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The RIGHT Solution For You
Based on your needs, we create the perfect debt relief plan catered to your specific needs.
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Consolidate all of your past due unsecured debts into one small payment.
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Are creditors hounding you? Get the help you need to deal with those annoying collection calls.
Avoid Personal Bankruptcy
Our alternatives to bankruptcy are tailor-made to meet your specific needs and financial goals.
Unsecured debts are debts such as credit cards, personal loans, lines of credit, store cards, medical bills, and utility bills that are not secured by collateral. Mortgages and car loans are NOT considered unsecured debt.
Debt Solutions
Credit Counseling
It is no secret that many American's are in debt up to their ears. Everyone is looking for a way to dig themselves out before they are buried alive. Thankfully, there are plenty of credit counseling and debt consolidation companies available to help.
Credit counseling is perfect for someone who is consistently late or unable to pay even the minimum balance of their monthly bills or for someone who has tried negotiating a reasonable repayment plan with collection agencies and failed. Credit counselors help to educate consumers about ways to avoid and eliminate any debt that they will not be able to pay off.
Contact a nonprofit agency that does not require a large fee upfront or promises to settle your debt for much less than what you owe. Make sure that the agency is legitimate and also accredited by the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. After all, credit counseling is a service that most people can benefit from.
Debt Settlement
Credit counseling is perfect for someone who is consistently late or unable to pay even the minimum balance of their monthly bills or for someone who has tried negotiating a reasonable repayment plan with collection agencies and failed. Credit counselors help to educate consumers about ways to avoid and eliminate any debt that they will not be able to pay off.
Contact a nonprofit agency that does not require a large fee upfront or promises to settle your debt for much less than what you owe. Make sure that the agency is legitimate and also accredited by the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. After all, credit counseling is a service that most people can benefit from.
A rapid rise in mortgage defaults and other un-payable loans due to sudden employment loss has led to individuals searching for strategies to get out of financial difficulties. One such strategy is debt settlement. This term is commonly used to describe a process whereby the debtor, usually through a company that specializes in settling debt, makes payments to that company while the debt settlement company negotiates with the companies to which money is owed.
The negotiations focus on partial forgiveness for the amount owed, and sometimes interest rate relief. Debt settling strategies such these are often workable, because the original lender might be facing two alternatives: negotiate away some of the debt (debt settling) and receive payment of a lesser amount, or not receive anything as the debtor goes into bankruptcy.
Other means the lender can pursue is to turn your account over to a collection agency, or file a lawsuit against you. The collection agency, if they do get their hands on the money, will take a big percentage for their services. Attorney fees, in the other case, will cut deeply into what the lender ends up receiving. In either case, debt settling may be relatively attractive.
As noted the debtor begins making one monthly payment to the debt settling company. That company usually holds the funds for several months while negotiating with the original lender(s). These debt settling strategies make the financial reality of their choices plain to the original lenders. They can negotiate a debt settlement or perhaps face the prospect of not receiving anything.
Employing debt settling strategies is not a choice to be made lightly. If one can solve financial problems with credit counseling or consolidating multiple loans into a lower interest loan, those approaches may be better. With interest rates at very low percentages, some old debts may be made much more affordable at today's prevailing rates.
Those approaches will protect your credit rating, if it is good to begin with. Debt settlement will likely reduce your credit score, and make it very difficult for you to access borrowed money for quite awhile. Also, before a debt settlement is reached the lender might already have decided on a lawsuit.
Debt settlement strategies can help in a pinch, but make sure you receive some counseling before proceeding.
Using Debt Consolidation to Take Hold of Your Future Finances
The negotiations focus on partial forgiveness for the amount owed, and sometimes interest rate relief. Debt settling strategies such these are often workable, because the original lender might be facing two alternatives: negotiate away some of the debt (debt settling) and receive payment of a lesser amount, or not receive anything as the debtor goes into bankruptcy.
Other means the lender can pursue is to turn your account over to a collection agency, or file a lawsuit against you. The collection agency, if they do get their hands on the money, will take a big percentage for their services. Attorney fees, in the other case, will cut deeply into what the lender ends up receiving. In either case, debt settling may be relatively attractive.
As noted the debtor begins making one monthly payment to the debt settling company. That company usually holds the funds for several months while negotiating with the original lender(s). These debt settling strategies make the financial reality of their choices plain to the original lenders. They can negotiate a debt settlement or perhaps face the prospect of not receiving anything.
Employing debt settling strategies is not a choice to be made lightly. If one can solve financial problems with credit counseling or consolidating multiple loans into a lower interest loan, those approaches may be better. With interest rates at very low percentages, some old debts may be made much more affordable at today's prevailing rates.
Those approaches will protect your credit rating, if it is good to begin with. Debt settlement will likely reduce your credit score, and make it very difficult for you to access borrowed money for quite awhile. Also, before a debt settlement is reached the lender might already have decided on a lawsuit.
Debt settlement strategies can help in a pinch, but make sure you receive some counseling before proceeding.
Many people may think that debt consolidation is a bad course, especially if they are very deep in debt. The truth is that consolidating debt will help to lower your monthly payments, and create a better focus on how you can remove yourself from stressful and unwanted debt situations and keep you from receiving bad credit. Debt consolidation strategies make it possible to take hold of what your future holds for you financially and allows you to take the best course available to you.
Debt Consolidation Methods
Consolidating debt is not a mystery practice that suddenly drops your debts. It is usually a loan by an independent company that will buy your previous debts from creditors and other sources while allowing you to have a better interest rate and repayment terms. Usually, debt consolidation strategies will consist of removing a partial amount from your debts and allowing you to have a longer repayment period with lower monthly payments. This allows all of your debts to be funneled into a more manageable monthly payment plan. This can certainly help people to find their way out of debt more quickly than the rigorous routine of being drained every month from all of your cash flow.
Benefits of Debt Consolidation
Consolidating your debt will allow you to get more out of your money each month. You will no longer need to wonder if you will have money for food, to pay rent or utilities and other expenses. A debt consolidation strategy allows you to end up with more money in your pocket every month and makes it possible for your bank accounts to grow at a steady pace. Keeping as much of your money available to you as possible is what debt consolidation can do for you. You will also not need to worry about falling into bad credit situations and losing points on your credit score as consolidating debt will help you from ever losing credit, providing you keep on top of your new payment schedule.
Debt Consolidation Strategies Available
Debt consolidation is offered by most banking and lending institutions. You can also go about consolidating debt by getting in touch with one of the many companies that help to eliminate debts through debt consolidation strategies. You can even do research online about your refinancing options for loans and other debts that you may not necessarily be aware of and can be useful towards letting you become debt free.
Student Loan Consolidation
Debt Consolidation Methods
Consolidating debt is not a mystery practice that suddenly drops your debts. It is usually a loan by an independent company that will buy your previous debts from creditors and other sources while allowing you to have a better interest rate and repayment terms. Usually, debt consolidation strategies will consist of removing a partial amount from your debts and allowing you to have a longer repayment period with lower monthly payments. This allows all of your debts to be funneled into a more manageable monthly payment plan. This can certainly help people to find their way out of debt more quickly than the rigorous routine of being drained every month from all of your cash flow.
Benefits of Debt Consolidation
Consolidating your debt will allow you to get more out of your money each month. You will no longer need to wonder if you will have money for food, to pay rent or utilities and other expenses. A debt consolidation strategy allows you to end up with more money in your pocket every month and makes it possible for your bank accounts to grow at a steady pace. Keeping as much of your money available to you as possible is what debt consolidation can do for you. You will also not need to worry about falling into bad credit situations and losing points on your credit score as consolidating debt will help you from ever losing credit, providing you keep on top of your new payment schedule.
Debt Consolidation Strategies Available
Debt consolidation is offered by most banking and lending institutions. You can also go about consolidating debt by getting in touch with one of the many companies that help to eliminate debts through debt consolidation strategies. You can even do research online about your refinancing options for loans and other debts that you may not necessarily be aware of and can be useful towards letting you become debt free.
If you have student loans, you should consider student loan consolidation. This is a great way to manage your bills so that you only have a single bill to pay each month rather than many bills. At the end of the day, consolidating student loans could save you a lot of money. Instead of having to pay off multiple interest rates, you will have only a single interest rate to deal with. This adds up, especially if you have a number of loans that are worth quite a bit of money. Student loan consolidation services understand that paying back your educational loans can be a daunting process, and thus, they are prepared to help you make it all the more easier. There really isn't a reason to not look into student loan consolidation: it can make the total payments you pay a month a bit cheaper or more manageable and ensure that you streamline the bill paying process. The easier it is to pay back your loans, the quicker you will do it because you will know exactly how much you owe.
Tax Debt Relief Can Help You Live Again
Holding onto your money is essential within the present economy even if you owe the government back taxes. As your wallet gets tighter, your family will depend on the money you have. Tax debt relief services can help you in these times of crisis.
Many tax debt relief companies can help Americans settle their tax debt for pennies on the dollar. These tax debt relief services know the law and can be on your side to remove penalties, stop tax liens, and avoid property seizures. America is in turmoil, and the last thing any American needs is for the federal government to tighten their grasp on your last dollars.
Many tax debt relief services can be found online. They will work with you and the IRS to help you get through these times of financial woe. Whether you owe thousands or hundreds of dollars to the federal government, tax debt relief can help you find the road to financial freedom.
Many tax debt relief companies can help Americans settle their tax debt for pennies on the dollar. These tax debt relief services know the law and can be on your side to remove penalties, stop tax liens, and avoid property seizures. America is in turmoil, and the last thing any American needs is for the federal government to tighten their grasp on your last dollars.
Many tax debt relief services can be found online. They will work with you and the IRS to help you get through these times of financial woe. Whether you owe thousands or hundreds of dollars to the federal government, tax debt relief can help you find the road to financial freedom.
Financial Calculators
Debt to Income Ratio
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The amount you owe is relevant only when measured against your income. The more you make, the more debt you can afford to take on. Fill in the blanks to get a rough idea of your debt-to-income ratio-and whether it is already higher than is considered manageable on your income.
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How much do you owe?
Use this calculator to find out how much you owe. This can be used as a good starting point for your debt management plan. Enter all of your credit cards and outstanding installment loans balances. Find out how much you owe and how long it will take to pay it all off.
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Debt Consolidation
Should you consolidate your debt? This calculator is designed to help determine if debt consolidation is right for you. Fill in your loan amounts, credit card balances and other outstanding debt. You can then see what your monthly payment would be with a consolidated loan. Try adjusting your terms, loan types or rate until you find a consolidation plan that fits your needs - and most importantly your budget!
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Cost-of-Debt Calculator
The interest you pay on your debt can quickly become very expensive. Use this calculator to help determine just how expensive your debt has become. Enter all of your credit cards and outstanding installment loans balances. Find out how much you owe, how much interest you are scheduled to pay and how long it will take to pay it all off.
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Credit Card Pay off
Use this calculator to see what it will take to pay off your credit card balance, and what you can change to meet your repayment goals.
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Personal Debt Consolidation
Should you consolidate your debt? This calculator is designed to help determine whether debt consolidation is right for you. Enter your credit cards, auto loans and other installment loans balances by clicking on the "Enter Data" button for each category. Then change the consolidated loan amount, term or rate to create a loan that will work within your budget. Click the "View Report" button for detailed results.
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Frequently Asked Questions
Our list of Frequently Asked Questions from people just like you will help you answer the questions you may have about Debt Consolidation, Credit Counseling, Debt Settlement, Credit Card Debt, Bankruptcy, Bad Credit, Tax Debt, Student Loan Consolidation, and Financial Planning. If you still have questions after, give us a call and we will walk you down the road to freedom.
Credit Counseling F.A.Q.s
The answers to your Credit Counseling questions are answered here. You will find new tips and useful advice from our helpful list of F.A.Q.s from people like yourself.
Q: How do I find a good credit counseling service?
A: Due to a few bad apples, the credit-counseling industry is under enormous scrutiny from both the government, and private consumer-interest groups. Although this is bad for honest credit counselors (and even worse for the not-so-honest ones), it's great for you, the consumer. Search the Web sites of the Federal Trade Commission (www.ftc.gov) and the Better Business Bureau (www.bbb.org) for "credit counseling" and you will find all you need to know, including complaints against individual credit-counseling firms.
Secondarily, you can tell right away if a credit-counseling service is legitimate by evaluating the promises it makes. Does it sound too good to be true? If so, then it is. No one can make your debts and/or bad credit disappear, and no one can save you 90% or more -- even 50% is really stretching it. Good credit counselors can typically save consumers 10-35% on their monthly payments, so if a firm promises to do much more, be skeptical of their claims, and of them as a company.
Q: How do I know if I need credit counseling?
A: If any of these statements apply to you, then you may need credit counseling. The more statements that apply, the more likely credit counseling is needed:
Q: What do I need to sign up for credit counseling services?
A: Technically, "credit counseling" refers to a wide range of educational services provided by credit counseling firms, and to receive most of these services, there are little or no requirements. However, people typically use the term "credit counseling" to refer to the debt-management services offered by many credit counseling firms, and in order to enroll in a DMP (debt management plan), you will need to be able to verify your identity. In addition, you will need to produce all necessary data on your current debts, such as your most recent statements, and you may be required to provide your banking information.
Q: How can I get myself out of credit card debt?
A: Getting out of credit-card debt can be a lot easier than it seems -- if you're able to use discipline. First, you need to resolve to curb your credit-card spending. Commit to only using your credit cards to buy things you absolutely need, and that you'll be able to pay off, in full, at the end of the month. If you're unable to do this, either because you need more than your current income and expenses allow or because you simply lack the will power, then you will not be successful in getting out of credit-card debt on your own -- you'll need a little help.
But if you are able to curb your credit-card spending, the next step is to ensure you can pay at least your monthly minimums on each of your credit cards, each month. Cut back where you need to. Instead of buying a $4 latte every day, brew your own coffee at home and drink it before you leave each day. Otherwise, the price of that latte can end up being a lot more than $4!
If you're able to curb your spending and pay at least your minimums, the next step is to save a little extra cash each month and apply it toward your debts. Even if it's only $20 a month, it will go a long way when allocated in the most effective manner possible. But most people can find a way to sock away an extra $5 every workday, which works out to more than $100 a month.
But what do you do with the extra $100? Simply apply it to the credit card with the highest interest rate and you'll see that balance drop like a stone! When you only pay the minimums, the bulk of your payments are going towards interest, which is why your balances never seem to go down -- paying an extra $100 takes a flat $100 extra off your balance each month!
It's important to note here that you must keep paying the same payment on each of your cards, each month. As your minimum payments chip away at your balances, the minimum payment required will drop, but this is a trap -- don't fall for it! Keep on paying the payment you've gotten used to and more of your payment will go towards paying down the balance.
When you finally get your first credit card paid off, take the total monthly payment (your original minimum + $100) and apply it to the card with the next highest interest rate. Repeat this process and in little time, you'll be credit-card debt free.
Of course, this plan can't work for everyone. Many people are so deeply in debt that they can't even pay the minimum payments on their cards, let alone save up an extra $100 each month. For these folks, services such as credit counseling, debt management, and debt settlement should be looked into.
Q: What is the difference between credit counseling and debt management?
A: Technically speaking, debt management is an element of credit counseling -- just one of the several services credit counseling firms offer to the public. From a practical standpoint, however, the terms are virtually synonymous. People frequently use the term "credit counseling" to refer to the establishment of a debt management plan (DMP). This "misusage" of terminology is now so common that you have to just judge by the context of the sentence whether someone really means credit counseling, or if they're actually using it as a synonym for debt management.
Q: Will credit counseling affect my credit?
A: Credit counseling can mean many things, but when most people use the term, they're referring to debt consolidation or debt management plans. When you enter into these programs, a credit counselor will collect all of your bills and then contact each creditor and let them know that you are working on paying. They then negotiate with each creditor to have late fees waived or have your interest rates lowered. You then make payments to the debt management company so that the calls from creditors stop. But how does this effect your credit?
Well, it will show on your credit report that you didn't pay off your creditors according to the terms of your original contract. All the accounts that are involved with your debt management plan will be marked as, ""does not pay account as agreed."" This might sound threatening, but it's actually a lot better than a ""charge-off,"" how your credit report is marked when you fail to pay at all, or especially a bankruptcy.
It's always best, of course, to pay your bills on time each month, but that's just not always possible. Problems crop up, and despite your best intentions, you might get behind on your bills. If you can keep on top of your debts, do so, but if you've just fallen too far behind, credit counseling can really help. So if you use a credit counseling service, you will have a blemish on your credit report, but it can be much less serious than the alternatives, especially that last resort, bankruptcy. Always consider all of the angles before you start a debt management plan.
Debt Settlement F.A.Q.s
Q: How do I find a good credit counseling service?
A: Due to a few bad apples, the credit-counseling industry is under enormous scrutiny from both the government, and private consumer-interest groups. Although this is bad for honest credit counselors (and even worse for the not-so-honest ones), it's great for you, the consumer. Search the Web sites of the Federal Trade Commission (www.ftc.gov) and the Better Business Bureau (www.bbb.org) for "credit counseling" and you will find all you need to know, including complaints against individual credit-counseling firms.
Secondarily, you can tell right away if a credit-counseling service is legitimate by evaluating the promises it makes. Does it sound too good to be true? If so, then it is. No one can make your debts and/or bad credit disappear, and no one can save you 90% or more -- even 50% is really stretching it. Good credit counselors can typically save consumers 10-35% on their monthly payments, so if a firm promises to do much more, be skeptical of their claims, and of them as a company.
Q: How do I know if I need credit counseling?
A: If any of these statements apply to you, then you may need credit counseling. The more statements that apply, the more likely credit counseling is needed:
- I frequently miss my monthly payments on at least one credit card or other debt
- I have several credit cards, all of which are at least 90% maxed out
- I have at least one credit card that's currently over its credit limit
- I have one or more credit cards that have exceeded their allowable balance and incurred overage charges at least twice in the past twelve months
- I make the minimum payments on my cards, but finance charges and other surprises typically send me over my credit limit, incurring an overage charge on top of that
- I have trouble making the minimum payments on my credit cards
- I'm behind on my mortgage, car loan, or other debt
- The principal and interest on my debts cause me to miss other important payments -- like rent, the electric bill, or car insurance
- I'm considering bankruptcy
Q: What do I need to sign up for credit counseling services?
A: Technically, "credit counseling" refers to a wide range of educational services provided by credit counseling firms, and to receive most of these services, there are little or no requirements. However, people typically use the term "credit counseling" to refer to the debt-management services offered by many credit counseling firms, and in order to enroll in a DMP (debt management plan), you will need to be able to verify your identity. In addition, you will need to produce all necessary data on your current debts, such as your most recent statements, and you may be required to provide your banking information.
Q: How can I get myself out of credit card debt?
A: Getting out of credit-card debt can be a lot easier than it seems -- if you're able to use discipline. First, you need to resolve to curb your credit-card spending. Commit to only using your credit cards to buy things you absolutely need, and that you'll be able to pay off, in full, at the end of the month. If you're unable to do this, either because you need more than your current income and expenses allow or because you simply lack the will power, then you will not be successful in getting out of credit-card debt on your own -- you'll need a little help.
But if you are able to curb your credit-card spending, the next step is to ensure you can pay at least your monthly minimums on each of your credit cards, each month. Cut back where you need to. Instead of buying a $4 latte every day, brew your own coffee at home and drink it before you leave each day. Otherwise, the price of that latte can end up being a lot more than $4!
If you're able to curb your spending and pay at least your minimums, the next step is to save a little extra cash each month and apply it toward your debts. Even if it's only $20 a month, it will go a long way when allocated in the most effective manner possible. But most people can find a way to sock away an extra $5 every workday, which works out to more than $100 a month.
But what do you do with the extra $100? Simply apply it to the credit card with the highest interest rate and you'll see that balance drop like a stone! When you only pay the minimums, the bulk of your payments are going towards interest, which is why your balances never seem to go down -- paying an extra $100 takes a flat $100 extra off your balance each month!
It's important to note here that you must keep paying the same payment on each of your cards, each month. As your minimum payments chip away at your balances, the minimum payment required will drop, but this is a trap -- don't fall for it! Keep on paying the payment you've gotten used to and more of your payment will go towards paying down the balance.
When you finally get your first credit card paid off, take the total monthly payment (your original minimum + $100) and apply it to the card with the next highest interest rate. Repeat this process and in little time, you'll be credit-card debt free.
Of course, this plan can't work for everyone. Many people are so deeply in debt that they can't even pay the minimum payments on their cards, let alone save up an extra $100 each month. For these folks, services such as credit counseling, debt management, and debt settlement should be looked into.
Q: What is the difference between credit counseling and debt management?
A: Technically speaking, debt management is an element of credit counseling -- just one of the several services credit counseling firms offer to the public. From a practical standpoint, however, the terms are virtually synonymous. People frequently use the term "credit counseling" to refer to the establishment of a debt management plan (DMP). This "misusage" of terminology is now so common that you have to just judge by the context of the sentence whether someone really means credit counseling, or if they're actually using it as a synonym for debt management.
Q: Will credit counseling affect my credit?
A: Credit counseling can mean many things, but when most people use the term, they're referring to debt consolidation or debt management plans. When you enter into these programs, a credit counselor will collect all of your bills and then contact each creditor and let them know that you are working on paying. They then negotiate with each creditor to have late fees waived or have your interest rates lowered. You then make payments to the debt management company so that the calls from creditors stop. But how does this effect your credit?
Well, it will show on your credit report that you didn't pay off your creditors according to the terms of your original contract. All the accounts that are involved with your debt management plan will be marked as, ""does not pay account as agreed."" This might sound threatening, but it's actually a lot better than a ""charge-off,"" how your credit report is marked when you fail to pay at all, or especially a bankruptcy.
It's always best, of course, to pay your bills on time each month, but that's just not always possible. Problems crop up, and despite your best intentions, you might get behind on your bills. If you can keep on top of your debts, do so, but if you've just fallen too far behind, credit counseling can really help. So if you use a credit counseling service, you will have a blemish on your credit report, but it can be much less serious than the alternatives, especially that last resort, bankruptcy. Always consider all of the angles before you start a debt management plan.
The answers to your Debt Settlement questions are found here. Browse around to find new tips and advice from our helpful list of F.A.Q.s
Q: Can I be sued if I'm enrolled in a debt settlement program?
A: Yes. Unlike bankruptcy and debt management programs (DMPs), debt settlement programs offer no legal protections. Whereas a DMP is an agreement between a debtor and his creditors, debt settlement is much more antagonistic. People who enroll in debt settlement plans have forsaken any chance of working with their creditors, and are taking a more hostile approach. Sometimes this is warranted, but as such, creditors may sue you if they believe they'll be able to collect.
The main thing to consider before enrolling in a debt-settlement plan is whether or not you are a likely target for a lawsuit. Could you pay back your debts, in full, if you emptied your bank account and sold off some of your luxury assets? If so, you may be a likely target. But if you're really struggling to make ends meet with the crushing burden of your debts, you're highly unlikely to get sued. After all, the creditor has to believe he can actually recover damages, and ultimately, you could always just file bankruptcy anyway. For these reasons, legal action in debt-related matters is somewhat rare.
Q: Can I negotiate a settlement with my creditors on my own?
A: Yes, you can. However, there are two things to keep in mind: 1) Credit counselors, DMP specialists, and debt arbitrators are trained professionals who work with creditors on behalf of clients every single day -- even if you follow the advice of this FAQ, you are unlikely to be as effective as an industry professional. 2) Dealing with creditors and bill collectors can be a real hassle, and it's easy for people to give up and throw in the towel. When you hire a professional, it is their job to deal with the headache, not yours. Furthermore, there are a lot of emotional issues surrounding unpaid debts, and when you have a professional working on your behalf, he or she is not caught up in the guilt or shame that you may be. This gives them better resolve when dealing with your creditors.
That said, there is certainly nothing to stop you from attempting to settle your debts on your own. In fact, although a professional may implement techniques better than you're able to, they aren't able to do anything you can't do for yourself.
The #1 rule when dealing with creditors is to get everything in writing and to maintain a record of all correspondence. If a creditor makes an offer over the phone, be sure to ask that they send it via mail, as well.
Q: How can I find reputable debt negotiation and settlement services?
A: First, check the Better Business Bureau (www.bbb.org) for any complaints about the service. Secondly, consult the Federal Trade Commission's Web site at www.ftc.gov. In general, you should avoid debt-settlement companies who:
Q: Is a debt settlement program guaranteed to work?
A: A debt settlement program is not a silver bullet or a magical cure-all for debt-ridden consumers. It is possible that your creditors will not accept your settlement offers and may take legal action to force you to pay your outstanding debts, in full. However, given the expense of taking legal action, debt settlement programs are more likely to work than not. Creditors view debts in the aggregate (total) and, typically, it's a lot more cost-effective for them to agree to your debt-settlement terms than it is to take legal action to win a judgment, and then, if they're successful, take further legal action to get you to pay -- and that's if you're even able to pay. Taking all of these factors into consideration, you can see why debt settlement plans work most of the time.
Q: What are the risks in enrolling in a debt settlement program?
A: Debt settlement is an aggressive strategy. Instead of working with your creditors, as with debt management plans (DMPs), debt settlement has you fighting with your creditors -- sometimes, it's the only thing left to try. But as such, debt settlement does present a host of risks that every consumer should be aware of before embarking on the strategy. They include:
A: Contact your debt settlement administrator immediately. Consult the contract you signed when you joined the program, and see what the procedure is for backing out of the program. There are likely to be fees associated with quitting, so take that into account when choosing a debt settlement program.
Q: What is a debt negotiation and debt arbitration?
A: First, it must be pointed out that there are two definitions of "debt arbitration." The first, and less common, is a legal proceeding, similar to small-claims court, in which a "disinterested expert" hears the case of the debtor and his creditor, and makes a ruling for how they should proceed (i.e. how much the debtor should pay the creditor, and the terms of the payment, etc.)
But "debt arbitration" is also used to describe the process of using a professional debt negotiator -- aka a "debt arbitrator" -- to negotiate an out-of-court settlement. These debt arbitrators are not "disinterested," but instead, they work on behalf of the debtor. In this way, debt negotiation/arbitration is an alternative to bankruptcy or setting up a debt settlement plan.
Q: Will a debt arbitration program really eliminate my debt?
A: First, it depends on what form of "debt arbitration" you're talking about.
The first, but less common, form of debt arbitration is a legal proceeding that takes place when a debtor and his creditor are unable to come to reasonable terms, and yet, for whatever reason, bankruptcy is not a viable option. In this case, an impartial third party (similar to a judge) informally hears the case and renders a decision as to how the debtor and creditor are to proceed. In most states, this process is legally binding, and thus, if the arbitrator decides you should owe nothing, then yes, your debt would be instantly eliminated. But there are two caveats: 1) The arbitrator is unlikely to determine you owe nothing / should be made to pay nothing unless your creditor has been truly egregious in his efforts to collect your debt, or the creditor lacks necessary documentation, etc. 2) In most states, the findings of a debt arbitration hearing can be challenged in a more formal court of law. In other instances, the term "debt arbitration" is essentially a synonym for debt negotiation -- hiring a third-party professional, sometimes a lawyer, to negotiate settlement of your debts with your creditors. In this case, debt arbitration is unlikely to "eliminate" your debt -- in fact, it's impossible. This form of debt arbitration, after all, is a negotiation, and you can't negotiate down to zero. It is possible for a debt arbitrator to reduce your debt by as much as 90% -- if your creditor feels he has no reasonable chance of collecting more and you might declare bankruptcy -- but 50%-60% savings are more common.
Debt Consolidation F.A.Q.s
Q: Can I be sued if I'm enrolled in a debt settlement program?
A: Yes. Unlike bankruptcy and debt management programs (DMPs), debt settlement programs offer no legal protections. Whereas a DMP is an agreement between a debtor and his creditors, debt settlement is much more antagonistic. People who enroll in debt settlement plans have forsaken any chance of working with their creditors, and are taking a more hostile approach. Sometimes this is warranted, but as such, creditors may sue you if they believe they'll be able to collect.
The main thing to consider before enrolling in a debt-settlement plan is whether or not you are a likely target for a lawsuit. Could you pay back your debts, in full, if you emptied your bank account and sold off some of your luxury assets? If so, you may be a likely target. But if you're really struggling to make ends meet with the crushing burden of your debts, you're highly unlikely to get sued. After all, the creditor has to believe he can actually recover damages, and ultimately, you could always just file bankruptcy anyway. For these reasons, legal action in debt-related matters is somewhat rare.
Q: Can I negotiate a settlement with my creditors on my own?
A: Yes, you can. However, there are two things to keep in mind: 1) Credit counselors, DMP specialists, and debt arbitrators are trained professionals who work with creditors on behalf of clients every single day -- even if you follow the advice of this FAQ, you are unlikely to be as effective as an industry professional. 2) Dealing with creditors and bill collectors can be a real hassle, and it's easy for people to give up and throw in the towel. When you hire a professional, it is their job to deal with the headache, not yours. Furthermore, there are a lot of emotional issues surrounding unpaid debts, and when you have a professional working on your behalf, he or she is not caught up in the guilt or shame that you may be. This gives them better resolve when dealing with your creditors.
That said, there is certainly nothing to stop you from attempting to settle your debts on your own. In fact, although a professional may implement techniques better than you're able to, they aren't able to do anything you can't do for yourself.
The #1 rule when dealing with creditors is to get everything in writing and to maintain a record of all correspondence. If a creditor makes an offer over the phone, be sure to ask that they send it via mail, as well.
Q: How can I find reputable debt negotiation and settlement services?
A: First, check the Better Business Bureau (www.bbb.org) for any complaints about the service. Secondly, consult the Federal Trade Commission's Web site at www.ftc.gov. In general, you should avoid debt-settlement companies who:
- Have an "unsatisfactory" rating from the Better Business Bureau
- Spend less than a half-hour talking with you before trying to sign you up and take the first check
- Encourage you to sign a contract without thoroughly reviewing it or having an attorney take a look at it
- Require "voluntary" contributions
Q: Is a debt settlement program guaranteed to work?
A: A debt settlement program is not a silver bullet or a magical cure-all for debt-ridden consumers. It is possible that your creditors will not accept your settlement offers and may take legal action to force you to pay your outstanding debts, in full. However, given the expense of taking legal action, debt settlement programs are more likely to work than not. Creditors view debts in the aggregate (total) and, typically, it's a lot more cost-effective for them to agree to your debt-settlement terms than it is to take legal action to win a judgment, and then, if they're successful, take further legal action to get you to pay -- and that's if you're even able to pay. Taking all of these factors into consideration, you can see why debt settlement plans work most of the time.
Q: What are the risks in enrolling in a debt settlement program?
A: Debt settlement is an aggressive strategy. Instead of working with your creditors, as with debt management plans (DMPs), debt settlement has you fighting with your creditors -- sometimes, it's the only thing left to try. But as such, debt settlement does present a host of risks that every consumer should be aware of before embarking on the strategy. They include:
- Damaged credit: By withholding payments and instead sending them to a debt-settlement firm, your credit will be tarnished. Ideally, you will be able to negotiate those "late" marks away, but there is a very distinct possibility that your credit will suffer even if everything else works out perfectly for you.
- Increased collection calls: Once you've missed a few payments in a row, the collection calls will really start to come in. Solution: Change your phone number.
- Tax consequences: Any portion of your debt that's "forgiven" or negotiated away is considered taxable income by the IRS. Beware!
- Potential lawsuits: Debt settlement is an antagonistic approach to ridding yourself of debt, and as such, your creditors have every right to sue you for payment in full. The fact of the matter is, though, it's rarely cost-effective for them to do so. In reality, most threats of lawsuits are hollow scare tactics, but the possibility of landing in court is real.
A: Contact your debt settlement administrator immediately. Consult the contract you signed when you joined the program, and see what the procedure is for backing out of the program. There are likely to be fees associated with quitting, so take that into account when choosing a debt settlement program.
Q: What is a debt negotiation and debt arbitration?
A: First, it must be pointed out that there are two definitions of "debt arbitration." The first, and less common, is a legal proceeding, similar to small-claims court, in which a "disinterested expert" hears the case of the debtor and his creditor, and makes a ruling for how they should proceed (i.e. how much the debtor should pay the creditor, and the terms of the payment, etc.)
But "debt arbitration" is also used to describe the process of using a professional debt negotiator -- aka a "debt arbitrator" -- to negotiate an out-of-court settlement. These debt arbitrators are not "disinterested," but instead, they work on behalf of the debtor. In this way, debt negotiation/arbitration is an alternative to bankruptcy or setting up a debt settlement plan.
Q: Will a debt arbitration program really eliminate my debt?
A: First, it depends on what form of "debt arbitration" you're talking about.
The first, but less common, form of debt arbitration is a legal proceeding that takes place when a debtor and his creditor are unable to come to reasonable terms, and yet, for whatever reason, bankruptcy is not a viable option. In this case, an impartial third party (similar to a judge) informally hears the case and renders a decision as to how the debtor and creditor are to proceed. In most states, this process is legally binding, and thus, if the arbitrator decides you should owe nothing, then yes, your debt would be instantly eliminated. But there are two caveats: 1) The arbitrator is unlikely to determine you owe nothing / should be made to pay nothing unless your creditor has been truly egregious in his efforts to collect your debt, or the creditor lacks necessary documentation, etc. 2) In most states, the findings of a debt arbitration hearing can be challenged in a more formal court of law. In other instances, the term "debt arbitration" is essentially a synonym for debt negotiation -- hiring a third-party professional, sometimes a lawyer, to negotiate settlement of your debts with your creditors. In this case, debt arbitration is unlikely to "eliminate" your debt -- in fact, it's impossible. This form of debt arbitration, after all, is a negotiation, and you can't negotiate down to zero. It is possible for a debt arbitrator to reduce your debt by as much as 90% -- if your creditor feels he has no reasonable chance of collecting more and you might declare bankruptcy -- but 50%-60% savings are more common.
Your Debt Consolidation questions are answered here. Browse around to find new tips and advice from our helpful list of F.A.Q.s from people like yourself.
Q: Can I consolidate my bills with a consolidation loan or a home equity line of credit?
A: Yes you can. However, you need to be cautious when consolidating "unsecured" debts, like credit cards, into "secured" debts, which both home equity loans and home equity lines of credit qualify as.
First, you need to understand the difference between a home equity loan and a home equity line of credit. It's quite simple, actually. A home equity loan is exactly what it sounds like -- it's a secured loan against the equity of your home. For example, if you owned a home worth $250,000 and you owed only $125,000 on it, you would be eligible for a home equity loan for as much as $125,000. If you applied for and received such a loan, you would actually receive a check for $125,000 (less any fees).
A home equity line of credit (HELOC) isn't really a loan -- it's more like a credit card. Given the same case as above, you wouldn't receive a check for $125k, but a "line of credit" equal to that. The advantage here is that you are only paying monthly interest and principal charges on the amount you spend from your line of credit, not the full $125,000.
Regardless, the danger here is that if you're unable to pay your home equity loan payments or your HELOC, your house is in danger. Home equity loans, after all, are commonly referred to as "second mortgages," and just like if you don't pay on your first, your home can be repossessed and sold by your lender. The same applies for HELOCs.
Therefore, it is somewhat risky to consolidate $50,000 of credit card debt into a home equity loan or HELOC. As credit card debt, the debt is "unsecured." If you can't pay it, your house is not at risk because most states have homestead exemptions that make it impossible for creditors to force the sale of all but the most expensive homes (think mansions). While a home equity loan or a HELOC might be the right choice for you -- knocking double digits off your annual percentage rate of interest -- you must be cautious and fully cognizant of all the risks.
Q: Can I consolidate my debt even if I don't own a home?
A: Yes. Although home equity loans and home equity lines of credit are two of the most popular methods of debt consolidation, they certainly aren't the only options. There are "unsecured" debt consolidation loans available, although they carry with them higher interest rates. And there are other techniques for consolidating one's debts that have nothing to do with borrowing, such as using a credit counselor to establish a debt management plan (DMP).
Q: Does 'debt consolidation' mean taking out a loan?
A: Typically, the term "debt consolidation" is used in conjunction with the word "loan." For example, if you have numerous debts and obligations at a variety of interest rates and maturities, you might take out a debt consolidation loan for the purpose of paying off all of your existing debts, leaving you with only the new loan.
However, this is not always necessarily the case. "Debt consolidation" can also refer to the process credit counselors engage in, in which all of your loans are "consolidated" so that you only have to make one monthly payment. This is the primary feature of a debt management plan (DMP), and only having one check to make out each month can make things a lot easier on debt-ridden consumers.
Q: How much does debt consolidation cost?
A: Debt consolidation can cost a lot, a little, or nothing at all. In fact, an ideal debt consolidation actually saves you money -- that's the whole point!
It really depends on what is meant by "debt consolidation." If you are referring to a debt consolidation loan, then the interest rate should be lower than the composite (average) interest rate you had been paying on your unconsolidated loans. However, even if this is the case, a debt consolidation loan may still be costing you due to a mismatch of maturities. For example, if you had three five-year loans at 18% interest, consolidating them into one ten-year loan at 17% would still cost you more in the long run, even though 17% is less than 18%.
Another type of "debt consolidation" is using a credit counseling company to establish a debt management plan (DMP). In this case, again, the idea is that you should be saving money. Credit counselors should be able to get your creditors to lower your interest rates and forgive old late fees, etc., or why else would you bother? However, there is still a cost, even if you are saving money on a net basis. Credit counselors charge all different types of fees, but a common practice is to charge you one month's worth of debt payments.
Finally, it should also be noted that certain types of debt consolidation can cost you a lot of money. First, we discussed debt consolidation loans, which are presumably "unsecured loans," and then we explored debt management plans, which aren't loans at all. But the third common type of debt consolidation is the secured loan -- most typically, home equity loans. Here, you might be able to really get your interest rates down, but at what cost? If you're unable to make future payments, you've now put your home at risk. With plain-old credit card debt, which is unsecured, your home is never up for grabs since most states have homestead exemptions. Although home equity loans can really help you cut your monthly interest
Q: Once I complete a debt consolidation program, will my credit score improve?
A: Your credit score is a composite of many factors, but generally, paying off a debt consolidation loan will be good for your credit. A history of on-time payments is one of the major factors influencing credit scores, but it cannot be stated with 100% certainty that your credit score will be improved. It is possible you will have taken on other debts, requested more credit, or incurred other credit-related blemishes at the same time you've been working to pay off your debt consolidation loan, all of which could be harmful enough to your credit score to negate the good work you would have done.
Q: When does it make sense to take out a debt consolidation loan?
A: Whenever considering a debt consolidation loan, you have to evaluate the pros and cons and make a rational financial decision.
Typically, you should be looking to pay a lower interest rate on your debt consolidation loan than the composite interest rate of your current outstanding debts. Ideally, you should look for a loan in which the interest rate is lower than any of your current debts.
But you also have to evaluate the costs. If your current debts have different maturities (i.e. one loan that will be paid off in two and a half years, another in three, another in five, and another in seven), then calculating the cost-benefit of a debt consolidation loan becomes trickier. Even with a lower interest rate, a maturity longer than the average maturity of your current loans could result in a higher final payback.
Ultimately, you may decide to pay a higher interest rate if you can stretch your loans out further. If, for example, you had a few three-year and five-year loans at interest rates of 8-15%, you might be willing to pay 16% on one, consolidated ten-year loan. Even though your final payback would be much higher, your monthly payments would be much, much lower, thanks to the longer maturity. Borrowers should be cautious about focusing on the monthly payment instead of the total debt, but in some cases, it is appropriate. You have to educate yourself about all of the pros and cons of a particular loan, and make a rational, informed decision.
Credit Card Debt F.A.Q.s
Q: Can I consolidate my bills with a consolidation loan or a home equity line of credit?
A: Yes you can. However, you need to be cautious when consolidating "unsecured" debts, like credit cards, into "secured" debts, which both home equity loans and home equity lines of credit qualify as.
First, you need to understand the difference between a home equity loan and a home equity line of credit. It's quite simple, actually. A home equity loan is exactly what it sounds like -- it's a secured loan against the equity of your home. For example, if you owned a home worth $250,000 and you owed only $125,000 on it, you would be eligible for a home equity loan for as much as $125,000. If you applied for and received such a loan, you would actually receive a check for $125,000 (less any fees).
A home equity line of credit (HELOC) isn't really a loan -- it's more like a credit card. Given the same case as above, you wouldn't receive a check for $125k, but a "line of credit" equal to that. The advantage here is that you are only paying monthly interest and principal charges on the amount you spend from your line of credit, not the full $125,000.
Regardless, the danger here is that if you're unable to pay your home equity loan payments or your HELOC, your house is in danger. Home equity loans, after all, are commonly referred to as "second mortgages," and just like if you don't pay on your first, your home can be repossessed and sold by your lender. The same applies for HELOCs.
Therefore, it is somewhat risky to consolidate $50,000 of credit card debt into a home equity loan or HELOC. As credit card debt, the debt is "unsecured." If you can't pay it, your house is not at risk because most states have homestead exemptions that make it impossible for creditors to force the sale of all but the most expensive homes (think mansions). While a home equity loan or a HELOC might be the right choice for you -- knocking double digits off your annual percentage rate of interest -- you must be cautious and fully cognizant of all the risks.
Q: Can I consolidate my debt even if I don't own a home?
A: Yes. Although home equity loans and home equity lines of credit are two of the most popular methods of debt consolidation, they certainly aren't the only options. There are "unsecured" debt consolidation loans available, although they carry with them higher interest rates. And there are other techniques for consolidating one's debts that have nothing to do with borrowing, such as using a credit counselor to establish a debt management plan (DMP).
Q: Does 'debt consolidation' mean taking out a loan?
A: Typically, the term "debt consolidation" is used in conjunction with the word "loan." For example, if you have numerous debts and obligations at a variety of interest rates and maturities, you might take out a debt consolidation loan for the purpose of paying off all of your existing debts, leaving you with only the new loan.
However, this is not always necessarily the case. "Debt consolidation" can also refer to the process credit counselors engage in, in which all of your loans are "consolidated" so that you only have to make one monthly payment. This is the primary feature of a debt management plan (DMP), and only having one check to make out each month can make things a lot easier on debt-ridden consumers.
Q: How much does debt consolidation cost?
A: Debt consolidation can cost a lot, a little, or nothing at all. In fact, an ideal debt consolidation actually saves you money -- that's the whole point!
It really depends on what is meant by "debt consolidation." If you are referring to a debt consolidation loan, then the interest rate should be lower than the composite (average) interest rate you had been paying on your unconsolidated loans. However, even if this is the case, a debt consolidation loan may still be costing you due to a mismatch of maturities. For example, if you had three five-year loans at 18% interest, consolidating them into one ten-year loan at 17% would still cost you more in the long run, even though 17% is less than 18%.
Another type of "debt consolidation" is using a credit counseling company to establish a debt management plan (DMP). In this case, again, the idea is that you should be saving money. Credit counselors should be able to get your creditors to lower your interest rates and forgive old late fees, etc., or why else would you bother? However, there is still a cost, even if you are saving money on a net basis. Credit counselors charge all different types of fees, but a common practice is to charge you one month's worth of debt payments.
Finally, it should also be noted that certain types of debt consolidation can cost you a lot of money. First, we discussed debt consolidation loans, which are presumably "unsecured loans," and then we explored debt management plans, which aren't loans at all. But the third common type of debt consolidation is the secured loan -- most typically, home equity loans. Here, you might be able to really get your interest rates down, but at what cost? If you're unable to make future payments, you've now put your home at risk. With plain-old credit card debt, which is unsecured, your home is never up for grabs since most states have homestead exemptions. Although home equity loans can really help you cut your monthly interest
Q: Once I complete a debt consolidation program, will my credit score improve?
A: Your credit score is a composite of many factors, but generally, paying off a debt consolidation loan will be good for your credit. A history of on-time payments is one of the major factors influencing credit scores, but it cannot be stated with 100% certainty that your credit score will be improved. It is possible you will have taken on other debts, requested more credit, or incurred other credit-related blemishes at the same time you've been working to pay off your debt consolidation loan, all of which could be harmful enough to your credit score to negate the good work you would have done.
Q: When does it make sense to take out a debt consolidation loan?
A: Whenever considering a debt consolidation loan, you have to evaluate the pros and cons and make a rational financial decision.
Typically, you should be looking to pay a lower interest rate on your debt consolidation loan than the composite interest rate of your current outstanding debts. Ideally, you should look for a loan in which the interest rate is lower than any of your current debts.
But you also have to evaluate the costs. If your current debts have different maturities (i.e. one loan that will be paid off in two and a half years, another in three, another in five, and another in seven), then calculating the cost-benefit of a debt consolidation loan becomes trickier. Even with a lower interest rate, a maturity longer than the average maturity of your current loans could result in a higher final payback.
Ultimately, you may decide to pay a higher interest rate if you can stretch your loans out further. If, for example, you had a few three-year and five-year loans at interest rates of 8-15%, you might be willing to pay 16% on one, consolidated ten-year loan. Even though your final payback would be much higher, your monthly payments would be much, much lower, thanks to the longer maturity. Borrowers should be cautious about focusing on the monthly payment instead of the total debt, but in some cases, it is appropriate. You have to educate yourself about all of the pros and cons of a particular loan, and make a rational, informed decision.
The answers to your Credit Card Debt questions are answered here. Browse around to find new tips and advice from our helpful list of F.A.Q.s from people like yourself.
Q: How can I get myself out of credit card debt?
A: Getting out of credit-card debt can be a lot easier than it seems -- if you're able to use discipline. First, you need to resolve to curb your credit-card spending. Commit to only using your credit cards to buy things you absolutely need, and that you'll be able to pay off, in full, at the end of the month. If you're unable to do this, either because you need more than your current income and expenses allow or because you simply lack the will power, then you will not be successful in getting out of credit-card debt on your own -- you'll need a little help.
But if you are able to curb your credit-card spending, the next step is to ensure you can pay at least your monthly minimums on each of your credit cards, each month. Cut back where you need to. Instead of buying a $4 latte every day, brew your own coffee at home and drink it before you leave each day. Otherwise, the price of that latte can end up being a lot more than $4!
If you're able to curb your spending and pay at least your minimums, the next step is to save a little extra cash each month and apply it toward your debts. Even if it's only $20 a month, it will go a long way when allocated in the most effective manner possible. But most people can find a way to sock away an extra $5 every workday, which works out to more than $100 a month.
But what do you do with the extra $100? Simply apply it to the credit card with the highest interest rate and you'll see that balance drop like a stone! When you only pay the minimums, the bulk of your payments are going towards interest, which is why your balances never seem to go down -- paying an extra $100 takes a flat $100 extra off your balance each month!
It's important to note here that you must keep paying the same payment on each of your cards, each month. As your minimum payments chip away at your balances, the minimum payment required will drop, but this is a trap -- don't fall for it! Keep on paying the payment you've gotten used to and more of your payment will go towards paying down the balance.
When you finally get your first credit card paid off, take the total monthly payment (your original minimum + $100) and apply it to the card with the next highest interest rate. Repeat this process and in little time, you'll be credit-card debt free.
Of course, this plan can't work for everyone. Many people are so deeply in debt that they can't even pay the minimum payments on their cards, let alone save up an extra $100 each month. For these folks, services such as credit counseling, debt management, and debt settlement should be looked into.
Q: How can I save money on my credit card debt?
A: The first way is to just ask. Oftentimes, all it takes is a call to your card issuer's customer service line. If you've been a fairly good customer, tell them you're thinking of transferring your debt to another company's card with a lower interest rate. If you've had some trouble making your payments on time, tell them you're worried about your ability to pay in the future. Either way, they'll often volunteer to drop your annual percentage rate of interest by a few points. Credit card companies aren't dumb: They know that they make no money when you close your account, and they'll usually work with you in order to avoid that coming to pass.
If this doesn't work, you can consider applying for another card with a low introductory APR. Then you can transfer your existing debt to this card and pay as little as 0% interest for a year.
Finally, it's usually a good idea to use your savings to pay off credit-card debts. After all, if your bank account is yielding only 2-3% and your credit card is charging you 12-24%, it only makes sense to withdraw your cash from the bank and use it to pay down your cards. Yes, it is important to have a cash reserve, but once you pay down your credit cards, you'll be able to use your available balance in the case of an emergency. In this way, it's not a whole lot different from cash. However, if your cash is yielding 2% and your credit card is charging you 12%, you're actually losing 10% on every dollar in your bank account!
Q: How does credit-card debt affect my credit report?
A: One of the major factors used in determining your credit score is your outstanding debt vs. your available credit. For example, if you had $6,000 in credit-card debt, but the total available credit on your credit cards was $12,000, then your ratio would be 50%. However, if you had $6,000 in credit-card debt on cards with only $7,000 in total credit, then your ratio would be 85%, and that's bad.
With this in mind, it's important to recognize that it's normally a bad idea to close one of your credit-card accounts. It's far better to leave the account open, but pay down the balance to $0. That way, your total debt used vs. available credit will be lower, thus making your credit score higher.
Q: What can I do to better manage my credit card debt?
A: If you're able, you should always pay the minimum payment as soon as you receive your bill. If you can pay more later, do so, but missing or even being late with just one payment can seriously tarnish your credit rating and subject you to higher interest rates.
If you find yourself in rather serious credit-card debt, the first thing you need to do is stop spending on non-essential items. Even essentials, if you use a credit card to buy them, should only be purchased if you're able to pay off the charges, in full, the next month.
When your minimum payments start to go down because you've chipped away at your balances, don't fall for the trap of paying the new, lower minimum payment -- keep on paying the old minimum. This way, your balance will drop even faster.
But if you're simply not able to manage your credit card debt on your own, there are trained professionals who can help you. Look into credit counseling, debt management, and debt settlement services before even considering bankruptcy.
Q: Will credit-card consolidation lower my interest rates?
A: In most cases, yes. In fact, this is one of the primary reasons for consolidating credit card debts. If a credit-card consolidation plan doesn't lower your interest rates, then you should probably look for another plan.
Bankruptcy F.A.Q.s
Q: How can I get myself out of credit card debt?
A: Getting out of credit-card debt can be a lot easier than it seems -- if you're able to use discipline. First, you need to resolve to curb your credit-card spending. Commit to only using your credit cards to buy things you absolutely need, and that you'll be able to pay off, in full, at the end of the month. If you're unable to do this, either because you need more than your current income and expenses allow or because you simply lack the will power, then you will not be successful in getting out of credit-card debt on your own -- you'll need a little help.
But if you are able to curb your credit-card spending, the next step is to ensure you can pay at least your monthly minimums on each of your credit cards, each month. Cut back where you need to. Instead of buying a $4 latte every day, brew your own coffee at home and drink it before you leave each day. Otherwise, the price of that latte can end up being a lot more than $4!
If you're able to curb your spending and pay at least your minimums, the next step is to save a little extra cash each month and apply it toward your debts. Even if it's only $20 a month, it will go a long way when allocated in the most effective manner possible. But most people can find a way to sock away an extra $5 every workday, which works out to more than $100 a month.
But what do you do with the extra $100? Simply apply it to the credit card with the highest interest rate and you'll see that balance drop like a stone! When you only pay the minimums, the bulk of your payments are going towards interest, which is why your balances never seem to go down -- paying an extra $100 takes a flat $100 extra off your balance each month!
It's important to note here that you must keep paying the same payment on each of your cards, each month. As your minimum payments chip away at your balances, the minimum payment required will drop, but this is a trap -- don't fall for it! Keep on paying the payment you've gotten used to and more of your payment will go towards paying down the balance.
When you finally get your first credit card paid off, take the total monthly payment (your original minimum + $100) and apply it to the card with the next highest interest rate. Repeat this process and in little time, you'll be credit-card debt free.
Of course, this plan can't work for everyone. Many people are so deeply in debt that they can't even pay the minimum payments on their cards, let alone save up an extra $100 each month. For these folks, services such as credit counseling, debt management, and debt settlement should be looked into.
Q: How can I save money on my credit card debt?
A: The first way is to just ask. Oftentimes, all it takes is a call to your card issuer's customer service line. If you've been a fairly good customer, tell them you're thinking of transferring your debt to another company's card with a lower interest rate. If you've had some trouble making your payments on time, tell them you're worried about your ability to pay in the future. Either way, they'll often volunteer to drop your annual percentage rate of interest by a few points. Credit card companies aren't dumb: They know that they make no money when you close your account, and they'll usually work with you in order to avoid that coming to pass.
If this doesn't work, you can consider applying for another card with a low introductory APR. Then you can transfer your existing debt to this card and pay as little as 0% interest for a year.
Finally, it's usually a good idea to use your savings to pay off credit-card debts. After all, if your bank account is yielding only 2-3% and your credit card is charging you 12-24%, it only makes sense to withdraw your cash from the bank and use it to pay down your cards. Yes, it is important to have a cash reserve, but once you pay down your credit cards, you'll be able to use your available balance in the case of an emergency. In this way, it's not a whole lot different from cash. However, if your cash is yielding 2% and your credit card is charging you 12%, you're actually losing 10% on every dollar in your bank account!
Q: How does credit-card debt affect my credit report?
A: One of the major factors used in determining your credit score is your outstanding debt vs. your available credit. For example, if you had $6,000 in credit-card debt, but the total available credit on your credit cards was $12,000, then your ratio would be 50%. However, if you had $6,000 in credit-card debt on cards with only $7,000 in total credit, then your ratio would be 85%, and that's bad.
With this in mind, it's important to recognize that it's normally a bad idea to close one of your credit-card accounts. It's far better to leave the account open, but pay down the balance to $0. That way, your total debt used vs. available credit will be lower, thus making your credit score higher.
Q: What can I do to better manage my credit card debt?
A: If you're able, you should always pay the minimum payment as soon as you receive your bill. If you can pay more later, do so, but missing or even being late with just one payment can seriously tarnish your credit rating and subject you to higher interest rates.
If you find yourself in rather serious credit-card debt, the first thing you need to do is stop spending on non-essential items. Even essentials, if you use a credit card to buy them, should only be purchased if you're able to pay off the charges, in full, the next month.
When your minimum payments start to go down because you've chipped away at your balances, don't fall for the trap of paying the new, lower minimum payment -- keep on paying the old minimum. This way, your balance will drop even faster.
But if you're simply not able to manage your credit card debt on your own, there are trained professionals who can help you. Look into credit counseling, debt management, and debt settlement services before even considering bankruptcy.
Q: Will credit-card consolidation lower my interest rates?
A: In most cases, yes. In fact, this is one of the primary reasons for consolidating credit card debts. If a credit-card consolidation plan doesn't lower your interest rates, then you should probably look for another plan.
The answers to your Bankruptcy questions are found here. Browse around to find new tips and advice from our helpful list of F.A.Q.s from people like yourself.
Q: Can filing bankruptcy stop my creditors from harassing me?
A: Yes. This is one of the major reasons many people decide to file. However, it is important to note that third-party bill collectors (i.e. anyone outside of the company you owe money to that is hired to collect the debt) must stop bothering you if you simply tell them, "I do not intend to pay this debt; please leave me alone." See information on the Fair Debt Collection Practices Act
Q: What alternatives are there to filing bankruptcy?
A: Although the new bankruptcy law makes filing bankruptcy more difficult and less attractive, luckily, there are more alternatives to bankruptcy today than ever before. The four methods explored here are negotiating with your creditors, using a bankruptcy attorney, debt settlement, and debt management.
One way of dealing with crippling debt is to simply ask your creditors what they can do for you. Can they lower or eliminate your interest rates? Forgive late-payment fees you may have already racked up? Put your debts into "forbearance" for a few months while you get yourself back on your feet? If you're asking yourself, "Why would my creditors agree to any of this?", the answer is because they know if you file bankruptcy, they will get little or nothing. Helping you avoid bankruptcy by coming to more favorable terms can be vastly preferable to many creditors than going through bankruptcy proceedings to recover what they're owed. You would be surprised how easy many creditors can be to work with.
A similar, but slightly different option is to use a bankruptcy attorney to help you settle one or more of your debts. Let's say you owe a company $10,000, and they're threatening to take you to court to recover it. You could hire an attorney to draft a letter stating that you are considering filing bankruptcy and asking if they would be willing to settle the debt for less than the full amount. Often, a company will agree to settle for 10-30% of what they're owed if they think you might declare bankruptcy otherwise.
More dramatic is the practice known as debtsettlement. Under a debt-settlement arrangement, you stop paying your bills, and instead, pay a debt-management company. They don't remit payment to your creditors (as under debt management/ credit counseling, discussed below), but instead, put your money in escrow. When you've achieved a certain balance or your creditors begin to turn up the heat, your debt-management company offers to settle the debt on your behalf, using the money you've saved up in escrow. This can damage your credit, but not as badly as bankruptcy.
A less aggressive alternative to bankruptcy is debt management, also commonly referred to as "credit counseling" (although, technically, debt management is just one aspect of credit counseling, which is a much broader term). Under this practice, your debt-management company (also sometimes known as a debt-consolidation company) works out deals with your creditors to lower interest or forgive fees, etc., and you pay the debt-management company, who then remits payments to your creditors. You can normally save significantly on interest charges by using a debt-management firm, but more importantly, you get the ease of making just one payment per month, instead of several. Although debt management can be temporarily harmful to your credit, it's much better in the long run then falling totally behind on your bills and having no other solution but bankruptcy.
Q: What is better for my credit, filing bankruptcy or enrolling in a debt-repayment plan?
A: Although enrolling in a debt-repayment plan can be temporarily harmful to your credit, virtually nothing you can do is as harmful to your credit score as declaring bankruptcy is. In fact, the only thing more damaging to your credit than filing bankruptcy is inaction -- ignoring mounting debts you'll never be able to repay and simply allowing interest to accrue. Bankruptcy should be the last resort only for people who literally have no possibility of ever paying off their debts, and for whom the options of debt management and debt settlement are simply not feasible.
Q: What steps do I need to take before I file for bankruptcy?
A: Under the new bankruptcy law, you must undergo credit counseling before filing for Chapter-7 or Chapter-13 bankruptcy. From there, you will be subject to your state's "means test" to determine if you are eligible for Chapter 7 (you must have income less than the state median). Then, before your bankruptcy becomes official, your creditors will have an opportunity to challenge your right to bankruptcy in court -- if you are anything less than 100% truthful, your bankruptcy motion may be denied.
These are the steps you need to take, legally, before you can file for bankruptcy. The steps you should take, in order to avoid making the wrong decision, are to consider every possible alternative to bankruptcy that there is. See more information about negotiating with your creditors, debt management, and debt settlement. Bankruptcy should always be the last option.
Bad Credit F.A.Q.s
Q: Can filing bankruptcy stop my creditors from harassing me?
A: Yes. This is one of the major reasons many people decide to file. However, it is important to note that third-party bill collectors (i.e. anyone outside of the company you owe money to that is hired to collect the debt) must stop bothering you if you simply tell them, "I do not intend to pay this debt; please leave me alone." See information on the Fair Debt Collection Practices Act
Q: What alternatives are there to filing bankruptcy?
A: Although the new bankruptcy law makes filing bankruptcy more difficult and less attractive, luckily, there are more alternatives to bankruptcy today than ever before. The four methods explored here are negotiating with your creditors, using a bankruptcy attorney, debt settlement, and debt management.
One way of dealing with crippling debt is to simply ask your creditors what they can do for you. Can they lower or eliminate your interest rates? Forgive late-payment fees you may have already racked up? Put your debts into "forbearance" for a few months while you get yourself back on your feet? If you're asking yourself, "Why would my creditors agree to any of this?", the answer is because they know if you file bankruptcy, they will get little or nothing. Helping you avoid bankruptcy by coming to more favorable terms can be vastly preferable to many creditors than going through bankruptcy proceedings to recover what they're owed. You would be surprised how easy many creditors can be to work with.
A similar, but slightly different option is to use a bankruptcy attorney to help you settle one or more of your debts. Let's say you owe a company $10,000, and they're threatening to take you to court to recover it. You could hire an attorney to draft a letter stating that you are considering filing bankruptcy and asking if they would be willing to settle the debt for less than the full amount. Often, a company will agree to settle for 10-30% of what they're owed if they think you might declare bankruptcy otherwise.
More dramatic is the practice known as debtsettlement. Under a debt-settlement arrangement, you stop paying your bills, and instead, pay a debt-management company. They don't remit payment to your creditors (as under debt management/ credit counseling, discussed below), but instead, put your money in escrow. When you've achieved a certain balance or your creditors begin to turn up the heat, your debt-management company offers to settle the debt on your behalf, using the money you've saved up in escrow. This can damage your credit, but not as badly as bankruptcy.
A less aggressive alternative to bankruptcy is debt management, also commonly referred to as "credit counseling" (although, technically, debt management is just one aspect of credit counseling, which is a much broader term). Under this practice, your debt-management company (also sometimes known as a debt-consolidation company) works out deals with your creditors to lower interest or forgive fees, etc., and you pay the debt-management company, who then remits payments to your creditors. You can normally save significantly on interest charges by using a debt-management firm, but more importantly, you get the ease of making just one payment per month, instead of several. Although debt management can be temporarily harmful to your credit, it's much better in the long run then falling totally behind on your bills and having no other solution but bankruptcy.
Q: What is better for my credit, filing bankruptcy or enrolling in a debt-repayment plan?
A: Although enrolling in a debt-repayment plan can be temporarily harmful to your credit, virtually nothing you can do is as harmful to your credit score as declaring bankruptcy is. In fact, the only thing more damaging to your credit than filing bankruptcy is inaction -- ignoring mounting debts you'll never be able to repay and simply allowing interest to accrue. Bankruptcy should be the last resort only for people who literally have no possibility of ever paying off their debts, and for whom the options of debt management and debt settlement are simply not feasible.
Q: What steps do I need to take before I file for bankruptcy?
A: Under the new bankruptcy law, you must undergo credit counseling before filing for Chapter-7 or Chapter-13 bankruptcy. From there, you will be subject to your state's "means test" to determine if you are eligible for Chapter 7 (you must have income less than the state median). Then, before your bankruptcy becomes official, your creditors will have an opportunity to challenge your right to bankruptcy in court -- if you are anything less than 100% truthful, your bankruptcy motion may be denied.
These are the steps you need to take, legally, before you can file for bankruptcy. The steps you should take, in order to avoid making the wrong decision, are to consider every possible alternative to bankruptcy that there is. See more information about negotiating with your creditors, debt management, and debt settlement. Bankruptcy should always be the last option.
The answers to your Bad Credit questions are answered here. Browse around to find new tips and advice from our helpful list of F.A.Q.s from people like yourself.
Q: Can bad credit be erased?
A: Bad credit can be erased one of two ways; the first of which is time. Negative credit data must be removed from your credit report after seven years, although oftentimes you have to ask the credit bureau to remove it. The one exception to this seven-year rule is Chapter-7 bankruptcy, which stays on your credit report for ten years.
The other way to erase bad credit is simply to ask. If the negative information is incorrect, then you can demand that it be removed from your credit report. The credit-reporting agency will then contact the supposed creditor, and if the information really is inaccurate, the creditor will either admit that it's wrong or will be unable to provide documentation proving otherwise -- either way, the blemish on your credit report must be removed.
Of course, you can use this loophole to your advantage even if the information is accurate. If you have reason to believe that your creditor does not keep good records, simply tell the credit-reporting agency that you believe the negative information to be inaccurate, and then the onus will be on the creditor to prove that you ever owed the money. Some people find this practice to be unethical, but others just think of the unethical methods used by creditors and consider this to be fighting fire with fire.
A slight variation on this strategy is to approach the creditor directly. For example, if you have an unpaid debt of $1,000 on your credit report, you may be able to go to the creditor and say, "I'm sorry about letting this debt accumulate, but now it is really damaging my credit score. Let's work this out between us. If I give you $1,000 right here and now, will you tell the credit-reporting agency that this was all a misunderstanding?" Your creditor may even be willing to settle for less than the total amount owed. However, be aware that credit card companies are much less likely to do this. It's not because they're hard to deal with, (they can actually be quite accommodating if you only ask), it's that they sell their debts to debt-collection companies rather quickly, and once this happens, the credit-card no longer has a claim on the debt, and the debt collector cannot say, "It was all a misunderstanding" -- your credit report already reflects that the debt was sold to a third party.
Q: Can I buy a home with bad credit?
A: You can always buy a home, no matter what your credit score is... The issue is whether or not you can get financing.
When you have bad credit, you (theoretically) pose a greater risk to lenders. They are worried you won't pay back your loan, in which case, they will have to seize your property and kick you out. In this way, home loans are secured loans -- they are secured by the underlying property (your house). This is why home loans have lower interest rates than unsecured loans -- home loans are less risky because the lender can always repossess the underlying property to recover his money. However, to do this is not free: It is a big and costly legal hassle, and since there is a limited amount of money that each bank can loan, they would prefer to lend it to safer borrowers with higher credit scores.
Of course, an appreciating (rising) housing market makes it much easier for people with bad credit to get home loans. From 2002 to 2005, housing prices were soaring throughout most of the country, and interest rates were low. Banks didn't mind lending to people with bad credit, since if the borrower was unable to pay, the bank could simply repossess the house -- which would have gone up in value by then enough to make it worth the bank's while. But now the housing market has taken a turn for the worse, and thus, banks are being much stricter with their lending. This is the "subprime crisis" you hear so much about on the news.
It's not nearly as easy to get a bad-credit (subprime) home loan today as it was even a year or eighteen months ago, but it's not impossible. One thing you can do to make yourself more credit-worthy is to have a substantial down payment for your home. This lessens the bank's risk. A second option for home-buying is to sidestep the mortgage lender altogether and work with the home-seller for "seller financing" of the property. As mortgage lending gets even tighter, more and more sellers will be willing to finance their properties themselves.
Q: How can I improve my bad credit score?
A: Improving your bad credit score consists of two main ideas: (1) Removing negative information already on your credit report, and (2) Having a positive credit profile as you move forward in your financial life.
You may challenge any information on your credit report that you think is inaccurate, or, if you have no ethical qualms about it, you can challenge information you only wish were inaccurate. Don't go overboard with the latter, however. The credit-reporting agency is not going to believe that every single negative item on your credit report is false! Please see Can bad credit be erased? for more information on removing items from your credit report.
But the other half of improving your credit score, having a positive credit profile as you move forward, is even more important. That's because negative information is erased from your credit report after seven years (ten in the case of Chapter-7 bankruptcy), but positive information can stay indefinitely! Just what is positive information? Here is roughly how the major credit-reporting agencies determine your credit score:
So first off, pay all of your bills on time. If you're late with a single payment, it can really ding up your credit score.
Secondly, don't be afraid of taking on new credit -- just be wary of taking on new debt. The distinction can be thought of like this: Say yes to the credit card with a $1,000 limit, but never go over $200 on it. This will result in having 80% available credit, which is good for your credit score (#2).
Third, the older your longest-running current account, the better. So don't rush to pay down your college loans or your mortgage or car loan -- apply those payment to reducing your current credit-card balances instead. It will be much better for your credit report.
Fourth, the types of credit used are important. The three types are revolving (credit cards), installment (car loan, etc.), and "consumer finance" -- which is typically bad news, (payday loans). Taking out consumer-finance debt can actually hurt your credit score, even if you pay your bills on time!
Finally, recent inquiries account for 10% of your credit score -- so don't apply for credit you don't really want or need. Saving 10% at Toys 'R Us could end up costing you thousands of dollars in extra interest!
Q: What is considered a bad credit score?
A: Typically, a credit score is a value expressed as a number between 300 and 850. This is the FICO score, developed by Fair Isaac & Company, but used by Equifax, Experian, and Transunion; the three largest credit-reporting agencies in the United States. There are other credit-scoring models, but most lenders rely on FICO, so we'll deal with that one.
Although the worst possible credit score is theoretically 300, scores below 500 are pretty rare. Prosper.com, the popular person-to-person lending site that helps people with bad credit find loans, will not match lenders with borrowers of scores below 520, and considers anything under 560 to be a "high risk" credit score.
People with credit scores below 620 typically do not qualify for the best loans. Instead, they get the infamous "subprime" loans. Therefore, 620 could be considered the cut-off point for "bad" vs. "good" credit -- but of course it's more complicated than that. Whether your credit is "bad" or "good" is really in the eye of the beholder -- the potential lender. If you're applying for financing on a Rolls Royce, then probably anything under 760 would be considered "bad," but if you're applying for a new cell phone, the creditor may think a score of 640 is great!
The median FICO score in the U.S. is 723; meaning that half of all people have a score higher than that, and half have scores that are lower. The mean-average score, however, is just 678, which tells us that there are a lot of people with bad scores "dragging down" the average from the median.
A decent way of seeing how your credit score ranks is to look at the Prosper grading system. As stated earlier, a score of 520-599 is "high risk" (scores below 520 are considered beyond high risk), but here are the other grades on the Prosper scale, along with corresponding credit scores:
Q: Can bad credit be erased?
A: Bad credit can be erased one of two ways; the first of which is time. Negative credit data must be removed from your credit report after seven years, although oftentimes you have to ask the credit bureau to remove it. The one exception to this seven-year rule is Chapter-7 bankruptcy, which stays on your credit report for ten years.
The other way to erase bad credit is simply to ask. If the negative information is incorrect, then you can demand that it be removed from your credit report. The credit-reporting agency will then contact the supposed creditor, and if the information really is inaccurate, the creditor will either admit that it's wrong or will be unable to provide documentation proving otherwise -- either way, the blemish on your credit report must be removed.
Of course, you can use this loophole to your advantage even if the information is accurate. If you have reason to believe that your creditor does not keep good records, simply tell the credit-reporting agency that you believe the negative information to be inaccurate, and then the onus will be on the creditor to prove that you ever owed the money. Some people find this practice to be unethical, but others just think of the unethical methods used by creditors and consider this to be fighting fire with fire.
A slight variation on this strategy is to approach the creditor directly. For example, if you have an unpaid debt of $1,000 on your credit report, you may be able to go to the creditor and say, "I'm sorry about letting this debt accumulate, but now it is really damaging my credit score. Let's work this out between us. If I give you $1,000 right here and now, will you tell the credit-reporting agency that this was all a misunderstanding?" Your creditor may even be willing to settle for less than the total amount owed. However, be aware that credit card companies are much less likely to do this. It's not because they're hard to deal with, (they can actually be quite accommodating if you only ask), it's that they sell their debts to debt-collection companies rather quickly, and once this happens, the credit-card no longer has a claim on the debt, and the debt collector cannot say, "It was all a misunderstanding" -- your credit report already reflects that the debt was sold to a third party.
Q: Can I buy a home with bad credit?
A: You can always buy a home, no matter what your credit score is... The issue is whether or not you can get financing.
When you have bad credit, you (theoretically) pose a greater risk to lenders. They are worried you won't pay back your loan, in which case, they will have to seize your property and kick you out. In this way, home loans are secured loans -- they are secured by the underlying property (your house). This is why home loans have lower interest rates than unsecured loans -- home loans are less risky because the lender can always repossess the underlying property to recover his money. However, to do this is not free: It is a big and costly legal hassle, and since there is a limited amount of money that each bank can loan, they would prefer to lend it to safer borrowers with higher credit scores.
Of course, an appreciating (rising) housing market makes it much easier for people with bad credit to get home loans. From 2002 to 2005, housing prices were soaring throughout most of the country, and interest rates were low. Banks didn't mind lending to people with bad credit, since if the borrower was unable to pay, the bank could simply repossess the house -- which would have gone up in value by then enough to make it worth the bank's while. But now the housing market has taken a turn for the worse, and thus, banks are being much stricter with their lending. This is the "subprime crisis" you hear so much about on the news.
It's not nearly as easy to get a bad-credit (subprime) home loan today as it was even a year or eighteen months ago, but it's not impossible. One thing you can do to make yourself more credit-worthy is to have a substantial down payment for your home. This lessens the bank's risk. A second option for home-buying is to sidestep the mortgage lender altogether and work with the home-seller for "seller financing" of the property. As mortgage lending gets even tighter, more and more sellers will be willing to finance their properties themselves.
Q: How can I improve my bad credit score?
A: Improving your bad credit score consists of two main ideas: (1) Removing negative information already on your credit report, and (2) Having a positive credit profile as you move forward in your financial life.
You may challenge any information on your credit report that you think is inaccurate, or, if you have no ethical qualms about it, you can challenge information you only wish were inaccurate. Don't go overboard with the latter, however. The credit-reporting agency is not going to believe that every single negative item on your credit report is false! Please see Can bad credit be erased? for more information on removing items from your credit report.
But the other half of improving your credit score, having a positive credit profile as you move forward, is even more important. That's because negative information is erased from your credit report after seven years (ten in the case of Chapter-7 bankruptcy), but positive information can stay indefinitely! Just what is positive information? Here is roughly how the major credit-reporting agencies determine your credit score:
- 35% - punctuality of payment
- 30% - the amount of debt, expressed as the ratio of current balances to total available credit
- 15% - length of credit history
- 10% - types of credit used
- 10% - recent inquiries
So first off, pay all of your bills on time. If you're late with a single payment, it can really ding up your credit score.
Secondly, don't be afraid of taking on new credit -- just be wary of taking on new debt. The distinction can be thought of like this: Say yes to the credit card with a $1,000 limit, but never go over $200 on it. This will result in having 80% available credit, which is good for your credit score (#2).
Third, the older your longest-running current account, the better. So don't rush to pay down your college loans or your mortgage or car loan -- apply those payment to reducing your current credit-card balances instead. It will be much better for your credit report.
Fourth, the types of credit used are important. The three types are revolving (credit cards), installment (car loan, etc.), and "consumer finance" -- which is typically bad news, (payday loans). Taking out consumer-finance debt can actually hurt your credit score, even if you pay your bills on time!
Finally, recent inquiries account for 10% of your credit score -- so don't apply for credit you don't really want or need. Saving 10% at Toys 'R Us could end up costing you thousands of dollars in extra interest!
Q: What is considered a bad credit score?
A: Typically, a credit score is a value expressed as a number between 300 and 850. This is the FICO score, developed by Fair Isaac & Company, but used by Equifax, Experian, and Transunion; the three largest credit-reporting agencies in the United States. There are other credit-scoring models, but most lenders rely on FICO, so we'll deal with that one.
Although the worst possible credit score is theoretically 300, scores below 500 are pretty rare. Prosper.com, the popular person-to-person lending site that helps people with bad credit find loans, will not match lenders with borrowers of scores below 520, and considers anything under 560 to be a "high risk" credit score.
People with credit scores below 620 typically do not qualify for the best loans. Instead, they get the infamous "subprime" loans. Therefore, 620 could be considered the cut-off point for "bad" vs. "good" credit -- but of course it's more complicated than that. Whether your credit is "bad" or "good" is really in the eye of the beholder -- the potential lender. If you're applying for financing on a Rolls Royce, then probably anything under 760 would be considered "bad," but if you're applying for a new cell phone, the creditor may think a score of 640 is great!
The median FICO score in the U.S. is 723; meaning that half of all people have a score higher than that, and half have scores that are lower. The mean-average score, however, is just 678, which tells us that there are a lot of people with bad scores "dragging down" the average from the median.
A decent way of seeing how your credit score ranks is to look at the Prosper grading system. As stated earlier, a score of 520-599 is "high risk" (scores below 520 are considered beyond high risk), but here are the other grades on the Prosper scale, along with corresponding credit scores:
- AA: 760+
- A: 720-759
- B: 680-719
- C: 640-679
- D: 600-639
- E: 560-599