debt relief option are actually have a better solution such as enrolling into a debt management program proposed by credit counseling service. Therefore, you should always explore the available options or at least consult a consumer credit counseling service before you make your decision to choose bankruptcy as the only option. The debt relief solution proposed by the credit counseling service normally will involve a debt management program where the counselor will work out with your creditors and come to an agreement to allow you to pay your debt according to the schedule stated in the debt management plan. It is your call to decide whether you want to enroll into the debt management program; however, it might be a better option to enroll into the plan compares to the option of filing a bankruptcy and get your debt pay off according to the schedule in the plan.

The bottom line is never go for a bankruptcy filing without analyzing for alternative options to relief you from debt problem. Try to approach for a consumer credit counseling to explore other potential options before bankruptcy becomes your ultimate solution for debt relief.

Although it may be hard for you to find more money from part-time job or other second income source to get rid of your debt since the job opportunities are limited, but you can still manage your finance so that you can outlast the recession without any financial hardship. The important thing you must do in this bad economy situation is don’t ever make your debt worse if you already created it. You should live in budget and spend according to a budget plan that has taken into consideration of the basic expenses needs & other necessities with are planned according to your financial affordability.

Having a budget plan is important in your own financial management, it helps you to control you spending so that you won’t overspend your money and create more debt that can make your existing debt situation worse. If you have not spent according to a budget plan and you are in debt, then it is the time to have one so that you can take your under control. You may find it hard to balance the expenses with your income especially if it is your first time to live with a budget plan. Most probably a problem that you may encounter is your expenses needs are more than your income. So, now you know why you are in debt. You have two options to solve the problem, first option is to find more money to cater for your expenses needs, and the second option is cut down your expenses to meet your financial affordability. Seeing the today’s bad economy situation, the second option is more visible.

Finding ways to cut down your expenses are a must-to-do task if you want to generate a budget plan that works without make your debt worse. In fact, it is not difficult to cut expenses. If you list down all your monthly expenses, you will surprise that among the items in the list, many are optional which you can cut to save money. If you have eliminated the optional expenses until your money is spent only on the basic necessity and debt repayment, but you still find that you are unable to come out with a budget plan that can balance your income with expenses, then you might need to get help from a professional in financial planning. If the shortage is due to overwhelming debt problem, then getting help from a credit counseling service is one of options that can help you to identify the best solution on your debt problem.

The bottom line is, money is tight for most people especially in today’s bad economy situation, you need to take some actions such as a budget plan to make sure you spend within your financial affordability and to avoid making your debt worse.

1. Refinancing To Reduce Monthly Payment

If your current monthly mortgage payment is beyond you financial affordability, then refinancing the mortgage can help to reduce it so that the monthly payment won’t become your debt burden. What you can do is finding a mortgage that has lower interest rate then your current one and chooses a longer repayment period to lower the amount for monthly repayment. In fact, you are prolonging your existing mortgage if you choose a longer repayment period to make the monthly payment within your financial affordability, be aware that by doing so you are increasing the total interest pay for the new mortgage. However, this option helps to reduce your monthly repayment and it will be a good option if the existing mortgage repayment is too high for you.

2. Refinancing To Improve Credit Ratings

It is very important to maintain your credit score at a good level in order to enjoy the best deal on the future credit application. If you have low credit score, it is important for you to repair it and restore it back to the good level. However, if you are thinking of refinancing a mortgage for the purpose of improving your credit ratings, then it might not always worth to do so because low credit ratings make a mortgage refinancing expensive. Unless you are willing to pay the extra costs to refinance a mortgage just to improve your credit ratings, the option definitely not the best scheme. There are better options for credit repairing, the simplest way to increase your credit score is by paying your monthly payments on time. If you consistently make your monthly payment on time for several months, you will see your credit score improve without the need of mortgage refinancing.

3. Cash-out-Refinancing By Liquidating Home Equity

Home equity is the value of your home after deducting the mortgage. For example, your home is worth $200,000 and you have a mortgage of $80,000, then your home equity is $120,000. Generally, you can’t use the total home equity but you can do a cash-out-refinancing to liquidate part of it, normally up to 90% for cash expenses. If you are facing a debt problem and you have home equity to be liquidated, then it will be a good option to consolidate the bad debt with a low interest-rate’s home equity loan. However, you might put your home at risk just in case you default the loan. So, remember to make the loan repayment on time and don’t make the mistake of building up your debt again.

Summary

You may think of doing a mortgage refinancing due to any reason, but be sure you consider it carefully to ensure your decision to refinance a mortgage is the best option for your need.