Debt Relief Lowdown

Baby steps to debt freedom

Nearly 60 million Americans are struggling with credit card debt and other kinds of debt and a large percentage of these people are sinking and fast. Isn’t there any way out of this? The one proposed by the government of going in for credit counseling though a good one, doesn’t seem to be working much. And bankruptcy is proving to be a difficult road. So, what exactly are we supposed to do in such a scenario?

Take baby steps. I know this sounds ridiculous but self help is one of the best ways out of debt and there is no need to try and repay all of your debt at one go. Slowly, with baby steps, repay your debts and better your credit score. Numerous websites and counselors will provide you with free advice, tips and ‘how to’ techniques that will help you come out of your debt trap.

I know it is much easier to say it than do it but unless you begin somewhere, all we are going to do is mope. As the Chinese saying goes: A journey of a thousand miles begins with a small step. So go on and take that step.

Tricks to lower your debt

I’m sure that like me, most of you have wondered how to reduce the payment of finance charges to credit card companies. I stumbled on this simple solution: Make biweekly payments.

Most people nowadays carry a balance on their credit cards. What they don’t know is that by doing this, they are allowing the card companies to charge a daily interest on their cards. So, it is imperative that you lower your balance and thereby the interest rates on the card. Big payments are always difficult and hence we find it difficult to shell out the entire amount. What we can do is halve the amount payable and pay up in two installments every month. And guess what, this plan holds good for all kinds of loans, including mortgages! But before you decide to switch to this bi-monthly schedule, just call up your credit card company and find out if they will allow you to submit your minimum payment in two separate payments.

Avoid charging taxes to your credit card and save money

By now, you probably know or have used the facilities offered by credit card companies to pay your taxes. What you may not know is that charging taxes to your credit card can be an expensive mode of payment, especially when the IRS offers an installment plan. Pr.com reports:

Mark Baylis, president of Debt Shield, said that taxpayers planning to pay their taxes with credit cards should be aware that the service providers that process the transaction charge a fee of 2.49 percent of the amount owed. For example, if you owe the IRS $1,800 in taxes, you will pay the service provider an extra $44.82 to use a credit card.

Read more: Debt Shield Cautions Taxpayers Against Charging Taxes

Save your children… empower them with fiscal education

Be warned, if you are a parent to a teenager you don’t want to hear this. According to a recent study conducted by Jumpstart Coalition for Personal Financial Literacy, by the time children are seniors in high school, nearly one in three use credit card. This figure rises to over 80 percent by the time these youngsters are in college. And by the time they are in their mid-20s, they are probably ready to file for bankruptcy, since they can no longer carry the heavy debt burden arising from the use of their credit cards.

And what could be worse for a youngster who has just completed college – even before he gets out of college, he is saddled with all kinds of debts including student loans and credit card debts. What’s worse, the new bankruptcy act makes declaring bankruptcy and discharging debt more difficult, especially for credit-card holders. So, how can you as a parent do something to prevent your child from being ensnared into a debt trap? The best thing you could do is teach your children about fiscal responsibility – the sooner you begin, the better. Tahlequahdailypress.com reports:

Coinstar Inc., a corporation offering coin counting, prepaid products such as credit cards, and gift cards and payroll services, noted the fastest-growing demographic declaring personal bankruptcy is people ages 20-24.

Read more: Charge it!

Never use your retirement accounts to pay off mortgage loans

You have an unbearable debt and don’t want to file for bankruptcy. But you also don’t want to approach a credit-counseling center because you know exactly how to repay your debt – withdraw the money in your individual retirement accounts (IRA) and pay off your loans. This would mean a dent in your retirement funds, but only a small one.

If you really think so, then the first thing you need to do is rush to a credit counselor, or somebody who’ll tell you that such an act would not only be self-defeating, it could make you lose some good money! The choice of using your IRA funds actually should not exist on your list of options to repay loans.

Imagine if you’ve deferred payment, then the taxes and penalties will be quite high. So, when you account for all these penalties and taxes, you may be forced to withdraw much more than you actually intended to.

And the biggest problem with trying to withdraw from your IRA is that you’ll lose your future tax-deferred returns. This means that if you withdraw something as paltry as $1,000, it could cost you over $10,000 in lost retirement income at a rate of 8% per annum or in other words, over 30-35 years, you would have lost nearly $1 million in future income! A better option would be to examine your accounts and find ways to trim unnecessary expenses.

Firstly, if your debt burden is too high, don’t try to sort out your financial affairs alone. You need professional help and quick. So quit dilly-dallying. But before you meet with your counselor, you could sit down and do some stock taking to know where exactly you’ve gone wrong in managing your money. Once you identify the problem areas, you’ve won half the battle. Now it is only a matter of time before you and your counselor chalk out a plan to ensure that you are back on track at the earliest possible.

Should you risk your roof to pay off your credit card debts?

Have you accumulated a huge debt and are now tempted to tap into the equity of your home to pay off your credit card bills? If yes, then before you take any final decision, take a deep breath and rethink your decision – it may not be such a good idea after all. Dailyindia.com reports:

The bad news about equity loans is these loans are secured against your house. If you miss a payment then you risk losing your home. Miss a credit card payment by itself and initially you will only have to listen to debt collectors, but you will still have your home.

Read more: Home Equity loans; don’t put your Home or Condo at risk!!

Refinancing your mortgage to pay off debts?

What happens when your debt is so heavy that you need to do something drastic to reduce it? Most people who own houses tend to consider their homes as a bankable asset to be used in times of an emergency. You can refinance your home and pay off the debt, but this would mean taking on a bigger mortgage. Alternately, you could keep your current debts and pay non-deductible interest to the credit card banks.

While both options are available, there are quite a few issues that we need to consider when taking such a decision. And you need to ask yourself a few basic questions that will help you make the correct decision. One of the first things you should ask yourself is whether the choice of debt repayment will save you money and if yes, then which mode helps you save the most. Agreed this is a repayment thing and it is only natural that you will choose the loan option that will help you save rather than lose money.

So you think refinancing your mortgage will be the right way to repay your debts? You could use the cash-out to pay for your credit card debt and thereby reduce the monthly payments. This will of course increase the cash flow, but it will also mean that the new mortgage will cost more than the current loan terms.

But what should you do if your debt burden is so high that you are probably headed for bankruptcy? Then does the mortgage option still hold? Firstly, if your debt problem is so bad that you may have to file for bankruptcy, then you may not be able to get a new mortgage. So, you don’t have refinancing option. But if you still want to try out this method, it will be best to consult a bankruptcy attorney and know the options available to you before you do anything.

Prevent identity theft with these tips

If you love to spend your money indiscriminately, then you had better beware of identity thieves because you may not notice how money is siphoned off from your credit card without you knowing. Identity theft is a crime that can earn the thief a good amount of money and there is a low risk of being caught. You should follow these tips to avoid identity theft. Mywebpal.com reports:

They open new credit card accounts using the victim’s social security number, date of birth and name. They establish phone or cellular phone service in the victim’s name. They open checking accounts in the victim’s name and write bad checks. They file for bankruptcy to avoid paying debts that they have incurred un-der the victim’s name or to avoid eviction. They drain the victim’s bank accounts. They even take out auto loans in the victim’s name.

Read more: Tips offered on how to prevent identity theft

The needs & wants way to get out of debt

We’ve been discussing how to get out of debt in the past few weeks. While we had a look at the different practical means of getting out of debt, there is something that goes beyond just creating a plan of action to get out of debt: Self control. Agreed that there are quite a few among us who don’t overspend and are trying very hard to make ends meet. But even then, if you can distinguish between your wants and needs, then you’ll realize that you can save up a little money even if you are badly off.

Here are a few tips that can help you save some money. The first thing to do is make a list of the things that you cannot do without and things that you would like to have but can wait. The necessary things, you cannot delay buying, but things you want can wait. Of course, it seems difficult and it is. But when you see a few extra dollars left over after you’ve paid off all your bills, you’ll realize that it was worth the effort.

How to avoid credit card pitfalls

According to statistics, credit card debt per household ranged close to the $10,000 mark in 2004. And the saddest part is that as per a recent study conducted for LendingTree.com, people have begun to believe that debt is an inevitable thing. Sun-sentinel.com reports:

Even more troublesome is the realization that the credit-card companies have grown cagey. They watch your behavior closely and change the terms of your debt almost at will. Big penalties lurk in the background for when you make any mistakes, even as the industry dangles those tempting offers for low-rate, no-interest, get-your-rewards-here cards.

Read more: Top 10 Credit card practices and pitfalls every consumer should know about