personal finance - financial guide€¦ · expected to pay over the course of a loan. your credit...
TRANSCRIPT
Page 2
Personal Finance
There are many factors that affect your personal
finances, such as how you utilize and pay off your
credit cards and personal loans. Moreover, there are
certain influencing factors that determine your
likelihood to be approved for a new line of credit, as
well as the amount of interest that you will be
expected to pay over the course of a loan.
Your credit score and credit history are among the
most important elements that lenders review when
determining whether or not to approve a loan and its
interest rate. That is because your credit standing
indicates the overall likelihood that you will repay
your loan.
Thus, it is important to learn how to improve a low
credit score, build credit for the first time, identify
weaknesses on your credit report and understand
the lasting effects that credit may have on your
finances.
Credit Scores
Your credit score is a three-digit number that reflects
your financial history, including your credit history,
Page 3
your credit utilization and whether or not you have
made payments on time. Your overall credit score
and history help lenders determine whether or not
you will be able and willing to repay a loan, as well as
the level of financial risk that you represent to the
lender.
There are three major credit bureaus in the U.S.:
Equifax, Experian and TransUnion. These bureaus
routinely receive reports from lenders that you have
accounts with, such as credit card issuers, auto
financers, home mortgage providers and financial
institutions that approve personal loans.
Your total balance, credit utilization, payment history
and other factors are reported to these credit
bureaus in order to determine your credit score.
Consequently, your credit score is likely to fluctuate
over time and change on a regular basis based on
payments made.
Overall, credit scores are calculated using the
following factors:
Your payment history
The amount of debt that you have in relation
to your credit limits
Page 4
The age of your credit history
Recent applications for new credit lines
Whether or not you have more than one
type of credit
Your credit score will fall into a “range” based upon
how you compare to others. These ranges are:
Bad Credit: 300-629
Fair Credit: 630-689
Good Credit: 690-719
Excellent Credit: 720-850
Credit Reports
You must check your credit report on a regular basis
in order to constantly check for potential mistakes.
Moreover, checking your credit report regularly can
help you catch the early warning signs of identity
theft, such as a number of incorrect information or
new credit accounts that you did not apply for.
Generally, you are able to review your credit report in
a number of ways, such as through financial
institutions and credit reporting agencies, or by
requesting a credit report from one of the three major
credit bureaus. In addition, credible websites such as
Page 5
CreditKarma.com and NerdWallet.com also offer free
credit reports.
When reviewing your credit report, you will find
information about you and your personal finances,
including:
Personal information, including your name
(as well as any changes to it), address,
phone number, date of birth and
employment history.
Accounts that have not gone to collections
and have not been defaulted on. These
accounts will list the name and address of
their creditors, as well as the type of
account, credit limits or original amount of
an installment loan.
Negative information (if any), such as
accounts that have gone to collections and
public records. Common examples include
bankruptcies and public court judgments.
Inquiries on your credit that appear for a
period of time whenever you apply for a new
line of credit, as well as credit limit
increases.
Page 6
As a rule of thumb, most of the information on your
credit report will remain on your report for seven
years. However, certain information, such as
bankruptcies, will remain on your credit report for up
to ten years.
Negative information, such as an account that goes
to collection, can potentially damage your credit
score for the total length of time that it remains on
your account.
Understanding Credit Utilization Rates
Credit utilization percentages can have a significant
impact on your credit score and your debt-to-income
ratio. Overall, credit utilization is a measurement of
how much you owe on all of your revolving accounts
in comparison to your total available credit.
Having a low credit utilization can improve your credit
score, whereas having a high credit utilization can
damage it and paint you as a “high-risk” borrower to
lenders. You can find your current credit utilization
ratio by taking the total balances on all of your
accounts, dividing that number by the total credit limit
on all of your accounts and multiplying the result by
100, thus expressing the result as a percentage.
Page 7
Experts suggest that you should not use more than
30 percent of your overall credit limit on any one
account. That way, your credit utilization on your
credit report should not reflect an amount above 30
percent.
Understanding Your Length of Credit
History
The longer you have had an open credit account
that, the better your credit score will likely be. The
difference between having a line of credit for six
months or six years can be significant, and can
determine up to 15 percent of your credit score.
Once an account is no longer active, it can no longer
be used to determine your length of credit history.
For example, if your longest line of credit is for an
auto financing account, but you pay off your loan,
that account will close, thus resulting in a potential
reduction to your credit score if you do not have
another credit account with a comparable history.
The Impact of Low and High Credit Scores
Your credit score can affect your financial standing in
a number of ways. From a financial standpoint, your
credit score is a deciding factor in whether or not you
will be approved for a loan, including mortgages,
Page 8
auto financing or credit cards. Your credit score will
also determine your interest rate, which will affect the
overall amount that you can expect to pay over the
term of the loan.
Not only can your credit score affect whether or not
you are approved for a new line of credit and a better
interest rate, but having a low score can also reduce
your likelihood to be approved for a home or
employment. Potential landlords and employers may
ask for your permission to check your credit.
Credit scores have become so important in the U.S.
that credit checks have become very regular. Your
score will likely determine whether or not you must
have to pay a security deposit when activating a
utility and even whether or not a cellphone carrier will
be willing to offer you services.
Tips for Building Credit from Scratch
If you have not had a credit account, you may not
have a high credit score due to the lack of credit
history and payment activity. This can present you as
a high-risk borrower to potential lenders. As such,
building credit for the first time can be a challenge.
For starters, you can apply for a secured credit card.
This is a type of credit card that is backed by a cash
Page 9
deposit that is made up front. Generally, the credit
limit for this type of credit card will equal the amount
of your deposit.
Similar to a secured credit card, you may also apply
for a secured loan by providing a financial institution
with collateral for the account. Collateral may be
monetary or something else of value to the
institution.
In certain cases, you may not be able to get a loan or
an unsecured credit card. However, if you are able to
get a co-signer for the loan, your odds for approval
may increase significantly. Having a co-signer
reduces your risk to lenders if the co-signer becomes
equally responsible for the loan and will likely be on
the hook should you be unable to pay for the loan.
If you have a friend or family member that already
has a credit card or another line of credit, that
individual can add you onto their account as an
“authorized user.” As an authorized user, you will not
be on the hook as a co-signer would be, and you do
not need to pass a credit check. However, you can
still benefit from having access to the credit card or
account and can build your credit history from the
account, even though the account is in someone
else’s name.
Page 10
Rebuilding and Improving Your Credit
As stated in previous sections, it can take seven to
ten years for negative information to be removed
from your credit report. However, that does not mean
that you cannot start rebuilding your credit already.
When rebuilding credit, it is important to review all of
your open accounts that may be damaging your
score. Experts recommend paying down any open
accounts that have not yet gone to collection and
work towards reducing balances to at least 30
percent or lower. Moreover, strive toward making
payments on time every time, as these efforts can
help you to significantly improve your score.
Review all of the information on your credit report
and dispute any details that are incorrect. Correcting
a large mistake on your report could potentially add
points to your overall score quickly.
If you do not have any open accounts, you may need
to obtain a secured credit card or a secured loan to
get started on building a positive credit history and
offset the existing negative marks on your report.
Having a co-signer or becoming an authorized user
Page 11
on someone else’s account can be just as beneficial
to those interested in rebuilding credit, as well as
those interested in building credit for the first time.
Credit Cards
Credit cards are used to make purchases or pay for
services that accept credit card payments. Generally,
these cards are linked to lines of credit that are lent
to you from credit card issuers. Therefore, when
making a purchase with a credit card, you are
essentially borrowing money from a lender.
When you are approved for a credit card, you will be
issued a specific credit limit, which is the maximum
amount of funds that you can utilize. However,
utilizing a large percentage of your credit limit can
impact your credit score negatively.
Customers generally pay their credit card bills on a
monthly basis. Every time a payment is due, you
have the option of paying a specific minimum
amount, paying the balance in full or paying an
amount in between.
Paying the minimum required amount is often the
most expensive option, as you will pay more in
interest rates over time. Therefore, if you are able to
Page 12
pay your statement in full every month, it is
recommended that you do so.
Payments must always be submitted in a timely
manner. Experts suggest that your payment history
could account for up to 35 percent of your credit
score. Additionally, making payments on time can
help you avoid additional fees, such as late fees.
If you are considering applying for a credit card, it is
important to familiarize yourself with common credit
card fees, as well as the various types of credit cards
available. By doing so, you will be better prepared
and know the type of credit card that works for you.
Common Credit Card Fees
If you intend on applying for a new credit card, it is important to learn about the common fees that you may come across. However, be mindful that not all credit cards will include every type of potential fee. Annual fees are fees that are charged every year in order to maintain the credit card account open. These fees generally coincide with the anniversary of the date that you first opened the credit card account in question. This type of fee is most commonly charged on rewards credit cards and secured credit cards. Balance transfer fees are associated with balance transfer cards. Generally, this fee is between three
Page 13
and four percent of the balance being transferred. However, there are cards that offer zero percent fees. Cash advance fees occur when using your credit card to obtain cash from an ATM or bank. This fee can vary between credit cards that offer this feature, but is typically between two and five percent of the amount of cash taken. A finance charge is a common charge that can be found on almost every type of credit card. It is a charge based on the interest that you owe on your credit card balance. Moreover, it is included in your monthly statement. You may avoid this charge altogether by paying off your balances in full each month before their due date. You may encounter a foreign transaction fee should you attempt to use your credit card for purchases outside of the United States. Fees range between three and four percent on average. However, there are various credit cards that do not charge this fee. Late fees are accrued when you submit a payment past the due date shown on your statement. The amount of the late fee will vary between cards. While all credit cards have late fees, you can avoid paying them by making payments on time.
Page 14
Similarly, a returned payment fee will occur if you submit a payment for your credit card but the payment is returned due to insufficient funds in your payment account. Generally, this fee is around $35.
Low-Interest Cards
Low-interest credit cards can help you save more
money in comparison to cards with higher interest. If
you are expected to pay less interest on your
purchases, you will pay less over the term of your
loan and be able to pay off your debt faster.
A low-interest credit card provides the most benefits
to those who carry a balance during most months
rather than those who are always able to pay off their
balance in full.
Credit cards with low interest are typically only
available to applicants who have higher credit scores
and positive credit history. In general, the lower your
credit score is, the higher the interest rates
associated with that credit card account will be.
If applying for a low-interest credit card, look for one
that offers a zero percent introductory annual
percentage rate (APR) period, preferably lasting a
year or longer.
Balance Transfer Cards
Page 15
If used correctly, balance transfer cards can be an
incredible tool for debt reduction and can help you to
avoid high-interest fees. A balance transfer card
offers a low-interest rate, preferably zero percent, for
a set period of time.
Typically, these cards will raise interest rates after
the pre-determined period of time has ended. Certain
balance transfer cards may also charge a fee based
on the amount of debt transferred onto the balance
transfer card.
A balance transfer card is a useful tool if you would
like to pay off a debt that is on another credit card or
on a loan that has a higher interest rate. Having a
higher interest rate can result in large finance
charges each month, therefore increasing the
amount you will be expected to pay over the course
of a loan.
The amount of debt that you can transfer onto your
balance transfer card will depend on the credit limit
that you have been granted. Generally, it can take up
to three weeks for a transfer to be completed. Thus,
you must continue to make payments on your old
account until the transfer has been completed.
If interested in a balance transfer card, it is important
to review offers that you may have in order to find the
balance transfer card that is right for you. Not only
are you looking for a card that has a low or zero
Page 16
percent interest rate for a lengthy period of time, but
it is worth taking the time to find a card that has a low
balance transfer fee.
Furthermore, it is preferable to obtain, a card that
does not carry an annual fee. Ideally, you will want to
pay off your entire balance within the low-interest
rate period.
Student Cards
Student credit cards are designed for young
adults who are between 18 and 21 years of age
and have limited or inexistent credit history but
would like to begin building toward credit. These
cards can have lower requirements in
comparison to traditional credit cards.
However, this type of credit card generally
includes a high interest rate and may also
include annual fees. These cards may also
include low credit limits, such as between $300
and $500.
When selecting a student credit card, it is
important to keep in mind that you can avoid
high-interest payments by paying your credit
card statement in full every month.
Page 17
Student credit cards are not the only options
available to young adults who have little or no
credit history. For instance, a secured credit card
can generally be obtained with the appropriate
down payment for the card.
In any case, student credit cards generally do not
include annual fees or foreign transaction fees.
Credit Card Rewards
When used responsibly, reward credit cards can offer
numerous benefits when used for regular purchases.
Depending on the type of rewards card that you opt
for, you may receive rewards in the form of cash
back or points that can be converted into discounted
or free airline tickets or hotel stays.
Reward credit cards are typically suitable for
individuals who have good or excellent credit scores
and do not intend on carrying a balance from month
to month. These types of credit cards typically have
high APRs. Thus, if carry a balance on a rewards
credit card, the monthly interest rate payments that
you will have to make will generally cancel out any
type of reward that you may have earned.
When selecting a rewards credit card to apply for, it
is important to look for rewards offers of at least two
Page 18
percent. Generally, the higher the percentage is, the
more rewards you will accrue.
A number of rewards cards will also provide higher
rewards for specific types of purchases, such as
payments made at gas stations or supermarkets.
Certain types of reward cards may also change the
purchase categories that offer the highest rewards on
a quarterly basis.
Secured Credit Cards
A secured credit card is backed by a cash deposit
that you make up front. Generally, the credit limit that
you are offered for this type of credit card equals the
amount of your deposit.
This type of card is particularly useful to individuals
who are building credit for the first time or attempting
to rebuild credit and recover from having a bad
score.
Debit Cards
Unlike credit cards, debit cards are tied to bank
accounts, such as checking accounts. Debit cards
also come as pre-paid cards in which you must
transfer money onto the card before you can use it
for a purchase.
Page 19
Checking Accounts
Having a checking account makes it easier to
make purchases. Checking accounts are
provided by various financial institutions. In most
cases, a debit card is provided with the account,
which may be used for purchases or for
withdrawing cash from an automated teller
machine (ATM).
The money that is available in your checking
account is determined by the amount of money
that has been deposited in it. If you do not have
direct deposit set up, you can cash paper checks
at your bank to deposit money into your account.
Most banks now provide access to online
banking services that allow you to better manage
your finances, view your balance and
electronically transfer funds to a savings
account, if you have one. Several banks also
provide online banking features such as
automatic bill payments and mobile notifications
for all purchases.
On the other hand, there are disadvantages to
checking accounts. For instance, several banks
Page 20
charge monthly fees in order to maintain these
accounts.
However, certain banks waive this fee if you set
up direct deposit or use your debit card a certain
number of times per month. You may also
experience other types of fees, such as
withdrawal fees when you use third-party ATMs.
Furthermore, certain banks may require you to
keep a minimum balance in your checking
account in order to keep the account active.
Alternatively, certain financial institutions may
charge debit card usage fees after a set number
of transactions.
Savings Accounts
Savings accounts are similar to checking accounts
as they are offered by banks and other financial
institutions. However, savings accounts do not
generally include a debit card, and you may be
penalized for withdrawing funds on a regular basis.
On the other hand, these accounts offer several
advantages that can help you save money, such as
higher interest rates to help you accrue additional
funds over time.
For some, having a savings account does not make it
any easier to save money, as it may be tempting to
Page 21
spend what you have with the quick and easy access
to those funds. This particularly true with so many
online features that most savings accounts offer.
Similar to checking accounts, savings accounts often
include a minimum balance requirement in order to
waive monthly maintenance fees.
Direct Deposit
Depending on your employer, receiving payments via
direct deposit to your bank account may be an option
to you. Direct deposit is an electronic payment
method that transfers funds from one bank account
to another. Having direct deposit can eliminate the
cost of printing paper checks (which reduces the
waste of paper) and provide employees with
payments sooner in comparison to physical checks.
If you set up direct deposit with your employer, you
will receive your paycheck directly to your checking
or savings account. Balances automatically increase
when a payment arrives, allowing you to avoid
unnecessary trips to your bank and any wait that
your bank may require before your funds become
available.
Direct deposits are not used to receive paychecks,
but various government programs, such as those
administered by the Social Security Administration
Page 22
(SSA), often require the use of direct deposit for the
transferring of monetary benefits as well. In certain
states, direct deposit is even used to receive benefits
such as the unemployment insurance funds.
If you would like to set up direct deposit payments,
you will need the following information:
Your bank account number
Your bank’s routing number
The type of account that would like deposits
to be made to (checking or savings)
Your bank’s name and address
The name(s) of the account holders listed
on your account
Most of this required information can be found on the
front of a personal check. You can also contact your
bank and ask for your direct deposit information.
When setting up direct deposit, you may also be
required to provide a voided check. Moreover, certain
employers may ask you to complete a form.
After setting up direct deposit, it may take a few
weeks for your payments to start being deposited
into your account automatically. During this period,
you will likely still receive paper checks from your
Page 23
employer or participating monetary benefit program.
Pre-Paid Cards
Pre-paid cards have become popular in recent years.
In general, these cards offer an alternative to
secured cards and do not require credit checks along
the way. Pre-paid cards allow you to transfer money
onto the card, at times for a fee. The money
transferred onto the card can then be used for
purchases of all kinds.
On the other hand, pre-paid cards have various
drawbacks, such as the fees incurred by these cards.
Depending on the type of pre-paid card you acquire,
you will likely run into numerous fees, including fees
to activate the card, deposit money, withdraw cash or
even check your balance.
Various pre-paid cards also include a monthly
maintenance fee that must be paid as long as the
card remains active. If you are interested in a pre-
paid card, it is important to review all of its potential
fees carefully and find a card that has as few fees as
possible.
Prepaid cards can be purchased from a number of
retailers, including superstores, grocery stores and
participating gas stations.
Page 24
Lines of Credit
In addition to credit cards, you may have the option
of acquiring a different type of line of credit, such as
a personal loan. Lines of credit may be provided in a
lump sum immediately or as set amounts of money
that are withdrawn as needed. It all depends on the
type of credit and the agreement terms between you
and the lender in question.
Personal Loans
While most personal loans are unsecured and
include fixed payment amounts, there various other
types of personal loans, including secured loans and
variable-rate loans.
Personal loans are generally provided in one lump
sum and must be repaid during a pre-determined
period of time, typically between one and seven
years. They may be fixed or be on a variable interest
rate. A fixed interest rate will not change over the
course of the loan, but a variable interest rate can.
An unsecured loan is not backed by any type of
collateral. Thus, unsecured loans are generally seen
Page 25
as a higher risk to lenders, which generally result in
higher interest rates ranging from 5 to 36 percent.
However, these rates vary depending on a number of
factors, such as your credit score, credit history and
debt-to-income ratio. These factors will also affect
your likelihood of being approved for the amount you
are asking for or being approved altogether.
A secured personal loan is similar to an unsecured
loan, except that it is backed by some form of
collateral, such as a vehicle or home. The most
common form of secured personal loans are
mortgages and car loans. However, certain banks
and lenders will offer a personal line of credit that you
can borrow against your car, home or another
valuable asset.
Interest rates are generally lower for secured loans,
as they are considered less risky to lenders. Should
you fail to repay a secured personal loan, the lender
can take ownership of the collateral used to obtain
the loan.
You can apply for a secured or unsecured personal
loan through most financial institutions. However, the
Page 26
minimum requirements for these loans vary between
lenders.
Generally, payments must be made toward the loan
amount on a monthly basis. These payments will go
toward the principal balance of your loan as well as
its accrued interest.
Your repayment options will vary depending on each
particular lender. While lenders allow you to pay in a
number of ways, including at a branch office, over
the phone, by mail or online, other lenders may
restrict payment options to one or two available
methods.
Payday Loans
Payday loans are generally only used as a last resort
when you need cash quickly and do not have any
other option. This type of short-term loan is typically
due in full on the applicant’s next payday. In some
cases, payday loans may be repaid in payments over
the course of a few months.
Overall, payday loans have some of the highest
interest rates on the market. It is not unusual to see
interest rates as high as 390 percent or higher.
In 2019, new regulations were put into place that
require lenders to pre-determine whether or not an
Page 27
applicant can repay the amount borrowed in a timely
manner. These new regulations also restrict lenders
from attempting to withdraw funds from a borrower’s
bank account after two attempts have already failed.
While new government regulations provide some
protection to borrowers, experts strongly recommend
caution when it comes to payday loans. Borrowers
may be able to use an alternative to a payday loan,
such as a small personal loan from a credit union or
small financial institution.
Otherwise, borrowers may simply apply for a credit
card. If you decide to apply for a payday loan, you
are encouraged to review all of the loan’s terms.
In order to apply for a payday loan, you will be
required to have an active bank account, a valid
photo ID and proof of your income, such as a pay
stub. You must also be at least 18 years of age.
Low-Interest Loans
Like all types of loans, the lower the interest
rate on the loan is, the less you will be expected
to pay over the course of that loan. However, in
order to obtain a low-interest rate loan, you
must typically have a good or excellent credit
score, as well as a debt-to-income ratio that
Page 28
meets a lender’s criteria for the amount that it is
lending.
You can apply for a low-interest rate loan
through most banks and financial institutions.
You may also apply online with various lenders.
Page 29
Debt Relief
As more Americans have begun to struggle with
debt, additional avenues to relieve such debt have
begun to emerge. Debt relief can be achieved in
various ways, including debt consolidation,
settlements and debt management plans.
Credit counseling can also be a valuable tool for
anyone who wishes to reduce and ultimately
eliminate the amount of debt that they owe.
Generally, counselors offer personalized, step-by-
step plans and assistance with budgeting.
By gathering more information about the various
methods of achieving debt relief, you will be better
prepared to make an informed decision. If facing a
potential bankruptcy, you will be given the
opportunity to learn the pros and cons of declaring
bankruptcy, as well as the alternatives that may be
available to you.
Debt Consolidation
With debt consolidation, you can combine the high-
interest debt into a singular, lower interest payment.
Page 30
In turn, this will allow you to reduce the amount that
you will likely pay in interest as you work toward
paying off the debt you owe and eliminate your debt
more quickly. Debt consolidation may be an ideal
choice if:
Your total debt, excluding your mortgage,
does not exceed 40 percent of your gross
income.
Your credit score and debt-to-income ratio
allow you to qualify for a zero percent credit
card or a low-interest debt consolidation
loan.
You have a plan to prevent accumulating a
significant amount of debt again in the
future.
Debt consolidation can be done through the use of a
credit card or personal loan, which provides you with
additional options. Regardless of whether you apply
for personal loans or credit cards, you must meet
certain criteria, such as credit score requirements.
Debt consolidation is not for everyone. If you have
excessive spending habits or are overwhelmed by
debt, debt consolidation may not be the right option
for you. Fortunately, there are other debt relief
Page 31
options that may be better suited for your
circumstances.
Debt Settlement
Debt settlement allows you to pay down old debts for
less than the total amounts that you owe, as long as
a creditor or collection agency agrees to accept the
lesser amount in a lump sum payment. Debt
settlement will also require you to have the money up
front to settle a debt altogether, which can be less
appealing to borrowers who are overwhelmed by
their debts or those that have little or no income.
On the other hand, creditors do not generally offer
debt settlement opportunities unless the creditor or
collection agency has reason to believe that you are
unable to pay the full amount you owe. Settlement
options are generally only offered if you have not
made payments for a long period of time, or if you
have stopped making payments altogether. Thus,
debt settlement is not generally an option for active
accounts that have a fair payment history.
If you are interested in settling debts with a creditor
or collection agency, you can either attempt to
negotiate with the creditor on your own or go through
a debt settlement company that will negotiate on your
Page 32
behalf. However, these companies cannot negotiate
for certain types of debt, such as student loans.
Furthermore, debt settlement options are not offered
for secured loans such as mortgages or auto
financing. That is because your home can be
foreclosed upon and your vehicle can be
repossessed should you be unable to pay your debt.
While settling a debt with a creditor can offer the
benefit of ridding yourself of debt altogether, often for
a reduced cost, it is not without its drawbacks.
Should you choose to settle your debt for less than
the amount you owed, your credit will likely take a hit.
The account will show as a debt that is charged by
lenders, which will remain on your credit report for up
to seven years.
In addition, you will likely be required to pay
additional fees on top of the amount you settle for,
such as taxes owed on the forgiven debt. Should you
choose to work with a debt settlement company, you
will also have to pay that company’s fees, which are
generally a percentage of the total amount of your
debt or a percentage of the forgiven amount.
Page 33
Credit Counseling
If you want to begin working toward debt relief, or if
you have not been able to make much headway on
your own, you may benefit from seeking credit
counseling. Depending on where you live, you may
be able to find a non-profit credit counseling agency
that offers services for free. Otherwise, you may be
charged a small fee for these counseling services.
Credit counseling can not only assist with general
budgeting strategies, but also with the development
of debt management plans and the providing of
resources for student loans and housing debt. If you
are considering filing for bankruptcy, a credit
counselor will be able to provide you with additional
information about the process, such as the lasting
impact that accompanies a declaration of bankruptcy
and all the alternatives that may be available to you.
When seeking out a credit counseling agency near
you, make sure to look for agencies that are
accredited and certified in your state. If the agency is
a nonprofit organization, make sure that it is part of
either the National Foundation for Credit Counseling
or the Financial Counseling Association of America.
Page 34
It is important to consider the cost of each credit
counseling agency, as well as the services that they
provide. Overall, the costs and available services can
vary significantly depending on each agency.
Debt Management Plans
Commonly available through credit counseling
agencies, debt management plans can assist you in
paying off debt quickly while also helping you save
money. A debt management plan can combine
several debts into one monthly payment, making it
easier to pay down your debt. Additionally, credit
counseling agencies can often get creditors to
reduce their interest rates, thus saving you money
over time.
If you are considering a debt management plan, be
mindful that these plans offer benefits such as:
Debt management plans can often help you
reduce your interest rates by half (or more).
These plans can help you pay off debt more
quickly in comparison to going at it alone.
These plans will consolidate various
different debts into one monthly payment.
Page 35
Debt management plans are not for everyone. Like
all debt relief options, debt management plans have
certain drawbacks, which include:
Debt management plans are primarily used
for credit card debt. Alternatively, they
cannot be used for tax obligations, student
loans, secured loans or medical expenses.
A debt management plan can take between
three and five years to complete. While on a
debt management plan, you will likely be
unable to use credit cards or apply for new
lines of credit.
Missing a payment can derail your debt
management plan and cancel out any
decreases to your interest rates.
Bankruptcy
Filing for bankruptcy should always be considered as
a last resort, as it is a timely process that will harm
your credit score and history drastically for up to ten
years. Rebuilding your credit following bankruptcy
can be very difficult, and there are a number of
lenders who will refuse to approve you for a loan
based on the fact that you have filed for bankruptcy
in the past.
Page 36
On the other hand, bankruptcy is still a viable option
for those who are overwhelmed by debt and may not
benefit from an alternative. Filing for Chapter 7 or
Chapter 13 bankruptcy may be the right choice if:
You do not have many assets.
Your total debt equals more than 40 percent
of your annual income.
Your debts can be discharged or forgiven
under Chapter 7 or Chapter 13 bankruptcy.
It would take you five or more years to pay
off your debt, even under extreme
measures.
It is important to note that filing for bankruptcy may
not eliminate all of your debt. Certain debts cannot
be discharged or forgiven through bankruptcy,
including child support, student loans and owed
taxes.
In order to file for bankruptcy, you must meet certain
eligibility requirements. For starters, you must meet a
“means test,” which reviews your income, assets and
expenses in order to determine whether or not you
are able to repay your debts. You will also not qualify
to file for bankruptcy if you have filed for Chapter 7 in
Page 37
the past eight years or Chapter 13 in the past six
years.
If you meet the requirements and wish to file for
bankruptcy, you will need to decide whether you will
file for Chapter 7 or Chapter 13. Chapter 7
bankruptcy would eliminate all eligible debt, while
Chapter 13 will allow you to choose certain debts to
continue to pay off while eliminating others.
In order to file for bankruptcy, you must complete a
number of steps, which include:
1. You must complete a bankruptcy
counseling form from a qualified nonprofit
credit counseling agency within 180 days
before filing for bankruptcy.
2. You are strongly encouraged to hire an
attorney that specializes in bankruptcy
cases, as there are numerous forms that
must be completed and filed. Your case
can be dismissed if you do not have the
proper paperwork or if anything is
considered incomplete.
Page 38
3. File the necessary paperwork with your
attorney. You will need to gather all
relevant documents related to your debts,
income and assets.
4. Once your bankruptcy petition has been
filed, a court-appointed trustee will take
over your case.
5. You will need to meet with your creditors.
While a trustee will arrange these
meetings, you must attend the meetings
with the creditors. You are strongly
encouraged to have your lawyer present.
6. Your court-appointed trustee will determine
whether or not you are eligible for
bankruptcy.
7. If found eligible, your court-appointed
trustee will determine whether or not the
assets you own are worth selling. If sold,
the funds gathered from your assets will go
to your creditors.
8. You may be required to attend an
educational course before your bankruptcy
Page 39
case can be completed. This course is
often provided through a qualified nonprofit
credit counseling agency.
It can take between three and six months after you
file your petition for your debt to be discharged. Once
this happens, your eligible debts will be forgiven.
Tips for Paying Off Debt
With the right motivation, strategies and a plan in
place, you can reduce and ultimately eliminate your
debt. Experts recommend the following tips to help
you find debt relief:
1. Make the most of your income.
Whenever possible, pay only essential
expenses and cut back on costs that may
be dispensable. Try to allocate as much of
your income as possible to pay down your
debts. Once you have a budget and a plan,
track your progress. Then, revise your
budget as needed.
2. Work on overspending habits. If your
debt is a result of overspending, make sure
to work on those habits. Create spending
Page 40
guidelines and stick with them to avoid
overspending.
3. Make extra payments whenever
possible. Making extra payments on your
debts can help you pay them down more
quickly. Moreover, it can help you reduce
your credit utilization ratio, which will
consequently improve your credit score
while you work towards eliminating the
accumulated debt.
4. Consider consolidation and other debt
relief options. Depending on your
circumstances, you may benefit from debt
consolidation or a balance transfer credit
card, as long as you have a decent credit
score and meet the income requirements.
Page 41
VIP Concierge Services
Still have questions?
We’re here to help.
Call us at 1-866-529-6007
From 7 a.m. to 10 p.m. EST.
Page 42