Debt Handling - Home Equity Loans - Pros and Cons
By Debt Handler | August 6, 2007
Get Out Of Debt - The Debt Buster System. Powerful Information Based On Proven Techniques And Strategies To Get Out Of Debt Without Bankruptcy. Repair Bad Credit Fast.
Obtaining a home equity loan is a common method of refinancing debt and it has several advantages. But there are a few potential ‘gotchas’ that are worth considering before taking the plunge.
First, what is a ‘home equity loan’? The basic idea is simple: obtain a line of credit, secured by the equity in your home. That is, if you have a certain amount of ownership in your house - say, as a result of having made a down payment or payments over a long time (as many homeowners do) - borrow against that equity.
Many homeowners will take out a HELOC (Home Equity Line of Credit), as they’re called, in order to use the money for the purpose those loans were invented: financing home improvements. That purpose gave the loan its original name. But, because of tax implications and other reasons, the HELOC evolved to serve other purposes.
Interest paid on most kinds of debt is not tax deductible, but interest paid on a home loan is. Hence, interest paid on a HELOC can actually be a form of less expensive debt.
Suppose, you have a 12% HELOC for up to $10,000. With most HELOCs you don’t actually borrow the entire amount at once. You draw on it, much as you would a credit card, as needed and desired.
So, you have multiple benefits. You can borrow only what you need - keeping the payments and the interest owed as low as possible. And, you get to reduce your taxes by a percentage of the interest paid per year.
If you had a credit card that charged 12% APR, the advantage is clear. You pay a net lower amount of money to the lender as a result of using a HELOC rather than a credit card to finance your purchases.
But, like any loan, it’s important to remember that a home equity loan is just that - a loan, or debt. If one of your major problems is the inability to exert the will to refrain from spending beyond your means, you have just found another supplier to feed your addiction. As a result, a home equity loan may actually make your more fundamental problem worse, rather than better.
But, if you have made a commitment to control your debt, and are seeking ways to reduce your overall expenses, a home equity loan can be a sensible method to employ.
One essential exercise is to actually calculate how much money you would be spending per month - and over the life of the debt - in one scenario versus the other. There are debt calculators readily available online to help you do just that.
Sometimes you will have to weigh whether you prefer to spend more money over the life of the debt as opposed to having a smaller monthly payment, but higher total amount of interest. The better calculators will help you run through both scenarios, changing amounts to help you weigh the pros and cons.
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Debt Handling - FICO, What is That?
By Debt Handler | August 4, 2007
Make Money Off Of The Debt Of Others?
One very important element in your overall credit worthiness package is your FICO score. But what exactly is that and how does it affect your debt management choices?
FICO is an acronym formed from the letters of its founder, the Fair Isaac Corporation. It is a number between 400 and 800 that ranks credit worthiness according to a proprietary algorithm invented by the company, with 400 being worst and 800 being best. Other companies now have their own variations.
Though the details of the algorithms are closely held trade secrets, over the decades many people have reverse engineered several of the important factors. Any late payments will lower your score, and the more of them and the later they are, the more heavily the score is affected. The total amount of debt carried per month is another element. A less important factor is the number of credit cards and credit checks performed.
Any score below about 620 is considered marginal and below 580 is decidedly poor. 720 and above is very good to excellent. A range between 620 and 720 represents a kind of gray area, where items other than your FICO will play a more significant role in loan decisions.
Banks, mortgage companies, credit card issuers and other lenders will use your FICO score as a very important criteria for deciding whether to make a loan, and at what interest rate. Other things being equal the higher your score the better interest rate you can obtain.
Of course, many times all other things are not equal. Prevailing interest rates in general, the current demand for loans, the general economy and other factors have a heavy influence on the willingness of lenders to lend and at what rate.
Also, the entire lending industry has undergone at least two significant shifts in the last 20 years. With the increasing use of computers and modern financial techniques, underwriting loans is done very differently today. Also, not surprisingly, the Internet has shifted finance to a very different mode of working.
Even with all these changes, though - or, perhaps in part because of them - the FICO score remains a primary tool for lenders. It may not determine the final decision, but it definitely influences the ‘first cut’ when presented with a stack of applications to approve or disapprove.
Fortunately for those who have financially slipped, there are alternatives. Though your FICO may be low you nonetheless have several options. The first thing to do is set into motion a plan to improve your score.
As you work to remove those outstanding overdue debts - either through paying them off or negotiating with the lender - your FICO will gradually improve. The age of 30 day past due, 60 day past due (or longer) late payments is a factor in calculating your FICO.
At the same time, you can shop around for lenders willing to take a higher risk by lending you money. The downside is those loans almost always carry a higher interest rate. Your best approach is to try to forego borrowing for as long as possible while you work to improve your debt situation. Your FICO will follow suit.
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Debt Handling - Developing A Budget Can Increase Income
By Debt Handler | August 2, 2007
Get Out Of Debt - The Debt Buster System. Powerful Information Based On Proven Techniques And Strategies To Get Out Of Debt Without Bankruptcy. Repair Bad Credit Fast.
It might seem that developing a budget should be an elementary task. But many people are simply not inclined to use spreadsheets, balance checkbooks or lay out a formal budget. Whether by nature, or as a result of a reaction to public school mathematics training, some people just aren’t ‘number people’.
But everyone will find it in their self-interest to make the effort to outline their expenses against income even if it requires getting someone else to help undertake the task. The budget should include monthly income and outgo, projections of expected increases and decreases and some buffer for the unexpected.
If you feel uncomfortable using spreadsheet software - which is available for free these days either through Open Office (http://www.openoffice.org/) or Google Docs & Spreadsheets (http://docs.google.com/ - at least jot down some figures on a legal-sized pad.
Divide the spreadsheet or page into two columns. In one, list income, in the other write down all monthly costs. In the costs column include all major regular bills, groceries, gasoline, etc. Then add at least 10% for unexpected expenses, if you can.
Now, for an important add-on task that too few undertake: project different scenarios. Make another budget (an imaginary one) that shows monthly costs, income and the difference between the two… except:
Exclude monthly credit card interest amounts. Exclude auto loan interest. Exclude 25% of any ‘impulse buy’ amounts. Then sum the total of those three.
These three represent the amount you could conceivably avoid paying every month. If the total is even as low as 10% of your monthly expenses (and for some it’s higher), you are paying a substantial amount of your income to charges that could be avoided.
No one but you, being as realistic as possible, can decide whether that 10% overhead you pay is worth what you get in return - having certain items earlier than you would by saving for them. But, consider this: saving that 10% APR paid on $2,000 for one year is: $110. And many people pay only the minimum monthly payment, which amounts to much more. That’s $110 you are paying solely to have something costing $2,000 a year earlier.
Only you can decide which is worth more to you, but developing a budget will help you make those decisions rationally.
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Debt Handling - Debt Reduction - Snowball Method
By Debt Handler | July 31, 2007
Get Out Of Debt - The Debt Buster System. Powerful Information Based On Proven Techniques And Strategies To Get Out Of Debt Without Bankruptcy. Repair Bad Credit Fast.
There are multiple ways to reduce your total (and monthly) debt load, some less painful than others.
The obvious one, of course, is to simply pay down your debts. That can be difficult, and for some it may seem hopeless. But there is one method that has been employed by many with great success: the snowball method (so named by Dave Ramsey).
The technique is, in essence, very simple. Order your debts from lowest to highest. Pay the minimum required on all monthly debts, then allocate any remaining funds you can to paying off the smallest debt. Thus, the smallest debt will get paid off first. This frees up yet more money to apply to the next-smallest (now the smallest) debt. Repeat until you have reached the level you want.
This method has several advantages. You see regular, visible progress in reducing your debts and in a relatively short period of time you could well be down to a livable level. As you roll-off those debts, you have more free income which can be split between payments on the debt next in line and the enjoyment of some rewards.
Psychologically, this helps keep the debtor motivated to continue the program. Seeing real progress helps one stick with it during a financially challenging period.
But, for all its virtues, the method does have one real drawback. It actually requires more time (and money) overall to pay off all your debts that way. The reasons have to do with how interest compounds.
If you pay off a $1,000 debt, a $2,000 debt and a $10,000 debt they may all have the same rate of interest. But paying off the lowest amount first actually costs you more in total interest paid. Since any outstanding amount is charged at the same rate of interest, the higher amount will incur the largest charge. As a result, over time, you will pay more in total interest charges.
Reversing the order, paying the highest amount first, actually saves you money in the long run. As you pay down the highest debt first, you are reducing the amount of interest dollars paid over time.
The difficulty is that the latter method, though more cost effective in the long run, is harder for most people to stick to. It takes a lot of discipline to live with that debt burden as you slowly reduce the $10,000 debt.
At most interest rates, the lower debts will actually get paid off first. But in the meantime you are making high monthly payments. That takes a lot of willpower every month.
That willpower is the one thing that a lot of people too deep in debt find hardest to generate. It’s the factor, often, that led to excessive debt in the first place.
For such people, using the snowball method may well be an advantage, despite the larger total amount paid out over the life off all the debts combined.
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Debt Handling - Debt Counselors - Do You Need One?
By Debt Handler | July 29, 2007
Those who get themselves into financially turbulent waters will sometimes seek a life preserver wherever they can. Sometimes, they reach out to a debt counselor. That can definitely be a wise move.
A skilled debt counselor can offer specialized knowledge gained through experience about which programs are effective and which are bogus. They have seen a variety of fool’s gold offers come and go and know how to separate the real from the merely shiny.
Beyond practical guidance, one of the best values a good debt counselor has to offer is that helping hand. Incurring excessive debt over a long period is often more a psychological issue than one of practical skill. Difficulty resisting a debt settlement plan that looks too good to be true is hard for some people. A third party can be an objective eye.
People deep in debt sometimes have trouble seeing the light at the end of the tunnel. In the midst of a financial crisis, it can be hard to focus on the long term - especially when willpower may be the one weak area that led to accumulating all that debt in the first place.
A debt counselor can help keep such a person’s eyes focused on the prize. Helping to develop a workable program is as much about setting realistic goals, and providing incentives and reminders of the worth of sticking to them, as it is about numbers in a spreadsheet.
But a debt counselor can be a hindrance if the person isn’t prepared to commit to resolving his or her problem. Relying on just one more crutch to avoid accepting responsibility isn’t an effective long term strategy. Short term help, for a period of readjustment, is perfectly healthy. But in the long run, it’s up to each individual to manage his or her own affairs.
Many people are not naturally good at managing money. But it’s a skill that can be learned. Balancing a checkbook requires only simple arithmetic or minor skill with a calculator. More often, the difficulty isn’t technical, it’s emotional.
Good advice is only worthwhile if it’s followed. No debt counselor can ensure that. They can make a program sensible, and therefore feasible. But a person has to be willing to follow a sensible strategy and that often means changing long standing self-destructive habits. That comes harder to some than others.
When a person is willing to follow good advice, but also willing to strengthen their own inner reserves, the road may be long, but it is sure.
Outlining a realistic program for consolidation, debt forgiveness, interest rate or loan terms renegotiation is just one of the practical benefits a counselor can offer.
Helping keep you on track is part of the total package. But, ultimately it’s up to each person to recognize their actual situation and meet it bravely.
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