Tuesday, November 27, 2007

Overloaded With Debt? Symptoms and Solutions

by Nancy Osborne, COO of ERATE


Most of us intuitively believe we would know if we were overburdened by debt, that kind of stress should be clear and obvious. However for those who suffer a disconnect with common sense, and there are far too many among us, or for those whose rose-colored glasses are so thick they impervious to reality, here are some clear and concrete signs that your debt is getting the better of you:

> You spend in excess of 20% of your net income servicing debt other than your mortgage.

> You are not contributing to your 401(k) or other retirement plans because you need the take home pay to service your debt.

> You use credit cards out of necessity and not out of convenience.

> You are frequently hit with late payment fees.

> You continually reach the maximum limit on your credit cards.

> You play the game of credit card roulette using one card to pay off another.

> You cannot meet the minimum payment requirement on your credit cards.

If these statements hit too close to home or are precisely on the mark then it may be time for a dose of reality and financial maturity to take hold of you. What should you do to stop avoiding the problem and finally face up to it. Here are some steps you can take to begin addressing the problem head on:

> Start by contacting your creditors and asking them to reduce the interest rates and fees on your accounts. Your account history with them will factor in big in their willingness to negotiate with you. Use the offers you have received in the mail (a rare occasion where junk mail may actually benefit you) as an incentive for your creditors to compete for your business. If the first person you speak with declines your request, ask to speak with someone else higher up the chain. Of course your goal is to remain with the creditor you already have your account with because closing seasoned established accounts and transferring balances to another creditor, could adversely impact your credit score in striking opposition to your goals and intentions.

> You may want to consider transferring an account balance with one creditor to another if a new creditor is offering zero percent interest or another low introductory offer to entice new applicants to transfer their account balances. But if you play the transfer game you must be organized about it or risk defeating your purpose should rates spike up on you unexpectedly at the end of the brief introductory period. If you cannot be trusted to track this closely enough then you may want to consider opting for a low fixed rate offer that will remain unchanged for the duration of your debt. The key to implementing any balance transfer strategy is to eliminate the possibility of negatively impacting your credit score in the process by keeping the account which you are transferring out of open after you have moved onto a better deal. Closing any seasoned long term accounts can result in your credit score taking a hit.

> If you find you are unable to negotiate with your creditors on your own, or if you need help establishing a budget as well as some oversight to help get you out of debt and remain that way, consider using the resources of a credit counseling agency. Choose your agency carefully and keep a watchful eye on any possible conflicts of interest between your goal of paying off your debt as quickly and cheaply as possible and the agency's compensation structure. It is best to use a non-profit counseling service which is sponsored by the credit card companies collectively as penance for their credit-card peddling practices. A non-profit service should charge you only a nominal monthly fee or a fee based on a small percentage of your over all monthly debt service. Note that the only occasion where consulting with a credit counseling agency could adversely impact your credit score would be if the counseling agency works to reduce or re-negotiate your debt (i.e. changing either the payment or interest rate) with a creditor on your behalf and that creditor reports to the credit bureaus that the debt was "not paid as originally agreed". However if you use the service strictly for debt management and budget development purposes, this should not result in anything being reported to the credit bureaus.

> Filing for bankruptcy should naturally be your last resort and this process has been made far more difficult with the changes to the bankruptcy laws that went into effect in 2005. You will likely end up having to go to a court approved credit counseling agency before you can proceed in this direction and it may be wise to hire an attorney to advise you and help walk you through the process. If you do decide to go the bankruptcy route, and feel it is your only option, know that the decision will stay with you for some time to come making it more difficult to get credit at a prime rate. While most derogatory credit remarks will remain in your credit profile and on your credit report for a period of seven years, a bankruptcy filing will stain your credit history for ten years.

Always consult with your tax or financial and legal advisors regarding your own individual circumstances before taking any action which could have a significant impact on your personal taxes or finances.

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