GETTING OUT OF DEBT
(Posted 2007-03-10 19:11:22 by Ray Lopez)
Now that the Democratic Party has control of the Congress, one of the many
things they're focusing on is the predatory nature of the big credit card
companies in the US. In particular, they're looking at the ridiculous
interest rates, ridiculous fees, and other complexities that credit card
companies employ to suck as much money as they can from consumers. It has
been said that people who are in debt to these companies have no one to
blame but themselves, and that may be true to a certain extent. But the
vast majority of the blame should lie squarely at the feet of companies
like Citi and Capitol One, for granting credit cards to millions of people
who shouldn't be given a credit card, and then by punishing these very same
people with confusing rules, criminally-high interest rates, and absurd
fees. I do not think that much will change, simply because these companies
are too powerful.
In the meantime, there are many out there who are in a lot of debt. My wife
and I have been climbing out of debt for the past four years or so, and we
will hopefully be completely out of debt in a year or so, praise God.
What's the best way to get out of debt? That depends very much on your own
individual situation. In my opinion, if your total amount of credit card
debt is five percent or less of your total family gross income, then you're
OK. So, if you and your spouse earn a combined $75,000 per year, you are
probably OK if your combined credit card debt is equal to or less than
$3,750 at any given time.
If your credit card debt is more than five percent of your gross annual
wages, then, in my opinion, you may have a problem. If your combined credit
card debt is between six and twenty percent of your gross annual wages,
then you really should think about engaging immediately in a debt reduction
strategy. Thus, if a couple who earns a total of $75,000 gross per year
has a combined credit card debt of more than $3,750 but less than $15,000,
then they should start working to lower that debt as soon as possible.
Why? Interest rates. The higher your debt, the "riskier" you are to your
creditors. As a result, they will jack up your interest rate, even if you
have a perfect payment history, only because of the fact that the more debt
you accumulate, the greater the risk to them of losing that money should
you decide you don't want to repay them.
If you are one of these people whose debt load is greater than five percent
of your gross annual wages but less than 20 percent, you can reduce your
debt load on your own, without any outside assistance. Dave Ramsey
(
http://www.daveramsey.com) has an excellent debt reduction strategy that
works well for many people, and you really should consider adopting it or
one like it, as soon as possible.
At one time, my wife and I had a credit card load that was much more than
20 percent of our gross annual salaries. Indeed, it was more than 50
percent of our gross annual salary! For folks like us, I would very
strongly recommend sticking to the Dave Ramsey approach. Another option
would be going to a non-profit consumer credit counseling service, similar
to the approach we ultimately took. The Dave Ramsey approach would have
worked for us (it works for everyone), but it would have taken us a very
long time to get out of debt at that rate. To me, the hit we took on our
credit rating was worth the time we saved by taking the same approach that
consumer credit counselors take. It is a personal choice of course.
We did not actually employ a consumer credit counseling service. Rather,
what I did was to negotiate with each of our creditors to have them lower
our interest rates so that we could pay off our balances. I would very
strongly recommend anyone to NOT do this. It was about five months of sheer
hell, of dealing with incompetant people working at credit card companies,
and of having agreements made and broken time and time again. The credit
card companies are actually set up better to deal with non-profit consumer
credit counselors, rather than with debtors one-on-one.
Having said that, let's say your debt load is equal to more than 20 percent
of your gross annual income, and you want to lower it. What do you do?
The first thing I would do would be to very seriously consider if you can
use the Dave Ramsey method to lower your debt. The reason for this is that
if you do decide to go the non-profit credit counselor route, your credit
rating will take a hit. According to Dave Ramsey's web site, people who
have gone through a non-profit debt management program are treated just
like Chapter 13 bankruptcy filers when they try and get a home loan.
But if you sit down with your spouse, the bills, and a calculator, and
decide it would just take way too long to pay off your bills the Dave
Ramsey way, and that you can stand to take the hit on your credit rating,
the next thing I would do would be to seriously consider what will happen
to you while you are being managed by a non-profit consumer credit
counselor. Here is a little snapshot of what happened to us when I called
up all our creditors to tell them we needed to lower our interest rates:
1. All of the credit cards that are to be managed by the non-profit agency
will be closed. And when you finish repaying them, they won't be reopened.
They're basically gone forever.
2. Any cards you have that are NOT managed by the non-profit agency will
either be closed, or the interest rates will go even higher. This part
really got us, and it sucks. My platinum AMEX card, which I had for 10
years and had never even been late with a payment, was immediately closed,
and I found out about it when I was trying to use it to pay for a parking
garage on a trip, and the card was declined. AMEX is pure evil, I will
never do business with them again.
4. During the time that your credit cards are being managed by the
non-profit agency, you will be unable to obtain ANY new credit. This means
no new car, new home, new credit cards, nothing. If you do, it constitutes
a break of your agreement with the card issuers, and they will come after
you for all the interest you should have paid them, in addition to jacking
up your interest rate back up to it's astronomically high level.
5. Your credit report will reflect the fact that you had to get your
interest rates lowered to repay your debt. The report will say things like
"NOT PAID AS AGREED" or some such crap, and this will result in a lowering
of your credit score. One of the few pleasant surprises is that our credit
score did not go down as badly as we thought it would. It certainly would
have been a lot worse had we decided to go for debt renegotiation (where
you repay them pennies on the dollar) or even bankruptcy.
So, now you know what you might face if you decide to go the non-profit
agency route. And you decide to go for it, to bear it out, to go ahead and
live on a cash-only basis for the entire time that your debt is being
managed for you. What next?
The next thing you need to do is to gather together all of the latest
credit card bills for each of the cards you want to have manged by the
non-profit agency. Do NOT include student loans. It turns out that
student loans cannot be managed by such agencies, but many of the more
unscrupulous non-profit credit counselors will tell you to include them,
only so they can increase the fee they charge you.
Get your bills together and contact a reputable consumer credit counseling
agency. I have had many people recommend to me Consolidated Credit
Counseling (
http://www.consolidatedcredit.org). Of all the companies they
seem to be above board, and competant.
If you decide to go with another credit counselor, be sure to look for the
following:
1. Make sure they don't charge you an exorbitant fee. Consolidated Credit
only charges about 30 or 40 dollars a month. Any company that charges you
more, or that charges you a lot based upon your balance is ripping you off.
2. Make sure they are competant. They will sound very competant at the
outset, when you are dealing with the sales people. But once your account
gets turned over to the folks in the back room, things can change a lot.
Checks, faxes, bills all get easily lost, and I even know of one case where
an employee was stealing people's payments.
The issue of competance is sometimes hard to judge up front, but spend a
little time Googling for each company you are considering, just to see if
you can find instances of other people getting ripped off. It does happen.
Once you do make an agreement with a non-profit agency, three things will
begin:
1. Your interest rates will be lowered, sometimes drastically. We did not
have any fees or late charges on any of our accounts, but I understand that
if you do, those will be removed as well.
2. Some agreed-upon amount of money will be taken out of your checking
account every month by the non-profit agency. They will take this money,
then distribute the payments to each of your creditors that they are
managing for you.
3. Of course, you also need to be ready for your credit to take a dive, as
described above, and to live on a cash-only basis. It generally happens
within a month of signing your agreement with the non-profit agency.
You will continue to get your monthly statements in the mail. Look over
these statements EXTREMELY carefully. Make sure that 1) your creditors are
actually getting the payments from the non-profit, and 2) that your
interest rates remain as agreed. I understand that if you have your
account managed by a non-profit agency, the interest rates won't change.
But for us the rates go back up on random accounts at random intervals, and
I have to back and call them up each time.
Track your debt carefully, and make sure that it is going down each month.
I hope this helps. There is nothing like the feeling of being out of
credit card hell!
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