## Which Student Loan Should You Pay First?

This post may contain affiliate links. Please read my disclosure for more information.

The financial camps are divided between paying off your smallest first vs. your highest interest student loan. So who’s right?

Finance people can agree on a few things. Some debts like payday loans and IRS back taxes are worse than others and ideally, you should get rid of all debt that keeps you from having a positive net worth.

But how do you decide what goes first? This is something I stressed over when we started out. I had a large high-interest student and a small low-interest car loan while my husband had a moderate student loan with moderate interest. A total conundrum.

Also read: Is Being Debt Free Worth it?

So if you’re struggling to figure out where to start here’s a look at my theoretical friend and her theoretical \$60,000 of student loan debt. She took out federal and private loans and doesn’t have a career that qualifies her for any student loan forgiveness. (Or this could be a couple’s student loans combined, however you want to look at it.)

Her theoretical student loans are:

a. \$20,000 @ 4% interest with minimum payment of \$150 p/m
b. \$40,000 @ 6.5% interest with minimum payment of \$300 p/m

I wanted to keep monthly payments as similar as possible so I adjusted the number of months for payment of the first loan accordingly keeping the total repayment for both at 36 months.

## Pay off the Smallest Loan First

a. \$1574.60 per month for 13 months. Total interest paid= \$469.77
+\$300 p/m for the minimum payment of other loan= \$1874.60 total monthly payment for first 13 months.

b. After 13 months of minimum payments, the balance is now \$38,879.74 with \$2,780.72 of interest paid during this time.
The new monthly payment becomes \$1,802.44 for 23 months and we end with \$2,577.18 more in interest paid.

Total interest paid over 36 months: \$5,827.67

## Pay off the Highest Interest Loan First

b. \$1653.49 per month for 26 months. Total interest paid= \$1,803.49
+\$150 p/m for the minimum payment of other loan= \$1,803.49 total monthly payment for first 26 months.

a. After 26 months of minimum payments, the balance is now \$17,763.60 with \$1,641.55 of interest paid during this time.
The new monthly payment becomes \$1,809.03 for 10 months and we end with \$327.28 more in interest paid.

Total interest paid over 36 months: \$4,959.65

Difference= \$868.02 saved by tackling higher interest loan first.

To compare, I calculated paying both at the same time.
Monthly Payment= \$1,816.44 for 36 months
Total Interest Paid= \$5,391.83 Less than option 1, more than option 2

I then further calculated to see what the difference would be if my friend paid off her loans in 5 or 10 years:

5 years= \$9,058.59 in interest paid (There’s that car she just financed)

10 years= \$18,801.86 in interest paid (There’s that down payment on a house she said she couldn’t afford!)

The moral of the story is that if \$800 keeps you up at night you should pay off higher interest loans first, especially if they’re big behemoths.

### But if \$18,000 keeps you up at night you need to get out of bed and start hustling.

Paying \$1800 a month on student loans looks like a big number but maybe your loan is smaller, maybe you have the means to move in with more roommates or cut the cable and eating out.

Also Read: How to Make Paying off Debt not Suck

### If you have smaller loans within your student loan pay those off in order of smallest to largest or break it down into milestones. Rewarding yourself with attainable benchmarks will help keep you motivated.

Whatever it is it’s time to start looking into the future and think about what you want to be doing with your money instead of giving it to the bank. Because the one thing everyone in the world can agree on is that it’s not fun to give away your money to banks when you don’t have to.

<img data-attachment-id="1309" data-permalink="https://www.modernfrugality.com/smallest-amount-or-highest-interest-student-loan/which-loan-first/" data-orig-file="https://i1.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/Which-Loan-First-e1501605428219.png?fit=400%2C693&ssl=1" data-orig-size="400,693" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="Which debt should I pay off first?" data-image-description="

Which debt should I pay off first?

” data-medium-file=”https://i1.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/Which-Loan-First-e1501605428219.png?fit=173%2C300&ssl=1″ data-large-file=”https://i1.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/Which-Loan-First-e1501605428219.png?fit=346%2C600&ssl=1″ loading=”lazy” data-pin-description=”If you are in the midst of paying off a ton of student loans, read this. All of the inoformation on the debt snowball and the debt avalanche so you can decide which way works for you! #debtpayofftips #debtsnowballtips #debtavalanchetips #moneytipsformillennials” data-pin-title=”Should you go debt snowball or debt avalanche for student loans?” class=”aligncenter size-full wp-image-1309 jetpack-lazy-image” src=”https://illianahummerclub.com/wp-content/uploads/2021/01/which-student-loan-should-you-pay-first.png” alt=”Choosing which debt to pay off first was so stressful! This article really put it into perspective.” width=”400″ height=”693″ data-recalc-dims=”1″ srcset=”data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7″>

<img data-attachment-id="1309" data-permalink="https://www.modernfrugality.com/smallest-amount-or-highest-interest-student-loan/which-loan-first/" data-orig-file="https://i1.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/Which-Loan-First-e1501605428219.png?fit=400%2C693&ssl=1" data-orig-size="400,693" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="Which debt should I pay off first?" data-image-description="

Which debt should I pay off first?

” data-medium-file=”https://i1.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/Which-Loan-First-e1501605428219.png?fit=173%2C300&ssl=1″ data-large-file=”https://i1.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/Which-Loan-First-e1501605428219.png?fit=346%2C600&ssl=1″ loading=”lazy” data-pin-description=”If you are in the midst of paying off a ton of student loans, read this. All of the inoformation on the debt snowball and the debt avalanche so you can decide which way works for you! #debtpayofftips #debtsnowballtips #debtavalanchetips #moneytipsformillennials” data-pin-title=”Should you go debt snowball or debt avalanche for student loans?” class=”aligncenter size-full wp-image-1309″ src=”https://illianahummerclub.com/wp-content/uploads/2021/01/which-student-loan-should-you-pay-first.png” alt=”Choosing which debt to pay off first was so stressful! This article really put it into perspective.” width=”400″ height=”693″ data-recalc-dims=”1″>

Jen Smith is a personal finance expert, founder of Modern Frugality and co-host of the Frugal Friends Podcast. Her work has been featured in the Wall Street Journal, Lifehacker, Money Magazine, U.S. News and World Report, Business Insider, and more. She’s passionate about helping people gain control of their spending.

Source: modernfrugality.com

## A Debt Consolidation Loan Will Not Fix Your Bad Money Habits

This page may include affiliate links. Please see the disclosure page for more information.

If you have a lot of debt or different types of debt, then a debt consolidation loan might sound like a good idea. However, if you have low credit, you may not have many options.

The good news is, you can still get a debt consolidation loan, even with bad credit. In this article, you will learn about the ins and outs of a debt consolidation loan, the pros and cons of getting one, and what your alternatives are if you aren’t ready to get a debt consolidation loan.

In This Article

## What is a Debt Consolidation Loan?

A debt consolidation loan is a new loan that you take out to cover the balance of your other loans. A debt consolidation loan is a single, larger piece of debt, usually with better payoff terms than your original, smaller debts. When you receive a consolidation loan, your other loan balances are paid off. This allows you to make one monthly payment rather than multiple.

For example, if you had one student loan for each semester of your four-year college degree, then you’d have taken out eight loans. This can be cumbersome to manage, so you could take out a debt consolidation loan to pay off all your eight loans and only make one monthly payment instead.

## Get A Debt Consolidation Loan with Bad or Average Credit

If you have poor or average credit, then it might be difficult for you to get approved for a consolidation loan or to get a loan with favorable terms. A bad or average credit score is typically anything under 670. You will need to take steps to get a debt consolidation loan for bad credit.

Step 1: Understand Your Credit Score

The first step toward getting a personal loan or a consolidation loan is to understand your financial standing. Your credit score is one of the main factors that a lender will evaluate when deciding to give you a debt consolidation loan. Therefore, take the time to look up your credit score and what events have caused your score. Sometimes, years of bad habits contribute to a low score.

Continue to monitor your score over time. You can learn what contributes to a good score as well as what causes your score to decline, and act accordingly.

Step 2: Shop Around for a Debt Consolidation Loan

If you have a poor credit score, you might be inclined to take the first loan offered to you. However, you may have multiple options for lenders to work with, so be sure to shop around for a good interest rate and term. You might want to investigate online lenders as well as brick and mortar lenders such as your local credit union.

Be sure to carefully review all the fees associated with taking out a personal loan. This might include an origination fee or a penalty for paying back your loan early. Understanding your fees can save you hundreds of dollars over the life of your loan.

Step 3: Consider a Secured Loan

Most personal loans used for debt consolidation are unsecured loans. This means that they do not require collateral. However, if you’re having a tough time getting approved for a loan, you might want to consider a secured loan.

Forms of collateral include a vehicle, home, or another asset. The collateral must be worth the amount of the loan if you default on the loan. Even if you can qualify for an unsecured loan, you may want to compare the interest rates of a secured loan to see if you can get a better rate.

Step 4: Improve Your Credit Score

Finally, if you can’t get a loan right away, you may want to take some time to evaluate your credit score and see where your areas of opportunity lie. If you have small glitches on your score that caused it to decrease significantly, then you might be able to raise your score quickly.

For example, one missed payment or forgotten bill can cause your score to plummet. If this is the case, you may be able to pay off that small bill and raise your credit score quickly.

## How to Qualify for a Debt Consolidation Loan

To get a debt consolidation loan, you must be 18 years or older and a legal U.S. resident. You must also have a bank account and not be in bankruptcy or foreclosure. These are the basics of qualifying for a debt consolidation loan.

In addition to these basics, you’ll want to try to improve your financial standing as much as possible. Borrowers with good or excellent credit and a low debt-to-income ratio typically have no problem getting a debt consolidation loan. However, if you have bad credit, you will want to work to improve your credit score and decrease your debt-to-income ratio.

If you have bad credit and are considering a debt consolidation loan, you might already be in a financial rut. This can make it difficult to improve your financial standing. If this is the case, you can search for lenders that specialize in helping people with bad or average credit and be sure to shop around for the best rates and terms that you can get.

## Personal Loans for Debt Consolidation

If you have poor credit and need a personal loan, you may want to check out these providers. They will offer high-interest loans to people with poor credit.

Fiona

Fiona is an online marketplace that connects potential borrowers with multiple lenders. Borrowers simply fill out a quick application, and they are matched with the lenders most likely to approve them. This saves time and money, as you can be matched with a lender without needing to visit a bunch of sites.

Fiona is ideal for borrowers with a 580 credit score or higher, and that doesn’t want to have to waste time filling out a bunch of applications. A nice feature of Fiona is their initial application requires just a soft credit check, so making a quick application won’t hurt your credit score.

Since Fiona is a marketplace and not a direct lender, the terms of offers and the number of offers borrowers receive may vary. Some borrowers report being bombarded with offers, which we feel is potentially a benefit as multiple offers help ensure you get the best deal.

LendingPoint

Lending Point will typically lend up to \$25,000 with an interest rate of 15.89% to 35.99% APR and a 36-month term. You can check your rate for free on their website. If you qualify, you can receive your personal loan in as little as 24 hours. LendingPoint takes your credit score, job history, and income into consideration when you apply for a loan.

SoFi

SoFi will lend up to \$100,000 with an interest rate of up to 17% on a 24-month term. There are no origination fees or early payment penalties and no overdraft fees. You can apply online for free and will typically receive your funds in a few days.

Upstart

Upstart will lend up to \$50,000 with an interest rate of 7% to 35.99% on a 36 or 60-month term. Funds are provided as early as the day after approval, but they have a high origination fee of 8%.

OneMain Financial

OneMain will lend up to \$20,000 with an interest rate of between 18% and 35.99% on a 24 to 60-month term. They do have small origination fees and late payment fees, but they typically range up to \$30 per payment. You can apply for a loan online and have it funded as early as a day after you apply. The company also has almost 1,500 branches across the country for those who prefer to apply for a loan in-person.

## Should I Get A Debt Consolidation Loan?

If you’re in a pinch and need to consolidate your loans to make them more manageable, then your best option may be to get a personal loan or a debt consolidation loan.

### Pros

There are plenty of benefits of a debt consolidation loan. Some of them are:

• Simplified finances. When you consolidate your debt, you will pay off multiple debts and only have one loan. This means you’ll make one monthly payment instead of multiple to keep track of.
• Lower interest rates. If you have a bunch of credit cards or other high-interest debt, the interest rates might vary and be high. Personal loans typically have lower interest rates depending on your credit score, the loan amount, and term length.
• Fixed repayment schedule. Instead of having multiple payments each month that vary by amount, interest rate, and term, you will have a fixed schedule each month.
• Boost your credit. By eliminating the risk of forgetting to make payments or letting your loans get away from you, paying a set amount on a consolidated loan can help you to boost your credit score.

### Cons

Debt consolidation isn’t for everyone. Be sure that you understand the risks you take on as well. Some of the things to watch out for include:

• You need to change your behavior with money. A debt consolidation loan won’t fix your bad habits with money. Often taking out a consolidation loan leads to more debt, because many people don’t fix the underlying overspending behaviors, or start a cash saving for emergencies. Not fixing your money behaviors leads to that same old cycle and could cause you to take on more new debt.
• Upfront costs. Some personal loans have upfront fees, including an origination fee, closing costs, or annual fees. If you pay a lot of fees over time, it might not be beneficial to consolidate your loans.
• Higher interest rates. If you have poor credit, you will not get a favorable interest rate on your consolidated loan. Therefore, you may have a higher interest rate on your consolidated loan than on your existing loans. If this is the case, it likely will not make sense to consolidate.

## The Bottom Line

Having poor credit does not mean that you can’t get a debt consolidation loan. However, it might be more difficult for you to get a loan right away or to get one at a favorable rate. If you decide to apply for a debt consolidation loan, be sure to shop around for the best rates and do your best to improve your credit.

This post originally appeared on Your Money Geek

Source: debtdiscipline.com

## How to Manage Your Debt Effectively

Love it or hate it, debt is an integral part of modern life in the United States. And, when you think about it, debt in itself really isn’t a bad thing. Neither are credit cards or loans.

They only become a potentially negative thing when they’re misused or mismanaged. And once they get out of control, they can head down a long spiral and bring you down with them.

The wise use of debt — whether it’s revolving (like credit cards and lines of credit) or fixed (like a secured car loan or mortgage) — is like the skillful use of the right tool at the right time for the right purpose.

So, it’s important to realize that avoiding debt isn’t really the answer. In fact, trying to go through life without incurring any debt or using credit can be unnecessarily difficult and troublesome. It can even impact non-credit-related situations like renting an apartment. The skill Americans truly need to focus on developing is how to manage debt effectively.

Following are 7 tips to help you manage your debt more effectively:

## 1. Think Before You Sign

Banks, retailers, and many other organizations make credit very easy to obtain if you have a good credit score.

Nearly every department store or specialty shop has its own credit card that you can sign up for instantly while you’re making a purchase, and it often comes with the enticement of an immediate discount off your purchase.

Even if your credit score isn’t very good, there are many lenders who are willing to offer credit at high interest rates, from 25% APR credit cards to 33% payday loans.

The point to keep in mind is that lenders and retailers want you to spend money with them. They’re not concerned in the least with what more debt is going to do to your budget, your lifestyle, or your future.

So, the first tip is simple:

## 2. Avoid Applying for Credit Impulsively

Don’t sign up for additional credit as an impulse buy or based on desperation. It’s always going to be a bad idea under those circumstances.

However, if you frequent a certain store and routinely spend money there anyway, and you’re confident you can be responsible with a new credit line, it may be beneficial to sign up. The point is, that needs to be a conscious decision, not a second thought for the sake of a one-time 15% discount.

## 3. Educate Yourself About Your Credit Score

Your credit score is a 3-digit number calculated by credit reporting agencies based on a number of factors, many of which the average American couldn’t even name. While it may seem somewhat arbitrary, that doesn’t change the fact that that 3-digit number can determine:

• Whether you qualify for a 0% introductory interest rate or have to settle for a rate that fluctuates at “prime plus 23%”.
• Whether you’re considered financially trustworthy or not, and therefore whether a landlord will rent to you or certain employers will hire you.
• Whether or not you can afford to buy your own house one day.
• And much more…

There are numerous situations that are partially or fully out of your control that can result in damage to your credit score. However, much of the damage done could be avoided if consumers simply understood the basic factors that affect their credit score. Then, they could actively work to improve a bad score or maintain a good one.

So, our second tip is: Seek out reliable information about managing debt effectively and educate yourself, so you’re equipped to take strategic action.

## 4. Assess Your Current Debt Situation

As you learn more about managing debt and understanding your credit score, you’ll begin learning terms like credit utilization ratio and debt-to-income (DTI) ratio. These simple calculations have a huge impact on your score, and on how willing lenders may be to offer you favorable terms or to offer any credit at all.

• Credit utilization ratio is the percentage of your currently available credit that you’re already using. (A simple example: If you own one credit card with a \$1,000 credit limit, and it has a current balance of \$200, you have a credit utilization ratio of 20%.)
• Debt-to-income ratio is the percentage of your monthly or annual income that goes toward paying off debt you’ve already incurred. (Another simple example: If you earn \$6,000 per month and the combined total of your existing car loan, mortgage, and minimum credit card payments amount to \$2,000, you have a debt-to-income ratio of 33%.)

There are other important factors as well, but these two figures form a significant part of the calculation when determining your credit score. If they’re going to offer you the best possible terms, lenders want to be relatively confident you’re able to easily afford to pay for the credit they’re offering you.

They can make that decision based, in part, on how much of your current reliable income is already going toward other debt you’ve incurred in the past, as well as how much of your available credit you’ve taken advantage of thus far.

## 5. Keep Your Credit Utilization Ratio Low

If you already have four credit cards and they’re all maxed out, when you apply for a new credit card, it’s a pretty good bet you’re going to max that one out too. You already have a 100% credit utilization ratio.

This shows you’re probably not great at managing debt, and there’s a good chance you’ll eventually overdraw your ability to pay. So, the credit card company may decline your application, or they may offer a lower credit limit and/or a higher interest rate to help mitigate their risk.

Of course, if your income is such that, even with all those maxed-out cards, you’re having no trouble at all making the monthly payments, (your DTI ratio is still low,) they may not worry about your utilization at all. And that’s where debt tends to snowball quickly and dangerously.

To sum up, here’s the tip: To improve your credit score and make sure you’re managing your debt effectively, you should shoot to maintain a credit utilization ratio and a DTI ratio of no more than 30%. In other words, you’re taking advantage of available credit, but you’re coming nowhere near the maximum you can afford to spend on it.

## 6. Make and Keep a Budget

This one requires very little explanation. Everyone realizes that creating a budget is necessary if you’re going to manage your spending. The more formal your budget, the better.

If you’re currently in good shape, your credit score is high and your debt is low, A strategic budget can help keep it that way while improving important tools like emergency savings and investments.

If you’re on the other end of the spectrum, your credit score is low and/or your debt is getting out of control. A budget can be the lifeline you need to slowly but surely pull yourself out of that downward spiral one penny at a time.

The formula is very simple: Income > Expenses.

Of course, putting it into practice is a little more challenging. There are plenty of tools available, from a pile of envelopes with cash set aside for various expenses to smartphone apps, but the real value of budgeting depends on your own self-discipline and willingness to stick to the plan you create.

So, for this tip: Make a budget that consistently keeps your income above your expenses, and do everything you possibly can to stick to it.

## 7. Get Professional Help with Credit Repair If It’s Needed

While all of the above tips are self-serve actions you can take right now to make a difference in your debt management, many Americans are already in a situation where it may not be possible to turn it around completely on their own.

For instance, if the loss of a job, divorce, military deployment, or other major life events caused you to unexpectedly rely on credit cards for months, you may be in a desperate situation that isn’t really even your fault.

Likewise, if you’re like so many Americans who grew up, finished school, and left home without ever learning the basics of financial responsibility, you may have gotten in over your head in debt without even realizing that was possible.

No matter what the reason is for your current situation, you don’t have to go it alone.

### Hire a Credit Repair Company

Get in touch with a reputable credit repair agency and discuss your situation with a professional who can help. For a small fee, they can take the reins on your situation by:

• Investigating your credit report to confirm its accuracy and completeness
• Working with creditors on your behalf to negotiate payment plans or better terms
• Disputing errors and eliminating inconsistencies on your report
• Setting up a realistic budget and debt reduction plan
• Guiding you through the challenges that will inevitably rise as you resolve your situation

So, the final tip is this: If you need help getting out of snowballing debt and getting yourself to the point that you can effectively manage it going forward, don’t hesitate. Get the help you need.

In modern America, completely avoiding debt is not only difficult, it’s potentially harmful. However, incurring debt without managing it effectively can be even worse. Follow the tips above, and you’re sure to get a solid handle on debt and use it skillfully.

Source: crediful.com

## Debt Settlement vs Bankruptcy: Which is Best?

• Get Out of Debt

You’ve tried debt payoff strategies, balance transfers, consolidation, and even debt management; you’ve begged your creditors, liquidated your assets, and pestered your friends and families for any money they can afford, but after all of that, you still have more debt than you can handle.

Now what?

Once you reach the end of your rope, the options that remain are not as forgiving as debt management and they’ll do much more damage to your credit score than debt payoff strategies. However, if you’ve tried other forms of debt relief and nothing seems to work, all that remains is to consider debt settlement and bankruptcy.

Debt settlement is a very good way to clear your debt. It’s one of the cheapest and most complete ways to eradicate credit card debt and can help with most other forms of unsecured debt as well. Bankruptcy, on the other hand, is a last resort option for debtors who can’t meet those monthly payments and have exhausted all other possibilities.

But which option is right for you, should you be looking for a debt settlement company or a bankruptcy attorney?

## Similarities Between Bankruptcy and Debt Settlement

Firstly, let’s look at the similarities between bankruptcy and debt settlement, which are actually few and far between. In fact, beyond the fact that they are both debt relief options that can clear your debt, there are very few similarities, with the main one being that they both impact your credit score quite heavily.

A bankruptcy can stay on your credit report for up to 10 years and do a lot of damage when it is applied. It may take several years before you can successfully apply for loans and high credit lines again, and it will continue to impact your score for years to come.

Debt settlement is not quite as destructive, but it can reduce your credit score in a similar way and last for up to 7 years. Accounts do not disappear in the same way as when you pay them in full, so future creditors will know that the accounts were settled for less than the balance and this may scare them away.

In both cases, you could lose a couple hundred points off your credit score, but it all depends on how high your score is to begin with, as well as how many accounts you have on your credit report and how extensive the settlement/bankruptcy process is.

## Differences Between Bankruptcy and Debt Settlement

The main two types of bankruptcy are Chapter 7 and Chapter 13. The former liquidates assets and uses the funds generated from this liquidation to pay creditors. The latter creates a repayment plan with a goal of repaying all debts within a fixed period of time using an installment plan that suits the filer.

Debt settlement, on the other hand, is more of a personal process, the goal of which is to offer a reduced settlement sum to creditors and debt collectors, clearing the debts with a lump sum payment that is significantly less than the balance.

### Chapter 7 Bankruptcy and Chapter 13 Bankruptcy

When people think of bankruptcy, it’s often a Chapter 7 that they have in mind. With a Chapter 7 bankruptcy, all non-exempt assets will be sold, and the money then used to pay lenders. There are filing costs and it’s advised that you hire a bankruptcy attorney to ensure the process runs smoothly.

Chapter 7 bankruptcy is quick and complete, typically finishing in 6 months and clearing most unsecured debts in this time. There is no repayment plan to follow and no lawsuits or wage garnishment to worry about.

Chapter 13, on the other hand, focuses on a repayment plan that typically spans up to 5 years. The debts are not wiped clear but are instead restructured in a way that the debtor can handle. This method of bankruptcy is typically more expensive, but only worthwhile for debtors who can afford to repay their debts.

Filing for bankruptcy is not easy and there is no guarantee you will be successful. There are strict bankruptcy laws to follow and the bankruptcy court must determine that you have exhausted all other options and have no choice but to file.

Bankruptcy will require you to see a credit counselor, which helps to ensure that you don’t make the same mistakes in the future. This can feel like a pointless and demeaning requirement, as many debtors understand the rights and wrongs and got into a mess because of uncontrollable circumstances and not reckless spending, but sessions are short, cheap, and shouldn’t cause much stress.

## How Debt Settlement Works

The goal of debt settlement is to get creditors to agree to a settlement offer. This can be performed by the debtor directly, but it’s often done with help from a debt settlement company.

The debt specialist may request that you stop making payments on your debts every month. This has two big benefits:

### 1. More Money

You will have more money in your account every month, which means you’ll have more funds to go towards debt settlement offers.

The idea of making large lump sum payments can seem alien to someone who has a lot of debt. After all, if you’re struggling to make \$400 debt payments every month on over \$20,000 worth of debt, how can you ever hope to get the \$5,000 to \$15,000 you need to clear those debts in full?

But if you stop making all payments and instead move that money to a secured account, you’ll have \$4,800 extra at the end of the year, which should be enough to start making those offers and getting those debts cleared.

### 2. Creditor Panic

Another aspect of the debt settlement process that confuses debtors is the idea that creditors would be willing to accept reduced offers. If you have a debt worth \$20,000 and are paying large amounts of interest every month, why would they accept a lump sum and potentially take a loss overall?

The truth is, if you keep making monthly payments, creditors will be reluctant to accept a settled debt offer. But as soon as you start missing those payments, the risk increases, and the creditor faces the very real possibility that they will need to sell that debt to a collection agency. If you have a debt of \$20,000, it may be sold for as little as \$20 to \$200, so if you come in with an offer of \$10,000 before it reaches that point, they’ll snap your hand off!

### Types of Debt

A debt settlement program works best when dealing with credit card debt, but it can also help to clear loan debt, medical bills, and more. Providing it’s not government debt or secured debt, it will work.

With government debt, you need specific tax relief services, and, in most cases, there is no way to avoid it. With secured debt, the lender will simply take your asset as soon as you default.

Debt settlement companies may place some demanding restrictions on you, and in the short term, this will increase your total debt and worsen your financial situation. In addition to requesting that you stop making monthly payments, they may ask that you place yourself on a budget, stop spending money on luxuries, stop acquiring new debt, and start putting every penny you have towards the settlement.

It can have a negative impact on your life, but the end goal is usually worth it, as you’ll be debt-free within 5 years.

## Pros and Cons of Debt Settlement and Bankruptcy

Neither of these processes are free or easy. With bankruptcy, you may pay up to \$2,000 for Chapter 7 and \$4,000 for Chapter 13 (including filing fees and legal fees) while debt settlement is charged as a fixed percentage of the debt or the money saved.

As mentioned already, both methods can also damage your credit score. But ultimately, they will clear your debts and the responsibilities that go with them. If you’ve been losing sleep because of your debt, this can feel like a godsend—a massive weight lifted off your shoulders.

It’s also worth noting that scams exist for both options, so whether you’re filing bankruptcy or choosing a debt settlement plan, make sure you’re dealing with a reputable company/lawyer and are not being asked to pay unreasonable upfront fees. Reputable debt settlement companies will provide you with a free consultation in the first instance, and you can use the NACBA directory to find a suitable lawyer.

## Bankruptcy and Debt Settlement: The End Goal

For all the ways that these two options differ, there is one important similarity: They give you a chance to make a fresh start. You can never underestimate the benefits of this, even if it comes with a reduced credit score and a derogatory mark that will remain on your credit report for years to come.

If you’re heavily in debt, it can feel like your money isn’t your own, your life isn’t secure, and your future is not certain. With bankruptcy and debt settlement, your credit score and finances may suffer temporarily, but it gives you a chance to wipe the slate clean and start again.

What’s more, this process may take several years to complete and in the case of bankruptcy, it comes with credit counseling. Once you make it through all of this, you’ll be more knowledgeable about debt, you’ll have a better grip on your finances, and your impulse control.

And even if you don’t, you’ll be forced to adopt a little restraint after the process ends as your credit score will be too low for you to apply for new personal loans and high limit cards.

## Other Options for Last Ditch Debt Relief

Many debtors preparing for debt settlement or bankruptcy may actually have more options than they think. For instance, bankruptcy is often seen as a get-out-of-jail-free card, an easy escape that you can use to your advantage whenever you have debts you don’t want to pay.

But that’s simply not the case and unless you have tried all other options and can prove that none of them have worked, your case may be thrown out. If that happens, you’ll waste money on legal and filing fees and will be sent back to the drawing board.

So, regardless of the amount of debt you have, make sure you’ve looked into the following debt relief options before you focus on debt settlement or bankruptcy.

### Debt Consolidation

A debt consolidation loan is provided by a specialized lender. They pay off all your existing debts and give you a single large loan in return, one that has a lower interest rate and a lower monthly payment.

Your debt-to-income ratio will improve, and you’ll have more money in your pocket at the end of the month. However, in exchange, you’ll be given a much longer-term, which means you’ll pay more interest over the life of the loan.

### A Debt Management Plan

Debt management combines counseling services with debt consolidation. A debt management plan requires you to continue making your monthly payment, only this will go to the debt management company and not directly to the creditors. They will then distribute the money to your creditors.

You’ll be given a monthly payment that you can manage, along with the budgeting advice you need to keep meeting those payments. In exchange, however, you’ll be asked to close all but one credit card (which can hurt your credit score) and if you miss a payment then your creditors may back out of the agreement.

### Balance Transfer Card

If all your debts are tied into credit cards, you can use a balance transfer credit card to make everything more manageable. With a balance transfer credit card, you move one or more debts onto a new card, one that offers a 0% APR for a fixed period.

The idea is that you continue making your monthly payment, only because there is no interest, all the money goes towards the principal.

### Home Equity Loans

If you have built substantial equity in your home then you can look into home equity loans and lines of credit. These are secured loans, which means there is a risk of repossession if you fail to keep up your payments, but for this, you’ll get a greatly reduced interest rate and a sum large enough to clear your debts.

## Bottom Line: The Best Option

Debt settlement and bankruptcy are both considered to be last resort debt-relief options, but they couldn’t be more different from one another. Generally speaking, we would always recommend debt settlement first, especially if you have a lot of money tied up in credit card debt.

If not, and you can’t bear the idea of spending several months ignoring your creditors, missing payments, and accumulating late fees, it might be time to consider bankruptcy. In any case, make sure you exhaust all other possibilities first.

Source: pocketyourdollars.com

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## How to Stop Spending Money You Don’t Have

So, you want to stop spending money.  That might be easier said than done.  When it comes to managing your money, there are things you need to do.  You know you need to budget, try to get out of debt and control your spending.

The issue is not necessarily that you are spending money on things you don’t have; you just aren’t spending it in the right way.  The issue is not that you don’t make enough money, it is just not having a plan on how to use it once you get it.

That’s what happened to me.  Unfortunately, I didn’t have a plan for my money.  That lead me down a path I did not like.

After years of working without a plan, I found myself on the steps of a courthouse declaring bankruptcy. And, because I did not learn how to make the right changes in managing my money, my husband and I found ourselves in debt a few years later.

The difference with the second time I had debt was that I took responsibility for it.  I owned what happened, and he and I worked together to make changes to not only pay off our debt but never go down that same road again.

If you find yourself in the same situation, you need to make big changes.  To start, you have to stop spending money you don’t have.  Plain and simple.

## HOW DO YOU KNOW IF YOU ARE OVERSPENDING?

### You’ve maxed out your credit cards

When there is no room to charge anything on your cards, you might have a problem.  In most cases, maxed credit cards signals you are living beyond your means.  If you have to continue to charge because you don’t have money, then you are spending too much.

### You can’t find a home for your latest purchase

Your temptation might be electronics or handbags. No matter what you love to buy, you might notice you are running out of room to store things.  When the stuff takes over your home and is causing clutter, it is time to take a long hard look at how you spend money.

### Your budget never works

There may be months when you don’t have enough money in your budget to cover your mortgage or food.  When you continually spend money on the wrong things, your budget will not work.

That means if you have just \$50 for entertainment, do not spend \$75.  That other \$25 has to come from another budget line.

### You spend more than you earn

Take a look at your credit card balances. You might be paying only the minimum balance because you can’t pay it in full. When you spend more than you make and continue to add more debt, take a look at what you are buying.  It might be time to pull back and stay out of the stores.

## HOW TO STOP SPENDING SO MUCH MONEY

### Use a budget

When many people hear the word budget, what they hear is “you don’t get to spend any money.”  That is the opposite of what a budget does.  Your budget is a roadmap.  It shows you where your money should go – including the fun money you want to spend!

Your budget helps you know what you need to do with your money when you get paid.  Look at every penny as an employee of yours.  You get to tell it where it needs to go.  Some of them will go to rent, others to your car payment and still others will go to the into your savings account.

The best part of a budget is that you can allow for fun.  Learn how to budget to have fun and even how to budget if your paychecks are never the same amount.

Related: How to Figure Out How Much to Budget for Groceries

### Write down your financial goals

Successful people start planning by having the end in mind.  It may mean taking a backward approach to your finances.

Think about what you want.  Do you want to get that credit card paid off or maybe take that dream vacation?  No matter your goal, figure out what it will take to get there, and that will help you set your goal.

It may mean fewer dinners out or putting in some overtime at work.  Whatever your goal, make sure it is clearly defined and you keep it front and center.  Put it on your refrigerator.  Keep a photo of it in your wallet.  Make sure you see that budget staring you back in the face every time you even think about spending money.  That will usually stop you right in your tracks.

Related:  The Secret Trick I Use to Stick to My Budget

### Cash is a Must so that you never overspend

If you are someone who is always saying “I can’t stop spending money,” then you need to use cash.  I’m sure you’ve heard it time and time again. Using cash is one of the simplest tricks to help you stop spending money you don’t have.

It works because it gives you defined money.  If you have \$100 to spend at the grocery store, there is no way you can even spend \$101.  You don’t have it.  You are forced to spend wisely and think more about every purchase you make.

I know some of you are reading this saying “but if I have cash I just spend it so fast.”  That is because you are not tracking it and taking responsibility for your spending.

You need to use the cash envelope method.

If you have an envelope for groceries with \$50 left in it, sure, you can dip into that and grab \$20 to spend on lunch.  But, what happens when you need food for your family?  That means you’ve just \$30 to buy food – which may not get you much.

Cash forces you to think about every purchase you make.

Related:  How You Can Become Accountable With Your Money

### Stop paying for convenience

There is a quick fix for nearly everything.  You can find dinners in boxes, small pre-packaged snacks, etc.  Rather than purchase convenience items, buy the larger size snacks and then re-package yourself into smaller baggies.  You will not only get more out of a box, but you can even control how much you put into each baggie.

There are other ways we pay for convenience.  We pay for someone to iron our shirts, wash our cars and even mow our lawns.  By doing these things ourselves, we can keep much more money and easily stop overspending.

Read more:  How You are Killing Your Grocery Budget

### Put away the credit cards to halt spending money

One of the simplest ways to stop spending money is to get out the scissors and cut up those credit cards!!  Or, if you aren’t ready to cut them up, put them on ice.  Literally.  Freeze your credit card in a block of ice.

If you keep spending, you have to cut off the source at its knees.  While I don’t think credit cards are a good fit for everyone, I know they work for some.

If you must use credit cards, never charge more than you have in the bank to pay it off.  That means you can’t charge the amount you believe you will get on your paycheck.  There is never a guarantee that your check will arrive.  Spend only the amount you have, not what you will receive.

Related:  How to Pay off Your Credit Card Debt

### Pay your bills on time

We all have bills.  We know when they are due.  When you miss the payment due date, you get assessed a late charge.   Pay them on time, so you don’t pay more than you need to.

In addition to late fees, not paying your bills on time can have an adverse effect on your credit score. Learn how to organize your bills, so you never pay them late again.

### Do not live above your means

Few of us would not love new clothes or a new car. We all would like to make more money or get the hottest new device.  The thing is, can you afford it?  Is it a want or is it a need?

If you are using credit or loans to get items that you can not afford, then you are living beyond your means and spending money you don’t have.  Scale back and make sure that you can honestly afford the house or the car and that it doesn’t ruin your budget and cost you too much.

Read more: Defining Your Wants vs. Your Needs

### Don’t fall for impulse buys

Stores are sneaky about making us spend money.  They use signs, layout and even scents to lure you into wanting to buy more.  The thing is, if you purchase something you did not intend to, then you are already blowing your budget and probably overspending.

Another way that you are spending too much is when you plan dinner but then decide at the last minute to go out to dinner instead.  Why do that when you have food waiting for you at home (which you’ve already paid for)?

The final reason you may impulse buy is that of emotion.  If you feel a rush because of that new item, you may purchase out of impulse and emotion instead of need.

Read more:  Stopping Impulse Shopping

### Plan your meals

One of the most significant changes we made was to menu plan.  It took me some time to put it all together, but now, I can plan our meals in no time at all.  I use the simple menu planning system that I’ve taken time to build over the years.

While this works for me, I remember when I was learning how to menu plan.  It was quite a process, and I relied upon the help of some experts in the field.   One of them I have used is Erin Chases’s \$5 Meal Plan.  I loved how simple it was to create our meals each week.

Even the best menu plan won’t work if you aren’t eating what you buy.  Make sure you are not making mistakes with your grocery budget and eat what you buy.  After all, throwing food away is just money in the trash.

Related:  Money Saving Secrets Stores Won’t Tell You

### Challenge yourself to spend less

There is something fun about trying to beat yourself at your own game.  By this I mean, if you have \$150 to spend on groceries for the week, try to spend only \$130.  That gives you \$20 more to spend on something else — or put towards your goal.

Related:  The Yearly Savings Challenge for Kids and Adults

### Stay out of the stores so you don’t shop

If you can’t control your spending and continue spending money you don’t have, you have to remove the temptation.  Even something that seems harmless can result in spending money.

Related:  Fun and Frugal Date Night Ideas

### Track the money you are spending

Keep track of your spending by adding up the amounts on your phone.  That way, you’ll have no surprises when you get to the checkout lane. You can try Shopping Calculator for Android or Total-Plus Shopping Calculator on iTunes.

When you start to see that total creep up, you realize how much you are spending. That may help you think twice about that extra box of treats you are tempted to toss into the shopping cart.

### Use the three-day rule before you spend a dime

The three-day rule is pretty simple.  If you see something you want, wait for three days before you buy it.  Once the third day is up, ask yourself if you still feel it is something you need.

If it is, look at your budget to ensure it works with this month’s spending.  Then, double check the cash to make sure you have enough to pay for it.  If both of these work, you can consider buying it.

The funny thing is that most purchases are impulse buys and the three day waiting period helps you realize you don’t need it.  And had you purchased it, you may even have buyer’s remorse at the three-day mark.

Related:  The Trick To Make Sure You Never Overspend

### Don’t use coupons and skip the sales

Sales are very tempting.  They lure you in and often result in making purchases you would not do otherwise.  That is why you nee your list. Stick to it and don’t fall for the sales.

You also need to put away the coupons.  Well, you can use them, but responsibly.  If you would not purchase an item at full price, you should never buy it only because there is a coupon.  A coupon is not a golden ticket to shop.

In addition to this, avoid the clearance aisles and end caps.  These are money spending traps!  You walk by, and your eye is drawn the end cap with the big SALE sign in front of it.  If you don’t need that item, don’t grab it.  Also, don’t walk by the clearance section.  It is very easy to pick up items you don’t really need.  That makes you again spend money you had not planned on.

Instead, shop the sections you need.  If you need detergent, go to that section and grab your item and then go to the next on your list.  Don’t wander through the store as you will be more likely to do “cart tossing.”   This is when you put items in your cart without noticing what you are spending.

I’m not saying not to buy anything on sale.  Just get the things you need that are on sale this week, or that you will need in the next weeks.  You probably need spaghetti noodles, but you don’t need a new pair of shoes.

Related: The Money Traps You Will Fall For

### Never shop without a list

Never shop without a grocery list. Ever. Then, force yourself to stick to it.

Some simple ideas include using a timer to limit how long you can be in the store.  If you have only 20 minutes to shop, you will be less likely to grab the items you don’t need and stick with those that are on your list.

Another is to challenge yourself to see how fast you can finish your shopping.  If you have the list and stick to it, you’ll find you spend less time shopping and more time enjoying the things you love.

The best reason to use a list is that you don’t have to worry about forgetting that “one item” you know you need.  When you force yourself to make a shopping list and stick to it, you’ll always have everything you need on hand for dinner.

### Keep emotion out of shopping

One tip is never to shop hungry.  When you do, your stomach controls what you buy.  The added benefit is buying the healthy foods you need.

If I am feeling bad about myself, buying something I have been wanting may end up making its way home with me. Spending money to make myself feel better never works.

There are many emotions attached to spending.  You have to identify which one(s) apply to you and find a way to fulfill that need through another method – other than spending money.

### Define Needs vs. Wants

There are items we need.  You need food, but do you need the extra box of cookies?  Yes, the sweater is really cute but is it something you need or just something you want.  Ask yourself  “is this a need or a want” with each item you buy.  You’ll soon be on your way to less overspending.

### Clean and declutter

When you declutter, you find all of those items you’ve spent money on and no longer need.  It makes you realize where you are spending.  You will also recall how clean your closet now is. Do you really want to fill it back up with more stuff?

The added benefit of decluttering is that it keeps your house clean and organized!  You can find what you need more easily and don’t have so much “stuff” cluttering the house.

### Save first, spend later

It is important always to pay yourself first.  Remember that the amount you have to spend is what is left over after you pay your bills and pay yourself.

You should always tell your money where to go instead of it deciding for you.  So many do that the opposite and save after they spend.  If you still save a little, you will quickly build a nice emergency fund and can have less guilt about your spending.

### Learn from your mistakes

The most important thing you must do is figure out where you’ve gone wrong in the past.  Your mistakes will be different from everyone else’s.  You may shop out of emotion while someone else does out of boredom.

You also need to keep in mind that you will make mistakes.  There will be months when you fall off the wagon.  Don’t beat yourself up over it.  Use it is a chance to learn from them and do what you can to not repeat them again.

Related:  The Mistakes You Will Make When Getting Out of Debt

Gaining control of your spending is possible.  You just need to have the desire – and the tools – to make it happen.

Source: pennypinchinmom.com

## The Worst Ways to Deal With a Bill Collector

The Worst Ways to Deal With a Bill Collector – SmartAsset

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Dealing with a bill collector is never fun and it can be particularly stressful when you’re sitting on a mountain of debt. Sometimes debt collectors fail to follow the rules outlined in the Fair Debt Collection Practices Act. If that’s the issue you’re facing, it might be a good idea to file a complaint. But if you’re personally making any of these mistakes, your debt problem could go from bad to worse.

Check out our credit card calculator.

## 1. Ignoring Debt Collectors

Screening calls and avoiding bill collectors won’t help you get your debt under control. Debts generally have a statute of limitations that varies depending on the state you live in. Once it expires, the collector might not be able to sue you anymore. But you could still be responsible for paying back what you owe in addition to any interest that has accumulated.

In addition to the potential legal consequences of unpaid bills, letting old debt pile up can destroy your credit score. Unpaid debts can remain on a credit report for as many as seven years. So if your debt collector is getting on your last nerves, it might be best to stop hiding and face him head on.

## 2. Saying Too Much Over the Phone

If you decide to stop dodging your bill collectors, it’s important to avoid sharing certain details over the phone. You never want to say that you’ll pay a specific amount of money by a deadline or give someone access to your bank accounts. Anything you say can be used against you and agreeing to make a payment can actually extend a statute of limitations that has already run out.

A debt collector’s No. 1 goal is to collect their missing funds. They can’t curse at you or make empty threats, but they can say other things to try and scare you into paying up. Staying calm, keeping the call short and keeping your comments to a minimum are the best ways to deal with persistent bill collectors.

Related Article: Dealing With Debt Collectors? Know Your Rights

## 3. Failing to Verify That the Debt Is Yours

When you’re talking to a bill collector, it’s also wise to avoid accepting their claims without making sure they’re legitimate. Debt collection scams are common. So before you send over a single dime, you’ll need to confirm that the debt belongs to you and not someone else.

Reviewing your credit report is a great place to start. If you haven’t received any written documentation from the collection agency, it’s a good idea to request that they mail you a letter stating that you owe them a specific amount of money.

If you need to dispute an error you found on your credit report, you have 30 days from the date that you received formal documentation from the collection agency to notify them (in writing) that a mistake was made. You’ll also need to reach out to each of the credit reporting agencies to get the error removed. They’ll expect you to mail them paperwork as proof of your claim.

## 4. Failing to Negotiate the Payments

No matter how big your debts, there’s usually room for negotiation when it comes to making payments. If the payment plan your bill collector offers doesn’t work for you, it’s okay to throw out a number you’re more comfortable with.

Sometimes, it’s possible to get away with paying less than what you owe. Instead of agreeing to pay back everything, you can suggest that you’re willing to pay back a percentage of the debt and see what happens. A non-profit credit counselor can help you come up with a debt management plan if you need assistance. Whatever you agree to, keep in mind that the deal needs to be put in writing.

Related Article: All About the Statute of Limitations on Debt

## 5. Failing to Keep Proper Documentation

Whenever you communicate with a bill collector, it’s a good idea to take notes. Jotting down details about when you spoke with a collector and what you discussed can help you if you’re forced to appear in court or report a collector who has broken the law. Collecting written notices from bill collectors and saving them in a folder can also help your case.

## Bottom Line

Dealing with bill collectors can be a real pain. By knowing how to interact with them, you’ll be in the best position to get rid of your unpaid loans and credit card debt (that is, if you actually owe anything) on your own terms.

Photo credit: ©iStock.com/Steve Debenport, ©iStock.com/RapidEye, ©iStock.com/JJRD

Amanda Dixon Amanda Dixon is a personal finance writer and editor with an expertise in taxes and banking. She studied journalism and sociology at the University of Georgia. Her work has been featured in Business Insider, AOL, Bankrate, The Huffington Post, Fox Business News, Mashable and CBS News. Born and raised in metro Atlanta, Amanda currently lives in Brooklyn.
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