Over the years, we’ve encountered so many clients who come to us for debt consolidation loans when they get in too deep. Getting in “too deep” translates into “credit card trouble” about 95% of the time. When people have too much credit card debt, they have trouble buying homes.
And we think that’s a shame.
We can help them with our Arizona Debt Consolidation loan about 95% of the time, but occasionally, it’s just too late. Sometimes the client has so much credit card debt, we can’t even qualify him or her for the debt consolidation loan that they need so badly.
If you ever get over your head with credit card debt, you are certainly not alone. At some point, it seems that everyone gets in some credit card trouble. If you find yourself unable to pay your credit card bills, you basically have three options.
#1: You can file bankruptcy.
Bankruptcy should be your last resort for eliminating credit card debt if you are a homeowner. A bankruptcy will harm your credit for several years and should only be considered if paying off your credit cards over the next two or three years is not an option for you. For example, you have become disabled or your credit card debts are so excessive that paying them off could take five years or more.
You should never, ever take more than 24 months to pay off a credit card debt– and even that is way too long by conservative financial standards. If you want to save the most money and be the most financially intelligent, you will pay your credit cards off at the end of every billing cycle, at the end of every billing month.
#2: You can call a “non-profit credit counseling” service.
Here’s how it works, you call a credit counseling / consolidation service and they call all of your credit card companies for you and negotiate a lower payment- one that you can afford.
You might have seven credit cards and the minimum payment on each is $100. The credit counseling company might get it lowered to $50 for each card.
Important! Be warned: If you take this option, your credit report will state that you are “in credit counseling.” As soon as you strike a deal with the credit card companies, they are going to punish you by reporting you as “in debt counseling.” It basically ruins your credit, so you might as well file bankruptcy, in our opinion.
You would have a great deal of trouble qualifying for any mortgage if you are in currently in credit counseling. In fact, it’s practically impossible.
#3: If you are a homeowner, you can take out a debt consolidation loan– also known as a home equity line of credit.
That is, you can borrow against your home’s equity and pay off all of your creditors. Your credit does not get ruined- in fact, your credit score will go up significantly after you pay off all of your debts.
We had one client with a 640 FICO score. After he paid off all of his debt with a debt consolidation loan, his score went up to 726, which is outstanding. He had good payment history; the only thing that was keeping him down was the number of debts he had.
In addition, if you wrap all of that nasty credit card debt into your primary home loan, it becomes tax deductible. So instead of harming your credit with credit counseling, you improve your credit, lower your monthly liabilities considerably, and get a bigger tax refund at the end of the year.
Credit card debt consolidation as opposed to bankruptcy or counseling is, by far, the best possible choice for homeowners.
1. Credit card debt is listed on your credit report as “revolving” debt and this hurts your score more than a traditional loan with a set payback period.
The term “revolving,” where debt is concerned, means that you can charge it up, pay it off and charge it back up again. As you can imagine, if you have a lot of credit cards, it makes lenders nervous and it also makes your score go down.
Why? Because even if you have perfect credit and you pay all of your bills on time, after the bank gives you a mortgage, you could max out all of those credit cards and go into bankruptcy.
Bottom line: The ideal number of credit cards to have is one or two. This demonstrates that you are a responsible individual who does not need multiple cards. After all, why would anybody need more than one or two credit cards? You may have a good answer to that question, but to the credit bureau, more than a few credit cards translates into a poor ability to manage borrowed funds.
2. Never, ever take out a “cash advance” on your credit card.
All credit card companies will eagerly supply you a PIN number so that you can withdraw cash from an ATM using your credit card. This is bad on so many levels.
First of all, there is always a “cash advance fee” and it’s always between $25 and $50. So if you take out $250 from an ATM machine and the fee is $50, you just paid 20% interest, up-front and on-the-spot. You could pay it back in an hour, but you still paid a fee that amounts to 20% (in the example provided).
In addition, if you read the fine print on your credit card agreement, you will find that the interest rate on cash advances is always ridiculously high- usually 26% or more.
So tack on that high interest rate to the “up front” interest you pay in the form of the cash advance fee, it should be apparent that credit card cash advances should only be used in the most desperate of circumstances.
3. Keep all credit card balances at 50% or lower.
This is about something called your debt-to-credit ratio. Let us say that you have 3 credit cards and all three have a maximum credit limit of $1000. Ideally, you would not owe more than $499 on each card at any given time. This tells the credit bureau that you have a lot of credit available to you, but you don’t need to use it. You are responsible enough with your money that you just use credit cards as you need them.
Even if you pay all of your bills on time and have never paid late in your life, if all of your credit cards are maxed-out, your credit score is going to be poor or fair at best. This fact seems the most difficult for people to understand.
Paying all of your bills every month and paying on time does not equal good credit. Not by a long shot!
Using credit wisely is what effects your credit score the most.
4. Shred all of your department store credit cards.
You might want to stop reading right here if you have department store credit cards.
You need to cancel and destroy them if your credit score is not as high as you need it or would like it to be.
Department store credit cards (Target, Kohls, Dillards) are the worst of the worst when it comes to credit card interest rates. They are always over 20% and- although this cannot be confirmed- it is generally accepted that these cards affect your credit score significantly, due to the fact that the terms are always terrible. A person that is wise about their spending would never take out a department store credit card. Use your Visa or American Express.
Is your Visa maxed-out? Well then, for goodness sakes, do not get a department store card so that you can get further into debt. That shopping spree at the mall could cost you a new home– this is no joke.
However, we know that stores will entice you with 10% or 20% off of your purchases if you apply for a store credit card that day.
If you are going to Home Depot and you are going to spend $2000 for new appliances it would be foolish not to take the $200 discount just for applying, right?
Abolutely right! Apply for the card and get the discount.
There is nothing wrong with applying for many different cards- just do not keep them.
Take the discount that the store is offering and when you get the credit card in the mail, immediately call to cancel. Put that card in the shredder the day it arrives. The only reason you would ever use a department store credit card is because your other cards are maxed out. If you other cards are maxed out, you should not be buying new items anyway. It’s just bad business.
5. If you are going to be late on a credit card payment, call the credit card company.
If something happens and you are unable to pay your credit card bill one month, call the credit card company.
For some reason, many people avoid the telephone when they are in financial trouble- which is the worst thing you can do. It usually just makes your collectors more aggressive.
Most credit card companies are appreciative of a phone call if you are going to be late on a payment.
In fact, if you call them and tell them that you had a problem this month, but you will send in the total past due amount within the next couple of weeks, they often agree not to report the “late” payment to the credit bureaus.
But if you choose not to make payment and you don’t bother to call your creditor to keep them in the loop, they are going to report you every time you are late. Late payments on credit cards hurt your score very much.