RAISE YOUR CREDIT SCORE 200 POINTS IN 30 DAYS: Part 2 – Get Out of Debt Fast

February 24th, 2008 • Related • Filed Under • by erica

If I were to rename this series, I would use the phrase “The Good, The Bad and the Ugly.” Thus, last week’s article “Manipulate Your Credit” would become “Changes for Good Credit.” Next week’s “Cleaning Your Report” would become “Erasing the Bad Credit.” And this article would become “Alternatives for Ugly Credit.” The first half of this article deals with paying off debt in good standing. The second half shows how to deal with debt collectors. Somewhere in the middle are little known truths about debt that will give you power when dealing with your debt.

MAKE A GAME PLAN

Whether you are dealing with good debt or debt that is weighing heavily on your shoulders, it is important to have a game plan when working towards paying it off. No matter where you stand with your credit, your plan needs to consist of starting with the smallest balance and paying that off first.

1. Consolidate your debt as much as possible. Although many people would suggest getting a consolidation loan, it is not always an option if you actually owe a lot of money. Here are two options that can actually be more beneficial.

a. Tap Into Your Home’s Equity: If you have a Home Equity Line of Credit (HELOC) or are able to refinance a home, then this is going to be your best bet for getting out of debt fast. You see, when you get a HELOC or refinance your mortgage and take cash out, you are using the equity in your home to pay off your credit. This is beneficial because a) your interest rate can be as low as 5% saving you a lot more money then leaving balances on a credit card, b) your payments will be approximately 70% less then what they would be if leaving them on a credit card and c) the interest you pay toward a home loan will be tax deductible (whereas credit interest is not) and that tax deduction can save you even more money every year you have it. As an added bonus, transferring balances to your home equity will raise your credit score when it frees up your debt ratio on your credit cards.

b. Get a good deal on a balance transfer: If a refinance is not in your stars, then look to the credit that you do have. Call up your credit cards and ask them for deals on balance transfers. Many times, by simply asking, you can get 0% interest for a minimum of six months, or as little as 3% for the life of the debt. While you’re at it, ask if they will lower your interest rates as well. More often then not, they have no problem lowering interest rates, but you have to ask for it.

2. Start with the smallest balance first. Being able to pay even one card off can feel like a life changing event. Whatever balances you have not consolidated, begin with the smallest balance first. Even though it may not have the smallest interest rate, it is still best to get at least one card paid off. This gives you the option to request another balance transfer and transfer your balances again when the original deals expire.

3. rinse and repeat. That’s just my way of saying…keep going. Consolidate the balances you can, and then pay off the smallest balances right away. Keep asking for lower interest rates, and keep pressing your luck.

4. do try and keep your nose clean. While it may seem tempting to go out and keep charging up a storm, if you truly want to get out debt, you need to spend as little as possible during this period. Whatever you do charge on your cards, pay it all off each month plus whatever extra you can spare. By using the cards instead of your checking account, then paying everything in your checking towards your credit card, you create a good payment history on your credit reports and you lessen the likelihood of bouncing any checks.

THE TRUTH ABOUT DEBT COLLECTORS

Although every state’s laws and rights regarding Consumer Debt differ, all collection agencies have fewer rights when collecting debt then the original company you owed the money too. Not only do they have fewer rights thanks to the FTC, but they also have purchased you debt for as little as $0.10 for every dollar you owed. That means if you owed $1,000, they probably bought the debt for $100. Anything you pay over that is pure profit for them, and they make that profit by harassing and scaring you into paying. Do not let them intimidate you. You are the one with the gold; therefore you are the one that makes the rules. So, here is exactly how to deal with debt collectors so that you can settle for as little as 30% of what you owe.

Here are some other things to know before you settle:

A) A debt collector wants you to pay them NOW, and they will lie to you to make that happen.

B) A debt collector cannot take you to court unless they are located in the same state. This is the rule for the majority of states, and you can find out your exact rights at your local District Attorney’s office.

C) If you don’t wish to speak with a debt collector, simply send them a “Cease and Desist.” If they ignore it and depending on the state, you could have a case against them for harassment if they continue to call you.

D) Credit card debt is unsecured debt, meaning they cannot try to repossess any of your possessions. However, homes, cars and secured credit cards can be repossessed as these are secured loans.

E) Other then mentioned here, the only time a collector can garnish wages is if they have taken you to court and won.

F) They cannot ruin your credit “forever.” Any negatives a debt collector puts on your account is only there for seven years (give or take a year). After seven years, it will drop off and your credit score will go up…unless you have it removed immediately. (I will go over how to do this final step next week.)

THE GAME PLAN FOR DEBT COLLECTORS

FIND OUT WHO HAS YOUR ACCOUNT. Check your credit reports and call your credit companies to find out who now owns your account. By making the first step and call them, they will deal with you more respectfully.
ASK THEM HOW MUCH THEY ARE WILLING TO SETTLE FOR. Do not be the first to make an offer. The collection agency bought your account for pennies on the dollar and they already know the lowest possible profitable settlement, which could be as little as 30% of your original debt. Let them make an offer as it will likely be much less then you may offer.
OFFER THREE MONTHLY PAYMENTS. No company is legally allowed to take more then three postdated checks for an agreed upon amount. If you can get them to settle, they will try to make it an amount you can afford with three monthly payments. Play hardball. See how low you can get them before you give them any bank account information.
DEMAND THEY PUT IT IN WRITING. If you do not get the settlement in writing, the collection agency may take your money and sell your account to another collection agency. If you get no proof that your account was settled, you will have to start the process all over again. Be sure to demand this and be insistent. If they tell you they cannot, tell them you will not pay them until you receive it and demand that they at least email it to you (as email provides a digital signature and timestamp).
ONCE THE ACCOUNT IS PAID IN FULL, MOVE ONTO THE NEXT CREDITOR. Generally, a creditor will keep your account approximately 90 days before selling it to another collection agency. At least by selling it to someone else, they can make back the money they spent to buy the debt. Therefore, don’t feel you have to call all of your debt collectors at once. Start with the smallest amounts first, and then work your way to the next one. By the end of the year, you can easily pay off four accounts one after the other.

If you follow these steps to clean up your credit, the negative items will fall off your credit report completely in 6 to 8 years depending on the credit agency. However, you can dispute negatives on your credit report and get them removed within 30 days. Next week’s final article (“Cleaning Your Report”) will go over how to do this step by step.