It’s a whole new world once you leave the cocoon of college and head off into the real world to make a living.
You’re no doubt overwhelmed with getting a job and finding a place to live. That’s understandable. But if you paid for your college education with student loans, it’s also incredibly important to check your credit reports and credit scores — especially before you make that first payment.
What Your Credit Reports & Scores Can Tell You
Under federal law, you are entitled to a free credit report each year from each of the three major credit reporting agencies — Equifax, Experian and TransUnion through AnnualCreditReport.com. In fact, this can be a good time to request a report from each agency, and check all three reports for errors and consistency.
Your credit reports should list all your student loan accounts. You also can double-check your federal student loan information and track down missing accounts by visiting National Student Loan Data System.
While you’re at it, don’t stop with the student loan accounts on your credit report. Your credit report also will list any credit card accounts, car loans or home loans you may have — with information on your current balances, monthly payment amounts and payment histories. Check those items for accuracy as well.
And if you see any errors on your credit report — this is the time to correct them. You want your credit record as clean and as accurate as possible as you begin to pay down debt and build strong credit.
Now is also the time to get familiar with your credit score. You can get your credit scores for free from several sources, including Credit.com, to help you track your progress as you pay your debt down. Payment history is the biggest factor in your credit score, so it’s important to pay on time and as agreed, as that can help you build a strong credit history.
Getting Ready to Repay
The student loan servicer should have been sending you statements all along so you could keep track of your borrowing. It’s always a good idea to check the numbers against your credit reports, the Student Loan Data System or if you’ve been keeping track on your own. If there are any discrepancies, contact the servicer.
Once you know you have all the correct information in front of you, add those student loan amounts together. Now you’re looking at the aggregate amount that you borrowed for your entire college education (try not to get overwhelmed – it may be a large number).
Once you get a full picture of how much you owe, you can make a plan for paying down the debt. It’s not uncommon, especially when you’re beginning your career, to find that your student loan payments are more than you can afford right now. While it may be concerning, there are repayment options available to you. Now is the time to discuss those options with the student loan servicer so you can come up with a workable plan.
Making a habit of checking your credit and tracking your progress, in addition to having a repayment plan that you can reasonably manage — these are all very important first steps as you begin to pay your student loans and build your credit.
If you’re trying to get out of debt, a part-time job can help you accelerate your debt payoff plan. Or maybe you are a parent with kids still at home or nearing retirement and you want extra income to avoid getting into debt, but you don’t want to be tied to a full-time job. Here are some of the most lucrative part-time jobs that also offer flexible hours. (Of course, earnings will vary significantly based on experience, geographic location, demand, etc.)
“Over the past year, we’ve seen a huge influx of drivers and a few rate cuts so while it’s not as lucrative as it once was,” drivers can still make good money, says Harry Campbell, publisher of TheRideShareGuy.com. “Generally, the bigger the city, the better the money.” He says drivers tend to make the most money on Friday and Saturday nights. Best of all, he says this work offers “immense flexibility.”
Range: $10 to $75/hr
What you need: Training ($250-$600), ServeSafe Certification ($40), uniform and bar kit (about $50 together).
Lea Hatch, owner of the event planning and bartending company, A Shot Above Entertainment, Inc. says that she, her husband and their staff work mostly on weekends, giving them a full-time income for a part-time lifestyle. “A bartender/server with our company will make a minimum of $80 for four hours,” she says, “but in general we average $100 to $150 per night. Our most lucrative events net us $800 to $1,200 per staff member.” In bartending jobs, income is often heavily dependent on tips, which can vary.
Range: $20 to $30/hour
What you need: Experience requirements vary depending on position.
Companies looking for part-time experienced workers are often in a “high-growth stage” but “hesitant to invest in human capital, just don’t have the work to justify 40 hours per week,” says Ellen Grealish, co-founder of FlexProfessionals, LLC. “Top part-time roles in terms of number of requests are finance (bookkeeping and accounting), administration (personal assistant, office manager, administrative, etc..) and HR (generalist, recruiter),” she says.
If you have specialized skills — you are a whiz at Quickbooks, for example — you may be able to bring in $25 to $35 an hour, contract specialists often make $50 to $60 per hour, and some attorneys who no longer want the grind of working full time can command $85 to $100/hour, she says.
Special Events Worker
Range: $12 to $15/hour
What you need: Requirements vary, training may be provided.
Special events, such as hotel banquets or concerts are often staffed in part by part-time workers who handle the influx of customers. Companies may find these workers through sites such as Shiftgig.com. “Highest paying gigs come from customer service positions at silent auctions that pay $15/hr and includes a $20 travel stipend,” says Shiftgig co-founder and CEO Eddie Lou. “Onsite managers can earn $20/hour.”
Range: $13 to $18/hour
What do you need: Clear background check and drug test, CPR and first aid training, speak fluent English.
Working professionals, celebrities and families looking for childcare help when traveling or attending special events often need reliable screened adult babysitters to watch their children. They turn to firms like The Babysitting Company where the screening has already been done for them. “Our professionally trained sitters work both part time and full time,” says Rachel Charlupski. She adds that there is a great degree of flexibility and many sitters are students, nurses or retired professionals. “Some sitters work with one family throughout the year and others wait for shorter-term assignments whenever they are available and remain on call. We have even booked travel assignments as 5 a.m. where a sitter had to be at the client’s plane at 8 a.m. to travel to Germany.”
Range: $20 to $150/hour
What you need: Web design skills
“Designers with strong portfolios can make incredible money, particularly if they team up with small website marketing firms that build/maintain websites for small- and medium- (sized) businesses,” says Josh Lindenmuth, CIO with the payroll company Payce, Inc. He says one designer he knows personally made over $15,000 a month on the side. “The key was that he became extremely good at churning out great sites fast. He could get done a $1,000 site every two days, while a less skilled designer/developer may take two weeks,” he says. Web design skills — which can be learned online or at local community colleges — and a great portfolio are essential.
Designers with special skills can also command higher incomes. For example, motion graphic designers on the marketplace shakr.com earn 70% of all revenue earned (indefinitely) through their Adobe after-effect templates.
Range: $15 to $75/ hour
What you need: Must love dogs! May also need to be licensed and/or bonded, and purchase insurance.
Earnings depend on locale and will increase if you can walk multiple dogs at the same time. On the plus side, “It provides plenty of exercise and you will meet new and interesting people on your walks,” says career counselor and executive coach Roy Cohen. “My dog, Oskar, is walked twice a day by a group of folks who are all artists, actors or students,” he says.
Range: $15 to $200/hour
What you need: Ability to tutor children or adults in specific subjects.
“For teachers, ex-teachers, college instructors and grad students this is a great option,” says Cohen. It may help to work through a tutoring company initially to learn the ropes, though pay will be lower than if you work on your own. Increasingly, good tutors can work through online portals, which means less travel to client homes, and those skilled in high-demand areas, such as SAT tutoring, can earn more.
Range: $150 to $300/hour
What you need: An MBA from a top-tier business school and/or specialized expertise.
Rather than hiring large consulting firms, some companies are now working on a more ad hoc basis, hiring individuals for strategic planning, process improvement, creating presentations and more. Rob Biederman, co-founder at HourlyNerd.com says technology now makes it simpler and more affordable to connect consultants to companies that need help. Our consultants “make a profile that feeds into an algorithm and when a project gets posted you will be automatically invited to bid on it.”
Marisa Goldenberg, whose education included a computer science degree from Princeton and an MBA from Harvard, often earns $250/hour and up as a consultant to top companies through HourlyNerd.com. “Depending on your experience level and what kind of project you are looking for you can set it up to work as much or as little as you want,” she says. She says she often sprints for a month, working very hard, then takes a break.
The FTC and CFPB allege that Green Tree Servicing LLC made illegal and abusive debt collection calls to consumers, misrepresented the amounts people owed, and failed to honor loan modification agreements between consumers and their prior servicers, among other charges.
“It’s against the law for a loan servicer to lie about the debts people owe, or threaten and harass people about their debts,” said Jessica Rich, Director of the FTC’s Bureau of Consumer Protection. “Working together, the FTC and CFPB are holding Green Tree responsible for mistreating homeowners, including people in financial distress.”
Green Tree has become the servicer for a substantial number of consumers who were behind on their mortgage payments at the time their loans were transferred to Green Tree. Because homeowners cannot choose their servicer, they are locked into a relationship with the company for as long as it services their loans.
Illegal Debt Collection Practices
According to the FTC and the CFPB, Green Tree’s collectors called consumers who were late on mortgage payments many times per day, including at 5 a.m. or 11 p.m., or at their workplace, every day, week after week, and left many voicemails on the same day. They also unlawfully threatened consumers with arrest or imprisonment, seizure of property, garnishment of wages, and foreclosure, and used loud and abusive language, including calling consumers “deadbeats,” mocking their illnesses and other struggles, and yelling and cursing at them. The company also allegedly revealed debts to consumers’ employers, co-workers, neighbors, and family members, and encouraged them to tell the consumers to pay the debt or help them pay it. The complaint also alleges that Green Tree took payments from some consumers’ bank accounts without their consent.
The agencies also allege that Green Tree pressured consumers to make payments via Speedpay, a third-party service that charges a $12 “convenience” fee per transaction, claiming it was the only way to pay, or that consumers had to use the service to avoid a late fee.
Mishandled Loan Modifications and Delayed Short Sale Requests
According to the complaint, in many instances, Green Tree failed to honor loan modifications that were in the process of being finalized when consumers’ loans were transferred from other servicers to Green Tree. This resulted in consumers making higher monthly payments, receiving collection calls, and even losing their homes to foreclosure. Green Tree also allegedly misled consumers about their loss mitigation options. The company told some consumers who were behind on their mortgages that they needed to make a payment to be considered for a loan modification, even for programs that prohibited the company from requiring up-front payments. In addition, Green Tree took up to six months to respond to consumers’ short sale requests despite telling them it would respond much more quickly. These delays caused consumers to lose potential buyers, miss other loss mitigation options, and face foreclosures they could have avoided.
Misrepresented Account Status to Consumers and Credit Reporting Agencies
According to the complaint, Green Tree misrepresented the amounts consumers owed or the terms of their loans. This included telling consumers they owed fees they did not owe, or that they had to make higher monthly payments than their mortgage contracts required. The company often knew or had reason to believe that specific portfolios of loans it acquired from other servicers contained unreliable or missing information. In many instances, it should have known that consumers had loan modifications from prior servicers and therefore owed lower amounts. And when consumers disputed the amounts owed or terms of their loans, Green Tree failed to investigate the disputes before continuing collections.
Green Tree also allegedly furnished consumers’ credit information to consumer reporting agencies when it knew, or had reasonable cause to believe, that the information was inaccurate, and failed to correct the information after determining that it was incomplete or inaccurate – often when consumers told Green Tree about it.
Proposed Settlement Order
In addition to the $63 million in monetary payments, the proposed settlement order includes provisions that require Green Tree to:
establish and maintain a comprehensive data integrity program to ensure the accuracy and completeness of data and other information about consumers’ accounts, before servicing them;
cease collection of amounts disputed by consumers until Green Tree investigates the dispute and provides consumers with verification of the amounts owed;
meet certain loan servicing requirements to ensure that whenever Green Tree is involved in the sale or transfer of servicing rights, the buyer or transferee will honor loss mitigation agreements and properly review outstanding loss mitigation requests;
ensure that it has enough personnel and the technical capacity to handle loss mitigation requests and respond to consumer inquiries in a timely fashion, and make its loss mitigation application available to consumers at no cost and on its website;
implement a “Home Preservation Requirement” to provide loss mitigation options to consumers whose loans were transferred to Green Tree during the time period covered by the complaint; and
obtain substantiation for any amounts collected when consumers have in-process loan modifications, and for purported amounts due when there is reason to believe a newly transferred loan portfolio is seriously flawed.
The proposed order also prohibits Green Tree from making material misrepresentations about loans, processing procedures, payment methods, and fees, from taking unauthorized withdrawals from consumer accounts, and from violating the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, and the Real Estate Settlement Procedures Act.
The Commission vote authorizing the staff to file the complaint and proposed stipulated order was 5-0. The FTC filed the complaint and proposed stipulated order in the U.S. District Court for the District of Minnesota.
NOTE: The Commission files a complaint when it has “reason to believe” that the law has been or is being violated and it appears to the Commission that a proceeding is in the public interest. Stipulated orders have the force of law when approved and signed by the District Court judge.
Millions of consumers will now be able to receive the credit scores and credit reports that nonprofit credit counselors purchase on their behalf.
Nonprofit organizations that offer credit counseling, housing counseling, and other financial counseling services buy credit reports and scores for the consumers they serve. These reports and scores help counselors engage in constructive conversations with their clients about steps the clients can take to improve their financial situation.
Until now, counseling organizations have generally been prohibited by their contracts with the credit reporting agencies from giving the consumer the credit report or score that they have purchased on that consumer’s behalf. For example, a nonprofit organization that purchases a credit report with a FICO credit score has typically signed a three-way agreement with one of the three large credit reporting agencies (TransUnion, Equifax, or Experian) and FICO, agreeing not to provide the report or score to any entity, including the consumer.
This no-sharing policy is common in contracts signed by business users of credit reports and scores. But when applied to consumer counseling, it limits a client’s ability to review the credit history provided by the counselor on their own and may make the consumer more dependent on the counselor to take steps to manage or improve her credit standing. We’ve heard concerns about this issue from counselors and consumers across the country.
A policy change that will affect millions of consumers
FICO’s announcement today signals a change in this policy. FICO has reached new agreements with the three credit reporting agencies that will allow millions of consumers who receive nonprofit credit counseling, housing counseling, and other services to obtain a copy of the FICO score that these organizations have purchased. We’ve been working with industry to make progress on these issues and we are encouraged by this positive step. FICO has taken the additional step to create content to help these consumers understand the key factors that influence their credit scores.
A step in the right direction
These efforts build on our open credit score initiative, which is helping to increase consumers’ access to credit scores and credit reports and empower consumers to improve their financial lives. Last year, we launched this initiative by calling on more of the nation’s top credit card companies to make credit scores freely available to their customers. Today, more than more than a dozen major credit card issuers are providing credit scores directly and freely to consumers, and they are increasingly being joined by other types of consumer lenders as well.
As part of this ongoing effort, we brought counseling organizations’ concerns about restrictions on their clients’ access to credit information to the attention of the credit reporting companies and FICO and urged that these restrictions be removed. However, even with the policy change on FICO credit scores, individual contracts between the credit reporting agencies and counseling organizations still prohibit the organizations from sharing the credit reports with their clients. This restriction makes it harder for counselors to do their job. And it keeps the consumers they serve from benefiting fully from the credit information that the counseling service organizations have paid for.
We are encouraged that, as part of this ongoing effort to press forward on these issues, Experian is now updating its policy and nonprofit counselors that purchase credit reports on behalf of their consumer clients will soon be able to share that those reports, as well as the scores, with the consumer. We urge the other credit reporting agencies to take steps to make this credit information available as well.
Ending restrictions on sharing credit scores and reports by consumer financial counseling organizations will empower consumers to take more control of managing their credit and help counselors to do their jobs more effectively.
Have you ever asked yourself the question, “What does my debt cost me?” Borrowing money does cost you. You may be paying all your bills on time and have a good credit score. But, don’t kid yourself; you pay a price for being in debt.
One source puts average consumer debt at these levels:
How much do those loans cost us? We went to industry sources to get some typical rates.
mortgage using a 15 year fixed is 3%.
low interest cards 11%
new direct student loans 4.6%
If we apply those interest rates to the average balances, we get:
Credit card annual interest: $1717
Mortgage annual interest: $4655
Student Loan annual interest: $1484
Don’t worry about how accurate the debt totals or interest rates are. That’s not important. We’re just illustrating how much being in debt can cost you.
You may owe more or less. You’ll need to do your own calculation. You’ll probably want to add in any auto, boat, or home equity loans.
To calculate your own cost of debt, you’ll need current statements from your accounts. There should be a line telling you how much interest accrued during the statement period or what your balance and interest rate is. (Multiplying the amount owed by the interest rate tells you the annual amount of interest. i.e. a balance of $1,000 times a rate of 12% = $120)
You’ll probably need to convert some interest costs, so they’re all either monthly or annual.
Let’s take a look at our test family. The cost of their debt is $7,856 per year or $655 per month.
Most people are surprised at how much their debt is costing them, especially if they have more than one account. How much is your debt costing you? And what would you do with it if that money were available to you each month?
You probably have some good ideas. I’d be surprised if you didn’t. So what’s your cost of debt? And what are you willing to do about it?
Do you need to get out of debt? Would a step-by-step course help you? We want to help. The Dollar Stretcher’sGet Out of Debt Course is designed to help you determine whether you have a debt problem. And, if you do, we’ll show you how to get out of debt. We’ll provide you with the proper tools and resources to dig out of your debt problem.
I should have known it was a bad sign when I called the customer service line for a tech gadget I was thinking of buying, and the CEO answered.
It can be a good sign when a CEO answers customers’ calls — it could mean he’s highly involved in the company. But looking back on it now, I see it as a possible sign that the company doesn’t have enough workers and that its gadgets aren’t worth hiring people to promote it. I wish I would have figured that out before I bought one of the devices at Ambient, only to see the company stop offering support for it less than three years later.
It was 2011 and I was doing research for a story I was writing about energy saving gadgets when I saw the wireless devices Ambient was selling. One was called an Energy Orb that changed color when your household energy use changed.
I called because I had some questions about its products, and was surprised when the CEO and co-founder answered. We talked for a bit, and I moved on with my story, eventually buying the Ambient Baseball ScoreCast for $43.82 on Amazon. About 2-1/2 years later, Ambient stopped supporting the device.
The ScoreCast was introduced in 2008 for $125, providing baseball scores through radio signals. A wireless plan isn’t needed.
My wife and I are big baseball fans, so I thought it would be fun to have the gadget on the fireplace mantle so we could see updated scores. Believe it or not, we didn’t have smartphones in 2011, so we didn’t have the immediate access that we now do on many devices in our home.
Just for the fun of it, I decided in early April to put four new AA batteries to see if it still worked. It didn’t. While $43 wasn’t much of a loss on something that worked for two baseball seasons, I wondered why it didn’t work and I again contacted customer service. Guess who got back to me? The same guy I talked to in 2011:
“On March 1, 2014, Ambient discontinued support for the Ambient Baseball, Ambient Football & Ambient Centerfield products. As of that date, customers with these devices in their homes stopped receiving game and standings data. The Ambient ScoreCast products were introduced in 2006 and manufacturing ceased in 2009. Sincerely, Pritesh Gandhi CEO | Ambient Devices”
I emailed him back, asking him what a consumer’s expectation should be when buying a tech device. I haven’t heard back yet.
How long should a gadget last?
Ambient’s pulling the plug got me wondering what consumers should expect when buying a tech gadget. Will the startup company that you were so fond of be around seven years from now when your device dies or needs tech support?
Is it just part of the expectation of a disposable society that when a relatively inexpensive gadget stops working, you’ll trade it in for a new one, recycle it, or worst-case, throw it away? Continue reading Why Your Gadgets Don’t Last
There are hundreds of algorithms companies use to score consumers, and even the most common credit scoring company has dozens of models. Fair Isaac Corp., more commonly known as FICO, has about 50 scores (a 2012 report from the Consumer Financial Protection Bureau puts that number at 49).
How can there be so many variations on a single score? It’s a confusing issue to consumers, particularly because “the FICO score” sounds like a single score. For starters, the information on each of your credit reports from the three major credit reporting agencies — Equifax, Experian and TransUnion — may vary, so that alone can give you three different numbers from one credit score model.
However, one of the biggest reasons there are multiple FICO scores is because lenders assess borrowers differently, depending on the loan product. For example, a lender considering you for an auto loan will be much more interested in your history of auto loan payments than a lender considering you for a personal loan.
FICO has different models tailored to the loan product the consumer applies for. On top of that, FICO creates custom scores for its clients, and FICO has updated its general formulas over the years. In 2014, the company announced FICO 9, its newest version of the basic algorithm, which does not include paid collection accounts in its scoring system and counts medical debt differently than other debts, because medical debt is often an unplanned expense beyond the consumer’s control.
Perhaps the most puzzling part when it comes to understanding FICO scores (or any credit score, really) is not knowing which model your potential lender uses. You might check one of your FICO scores religiously, but you still might not know exactly what a future creditor sees when it processes your application. While it’s important to check your credit scores — you should do so regularly, and there are many ways you can see your scores for free — keep in mind that scores fluctuate and you also can’t be certain what your lenders look at. The best thing you can do is focus on the fundamentals of good credit: Make payments on time, keep your debt levels low, avoid closing old accounts if possible, maintain a good mix of accounts and apply sparingly for new credit.
FICO has a program called FICO Open Access that allows customers of some partner institutions — like Discover and Barclaycard — to see their FICO scores for free. You can also get two free credit scores from Credit.com every 30 days, with a progress report of how your credit has changed over time.
Living a double life seems like it would be challenging enough, but that’s child’s play compared to what one California identity theft suspect is believed to have accomplished. Cathryn Parker, 72, was arrested in March when she was stopped for a traffic violation and gave a law enforcement officer a fake name. Turns out, Parker is under investigation for stealing multiple identities and living under at least 74 aliases, according to the Associated Press.
Parker is accused of stealing seven identities, most of whom are Hollywood film production staffers. Investigators discovered that Parker’s home and utilities services were registered under false names, and Parker had also opened fraudulent credit card accounts with victims’ information. Investigators say she is suspected of committing crimes dating back to 2010.
As of April 17, Parker was in federal custody in Northern California, where she was wanted for violating probation, the AP reported. She had been convicted of mail fraud in 2000.
While Parker’s high number of identities is uncommon, her alleged crime is not. Identity theft affects millions of Americans each year. Victims of identity theft often suffer damage to their credit standings and finances, and the longer it goes undetected, the more costly and time-consuming the recovery can become.
Preventing identity theft is a huge part of this problem — it’s practically impossible to do. Even consumers who take the best preventative measures, like never storing sensitive data online and rarely sharing personally identifiable information, may still have their data stolen in a cyberattack on a company that rightfully has that information (for example, the Anthem data breach).
Credit monitoring can be extremely helpful in stopping a situation like a thief opening a fraudulent credit card account in your name. You can get your credit report summary for free, updated every month on Credit.com, to watch for changes that you didn’t authorize. In addition to that, the most effective form of protection is monitoring your identity from as many angles as possible, including public records and information on the Internet. Whether you do it yourself or pay for an identity theft protection service, the most important thing is to act quickly when you notice something is wrong, in order to prevent extensive damage to your credit and financial well-being.
In the more than 15 years of experience working in the debt industry, I’ve heard every story under the sun about how someone fell into debt. While there are times when people fall into debt for unavoidable reasons, I do notice a lot of people fall into debt for the same reasons. So in order to help keep you from making the same mistakes, here are the five biggest reasons I’ve seen people fall into debt.
1. Treating Credit Like Cash
Many of my clients have a tendency to treat their credit cards like an extension of their bank account. They max out their credit cards without taking into consideration the impact it’s having on their credit scores and how much more they’re paying over time in interest. This sort of behavior could really put you in a jam!
My solution? Stick to a debit card or keep yourself honest with only one or two low-limit credit cards. I also advise them to assign specific “jobs” to their cards, to keep them from overspending. Budgeting for “fun” purchases that you pay for with cash or a debit card could help keep you from overspending, while reserving your credit cards to handle recurring bills and online subscriptions — in amounts you can pay in full each month — is a better way to manage them. Keep in mind, carrying a balance that is more than 30% of your credit limit can have a negative impact on your credit scores. If you want to see how your debt levels are influencing your credit, you can get two free credit scores on Credit.com, plus an overview of what factors are affecting them.
2. Trying to Keep Up With the Joneses
True wealth is having a high net worth, not having a lot of stuff. A lot of my clients fall into debt because they believe in order to seem financially successful they need to SPEND their money on elaborate, luxurious and unnecessary things to simply keep up with neighbors. Trying to keep up with appearances and maintain a lifestyle you can’t afford is one of the quickest ways to fall into debt.
So what do I tell my clients? I explain to them that the neighbors they’re so concerned with, the ones with the fancy cars, are most likely in debt themselves! You can never know who owes money and how much, so it’s important to not judge by appearances. Spend only on things you can afford, put money away and you’ll be the one people want to keep up with.
3. Not Separating Needs From Wants
You want to have your priorities straight, especially when it comes to money. Not having a clear understanding of the things you need as opposed to the things you want could result in a lot of unnecessary spending and, in turn, debt.
Whenever my clients seem to be having difficulty understanding the difference between needs and wants, I tell them to write everything down. Making a simple list of needs, wants and even a category for both can help you identify and prioritize your spending goals. Keeping a tight list can help you attend to the things you need while also setting aside enough money to get the things you want.
4. Financial Illiteracy
Some people just don’t know how money works, how to budget or how to manage personal finances. Whether it’s because they were never properly educated or simply hated economics in school, financial illiteracy can lead anyone into debt.
That said, it’s never too late to learn! I always suggest that my clients take some time and educate themselves on basic personal finance. With the vast number of great books, blogs, podcasts and websites out there dedicated to personal finance and financial literacy, you’re sure to find a way to learn about money and, subsequently, keep yourself out of debt.
5. Hoping for the Best, But Not Preparing for the Worst
Without an emergency fund, you’re leaving yourself exposed to all sorts of financial woes. I understand that you cannot prepare for every situation, but having a safety net of funds in the bank can help you sleep better and keep you from getting into debt when the unexpected happens.
A lot of my clients find themselves falling into debt when disaster strikes because they simply didn’t save enough. I suggest they build a budget so they can see how to save to their maximum potential. Once they’ve set aside enough money, they start to understand the benefits of keeping money in the bank. I constantly have clients telling me that budgeting has given them financial peace of mind.
When it comes to staying out of debt, it really boils down to paying attention. More often than not, people find themselves up to their ears in debt because they ignore their statements, are overspending because they don’t budget, and getting caught with unmanageable expenses because they didn’t save. Take the time to sit down and review your finances. Learn how much you need to save for emergencies and long-term goals and make it a habit of continually setting money aside. The more frequently you do a checkup on your finances, and the more frequently you hold yourself accountable, the less chance you’ll have of falling into debt.
This is the third part in a four-part series about Beth, who’s struggling to make monthly payments on her debt. I encourage people struggling with unaffordable debt to use this as a debt relief information guide. The focus of this series assumes your situation is past being able to apply conventional wisdom, like lowering monthly expenses and paying extra toward high-interest credit card debts.
In the first two parts of my email exchanges with Beth (a reader who submitted her questions to me offline, and who has given permission for me to publish our exchange as a learning tool, but with her name changed; we have also removed the names of her creditors), I focused more on eliminating options to manage her debt based on her lower income, which is also unstable because her current employment is temporary. If you are just starting out with researching your own path to manage problem debt, you may benefit from reading this series from the beginning.
In this part, her questions for me are keenly focused on negotiating lower payoff settlements with her credit card lenders.
Tomorrow I’m going to look for a bankruptcy attorney, however I’m more inclined to do a settlement at this point, that being said I have these questions:
I have a checking acct with [one bank] where I currently have 2k [saved] and will have a little over 3k in 2 weeks; do I have to withdraw the money before trying a settlement with them? (I’m afraid they would freeze my checking and keep the money), if so should I open a checking acct with another bank? I’m assuming [a different bank] wouldn’t touch my money.
If I’m successful, the settlement would save me $20k, will that be taxed? If so can you estimate the amount (roughly).
What is the best way to negotiate the settlement with [one bank] and the others? For instance: I would offer 25% and they counteroffer 40% then I give my last offer 30% and if they don’t take it, I would then not make the payment for the first time ever and hopefully they will call me and take my 30% offer, would they call my bluff? And if they divide it into 3 payments can I try and negotiate 4-5?
Can I be honest and tell them my plan to pay them: what I already have saved, plus what I’m going to make/or borrow from my parents?
This may sound very dumb, but I have a $20k in my 401k, what if I withdraw about $5k, I know it would be heavily taxed, but is it something possible? I understand I’m not supposed to touch my 401k ever but in my situation it would save me interest and would be debt-free. What do you think?
If you could please take the time once again and I think I will be all set.
My Response to Beth
Those were really targeted questions Beth sent back. Here is how I responded:
1. I typically encourage moving to another bank if you have a checking or savings account with a bank that you will also be negotiating a credit card settlement with.
2.You can indeed be taxed on forgiven or canceled debt in excess of $600. Many people I have worked with over the years were able to meet the insolvency test, which meant they were fully or partially able to avoid any tax implications from debt forgiveness. I cannot hazard a guess at what your taxes would be. This is an issue you want to consult with a tax professional about. But if you determine you will owe any tax after settling, be sure that is part of your budget and planning.
3. The way you make calls to your creditors in the early stages of communication is one thing. You will typically not be offering to settle, or perhaps even be bringing up the subject until you are three to five months late with payments (unless they bring it up). I would not call my creditors and ask about settling for less than what I owe when still current, or not yet several months behind. It is a waste of energy, as the person answering the phone in these early stages may not be trained or authorized to even talk about it. In fact, and somewhat amusingly, you can call large credit card banks to talk about settling too early, and hear from the customer service rep that “we do not settle debts.” Read through the entire section about negotiating credit cards in the first stage of collection. You will be ready to talk with your creditors and negotiate your settlements when you finish.
You will typically not get your credit card banks to extend out payments — on the settlement amounts they agree to — for more than 94 days if they have not charged off the debt (taken the loss in their accounting books). Many banks might like to be able to offer their account holders that option (longer payment arrangements on settlements). But federal regulators have set guidance and policy that prevents them from doing that unless the account is charged off. Charge-off is one big determining factor banks use when they send accounts to outside third-party debt collectors and debt buyers, which is why settlements with monthly payments longer than a few months are often going to be achieved with debt collectors. There are often many opportunities to negotiate with debt collectors when your credit cards have just been charged off.
4. I find laying out your entire plan to negotiate and settle your debts with your bank or debt collectors to be counterproductive. They only care about the debt in front of them. Keep your focus to just the account at issue during any communications. If you mention other accounts, it is often just to say you are struggling with more than just paying them. They can see that because they typically have real-time access to your credit reports. When it comes time to have meaningful dialogue about what you can afford to pay as a settlement (which for you is not for many months), that is when you can bring up the fact that you are borrowing money from family to pay the deal if they agree to it.
5. Conventional wisdom says do not touch your 401(k) in this situation. That money is protected from creditors even if they sue you and get a judgment, and is also kept intact if you filed Chapter 7 bankruptcy. I am not all about conventional wisdom at all times. I have worked many cases over the years that were a great fit for borrowing against their 401(k)s. Yours is not one of those situations, in my opinion. That is something I would look closer at when there are complex assets, security clearances (work in finances, military contracting, etc.), or similar circumstances. Your path to successfully settling your credit cards looks straightforward to me.
Over the years of doing these types of consultations with people (primarily on the phone), and when encouraging people to understand they can negotiate settlements with creditors and collectors on their own, I have often repeated this: Debt settlement is not rocket science, but there is a formula to follow. That formula is 90% investing the time to become informed about what debt negotiation is, and how and when to get things accomplished. It took Beth and me three days and several emails to get to this point. But Beth also invested more time into reading up on her options in more detail.
In the next, and final, part of the series, you can see how Beth became more serious about doing something that I teach every person in the midst of a debt triage situation to do. Stay tuned.