The Debt Hawk » Credit and Loans

Paying Off Credit Card Debts With Loans

Hawk — Fri, 22 Jan 2010 12:53:57 +0000

One of the social mantras we seem to hear a lot of is the idea of using a loan consolidation to pay off high-interest credit card debt. While this can sometimes be a good thing, it's not a quick fix that works for everyone and, in most cases, is merely salve on the wound rather than true healing.

Debt Consolidation Loan Benefits

The benefits to paying off credit card debt with lower-interest loans are obvious: you get lower interest (which usually means lower overall payments), you make only one payment per month instead of several, and all of this often means the debt can be paid for more quickly. Loan consolidation can offer all of these things.

It can offer them.

Debt Consolidation Loan Pitfalls

That doesn't mean it always does and it definitely doesn't mean you're really out of debt. YOU HAVE JUST MOVED DEBT!!

Paying off credit card debt by getting another loan is merely transferring the debt, not paying it. That's an important thing to remember because that is more often than not the real pitfall with loan consolidation.

Many people have fallen into this trap. Chris Viale, who is the general manager of Cambridge Credit Corp (a non-profit credit counseling agency), says that 70% of Americans who take out a loan to consolidate debt end up with the same or more debt load within 2 years.

In other words, now that the credit cards are “clear” and the bills are coming in with $0.00 balance on them, card holders begin to see more money available and, rather than spend the extra cash they might have, now that their loans are lower-cost, to more quickly pay those loans, people are instead going deeper into debt.

This is an easy trap to fall into. There are hundreds of justifications people can make to themselves, even with the best of intentions.

Actually paying off credit card debt, rather than getting a new loan and thinking as if your credit cards are paid off, is an important step towards financial solvency. Shuffling debt around is only an interim step that doesn't meet the goal of actually paying the debt off. Putting your home at risk (through equity loans) or other means may not be your best option or in your best interest.

Often, debt consolidation can help make it easier to keep up with your bills and pay off your debt, but it still requires discipline and isn't a “quick fix” by any means. It's a bandage on the wound, but the debt wound still requires healing. That comes from you, not your credit.

Don’t Miss Loan Payments for Christmas

Hawk — Fri, 11 Dec 2009 11:24:24 +0000

This is a festive, happy time of year for most of us. This year, however, a lot of us are looking at stretched budgets and financial worries. Many are making critical decisions about their financial futures. One bad decision that too many people make is not paying their December and/or January bills to pay for Christmas. It is imperative that you do not miss loan payments for Christmas. I wanted to write this article to help you stay committed to your get out of debt plan during the Christmas season.

Every Christmas is a joy, but if you skip your loan payments in order to have a few extra dollars to get more Christmas gifts, you are making a foolish mistake. This time of year, more and more credit companies are seeing Christmas loan payments being skipped to finance gift-giving or other holiday activities. But, don't allow the pressure of Christmas gift giving destroy you get out of debt plan.

It's estimated that this Holiday season, nearly a million people will skip their monthly mortgage payment and nearly two million will skip unsecured credit payments, such as credit cards.

If you are planning to be one of those people, you should think again. Skipping a mortgage payment is just a bad idea all the way around. Your home is your home and your holidays won't be any brighter or happier knowing that you will have to figure out how to make a double payment next month or stay behind for several months until you can catch up. Getting behind is digging a hole that is harder to climb out of that it was to avoid.

Credit card payments are just as bad, but worse in many respects. Skipping a payment can mean violating your credit agreement and incurring penalties. Usually higher interest rates. That menas that not only are you paying for that skip by making an extra payment, but all of your payments are going to rise because your interest rate is now higher. It's much harder to get the credit card company to lower that rate than it is to keep it low yourself.

Finally, there is your credit. If you've been late before in the past two years, it's likely that your creditor will be willing to exercise their right to report your late payment to the credit bureau. That knocks your score.

Is all of that worth one extra toy or one more gadget under the tree?

Your family's holidays will be a lot happier and sweeter if you put the future first and skip the extra gift-giving in favor of keeping your financial footing intact. This year, families who have a good home and food to eat have plenty to be thankful for already. Enjoy your family, celebrate the birth of Jesus, but don't get further into debt.

Improve Credit Score By Understanding The Credit Score Formula

Hawk — Wed, 14 Oct 2009 17:57:32 +0000

As people start the process of getting out of debt, they often want to improve their credit score at the same time. While you are digging yourself out of debt, you might as well improve your credit score at the same time. This article is designed to help you to improve your credit score by understanding the credit score formula. At the end of the article I give my 6 step approach to improving your credit score.

Credit Score Formula

35% - Late or missed payment - Do you pay your bills on time?
30% - Debt amount - How much do you owe to each of your current lenders and how much of a credit limit do you have with them? How close to your credit limits are you?
15% - Credit history - How long have you had each account?
10% - Kinds of debt - What kinds of debt do you have? Home loans, credit card debt, payday loans
10% - Credit report inquiries - How many new accounts or queries have you had?

Understanding Credit Score Formula

As you can see above the FICO score formula consists of 5 parts. In order to improve your credit score you have to improve each part of the formula, but certain factors are given more weight than others.

The first thing to think about is what is the purpose of the credit score. Lenders use the credit score to determine how likely it is that you will repay your next loan on time. The credit score formula focuses on 5 factors indicative of whether a loan will be repaid.

Payment History

The first part of the credit score formula is whether you pay your bills on time. Over one-third of the score is based around this factor and for good reason. There is no better indicator for a lender on whether he is going to be repaid on time than whether you are paying your other lenders in a timely fashion.

Amount Currently Borrowed

The second most important credit score factor is the amount of money you currently owe to each of your creditors and the amount they are still willing to lend you (your current credit limit). The more debt you have, the higher the risk for a new lender that you will not be able to make your debt payments.

Credit History

The third factor looks at how long you have had each account. Lenders like to see borrowers who have a long credit history because this tells them that the data for the other credit score factors is more relevant.

Credit Types

The fourth factor is the type of debt you currently have outstanding. If you have secured loans like home mortgages, unsecured creditors know that they will be behind the secured home loan company in a bankruptcy. Additionally, if someone has a lot of credit card debt, another creditor might be hesitant to extend more unsecured credit.

Credit Score Checks

If there are recent credit report inquiries being made with the credit bureaus, creditors know that you are trying to obtain more credit. This is concerning to a creditor because that creditor knows your current list of creditors, but it doesn't know if someone else is going to extend more credit to you shortly which could raise the risk of non-repayment for the creditor.

Improve Credit Score

Now that you understand the FICO score formula, you are ready to improve your credit score. The good news for people trying to get out of debt is that most of the activities that you are already doing are improving your credit score.

Here are six steps to improve your credit score:

Get current on all of your bills
From now on pay your bills on time (THIS IS A MUST)
Start paying off your debt to get the balances down
Don't close any credit accounts until your credit score has improved to where you want it to be
Don't apply for more credit
Wait patiently as improving your credit score takes time

Many people have a hard time with step number six because they want to see credit report score improvements quickly. But always remember that your credit report score is only important if you are trying to get credit. Since credit is what got you into your debt problems in the first place, focus on paying down your debt instead of accumulating more. Then, you make your credit report score irrelevant.

Once your debt is cleaned up, your credit score will improve on its own.

I hope that you learned a lot in the article. Please subscribe to my RSS feed to make sure that you don't miss any future posts.