How to Eliminate Debt

Debt elimination involves three steps:


1. Stop acquiring new debt.
2. Establish an emergency fund.
3. Implement a debt snowball.


Here’s how to approach each step


Stop acquiring new debt


(This step can be accomplished in an afternoon.)


This may seem self-evident, but the reason your debt is out of control is that you keep adding to it. Stop using credit.
Don’t finance anything. Cut up your credit cards. 


That last one can be tough. Don’t make excuses. I don’t care that other personal finance sites say that you shouldn’t cut them up. Destroy them. Stop rationalizing that you need them.


• You don’t need credit cards for a safety net.
• You don’t need credit cards for convenience.
• You don’t need credit cards for cash-back bonuses.


You don’t need credit cards at all. If you’re in debt, credit cards are a trap. They only put you deeper in debt. Later, when your debts are gone and your finances are under control, maybe then you can get a credit card. (I don’t carry a personal credit card. I don’t miss having one.)


After you destroy your cards, halt any recurring payments. If you have a gym membership, cancel it. If you automatically renew your World of Warcraft account, cancel it. Cancel anything that automatically charges your credit card. Stop using credit.


Once you’ve done this, call each credit card company in turn. Do not cancel your credit cards (except for those with a zero balance). Instead, ask for a better deal. Find an offer online and use it as a bargaining wedge. Your bank may not agree to match competing offers, but it probably will. It never hurts to ask....


Establish an emergency fund


(This step will probably take several months.)


For some, this is counter-intuitive. Why save before paying off debt? Because if you don’t save first, you’re not going to be able to cope with unexpected expenses. Do not tell yourself that you can keep a credit card for emergencies.  Destroy your credit cards; save cash for emergencies.


How much should you save? Ideally, you’d save $1,000 to start. (College students may be able to get by with $500.) This money is for emergencies only. It is not for beer. It is not for shoes. It is not for a Playstation 3. It is to be usedwhen your car dies, or when you break your arm in a touch football game. 


Keep this money liquid, but not immediately accessible. Don’t tie your emergency fund to a debit card. Don’t sabotage your efforts by making it easy to spend the money on non-essentials. Consider opening an online savings account. When an emergency arises, you can easily transfer the money to your regular checking account. It’ll be there when you need it, but you won’t be able to spend it spontaneously.


Implement a debt snowball


(This step may require several years.)


After you’ve stopped using credit, and after you’ve saved an emergency fund, then attack your existing debt. Attack it with vigor. Throw whatever you can at it. 


Many people say to pay your high interest debts first. There’s no question that this makes the most sense mathematically. But if money were all about math, you wouldn’t have debt in the first place. Money is as much about emotion and psychology as it is about math.


There are at least two approaches to debt elimination. Psychologically, using a debt snowball offers big payoffs, payoffs
 that can spur you to further debt reduction. 


Snowball Method: (short version)


Order your debts from lowest balance to highest balance.
Designate a certain amount of money to pay toward debts each month.
Pay the minimum payment on all debts except for the one with the lowest balance.


Throw every other penny at the debt with the lowest balance.
When that debt is gone, do not alter the monthly amount used to pay debts, but throw all you can at the debt with the next-lowest balance.  I’m a huge fan of the debt snowball. It still takes time to pay off your debts, but you can see results almost immediately. 


Supplementary solutions


You can do other things to improve your money situation while you’re working on these three steps.


First, focus on the fundamental personal finance equation: to pay off debt, or to save money, or to accumulate wealth, you must spend less than you earn.  Curb your spending. Re-learn frugal habits. 


While you work to spend less, do what you can to increase your income. If possible, sell some of the stuff you bought when you got into debt. Get an extra job. 


Finally, go to your local public library and borrow Dave Ramsey’s The Total Money Makeover. Don’t be put off by the title — this is a fantastic guide to getting out of debt and developing good money habits. After you’ve finished, return it and borrow another book about money.


The most important thing is to start now. Don’t start tomorrow. Don’t start next week. Start tackling your debt now. Your older self will thank you.


-Edie Webber


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Pay Yourself First

Most people
today only save about 4 percent of their income. That means they are only working 22 minutes a day for themselves. If you're serious about finishing rich, you need to change this behavior. By making small, incremental improvements to your savings, you can win big. 

You should Pay Yourself First, at least one hour's worth of income every day," David Bach writes. "(Another way to put this is to say that you should Pay Yourself the First 12.5 percent of your gross income, but an hour a day is easier to remember.) 

The key is making your saving automatic by "paying yourself first." In other words, pay yourself before you pay the mortgage, the credit card company or even your taxes. And make sure it happens automatically each month so you don't have a chance to put that retirement money toward new shoes or golf clubs. 

The government pays itself automatically each time you get paid. Taxes are taken out of your salary before you even get your check. You should arrange for money to be taken from your salary and put into a retirement account before you ever get to see it. Most employers make this easy through a 401(k) plan. Sign up and you're well on your way to retirement. 

How to do it:

Very simply, however you receive your income, take 10% off the top and put it away in a savings account. Don’t touch it. When you get your check, either do it yourself right there at the bank, or have it done automatically by whoever is doing your direct deposit, set up a saving account to have 10% automatically direct deposited there.

You must be paid first, and every single time you get paid.

For some, starting to pay yourself before you have paid off your debt may seem counter-intuitive. Why save before paying off debt? Because if you don’t save first, you’re not going to be able to cope with unexpected expenses. Do not tell yourself that you can keep a credit card for emergencies. Hide your credit cards; USE CASH for emergencies.

How much should you save? Ideally, you’d save $1,000 to start. This money is for emergencies only. It is not for beer. It is not for shoes. It is not for a Playstation 3. It is to be used when your car dies, or when you break your arm in a touch football game.

Keep this money liquid, but not immediately accessible. Don’t tie your emergency fund to a debit card. Don’t sabotage your efforts by making it easy to spend the money on non-essentials. Consider opening an online savings account. When an emergency arises, you can easily transfer the money to your regular checking account. It’ll be there when you need it, but you won’t be able to spend it spontaneously.

We are taught this principle by God himself, don’t forget to give 10%, this idea frees us from gripping tightly to our money. It reminds us from where all things come and we are only borrowing them for awhile.

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A Tale of Two Credit Scores

By Liz Pulliam Weston MSN Money


The short version: Lower scores can cost you hundreds of thousands of dollars in extra interest and radically change the way you're able to live your entire life.  Here's a scenario that can help you understand how.


Emily and Karen are friends who borrow about the same amount of money over their lifetimes:


Each gets $20,000 in private student loans to help pay for college.


College is also when they get their first credit cards, and they each carry an $8,000 balance, on average, over the years.


They buy new cars after graduation and replace them every seven years until they buy their last vehicles at age 70.


Each buys her first home with a $300,000 mortgage at age 30 and then moves up to a larger house with a $400,000 mortgage after turning 40.


Each takes out a $50,000 home-improvement loan to remodel the second house. But Emily has a FICO credit score of 750, which is considered good to excellent. Karen has a 650 score, which is considered fair to poor, depending on the lender.


Emily maintains her good credit scores by always paying her bills on time, applying for credit sparingly and never maxing out her credit cards. Lenders respond by increasing her credit limits and giving her more offers of credit, allowing her to spread her balances across several cards and further protect her scores.


The high cost of bad credit:


Karen, on the other hand, doesn't always pay on time and sometimes maxes out her cards, which makes lenders reluctant to extend more credit. She tends to carry larger balances on fewer cards than Emily, which further hurts her scores, and Karen has less ability to negotiate lower interest rates. 


The following examples of what they pay are only illustrations. In real life, interest rates will wax and wane over time while the amounts paid for houses and cars will vary. But the illustrations will give you a pretty good idea of the potential cost of not-so-great credit.


The extra cost of a student loan:
Emily  Interest rate 7.25% 
Karen Interest rate 13.25%
Monthly payment $234  $302 
Total interest paid (10 years) $8,176  $16,189 
Karen's penalty $8,013 




The extra cost of a credit card:
Emily Interest rate 10.99%  
Karen Interest rate 19.99%
Annual interest paid $880  $1,600 
Lifetime interest paid $44,000  $80,000 
Karen's penalty $36,000




The extra cost of house No. 1:
Emily Interest rate 4.84% 
Karen Interest rate 5.66%
Monthly payment $1,581  $1,734 
Total interest paid (10 years) $132,592  $156,802 
Karen's penalty $24,210 




The extra cost of a car:
Emily Interest rate 5.78% 
Karen Interest rate 13.24%
Monthly payment $481  $572 
Interest cost per loan $3,843  $9,310 
Lifetime interest paid $30,768  $74,480 
Karen's penalty $43,712




For their second homes, paid for with a 30-year, fixed-rate loan for $400,000 over 30 years:




The extra cost of house No. 2:
Emily Karen
Interest rate 4.84% 5.66%
Monthly payment $2,108  $2,312 
Interest cost per loan $359,004  $432,221 
Karen's penalty $73,217




The total cost of Karen's lower scores? As a 30-year-old with a mortgage, car payment, student loan and credit card, she pays $372 a month more than Emily does for the same amount borrowed. Over a lifetime of borrowing, she pays an astounding $201,712 more. 


It also doesn't count opportunity cost -- what Karen might have earned if she'd been able to invest the extra money she was paying to lenders. If you divided the $201,712 penalty over 50 years and figured an 8% average annual return, those interest payments could have turned into a retirement kitty worth more than…$2.3 million.


But mostly, the cost above doesn't quantify a lifetime of struggling with money. Because more of Karen's paycheck went to lenders, she had less money for everything else, from vacations to her kids' educations. 


If you've ever wondered why some families flounder while others in similar circumstances don't, the answer could be (and probably is) rooted in how they handle credit.


###


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Bad Credit is Hazardous to Your Wallet

Bad credit costs you good money!


Consider Christine Pomoni’s story (similar to many 
Americans today). Although she has an MBA in Finance, she
fell into the expensive bad credit score trap:


In 2005, I had:
-$15,000 in private student loan to fund my college education
- I bought my first car $15,000 for 5 years on credit
- I bought my first home with a $150,000 mortgage for 30 years

In 2005, I was paying my credit cards bills on time and at that time, my FICO credit 
score was 720, which is good to excellent.


2009: In 2009, lending standards got tighter.  But then I 
lost my job and I couldn't make timely credit cards 
payments anymore. I was unemployed for a year. I 
maxed out my cards, so lenders wouldn’t give me offers 
of credit. My credit balances piled up, hurting my credit 
score and driving my interest rates up. It was impossible to 
increase my credit score, it actually downgraded to 630, 
which is fair to poor.


 When my credit was ruined, I paid a penalty of $6,250 in higher student loan 
fees.


 I paid a penalty of $24,000 making late payments and maxing credit cards.


 My car payments skyrocketed because my credit was ruined, as soon as my FICO 
credit score was downgraded to 630 had to pay an additional $2,135.


 With 630 credit score, required to pay $68,480 on my mortgage interest.


 Bad credit costs add up fast. In total, my bad credit costs me 
$100,865!


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Get to Know Your Credit Bureaus

So What are the Credit Bureaus?


In brief, credit bureaus are businesses that maintain files on basically every consumer who has ever been involved in some type of credit obligation, such as a loan or a credit card.  Credit files contain a myriad of information, including the amount of credit debt a consumer has accumulated, the type of debt and payment 
history.


When requested by a potential lender or creditor, this information is collected and packaged into what is known as a credit report.  Lenders and creditors use the information from the credit report to supplement any applicant information they have gathered in order to make an informed decision about a consumer’s creditworthiness.


Who are the credit bureaus?


Today there are three national credit bureaus that dominate the industry: Equifax, Experian, and TransUnion.  Each bureau owns or is affiliated with hundreds of previously independent local credit bureaus.  However, there are still many smaller regional credit bureaus that have no relationship with the three major bureaus.  


The credit reporting industry currently generates between $3 and $4 billion in annual sales.  The credit bureaus estimate that approximately 1.3 billion credit reports are run each year, and each bureau, on average, maintains approximately 225 million consumer credit files.


Credit bureaus collect information on consumers from lenders such as banks, credit card companies, department stores and even collection agencies.  The bureaus also draw information from public records to provide additional details regarding bankruptcies, judgments or liens.  Any company that makes lending decisions or 
manages financial accounts can voluntarily report back to the bureaus, and the bureaus are always soliciting information from these types of companies.


C. What are the sources of income for credit bureaus?


1. Financial institutions, insurance companies
2. Businesses who pay to report payment history
3. Companies who purchase qualified lists
4. Companies for employment checks
5. Credit monitoring services, repositories


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Ten Myths about Credit Scores

If you’re a fan of TV’s “Mythbusters,” then you may already know the truth about many popular fictions – like how a heated Jawbreaker can explode when you bite into it, or that a home ceiling fan cannot decapitate you, or that your toilet seat is the cleanest surface in your house. While these are fun myths to debunk, knowing the facts of these fictional stories probably won’t affect your personal finances.


What can impact your wallet is what you know – and just as importantly, what you don’t know – about your credit score. Your credit score is a three-digit numerical representation of your credit-worthiness, or how likely you are to reliably pay back money you borrow. It may seem simple enough, but credit scores aren’t always intuitive. Even when you think you’re doing the right thing 
financially, you may be actually hurting your credit score.


When it comes to credit reports and scores, knowledge is power. Here are the real facts behind 10 common credit score fictions:


Fiction: The more money you make, the better your credit score will fare.
Fact: Your income has nothing to do with your credit score. It’s
 not reported to the credit bureaus or listed on your credit report.


Fiction: Once you’ve paid a past-due debt, it will drop off of your credit report.
Fact: Late payments and other negative information remain on your credit report for seven years from the date of the initial late payment. Bankruptcies typically stick around for 10 years from the bankruptcy filing date. While that black mark may continue to soil your credit report, however, its effect on your credit score will lessen over time.


Fiction: Credit bureaus never make mistakes.
Fact: Nearly eight in 10 credit reports contain a serious error or some sort of mistake, according to a survey by the U.S. Public Interest Research Groups. Because many errors can negatively impact your credit score, it’s important to check your credit report regularly and dispute any inaccuracies you find. 

Fiction: Practicing a cash-only policy will help your credit score.
Fact: Having good credit is a function of having credit available to you and using it responsibly. If you don’t have or use credit, you may have no credit history at all and if you do, your credit score won’t be as good as someone who consistently demonstrates responsible use of credit over time.


Fiction: All credit reports and credit scores are the same.
Fact: You have three main credit reports – one from Experian, Equifax and Transunion – plus a variety of credit scores. The information listed on each of your credit reports may vary and your credit scores – even if based on a single report – may also vary. No one credit report or score is better than the others. They all seek to document your credit history and assess your credit risk.


Fiction: How responsibly you manage your checking, savings and investment accounts will impact your credit score.
Fact: Like income, your checking, savings and investment account activity is not reported to the credit bureaus and does not affect your credit score.


Fiction: Closing credit card accounts will help your credit score.
Fact: When you close a credit card account, you may be affecting your “credit utilization.” Credit utilization is simply how much credit you use (balances) compared to how much credit is available to you (credit limits). Closing a credit card account lowers the amount of credit that’s available to you, which may increase your credit utilization percentage if you maintain balances on any of 
your other credit cards. A higher credit utilization may negatively impact your credit score.


Fiction: Pulling your own credit report will lower your credit score.
Fact: When you pull your credit report for your own educational purposes, it’s considered a “soft inquiry” and will not affect your credit score. On the other hand, when a creditor or lender pulls your credit report for the purpose of extending you credit or a loan, it’s a “hard inquiry” and may negatively impact your credit score. (Learn more about credit inquiries.)


Fiction: If a bill or debt isn’t generally reported to the credit bureaus, missing a payment won’t affect your credit score.
Fact: Any time you pay a bill late or don’t pay at all, that activity can be reported to the credit bureaus. Different companies have different policies about reporting late payments or negative information, but never assume that just because you’ve never seen a particular bill listed on your credit report that it can’t negatively impact your credit score if you don’t pay it.


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10 Steps to Healthy Credit

It's NEVER too late to develop good credit habits.  Start followjng these credit tips today for a better future:


1.  NEVER--Ever--charge what you can't afford-No Matter What.


2.  Always Pay your bills on time to establish a good payment history. Paying bills late incurs late fees and
 damages your good credit.


3.  Set a monthly budget (spending limit) and stick to it--no matter what.


4.  If financing, shop around for the best mortgage, automobile, financing, and credit card rates. 


5.  Understand the terms of your mortgage, automobile, credit card.and other financing completely.


6.  Save money each payday for emergencies. 


7.  Shop as carefully with a credit card as you do with cash.  Don't buy frivolous items or those things you can't afford.


8.  Make full payments, not partial ones.


9.  Keep mortgage, automobile, credit card, and other information  on financing (including the phone number
 of the issuer) in a safe place.  Set up file folders for each bill.


10.  Make sure to also keep receipts, sales slips, and payment history in a safe place.  Compare charges when your billing statements arrive.  If there's a mistake, call your issuer right away.


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