Divorce Your Debt: Five Alternatives

Debt, particularly the kind that comes from credit cards, can leave consumers on a sort of hamster wheel, paying, paying and paying and never getting anywhere. While most people use their cards meaning to pay their debts, bad decisions, a struggling economy or unexpected expenses can derail the best of intentions. Unfortunately, when it comes to debt, it isn’t the thought that counts.

Eventually, most people on that hamster wheel realize the futility and will do just about anything to get off. It is important to understand the alternatives.

DIY debt reduction is a plan in which consumers strive to reduce or eliminate their debt on their own. In its simplest form, a DIY plan must employ two criteria to work. Consumers must stop using credit and they have to pay more than the minimum amount due each month. A DIY plan requires a lot of discipline and belt-tightening but it will work, though it may take years longer than most people think.

Add on a few details to the plan and it can work more quickly. By paying at the beginning of billing cycles, one saves a bit of interest and is never in danger of late fees. Over paying by at least 20% will significantly affect the principal debt. The more money paid early in the process, the sooner it will be over but the most dramatic results may not be visible for quite a while.

Transferring Balances or shifting debt from one credit card to another may provide temporary relief and help jumpstart a DIY plan. Combined with very aggressive payments, that little interest rate break may last long enough to help people get back on track. Unless there is a real DIY plan, however, transferring balances just postpones the inevitable. The introductory interest rates are temporary; sometimes barely lasting six months. One must consider the subsequent interest rate if the debt cannot be paid entirely during the period of the introductory offer.

There are also lots of snares and traps associated with balance transfers. The ways the interest is calculated, the method the creditor uses to classify balances and how payments are applied could end up costing the consumer much more than imagined. Additionally, penalties in the forms of fees or interest rate hikes if the consumer is even a day late with a payment can make the balance transfer a really bad decision.

Debt Consolidation is often the first alternative people think of but is unavailable to most consumers. Consolidation is supplied by a bank and is usually associated with a line of credit or a loan based on home equity. If a consumer does not have assets and equity, there is no loan.

Paying off high-interest rate credit cards with a lower interest rate mortgage makes sense on several levels. The lower interest rate, easier payments and the ability to deduct the interest from taxable income are enticing. However, default on the loan can result in the loss of a consumer’s home instead of mere credit report damage on unpaid, unsecured debt. Lengthening the payback time on the debt may reduce payments but additional months or years of interest really add up. And there is always the potential of running up those now empty card balances again.

Debt Management is when an agency, usually a non-profit company, contacts a consumer’s creditors and requests interest rate and minimum payment reductions which are significant enough to help the consumer effectively pay the debt in a reasonable time frame. These agencies have standing agreements with most creditors and if the consumer is in arrears, the proposals for payment plans are often accepted. The debt management agency will also consolidate payments so that the consumer makes one large payment each month to the agency which is then distributed to the creditors. Fees often apply and a consumer is required to stop using credit entirely. Debt management also maintains the damage to credit reports that first prompted the need for help. Even with generous creditor concessions, it can take years to pay off the debt.

Debt Settlement must be accomplished by experienced negotiators who approach a consumer’s creditors and negotiate a reduced balance. Debt settlement requires considerable knowledge of consumer rights and a clear understanding of the credit card industry. The consumer will pay less on the debt but often has to pay all at once. (Sometimes payment plans can be established but usually this involves additional loans which are secured with assets.) The consumer will also pay a steep fee to the settlement company. Credit report damage remains to the legal limit and all forgiven debt becomes taxable income; so Uncle Sam gets his cut next April.

Bankruptcy comes in a number of forms. Most often consumers are guided to either Chapter 13 or Chapter 7 bankruptcy. Chapter 13 is a court ordered version of debt management and many who file for Chapter 13 eventually re-file for Chapter 7. Chapter 7 is when the court orders that included debt be discharged entirely. The consumer is given a fresh start with a credit report that is severely damaged for ten years.

Filing for Chapter 7 does not automatically guarantee that debts will be discharged. Consumers would be well advised to seek the advice and guidance of a reputable and experienced attorney who specializes in bankruptcy.

Getting advice is often difficult because it seems that everyone who knows enough to give it also has something to sell. With the exception of the DIY plan, attempting to do any of them on one’s own can make matters much worse.

When creditors are alerted to a possibly defaulting debt, they will, of course, act and speak in their own interest. They may revoke credit making the entire balance due immediately. They may reduce credit limits far below the outstanding balance, charging over-the-limit fees until the balance is significantly reduced. They may raise interest rates and increase minimum payments. They may even sell accounts off to collection agencies which will assuredly be much more aggressive than the original creditors and which are more likely to actually take the legal action they threaten.

A common mistake consumers make in choosing one method over the other is they base their decision on emotions more than understanding the practical solution that best fits their situation. They wish to be ethical without understanding the ethics of the credit world. They worry about their credit reports without knowing how credit reports work. They fear not having their credit cards because they do not know how to live without them or within their means.

Education is key to our decision but second best is advice from a certified, and reputable, financial counselor—not a financial adviser who focuses on investments. The National Foundation for Credit Counseling (NFCC) provides a website feature to help locate reputable certified counselors. These counselors all work for debt management agencies under the governance and standards of the NFCC and are a consumer’s best bet for reliable advice.

Joseph Onesta is speaker, trainer and work culture consultant. As former Director of Education for Consumer Credit Counseling Service of Los Angeles, he has helped tens of thousands of consumers along the path to financial wellness through education seminars, workshops and publications. To learn more about his services, visit his website at www.integrityhpi.com.

Dumbest Things People Do With Credit Cards

As our economy appears to be passing through some of the darkest times since the 1929 stock market crash, almost all of us are faced with juggling our assets and liabilities. Unfortunately some of us may make some pretty dire mistakes with our credit cards. These mistakes can only harm us in the long-run. Try to avoid them.

Taking cash advances to make ends meet. The interest rate on cash advance balances is often astronomical compared to your regular interest rate. You may notice that your payments are applied in a way that makes it difficult to pay off the cash advance balance without paying off the whole card.

Using credit card “checks” to pay bills. Be real careful about those checks your creditors send you from time to time. The temporary interest rate seems appealing but what will it be when the trial period runs out? Also there are transaction fees associated with those checks that may significantly offset the discounted rates on offer. Read the fine print and ask questions before using them.

Borrowing from one card to pay another. This is a bad sign and if you are doing this you need to see a credit professional pronto. Borrowing from one credit card, whether using a credit card check or getting a cash advance, to pay another is like paying compounded interest on the same debt twice. Your debt moves from creditor to creditor but at an ultimately much higher rate.

Making partial payments. If your payment is even one dollar short of the minimum, your credit card company will consider your account delinquent. Creditors do not consider your effort or sacrifice in sending as much as you could. It was still not enough. Late fees will apply and you if you don’t catch up before the next statement is printed, your delinquency will show up on your credit report.

Paying just a few days late. Your creditor isn’t looking at the postmark on your payment. If your payment doesn’t arrive and post on time, you are late. Fees apply. Let the account go more than 30 days late and you are looking at remarks on your credit report for seven years. Paying late may also come with other penalties such as reduced credit limits and higher interest rates on existing balances.

If you are already on a credit card treadmill, the faulting economy may well be the proverbial straw to break the camel’s back. Seek help from a certified financial counselor. The National Foundation for Counseling can put you in contact with a reputable nearby counselor. Ask the counselor to explain all your options and the consequences of each before you decide.

Joseph Onesta is a speaker and consultant with Integrity HPI. As former Director of Education and Training at Consumer Credit Counseling Service of Los Angeles, he authored a personal finance certificate course and has helped tens of thousands of individuals and family along the road to financial wellbeing. Visit his website at www.integrityhpi.com for more information and to subscribe to his free Balanced Life Tips e-newsletter.

Debt Free: Seven Steps to Reduce and Eliminate Credit Card Debt

Credit cards are a convenient way of not having to carry wads of cash to make purchases and, in the short term, they can help consumers take advantage purchasing options when cash flow and amazing sales do not match up. Using credit in the right way can greatly enhance the quality of our lives.

Unfortunately many people are far too liberal with credit card use. Using credit cards to buy things one cannot afford or to artificially maintain a standard of living that does not match one’s income may be fun for a while but are disastrous in the long run.

Most consumers do not really understand the cost of using their credit cards. Being able to afford the payments does not mean that one can actually afford the purchase. Using credit cards and making minimum payments can double or even triple the cost of a purchase because those payments mostly cover interest charges. That means a twenty-dollar pizza paid for on a credit card might end up costing sixty bucks!

Consumers who unwisely use credit quickly discover they are on a credit card treadmill. It doesn’t take long before most of their cash becomes tied up in making payments on their cards. There isn’t cash left to live on and when they use up the cards they have, they apply for more, either requesting limit increases or applying for new cards. Reality only begins to set in when their credit applications are eventually denied.

If you are beginning to recognize the credit card treadmill in your life, it may not be too late. But do not wait. What may just be a tank of gas here or a bag of groceries there will quickly become an all out inability to afford even the basic necessities of life without credit.

If you take decisive action now, you will not only save your credit report, you will save thousands of dollars and in the long-run; you will save your quality of life. Here is what you need to do.

1. Stop using most of your cards. OK, your heart just sank. Take a minute and breathe. You may have to tighten your belt a little and sacrifice in order to do stop relying on credit but if you don’t do it now, it will be done to you eventually. Realize that for as long as you have been using your credit cards, you have been borrowing against your future income. It has always been predictable that you would have to sacrifice spending cash on stuff you might want later because you used credit to buy stuff you wanted earlier. Maybe you never thought of it this way but that is exactly what you did.

2. Carry only ONE card and pay it off each month. You can still have the convenience of using a credit card without the expensive interest. Simply do not use the card unless you have the cash in the bank to pay it off when the statement arrives. If you do not carry a balance from month to month, there should not be any interest to pay. If there is, get rid of that card!

3. Pay more than the minimum. Making the minimum payments means paying the most interest. When you are actively reducing your debt, you should over pay the minimum balance due by least 20%. If you do this and do not use the card, you will be applying the additional payment to the principal balance due and you will reduce your debt. Walletwizard.com offers a free, easy to use form that helps do this with more than one credit card.

4. Pay bills when they arrive, not when they are due. Most credit card interest is based on your Average Daily Balance. The sooner you make a payment, the lower the balance and the less you will pay over time. You also avoid the possibility penalties in the form of late fees and the interest rate increases that may result from your payment arriving after the due date.

5. Be careful transferring balances. If you have good credit, you are probably receiving offers to transfer your other balances to a new account. In general, applying for more credit is a bad idea because of the danger of using your old cards after transferring the balance. Sometimes those introductory rates are awfully tempting! Before you apply, carefully read and understand the terms of the new card. How long will that introductory interest rate last? What do you have to do to maintain that rate? What interest rate will kick in after the introductory rate expires?

6. Create and maintain a spending plan. Have a clear understanding of your income and expenses. You have to live within your means. In fact, for a time, you will have to live below your means in order to pay off your debt. Tighten your belt a little more and throw as much money at your debt as is sustainably possible.

7. If you need help, get it; but beware. If you watch television, you see countless commercials for debt solutions promising to reduce your interest rates, consolidate your payments, or even pay less than you owe. Before you opt for any of these advertised solutions you need to understand your options. Carefully consider the terms, the associated fees, and the consequences, particularly to your credit report. If it sounds too good to be true, there is likely something you do not understand about the program.

If you are having difficulties associated with credit card debt, doing nothing will only make things worse. Acting now to reduce and even eliminate your credit card debt is one of the best things you can do for a brighter financial future.


Joseph Onesta is a speaker, trainer and work culture consultant. As Director of Education for Consumer Credit Counseling Service of Los Angeles, he helped thousands of individuals and families toward financial wellness through articles, seminars and his personal finance certificate course. He now offers his services through employers who understand the value of Personal Finance Employee Education. Visit his website at www.integrityhpi.com.

Financial Lessons Learned from Hurricane Katrina

The financial world is in chaos. World leaders are scrambling to save economies that up to now, seemed to need little more than interest rate regulation. Government bailouts, take over of major financial institutions and decimation of retirement accounts have set our society in turmoil from the highest in government to individual citizens. We are in the midst of a kind of economic hurricane Katrina and we need to know how to best weather the storm.

As Katrina approached the gulf coast, people in New Orleans were encouraged to evacuate but many ignored the warnings and stayed behind. They later found themselves stranded on their rooftops having lost everything. If, like them, you do nothing, in this financial storm, you may find yourself stranded or worse. The warning signs are all around us. It is not time to hunker down and hope that the storm blows over. It is time to take action.

Reconsider what you have, what can be saved and what you might have to count as a loss.

In personal finance terms, it comes down to revaluating your wants and your needs. Luxuries that become a habit have a way of looking like necessities when they are not. We all should examine the ways we spend money and reconsider our habits. How much of our spending is on luxury and how much is on necessity?

If we do not tighten our belts voluntarily, they will be tightened for us. In the throws of Katrina, stranded people were hungry and parched and help did not come for a long time—too late for some.

For some of us tightening the belt a notch may mean public transportation rather than driving to work. It may mean packing a lunch rather than eating out. We might dry-clean less often. We might eat at home more, turn the lights off when we leave a room or wear a sweater rather than turning up the thermostat this winter.

Do we really need to spend four or five dollars on a cup of coffee? Sorry Starbucks, I own a travel mug and can brew a decent cup at home. If I am going to go out for a cup, it will be the basic model, not the frothed-up, price-inflated version. How about cutting your prices for your loyal customers who have spent so freely?

Do not wait for the government to save you. They are not prepared for it. Our government and FEMA were taken completely by surprise by Katrina and the process was mismanaged and mistakes made from the very beginning.

Remember the economic stimulus check you received at the beginning of the summer. It was like throwing a pizza at 30 or 40 really hungry people. The big story at the time was how very few people were actually spending it in the way the government hoped. Now we are bailing out banks to tune of billions of dollars because of their bad, even predatory lending decisions.

Looters are on the loose. As citizens of New Orleans were forced to turn their backs on their homes and businesses to save their lives, looters were right behind them picking up was they left behind.

Beware of unscrupulous offers of credit, pay-day loans, easy financing and guaranteed satisfaction. Think twice before moving your investments on the advice of someone who needs to make a living off of your decisions. Read the fine print of offers on insurance that will make your payments for you if you are unable to do so. Anyone who offers an easy solution in a time like this is selling snake oil.

Just after the storm, creditors were very patient and cooperative with credit card holders and were very understanding about late payments and lost cards. How long do you suppose creditors left accounts open for displaced Katrina victims who were no longer employed and could not pay their bills? It wasn’t long before accounts were being closed for various reasons, all of them legitimate.

Learn to live without your credit cards. Using credit now just means you will have to pay more later. Interest rates often double or even triple the cost of your purchases if you are carrying balances from month to month and making minimum payments. In a tight economy, why would you pay more for something just to have the simple convenience of using a credit card?

Most everyone has debt obligations and when it comes to prioritizing which creditor gets paid and which does not, credit cards fall to the very bottom of the list because the debt is unsecured. At the top of the list are your mortgage, legal obligations like child support and your taxes. Think of long-term consequences rather than short-term inconveniences.

There is going to be a very fowl mess to clean up. More than three years later, there are still homes in New Orleans that have not been cleaned out, gutted or torn-down and the job of cleaning up that mess gets more and more difficult as time goes by.

Financial storms can cast very long shadows. Lost opportunities, damaged credit reports and investment losses may require years of recovery and rebuilding. The thing to remember is that you can rebuild and though things may never be as they were or as you planned them, you can and will survive and even find happiness. In the midst of the storm the best we can do is to try and limit the damage.

Profiteering will be rife. In the recovery process after Katrina, gross profiteering was not only everywhere, it was obvious. Even today, building supplies are at a premium price even at the national chain stores. Contractors in New Orleans can charge two and three times their normal rates. Long waits in line and even longer waiting lists for contractors betray how willing some are to pay the price of recovery.

As we emerge from this crisis, and we will come out of this, there will be some who promise quicker and easier recovery. Call them economic ambulance chasers. They will promise investments with large and quick gains. They will offer to repair credit reports, provide quick easy access to bankruptcy and offer easy credit terms. If it sounds too good to be true, it is.

Remember the fundamental rules. Promises of high returns naturally carry corresponding risk. The more an investment opportunity promises a return, the more likely it is that you can also lose your shirt. There are no secrets to credit repair. You can do it all yourself and the information you need is free and readily available. And anytime there is a legal way out, like bankruptcy, debt negotiation or tax settlement, there are consequences that are unavoidable. You should find out what they are before you sign on the dotted line.

There will be help. Volunteers and charities poured into New Orleans after Katrina as if a levy of a different kind had been breached.

It is difficult to say what kinds of real help will be available after this economic storm. They are limited only by our ingenuity and our capacity for kindness. Ultimately, however, each of us is responsible for our own financial well-being. Be careful; it is a gale out there.

Joseph Onesta is a Speaker, Trainer and Consultant with Integrity HPI. His practice focuses improved work environments that develop an "employer of choice" reputation for his clients while facilitating the work-life balance of their employees. As former Director of Education and Training for Consumer Credit Counseling Service of Los Angeles, he offers seminars and workshops in Personal Finance Employee Education.