3 Great Ways to Eliminate Credit Card Debt

Welcome to part 3 of the HOPE4USA.com Credit Card Mastery Series.

In today's episode we will be discussing 3 great ways that you can work to eliminate your credit card debt if you are already in over your head. Credit cards can be powerful credit building tools; however, credit card debt is never good for your credit scores or your wallet. Learn how to take control of your credit card debt once and for all - your credit scores and your wallet will thank you!

Visit HOPE4USA.com or follow us on Facebook during this informative weekly series so that you can learn how to turn your credit card accounts into powerful credit building tools. 

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Michelle Black is an author and leading credit expert with nearly a decade and a half of experience, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars across the country. She is an expert on improving credit scores, budgeting, and identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here. 

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Saying No-No-No to Holiday Overspending!

There are many holiday traditions which are beautiful, meaningful, and worth repeating year after year. However, the tradition of holiday overspending has become all too common among American consumers. Trust me, I understand the temptation to overspend during the holidays and I have heard every excuse in the book given to try to justify this bad habit. "I want to do something really special for my loved one this year because he/she has been going through a difficult time. I'm not worried about charging gifts on my credit cards because I will pay the balances off in a few months with my tax refund. Money is so tight during the rest of year so my family and I deserve to have a little fun during the holidays."

It is much easier for consumers to talk themselves into overspending during the holidays than at any other time of the year. Social pressure, pressure to please loved ones (whether the pressure is real or perceived), and incessant retail marketing can make it difficult for many consumers to stick with a spending budget they can actually afford. However, the truth is that consumers do not have to fall into the debt trap in order to have a happy and meaningful holiday season with their loved ones.

The Plan

The single most effective way for a consumer to swear off holiday overspending once and for all - and to actually achieve this goal - is to start with a plan. As a reader of the HOPE4USA Credit Blog you know that having a written budget to follow for your monthly expenses is essential to financial and credit success. (Need help creating a monthly budget? CLICK HERE for a free HOPE4USA Budgeting Guide.) However, with all of the extra expenses present during the holiday season it is also important to have a separate, written budget for holiday spending as well.

How It Works

When starting a holiday budget it is important to begin by listing the amount of money which is actually available for spending, not the expenses. Starting with the amount of money you can actually afford to spend (without going into debt or dipping into non-holiday savings) will help you to build the most effective budget possible.

Let's say that you determine your total available spending limit for the holidays should be $1,000 or less. The next step should be to divide those funds into spending categories such as charitable giving, Christmas presents, holiday treats and meals, decorations, and unplanned expenses. The funds can be allocated within the spending categories however you see fit. Here is a possible example:

·        Charitable Giving - $100 (10% of available funds)

·        Christmas Presents - $550 (55% of available funds)

·        Holiday Treats and Meals - $200 (20% of available funds)

·        Decorations - $50 (5% of available funds)

·        Unplanned Expenses - $100 (10% of available funds)

Once you have separated your available funds into separate spending categories you can move on to determining how much you will spend for each person on your Christmas gift list. One of my favorite strategies for budgeting Christmas gifts is to list each person for whom you wish to buy a gift in their order of importance. Next you can determine which percentage of funds you wish to spend on each person and calculate those percentages against your pre-set budget to find out your gift "allowance" for everyone on the list. Here is an example.

·        Spouse - 20% ($110 in the example budget above)

·        Child #1 - 15% ($82.50 in the example budget above)

·        Child #2 - 15% ($82.50 in the example budget above)

·        Grandchild #1 - 10% ($55 in the example budget above)

·        Grandchild #2 - 10% ($55 in the example budget above)

·        4 Friends - 5% each ($27.50 each in the example budget above)

·        Misc. Friends, Teachers, Neighbors, etc. - 1% each ($5.50 each in the example budget above)

Make the commitment to set a budget and stick to it and you will make the holiday immensely more enjoyable for yourself and your family this year. As a bonus you can give yourself and your family the gift of starting 2015 off on the right foot financially, without a Christmas overspending hangover.

Merry Christmas from HOPE4USA! Click the image to the left to download the HOPE4USA Basic Christmas Budget worksheet and set yourself up for a holiday season without regrets.

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Merry Christmas from HOPE4USA! Click the image to the left to download the HOPE4USA Basic Christmas Budget worksheet and set yourself up for a holiday season without regrets.

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Michelle Black is an author and a credit expert with over a decade of experience, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and  a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, credit reporting, correcting credit errors, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here. 

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Is Settling My Debt the Key to Better Credit?

Let's face it, no one plans on having bad credit. Aside from a few bad apples, the vast majority of consumers never set out with the intention of acquiring debt and failing to pay it off according to terms. Instead, most consumers who develop bad credit do so as a result of some unfortunate circumstance such as a job loss, an illness, divorce, etc. Even those consumers who find themselves swimming in collection accounts as a result of poor financial planning typically do not realize that they have overextended themselves financially until they have already bitten off more than they can chew.

One of my favorite sayings is the HOPE4USA slogan, "Bad credit happens to good people all the time." The reason why this statement means so much to me is because it is 100% true. Whether a person is facing credit problems due to bad luck or bad decisions, that does not mean that he or she is a bad person. Everyone deserves a second chance.

Cleaning Up Past Mistakes

Unfortunately, when most consumers set out to begin cleaning up their past credit mistakes they do it wrong. I cannot count how many consumers have expressed their frustration to me over the years after they paid off a pile of old collection accounts and their credit scores remained low - often even lower than they were initially. The fact that most consumers fail to understand is that paying off or settling collection accounts generally will not do anything to improve credit scores.

Why Paying Collections Doesn't Raise Credit Scores

The FICO credit scoring models currently in use by lenders do not reward consumers for paying off collection accounts. Current versions of FICO are much more concerned with the fact that a collection occurred in the first place than they are with the balance of the account. In fact, a collection account will have virtually the same negative impact upon a consumer's credit scores whether the balance is $2,000 or $0. (Defaulted credit card accounts are typically the exception to this rule.)

The purpose of a FICO credit score, also known as the design objective, is to predict the likelihood that a consumer will become 90 days past due on any of his/her credit obligations within the next 2 years. Current FICO credit scoring models are built with the assumption that a consumer who had collection accounts in the past is still likely to be 90 days late on an account in the future. Therefore, the presence of a collection account - regardless of the balance - is going to have a negative credit score impact.

Change on the Horizon?

FICO 9, the most recent credit scoring model released by FICO was designed to treat $0 balance collection accounts very differently than they have been treated in the past. The new scoring model was built with scoring logic to completely ignore collections with $0 balances. The result? Consumers who settle or pay their collection accounts could potentially see a massive score increase under the new scoring model.

Before you get too excited it is important to realize that it will likely be many years before FICO 9 is widely adopted by lenders - if it is even adopted at all. Check out my previous article, "Why You Shouldn't Be Too Excited About the New FICO 9 Scoring System...Yet" for more details. If lenders are not using the new scoring model then it is impossible for consumers to see any benefit from the new scoring logic.

What Should I Do?

If you believe that the fact that settling your collection accounts will not likely help your credit scores is a good reason to ignore the accounts, you may want to think again. Unpaid collection accounts have the potential to come with a lot of nasty consequences. Lawsuits, judgments, and wage garnishments are a few of the unpleasant side effects that often accompany unpaid debts. Settling past due accounts can be a very smart move, though it may be advisable to consult with a reputable professional for help and guidance before you get started

Where to Begin

It is important not to become overwhelmed when you make the decision to begin trying to fix past credit issues. The best place to start is to get a copy of all 3 of your credit reports (and possibly your scores as well). You can access a free credit report from each of the 3 major credit bureaus every year at www.annualcreditreport.com. Credit scores are not free, but you can often access them as part of a free or inexpensive trial to a credit monitoring service. CLICK HERE to compare trial offers which offer 3-credit scores.

Once you have your reports, review them thoroughly for mistakes. Credit mistakes happen more commonly than many consumers realize. In fact, the FTC estimates that over 40 million consumers may have errors on their credit reports.

When reviewing accounts for errors remember that all aspects of the account (i.e. balance, date opened, date of last activity, etc.) should be correct. If errors are discovered you have the right according to the Fair Credit Reporting Act to dispute those errors. You can dispute credit errors on your own or with the help of a professional. CLICK HERE for a great, free Credit Repair Toolkit to help you get started or you can schedule a no-obligation credit analysis with a HOPE4USA Credit Expert.

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Michelle Black is an author and a credit expert with over a decade of experience, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and  a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, credit reporting, correcting credit errors, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE Facebook page by clicking here. 

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Why Credit Avoidance Is a Bad Strategy

The title of this piece alone is enough to ruffle the feathers of the die-hard believers in the cash-and-carry lifestyle. So, before I even begin with my explanation of the many ways that swearing off credit can come back to bite you, let me begin by stating that you can still live a debt free lifestyle while building a solid credit score. Don't believe me? Has your favorite financial guru told you otherwise? Before you shake your head and move on to the next item in your newsfeed, take 5 minutes to hear me out. Trust me, you will be glad that you kept reading.

Your Credit Score Is NOT Your Debt Score

Despite what you may have heard, credit scoring models do not reward consumers for going into debt. In fact, the truth is quite to the contrary. The idea that you have to carry a lot of debt in order to have good credit scores is completely false. It is 100% possible for you to be debt free and still have very good credit scores.

Credit scoring models like FICO pay a lot of attention to a consumer's debt load. Many consumers find it surprising that a whopping 30% of their FICO credit scores come from what is known as the "Debt Category" of their credit reports. Credit scoring models are constructed so that the more you owe, the worse it is for your scores. This fact is especially true when it comes to credit card debt. However, if you have credit cards with zero balances you will be heavily rewarded in the credit score department. Having credit card accounts which you keep paid off shows the credit scoring models that you are a good credit risk. Conversely, charge up more credit card debt than you can afford to pay off in a month and not only will you waste money on interest fees but your credit scores will also suffer.

Credit Matters In More Ways Than You Think

If you have experienced a financial disaster, bankruptcy, illness, or just plain bad financial decision making in the past then the idea of swearing off credit all together and adopting a cash-and-carry lifestyle can be tempting. Deciding to close your accounts and never again apply for another credit card or loan is a drastic decision, but plenty of people have proven that it is possible to live a life free from these traditional "trappings" of the credit world. However, what followers of this cash-and-carry lifestyle fail to consider is the fact that pretending their credit doesn't matter can cost a lot of money in the long run.

Thinking that your credit will only have an impact on your life if you intend to apply for a credit card or a loan is completely unrealistic. Like it or not, we live in a very credit driven world. Here are just 7 of the negative consequences to not having good credit.

Without good credit:

1. It can be hard to qualify for an apartment.
2. Getting a cell phone contract can be very problematic.
3. Higher insurance premiums are probably in your future.
4. Getting a job or a promotion may be difficult.
5. Security deposits on utility accounts are higher.
6. Receiving a security clearance for a job could be very tough.
7. Qualifying to purchase a home might be impossible.

The Truth About Credit "Temptation"

Again, I agree with those who believe that debt is bad. Excessive debt will waste your hard-earned money, it will lower your credit scores, it can be bad for your marriage, and it can cause you a lot of worry and stress. However, the idea that swearing off credit cards in order to avoid the temptation to go into debt is an overly simplistic approach to a complicated problem.

The root of the problem which people who are afraid of credit need to address is the fact that having credit cards is not what caused their financial and credit problems. Problems of this nature are almost always caused by poor money management habits. Saying that credit cards cause people to go into debt is like saying that spoons make people fat.

Closing your credit card accounts is not going to eliminate the temptation to over spend. In fact, for the person who has truly mastered proper money management habits, the temptation to charge more than he/she can afford to pay on a credit card is no greater than the temptation to spend too much on a debit card. Cutting up your credit cards is simply not the answer to your financial problems.

If you have made credit or money mistakes in the past, you are not alone. Don't allow the mistake of your past to define you. Instead of feeling defeated and ashamed you can challenge yourself to try again.

You should not allow let fear or misguided advice cause you to believe that a life free from the world of credit is your answer. After all, in reality there is no such thing as leading a life which is unaffected by your credit. You can embrace this knowledge or you can try to hide from it. Either way, your credit is always going to have a big impact upon your life.  

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Michelle Black is an 12+ year credit expert with HOPE4USA, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and  a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE Facebook page by clicking here. 

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HOPE for a Debt-Free Life (Part 1)

HOPE for a Debt-Free Life!Part 1 By Michelle Black

Does the mere mention of “debt” make your blood pressure spike a little? Do you begin to mentally kick yourself when you think about the amount you owe to creditors on a monthly basis? Is the stress of having more bills than money causing you to be unhappy or, even worse, causing tension within your entire family?

If you answered yes to any of the questions above then I am very excited to be sharing some great debt-payoff-tips with you over the next few weeks. The good news I would like to begin with is that, no matter what your current debt situation looks like, there is a way to turn it around. At the HOPE Program one of our favorite phrases is “There’s no such thing as a HOPEless situation!” There is so much truth in that powerful statement. If you could just take that single statement to heart and know that, with a little hard work and a solid plan, you can turn your financial and credit situation around, it would offer you a tremendous amount of stress relief!

Are you ready to hear some more? Then let’s get started with tip #1:

Track Your Spending.

My next tip is going to involve setting up a workable budget for your household. However, before a workable budget can be properly established you must have a clear idea of where your money is going currently. The easiest way I have found to track your spending is to carry a 3X5 card in your purse or wallet for a period of 4 weeks. Every time you spend any money (cash, charge, or check) be sure to write down the location of the purchase and the amount of the purchase on your 3X5 card. Remember to spend normally during this 4 week period. You will want an accurate picture of your spending habits when you get ready to plan your monthly budget.

Check back soon for my next tip to help you move closer to your debt free lifestyle!