Month: November 2007
Debt has in many ways become “The American Way” … it has become so commonplace that meeting someone debt-free is often more surprising than meeting someone with substantial debts. Once someone finds themselves in the debt trap, the question becomes ‘now what?’ Several potential options are often thrown around: using a credit counseling agency to administer a DMP (debt management program) to manage the unsecured debts, arranging lower rates/ payments directly with your creditors, bankruptcy, and debt settlement/ negotiation. If you watch much TV late at night, you are aware that advertisements for debt settlement abound – it sure sounds good – “cut your debts in half,” “eliminate your debts in ½ the time,” “drastically reduce your monthly payments,” and other amazing claims. What is the truth? How does it really work? Let’s explore the issues and realities of debt settlement as a potential option in managing one’s debts …
What is it? Simply put, debt settlement is attempting to negotiate [‘settle’] a debt with a creditor in an effort to get them to take less than the amount owed. So what is the rub? Obviously, a creditor has no reason to settle on a debt unless there is evidence that you can’t pay it back. So, if you anticipate calling your creditors when you’re current on your accounts expecting to negotiate down the balances, don’t hold your breath. The account will normally need to be past due several months (typically 6 months for most debt settlement companies to work on your behalf; some will do it within 120 days of non-payment). So, if you were to see an advertisement and call them, they will inform you to stop making payments on your accounts and then they will ride in on the proverbial white horse and attempt to negotiate the debts on your behalf. A couple points of fact: if the debt is legitimate, a creditor isn’t required to negotiate; they can refuse to accept a settlement. Realize that becoming delinquent on debts is not a sure-fire way to get out of paying the full amount owed; you don’t have that guarantee [and avoid any company making such promises]. Second, if you are delinquent on your debts, you may be as successful negotiating on your own behalf as a debt settlement company would (without the cost – typically 10% to 25% of the amount you’re being saved).
The Federal Trade Commission offers the following suggestions [steer clear of companies that]:
– Guarantee they can remove unsecured debt
– Promise debts can be paid off with pennies on the dollar
– Claim their system will let you avoid bankruptcy
– Require substantial monthly service fees
– Demand payment of a percentage of savings
– Tell you to stop making payments and communicating with creditors
– Require you to make monthly payments to them, not creditor
– Claim that creditors never sue consumers for non-payment of debt
– Promise that using their system won’t negatively impact your credit
– Claim they can remove negative information from your credit report
With that said, there may be times when approaching debt settlement as a strategy may make sense [assuming you’ve also examined other options]:
– You have enough money set aside to offer a settlement
– You are paying the debt of another without obligation (i.e., parent)
– The debts are already approaching 6 months past due
– The debts are fairly small (<$1,000) or large (>$10,000)
– The impact on your credit isn’t going to matter
– The total costs of settlement are less than what you owe
– You are “judgment proof” (your assets [if any] are exempt)
I'm out of state at a conference this week … Tomorrow I will be accepting an award on behalf of our Office for Financial Success which is being recognized by the Association of Financial Counseling and Planning Educators as the Financial Counseling Center of the Year.
A couple things I wanted to bring to your attention this week:
– In addition to the tip being e-mailed, the tip is also posted to a blog site each week (http://financialtip.blogspot.com) – this is a good way to read the tip if the e-mail comes 'garbled' …
– An archive of tips [sorted categorically] is available at: http://financialsuccess.missouri.edu/archive.
– The Financial Survival & Success one-credit courses are available this spring (see below). There are NO PREREQUISITES for either class.
FINPLN 1183 (Financial Survival).
A one-credit course geared to underclassmen; class focus is on “student-specific” financial issues: credit cards, student loans, debt management, avoiding common financial pitfalls, credit issues, etc. Offered pass/fail.
Thursdays — 2:00-2:50
Meets once/week for full semester
Instructor – Dr. Mark Oleson
FINPLN 4483 (Financial Success).
A one-credit course geared to upperclassmen; class focuses on common post-graduation financial issues: Beginning Investing (stocks, mutual funds, bonds, etc.), Retirement Planning (401(k)s, IRAs), Managing loan and other accumulated debt after graduation, Insurance issues, Purchasing a home, etc. Offered pass/fail.
Tuesdays — 2:00-2:50
Meets once/week for full semester
Instructor – Dr. Mark Oleson
The debate on the good, bad, and ugly about credit cards is one not likely to end anytime soon. The reality is that most people have them, few people understand them, and many people create untold credit and financial problems as a result of misuse. What I want to address are some of the common criteria that should be evaluated when considering what card I should get [the whether I should or shouldn’t get one is a post for another day] … the type of card should largely be a byproduct of how you will use the card (pay in full each month, carry balance, etc.). There are plenty of options – 30,000+ to choose from.
ANNUAL FEE. Fee charged for membership privileges – typically $50 to $100 per year. By shopping around, this is a fee I can/should avoid – 75% of cards do not charge an annual fee.
INTEREST RATE. This is obviously a high priority if my tendency is to carry a balance. Rates can vary dramatically – common rates on the low end are around 8.9% (you can get lower – I have a card I got a while ago with a fixed rate of 4.9%); on the high end, I’ve seen fixed rates approaching 30%. For students, a ‘normal’ range for a “good rate” will be 12% – 16% (unless of course you already have established credit). Pay attention to the fine print: introductory vs. long-term rate, variable vs. fixed rate, and default rate (if I am late on a payment) are all important elements.
BENEFITS. More and more credit cards are offering ‘perks’ to members for card use … the benefits vary dramatically: cash back, flight miles, insurance (rental car, flight, etc.), shopping discounts, gas rebates, and donation of % of charges to your charity are some of the more common examples. Read the fine print – Do I have to spend a certain amount to receive the benefit? Are there limitations on how much I can receive? Do the rewards expire? Are there other caveats/ stipulations? Ultimately, ask yourself ‘does the benefit exceed the cost?’ It doesn’t make sense to pay 21% to a credit card company in exchange for 1% cash back …
FEES. Annual fees can be avoided – if I’m late, or over-the-limit, my card is going to charge me. The question is how much? The answer is $35 [or more] per ‘offense’ in most cases. Balance transfer, convenience check, and cash advance are all other transaction fees to inquire about.
OTHER ISSUES. The items mentioned above are some ‘general’ questions to ask about – you may have other ‘specific’ questions you want to have addressed: customer service, level of credit limit, penalties (universal default?), how widely is the card accepted (Discover, AmEx), etc.Many websites are available to help you examine these criteria more closely as well as search amongst the wide array of card options to find one that will be most suitable for your needs.
Properly managing credit is a common concern for many people. Being able to do so effectively involves balancing many issues, one of which is understanding the impact of inquiries on credit. Fair Isaac (the company that developed the most commonly used credit scoring model – the FICO score) estimates the impact of inquiries to be 10% of one’s overall credit score. This definition of “new credit” as it is referred is comprised of:
- Number of recently opened accounts.
- Number of recent credit inquiries.
- Time elapsed since recent account openings; by type of account.
- Time elapsed since inquiries.
A credit inquiry is “an item on a credit report that shows a business with a ‘permissible purpose’ has previously requested a copy of the report.” What do I need to know about inquiries?
- Personally viewing your credit DOES NOT negatively impact your credit.
If you get nothing out of this tip other than this one fact, I’ll be happy. Don’t be afraid to review your credit because of the negative impact the inquiry will have. IT DOES NOT HURT YOU. Viewing your credit for mistakes, potential fraudulent activity, etc. is the responsible thing to do. Remember to use the government’s free site to order your report(s) – one free report per year per bureau.
- Understand the two general types of inquiries.
There are two main types of credit inquiries – often referred to as “hard” and “soft” inquiries/pulls. Hard pulls are voluntary, meaning that you initiated the action for a particular company to view your credit. Fair Isaac mentions that the impact of hard inquiries can vary (depending on your ‘level of credit’ – the more established the credit, the less the impact); but they can temporarily lower one’s credit score up to 5 points [it will lower the score for 6 months after which time it will go back up]. Soft pulls on the other hand, are involuntary (offers for pre-approved credit, credit checks by prospective employers, inquiries by companies with whom you do business, etc.) they are visible on your report but only for informational purposes. Soft inquiries have no impact on your credit, although both types of inquiries will stay on your report for two years. Only hard inquiries are visible to people looking at your report; they won’t see soft inquiries (only you will see them). This fat wallet resource documents which companies will use a hard pull when reviewing your credit and under what circumstances. Some banks will do a hard pull when you apply for a checking account, cell phone account, [or other “non-credit” account] – others will do a soft pull to open the same account. I think it’s helpful to know how they do it since one impacts you and one doesn’t …
- Don’t be afraid to shop for rates.
Many people [because of the impact of inquiries on credit] are afraid to shop around to find the best loan terms for auto/mortgage or other loans. Shopping for a loan [through multiple sources] will show up as multiple inquiries on your report (since they are viewing your report). To compensate for this (since someone obviously isn’t going to get four mortgages), a credit score will ignore all mortgage and auto inquiries made 30 days prior to scoring. For inquiries more than 30 days old, the model will treat inquiries made in a “normal shopping window” as one inquiry. If your lender is using the ‘new’ scoring model, that window is 45 days; the window in the ‘old’ model is 14 days.