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Debt Consolidation Facts

1. If you spend more than 50% of your credit limit every month, this indicates to the Credit Bureau that you do NOT have enough cash on hand to meet your monthly expenses. This will identify you as a high credit risk and will actually reduce your credit score by 60 - 70 points overnight (Fair Isaac).

2. If you miss 1 or 2 payments on your credit card debt, the issuing company will skyrocket your interest rate to a whopping 27% - 30%!

3. Out of a random sample of 3 million American consumers (included in Experian's National Score Index), 51% of them have at least 2 credit cards and 14% of them have 10 or more credit cards.

Archive of Debt Consolidation Posts

Archive of Posts 1 2 3

(April 11th, 2007)

10 Crucial Debt Reduction Mistakes

Humans beings are impatient. Just like the process of losing weight, many people try to rush through their tasks of debt reduction and make costly crucial mistakes that ruin their entire debt reduction or debt management plan. In this article, we will explain those 10 debt reduction mistakes that you should avoid:

1) Forgiven Debt is Taxable Income

If you have had a debt settlement agreement with your debtors where they wrote off your debt, this automatically creates taxable income for you! According to IRS Form 980, if you receive a debt settlement of $600 or more, it will automatically be reported to the IRS and the beneficiary of this settlement will have to include this forgiven debt in his taxable income. Therefore, if you have had a large portion of your debt forgiven, you should not be totally happy because you will have to pay tax on this amount!

2) Destroying the Plastic

Some people burn or tear down their credit cards while other close them down in an effort to stop racking up more debt on them. If you absolutely cannot prevent yourself from impulse buying, then this is a good action. However, beware that incase you lose your job or have an emergency such as an accident that makes you temporarily disabled to work, you will not have a credit card to bail you out. Ofcourse, you would only need a credit card in this instance if you do NOT have any savings left over.

Also know that closing down your credit cards will temporarily lower your credit score, as your debt ratio will appear higher and the length of your credit history will be shorter. Furthermore, if you were to ever make a debt negotiation or debt settlement agreement with creditors, they would only consider open credit card accounts and NOT closed ones. Thus, do not totally burn or destroy your credit cards. Try to hide them in a place which is not easily accessible, so as to prevent impulse buying.

3) Statute of Limitations on Debt Collection

You can read more on this topic at Statute of Limitations on Debt Collection.

4) Pay This Bill, Ignore That One

When people become overwhelmed by their debt loads, they will pay one credit card bill this month, and leave many others unpaid. Then in the following month, they will pay the unpaid credit card bills from the last month, and ignore the credit card statements arriving in the current month. While this sure ruins your credit score, it also creates many late payment fees that you have to make, on top of the original debt you have to pay. If you check the right sidebar of this website under the header "Debt Consolidation Facts", we present the following fact:

If you miss 1 or 2 payments on your credit card debt, the issuing company will skyrocket your interest rate to a whopping 27% - 30%!

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(April 10th, 2007)

15 Signs Indicating You Need Credit Counseling or Debt Help

Many people with huge debt loads to pay off will probably try cutting down on their spending and put more emphasis on paying off their debts. They will also keep a close watch on their spending habits and cut down on unnecessary purchases. Just like losing weight, some people will be successful in debt reduction all by themselves. However, there's many other people who need the help of a personal trainer, or a professional credit counselor to be precise. Here are 15 signs indicating you need help from a professional credit counseling firm:

1) Your credit card debt load increases every month, while your income is falling. You have more and more debt to pay off each month, while little or no savings.

2) You are making only the minimum required monthly payments on your credit card debt.

3) You apply for new credit cards and make use of cash advances (payday loans) from these cards to pay off existing credit card balances.

4) You have a wallet full of credit cards, probably more credit cards than a Gambler with Poker chips.

5) You are maxing out your credit limits on your multiple credit cards each month. Or, you are very close to reaching the limits.

6) Each month, you charge more debt to your credit cards than make payments towards them.

7) You work extra long hours (overtime) to keep up with your credit card debt payments.


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(April 8th, 2007)

How to Improve Your Credit Score - 4 Basic Things

1) Pay Off Your Debts

To get good mortgage loan terms, you need to have a credit score in the 700 - 720 range. The expected national average is 723 according to Fair Isaac. What's the best way to increase your credit score in the short term? The best way is to pay off any high debt balances on your credit cards which could increase your credit score by a whopping 60 - 80 points overnight! Credit Bureaus look at how you handle credit card debt, whether you try to pay it off as fast as you can, or you are the type of person that only meets the minimum payment schedule. If you are determined to pay off your high credit card balance, this will reflect on your credit score and will net you favourable terms with mortgage lenders.

2) Never Use More than 50% Of Your Credit Limit

If you spend more than 50% of your credit limit every month, this indicates to the Credit Bureau that you do NOT have enough cash on hand to meet your monthly expenses. This will term you as a high credit risk and will actually reduce your credit score by 60 - 70 points overnight (according to Craig Watts working at Fair Isaac). You need to minimize your credit limit usage and keep your credit balances owed very low for atleast 3 months before applying for credit or a mortgage loan.

3) Don't Close Old Credit Cards

In the above bulleted list, we mentioned "Time Length of Credit History." If you have credit cards that are 4-5 years older, then it's NOT a good idea to close them down. Use those to maintain your credit history and use them responsibly! Furthermore, do NOT go out applying for new lines of credit at any retail store or bank, and do not go out asking for an auto loan, because that will decrease your credit score by a few points instantly.

4) Ordering Your Credit Report or Seeking Credit Counseling

Here are some myths that do NOT affect your credit score in any way.

  • You ordering your credit report from Experian, TransUnion or Equifax.
  • You going out to seek credit counseling or debt management services.
  • Mortgage or other debt lenders checking your credit score for any applications you have made.

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(April 7th, 2007)

Paying Off Your Student Loans Early: Is It Worth It?

You have gone to school for many years and have accumulated thousands of dollars in debt. Does it make sense to pay off this student loan debt as fast as possible or should you just make the minimum payments required on the loan? If you refinanced or consolidated your loan at a low student interest rate, you could invest the money you would have otherwise used to pay off your student debt into Money Market Accounts (MMAs), Certificates of Deposit or a regular savings account that will yield higher interest returns. Furthermore, any interest you pay on your student loans is tax deductible! Most people are smart enough to know both of these points. However, there's a 3rd point to consider:

"If a student borrower who has received a loan described in subparagraph (A) or (B) of section 428(a)(1) dies or becomes permanently and totally disabled (as determined in accordance with regulations of the Secretary), then the Secretary shall discharge the borrower’s liability on the loan by repaying the amount owed on the loan."

Source: Higher Education Act of 1965, Section 437 (a).

This above paragraph states that if you were to die while still owing student loan debt or become physically disabled, you will be discharged from the loan and will NOT have to ever pay it back! Let's consider this example. Say Peter has an extra $800 every month left over every month after careful budgeting and minimizing his expenses. What should he do with this $800? Should he save it in a Money Market Instrument yielding higher interest rate returns, or should he pay off his student loan debt?

i) Peter uses his $800 saved up every month to pay off his student loan debt for a total of 5 years. Unfortunately after 5 years, Peter gets in a bad car accident and becomes permanently disabled. At this point, Peter does NOT have any student loan debt, but he does NOT have any savings either!!

ii) Peter makes minimum monthly payments on his student loan debt for 10 years of $50. He therefore saves $750 a month every month for that time period. At the end of 10 years, Peter gets into the same car accident described above and becomes permanently disabled. At this point, all of Peter's student loan debts will become discharged and he will be debt free. Furthermore, he will have a nice saved up amount of $750 / month x 12 months x 10 years = $90,000!

The above 2 scenarios are fictitious but they do make sense! At the end of 10 years, Peter would have $90,000 saved up (a nice amount) as opposed to having saved up nothing.

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(April 5th, 2007)

Using Your Home Equity Line of Credit

What's a Home Equity Line of Credit?

A home equity line of credit is a line of credit borrowed with your home as collateral. Therefore, if you fail to make payments on the borrowed credit amount, you will forfeit your home as it has been pledged as collateral. Because your home is probably the biggest asset you will ever own, most people use a home equity line of credit to pay for large education bills, home improvement costs and unexpected big medical bills. A home equity line of credit is not used for your day to day living expenses, that's just stupid.

Once you apply for a home equity line of credit, the lender will assess your credit limit (the most amount of credit that you can borrow at any given point). Your lender will set a percentage point in calculating the credit limit. For example, take the following hypothetical situation:

Full Value of House (Appraised) $250,000
Percentage (set by lender) 85%
Amount of Appraised Loan: $212,500
Less: Balance owing on Mortgage $(115,000)
Available Qualified Credit Limit $97,500 

Apart from this, the credit lender will also look at your current short term and long term debt. If your debt burden is high, this means you will be eligible for a lower credit limit. However if you do not have any debt, then you could be potentially eligible for all of this $97,500 credit limit.

You are allowed to withdraw money from your home equity line of credit at any time you want, provided you are approved for one. Some lenders will require you to keep a minimum balance in the line of credit every month. Withdrawals can be made using your credit card.

Annual Percentage Rate (APR) & Closing Rate of the Home Equity Line of Credit

Did You Know?
Your Annual Percentage Rate (APR) is based on your current credit score and Combined Loan to Value Ratio. The formula for Combined Loan to Value Ratio (CLTV) =Amount of Money Being Borrowed / Total Appraised Value of Potential Property. For example, if a borrower wants to borrow $120,000 while the full appraised value of his property is $200,000, then the Combined Loan to Value Ratio (CLTV) is $120,000 / $200,000 = 60%

Choose a credit lender that charges the lowest APR (Annual Percentage Rate). APR is the cost of borrowing credit expressed in percentage form, over the annual life. For example, some lenders will offer you an APR of 12% while others will offer you 15%. Obviously, the lower the APR, the lower the cost of borrowing credit. Furthermore, look at the closing costs of the home equity line of credit.

Closing costs include any attorney fees for drafting the line of credit agreement, fees for filing the line of credit, title search fees, insurance and any taxes payable.
Note: The APR does not incorporate any of these closing costs. These closing costs are separate and do not have any relationship with the APR.


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(April 4th, 2007)

Good Faith Estimate of all Closing Costs in Mortgage Loan Applications

Your debt lender is required to provide you with a good faith estimate of all the closing costs you will have to pay for within 3 days of your initial mortgage or other loan application. Here is a list of the type of fees you will have to incur upon closing of your mortgage loan application:

  • Buyer & Lender Attorney Fees
  • Mortgage application fees
  • Property appraisal fees
  • Mortgage broker's commissions
  • Lender Inspection fee
  • Underwriting fee
  • Mortgage Insurance Premiums (charged if your down payment is less than 20% of the value of your home)
  • Closing settlement fee
  • Notary fees
  • Title search fee
  • Credit report inspection fees
  • Interest charged from the day of mortgage settlement to the date of first payment
  • Property taxes from the day of mortgage settlement to tax year end

Since closing costs take up about 3-5% of the mortgage loan's total value, you should wait until you receive a Good Faith Estimate of all closing costs, before signing the mortgage loan application. It's also smart to receive Good Faith Estimates from various debt lenders, then compare and choose the best one. Now you may not understand some of the closing fees listed above. We will try to describe a few.

Title Insurance

Title insurance checks for any liens (claims) put against the property you are just about to acquire as well as for any legal errors, fraud, forgery, divorce rulings & missing inheritances. You do not want to purchase a property against which a bank has put forth a lien now do you? This is why title insurance is very important. Title Insurance ensures that the buyer is protected against any of these misfortunes.

Here is a table of the type of closing fees charged, as well as their related amounts for a $50,000 loan, $100,000 loan as well as a $150,000 loan.

Type of Closing Fee Fee for $50,000 Loan Fee for $100,000 Loan Fee for $200,000 Loan
Buyer's Attorney Fees $400 - $700 $1200 - $1500 $1500 - $3000
Transfer of Taxes $75 - $1125 $75 - $1125 $75 - $1125
Recording Fees $40 - $60 $75 - $150 $100 - $200
Survey $125 - $400 $125 - $400 $125 - $400
Inspection $175 - $300 $175 - $300 $175 - $300
HomeOwner Insurance $300 - $600 $500 - $800 $700 - $1000
Property Appraisal $150 - $400 $150 - $400 $150 - $400
Lender's Attorney Fees $150 - $400 $150 - $400 $150 - $400
Title Search & Insurance $450 - $600 $450 - $600 $450 - $600
1-3% Points $500 - $1500 $1000 - $3000 $2000 - $6000
Loan Origination $500 $1000 $2000
Initial Loan Application & Credit Report Fee $75 - $300 $75 - $400 $75 - $400
Escrow Taxes Deposit $100 - $800 $100 - $2400 $100 - $3000
Partial Month Interest Charges $20 - $400 $50 - $1200 $100 - $2400


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(April 3rd, 2007)

15 Hidden Traps Debt Lenders Use to Rip You Off & How to Avoid Them

1. Watch out for the hidden costs: Lenders will hit you & casually inform you of many hidden costs just before you are about to close the deal. Some of these costs include:

  • Administrative fees
  • Documentation fees
  • Processing fees
  • Underwriting costs
  • Other miscellaneous fees

They will hit you with all these fees just before you are about to close the deal, when they know you will NOT back out (backing out will be costly for you). To protect yourself, ask for a list of ALL these fees in detail upfront, before you even begin to bargain the deal. Then, ask them to give you all these fees in writing, with a valid signature. Ask your lender to give you a Good Faith Estimate, more about this topic can be read at: http://www.bankrate.com/brm/news/real-estate/buyerguide2004/closing-estimate.asp You can tell if your lender is trustworthy if he tells you about all these fees upfront, although by law, he is required to tell you all these fees 3 days after your initial application.

2. Low-Ball Closing Costs: Lenders will attract your attention and business towards them by offering you very low closing cost estimates. This is known as the "low balling" technique. Once they low-ball you into their system, they will reveal the actual high closing costs just last minute before the deal is closed. They know that it will be too late for you to back out of the deal. Some lenders will deliver you the actual closing costs day before you sign the mortgage settlement and you shall be forced to pay all the actual costs or risk losing your property. At this point, we should also define what closing costs actually are. Closing costs are the expenses incurred in acquiring your home. They usually range from 3-5% of the value of your home. Here's a list of common closing costs:

  • Buyer & Lender Attorney Fees
  • Mortgage application fees
  • Property appraisal fees
  • Mortgage broker's commissions
  • Lender Inspection fee
  • Underwriting fee
  • Mortgage Insurance Premiums (charged if your down payment is less than 20% of the value of your home)
  • Closing settlement fee
  • Notary fees
  • Title search fee
  • Credit report inspection fees
  • Interest charged from the day of mortgage settlement to the date of first payment
  • Property taxes from the day of mortgage settlement to tax year end

3. Fixed Locked In Interest Rate: Most mortgage lenders will lock you in with a fixed interest rate over the life of the mortgage loan, at the time of closure. If interest rates go up on the date of closure, you will have saved yourself some money (a lot of money) by locking in a cheaper interest rate. However, if the interest rate goes down while you locked in a higher interest rate at the date of closure, the lender will make some profit off you. Beware of some lenders though, they can use the following tactics:

  • If the interest rates drop before the date of closure, they will inform you that your interest rates are locked in at a higher percentage and they cannot change it.
  • If the interest rates rise before the date of closure, some lenders will inform you that your interest rate is NOT locked in, and you will therefore be charged a higher interest rate.

4. Floating Mortgage Interest Rates: If you select a variable interest rate instead of a fixed rate, your monthly mortgage payments will vary and change all the time, in accordance with the fluctuations in the market. Some lenders will add 1-3% points on top of the interest rate fluctuations in the market, to make some extra money off you. Clarify with the lender in writing exactly how many percentage points of interest they will add on to the floating mortgage interest rate. Make sure you get this in writing, word of mouth means nothing!

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