Payday Loan Fairy

My husband and I have high credit scores and are not behind on our bills. But are overwhelmed with the amount of debt we carry, credit card debt that is. Should we resort to debt settlement or continue to make minimum payments for the next five years. At this point we can only make minimums. Any advice is appreciated. Any rude remarks will be reported. Thank you

Great question! The answer depends on your situation, your goals and what's most important to you.

Let's start with your situation...

The fact that you have high credit scores and have not fallen behind means you have something to lose (your perfect payment history) if you choose debt settlement.

But, let's first get clear about exactly how your credit will be affected, because along with the negative impact to your payment history, the other two important areas of your credit, your debt-to-income ratio and utilization, are both greatly improved through debt settlement.

Remember, credit "score" is not everything... Credit "worthiness" (your ability to get a loan) is more important, especially long term.

A question to consider is this: What do you do your credit for?

Most keep their credit in good shape so they can get into deeper and deeper debt, only to pay more and more interest.

But is your credit really "good" right now?

Having a perfect payment history (about 35% of your credit) and a good credit score is nice, but other factors could be crippling you.

Let's take a look...

Debt-to-income ratio is the amount of money that you’re obligated to pay each month towards your debt (that’s your credit cards + your car + your student loans + your mortgage + whatever you have = that monthly amount) vs. your net monthly income.

Now if that monthly amount is under a third of your net income then that’s GOOD. If it goes over a third then it becomes BAD and it's a problem.

You can have a perfect payment history (never have missed a payment), but if your debt-to-income ratio is too high then you’re effectively crippled when it comes to credit worthiness, or your ability to get a loan. You’re not credit “worthy”, even though you may have a good credit “rating”.

You want to keep your debt-to-income ratio at or under a third to be in the best light with lenders. Over 45-50% is crippling to your credit, regardless of score, because you simply cannot afford any more debt.

If your debt-to-income ratio is too high now, then concerns about debt settlement affecting your credit simply don't make any sense.

The third area of your credit to consider is your "utilization" or "debt-to-credit-limit ratio". The ways this works is very interesting. This is probably the least known factor that affects your credit, but is just as important as payment history to your score.

Each account you have has a credit limit and a current balance. If that current balance is less than 50% of your credit limit, that’s a positive factor. If you have an account that’s over 50% "utilized" (balance over 50% of the limit), then it's a negative factor and bad for your credit worthiness. If your balances get to the limit, or over the limit, then this is a crippling factor to your credit.

Take a look at your accounts.. are any balances over 50% of the limits?

Keep these three factors in mind when evaluating your credit worthiness: payment history, debt-to-income ratio and utilization.

However, most of the time, worrying about your credit rating when you’re drowning in debt is like worrying about how your front yard looks when you house has just burned to the ground.

I don't know how much debt you have or what your interest rates are. These are critical factors in your decision.

The suggestions about calling to lower your interest rates are good, however, since Oprah popularized this strategy in early 2006 with her "Debt Diet" series, millions of people have called their creditors to ask for their rates to be lowered, threatening to transfer balances etc... The reality you'll find today is that this rarely works anymore, but may be worth a shot.

Most important is this, the "BIG IDEA":

STOP paying interest and START EARNING interest, ASAP!

This is critically important if you ever want to retire, and makes all the difference between a life of wealth or a life of slavery (seriously).

You mentioned paying minimums for the next five years. If you could pay off your debt in 5 years with minimum payments, then a) you have a small amount of debt and low interest rates, and b) you don't have enough debt for debt settlement.

Take a look at the time it takes to pay off debt with minimum payments if you are paying what the average American pays in credit card interest...

Number of Years to Pay-Off Credit Card Debt at 19%

Debt: Pay Off (Principle & Interest): Number of years at 19%

$10,000.00 $26,276.59 42 years, 9 months

$15,000.00 $55,370.41 48 years, 11 months

$20,000.00 $74,464.22 53 years, 3 months

$25,000.00 $93,557.98 56 years, 7 months

$30,000.00 $112,651.77 59 years, 4 months

$35,000.00 $131,745.58 61 years, 8 months

$40,000 $150,839.39 63 years, 6 months

$45,000 $169,933.22 65 years, 6 months

$50,000 $189,027.02 67 years, 1 month

$60,000 $227,214.61 69 years, 10 months

$70,000 $265,402.22 72 years, 2 months

$80,000 $303,589.81 74 years, 2 months

$90,000 $341,777.43 76 years, 0 months

$100,000 $379,965.06 77 years, 7 months

$110,000 $418,152.62 79 years, 0 months

$120,000 $456,340.27 80 years, 4 months

$130,000 $494,527.82 81 years, 4 months

$140,000 $532,712.48 82 years, 8 months

$150,000 $570,903.04 83 years, 8 months

While credit is important, CASH IS KING, and CASH FLOW RULES, right?

So for you to make the best choice, you and your husband must decide what's most important: credit or cash flow.

Consider your goals.

If credit is ultimately most important to you two now, then you must cut your expenses to the bare minimum and put EVERY DOLLAR you can towards paying off your debt in an accelerated fashion in order to get out of debt ASAP.

You'll need an "accelerated debt pay-off plan" if this is the case...

Accelerated debt pay-off plans come in three main types. In each, you pay the minimums on each account, and put all the additional money you can afford towards ONE account. This is often called your "margin". The three approaches are:

1) List your debts in order of the highest interest rate and pay down the highest interest account first until it's paid off, then pay down the next highest interest rate account and so fourth, until your debts are eliminated...

2) List your debts in order of the current balance, paying down the account with the lowest balance until it's paid off, then pay down the next lowest balance account, etc., until your debts are eliminated...

3) Take the current balance of each account and divide it by the minimum payment (= division number), then list your debts by this division number from the smallest to the biggest, paying down the account with the lowest division number until it's paid off, then pay down the account with the next smallest division number, and keep going until you're debt free...

Any of these three approaches will usually get you out of debt in about 5-7 years IF you are committed to budgeting and putting as much money as possible towards paying off your debt. It requires self discipline and long term commitment. You will have no negative affect on your credit this way.

However, you mentioned you are overwhelmed with the amount of debt you have and can only make the minimums, so an accelerated plan doesn't sound like a solution to get you out of debt anytime soon.

Debt settlement can most likely get you debt free fastest. My average client is completely out of debt in 28 months.

Usually, debts are cut in half, and often payments are cut in half as well. Payments are almost always significantly reduced during the program.

While debt settlement has a negative impact on your payments history (more so if you've never been late, not so much if you've already fallen behind), debt settlement also has a POSITIVE AFFECT on your debt-to-income ratio and utilization because the accounts are paid to a zero balance on your credit report.

You can also do credit repair and credit rebuilding (usually within 6-12 months) after you complete debt settlement.

Of course, all that money you're currently paying in minimum payments will be back in your pocket, usually within 24-36 months. What would you do with all that extra cash flow? Investing these savings to EARN INTEREST can make all the difference for your financial future... and that's the BIG IDEA!

If you are shopping around for a debt settlement program, BE CAREFUL! The industry is filled with ignorant sales people who will steer you into a "bad program" for their own gain and your detriment. I'm serious, watch out...

*** Read this Debt Settlement WARNING: http://ezinearticles.com/?Debt-Settlement-WARNING!&id=1275007

Hope this helps!

2008-06-26 12:24:30 by wonkeee2008

www.debtsettlementcompanyhelp. com Our Debt Settlement Company's debt solution provides the debt relief you need to get you back on your feet ...

I enrolled with Renaissance Debt Solutions out of MD and paid the initial $349 start up fee to help me with credit cards and a repo that I have been paying on for 3 1/2 yrs. I was not behind in anything at the time but am now. Checked with the BBB (after the fact) and the company has an unsatisfactory rating. Does anyone have any further information about this company before I just cut my losses and try to get back on track with my creditors myself?

wow, that sucks. have you tried taking out a loan at prosper to consolidate your debts? maybe its not too late.

Good Luck
http://savingmoney.iblogger.org

2007-07-28 08:03:41 by drowning

I have an credit card with the former Providian now WAMU. The limit was for $2,000. In early 2006 I was put out of work due to complications in my pregnancy, so our income was cut in half. We fell behind with Providian. About a year ago I called to see what I owed to bring my account current. My husband and I dug deep into our pockets and came up with the money. I sent the payment in, then go a statement saying my account was in the negative again. So now I have had the run around for over a year. They sent my account to a collections agency which I made small monthly payments too until I could get back on my feet. Well I am still unable to go back to work due to health issues that came up after my pregnancy. So we are in a bit of a rut. Providian called today and told me I owe $700, but only need to pay $169 to bring it current. But I owe $2600, so how is paying $169 going to bring it current? The lady went on her speal about my credit being damaged.
She then was telling me I need to contact friends and family to come up with the money to pay them. I said no, because this is my problem and I am not asking people for help, then owe more people money. She said that the account was 40 days past due and that I need to pay $24 to get it current. At this point I was confused because she just told me three different amounts to pay. Before getting off the phone with me she said that if I dont pay it will get sent to a third party collections and they will demand the full amount. Then asked if she could have family members phone numbers to contact regarding my account. I had my husband call back after I got off the phone with her and she told him two totally different things. She told him I only owed $2575 and that I only needed to pay $600 to bring the account current. He said he didnt appreciate how she me to ask family/friends for money. She said that they don't do that and its not their business to say that! Is there anything I can do?
I have read over the Fair Debt Collections Act and have read something about debt collectors not being able to ask a third party about my debt. I am just fed up with them. She also was prying about my tax money, and I said that is my money and what I do with it is none of your business. She was trying to pry and see when we would be getting our money back and I played dumb. I just need some kind of help with this if there is any at all?!? I thought about debt settlement, but I heard it affects your credit even more, then you have to pay taxes on the other half you did not pay. Please help!

If you are more than 40 days behind then the damage to your credit has already occured. Don't worry about a debt settlement program, you usually need a total of $10000 or more to qualify for one of those programs.

The collectors cannot call anyone else regarding your debt, this is totally against the law. Right now they are trying to get whatever money they can, from you. That is the reason you are hearing different amounts.

My suggestion is that if you are really in a tight spot, don't pay the account for the next three months. Once you reach close to about 4 or 5 months, give the concerned party a call and tell them that you have saved some money with great difficulty and ask for a one time settlement. If they agree, tell them to send a letter of agreement and them only pay them. make sure that they report the account as paid and closed.

2008-02-25 10:42:31 by *MermaidMom*

if you have signed a contract you are out of luck -- if not just do not pay them any more money!!! chalk up the loss to experience!!!

2008-02-18 06:20:10 by ruby

Im a young man who just recently has found a carrer in union carpentry. I during my "learning" years amassed roughly 10000 dollars in unsecured debt. The problem that is while my earning potential is great, im still a apprentice making roughlym 30-35k this coming year. I am behind on all 8 of the unsecured accounts and have sought cuncil through Superior debt services. My agent has put together a 12 month package for that will have me paying 5000 to settle those eight debts. The iodea is to not pay or contact these creditors again and they will settle for less. From what I have researched so far, it sounds legit. I would like any info/ personal experience user may have had, any help/ advice would be greatly apprcieated!!

2008-02-11 17:16:17 by jrhender0902

anyone out there ever start a debt settlement company and researched the legal aspect in the state of NJ? I need legal advice from an expert.

If you want legal advice, you will need to speak to an attorney.

2008-08-13 10:26:58 by Shmooz J