Debt Management
Whether you are buying a home, a car, or just a new dvd player three little numbers can make or break you.
Most of us know our approximate credit score but do you know how it’s calculated?
Now more than ever, when I meet with a client, we always talk about how to improve their credit score. So, let’s take a look at just what goes into figuring that number.
First off – payment history accounts for 35% of your credit score! pay your bills on time.
The second most important is your outstanding debt. A high balance against your credit limit can harm your credit. Aim for balances under 30%.
For example, if you have a credit card with $1,000 limit, keep the balance below $300, or spread the balance among multiple cards.
Your credit history accounts for 15% of your score. Longer history makes you a less risky borrower. Don’t close old accounts.
Credit inquiries can also impact your score. When a lender checks your credit, that’s a hard hit and it causes a slight ding to your credit score.
Apply for new credit in moderation. Here are inquiries that will not mess up your score: job related, insurance, utilities or promotional – for pre-approved offers in the mail.
In summary:
1. Bring past due accounts current
2. Pay down credit cards
3. Do not close old accounts
4. Have a mix of accounts: mortgage, auto and 2-4 credit cards
As always – you can send me an e-mail, or drop me a line on twitter – and tell us how you were able to improve your score.
In over your head on those credit card bills? Negotiating with creditors can save you big bucks. But there are some hidden pitfalls that not everyone knows about.
When I worked with Jim and Lisa on their financial plan, it became obvious that in order for them to save more money, they needed to get rid of some of their credit card debt. So, they decided to negotiate with creditors. They owed a total of $48,000.
They managed to settle for a lump sum payment of $30,000, and they were thrilled to have $18,000 of their debt cancelled! However, several months later they received a 1099 notice showing that they would owe a tax on the forgiven debt.
So, here is what you need to know:
First – the forgiven credit card debt we are talking about is not the same as a cancelled mortgage debt under the mortgage debt forgiveness act.
The cancelled credit card debt is almost always taxable as income, except when you are insolvent or if your debt was erased in bankruptcy. Irs defines being insolvent when “your debts exceed your total assets.”
Finally, while settling your credit card debt for less may give you some breathing room, it will negatively impact you credit score.
As always, i would love to hear from you. Tell me what has worked for you to successfully negotiate with creditors. You can email me through our website krdo.com
Senate Passes Credit Card Reform Full of Consumer Friendly Provisions:
* The bill prevents card issuers from increasing interest rates in the first year after an account is opened, and requires promotional rates to last at least six months. * For existing cardholders, the bill puts an end to fees charged for paying off a debt via mail, telephone or electronic transfer, but fees will be allowed for live services on expedited payments. When timing card payments, issuers must mail statements 21 days before the bill is due, rather than 14 * Specific provisions were made for responsible cardholders, including eliminating so-called double-cycle billing. Card companies can no longer charge interest on debt paid on time during a grace period. And when issuing new cards or increasing credit limits, companies will be required to consider a customer’s ability to pay the debt. If issuers plan to increase interest rates, fees and finance charges, cardholder must be notified 45 days in advance. * This bill will make it tough for a 21-year old to get a credit card. When issuing credit cards to people under 21, credit card issuers have to get a parent’s signature, or co-signer older than 21. Otherwise, the applicant has to document that it has independent means of repaying the debt. And issuers must get approval from a parent or guardian before increasing the credit limit on accounts for which they are jointly liable.
Essentially, these are mostly protections to prevent abuse and stop the downward spiral that occurs to a person if they make a late payment. For many consumers this will be a positive change and it will offer more transparency in rate change. However, on the other side are banks, complaining that putting on additional restrictions will raise the price of credit for everyone and make credit less available.
From Jill: Question: Denisa, Christmas shopping is thankfully over, but now the financial reality sets in. I have a lot of credit card debt! I feel like I already live paycheck to paycheck and I know that I need to save for retirement. Should I pay off my credit cards first and then save, or do both?
Answer: I applaud you for your commitment to fiscal responsibility. There is a theory that due to the volatility of the stock market, people are better off paying off their high interest credit cards instead of investing. I believe differently. In reality, as life throws curve ball at us, we dust off that credit card that we just paid off and use it again. The saving for retirement then becomes postponed indefinitely while we find ourselves in more credit card debt.
This is the time when you can have the cake and eat it too by setting money aside for rainy days and retirement while paying off your credit card debt. However, it is important to have a disciplined plan for both your savings and for reducing your debt.
For your debt, you will need to make more than a just a minimum payment. Once you pay off one card, make sure to add this money toward the payment of another card, and repeat until they are all paid off. Simultaneously, for your savings, make sure to place a portion of this money into a money market or savings account for rainy days, then invest the rest each month toward retirement.
