About Debt Management

what you need to know about debt

Debt - it's one of the facts of life. We incur debt to pay for college, finance a car, buy a home, and pay for items we may need now.

Unfortunately, many households have incurred too much debt. The ease of financing and use of credit cards have entangled many consumers to never-ending debt cycle where debt never sleeps - debt never takes a holiday - debt is always there consuming a sizable chuck of your disposable income.

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Basic Rules for Managing Debt

Pay on Time:

Pay your debt obligations on time, every time. Send payments at least 2-3 days before the due date to ensure that your payment arrives on time.


What if Your Payment is Late

If you are going to be late with your payment, call your creditor immediately. Explain your situation. Many creditors will gladly accept credit card payments over the phone.

If paying by credit card is not an option, notify the creditor that you will be sending payment today. Most creditors will make notation to your account to avoid late fees.

If you find that the creditor needs payment by the next business day to avoid late fees, consider using a payment exchange service such as Western Union. Their fees are less expensive than overnight express mail service:

click for: www.westernunion.com


What if You Can't Make Payment

If you don't have enough money to make payment for the month, suggest to your creditor that you can pay perhaps half the payment now and the rest next month.

If unemployment, divorce, sickness, etc., puts you in a situation where you need to suspend payments, discuss your situation with the creditor. Many creditors have deferment plans for financial hardships.

The key point is contacting and working with your creditor. Never assume that your creditors are going to "walk away" from your debt obligations. You want to avoid having your account sent to collections. Creditors will be happy to work with you if you make a honest attempt to resolve your situation.


Keep Records

Keep and maintain all records when speaking with your creditor. Note the date and time, the person's name with whom you are speaking with, the issue that you called about, and the recommendation the creditor offered. Request a confirmation or other ID number that proves that you spoke with your creditor.

These records are important proof in the event you receive non-payment notification with penalty fees and other "account suspension" or "account collection" notices.


What if Collectors Call

If you receive a collection notice, contact your creditor immediately. Find out why your account was sent to collections after a repayment agreement was reached. Request that they remove your account from collections and renegotiate your repayment plan.

If the creditor is unable to help, you might consider taking the following steps:

  • Never ignore collections notices or payment due notices. Get them resolve as quickly as possible.
  • Understand your rights under the Fair Debt Collection Practices Act.
  • Seek credit counseling services from a professional advisor. They can help negotiate a debt repayment plan.

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Costs To Avoid

Late Payment Charges

Fees are charged for scheduled payments that are past due.

Creditors generally have a 3-5 day grace period beyond the due date before charging late payment fees. But note that creditors are in the business to make money. So many are moving the grace period back.

Most credit card companies do not allow a grace period. You can incur a late payment fee if your payment is received 1-day past the due date.

The best rule is to always pay your debt obligations 2-3 days prior to the due date.


Over-the-Limit Fees

Fees are charged for making purchases over your credit line limit.

Your best rule is keep your credit line balances at 50-60% of the total credit line limit. This keeps your credit rating strong and avoids going your limit.


High Interest Rate Charges

Fees are charged for carrying a credit balance beyond the 25-day grace period.

Many of these interest rate charges are around 16-22% — considerably high penalties for "borrowing" money. So try to pay your credit card balance in full each month.

If you can't pay the full balance, use a lower-interest rate credit line to pay your credit card balance to avoid the high interest rate charges.


For Example:

If your credit card balance is $4,800 at an interest rate charge of 17%, your monthly interest fees will be: $68.00.

If you have the same credit line balance ($2,500) at an interest rate of 9.90%, your monthly interest fees will be: $39.60.

If you consolidated your debt under a consolidation program such as a home equity credit line with interest rates at 6% or lower, your monthly interest fees will be: $24.00 or lower.

Your best rule is to always payoff your credit cards each month to avoid high interest rate fees. If you maintain a credit card balance, you might want to review some equity line credit to payoff high interest rate charges.

Link to our Home Equity Center for information

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Methods of Payment

By Paper Check

The most common form of payment. You should schedule time weekly to review bills so that all debt obligations can be paid 2-3 days prior to their due date.


By Automatic Draft

This is where the creditor to automatically DRAFTS your money account each month for the payment due. This is very common for home mortgages and other fixed loan payments.

Some creditors, especially for home equity, student loan payments, and other personal loan payments, will reduce your interest rate by to 0.25% or more if you use this feature. This is one of the easiest and most rewarding ways to pay your bills.

You need to make sure you have enough money in your account to cover automatic drafts. You must keep good accounting. You want to avoid overdraft fees from your bank and non-payment fees from your creditor if your DRAFT account has non-sufficient funds.

Automatic draft is best when you have an overdraft protection account that covers non-sufficient fund situations.


By Online Payments

There are three types of online bill payments:

  • Bill paying using Personal Financial Management Software (PFM).

    These software programs load on your computer and function like checking accounts. You simply schedule payments that are sent automatically to your creditor.

    The most common software type: Quicken®

  • Bill paying using your online bill payment services.

    Most banks offer Internet Banking services, where you can log-in and pay your bills online.

    Also check out this FREE bill payment service:

  • Direct Bill Pay

    Most creditors and credit card companies offer bill-payment features via their online web site. Simply link to your creditor and enroll into their bill payment feature.

    You will need to set a calendar to remind you to pay the bill online as you would pay using offline. The service is generally FREE and the payment can be posted on whatever date you set.


Bill Payment Providers

Service providers that will pay bills on your behalf.

You simply have all of your bills sent to them. They will work out a budget plan where your obligations are paid on time. They will also be responsible for any billing disputes and charges.

These services do come with a cost.

Check out this online provider at:
You may also check the yellow pages for local providers:
bill pay service providers


By Credit Card

There is only one reason for using your credit cards to pay bills: to build rebate credit awards. Never take out a cash advance to pay an obligation. It will cost you plenty. It is much better to work with your creditor if cash is short.

Paying by credit card involves the following:

  • you pay your obligations with your credit card
  • you take advantage of the credit card's 25-day grace period
  • you collect rebate awards for your purchase
  • you pay off your credit card in full each month

You can use your card to pay utility payments, living expenses, and other family purchases.

We have more information about using rebate credit cards for living purchases: view module


By Cash

Not very feasible since it would require a physical visit to a payment exchange office. The fees can also be high.

Paying by cash may be required for individuals who lack bank money accounts. One reliable bill payment service for non-bank customers is Western Union: click here for information

Note that your goal should be to fix up your credit situation so that you can safely qualify for a banking or other money account.

view topic: building a credit history

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Billing Disputes

Reasons for billing disputes include:

— incorrect purchases that was posted to your account
— purchases that were to be refunded
— payments that were not properly posted
— fraudulent use of your account
— errors made by your creditor

The Fair Credit Billing act entitles you to certain protections in the event of a billing dispute on open-line credit accounts, such as credit cards, store cards, etc.) The act does not protect fixed, closed-end accounts (mortgages, car loans, etc).

more information about the Fair Credit Billing Act


Your first step is to speak with your creditor by phone (and to guarantee your rights by letter).

The creditor must conduct a reasonable investigation of your dispute within two billing cycles.

view your course of action when disputing bills

When speaking with you creditor, keep notes of the time and date, the name of the person assisting you, and creditor action to resolve your situation.

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How Much Debt

2: The "DEBT ratio"

calculated by dividing monthly debt payments and other financing obligations by your gross monthly income. As a basic rule, the debt ratio should not exceed 36%.

What debt payments are includes:

  • housing debt payment (from above)
  • auto and other transportation loan payments
  • student debt payments
  • secured and unsecured loan payments
  • credit card payments
  • credit line payments (home equity)
  • alimony and child support payments
  • tax lien payments
  • other debt obligations

The debt-to-income ratio is calculated by:

dividing your fixed monthly debt expenses by your gross monthly income.

As a basic rule, you should live within the following percentages:

monthly housing debt expenses including taxes, insurance: 25-28%
other credit obligations (credit cards, auto loans, etc.): 10-15%
your total debt obligations should be around: 36-40%

Calculating Your Debt-to-Income Ratio

Input the following data to calculate your debt ratio:

monthly housing debt/rent expenses including taxes, insurance
monthly installment loan payments
monthly revolving credit line payments
real estate loan payment on non-income producing property
alimony and child support
any tax or legal assessments
use this calculator to calculate the monthly expense from an annual expense


Monthly Mortgage or Rent (including escrow):
Monthly Auto or Other Installment Loan Payments:
Minimum Monthly Credit Card Payments:
Minimum Credit Line Payments (home equity):
Monthly Real Estate Non-Income Loan Payments:
Monthly Alimony and Child Support Payments:
Monthly Tax and Legal Assessments:
Monthly Other Payments:

Monthly Gross Salary or Pay:
Annual Bonus:
Monthly Alimony / Child Support:
Other Monthly Income:
Monthly Debt Payments:
Monthly Gross Income:
Debt-to-Income Ratio (s/b around 36%): %

Debt Ratio Barometer:

  • 36% or less:
    debt level within acceptable range for most people.

  • 37%-42%:
    debt level a little high, need to take corrective action to bring debt level down. You may consider paying off or consolidating some of your debt.

  • 43%-50%:
    danger level, need to take immediate action before you lose control of your financial situation.

  • 50% or more:
    excessive debt loan, may need to seek credit counseling services
* Calculations are based upon the assumptions you entered. Please note that rounding errors can make a small difference in calculations. Your actual mortgage lending rate may vary depending on your credit quality and lender. The circumstances surrounding your credit and loan qualifications may result in different calculations.


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Solving Your Debt Problems

Step 1: Accept Responsibility

Your first step is to accept responsibility for your debt. You need to accept its existence with determination to repay and control your debt position. Failure to accept your debt problems will only allow it to continue.

Understand that your debt has repercussions on your family and others. Failure to assume control makes it difficult to save for college, plan for retirement, and prepare for family needs. Likewise, your mismanagement may be carry forward by your children who learn by your example.


Step 2: Rid Yourself of Instant Gratification

You must forgo your pleasure of short-term "wants" for the more important long-term "needs" to reduce your debt. This may require:

— buying "used" instead of "new"
— buying not the latest gadgets
— buying not the latest trends
— allowing the car to run another year

Access to credit cards means instant gratification. Say good-bye to instant credit and rely on pre-paid credit cards as your means of commerce.

review pre-paid cards


Step 3: Establish a Monthly Budget

You need to plan and quantify your expenses for housing, food, transportation, savings and paying down your debt.

Budgeting disciplines your spending habits. It restricts buying for items you need, forcing the "wants" to a future day by saving and planning.

we have a complete section on monthly budgeting


Step 4: Set Financial Goals

Your first goal is to reduce and eliminate your financial debt. In addition, you need to set your sights on the following:

— saving for college
— saving for the next house
— saving for emergency cash
— saving for retirement

These goals motivate your need for a budget, debt consolidation plan, and debt reduction plan. These goals become part of the budget planning process under Step 3.


Step 5: Setup a Debt Repayment Plan

Finally, you need to establish a debt repayment plan. It generally involves the following:

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