Ten Tips to Getting Out of Debt

For some, job layoffs and unforeseen external factors have loaded them up with debt. For most, however, debt is the result of extraneous spending, poor money management, or both.

Here are ten tips to getting out of debt. Some are easier to follow than others, but all are designed to help alleviate the problem:

1. Create a realistic monthly budget for your expenses. List all monthly bills and necessities and make sure they are covered by your monthly income. Allow only the money remaining after the bills are paid to be spent elsewhere. Stay within your budget guidelines.

2. Pay off the balance on the credit card with the highest interest rate first (unless the balance on any card exceed 50 percent of your credit limit). First, pay all balances to below 50 percent of the card limit because balances above this level cause your credit score to diminish. Then pay off the balance on the credit card with the highest interest rate. If the account was opened within the past year and you have additional older accounts, close it after it is paid off. Next month do the same with the card that has the next highest interest rates. Continue until you reach the credit card with the most favorable terms (i.e., low interest rates). Use this as your preferred account. You need only four open accounts to establish a positive credit history.

3. Learn to use cash instead of credit cards. Have one primary credit card and use it only for emergencies or major necessities, such as a new refrigerator if the current one stops working. Put your credit card in a safe place, not available for everyday use. Also, do not accept increases on your credit card limit above an amount you can easily pay off in three months.

4. Use direct deposit for your paychecks. Also have a limit on how much you will allow yourself to withdraw each week and month.

5. Cut down on your discretionary expenses. This includes dining out, overusing your cell phone, and other such unnecessary expenses.

6. Evaluate your living situation. Your housing costs should be no more than 33 percent of your household income, including mortgage payments, property tax, and both property and homeowner's insurance. You can shop around for lower insurance rates, refinance your home mortgage, and look for more economical utility plans.

7. Avoid borrowing money to get out of debt, especially consolidation loans. Many people think this is a way of helping them get out of debt. However, consolidation loans are simply a means of combining debt. You could end up losing everything because you’ve tied it all up in one loan. If you must borrow, see if a friend or family member can lend you money, since the interest rates should be low or nonexistent.

8. Contact your creditors and try to work out repayment plans. Many creditors are willing to work with you in a manner that will help them get their money without having to resort to debt collectors.

9. Become a savvy shopper. Look for deals, bargains, and savings. You’d be surprised at how much you can save if you take the time to shop around. Check out the price comparison Web sites such as Shopping.com and BizRate.com.

10. Look for extra ways to make some money. From part-time work to a garage sale to taking in a boarder, there are many ways to bring in some additional income.

If all else fails, seek out help from a debt reduction specialist or counselors who can help you formulate a plan for getting out of debt and staying out. Just make sure that you check out the service in advance. Many companies are simply taking advantage of people in debt and charging them high service charges. Typically, these companies can get you debt free in about 3 years and charge 15% of your debt amount as their fee. If you stay disciplined and complete their programs, this is not a bad way to go once you consider all of the savings on time and money.

How to Save Money and Get Out of Debt

By *01 WriterGig

Ready to get serious about managing your money? Wish you have a healthier savings account? If too much debt is causing you stress and concern, take the steps necessary to turn around your finances. Not only will your bank account look better, you'll sleep better too with the stress of debt out of your life. Here's how to save money and get out of debt.

Step 1 - Tally up your debts, your monthly income and your set expenses (bills that are constant). Estimate your other expenses, such as groceries, gas, clothes and extras. Look back at bank account statements and credit card bills to get a feel for how much you spend in the different

Step 2 - Make a plan. If the word budget scares you, think of it as a plan for how you will allot or spend your hard-earned money. How soon can you save money get out of debt? The sooner you have a plan, the quicker this process will be. Decide now how much you will spend in each category every month. Make sure there is some money earmarked for savings.

Step 3 - Use cash for variable expenses, such as groceries and incidentals. Take the cash out weekly and allot it to envelopes marked with the categories. Spend wisely. Once the cash is gone, it's gone until the next dispersement. No dipping into other envelopes or the bank account.

Step 4 - Save $1,000 in an emergency fund. Pay minimums on your debt while you save your money for emergencies. It's important to have this cushion in the bank so that in the case of an emergency (unexpected car repair or medical expanse) you don't have to turn to credit cards once again.

Step 5 - Cut up your credit cards (but don't close the accounts if you have an outstanding balance or still owe money on them). Stop using them online, too. Use your debit cards for budgeted online expenses.

Step 6 - Have a weekly budget meeting with your spouse or yourself if you're single. Be accountable to each other.

Step 7 - Pay off your smallest debt first, adding anything extra to that debt each month until its gone, while still paying the minimum on your other debts. Once the first debt is paid off, put everything that was going toward it to your next debt. Dave Ramsey calls this the "debt snowball" because as you pay off the smaller debts, you free up more and more money to pay off the larger ones.

Step 8 - Stay motivated. Keep working toward your goals and remind yourself monthly of the progress you've made. Get intense, Get rid of your debt so that you can be free of those interest payments and begin spending your money on the things that matter as you save for your future.

Step 9 - Use manufacturer's coupons, combined with the best grocery store sales, to save money on your food bill. Since a large portion of your disposable income goes to buy food, this is a good area to trim. See resources, below, for a great coupon source website.

Step 10 - Plant some of your vegetables and herbs instead of buying them. Even replacing 1/4 of your summer vegetables with home grown ones will add up to a big savings. Do you live in an apartment or small house? If you have a balcony or deck, you can at least have a decent container garden. Start with tomatoes in large pots. Small savings will help you save money and get out of debt more quickly.

How to Compare Debt Settlement vs. Bankruptcy

By eHow Personal Finance Editor

Debt is a part of life, but too much debt can make life difficult to enjoy. Two potential solutions to resolving this problem and starting your financial life anew include filing for bankruptcy or using a debt settlement company. Before you commit to either option, it's important to know the pros and cons of using a debt settlement company versus filing for bankruptcy to help alleviate your financial woes.

Determine the Extent of Your Debt Problem

Step 1 - Request a copy of your credit report from one or all three major credit reporting agencies in the U.S. The companies are TransUnion LLC, Equifax Credit Information Services, Inc., and Experian.

Step 2 - Review your credit report and check for inaccuracies, such as incorrect personal information, accounts that do not belong to you and even accounts listed with balances that are actually paid in full. It's also important to know your FICO score, which is a credit score system. The acronym 'FICO' is derived from the name of the software used to calculate the score. While FICO scores range from 300-850, the average score is somewhere in the high 500s.

Step 3 - Determine how much debt you have by adding up the balances of all of your credit accounts, loans, both secured and unsecured, and even collection accounts.

Step 4 - Use this information when making your decisions about filing for bankruptcy or employing a debt settlement agency to help alleviate your financial problems.

Examine Your Monthly Finances

Step 1 - On a sheet of paper, list all of your monthly income including paychecks, alimony/spousal support, child support, bank, investment and rental interests or income. If you work overtime or receive bonuses, include that information, too. If you opt for filing bankruptcy, you will need to include your average monthly income from the six months prior to filing in your bankruptcy petition, so it's important to get these numbers no matter which solution you opt for, bankruptcy or credit counseling.

Step 2 - On another sheet of paper, list all of your mandatory monthly living expenses, such as for housing, transportation, insurance, prescriptions and doctor visits, utilities, groceries and education-related costs. Don't include payments for credit card debts, entertainment, or other items that are not necessary for your day-to-day survival. Definitely do not list an expense twice. That means if you used your credit cards to buy prescriptions, include that cost in your mandatory expenses list. However, if you used your credit card to buy a shirt, do not list the purchase on your mandatory expenses list at all, unless it was necessary for say, work.

Step 3 - Subtract the total of your monthly living expenses from your total monthly income. A balance indicates you have expendable income you could potentially use to pay down your debts. A zero or negative balance indicates you do not have expendable income that could be used to pay down your debt.

Step 4 - These calculations are important for helping you formulate your decisions about filing for bankruptcy or seeking the aid of a debt settlement agency.

Determining if Debt Settlement is Right For You

Step 1 - Determine if you could pay down your debts with your current income. If your income does not exceed your housing expenses, utilities, gas, groceries, and basic financial needs for the month, debt settlement is not a viable solution for you. However, if your monthly income exceeds your basic living expenses, debt settlement may help you resolve your financial crisis.

Step 2 - Determine if your debt situation qualifies for debt settlement services by examining the total amount of unsecured debt you owe. To qualify, you will usually need to owe at least $7,500 in unsecured debt. However, the qualifying balance will vary by debt settlement company. Make sure you ask each debt settlement company about their unsecured debt balance requirements to determine which debt settlement company is right for your situation.

Step 3 - Look for reputable debt settlement companies. Companies that charge huge fees up-front are companies to be avoided. Opt for debt settlement companies endorsed by the Better Business Bureau, or some other reputable pro-consumer group. Make sure to check that their fees are reasonable for the services rendered.

Step 4 - Compare the services each company offers. Look for companies with a sound history of effectively negotiating with creditors. Ask for references or case studies you can examine that prove the company's track record. If company representatives are hesitant to provide you with that information, walk, don't run, out their door.

Step 5 - Examine the pros and cons of committing to a debt settlement program. Ask the debt settlement company if by hiring them to represent you to negotiate your debts will your various creditors how your life might be impacted. Will those harassing creditor calls stop? (possible, but no guarantees. Creditors can still contact you for the collection of debts they are owed unless or until you file bankruptcy). Also, inquire how a debt settlement program will impact your credit in the future and what the long-term side effects to your credit might be.

Step 6 - Make sure you are prepared for the drawbacks of debt settlement programs such as the potential for increased creditor calls, possible collection lawsuits initiated by creditors, damaged credit and tax problems. If you don't think you can handle these possibilities, then you should probably look for another debt solution.

Determining if Bankruptcy is Right For You

Step 1 - Determine if you have any other options for resolving your financial crisis short of filing bankruptcy. Look online for other solutions to your debt problems such as debt settlement, debt management and nonprofit assistance. In addition, attorneys who practice bankruptcy law have begun to offer debt settlement services to clients who might have filed a bankruptcy before the Bankruptcy Code was overhauled in October, 2005, and find the new laws too onerous.

Step 2 - Determine if you qualify for bankruptcy by reading the most current version of the U.S. Bankruptcy Code, found in Title 11 of the U.S. Code. However, the revamped Bankruptcy Code is extremely complex to understand, so don't be surprised if you aren't able to comprehend much of what you are reading. The Bankruptcy Code can be found online. Many books attempting to explain the Code in plain English have been written, so check out your local library or bookstore for some helpful titles. Even if you discuss your financial problems with an attorney who specializes in bankruptcies, you might still want to read up on the law for yourself.

Step 3 - Determine which bankruptcy chapter you qualify for by reading the descriptions of each type of bankruptcy, as well as by reading the rules and regulations associated with each. This information can be found at your local library, bookstore, online, or by talking with an attorney who handles bankruptcies in their everyday practice.

Step 4 - Court costs for filing bankruptcy are different depending on which chapter you file. Currently, a Chapter 7 bankruptcy costs $299 in filing fees while a Chapter 13 costs $274, although Congress can change those fees at any time. It will also be important to learn how much an attorney will charge you to represent you in your bankruptcy. If you meet with a bankruptcy attorney, they will likely give you a written fee quote for their services either at your first meeting or perhaps in the mail. Do not expect to be able to email a bankruptcy attorney for a price quote on what they would charge for their services. Bankruptcy is an extremely complex area of law and an attorney well familiar with the law's complexity wouldn't likely give you a fee quote over the phone or in an email without knowing your entire financial picture. Would you call a doctor to ask how much it would cost to set your broken arm? Do you think the doctor would even come to the phone, and secondly, do you think they should or would give you an answer? They don't know how broken your arm is by talking to you on the phone and a bankruptcy attorney doesn't know how bad your financial situation is until they meet with you to discuss it.

Step 5 - Another important consideration is deciding whether filing for bankruptcy will resolve your credit problems. Depending on the types and amounts of your debts, a bankruptcy filing won't necessarily rid you of your duty to pay some of your bills, even though you filed for bankruptcy. Keep in mind that a bankruptcy filing remains on your credit record for ten years but a bad debt is only supposed to stay on a credit report for seven.

Tactics For Paying Off Debt Collections

by Latoya Irby

A debt collection is one of the worst entries on your credit report. A collection is a severely past due account that will make it difficult for you to get approved for new credit and loans.

If you have a collection account on your report, it’s likely affecting your credit score. This is especially true for more recent collections. You can improve your credit score by getting these collection accounts deleted from your report or reported as “Paid” or “Current.”

Before you pay off a collection account, first negotiate with the debt collector to have your credit report updated to something favorable. The only unacceptable scenario is to pay the collection without having having fact reflected in your credit report.

Here are some possible payment scenarios and outcomes, listed from most ideal to least ideal (but still acceptable).

Ideal

Negotiate with the debt collector to have the account deleted from your credit report in exchange for payment. Send a written request (a pay for delete letter) to the collector offering a settlement payment if the collector deletes the account from your credit reports. Wait for a written response from the collector before taking any action.

If you prefer, you can contact the collector by phone to negotiate pay for delete. However, you risk inadvertently saying something to the collector that conveys responsibility or liability for the debt. You don't want to do this if you're beyond or nearing expiration of the statute of limitations. Even if you choose to negotiate by phone, you still need to have the agreement in writing. Have the collector mail or fax you a letter including the terms of the agreement before making a payment.

MyFico forums has a sample pay for delete letter you can use. Remember, debt collectors don’t have to remove accurate entries from your credit report.

Next best thing

Most collectors want payment in full and will not delete the account from your credit report for a settlement payment. When this is the case, offer to pay the account in full in exchange for the collector deleting the account from your credit report. Again, send your request in writing and wait until the collector responds in writing before making a payment.

Not as good, but still ok

Ideally, you want the entry completely removed from your credit report. Unfortunately, not all collectors are willing to do this even in exchange for payment. If you cannot have the entry completely removed, you should have it updated as “Paid in full.” Offer the collector a settlement payment some % less than the full amount owed. Get the collector to agree to update the account as “Paid in full.” The agreement should be in writing.

Acceptable

Settle the account with the collector and accept an update of “Paid. Settled.” Keep in mind that a settled entry on your credit report will not boost your score as much as “Paid in full.” If you want your account to state “Paid in full” but cannot get the collector to do so for partial payment, then pay the account in full.

Acceptable

Pay the collector in full. Be sure to keep proof of payment. Monitor your credit report to make sure the collector updates the account as paid. If the collector does not update the account, dispute the account with the credit bureau, providing proof of payment if necessary.

Your Rights When In Collections

The Fair Debt Collection Practices Act, FDCPA, dictates how debt collectors can act when collecting a debt from you. These are things a debt collector can't do. If you need to reference the law, citations have been provided.

1. Ask you to pay more than you owe

The collector cannot misrepresent the amount you owe. [15 USC 1692e] § 807(2)(a)

2. Ask you to pay interest, fees, or expenses that are not allowed by law

The collector can't add on any extra fees that your original credit or loan agreement doesn't allow. [15 USC 1692f] § 808(1)

3. Call repeatedly or continuously

The FDCPA considers repeat calls as harassment. [15 USC 1692d] § 806(5)

4. Use obscene, profane, or abusive language

Using this kind of language is considered harassment. [15 USC 1692d] § 806(2)

5. Call before 8:00 am or after 9:00 pm

Calls during these times are considered harassment. [15 USC 1692c] § 805(a)(1)

6. Call at times the collector knew or should know are inconvenient

Calls at these times are considered harassment. [15 USC 1692c] § 805(a)(1)

7. Use or threaten to use violence if you don't pay the debt

Collectors can't threaten violence against you. [15 USC 1692d] § 806(1)

8. Threaten action they cannot or will not take

Collectors can't threaten to sue or file charges against you, garnish wages, take property, cause job loss, or ruin your credit when the collector cannot or does not intend to take the action. [15 USC 1692e] § 807(5)

9. Illegally inform a third party about your alleged debt

Unless you have expressly given permision, collectors are not allowed to inform anyone about your debt except:

• your attorney
• the creditor
• the creditor's attorney
• a credit reporting agency
• your spouse
• your parent (if you are a minor)

[15 USC 1692c] § 805(b)

10. Repeatedly call a third party to get your location information

The collector can only contact a third party once unless it has reason to believe the information previously provided is false. [15 USC 1692b] § 804(1)

Expensive and Credit-Score-Damaging Ways to Get out of Debt

By LaToya Irby

The easiest way to recognize a “stupid” debt repayment method is to think about whether the debt is actually paid off when the method’s complete. As you think about ways to get rid of your debt load, ask yourself, “Is this just a quick, easy solution to tide me over or will this really, once and for all, get rid of the debt?” Here are some of the worst (and most costly) ways to “pay off” your debt.

1. Borrow from your 401K

You shouldn’t borrow from your 401K period, much less to pay off your debt. Let’s talk about what happens when you borrow from your 401K. First, you can’t contribute to it anymore until you’ve repaid the loan. Second, your take home pay is less (because you have to pay back the loan) until the money’s paid back. Third, if you leave your job, you’ll have to pay the entire loan immediately or you’ll end up with early withdrawal fees and income taxes.

2. Refinance your mortgage

Another bad idea, especially if your debt was unsecured to begin with. Tying bad debt to your home’s equity isn’t smart. When you couldn’t pay your credit card debt, you ended up with a trashed credit rating. Securing your debt with your home means you lose your home and get a trashed credit rating when you can’t make payments.

3. Consolidate with a high interest loan

Debt consolidation may be a solution if you can get a loan at the right terms. If the only loan you can get has a higher interest rate than the average of your other debt, leave it alone. Your monthly payments may look lower, but that’s only because the loan is spread over a long repayment period. If you add up the interest you’d pay over the life of the loan, you’ll see that you’re spending more money that if you hadn’t consolidated with that loan.

4. Transfer your balances to other credit cards

Transferring balances to credit cards with those low introductory rates only makes sense when: you are financially able to pay off the balance before the introductory rate expires and you will not use the card to make purchases or take out cash advances. If you can’t transfer the balance under those conditions, it won’t work for you. And, forget about shuffling your balance to a new credit card with a new teaser rate, the balance transfer fees negate the interest savings.

The solution? The best way to pay off debt is to create a realisticbudget, and negotiate a payment plan with your creditors. This can be done yourself, or with a reliable debt settlement company. Make sure you checkthem out with the BBB, and the fees are no more than 15% of the debt amount over 9 months or more.

Dos and Don'ts Of Using Credit Cards Responsibly

By LaToya Irby, About.com

Most of us aren't born knowing how to use credit cards. Still, it’s important to learn the rules of the credit card game – preferably before you start playing. These do’s and don’ts of credit card usage encourage healthy spending habits for new and experienced credit card users alike.

Don't

• Use your credit card to make everyday purchases. Items like food, clothing, and gas shouldn't be purchased with a credit card. Using your credit card as a substitute for cash is a habit that can quickly lead to debt. For ordinary purchases, leave your credit card in your wallet and use cash or debit card instead.



• Get into the habit of making minimum-only payments. Making only the minimum payment each month increases the amount of time it will take to pay off your debt. It also increases the amount of interest you end up paying. To pay your debts off quicker and cheaper, you should pay as much as you can on your balance each month.



• Use your credit card to buy things you can’t afford. Living a borrowed lifestyle is the quickest way to get into debt. If you can’t afford a purchase today, chances are you won’t be able to afford it tomorrow, or even next month.
  



• Close out a credit card without knowing how your credit will be impacted. There are times when closing a credit card can hurt your credit score. Avoid closing cards that still have a balance or those that make up a significant amount of your credit history.
  
  

Do

• Make wise decisions about purchasing items you need versus those you simply want. We’ve all used the word “need” to describe something we really just wanted badly. Using your credit card responsibly means recognizing which things you need and which you just want.



• Let your creditor know in advance if you won’t be able to make your monthly payment on time. The worst thing you can do is simply forgo your credit card payment, no matter the reason. Most creditors will assist you if you let them know before you miss your payment. Simply call your creditor, briefly explain the situation, and ask that any late fees be waived.
  



• Stay within 30% of your credit limit. A large part of your credit score considers the amount of debt you have. Keeping your balances low helps you maintain a good credit score. Not only that, lower balances are easier to manage than those that are higher.
  
  


• Negotiate a lower interest rate. Especially if your current rate is higher than offers you receive. Your interest rate determines how much you pay for carrying a balance on your credit card. Evaluate the interest rate on your credit card periodically to be sure you are getting the best deal possible.