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The Advantage Advisor

Volume 4 / Issue 4 / 2009

In this issue:

Debt settlement

Private mortgage insurance

Store credit cards

What about debt settlement?

There are many people who are looking for financial help right now, especially when it comes to paying off debt.

Unfortunately, there are an overabundance of advertisements out there from various debt relief agencies, many of which make promises that may not be realistic.

One such service that is heavily advertised is debt settlement. Debt settlement is a process through which you, or a company working on your behalf, attempt to negotiate with your creditors to accept a payoff amount that is significantly less than what you actually owe.

While this can seem like a good idea at first glance, there are some possible negative aspects of debt settlement that consumers should be well aware of before signing on with such a company.

First, the debt settlement industry is largely unregulated. Non-profit credit counseling agencies are regulated by the IRS, and many are also regulated under individual state laws. Debt settlement is a for-profit industry that does not fall under any federal oversight, and few states have laws that regulate or oversee these companies.

The fees to use a debt settlement company can be very high and are often paid up front before the company does any work on the client’s behalf. Also, it is not uncommon for debt settlement companies to require their customers to sign over power of attorney.

Debt settlement can have a serious, negative effect on your credit report and credit score. Debt settlement customers are often instructed to stop paying their creditors. This means the accounts become delinquent and over-the-limit and late fees continue to increase the outstanding balance.

If a debt is successfully settled, it will be reflected on your credit report that you did not pay the full amount owed. Also, any forgiven debt over $600 may be considered taxable income by the IRS.

If you, or someone you know, is looking for a way to reduce your debt, please make sure to take some time to educate yourself to ensure that you work with a reputable debt relief company.

Be wary of companies that:

Cold call or solicit a consumer out of the blue.
Charge high fees, especially if the fees are paid up front.
Ask consumers to sign over power of attorney.
Will not send free information about their services and fees.
Encourage consumers to sign up for a plan or program immediately without first sending the consumer the program’s details in writing.
Pay their employees based on commission.
Don’t offer financial education as part of their plan or program.

When choosing a debt relief agency, consumers should look for a company that:

Is a non-profit organization and, preferably, a member of the National Foundation for Credit Counseling such as Advantage Credit Counseling Service.
Is in good standing with the Better Business Bureau.
Is accredited.
Discloses information about the fees and details of their plan or program in writing before requiring a consumer to sign up for anything.
Offers a comprehensive financial education as part of their plan or program.
Adheres to any applicable state or federal laws, including licensing requirements.

Paying down debt takes time. The best thing to keep in mind is that if something sounds too good to be true, it probably is.

Did you know …

In 2007 the average credit card balance for cardholders who were carrying a balance was $7,300, according to the Federal Reserve. The average interest rate on a credit card is currently around 14 percent.

If a cardholder with a $7,300 balance and a 14 percent interest rate makes only the minimum payment on his or her credit card (assuming the minimum payment is $25 a month), it would take 160 months - over 13 years - to pay off the card. The interest paid during that time would amount to $4,343.

Pay more than the minimum on your credit cards whenever possible. You’ll save yourself years of debt repayment and thousands of dollars in interest charges.

Source: www.creditcards.com

About those store cards …

If you have a charge card in your wallet for a particular store, it is important to understand that what you have is a traditional credit card.

Years ago, when consumers used “store credit” to make purchases, it was an agreement between the client and the individual store. The account was managed by that retailer.

Time has changed this arrangement.

Today, if you have a credit card for a particular retailer, your credit lender is most likely not the store whose name appears on the card. Stores now use credit card companies to provide credit and manage the accounts.

Take a look at your card. Chances are good that there is the name and logo of a major creditor — such as Visa, Master Card or Discover — on that card. If you read the terms and conditions of your agreement, you will find which company is the “card issuer” — such as Bank of America, Juniper, etc.

These store credit cards carry all of the interest rates, charges and fees just like any other credit card. Applying for a store credit card may slightly lower your credit score, and after the account is opened it will also show up on your credit report.

Use caution when signing up for store cards. Be sure to check the interest rates, which can be significantly higher than general credit cards. Also, read the fine print to see what fees and charges go along with the account.

If you decide to use a store card, make sure you can pay the balance off in full as soon as the bill arrives.

Dear Debt Monkey

Q: I’ve been considering buying a home. I keep hearing about something called “PMI.” What is PMI? Will it affect my mortgage?

A: PMI is Private Mortgage Insurance.

Mortgage lenders require a borrower to pay a monthly PMI if he or she borrows more than 80 percent of the home’s purchase price or appraised price. Basically, this applies to borrowers who have put down less than 20 percent of the home’s purchase price.

PMI protects the lender in case the borrower defaults on the mortgage.

The amount of PMI a borrower must pay each year is based upon how much money was put up by the mortgage lender. The yearly amount is usually divided by 12 months and spread out throughout the year as part of the monthly mortgage payment.

In most cases, a borrower can stop paying the PMI once he or she has at least 20 percent equity in the home. A borrower may also be able to stop making PMI payments if the value or his or her home has increased enough to give the owner at least 20 percent equity in the home.

The housing counselors at Advantage CCS can help prospective homeowners understand the terms and responsibilities of mortgages and home ownership.

The Advantage Challenge

ACCS is challenging you to ...

Start thinking of fun and frugal family activities for the summer months.

Start checking your local newspapers and TV stations to see what community events are advertised. Browse the web for ideas. Create your own fun by stocking up on art supplies and games.

Begin to compile a list of fun things your family can do that cost little or are free. Try to come up with at least one activity per week. See how creative you can be.

Testimonial

“I came to you back in 1995 with about $5,000 in past due bills. I was making barely more than $7 an hour and was in a dire situation. Through your professional and courteous help, I was able to pay my debt in full sometime in 1999 ... It’s been 10 years since I’ve paid my debt, and I’m one of your “success stories” ... Thank you, CCCS, for putting me on the path of successful financial management.” -- Lin

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