Let's say you bring home four thousand dollars a month. That's a pretty good income to a lot of people, but it's not going to buy you six cars and a mansion. There just isn't enough cash flow there. There are some expenses that are unavoidable, (and taxes are one, which is why we said "bring home;" it's income after taxes) such as insurance (although you should insure yourself for most things) food, clothing, utilities, you get the idea. Let's assume that these types of basic needs expenses should consume no more than 30% or so of your income, and the smaller that percentage is, the better. So in our example, that would mean that we need to budget no more than around $1,200.00 a month for all of those things, leaving us with $2,800.00 for everything else.
We still don't have a car or a house yet, or any furniture for that matter, so let's see where the rest of it goes. Very few lenders will allow someone to borrow more than about 48% of their income to buy a house, which means your payment can't be higher than $1,920.00 dollars. But my goodness, that's a LOT of house. Are you sure you need that much house? If you max out your borrowing power for your house you have $800.00 left over to buy furniture, go out to eat, go to a movie, vacation, oh - and get a car.
But you want a nice car (or three) to go in that nice big garage you've got. So you lease, or go to a bunch of "sales" and end up with $750.00 a month in car payments. But you've still got insurance and gas to pay for, but only fifty dollars a month to spend. And you still don't have that big screen TV you want or a couch to watch it on. So you tighten your belt for a month or two and then get a credit card and trade another $250.00 a month of your cash flow to get the house all gussied up. And then, you decide that you need a vacation.
It's obvious that you are already bankrupt. You have more expenses than you can pay for with your income. And the only way out of the situation is to get some of your cash flow back to deal with the rising mountain of debt. The problem is that all of your cash flow is committed to someone else's pocket. You don't have a dime. You've got lots of stuff, but it belongs to other people. Your cash flow has become their cash flow. It's not long before you're missing payment, defaulting on some of the small loans - and before you know it you're credit is a train wreck and you don't have any idea how to fix it.
You may be one of those folks who never made much money at all. I know I was for the longest time. I never had a chance to build a good credit history because I always spent more than I earned trying to have more stuff than I could afford. I never had good credit and lost it, I never had good credit at all - that is, until I got really protective about the cash flow I did have.
I know what some of you are thinking. All I need is more income and everything will be ok. Wrong. You are spending every dime and more right now, more dimes will just fly right out the window after them. You have to change your habits before you can fix your credit, until you do that, more income will just make your problems worse. But you can fix your bad credit, all it takes is a little downsizing and some time.
Monday, January 31, 2011
Sunday, January 30, 2011
Fixing bad credit (article series) - part 1
Some things are harder to do than others. It's pretty easy to fall down when you begin to surf for the first time, for instance. It's not hard to keep from falling down walking across the street - at least, not if you're older than about three. Unfortunately, most people enter their adult lives completely unprepared from a financial standpoint and end up having to go through the process of learning to surf through the currents and massive waves in the ocean of money issues that await them. Falling down is pretty normal in that case, and unfortunately fixing bad credit is a little bit tougher than just getting wet and crawling back up on your board again.
Odd analogies aside, it's not going to be easy to fix your bad credit history. the key word there is history. It took you some time to get into the mess you're in, it's going to take you some time to get out again. Actually, fixing bad credit isn't really hard, not like scaling mount Everest hard, but it is going to take something that very few people seem to take the time to develop - discipline.
Discipline involves making some decisions about your lifestyle and money habits over a period of time. It involves patience and persistence. Wow, there are a lot of big words that sound like your grandad, I know, but there really isn't any other way around it. Part of the reason your parents and grandparents harped on those things is that they knew you would figure out the easy stuff, like falling in love, but that subjects and issues like discipline were going to need some reinforcement. So what exactly does financial discipline mean?
Well, the pursuit of discipline is the same no matter what you apply it toward. Discipline in fitness means exercising consistently and eating right every day for years at a time. You have to concentrate and practice to get good at it. And that means you're going to have to make some choices before hand, and then learn to stick with those choices for days and weeks and months and years - and decades. A lifetime in fact. But if you really want to fix your bad credit, you're going to have to change the way you think about and deal with money starting right now, and moving forward for the rest of your life. Every single day is a chance to not only fix bad credit, but gain true financial freedom from credit.
A certain amount of credit may seem necessary, but that's not entirely true either. Credit is the process by which you give away part of your cash flow over a period of time to someone else, in exchange for a lump of cash now. The only kind of credit that might be required, and only because of the way families operate these days, is house credit. Everything else is just a waste. You need to think about your cash flow in an entirely different way before you can begin to make good financial decisions.
Odd analogies aside, it's not going to be easy to fix your bad credit history. the key word there is history. It took you some time to get into the mess you're in, it's going to take you some time to get out again. Actually, fixing bad credit isn't really hard, not like scaling mount Everest hard, but it is going to take something that very few people seem to take the time to develop - discipline.
Discipline involves making some decisions about your lifestyle and money habits over a period of time. It involves patience and persistence. Wow, there are a lot of big words that sound like your grandad, I know, but there really isn't any other way around it. Part of the reason your parents and grandparents harped on those things is that they knew you would figure out the easy stuff, like falling in love, but that subjects and issues like discipline were going to need some reinforcement. So what exactly does financial discipline mean?
Well, the pursuit of discipline is the same no matter what you apply it toward. Discipline in fitness means exercising consistently and eating right every day for years at a time. You have to concentrate and practice to get good at it. And that means you're going to have to make some choices before hand, and then learn to stick with those choices for days and weeks and months and years - and decades. A lifetime in fact. But if you really want to fix your bad credit, you're going to have to change the way you think about and deal with money starting right now, and moving forward for the rest of your life. Every single day is a chance to not only fix bad credit, but gain true financial freedom from credit.
A certain amount of credit may seem necessary, but that's not entirely true either. Credit is the process by which you give away part of your cash flow over a period of time to someone else, in exchange for a lump of cash now. The only kind of credit that might be required, and only because of the way families operate these days, is house credit. Everything else is just a waste. You need to think about your cash flow in an entirely different way before you can begin to make good financial decisions.
Saturday, January 29, 2011
How to Get a Loan with Bad Credit
There's no need to panic if you are having trouble getting a loan approved because of a low credit score. A lot of people want to know how to get a loan with bad credit. Increasingly, financial institutions are taking more precautions before issuing loans. But rest assured, if you follow some specific guidelines, you can always find the financial assistance that you need.
Using the most accessible loan application processes, you realize that almost anyone, regardless of credit score, can buy a house or car. But if you have a bad credit rating, you will find that it is a much more tedious process; they do more to secure their investment. Your credit is measured by your FICO (Fair Isaac Corporation) score, which is a 3-digit number between 365 and 850. Your FICO score basically is a predictor of how likely you are to payback your credit at the defined term. It is based on your history of credit payments, number of open accounts, total credit balances, and some public records such as liens and judgments.
Generally speaking, if your FICO score is about 680, you are attractive to creditors, while a score below 680 will cause lenders to be more cautious.
Don't be afraid to ask for loans if your FICO score is below 680. As Wayne Gretzky said, "you miss 100% of the shots you don't take". The worst thing that can happen is they'll say no. And if you're in a situation where you must to take out a loan, you need to go for it!
It is highly likely that they'll want collateral or 20-30% down. This is the time to evaluate what it is you need the loan for and decide if you can afford it. That 20-30% shows them that you are serious about being responsible and will probably be the difference between getting approved or denied.
The other possibility is that the loan will carry a higher interest rate. Unfortunately, that's just the nature of bad credit loans. You are a higher risk to the creditor because you've demonstrated in the past that you have not always met your obligations.
That's why it is important to shop around and find the best offer possible. What you don't want to do is get yourself into a situation where the monthly payments are not affordable and you once again find yourself damaging your credit score.
Using the most accessible loan application processes, you realize that almost anyone, regardless of credit score, can buy a house or car. But if you have a bad credit rating, you will find that it is a much more tedious process; they do more to secure their investment. Your credit is measured by your FICO (Fair Isaac Corporation) score, which is a 3-digit number between 365 and 850. Your FICO score basically is a predictor of how likely you are to payback your credit at the defined term. It is based on your history of credit payments, number of open accounts, total credit balances, and some public records such as liens and judgments.
Generally speaking, if your FICO score is about 680, you are attractive to creditors, while a score below 680 will cause lenders to be more cautious.
Don't be afraid to ask for loans if your FICO score is below 680. As Wayne Gretzky said, "you miss 100% of the shots you don't take". The worst thing that can happen is they'll say no. And if you're in a situation where you must to take out a loan, you need to go for it!
It is highly likely that they'll want collateral or 20-30% down. This is the time to evaluate what it is you need the loan for and decide if you can afford it. That 20-30% shows them that you are serious about being responsible and will probably be the difference between getting approved or denied.
The other possibility is that the loan will carry a higher interest rate. Unfortunately, that's just the nature of bad credit loans. You are a higher risk to the creditor because you've demonstrated in the past that you have not always met your obligations.
That's why it is important to shop around and find the best offer possible. What you don't want to do is get yourself into a situation where the monthly payments are not affordable and you once again find yourself damaging your credit score.
Friday, January 28, 2011
Reducing Credit Card Debt - Part 2
In part 1 we looked at what needs to be included in a hardship letter, now let's cover what comes after you've gotten your letter written. Send the letter, along with a request to settle for $x amount (where again, x is a dollar amount, 35-50% of the current balance).
You can also talk about your hardships while on the phone with the collectors and requesting a settlement offer. Try to focus on financial hardships over personal issues. Be sincere when you tell them about this stuff. You might just find that acing embarrassed by the situation will go further than being a "woe is me" victim with no personal responsibility. But remember we ALWAYS want an offer IN WRITING.
That also means you want to start a small journal where you record the name of the person you speak with, who they are representing, direct number/extension, time and date. You want to keep this accessible at all times in case they call and you have to speak with them.
3. When you do send them a check, use certified mail that includes a receipt.
After they send you a settlement offer that is acceptable to you, send them a check. IMPORTANT: make sure that you write your account number on the check and write "For Payment In Full" in the memo area. Send the check and a COPY of the settlement offer via certified mail. And don't forget a return receipt!
After the account has been paid and has a zero balance, you can do some steps to repair your credit and possibly have the settled debt removed through disputing it.
The negotiation process can be tricky and often times, a company's willingness to cut you a good deal will be dependent on the economic climate.
You can also talk about your hardships while on the phone with the collectors and requesting a settlement offer. Try to focus on financial hardships over personal issues. Be sincere when you tell them about this stuff. You might just find that acing embarrassed by the situation will go further than being a "woe is me" victim with no personal responsibility. But remember we ALWAYS want an offer IN WRITING.
That also means you want to start a small journal where you record the name of the person you speak with, who they are representing, direct number/extension, time and date. You want to keep this accessible at all times in case they call and you have to speak with them.
3. When you do send them a check, use certified mail that includes a receipt.
After they send you a settlement offer that is acceptable to you, send them a check. IMPORTANT: make sure that you write your account number on the check and write "For Payment In Full" in the memo area. Send the check and a COPY of the settlement offer via certified mail. And don't forget a return receipt!
After the account has been paid and has a zero balance, you can do some steps to repair your credit and possibly have the settled debt removed through disputing it.
The negotiation process can be tricky and often times, a company's willingness to cut you a good deal will be dependent on the economic climate.
Thursday, January 27, 2011
Reducing Credit Card Debt - Part 1
You must be willing to document, communicate, negotiate, and follow up if you want to go about reducing credit card debt alone. These are essential skills for successfully getting debt free. If you are willing to do these things then there's three golden principles that you must always follow:
1. The accounts you are trying to settle must be delinquent
This is NOT a method of paying less for items you purchase (that you can't afford!). Creditors are not looking to settle for less than the full amount you owe them until your account is past due. That means usually around 180+ days. At this point, creditors write your account off for a tax benefit as bad debt. At this point the creditor usually sells off the account to a third party collector.
Bad debt is often sold to collectors for pennies on the dollar. A $10,000 debt is typically sold for around $350! Its for that reason that we can negotiate with collectors - if they settle for 50% of the original debt amount, they're still making a huge profit!
2. Focus on documenting EVERYTHING. This is much more important than conversations you have on the phone!
Never make a payment by phone!
Collectors will always try to get you to pay via check by phone. Do not accept this! Say something to the effect of:
"I'm not able to make a payment immediately but do want to close this account as soon as possible. I know you all want to collect your cash right now, but I'm afraid that is not possible at this time. I'm about to have $x (where x is 35-50% of your debt balance) soon and I'd like to settle one of my accounts with whichever creditor can offer me the best deal. Can you send me a hard copy of an offer in the mail?"
They will probably send you an offer that is still way higher than you want to be paying such as 80-85% of the full amount. Now what you want to do is write a "hardship letter." A hardship letter basically describes why you are unable to pay the amount they are saying you owe.
You can cite, health issues, unemployment, family/marriage issues, natural disasters, accidents, reduced income, or disability to name a few possibilities. Use as much detail (within reason) as possible to describe your hardship(s) as this can help with your negotiation. If you can obtain documented proof of any of them, it doesn't hurt to include it with your hardship letter. We'll continue with the hardship letter in part 2.
1. The accounts you are trying to settle must be delinquent
This is NOT a method of paying less for items you purchase (that you can't afford!). Creditors are not looking to settle for less than the full amount you owe them until your account is past due. That means usually around 180+ days. At this point, creditors write your account off for a tax benefit as bad debt. At this point the creditor usually sells off the account to a third party collector.
Bad debt is often sold to collectors for pennies on the dollar. A $10,000 debt is typically sold for around $350! Its for that reason that we can negotiate with collectors - if they settle for 50% of the original debt amount, they're still making a huge profit!
2. Focus on documenting EVERYTHING. This is much more important than conversations you have on the phone!
Never make a payment by phone!
Collectors will always try to get you to pay via check by phone. Do not accept this! Say something to the effect of:
"I'm not able to make a payment immediately but do want to close this account as soon as possible. I know you all want to collect your cash right now, but I'm afraid that is not possible at this time. I'm about to have $x (where x is 35-50% of your debt balance) soon and I'd like to settle one of my accounts with whichever creditor can offer me the best deal. Can you send me a hard copy of an offer in the mail?"
They will probably send you an offer that is still way higher than you want to be paying such as 80-85% of the full amount. Now what you want to do is write a "hardship letter." A hardship letter basically describes why you are unable to pay the amount they are saying you owe.
You can cite, health issues, unemployment, family/marriage issues, natural disasters, accidents, reduced income, or disability to name a few possibilities. Use as much detail (within reason) as possible to describe your hardship(s) as this can help with your negotiation. If you can obtain documented proof of any of them, it doesn't hurt to include it with your hardship letter. We'll continue with the hardship letter in part 2.
Wednesday, January 26, 2011
Settling credit card debt
One of the most common questions we get is, "How can I got about settling credit card debt myself?"
And it is a great question. Wanting to settle your debt for less than you owe obviously makes the most sense if done in the most cost-effective manner possible. There's tons of advice out there regarding debt settlement. Some of it is useful but dangerously incomplete. And some of if it is just plain old bad and should be avoided.
Here is a basic plan for settling credit card debt for less than the principle amount owed. I'll discuss some key concepts to this plan and shed some light on how the process works. First, let's clear up a couple of things...
Its NOT as easy as you may think and there are plenty of pitfalls to avoid
It requires significant time to do the process, its not a simple call to a collections agency. You must document, communicate, negotiate, and follow up when settling credit card debt
Don't expect to be able to simply talk a collection's caller into settling for 10% of your debt over the phone. If you are negotiating on your own, 2/3rds is a much more reasonable and attainable goal.
Generally, most people to choose to try to settle credit card debts on their own are able to do so for 75%. However, the real professionals are able to negotiate settlements as low as 10%. But this is because they are able to invest significant time into the process and they know exactly what they are doing.
It is not uncommon for people to have no success at all getting any reduction of debt without assistance -- even failing to get a break on double-digit interest rates. Unfortunate folks such as these either remain in debt for life or must reach out for professional assistance.
Attorneys and arbitrators, the common professionals hired to negotiate debt settlements average around 50% and then charge around 15% for their service fee putting the total cost around 65% of your total debt.
So how are they able to settle for 10-50%? The secret lies in the volume of debt that the professionals represent. You see the professionals deal with the creditors every single day; they are dependent on each other. And when a professional approaches a creditor representing millions of dollars in debt from many clients, he's able to negotiate what is effectively a "bulk discount". By representing and being able to guarantee cash for a larger segment of the creditors receivables, a professional is able to gain significant leverage saving his clients big time.
And it is a great question. Wanting to settle your debt for less than you owe obviously makes the most sense if done in the most cost-effective manner possible. There's tons of advice out there regarding debt settlement. Some of it is useful but dangerously incomplete. And some of if it is just plain old bad and should be avoided.
Here is a basic plan for settling credit card debt for less than the principle amount owed. I'll discuss some key concepts to this plan and shed some light on how the process works. First, let's clear up a couple of things...
Its NOT as easy as you may think and there are plenty of pitfalls to avoid
It requires significant time to do the process, its not a simple call to a collections agency. You must document, communicate, negotiate, and follow up when settling credit card debt
Don't expect to be able to simply talk a collection's caller into settling for 10% of your debt over the phone. If you are negotiating on your own, 2/3rds is a much more reasonable and attainable goal.
Generally, most people to choose to try to settle credit card debts on their own are able to do so for 75%. However, the real professionals are able to negotiate settlements as low as 10%. But this is because they are able to invest significant time into the process and they know exactly what they are doing.
It is not uncommon for people to have no success at all getting any reduction of debt without assistance -- even failing to get a break on double-digit interest rates. Unfortunate folks such as these either remain in debt for life or must reach out for professional assistance.
Attorneys and arbitrators, the common professionals hired to negotiate debt settlements average around 50% and then charge around 15% for their service fee putting the total cost around 65% of your total debt.
So how are they able to settle for 10-50%? The secret lies in the volume of debt that the professionals represent. You see the professionals deal with the creditors every single day; they are dependent on each other. And when a professional approaches a creditor representing millions of dollars in debt from many clients, he's able to negotiate what is effectively a "bulk discount". By representing and being able to guarantee cash for a larger segment of the creditors receivables, a professional is able to gain significant leverage saving his clients big time.
Tuesday, January 25, 2011
Living debt free
You know what it's like to sit down at your desk with a pile of bills that seems 6 inches thick. Every single dime in your paycheck is gone and spoken for well before you put it in your bank account. While the idea of living debt free sounds fantastic, you may not know how to get there, or if it is even possible for you. The good news is that living debt free is absolutely possible for anyone, it's just going to take some dedication and patience.
The key to living debt free lies in financial discipline. If you have too much debt it means that you spend too much money. That's all there is to it really, you can blame it on a lot of things, and there are often situations, such as illnesses that arise, that are completely out of your control. But most people are deeply in debt because they are spending money that isn't theirs, on things they just can't wait to have.
In just a few years, most of the junk you bought is already in the trash, but that debt is still there. Not only that, it's growing faster than ever because of interest. The good news is that there is a very simple solution for getting out of debt. Living debt free means following a couple of very simple rules for as long as it takes to pay off your debt and get on the right financial footing.
The first step is to throw your credit cards in the blender. Cut them up, burn them ceremonially, let the dogs chew on them, throw them in the garbage disposal, or whatever else it takes to make sure that you never use them again. The only way to get out of debt is to begin by not ever getting in any more debt.
The next step is to begin downsizing your budget. In order to pay off your debt and live debt free you're going to have to free up some extra money from your paycheck to pay extra on the debts you already have. The only two ways to do this are to increase either your income or decrease your expenses so that there is extra money available to pay off debts. A combination of both will work best of course, it just depends on how fast you want to be debt free.
Once you stopped spending, and started paying off your current debts, the only thing left is the discipline of patience. You simply must make a commitment to living debt free or you will never make it. It's going to take a few years, but once you're done with it that old stack of bills will be much smaller and you will be able to keep a lot more of the money you earn.
The key to living debt free lies in financial discipline. If you have too much debt it means that you spend too much money. That's all there is to it really, you can blame it on a lot of things, and there are often situations, such as illnesses that arise, that are completely out of your control. But most people are deeply in debt because they are spending money that isn't theirs, on things they just can't wait to have.
In just a few years, most of the junk you bought is already in the trash, but that debt is still there. Not only that, it's growing faster than ever because of interest. The good news is that there is a very simple solution for getting out of debt. Living debt free means following a couple of very simple rules for as long as it takes to pay off your debt and get on the right financial footing.
The first step is to throw your credit cards in the blender. Cut them up, burn them ceremonially, let the dogs chew on them, throw them in the garbage disposal, or whatever else it takes to make sure that you never use them again. The only way to get out of debt is to begin by not ever getting in any more debt.
The next step is to begin downsizing your budget. In order to pay off your debt and live debt free you're going to have to free up some extra money from your paycheck to pay extra on the debts you already have. The only two ways to do this are to increase either your income or decrease your expenses so that there is extra money available to pay off debts. A combination of both will work best of course, it just depends on how fast you want to be debt free.
Once you stopped spending, and started paying off your current debts, the only thing left is the discipline of patience. You simply must make a commitment to living debt free or you will never make it. It's going to take a few years, but once you're done with it that old stack of bills will be much smaller and you will be able to keep a lot more of the money you earn.
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