To start, let’s go over the differences between banks and credit unions. A traditional bank is a for-profit public financial institution. A credit union is a non-profit financial cooperative. In order to join a credit union, you need to share a “common bond” with them. Typically this takes the shape of a professional association (i.e. a teacher’s credit union) or a geographic community (meaning you have to live in a certain town or city to join). In a credit union, each member is not simply a customer, but a part-owner that has a vote in the leadership of the union.

Now that you understand the basic differences between a bank and a credit union, let’s talk about some of the highest priorities for most bank customers and see how each type of institution adds up.

Convenience & Customer Service

Branch Locations & ATMs
Traditional banks, especially the nationwide banks, tend to have many branch locations and ATMs. That means they are automatically more convenient, right? Not necessarily. Did you know that if you bank at one credit union, you can also use other credit union’s branches through CU Service Centers or CO-OP Financial Services Network? All you have to do is check the websites and see if the credit union you’re interested in is listed. Please note, if you are a member of a credit union and you are visiting another branch in either network, you’ll need to know your account number and have your ID, or else they likely won’t be able to serve you.

Another thing to note is how large a presence your bank or credit union of choice has in your city. Think about where you live, work, hang out, and how often you travel. Then look up the locations of each of these financial institutions and compare them to see who truly has a stronger presence in your area. Just because a bank has ATMs across the country doesn’t mean they’ll have any in your neighborhood!

Availability & Helpfulness of Customer Service
Think about your priorities. Are you looking for a bank you can reach at all hours of the day, any day of the week? If so, traditional banks are the way to go. Or, do you prefer to have less access to customer service, but want to receive personal attention every time? You probably want a credit union. Credit unions consistently rank higher in customer service satisfaction than banks. Since a credit union is essentially being run by its members, it is very important for them to ensure that the members are satisfied.

So what if you’re a mix of the two? You want personal attention but you really need it to be available at all hours and on weekends. You can still choose a traditional bank – but you’ll have to do your homework. Banks may be corporations, but each branch is slightly different. I used to work for a large, national bank in a slower branch where I had the time to give stellar customer service every day. However, my good friend worked at a much higher traffic branch. Although she still gave stellar customer service, there were some things that were out of her control – like wait time, how much time she could spend with each customer, etc. So if you find a bank you like, look for a branch that has slower traffic.

In terms of evaluating customer service on the phone, give them a call! I recently wrote a blog post about trying to lower my credit card interest rates. I called three banks and two credit unions. One of the three traditional banks gave me fantastic service and went over and above to meet my needs! One of the two credit unions also gave me great customer service,  but they did not offer the same solution as the traditional bank. So although everyone will tell you that you’re guaranteed to have better customer service at a credit union, don’t be so sure. It all depends on which credit union you choose and whether you prioritize in-person customer service over all-hours availability.

Products

Traditional banks and credit unions tend to offer the same products, such as: checking and savings accounts, credit cards, auto loans, home loans, home equity lines of credit, CDs, and investment accounts. The main difference you’ll see on these accounts is interest charged or earned, fees charged, and the customer service you will receive on the account. Warning: it has come to light that some banks and credit unions are offering payday loans but covering it up by calling them something else. Payday loans are a dangerous and expensive form of credit that should be avoided at all costs. So if your financial institution is offering you a short-term line of credit that has an application fee or high interest rate, stay away.

Fees

What They Charge for Deposit Accounts
There are still many banks and credit unions that offer free checking, although it is common thought that this is disappearing. Read the terms with your personal banker when signing up for an account to make sure it is truly free and doesn’t include any hidden charges. Credit unions and banks will require you to make a deposit when you open an account. However, with some credit unions, the required deposit must stay in your account to maintain your membership. Most savings accounts at any financial institution do require a minimum balance and, if they don’t, will at least charge a fee after a certain amount of withdrawals.

What They Charge for Overdrafts
If you don’t have overdraft protection set up with a traditional bank, you will pay large fees for transactions that go through while you’re negative. Credit unions may also charge overdraft fees, but most often at a lower price. Either way, you should never lose money to these fees! No matter what type of financial institution you join, inquire about overdraft protection. It is often free and can come in the form of a credit card, a line of credit, or can be attached to your savings account. You may think this type of situation would never happen to you, but you can never be too sure!

What They Charge for Loans
On average, credit unions charge lower interest rates on loans. Since credit unions are not-for-profit they funnel money earned back to their members, which enables them to charge lower interest rates on loans and yield higher interest rates on savings accounts. However, you still need to compare the interest rates of the credit union and bank you’re interested in because they can vary from institution to institution and based on loan type. For example, many credit unions charge a higher interest rate on mortgages than traditional banks. But, their credit card interest rates are typically much lower and are even capped at 18% for federally chartered credit unions (unlike banks who can go upwards of 30%.) In my personal experience, when I called to lower my credit card interest, the credit unions had lower rates than two of the three traditional banks I called, but they couldn’t compete with the one traditional bank that offered me the lowest interest rate (11%). So, averages aside, the best way to know for sure is to do your research on the specific institutions you’re interested in!

Interest Rates for Savings Accounts
The sad truth is that whether you go through a bank or credit union, you won’t make a ton of interest by putting your money into a savings account. Credit unions usually earn a marginally higher interest rate on savings accounts, but still come in under 1%. To find the best rates offered for savings accounts or loans, check bankrate.com.

Security

Government Protection
Whether you go for a traditional bank or a credit union, your funds will be covered should anything happen to the institution, up to $250,000. Traditional banks are insured through the FDIC (Federal Deposit Insurance Corporation) while credit unions are insured by the NCUSIF (National Credit Union Share Insurance Fund). Again, much safer than stuffing your money under your mattress!

So now that you have all this information, what’s the answer? Shop around! Even with these basic differences, that doesn’t mean you can’t find one credit union that is better than the other or one traditional bank that is better than the other. So start with a few banks you may want to join and a few credit unions that you’re eligible for. Then write down your priorities and see who checks off most of your needs. That is the only way to ensure that you will be happy with your financial institution at the end of the day.

To help you cut through the misinformation, we’re going to examine the various costs of debt consolidation, including any fees and interest charges that might apply. We’ll also explain how these costs compare to those for debt settlement or debt management

Keep in mind that there are several different ways to do debt consolidation, including: a debt consolidation loan from a bank or peer-to-peer lender, a home equity loan, or a credit card balance transfer. (See our article Is Debt Consolidation a Good Idea? for a more detailed description of these)

What Kind of Debt Consolidation Fees Should I Expect?

Here’s a pretty comprehensive list of all the kinds of fees you should research when looking into the possibility of doing debt consolidation:

Origination fees: This type of fee often applies to new loans, whether it be a home equity loan or an unsecured debt consolidation loan. Lenders argue that these fees are necessary to cover the administrative costs of initiating your loan. Origination fees can be anywhere from 1% to 5% of your total loan amount (which is a lot!) so don’t take these lightly. In some cases, however, you won’t need to pay an origination fee when you get a debt consolidation loan.

Closing fees: This is another term for origination fees.

Annual fees: You’re especially likely to have an annual fee if you get a home equity loan or home equity line of credit (HELOC), and often you’ll have an annual fee with a balance transfer. These fees are often around $50 (though they can be less).

Balance transfer fees: When you do a balance transfer, you’ll have to pay a fee right off the bat that’s equivalent to a small percentage of your total balance (kind of like an origination fee). Usually, the initial balance transfer fee is between 3-5%.

Late fees: These obviously can vary quite a bit depending on what type of debt consolidation you’re doing. If you do a balance transfer, you need to be extra careful about late fees, because while normal credit card late fees run between $15 and $35, a late payment during a balance transfer introductory period can cost you hundreds of dollars. That’s because, according to the terms of most balance transfer offers, you start with a low (or even zero percent) interest rate for a limited period of time – but that disappears if you make even one late payment. Other late fees are not so drastic, however, you should still be aware of them and avoid them as much as possible.

Early cancellation fees: These are common when taking out a HELOC. For example, you may be charged either a flat fee (up to $400 or $500) or a percentage fee (around 1% of the loan amount) if you decide to close the line of credit within the first three years. The reason for this fee is that the company would prefer to earn more interest from you, rather than having you quickly close the account.

What Are Other Costs Of Debt Consolidation?

Other than the fees mentioned above, the only other costs are the interest charges, which as you might expect, depend upon the terms of your agreement and the type of debt consolidation you do.

If you get a debt consolidation loan from a bank or other lender, your interest rate will likely be between 7% and 30%. That means, on a loan of $10,000 you’ll be paying approximately $700 to $3,000 per year. If your credit score is good (i.e. above 700) then you’ll probably be able to find an interest rate less than 20% – and hopefully much lower.

On the other hand, if you decide to do a credit card balance transfer, you might not have to pay any interest for the first 12 months. Many credit card companies offer balance transfer deal with 0% APR during the introductory period, which can last up to a year (or even 18 months). But be careful, because as we mentioned above, you can quickly lose your 0% interest rate if you make a late payment OR if you don’t pay off your entire balance within the introductory period.

Finally, if you get a home equity loan or HELOC, your interest rates will usually be somewhere between 4% and 10%, however you are taking on much more risk than with other types of debt consolidation because you could lose your home if you aren’t able to make the payments. That’s why using a secured loan (which means one backed by collateral or property like your house) to consolidate your unsecured debt (not backed by collateral) is not recommended.

(For more information about each type of debt consolidation, read our post on Debt Consolidation Programs)

How Do Debt Settlement Fees Work?

So now that you understand how debt consolidation fees work, you might be wondering how they compare to the cost of debt settlement.

The fees for debt settlement are quite a bit different. When you work with a debt settlement company, you are essentially paying them to negotiate with your creditors so you can pay a fraction of your balances in a lump sum to cancel your debts. These companies are not allowed to charge you an upfront fee – instead they are legally obligated to wait until they’ve helped you settle at least one of your accounts, and even then they can only charge you an amount that is proportional to the amount of your debt that was settled.

Now, there may be other costs of doing debt settlement, and these are not as obvious. Since debt settlement requires that you pay your monthly amount to an escrow account instead of directly to your creditors, you will incur late fees on each of the accounts you’re trying to settle. This can sometimes cause your interest rates to skyrocket as well. If you don’t succeed in settling those debts, you will have more debt to deal with because of the fees and interest charges.

How Do Debt Management Fees Work?

Unlike debt settlement, the fees for debt management are somewhat predictable. Usually you will pay a monthly fee of between $15 and $50 to the debt management company or government-approved credit counseling agency that is in charge of your debt management plan.

In many cases, you will also need to pay a small fee to enroll, but you can almost always get at least one meeting with a credit counselor at no cost before deciding for sure if you want to do a debt management program. There are certain agencies that require you to buy educational materials that instruct you on how to budget your money better and how to get out of debt. These may sometimes cost $20 or more.

If the debt management plan is successful, you will see have a monthly amount that you must pay, which will be split between your creditors. You’ll need to pay that for 3-6 years on average in order to get out of debt. Late or missing payments during that time could result in late fees and increased interest rates.

Do Your Research On Debt Relief Costs and Fees

The bottom line is that you need to be well-informed about the different fees and costs of each type of program before you commit to any particular one. Each of the debt reduction methods discussed above can work for some people in certain situations, but they can also hurt you and make your situation worse if you are not prepared and/or don’t know what to expect.

So do your research and ask plenty of questions before you decide to use a debt consolidation loan, debt settlement, or debt management program to get out of debt. And if you’re trying to decide between several types of debt relief, see our article on the Ways To Get Out Of Debt.

Have more questions? Just send an e-mail to Ask (at) readyforzero.com.

“I love your website and the work you’re doing to help people. It’s great, I always tell people about ReadyForZero. I’m living proof that it works.”

It’s so much fun helping people get out of debt in the age of social media because it means we’re able to connect easily with people all across the country who are having success paying off their accounts using ReadyForZero.

Even as little as ten years ago, there was no easy way for a company like ours to hear spontaneous, continuous feedback from real users. But now, with Twitter, Facebook, and other social media sites, we can have a two-way dialogue with people at the click of a button.

A couple weeks ago we got one of those kinds of Tweets that makes us want to jump out of our seats and do a victory dance:

Thanks to @ReadyForZero!Paid off credit card #1 and moving right on to the next.Love your site and recommend it all the time.

— Chad Harris (@42graystreet) April 26, 2012

Awesome!

We have been extremely lucky to have some amazing ambassadors who talk about us to their friends and family – and anyone else who needs an easy and effective way to manage their debt.

Once we saw this Tweet, our fingers were itching to pick up the phone and give Chad a call. About two weeks ago we got our chance.

Chad is the first person we’ve profiled who has his student loans, auto loans, and credit cards all linked up in his ReadyForZero plan! In total, Chad said before he got serious about eliminating his debt he had $15,000 in student loans, an $18,000 car loan, and $16,000 in credit card debt.

He told us that since he not only has several different accounts but several different types of accounts, it has been even more useful to have a tool like ReadyForZero that helps him organize everything and does the math behind the scenes to give him the best plan to save money and get out of debt as fast as possible. Which is why we were so excited to talk to him. Without further ado, here’s Chad’s story…

Stage 1: Innocence

Have you ever had a passion for something? I mean, a real, honest-to-goodness passion that inspires you to meet new people, accomplish great things, and go to the ends of the earth in order to pursue your passion? If you have, then you know the joy it can bring.

And if you do, then you share a common bond with Chad. In his case, the passion that took him to all corners of the globe (or at least all corners of the U.S.) was the Dave Matthews Band.

Dave Matthews Band

He fell in love with their music early on, and became an even bigger fan as time went on. About five years ago, after graduating from college, he began traveling to see them perform in concert. Each show was a unique and exhilarating experience. Among the other DMB concert-goers he found new friends who shared his passion. They’d meet up at each successive concert, and despite not seeing each other in between, they remained great friends. When they’d finally see each other again, it would be like no time had passed since their last meeting.

Chad at The Gorge

During this time, he estimates that he went to over 20 Dave Matthews Band concerts in total. There were so many memorable concerts that Chad has a hard time picking his favorite, but two that stood out were a performance at The Gorge in Washington State (see photo above) and one in DMB’s hometown of Charlottesville, Virginia.

Stage 2: Awakening

Of course, these trips were not free, and Chad eventually came to the difficult realization that many young people make in the years after college. With student loans coming due and credit card balances growing after leaving college, he realized his lifestyle was not sustainable.

His frequent concert attendance was draining his budget, and often he was using credit cards to fill the gaps. Although he doesn’t regret those trips, he told us his income at the time was not enough to support that kind of frequent traveling along with all the other things he was spending money on at the time. “Sometimes I was flying, sometimes I was driving; but it all adds up, and it added up very fast.”

Today, he looks back at his younger self and isn’t afraid to use the word “irresponsible.” He told us, “I came out of college with a little bit of debt, but not that much. I think maybe just a couple thousand dollars. But [after college] I just kept using the card I had used in college.”

Despite taking some measures to live frugally, he found that his financial picture was deteriorating. “After I graduated from college I was living at home for awhile and that should have allowed me to pay off debt, but I didn’t… A few years ago I had maxed out a credit card and I went to get a new one. I just wasn’t changing anything about my life.”

As his debt started to accumulate, he began to feel squeezed.

“I can think back to some months when I had no money whatsoever,” he said. “I remember going to the bank one time and crunching my numbers and thinking ‘Oh my god, I’m going to be late on a couple bills, and I have no cash for the next 2 weeks.’” This is the common problem for those of us who get caught in the debt trap. The account balances grow slowly, kind of like a baby bear that looks harmless at first. But then, after growing bigger everyday, you look around and realize it’s big enough to crush you.

And just like that, suddenly Chad was in danger of being crushed by his debt: “I was thinking ‘how am I gonna put gas in my car? How am I going to get groceries?’ I even asked the bank to raise my credit limit on my Visa, just because I needed some breathing room, and they said no.”

Stage 3: Redemption

Chad knew that it was time to make changes. But like many people, he didn’t want to share his situation with those close to him. “I was too proud to ask for help – and debt is a subject you don’t really talk about with people – so I felt alone with this,” he told us.

Instead, he started doing research and trying to figure out better personal finance practices on his own.

And fortunately, around that same time he got a job that paid better, and he decided to get serious about watching his spending. He said, “I started my own budget and I just started tracking what I was spending my money on.”

Shortly after that, he came across our site. He told us, “I found ReadyForZero in January. And I can tell that because I’m looking back at my spreadsheet and I can see how I started changing where I was directing my money. When I started with ReadyForZero it told me to pay off my Exxon Mobil gas card and my Best Buy card first, because those had the highest interest rates.”

Seeing the high interest rates presented clearly to him in ReadyForZero made a big difference. And he said that being able to compare what would happen if he paid off those accounts to how much he would have to pay if he didn’t made him determined to tackle them. He said, “plenty of people had told me ‘pay off your highest interest rate accounts first!’ and finally ReadyForZero told me, ‘Dude, pay off your Best Buy card.’”

That’s when it hit home and he realized the need for a thoughtful strategy, rather than just paying money randomly toward each of his accounts. “I had been trying to pay off everything at the same time. And that’s not a good way, because you lose money in interest that way, and you don’t see much progress because each account is being reduced very, very little.”

“That’s why I love your site so much,” he said. “Because it feels like a community and I can see how other people are getting out of debt, and it allows me to stay informed on financial topics. And then the tool itself is telling you what your story is – and it looks bad, you know, but then it’s giving you a plan and saying ‘You can do this! If you can pay off this amount every month, you are going to be able to pay off these cards in this amount of time.’ And just to see those numbers is so helpful and makes you feel like you are in control. And I fell in love with your site for that reason.”

Once he began aiming directly at those high interest accounts, Chad saw rapid progress. “I had carried that Best Buy card for four years, and then in four months – boom – it was gone! And I honestly did a dance, a victory dance, when I got the e-mail [from ReadyForZero saying the account was paid off].” (Apparently, we’re not the only ones who like doing victory dances!)

Chad said one of his favorite things about ReadyForZero is the positive reinforcement and encouragement. He told us, “you know, you wouldn’t think, but when you get the e-mail with the trophy and it says congratulations – it makes you feel great.

Stage 4: Enlightenment

These days, Chad is on a roll. Not only has he paid off his two highest interest accounts, but he’s on his way toward paying off the third one.

He was quite happy to have those two cards done, saying, “in Best Buy’s case, I had maxed it out at $2,000 and it had been fluctuating between $1800 and $2000 for the better part of two years – with a 24% interest rate! I mean, geez!”

As for the Exxon Mobile card, he said: “That one was maxed out at $700. And the minimum payment on that was $12 per month and that was all I paid toward it, and I did that for over a year – and then [when I started RFZ] in two months it was gone.“

The beauty of having a plan and executing it is that he’s not losing any momentum after each card gets paid off. He just shifts to the next part of his plan. “Now I’m on to the next card, which is American Express,” he said. “What proves to me that it’s worked is I’m looking at how much I’m paying down my credit debt every month, and ever since I joined ReadyForZero I’ve paid an average of $418… and when I look at the previous months before that, I was only paying down $126. And my income situation hadn’t changed.”

With this success comes wisdom, and a more informed perspective on finances. “Now, when I buy something, I make a plan to pay it off,” he said. “I’ve started making good decisions. And I put more money toward the bills. I increased the total allocation per month that goes toward the credit card bills.”

Furthermore, his overall credit picture is much brighter. “My credit score has shot up to 724. I don’t have any bad things in my history like bankruptcy or late payments but my score had been way down because I had just so much debt. And now it’s way up.”

We’re so happy that ReadyForZero has played a part in helping him get to this point. We always love hearing about positive outcomes for our users. In his words, “It’s helped me become so in tune with my finances.”

Since things are going well now, Chad is planning to see the Dave Matthews Band live in concert a few times. After all, what is life without passion? And if you can pursue your passion and keep your finances on track, it makes everything sweeter.

Long term, Chad has a goal of building up a substantial savings account. He is focused on goals of financial stability that once seemed very distant. And his newfound mastery of personal finance has become part of his identity, carrying over to his office where he works as a Clinical Data Specialist for a medical device technology company. Contrary to the old days when he was afraid to talk about his finances, now he enjoys discussing personal finance with his co-workers. He shares our attitude that we can tackle debt together by erasing the fear and embarrassment from it.

And whenever he runs into someone who is working to pay off debt he recommends ReadyForZero to them. He told us, “I love your website and the work you’re doing to help people. It’s great, I always tell people about ReadyForZero. I’m living proof that it works.”

We’re lucky to have such a great success story, and we think Chad’s experience is an inspiration to anyone who would like to pursue their passion while continuing to remain financially secure. Keep up the good work, Chad!

How to Make Costly Weekend Activities More Affordable (Bargaineering)
Need a less expensive spin on traditional weekend activities? You may not have to give up your favorite things to do in order to save money. Read this article for creative ways to enjoy your favorite activities in less expensive ways.

25 Ways to Have Cheap Summer Fun (Wisebread)
How about some other activities for the weekend? Here are some great ideas for how to stay entertained this summer for cheap!

10 Ways to Save Money on Gasoline This Summer (OneMoneyDesign)
Are you afraid you’ll lose the money you saved on these activities in what you spend on gas? Not necessarily! Here are different ways you can save money on gas this summer. Good for the environment and good for your wallet!

Seven Ways to Make Big Bucks at Your Garage Sale (FiveCentNickel)
Hosting a garage sale is a great way to get rid of unnecessary clutter, make money, and mingle with your neighbors! If you have a lot of stuff left over from your spring cleaning, read these tips and then host your own garage sale!

27 Ways to Make Money for Teens (Adults Too!) (Christian Personal Finance)
Do you have teens that need to be kept busy when school’s out? Or, are you a teen and want find a way to make some extra cash so you can do all the things you love without asking mom and dad for money? Check out this article for ways to make extra money this summer – without having to flip burgers!

While we’re mentioning articles we liked, here are some blogs that were kind enough to feature ReadyForZero recently:

Balance Junkie
Make Money Make Cents
One Smart Dollar
See Debt Run
The Debt Princess
Young and Thrifty

Do you have ideas for making or saving extra money this summer that we haven’t mentioned here?  Share them with us in the comments below!

Democrats (including President Obama) and Republicans have both argued for keeping these interest rates at their current level, but they’ve disagreed on how to pay for the extension of the low rates.

So how will this debate affect you? Below we’ll describe the arguments on each side of this debate and how it may change (or not) your repayment of student loans.

Which Loans Are Affected by This Student Loan Debate?

The debate focuses on federal Stafford Loans, which allow students to borrow money directly from the U.S. Department of Education to pay for college. In fact, there are two types of Stafford Loans – subsidized and unsubsidized. The subsidized Stafford Loans are given to students who demonstrate financial need. These are often first-generation college students or those who come from families without any significant financial resources. For now, the subsidized Stafford Loans have an interest rate of 3.4%. On the other hand, the unsubsidized Stafford Loans are not based on need and have an interest rate of 6.8%.

The rate hike scheduled for July 1st would only affect the subsidized Stafford Loans, doubling their interest rate from 3.4% to 6.8%, which would bring their interest rates in line with the unsubsidized ones.

Here’s the really key piece of information though: the rate increase would only apply to new loans issued after July 1st. So if you’ve already got loans, the rate change won’t affect you.

The Two Sides of the Student Loan Interest Rate Debate

While it seems that almost everyone is in favor of keeping the 3.8% interest rate intact, disagreement has sprouted – not surprisingly – over how to pay the cost of extending this low interest rate. It’s estimated that it will cost the government about $5.6 billion to continue offering the lower rate to students.

So what are the opposing arguments in this debate? On one side, President Obama and Congressional Democrats supported Senate Bill 2343, which would have paid for this rate extension by changing a law that allows high-income individuals to avoid paying Social Security and Medicare taxes when they classify money they earn as dividends instead of cash income. Making the change would allow the government to recoup more tax money from those individuals, which would then be used to cover the costs of providing the lower interest rate.

Republicans, meanwhile, supported H.R. 4628, a bill that would pay for the lower rates by taking money from a preventative health fund that was created by President Obama’s health care reform law passed in 2010.

It’s not a coincidence that each bill targeted something sacred to the other side. We can be pretty sure that Democrats will not be willing to undercut President Obama’s signature piece of legislation, and Republicans will not be willing to raise taxes. For that reason, it’s pretty clear that the debate and the two bills, H.R. 4628 and S. 2343, have so far been mostly political posturing.

The Most Likely Outcome for Student Loan Interest Rates

Even though the attempts at extending the 3.4% interest rate have so far not been constructive, there’s a possibility that it will get done before the July 1 deadline. After all, there is quite a bit of pressure on both Democrats and Republicans to make this happen, and neither side wants to risk being blamed for an interest rate hike in an election year.

Most likely, one of the following scenarios will take place in the next month and half:

• Republicans and Democrats will agree on a compromise that keeps the interest rate at its current level, and both sides will claim credit for making it happen, or…
• They’ll fail to reach an agreement, in which case each side will blame the other for preventing it from happening

We can’t know for sure which outcome will transpire until we watch the events unfold leading up to the deadline.

So How Will The Student Loan Debate Affect Me?

Unless you plan to get subsidized Stafford Loans in the future, you won’t be affected by this debate.

Pretty straightforward, right?

Even if you have federal loans already (no matter which kind), you won’t be affected unless you’re planning to get subsidized Stafford Loans in the future.

It’s estimated that about 7.4 million students will be given new subsidized Stafford Loans after July 1st of this year, and those are the people who will be paying higher interest rates if a compromise is not reached. If you’re one of those people, you’ll have to pay up to $5,000 more over the life of your loan if the rate goes up to 6.8%.

What About Student Loan Forgiveness?

Since the current student loan debate only affects a small fraction of the total number of student loan borrowers, it’s worth having a broader debate about the rapidly increasing amount of student loan debt held by Americans.

One relevant idea is a student loan forgiveness proposal contained in H.R. 4170, a bill authored by Rep. Hansen Clarke, that would cancel student loan debt for borrowers who have paid 10 percent of their discretionary income towards their loans over the past 10 years. The bill would also cap interest rates on all federal student loans at 3.4%.

That’s certainly an intriguing idea, but as always, the problem is deciding how to pay for it.

In the short term, if you’re someone who’s struggling with student loan debt you should be aware of several programs that might help you get some breathing room. The first is called Income Based Repayment (IBR) and is a federal program that allows you to enter an extended repayment plan that will lower your monthly payments. Many private lenders have this type of program as well, so regardless of which type of loan you have it’s worth contacting your lender if you need lower monthly payments.

For those with federal student loans, it’s worth learning about the Special Direct Consolidation Loan Program that could make your life easier by giving you just one payment (and one bill) to worry about each month, as well as lowering your interest rate slightly.

Many former students are finding it difficult to pay off student loans right now because the economy is still tough for young people. If you’re one of the people who is struggling, inform yourself of the options available to you and be proactive in finding a program that might be able to help for your particular situation.

Image by borman818

DIY specialty gift baskets. A “Do It Yourself” (DIY) gift basket is simple to make and easy to tailor to your mother’s likes and dislikes. Just purchase an inexpensive basket at any craft store and then fill it with some of her favorite candles, bath salts, lotions and other beauty goodies. Or you could put in some candies, chocolates and other homemade treats. If it reflects your mom’s personality it will be even more special, so get creative with it!

Customize your own cards. Whether it’s a poem, a song or just a handwritten letter, creating a custom card will definitely bring a smile to your mother’s face. It doesn’t take much time or money, but it’s a heartfelt gift she will really enjoy – and will probably cherish for a long time.

Recipe card box or binder. A few years ago, I gathered up all my mom’s recipes, made copies of them and put them in a decorative binder. I bought some sheet protectors and tabs to label the recipes into sections. She absolutely loved the gift! It’s a nice way to organize the family recipes and you could do the same thing with a recipe card box as well.

Personalize a flower arrangement. All women love flowers and trust me when I say, we can never get them enough. Most local flower shops will let you create a personalized bouquet for that special someone. Look for online special at sites like ProFlowers.com and FTD.com for custom but inexpensive bouquets. It will mean so much more when you tell her you made the arrangement yourself. As an alternative, you could pick some wildflowers and make a wild arrangement too.

Start an herb or veggie garden. Herb and vegetable gardens have dual benefits; they cater to someone’s green thumb while offering fresh veggies and herbs for cooking. With simple herbs, like rosemary or basil, and veggies like tomatoes, you can start a vegetable or herb garden for your mom. You can find inexpensive pots and planters at most home and garden stores. It’s a nice gift that you and your mom can continue to grow and nurture together.

A day or night off. A mother’s work is never done and they deserve a day off from time to time. Offer to take over the household chores for the day, or volunteer to cook the family a meal. Purchase a certificate for a spa day, or give her a gift card to her favorite restaurant. Let her know the day is all about her.

Books and magazine subscriptions. My mom loves to read books and magazines, so one year I bought her a $25 discount card membership to a local bookstore. Every month she gets new releases and magazines for half the price. Consider buying her a subscription from Discount Mags or giving her an Amazon gift card to purchase ebooks of her choosing.

Clean out and wash the car. Gather up a bucket, some soap and a sponge and give the family car a good cleaning. Vacuum the inside and fill up the gas tank. You could keep this a secret and she’ll be surprised the next time she needs to car pool or run errands.

Canvas print of a family photo. You don’t have to be an artist or photographer to create a nice art piece. Take your mom’s favorite photo and upload it to a site like Canvas on Demand. It turns a photo into a beautiful art canvas. I did this with one of my vacation photos that now hangs above my fireplace.

A memory journal. I’m one of 5 brothers and sisters so we have some crazy, sad and funny memories we’ve made together over the years. Ask everyone in the family to write down their favorite memory into a journal. It can be something silly, or more serious, whatever you choose. When the next Mother’s Day rolls around, keep adding to the memory journal.

Give a gift that keeps on giving. All moms enjoy getting gifts that make their lives easier and help save them time. Consider buying your mom a crockpot, a vegetable/rice steamer or a blender. These are items that encourage healthy cooking that’s quick and easy, while saving time and money. Another gift that keeps giving are old-fashioned hugs and kisses, moms can never get enough of those.

These are just a few ideas to give your mom something special without spending too much money. If nothing else she just wants to spend a little time with you on Mother’s Day. Give her a phone call, take her out for coffee or send her a card in the mail. As long as the gift is thoughtful and heartfelt, it will be greatly appreciated.

What are your favorite Mother’s Day gift ideas? Leave a comment below!

Have you ever wondered if you could get your credit card interest rate lowered? Maybe you’ve had friends do it, or you’ve read about people who called their credit card companies and asked for lower rates… and got them. The truth is, you can sometimes lower your interest rate simply by calling and asking.

But it’s not always easy, and certainly not guaranteed!

In a previous post, we gave you specific tips for how to lower your interest rate with a simple phone call. However, today we wanted to give you a more personal perspective on how this works. So we decided to call them ourselves and report the results to you!

I called three big, national banks that I have credit card accounts with and then called some regional banks (in the San Francisco area) so I could compare the treatment I got from each bank and find out which ones were willing to lower my interest rate.

Asking National Banks to Lower My Credit Card Interest

I have to admit, when I finally sat down to make these phone calls, I got extremely nervous. Because of the fact that I’m now living in my third state in four years, I only bank with big, national banks. I need to know that I can access my money and my credit no matter where I am and bigger banks offer that convenience. But that doesn’t mean I think they’re going to treat me better!

So when I actually dialed the first bank, I noticed my heartbeat get faster and my palms start to sweat. Why was I so nervous all of a sudden? Because, in my heart of hearts, I felt no reason to believe that they would help me. Nevertheless, I picked up the phone and started making the calls – and that’s always the most important step!

Big Bank #1

When I reached the first live human and told him what I wanted – to lower my credit card interest rate – I knew I already sounded defeated. I explained everything I thought would help my case – history with the bank, good credit score, never made a late payment – and still figured I’d get a no. To my surprise he put me on hold to check out my account. I took a deep breath and felt my first glimmer of hope. Maybe he would actually help me – at least he was looking into it!

He came back after a few minutes and told me nothing was “available” to me at that time. I had no idea what he was talking about. Wasn’t I supposed to just negotiate for a lower rate? What needed to be “available”? I asked him to explain and he simply repeated himself. I very politely requested to speak with someone who could take a deeper look, and he gladly transferred the call. (One point to me for keeping calm!)

A woman came on the line and essentially told me the same thing. Again, I highlighted all of the positives about my situation and tried to find out why she wouldn’t negotiate a lower rate with me. All she did was tell me that she’s not a credit analyst – and no I couldn’t speak with one – and that I should just continue to have a good history with the bank. She did mention that they look at the entire debt picture – other cards, payment history, student loans, etc. Finally, she repeated that there were no other rates they could offer and that if I really wanted to do anything, I could do a balance transfer onto a new card. No go, I told her. The last thing I want is to open another line of credit.

I finally asked her one more time what I could possibly do to improve the chances of lowering my APR in the future. She advised that I keep making payments that are high enough to cover the minimum payment plus the monthly interest. She also gave me this little nugget of wisdom: if you pay your bill prior to the statement closing date each month, then your credit score will improve. Who knew paying a few days early could actually improve your credit score? Swing and a miss, but at least I got some good information!

Big Bank #2

By now I was feeling more confident about this situation, even though the first bank turned me down. At least now I knew it was possible to get taken seriously! I called the next bank, not expecting positive results, but at least knowing they wouldn’t think I was ridiculous for even asking. The first (and only) person I spoke to seemed to be in another country and was having trouble understanding me, as I could barely understand him. I gave him the spiel I gave the first bank and all he did was repeat the same line: there’s nothing “available” to offer me.

Why did they keep saying that? I was trying to negotiate a lower APR, not obtain a product. After pushing for more information, he continued to repeat himself as though he were reading from a script. And instead of telling me what I could do to get a lower interest rate, he told me how it could easily get higher, like if I made late payments or went over my credit limit. But what did that have to do with me? He seemed to want me to be happy with what I had and not bother trying to get a lower rate. I was too frustrated to even ask to speak with anyone else since he wouldn’t offer me any information. Another swing and miss.

Big Bank #3

Now I was getting more comfortable making these calls, and it was time to call the last big bank. I have to give full disclosure, I used to work for this bank. I had some hope that they would be more helpful since I always knew this bank to have customer service high on the priority list. However, as a lender, this bank is really tough. I even had to turn down fellow employees on many loans and credit cards when I worked there because their credit scores weren’t high enough. Those employees certainly didn’t get any special treatment for being a bank employee and I knew I wouldn’t either. (I’m pretty sure they can’t even tell from looking at my account that I was an employee of theirs.) I just hoped they would live up to my expectations.

Well, they surpassed my expectations! When I told the woman what I wanted, she immediately pulled up my account and knocked my already-low APR over two percentage points down. That was easy! When I told her how surprised I was, she said it was that easy because they were offering a promotion and that in six months my rates could go back up. Promotion? What? Again, I thought I was negotiating for lower rates. Shouldn’t that happen on a case by case basis and have nothing to do with promotions?

She told me that this bank can only lower interest rates if a promotional rate is available and then if the customer has a good profile with the bank. History with the bank isn’t everything though.  Even if someone is the perfect customer with a perfect credit score, if this bank doesn’t have any promotions going on then nothing can be done.

At least now I finally understood what the first two banks were talking about when they mentioned what was or wasn’t “available” to offer to me. Another thing to note about promotions – they are available for only a limited amount of time. This means that after six months my rates will go back up and all I can do is call again and see if a new promotion is available. I didn’t like hearing this, but since credit card rates are always variable, it didn’t come as a huge surprise.

I was getting ready to thank the woman and hang up when she gave me even better news. She told me I could transfer any outstanding balances on other cards to this card that I already had at 0% interest. That’s right, a balance transfer without having to open a new card! That meant no credit check, no opening a new line of credit – just putting the balance on the card I already had. Plus, the interest rate on the balance transfer would be good until November 2013. That’s a year and a half! I haven’t even seen that long of a 0% interest rate on new cards – much less an already existing one. What about fees? The one-time balance transfer fee would be equal to what I was already paying in interest for one month on my other cards! Now, I not only got an instantly lower APR on purchases, but I was able to consolidate my debt onto this one card without having to open any new lines of credit. The whole thing was done over the phone in five minutes. Home run!

Asking Regional Banks for Lower Interest Rates

Needless to say, I was flying high by now, but my research wasn’t finished. I needed to see if I felt any different when dealing with smaller banks. Planning to contact regional banks in the San Francisco Bay Area, I found that most didn’t offer credit cards – just home mortgages and other secured loans. I was able to find local credit unions that offered credit cards along with personal banking, so that’s who I reached out to.

Small Bank #1

I explained to the first small bank that I was new to the area and looking for a place that I could open a bank account and a credit card. I even told them about my previous experiences trying to lower interest rates with the bigger banks. The person I spoke with was extremely friendly and said someone would have to apply for a credit card to get a lower interest rate than their existing rate. No thank you. If I want a lower rate and I’m a good customer, why should I have to open a  new card and take the hit on my credit score?

He then told me about a product they offer that essentially pre-approves their customers on lines of credit. Every quarter, credit scores come out again, this bank sees them, and can offer more credit to customers with a high score. So if I were a customer, and my new credit score came out and proved to be high, this bank could automatically offer me the new card with a lower interest rate without pulling my credit report. I don’t consider this a perfect solution because I’d still never want a new credit card but at least I could get a lower rate more easily. However, he said the same thing as the others: if what I have is the lowest possible rate they can offer, then there’s nothing I can do.

Small Bank #2

Finally, I seemed to have a handle on all of this, so my call to the last bank was just to round out my research. As suspected, this credit union said the only way to lower an interest rate is to apply for a new card. She didn’t say anything about pre-approval though, which means I could not do this without my credit score taking a hit. This credit union also had a pretty high starting rate, so I didn’t see much reason to entertain the conversation any further.

I wanted to call a few more and see if this was the same all around but then I realized something else to consider. I work during the day, as many people do, and had to make these calls during the evenings and on Saturday afternoon. All of the big banks were available all the time (the last one I spoke to was just before 11pm on a Thursday) but only a few of the smaller banks had a customer service line that was open after hours. So there was that convenience factor again. At noon on a Saturday, all the other smaller banks’ customer service lines were closed.

Conclusion

All in all, I started out feeling optimistic, then freaked out before my first call, then ended up extremely happy with the results! I can now say that, although there’s no guarantee that you’ll get what you’re going for when making these calls, it’s worth the effort. I wish I had done this months ago and am kicking myself now! The only thing that gave me the guts to make the calls in the first place was the fact that I needed to do the research for this article. Otherwise, I know I never would have done it.

So don’t make the same complacent mistakes that I would have made – make the calls!  The absolute worst thing they can tell you is no – and it turns out that’s not such a big deal. In fact, every bank who told me no also told me to try calling again in a few months.  And besides, at the end of the day, if you have a positive result, then it’s worth its weight in gold!

What do you think of my experience? Have you ever tried to lower your interest rate before? If so, leave a comment below and tell us what happened!

May is here! That means flowers are blooming, summer is coming, and Mother’s Day is less than a week away!  Have you thought about what you’re going to do for your mom? There’s still plenty of time left to do something thoughtful for mom and we’ve rounded up some creative – and cost-effective – ways to celebrate Mother’s Day this year. Try something new and she won’t forget it!

1o Mother’s Day Gift Ideas That Won’t Blow Your Budget  [PT Money]
Moms love sweet, thoughtful gifts from the heart, and Phillip Taylor has some creative, frugal ideas on how to make your mom feel loved and appreciated on her special day.

13 Mother Daughter Dates for Mother’s Day [Tres Sugar]
From grabbing ice cream sundaes like old times to taking walking tours, I’m loving these great ideas on how I can spend time with my mom doing something she’d love on  Mother’s day.

Top 10 Mother’s Day Gift Ideas [Ask Men]
And while we’re talking  about  mother-daughter gift ideas,  this article is for all the sons out there who are stumped on what to do for their moms on Mother’s Day.

Great Mother’s Day Ideas for Dad [Parents Magazine]
We’ve covered gift ideas for daughters and sons, but we can’t forget about the  fathers! This article even includes some suggestions from moms on what they’d like to receive for Mother’s Day from their husbands and kids.

10 Gifts for Mom That Help Women in Need [ Huffington Post]
Make your mom feel special AND help women in need out at the same time? Yes please! The purchase of each of the gifts suggested in this article contributes towards having a positive impact on women around the world.

So tell us, what are you planning to do for mom this Mother’s Day and which of these ideas do you like best?

So I figured, “What the heck, why not do an update every month until I’m entirely debt free?”

This is my update for April and May, which means I have two month’s worth of progress to report. As Kramer would say, “Giddyup!”

The Incredible Shrinking Credit Card Balance

If you’ve been reading the challenge updates all along, then you know exactly how far I’ve come. But in case you haven’t (or you’ve forgotten), I wanted to show the progress since January, as the balance on my credit card has been slowly paid down. Here is the amount of my total balance for each month since the beginning of the challenge:

January: $3199
February: $2716
March: $2361
April: $1881
May:

I’m intentionally leaving the amount for May blank for a moment, because before I reveal my current balance I want to describe all the efforts I’ve made over the past month, including…

Becoming a Budget Ninja

I used to be hopeless when it came to budgeting. It’s not that I was engaged in excessive spending; on the contrary, I’ve always tried to be frugal. But my strategy was simply to not buy anything I didn’t need rather than actually track my monthly expenses. If I spent more than my income in a given month, I’d just put the difference on my credit card and hope to pay it off the next month.

The problem was that certain expenses ended up slipping through the cracks. When I finally got serious about tracking my monthly budget (using this great spreadsheet created by Azra), I realized that these little “necessities” added up to a big percentage of my spending. Things like eating lunch out instead of bringing something from home were impacting my budget negatively.

So for the last couple months I have been dedicated to becoming a black belt in budgeting. It’s really helped me identify ways to save money. For example, these days when I go to the grocery store I’m more aware of price differences, and I notice how cheap something like oatmeal is (one of my breakfast favorites). I’ve also been paying more attention to how often I eat out and making a concerted effort to bring lunches from home.

And I think I’m starting to see some progress. I previously wrote about my budget for February. Here’s what my budget looked like for March:

Not great. But not terrible. While I went over budget by $226, the amount I spent on travel was $303. My March travel spending included a staff retreat where a friendly game of poker caused me to lose some serious money (okay, maybe it was only $10) to this guy.

Without the travel spending, I would’ve been under budget. As they say, though, “almost doesn’t count.” So let’s move on and see how I did with my April budget:

I spent $542 less in April than I did in May! How awesome is that? This is officially the first time I’ve spent less than I budgeted, by a whopping $316, and I’m pretty darn proud of myself for that. I think it’s clear by now that the three main categories that cause the most variation from month to month (at least for me) are Travel, Eating Out, and Miscellaneous.

Since I had no costs associated with Travel or Miscellaneous in April, and since my Eating Out expenses were at an all-time low, I was able to save quite a bit of money.

And take a wild guess what I did with that extra money?

Yep, I paid down my balance. But I’m not quite ready to disclose where my current balance is. First, I want to share my experience with…

Renting My Car For Fun and Profit

Well, maybe not so much for fun… but definitely for profit. Have you heard of a company called Getaround? We’ve mentioned it before on the blog, and we linked to them in our Zero Debt Action Plan.

I’ve been wanting to make some extra money on the side to help pay off my credit card, and since I didn’t have much luck making extra money on eBay, I was curious to try something else.

That’s when I decided to try Getaround. In order to list your car on their website, you have to have a car with less than 150,000 miles that you’re willing to rent to strangers. My car has slightly less than 150k miles and although I was a little wary of renting my car to people I had never met before, I decided to give it a try.

The sign-up process was very smooth, and I created a profile for my car, with pictures and everything:

Pretty cool, right?

The beauty of this program is you can make your car available only when you don’t need it. For me, I take public transportation to work, so I usually only need my car on the weekends. I listed my car’s availability like this:

Once I created my profile, I waited. And for a few days I didn’t hear anything. Then I started getting some bites. My first rental went pretty well – the person came by to pick up the car in the morning and brought it back the next morning. When I got it back, I carefully checked all over the car for any signs of damage or reckless driving, but thankfully didn’t find any. That helped me feel a little more confident about future rentals. (Plus, Getaround provides insurance in case anything should go wrong)

All told now, I’ve rented it four times, and my earnings so far are:

Not too bad, right? That’s another $96 I’ve put toward my credit card debt, so it will likely save me a few bucks in interest charges as well.

I am going to continue being cautious about renting my car out, but as long as I feel comfortable with the people I’m renting to, it’s a convenient way to make some extra money to pay off my balance quicker. Speaking of…

My Current Credit Card Balance

So what’s my balance now? I’m sure you’re on the edge of your seat waiting to find out, so I won’t drag out the suspense much longer. Here’s a summary of changes to my balance over the last month and half:

$1881 (April Balance)
- $488 (April Payment)
- $316 (Extra Payment due to spending less)
- $96 (Extra Payment due to renting out car)
——
$981 (Current balance)

Get your own snapshot – click here!

So there it is, $981 – I’m finally in the triple digits!

Also, I feel like I should say thanks to USAA for an awesomely low 6.9% interest rate! That’s been a big help in getting closer to debt free. (If you want to get your own interest rates lowered, try these tips)

That’s it for my latest update. So what do you think? Am I doing well? Am I missing anything? Is it wise to rent my car out… or is it foolish? I look forward to reading your comments below!

Image 1 by Alan Cleaver

Are you struggling with debt? If so, this blog post is for you. We want to help you understand all the different ways to get out of debt.

Believe it or not, there are many unreliable and even predatory companies out there that will take advantage of you if you’re not careful, so you must do your research and understand how these options work and decide which get-out-of-debt method is right for you.

Below, you’ll find concise explanations of the five major ways that Americans get out of debt:

• Debt Consolidation
• Debt Management
• Debt Settlement
• Bankruptcy
• “Do It Yourself”

We’ve found that using traditional methods to search for information about these programs doesn’t work. For example, if you use a search engine like Google to look up information about debt settlement or debt consolidation, you’ll likely come across many unsavory companies trying to lure you into their clutches before you stumble upon any reliable explanation of how the process works.

Because of that, you can end up making a decision that puts your financial situation at greater risk.

So before you get caught up in paying thousands of dollars to a company that’s not trustworthy, read through the information below and learn what you need to know about the most common ways to get out of debt.

What Is Debt Consolidation and How Does It Work?

Of all the options available to people who need debt help, debt consolidation is one of the most mild, least drastic options. That’s because, unlike other methods we’ll describe below, you don’t have to negotiate with your creditors in order to do debt consolidation.

Debt consolidation entails taking out a new loan (called a debt consolidation loan) to pay off your existing debts. The term “consolidate” means to group several things together into one, which makes sense, since debt consolidation groups all your existing debts into a new loan. This helps to streamline your payments – you’ll pay just one bill every month instead of many.

It can also allow you to get a lower interest rate and lower monthly payments than what you’re currently paying.

Here is what to expect if you choose to get a debt consolidation loan:

1. You contact a bank or peer-to-peer lender. First, you do some research to identify which company you want to work with. (If you need help with this, read How to Find a Reputable Debt Consolidation Company or learn about specific debt consolidation programs)  After you get in touch with a lender and verify that their terms and interest rates are good, you’ll need to allow them to check your credit score. If it is above 660, you should be able to get a consolidation loan.
2. You work with the lender to set terms for your new loan. Since the bank or peer-to-peer lender who is offering the debt consolidation loan will be your new (and only) creditor, you need to work with them to ensure the interest rate and monthly payments are going to work for you. As always, read the fine print. And don’t forget to calculate the total cost of the loan (including all the interest you will pay).
3. Your debts are transferred to the new lender. Once this happens, you no longer owe your previous creditors anything. You now owe the new lender the total amount of your balance.

The Bottom Line:

If you  want a different repayment plan than what you’ve currently got – one that works better for you (with lower interest rates, etc.) then debt consolidation is a good option.

As always, make sure you work with a company that you trust and don’t sign up for a repayment plan that is unrealistic because you don’t want to end up making late payments or getting swallowed up by debt again if you’re not able to stick to your plan.

For more details about debt consolidation, check out these blog posts:

• How Does Debt Consolidation Work?
• Does Debt Consolidation Hurt Your Credit?
• Is Debt Consolidation a Good Idea?

What Is Debt Management and How Does it Work?

Of course, debt consolidation is not the only way to get out of debt. Another common method is debt management. These two terms are often mixed up, because many companies advertise both debt management and debt consolidation.

In reality, debt consolidation only refers to getting a new loan that pays off your old debts and gives you one payment.

On the other hand, a debt management plan (DMP) is a program offered by companies or non-profit groups that helps you negotiate a new payment plan with your current creditors. So unlike debt consolidation, you still have the same debts (with the same balances) but you negotiate for lower interest rates and, if necessary, lower monthly payments.

People usually go to a “credit counseling” non-profit organization to get help starting a debt management plan. (There are also for-profit companies that do debt management) If you decide to do debt management, it’s best to use a certified credit counselor.

Here are the steps you can expect to go through if you do a DMP:

1. You make an appointment with a credit counselor. At this meeting, you will go over your entire financial picture and the credit counselor will try to give you practical ways of improving your monthly budgeting so that you’ll have money leftover to pay off your debt.
2. They help you make a plan for paying it off. Based on the number of accounts you owe, and your ability to make monthly payments, they will create a debt management plan that’s tailored to your situation. To do this, they will communicate with your creditors and ask them to lower your interest rates and your monthly payments.
3. Your credit cards are canceled and you begin the plan. Depending on which organization you work with, you may be asked to use a direct deposit program to pay your monthly amount. Since your credit cards will be canceled, you’ll need to be prepared to for life without credit – and your credit score may be temporarily hurt because the canceled cards will increase your rate of credit utilization.
4. The DMP usually takes 3 to 6 years to complete. Of course, the timeline depends on your total debt and how much income you’re directing toward getting out of debt. If you finish the DMP, you should have no remaining debt obligations, and, although your credit score may be lower, it will better than if you had gone through bankruptcy or debt settlement.

The Bottom Line:

You should only do debt management if you are having trouble paying your current bills and need a reduction in monthly payments in order to be able to do so. If you need help learning to manage your money and want to enroll in a credit counseling program, you can always get credit counseling – whether or not you decide to do debt management. Either way, the first step is to start by contacting a credit counselor from among the ones recommended by the Department of Justice or by using the National Foundation for Credit Counseling website.

if you want to do a debt management plan with a credit counselor, ask them these important questions before you begin.

And if you enroll in the debt management plan, make sure you pay on time every month and keep tracking your statements from all of your creditors to ensure things are going according to plan – otherwise, your DMP and your finances could be jeopardized.

What Is Debt Settlement and How Does It Work?

Debt settlement is a more drastic option than either debt consolidation or debt management. With debt settlement, you are telling your creditors “Sorry, I can’t pay the entire amount I owe, but I can pay a fraction of it to you right now if you’ll cancel the debt.”

As you can imagine, doing debt settlement will hurt your credit score pretty significantly. It’s not something you should do before considering other options. However, for some people, it will be the best option.

While there are many debt settlement companies out there, it’s worth pointing out that you can attempt to negotiate settlements on your own. We’ll describe the pros and cons of this below.

But first, here are the steps you can expect to go through if you use a debt settlement company:

1. You contact the debt settlement company. They will ask you for the details of your situation, including the amount of debt you owe and the different types of debt you have, as well as the amount of income and savings you have that can be used to pay off debt.
2. They ask you to sign a contract. If you agree, you will have to begin paying them each month instead of paying your creditors. The money you pay will be held in an “escrow” account, which means it will not be given to your creditors immediately. Instead, the debt settlement company waits until you have accumulated enough money in your escrow account to make a lump sum offer to settle your debts. Sometimes this can take months.
3. The company attempts to negotiate with your creditors. Once you have enough money in the escrow account, the company will begin to contact each of your creditors (the banks and credit card companies that you owe money to) and attempt to negotiate a settlement where you pay some percentage of your outstanding balance as a lump sum in return for having the debt canceled.
4. If it works, your debt is reduced. Assuming you’re working with a legitimate debt settlement company, they might be able to negotiate lower balances on some or all of your debts. For example, if you owed $5,000 on your Bank of America credit card, it might be settled for $3,000. That’s the potential positive impact of debt settlement.
5. If it doesn’t work, you’ll be in worse shape. Why? Because you will potentially lose two things you can’t afford: time and money. If the settlement offers are not accepted by your creditors (or very few of them) you will be months or years behind on your payments. Legally, the company must give you back the money in the escrow account if they fail to settle any of your debts. However, if they settle some of your debts they will be able to take a fee (which can be a flat fee or a percentage) from that escrow account.

The Bottom Line:

You should always read the fine print before signing up for a debt settlement program. Be sure to ask about their fees and their timeline for settling your debts. And read these excellent recommendations from the FTC prior to enrolling in any debt settlement program.

One of the hardest parts of the debt settlement process is that you will be contacted constantly by your creditors during the months/years you are accumulating money in the escrow account. An insightful Wall Street Journal article in 2010 discussed some of the psychological impacts of debt settlement and how to cope with them.

Most importantly, keep in mind that some of your creditors may have rules against working with debt settlement companies – and in fact, a lot of evidence suggests you may have more success negotiating settlements on your own. So think about tackling settlement on your own, and if you do, utilize the practical tips in this article. And remember, you must be sure to get written confirmation of any settlement agreement before paying your creditors a lump sum.

What Is Bankruptcy and How Does It Work?

Most people are familiar with bankruptcy and view it as the most drastic of all possible ways to get out of debt. It’s true that bankruptcy is in some ways more drastic than the options mentioned above, but there is no reason to be scared or embarrassed about bankruptcy if that is truly the best option for you. It is much better to go through bankruptcy than to do nothing or to try a debt reduction method that is not appropriate for you and have it fail. However, there are some nuances that you need to understand before making a proper decision about bankruptcy.

There are actually two types of bankruptcies for individuals:

• Chapter 7 Bankruptcy: The most common form of bankruptcy, also known as the “liquidation bankruptcy.” Although many people mistakenly believe you have to lose all your assets in a Chapter 7 bankruptcy, the reality is that you get to keep any assets that are covered by the exemption law in your state. Every state has its own law regarding which assets are exempted, and the majority of people who file for Chapter 7 are able to keep all of their property. Any unprotected assets you may have (such as money in your checking account) will be liquidated by the bankruptcy trustee in order to pay back your creditors.

• Chapter 13 Bankruptcy: Also known as a “reorganization bankruptcy.” You file a “repayment proposal” that outlines how you will pay off some of your debts over a period of 3-5 years. According to the U.S. Courts website, “Chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a Chapter 13 trustee who then distributes payments to creditors.” To be eligible for this type of bankruptcy, you must have less than $365,475 in unsecured debt (such as credit cards and medical bills) and less than $1,081,400 in secured debt (such as auto or home loans). The bankruptcy trustee will be in charge of your repayment plan, and your payments go to them. How much you need to pay each month will depend on factors like your income, expenses, kinds of debt, etc. In some cases, Chapter 13 can help people save their car or home by giving them 3-5 years to get caught up on their payments toward those debts.

The Bottom Line:

The most obvious impact of going through bankruptcy is that your credit will be hurt. But this may be a small prices to pay for being debt free, especially if you’ve evaluated all your options and can see that this is the best one for you. Even if you go through a bankruptcy, you will still be able to rebuild your credit and borrow money in the future. It’s important to research all the options, but don’t hesitate to talk to a bankruptcy lawyer if you’re thinking about filing for bankruptcy. That person can help you navigate this decision and explain how the process works. You can visit the National Association of Consumer Bankruptcy Attorneys’ (NACBA) website for a bankruptcy attorney near you. As always, it’s a good idea to know exactly what you’re getting into before you make any commitments or any decisions.

If you want a more detailed description of the bankruptcy process, you can read our previous article, Basics of Bankruptcy: How to Know When It Is Your Best Option.

What Is “Do It Yourself” Debt Reduction?

The phrase “do it yourself” is pretty self-explanatory. But can anyone really get out of debt on their own?

Yes! In fact, people do it quite frequently. The key is to inform yourself so you can take the specific actions necessary to improve your situation.

Here are steps you can take if you decide to get out of debt on your own:

1. Reduce your interest rates. Sometimes just getting some breathing room is the most urgent thing. If that’s the case, you can often call your credit card companies and ask them to lower your interest rates. See our blog post on how to lower your interest rate with a simple phone call.
2. Inquire about hardship programs. Most people don’t realize it, but credit card companies and other creditors (including health care companies) usually have something called a “hardship program” for people who are in danger of drowning in debt. Use these tips to find out about hardship programs. You should know that although inquiring about a hardship program will not hurt your credit score, if you mention that you can’t pay your bills then any available credit you have with that institution may be cut or eliminated.
3. Fix your budget. In order to get out of debt on your own, you’ll need to make your money go further. That means becoming a dedicated budget enthusiast! Try using this handy budget spreadsheet to track where your money goes each month, and then squeeze every last penny you’ve got into your debt repayment.
2. Use free online tools to manage your debt. There are a lot of great free tools online that can help you with this process. One of these is ReadyForZero, which helps you visualize your debts all in one place and gives you an automatic plan for how to pay them off. This can really help motivate you to get out of debt.

The Bottom Line:

Doing debt reduction on your own is not something that will work for everyone. That’s why it’s a good thing that other options exist. But if you’re not ready for debt settlement, debt management, debt consolidation, or bankruptcy, it could be a perfect option for you. If you’re interested in how this has worked for people in the past, check out these stories of people who have had success getting out of debt.

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It can be hard to navigate through all these different ways to get out of debt and find the best one for your unique situation. So we hope the information above is helpful. Also remember that if you’re finding it hard to stop spending money even though you know it’s necessary, there are groups that can help you face the psychological challenges of controlling your spending behavior. One group that many people find helpful is Debtors Anonymous, which is free to attend and has meetings throughout the U.S.

And no matter which path you choose to take, we want to help. We’re always here to answer your questions. Just post a comment below or e-mail us at ask@readyforzero.com. Also, if you have had experience with any of these programs (good or bad) please leave a comment below and tell us about it.

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