I’ve been spending a bit of time lately discussing credit cards and debt because it’s an important issue for many people. Unlike a lot of bloggers I’m not against credit cards completely. They are a financial tool just like any other. They can be a powerful tool when used correctly, but they can also cause you harm if used incorrectly. The problem is that credit cards are designed for failure by default. The features that are built into a card such as high interest rates and low minimum payments mean that even if you make all of your minimum payments on time you’ll still be doing more harm than good.

What happens with many people who get in over their head with credit card debt is they underestimate the impact that making the minimum payment each month has. Think about it. If you borrow $1,000 and your monthly minimum payment is just $25 it’s easy to write that off as an insignificant payment that you can easily afford. This way of thinking is extremely dangerous because it usually leads to racking up more debt and then spending the next ten years paying a ton of interest. So to really get ahead in the debt game you need to break the minimum payment mindset.

Understanding How Minimum Payments Are Calculated

Each card is different, but generally the minimum payment is simply a set percentage of your balance. Some cards are as low as finance charges plus 1% while others may base the minimum amount upwards of 4-5% of the balance. What you have to realize is that with a typical credit card APR the minimum payment will generally cover only a little more than that month’s finance charges, meaning at best only half of your payment is going towards paying down the balance.

For a very simplistic example, let’s take a look at a credit card balance of $1,000 with an APR of 18%. If you break the APR down to a monthly rate you are effectively being assessed a finance charge on the balance of 1.5% per month. Lets also assume that the minimum payment is calculated by using 2.5% of the balance.

This means your minimum payment in the first month is $25, or $1,000 x 2.5%. With the APR at 18% and an effective finance charge of 1.5% that means of that $25 you paid, $15 is simply paying the finance charge leaving only $10 actually applied to the balance.

So the next month your remaining balance is $990, or $1,000 – $10. Your next minimum payment is $24.75. For this payment you will see $14.85 going towards the finance charge and only $9.90 going towards the balance. Your new balance is now $980.10. You have sent the credit card company nearly $50 of your hard earned money and have only reduced your balance by $19.90. That is quite a raw deal for you, but a great deal for the credit card company.

Using this example if you continue to only make the minimum payments for the life of the balance it would take you 153 months or 12 years and 9 months to pay off the card and you will have paid $1,115.41 in interest; even more than the original amount you borrowed! (Of course this assumes the company allows small payments. In some cases they will impose a $10 minimum payment even if the calculated minimum is less than that)

Don’t Get Caught in the Payment Mindset

Today you can get financing for almost anything, from the cheapest electronics to new furniture for your house. All too often we are lured in by commercials that state how low your monthly payments can be. When you look at purchases as monthly payments as opposed to what they really cost you are setting yourself up for a very long payment plan and significant additional costs in the way of interest.

Even if you do use credit responsibly you can still fall into this trap. I see people who have the money available to pay more than the minimum amount each month but they don’t. They want to keep the cash flow available for other things. They end up treating this minimum payment as simply a monthly bill and find themselves just budgeting for it. Once this becomes habit you may find yourself paying the minimum for a long time without realizing how much it is actually costing you.

Try to Pay More Even if it is Only a Small Amount

Understandably, times can get rough and your only option may be to pay the minimum. That’s ok, just try not to make it the norm. Get into the habit of sending a bit more than the minimum each month. If your minimum payment is $25, try sending in $40. If it is $100, send in $150 or something. It may not seem like it makes much of a difference but it does over the course of time. Just applying an extra $20 to a $25 monthly payment can cut the length of time it takes to pay off the balance by more than half and potentially save you hundreds or even thousands in interest.

Clearly it would be ideal to pay the balance in full every month but that simply isn’t possible for many people. By taking baby steps and applying a little extra it will help. It won’t be instant gratification but doing so can shave years off of the repayment and save literally thousands in unnecessary interest. Remember, just because they give you a minimum amount doesn’t mean you should pay them that amount. Doing so will only cost you far more in the long run.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

How to Break the Minimum Credit Card Payment Mindset

When it comes to paying off debt there’s one useful tool that can not only simplify your finances but also reduce the amount of interest you pay. Debt consolidation takes some or all of your small debts and combines them into one loan or line of credit. This results in just one payment and if you can get a lower interest rate, can add up to big savings.

While this is a good idea, there’s also a big problem. Many people will consolidate their credit card debt but then fall back on the habit of using the now open credit lines to make purchases again. This is bad news because now you’re just making your debt problem even worse. What happens is that people have a hard time breaking habits. If they are consolidating debt then there must be a reason there is debt to begin with. So when this consolidation now frees up more available credit these habits can creep back in and make the debt problem even worse.

Be Careful if Using Home Equity to Consolidate Debt

Tapping into home equity has been a common debt consolidation method over the past few years, but you should really think twice before going this route. I don’t need to remind you about the problems right now regarding falling home prices, but there’s another danger when you go this route.

Credit cards are unsecured debt meaning there is no collateral backing the card. If you fail to pay off your credit card you might have to put up with collection calls and damage to your credit score, but that’s about the extent of it in most cases.

If we’re talking about a mortgage or car loan we’re dealing with secured debt. This just means that the underlying asset is used as collateral for the loan. Now if you fail to make payments the bank is going to take your house away. If you can’t repay the home equity loan or line of credit you might be forced to sell the house so the bank can recover the money. If you find that you start racking up more credit card after you’ve tapped the equity in your home to consolidate your existing debt you could be faced with losing your home thanks to your credit card problems.

To Close or Not to Close

You may be thinking that simply closing or canceling the old credit cards will be a great solution so you won’t find yourself tempted to use the card again. Not so fast. Some of the factors in your credit score have to do with the length of time you’ve had accounts and your credit utilization ratio.

When you close out an account you will not only hurt your credit ratio but you may be eliminating years of credit history from your account. Before closing any accounts you should carefully examine your credit report to see what, if any cards should be canceled. If it is a new department store card you opened last Christmas to get a discount and had a limit of $500 it may make sense to just get rid of the card. But the last thing you want to do is cancel a card you’ve had for a few years with a higher credit limit. That may ultimately do more harm than good.

How to Stop Using Old Cards

So, if you don’t want to cancel all of your old cards what can you do to ensure you don’t get into the habit of using them? The simplest and most dramatic thing you can do is to simply get a pair of scissors and cut the card up. Problem solved. The account is still open but you can’t just swipe a new purchase. Of course if this was a card for emergencies that may not be the best idea.

Some people find it useful to lock their cards up in a lock box. If you have one at home you can do that, but an even better way that makes them even harder to get to is to lock them up in a safe deposit box at your local bank. Either way, if they aren’t in your wallet and aren’t easily accessible you are far less likely to use them.

Use Debt Consolidation Wisely

Don’t fall into the endless cycle of debt. If you are thinking about consolidating your debt make sure you stop using the old credit that you are trying to consolidate. Consolidation can be a great step towards getting rid of debt, but simply continuing to use credit will just dig you into a deeper hole. It seems like common sense, but leaving those cards in your wallet or even considering that open credit line as a means for buying something will just perpetuate the cycle.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

If You’re Going to Consolidate Debt Then You Have to Stop Using Credit

Finding the Best Mortgage Can Save You Thousands

Buying a home is one of the largest purchases you’ll ever make. Because it’s such a large purchase and there is a lot of money at stake it only makes sense to get the best possible financing. After all, most home loans last for decades, so a poor choice up front can end up costing you for years to come. The problem is that not all lenders are created equal, and even trying to compare similar loans can make your head spin. So, let’s take some of the confusion out of shopping for a mortgage and make sure you’re getting the best possible deal.

Most people assume that finding the best interest rate is the most important aspect of finding a loan, but that is only part of the overall picture. Interest rates are very important, but what looks like a good rate on the surface might be overshadowed by excessive costs or unfavorable terms elsewhere in the loan that aren’t immediately apparent. If you know what to look for you can be sure you’re comparing apples to apples. Having just gone through the process of trying to find a loan to buy a house there are a lot of things I noticed over the past few weeks that can help you save money when shopping for a mortgage. Here’s what you need to do to find the best possible home loan.

Check Your Credit

Before you even start shopping around for loans you should first check your credit. If you haven’t already, it’s a good time to use your free annual credit report from annualcreditreport.com. You are entitled to a free credit report from each of the three main credit bureaus each year. The idea here is to make sure your credit report is accurate and if there are any errors, you have enough time to fix them before applying for loans. If you do encounter an error, use this time to call the creditor and see what you can do to get it rectified. In many cases it could be just an honest mistake, but it could also be an indication of something more serious.

You are going to want to check your credit about 30 to 60 days before you begin applying for loans if at all possible. This is because many creditors only update their records once a month, meaning even if you are able to fix an error right away it may still take another month or so before it gets updated on your credit report. It’s easier to wait for an error to be dropped from your report than to go to a lender with a blemished report and then try to explain the situation to them.

It’s also a good idea to get your credit score prior to applying for a loan. Yes, once you apply for a loan you’re going to have your credit pulled by the lender anyway and you will likely get a copy of your score, but a lot of pre-qualifications (not pre-approvals) are done with rough estimates of your income, debt, and estimated credit score without actually pulling your credit. This helps when you’re shopping rates and simply making quick phone calls to various lenders as you can give them an idea right up front as to what your credit score is so they can have a better idea of what you might qualify for. Of course, the score they actually pull once they go through the application will be what is used, but you can make things a little easier by giving them as much information as possible up front.

You won’t get your credit score with your free credit report, so this is something you’re going to have to do separately. Two of the best options for obtaining your credit score are myFICO and Credit Karma. Credit Karma is free and provides some neat features to help you monitor your score and make improvements. I used Credit Karma while we were applying for our mortgage and one thing I did notice was that there was a huge discrepancy between my wife’s score that the banks were obtaining and what Credit Karma was showing. The difference was nearly 100 points. At the same time, Credit Karma was showing my credit score as dead on. So, just keep that in mind. You can get a credit report and credit score from myFICO for around $15 so it’s also not a very steep price to pay if you want to go that route.

Know What You Need and What to Expect

Before shopping for your home loan you should have a good idea of what you need. This means understanding what types of loans are out there and what your specific situation warrants. Do you want a 30-year or 15-year fixed mortgage? Do you qualify for FHA or will you need to seek another type of loan? Do you have 20% to put down to eliminate PMI or will you piggyback your mortgage with a second loan to eliminate PMI? These are all questions you should ask yourself before heading to a lender because if you can tell them exactly what you’re looking for, they can better find what they have available for you. Do your homework ahead of time so that you can narrow your search. If you go to the bank and simply say you want to buy a house for X amount of dollars they might come back and give you a handful of different loan options that may or may not be appropriate for you and it just makes things more confusing for you.

Not only do you need to know what you want, but you should know what to expect in the current market. First, you should check on current interest rates. One of my favorite sites for a quick update is simply bankrate.com. There you can find the average interest rates for a number of loan types. After all, if you don’t know what the going rates are, how will you ever know if the quote you get from the bank is a good one or not? This is also where knowing your credit score can come in handy. For example, if you have a score under 700 it’s safe to assume that you probably won’t be able to get the lowest rate out there. Knowing this, if you see a bank come back with a quote for a very low interest rate it might be a red flag that points to a loan that’s padded with points or other fees that ultimately make it a bad deal for you. So, if you can go into the mortgage shopping process by having some expectations of what you might qualify for and for what rate, you can better determine whether or not your quote is a good deal or not.

Start Shopping Around

Once you’ve determined what you want and know what to expect in the current market, it’s time to start checking with various lenders to see what they can offer. At this stage you should expect to inquire with at least 5-10 different lenders. A lot of people are concerned that this could be detrimental to their credit score because of all the credit inquiries, but don’t worry. Hard inquiries made during the most recent 30 days are not factored into your current credit score. In addition, any inquiries within the 14-day period before that only count as one inquiry. So, as long as you plan ahead and do your loan shopping within a month or so you’ll have no negative impact on your credit score.

To start, you might as well check with the institutions where you currently have your finances. Whether it’s a bank or credit union, existing customers can often get slight discounts. Plus, since you already have a relationship with them it’s easy enough for them to pull a lot of your information and see what you might qualify for. This doesn’t mean you’ll get the best rates, but it’s a good starting point.

After you’ve talked to your current bank you might want to make a few phone calls to other local banks that you might not currently do business with. Banks and credit unions are always looking for new business and will be more than happy to take your call. So, see what kind of rates they can offer and see if it’s worth pursuing.

Finally, thanks to the internet you have a vast number of lenders available at your fingertips. You can look to banks that might not even be in your area or find lenders that otherwise would have gone undiscovered if you stuck to your local yellow pages. Again, this doesn’t always mean you’ll get the best deal with a company you see online, but it can at least be worth a shot. You might also want to look at lendingtree.com for some good comparison shopping.

Assemble Your Documents

After you go through a quick phone call or initial meeting with a lender the next step will be to submit various financial documents that the bank will use to get you pre-qualified. Generally speaking, the bank wants to see verified sources of income, debt obligations, employment history, and so on. To make both your job and the lender’s job easier, you should start getting these documents prepared ahead of time and make multiple copies. If you’re going to be applying with a half dozen lenders you don’t want to rely on one set of originals and have to wait for each bank to get those back to you before applying with another.

Documents typically requested:

• W-2 forms from the past two years.
• Tax returns from the past 1-3 years.
• The last two months of bank statements (both checking and savings accounts).
• The most recent statements for all investment accounts (IRA, brokerage, 401(k), etc.).
• Employment history and current employer contact information.

If you have all of these documents ready to go you’re going to save yourself a lot of time. And the sooner you can present these to the lender, the sooner they can get you pre-approved. The lender will appreciate the fact that you’re prepared and this can help ensure your application gets through the process as fast as possible.

Pre-Qualification vs. Pre-Approval

It is very important to note that during your initial shopping stages you will most likely be doing a pre-qualification and not pre-approval. There is a big difference and both consumers and lenders often mix and match the words. Pre-qualification is simply when a lender asks you for some basic information such as income, debt levels, assets, and estimated credit score to determine if you’ll likely qualify for a loan or not. At this stage nothing is verified, no credit reports are pulled, and the loan officer is simply trying to see if you might be someone they can do business with. Getting pre-qualified does not mean the bank will lend you the money, but it gives you a rough idea of what you might qualify for with that specific lender.

When you get to the process of actually having the lender pull your credit report, submit W-2s, tax returns, verify employment, and fill out all of the disclosures, then you’re looking to get pre-approved. Once you’re pre-approved that means based on the information you’ve provided and subsequently verified by the bank, the lender is willing to lend you the money baring any major changes to your credit or income and the appraisal and title search on the house you wish to buy come up ok. It is at the pre-approval stage where you will receive a good-faith estimate and can tell sellers and real estate agents that you’re a qualified buyer.

Comparing Loans With the Good Faith Estimate

Once you go through the application process if you come back approved, you’ll typically get what’s called a good faith estimate. There is where you’ll begin to see the nuts and bolts of the loan and can hopefully spot what makes one particular lender’s offer better than another. Generally speaking, they must provide this to you within three days of applying for the loan.

The GFE will contain a lot of information regarding the closing or settlement costs. As I mentioned above, getting a good interest rate is important, but even more important can be the closing costs and how the fees are structured. The closing costs are also where a lot of lenders make their money by sticking it to borrowers with inflated or unnecessary fees and then just rolling them into the loan. Your GFE should itemize all of the closing costs, how much you’re being charged, and who is responsible for paying them. Some of the fees you might encounter are:

• Property appraisal
• Credit report
• Lender’s inspection
• Mortgage insurance application
• Assumption
• Mortgage broker fee
• Tax-related service fee
• Application
• Commitment
• Rate lock
• Processing
• Underwriting
• Wire transfer
• Abstract or title search
• Title examination
• Document preparation
• Notary
• Attorney
• Title insurance
• Recording
• City/county tax stamps
• Transfer tax
• Survey
• Pest inspection
• Condominium application
• Prepaids items such as interest, hazard insurance, property taxes, mortgage insurance and flood insurance

If you’ve never purchased a home before this list might scare you. Yes, there are a ton of fees that are involved with buying a home, and as you can see, a lot of opportunities for the bank to make money on your behalf. So, it’s when you get your good faith estimate that you need to scrutinize each quote to see what kind of a deal you’re really getting. Is that 0.25% lower loan such a good idea when it’s padded with excessive fees at closing that ultimately get rolled into the loan? That’s what you need to determine.

As an example, while we were looking over our loan offers last week I was simply shocked to see how different banks are when it comes to some of the fees. For instance, one lender only charged $12 for the credit check while another listed it at $60. One lender had a wire transfer fee of $20 while another had it listed at $125. And even the appraisal itself often came in more than $100 different between lenders. If some of these fees seem out of line, they may be negotiable so it doesn’t hurt to ask.

Finally, keep in mind that the good faith estimate is just that, an estimate. While it should be reasonably close to what you finally expect to pay, things can change.

An Informed Shopper Makes Better Decisions

I hope this has helped you understand some of what is involved with shopping for a mortgage. It can be a time-consuming and tedious process, but the more you know and the more prepared you are, the better off you’ll be. This is a major financial decision in your life so it pays to put in a little work to make sure you’re getting the best deal available to you.  If you know what kind of loan you want, what terms to expect, and know how to spot the features of a low-cost loan you’ll be well on your way to finding the best mortgage.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

How to Shop for the Best Home Loan – Finding the Best Mortgage

There is Help Available, but be Careful to Avoid Scams

Have you tried to get a handle on your debt yourself but still can’t seem to make any headway? First of all, it’s OK and there’s nothing to be ashamed about. If you find that you just can’t get back on track yourself, there are people out there who can help. At the same time, you must be careful when selecting your help because there are those who prey on people in debt and seeking help. Some programs may end up costing you a lot of money to simply do what you’ve already been doing, and others are downright scams targeted at taking advantage of you.

To help you understand what type of help is out there, we’re going to talk about the different assistance programs typically offered, what kind of services they provide, and what you can expect from them. There are four basic types of resources to help you get a handle on your debt:

1. Debt Settlement Companies

Debt settlement companies negotiate with lenders to accept only a portion of the amount owed and forgive the remaining debt. They often charge a considerable fee and claim to be able to obtain an immediate reduction in monthly payments. The reality of debt settlement is that the consumer is told to stop paying bills and make payments for a few months while they negotiate with the creditors. The debt settlement company then tries to negotiate a payoff amount with each creditor and uses the threat that you’re heading into bankruptcy as a negotiating tool. This often appears legitimate since you’ve been missing more payments, so it can help reach a settlement with the creditors for an amount much lower than what you owe. Then you use the money that you hopefully saved over the past few months to pay off the negotiated payoff amount.

For example, let’s say you owe $10,000. Instead of making your regular monthly payments on this debt, you stop and put that money aside and find you’re able to save up $2,500 over the course of four months. The debt settlement company charges you a $500 fee to negotiate this debt on your behalf and is able to get the creditors to agree to settling the debt for $2,500. That’s great, right? You were able to get out of paying most of your debt! Not so fast. Remember how you were told to stop making payments on the debt? Those negative marks usually aren’t going away and have now caused significant damage to your credit history and will be there for seven years. And the fact that you settled the debt doesn’t make it appear as if you paid off your debt. That alone will show up on your credit report as “settled” and is also a significant negative mark on your history that will be with you for years. Unless your credit score is already at rock bottom, you’re already months behind on your payments, and you’re staring bankruptcy in the face, this is usually not a good option.

2. Bankruptcy

That brings us to the next ugly alternative — bankruptcy. Under bankruptcy, all or a portion of your debt can be absolved by the courts. Bankruptcy is typically held as the last resort since a bankruptcy will stay on your credit history for ten years and make it quite difficult to obtain lending for a while. In addition, the legal fees associated with filing bankruptcy can be fairly steep. You’ll often hear stories about people who are too broke to even afford to file bankruptcy because the attorney fees alone can run into the thousands of dollars.

Things can get complicated depending on whether you have secured or unsecured debt, own property, have equity, and what type of investment accounts you have, and what chapter bankruptcy you file. The potential complications and legal issues surrounding bankruptcy go far beyond this article, so it’s certainly worth your while to consult legal assistance if you feel that bankruptcy is your only option.

3. Debt Consolidation

So, we’ve talked about two of the least attractive options, but now it’s time to focus on the two potentially better options. First, you may be considering debt consolidation. Here, you’re not negotiating out of any debts, settling for a smaller amount, or absolving yourself of any debts through legal proceedings. Instead, you’re simply consolidating all of your debts into one or two more manageable payments.

We’re not magically fixing any debt problems, but just making it easier to make payments and hopefully reduce the amount of interest paid. For example, if you have six outstanding credit cards with interest rates from 20-30%, consolidating these into a single loan or credit card that has a 12% interest rate can not only reduce the number of payments each month, but it could potentially save thousands in interest.

A few words of caution. Be careful when seeking out a debt consolidation company. Some will advertise debt consolidation only to pressure you into some sort of debt settlement program after meeting with you. Others will offer a consolidation loan that doesn’t have a very good interest rate and may be lined with fees that make it so you aren’t actually saving any money. And finally, the biggest problem when consolidating debt is that people don’t change their behaviors and end up right back where they started and in even more debt a few years later. Remember, debt consolidation doesn’t pay off your debt, it simply shuffles it around. If you consolidate your debt and now have all of this available credit on your credit cards, you have to make sure you don’t start using that credit or you’ll find that you’re going to be in even more trouble.

4. Credit Counseling Services

This brings us to credit counseling services. There are two different ways that a credit counseling service can help you if you are burdened with debt. First, a good credit counseling service works closely with you to help provide financial education and tools that can help you get your finances under control. They may work with you to create a budget and assist in helping with the emotional baggage that comes with excess debt.

The second method of assistance is through a debt management program, or DMP. Through a DMP, the credit counseling organization works with you and with your lenders to find a way to manage the debt and pay it off. Unlike a typical debt settlement, a DMP will usually focus on working with the creditors to reduce interest rates, waive late fees, and establish a more affordable monthly payment before trying to negotiate the amount of the debt entirely. Because of this, being on a DMP generally won’t hurt your credit score. Even so, there may be a note on your credit history indicating that you used a DMP to assist in paying off the debt, and future lenders could use this to decide whether or not to extend credit to you. At any rate, this is still better than having months of late payments and a debt being shown as settled on your credit history.

The problem is that not all credit counseling services are created equal. First, there are two primary types: for-profit and non-profit debt counseling services. For-profit services are almost always a bad idea, and in some states for-profit credit counseling companies are illegal. So, your first step should be to determine whether or not you’re looking into a non-profit agency or not. Unfortunately, just finding a non-profit counseling agency is not enough. Every organization is different and there will be different fees and services associated with each. In some cases you may be able to have the fees waived, but you certainly want to make sure you understand what you’re getting for your money if it does cost anything. Be wary of any company that promises a lot but charges a high monthly fee.

More about Debt Management Plans

As I mentioned above, many credit counseling services will offer a debt management plan (DMP) to help you in getting out of debt. One thing you need to understand is that these plans aren’t typically like debt settlement companies and won’t cancel out existing debt, nor is it a consolidation loan. It’s actually a plan put together that helps the creditors get their money while allowing you to make payments on time.You’ll also want to note that most DMPs will only address unsecured credit, so if your primary concern is a home or auto loan, there won’t be much a credit counselor can do other than help you budget those payments.

With a DMP your credit counselor will work directly with each of your lenders to see if they accept a DMP and if they can work with you to make sure that you stay current on your payments and possibly even reduce the interest rate. In some cases a credit card company will temporarily reduce the interest rate while on a DMP. I’ve seen people get their rates reduced all the way down to about 6% in the past.

The other benefit of a DMP is that it can often simplify your monthly payments. Most credit counseling services will take over sending monthly payments to each individual lender so you’re left with only making one single payment to the credit counseling agency. They usually schedule these for monthly or bi-weekly through automatic debit with your bank account so it can ensure you don’t miss a payment. As you probably know, it’s a lot easier to make and keep track of one or two fixed payments a month rather than a bunch.

A Few Final Thoughts

As you can see, there are options out there to help you manage your debt problems if you find you can’t handle it yourself. Aside from bankruptcy, you can accomplish most of the tasks that these services provide on your own for little or no extra cost. Understandably, not everyone has the time or resources available to follow through with their plans and this is when seeking assistance from a third-party can be beneficial.

While you explore your options, be sure to look at all the alternatives and make sure you’re dealing with a reputable company. There are people out there who realize the amount of stress someone with debt problems is under and they will sometimes try to take advantage of this situation. If anyone is promising seemingly incredible results, know that there is no magic bullet for getting out of debt. Each avenue has its own pros and cons, and some may have a lingering impact on your credit history that will be with you for years, so don’t take the decision lightly.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Where to Go for Help With Getting Out of Debt – Credit Counseling and More

This is a guest post by Trisha Wagner. Trisha is a freelance writer for DestroyDebt.com, a debt community featuring debt forums. Trisha writes regularly on the topics of getting out of debt and personal finance.

Using a treadmill as part of your exercise regime can be a helpful tool in keeping your body active and healthy. Unfortunately, far too many people are running on a different type of treadmill — the treadmill of debt — and it is definitely not good for the health of your mind or body. For families living paycheck to paycheck and can’t pay their bills, the frustration of trying to beat back their growing levels of debt can make life seem almost unbearable. Fortunately, there is hope for people trying to jump of the treadmill of debt. The following tips can help you stop racing to catch up and get your feet firmly back on the ground.

• How did you get here? The first step to getting out of debt doesn’t actually involve money. There are many people who are suffering financially through no fault of their own. Perhaps they lost their job or had medical issues that kept them from work while racking up huge medical bills? However, these cases are not the majority. In fact, many people dealing with staggering levels of debt got into financial trouble by making bad choices regarding money. With that in mind, before you can truly begin your journey toward debt free living you must understand how you got yourself in your current position in the first place.
• Financial responsibility. After years and years of overindulgence people are finally coming to terms with the fact that many Americans lack financial responsibility. With the introduction of credit cards several decades ago people slowly lost sight of what it means to live within or below your means, now an entire generation has to learn how to manage money responsibly again. Simply put, this means you have to spend less than you earn AND actively put money aside for future expenses.
• Make changes to get out of debt. If you find yourself worrying how you are going to keep making the minimum payments on your high interest credit cards you have to make changes immediately in your lifestyle. Get rid of your credit cards and stop incurring debt starting today. Obviously the way you have been handling your finances is not working so the next step would be to determine what changes you can make to get back on track and find financial stability. Closely examine where you are spending money each day and cut out unexpected expenses which will put money back in your budget for debt repayment. Find a method of debt repayment that works for you and your financial situation and begin aggressively paying off you debt. If you find you are unable to develop a strategy on your own do not be ashamed to seek the help of a reputable, experienced financial advisor.

The key to getting off the never ending treadmill of debt is to face your situation head on and actively work toward reducing your debt and regaining control of your life. Millions of people before you have been in the same situation and through discipline and sacrifice have been able to overcome high levels of debt and find financial stability.

Trisha Wagner is a freelance writer for DestroyDebt.com, a debt community featuring debt forums. Trisha writes regularly on the topics of getting out of debt and personal finance.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Getting Off the Debt Treadmill – Stop Running In Place and Start Making Progress

If you watch any TV, you’ve probably seen these commercials from FreeCreditReport.com. They typically have a band and a guy singing a catchy jingle that tells a story about how he should have checked his free credit report. The commercials aren’t too bad, but there’s one big problem — the reports aren’t free if you aren’t careful. If you catch what the guy at the end of the commercial says really fast or read any fine print you’ll see that when you go to get your credit report you’ll automatically be enrolled in some credit monitoring program.Then it’s up to you to try and remember to cancel before the monthly charges start showing up on your credit or debit card.

Now, I know that those of you who are fairly diligent would obviously remember to cancel these services and get your report for free, but most people don’t. I’ve worked with so many people who signed up for one of these programs after seeing a commercial only to realize a few months down the road that they are mysteriously being charged a monthly fee for some service they don’t even know about. It is a bit misleading if you aren’t paying close attention.

The FTC Fights Back

The Federal Trade Commission has received complaints from consumers who thought they were ordering their free annual credit report, but instead paid hidden fees or agreed to unwanted services. The Fair Credit Reporting Act guarantees consumer access to a free credit report from each of the three nationwide reporting agencies – Experian, Equifax, and TransUnion – every twelve months. With AnnualCreditReport.com, visitors have access to truly free credit reports, with no hidden fees or trial memberships. So, the FTC has decided to fight back. Earlier today the FTC launched their own parody videos that are similar to the ones you regularly see on TV, only this time they are talking about a true free credit report.

Below you’ll find one of the videos. And if you are interested, the FTC has set up their own YouTube channel with another credit report commercial along with a number of additional FTC videos.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

FTC Creates Video PSA Spoofs of FreeCreditReport.com Commercials

If you have credit or debit cards, you may want to examine your recent activity. Numerous reports are popping up across the web with reports of very small purchases being made by Adele Services. Most of the reports are showing $0.10-$0.25 transactions occurring anywhere from mid-November through the last few days.

On your bank account or credit card statement, you will likely see this by the transaction: ADELE SERVICES 800-764-8104 NY or GFDL 800-764-0847 TX

If you encounter any of these transactions, you should alert your bank or card issuer right away. It’s still unclear as to how these card numbers have been obtained. It is possible that a retailer database has been hacked. Some are suggesting that these small transactions are just tests to find valid accounts where much larger fraudulent purchases will be made in the future. Others say it could be a scheme to try and funnel small, and hopefully unnoticeable amounts from a large number of people. Whatever the reason, if you’ve been affected, you want to get that card canceled and a new one issued immediately to prevent further damage.

Here are a few discussions that alerted me to this scam:

Amazon Discussion

800 Notes Discussion

If you have been affected by this, or have any additional information, feel free to provide more details such as how much was charged, and on what date. Since there isn’t a lot of information concerning this scam yet, the quicker people become aware of it and take action to remedy it, the less damage will be done.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Be on the Lookout for Fraudulent Credit and Debt Card Charges From ADELE SERVICES 800-764-8104 or GFDL

With the whole mortgage meltdown and ensuing credit crisis, there is plenty of blame to go around. Even with shady lenders, complex loans, and loose lending requirements, most of this could have been avoided if people took the time to read, and more importantly, understand what they were signing. Most people simply don’t want to spend the time to sit there and read all of the fine print and those who do actually read it may not fully understand everything.

Don’t Be Embarrassed if You Don’t Understand

When someone explains something technical or difficult to grasp and then asks, “Do you understand?”, the response is typically “yes.” Either it is because you want to get through the process quickly, you don’t think it is very important, or you don’t want to feel embarrassed that you don’t understand a concept. This could end up being a costly mistake. If you don’t understand something or if you see conflicting information, it is in your best interest to stop and ask questions. It’s much easier to take a moment before signing to get clarification than to learn the hard way at some point in the future.

Information Included in the Fine Print

Most people are concerned with a few key areas of a loan such interest rate and length of the loan, but it is within the fine print of the promissory note or security agreement that contains the information that can really cost you money. The most common information included throughout the text will include:

• The promise you make to pay the lender a certain amount of money plus the agreed to interest rate.
• Whether the interest rate is fixed or variable — if variable, when does the rate change and by how much.
• The payment schedule.
• Charges for late payments.
• Any applicable grace period.
• If the loan can be paid off early and if any penalties are incurred for doing so.
• Whether or not security or collateral is required.
• Whether or not the loan can be extended.
• What happens if you default.
• What happens if you pay with a bad check.
• Can the lender take money from other accounts you may have with them to repay the loan.
• Who pays legal fees and collection costs.

Don’t Sign Anything Until You Completely Understand

While it pays to make sure you get a good interest rate with good terms, it is equally important to make sure you understand everything about the loan even if you don’t think it will ever apply to you. You have nobody to blame but yourself if you make a late payment and find out there is a $40 late fee. It would come as no surprise if you took the time to understand what you agreed to. In the event of a problem with your account, ignorance is not a defense. It may seem like a waste of time to spend an extra ten or fifteen minutes to read multiple pages of small text, but it could end up saving you money or problems somewhere down the line.

And finally, don’t feel pressured by the person sitting across the table who’s urging you to sign. Not everyone is out there trying to trick you into a shady loan, but you shouldn’t feel rushed if they are just trying to quickly get you through the process. They can wait, and you should take as much time as you need. If they brush off certain sections saying it isn’t important, just explain that you want to take a moment to look it over. A couple extra minutes will ensure that you aren’t missing some key terms on the loan and help you completely understand what to expect, and what the consequences will be if something goes wrong.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Read the Fine Print Before Signing Any Loan – You Might be Surprised at What’s in There

This is a guest post by FWP. FWP from the Financial Wellness Project shares her stories, lessons, and progress reports as she attempts to get a handle on her finances and make sense of money while still living a ‘rich’, enjoyable life. Please consider visiting and subscribing to the Financial Wellness Project and share in her endeavors. She writes several times a week from the San Francisco bay area, in California.

This article is part of her ‘Friday Cures.. for a lean purse!‘ series.

I have been reading Dave Ramsey’s famous book, The Total Money Makeover. Being part of the personal finance blogging community, it is difficult to not have been exposed to the famed debt snowball concept.  The idea piqued my interest, thereby prompting me to go out and borrow a copy of his book from the local public library.

In the book, Ramsey discusses his ‘baby steps‘, where he lists 7 steps for achieving freedom from debt.  Over the course of this series, let’s visit each step and evaluate how it pertains to our lives . I hope that you too might find this exercise enlightening and useful.

Today, we visit step #1:

Huzzah! I currently have about $1300 in my emergency fund, an HSBC Direct online savings account opened with a 3.5% interest rate this past summer. (I am actually in the process of moving this money along with a few hundred dollars to a new Everbank account, due to a higher interest rate there.)

Why Should I do Such a Thing?

Before I began, I was skeptical and a bit confused. I had several thousands of dollars in consumer debt, about $7000 at the time. Interest was accruing on whatever was still sitting around at a high 16%. Could I really afford to NOT be putting in as much ’spare change’ as possible towards my debt payments, rather than hoarding a bit aside (for very little interest rate anyway) ? Did this really make any sense?

Online, a fellow PF blogger had put aside $1000 to put his mind at ease. Apparently he had learned the lesson the hard way.  He initially had not, and then suddenly encountered car problems and as a result, immense car expenses. He did not have the funds for this, and so went further into debt, borrowing money for those new expenses. This reaction disrupted his debt-paying rhythm, and troubled him tremendously. In retrospect, he decided that he should have put aside some emergency money, and that he would set aside at least $1000 to avoid such a setback in the future.

This scenario pretty much reflects Ramsey’s reasoning.  He mentions also that some become discouraged from moving forward with their ‘total money makeover’ from encountering such a potentially stressful situation.

What About if I Don’t Have $1000?

Put aside as much as you can today, even if it’s $500.  It is imperative that you make building your emergency fund a top financial priority.

Where Could I Store This Emergency Fund?

Ramsey recommends opening up a regular savings account for this purpose.  Do not set up an account that will impose a penalty for dipping into the fund, such as a certificate of deposit (CD).  We want to be able to access that money when we need to.

Furthermore, he suggests that we put it aside in an account that is NOT linked up to any of our checking accounts.  It would make it too easy and tempting for us to falter and transfer funds for supposed ‘emergencies’ from the savings account to the checking.

Pros & Cons

I can see the advantages of this ‘baby step’:

• I feel better knowing that i have some money — no matter how seemingly small — set aside that is liquid/easy to access, available to me in case of emergencies.
• I would not incur any fees/penalty with the right set up (i.e. not putting funds in a CD) in case of needing to withdraw those emergency funds.
• As long as an emergency didn’t cost me greater than $1000, I may be able to continue to make at least my minimum monthly debt payments without too much disruption, while slowly rebuilding the depleted funds.

Basically, I would feel a little more secure, knowing that I have some sort of backup just in case.

The main disadvantage, of course, is that that $1000 could be helping me to lower my future debt payments, by lowering the balance that the interest is applied to monthly. Using the money in this case instead would help me get closer to reaching $0 in debt.

However, I need to choose one set up or the other. After rationalizing and also consulting my emotions, the cost of not using the funds for a chunk of debt payment may well be worth the price of not having subconscious anxieties about a lack of backup resources.

Additional Resources

• You can learn more about building a savings account
• Check out the latest great interest rates on savings accounts in your area
• A savings calculator to determine when you might reach a particular goal
• Learn about paying yourself first
• Learn how to watch your expenditures in order to save

How about you?  Have you been putting aside money for an emergency fund of your own?  If so, how have you been doing? If not, why not?  What are your thoughts on this baby step?

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Set Aside $1,000 in an Emergency Fund. Now

If you follow the peer-to-peer lending arena, you might recall that back in April, Lending Club closed to new lenders as they began the SEC registration process. There was a lot of discussion and speculation regarding this move, but as of now, Lending Club has completed the registration process and is now open for lending once again.

This is all good news, but what does this SEC registration mean for you? According to their announcement:

• Under the registered offering, Lending Club lenders will now invest in notes that correspond to portions of loans made to borrower members. The notes have stated interest rates ranging from 6.69 percent to 18.63 percent, after a 1 percent service charge is applied.
• By partnering with FOLIOfn Investments, Inc., a registered broker dealer, Lending Club becomes the first social lending network where lenders have the option of a trading platform. On the trading platform, lenders who become customers of FOLIOfn will be able to put notes up for sale in the event they need liquidity before the completed term of a note.
• We believe this will accelerate the mainstream adoption of social lending, which will help more borrowers get funded faster.

I have to say, I haven’t had a chance to use any of these peer-to-peer lending services, but the ability to trade notes in a secondary market is fantastic. That was one thing I was always a little uneasy with, as I didn’t want to be stuck with a particular loan for any great length of time. So, the ability to get in and out of different notes is attractive. But we’ll have to see how well this works out. It will depend on how big and active the market is for this trading to really determine how useful it will be. Either way, this is a great step in the right direction in this growing form of lending.

Of course, with any registered investment product, you should read the prospectus before investing your money. Thankfully, Lending Club has a very easy to read and navigate prospectus that can be found here.

I still have some money in my Lending Club account that I never got around to investing before they closed for the registration, so this might be a good time to take a look at how it works in more detail. If I do, I’ll be sure to provide a detailed review.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Lending Club is Now Open to Lenders Again After Completing SEC Registration