Debt Advizor

A credit score is a numerical expression based on a statistical analysis of a person’s credit files, to represent the creditworthiness of that person. Credit worthiness is typically defined as the likelihood that an individual is going to pay their accounts, preferably on time. So lower your score, the more risk you pose to a lender, the more likely you are going to get a less favorable interest rate on a loan.

A credit score is primarily based on credit report information, sourced from credit bureaus (Experian, Transunion, and Equifax). While there are different ways of calculating a credit score, the most widely accepted method was developed by the Fair Isaac Corporation. If you plan on buying a home, you should be most interested in the FICO score. The three major credit bureaus also have their own scoring model that they have developed which are called Score Power, Plus Score, and Vantage Score. Since the bureaus have their own scoring model, your credit score varies somewhat across all three bureaus. They also tend to differ on what information they have on your report. For example, an error might show up on two reports but not the third. If a mortgage broker chooses to view these scores, they will always choose to base your rate on the middle of the three scores.

Did you know that as an American citizen, you are entitled to a free annual credit report by law?
The three credit bureaus run a website called www.annualcreditreport.com where you can obtain the report but not your score. This allows you access to your financial identity that lenders use to set interest rates. This free access to your report is not based on a FICO score.

Not buying a home? Your credit score follows you to other places too!
Your credit score is used in some of the most unlikely places. Your score is not just used for credit cards, auto loans, and home mortgages. If you want a mobile phone, good insurance rates and even a job, it would benefit you greatly to have a favorable credit score.

Credit Score Breakdown:

• payment history (35%)
• amounts owed (30%)
• length of credit history (15%)
• new credit (10%)
• types of credit used (10%)

35 percent of the score is based on your payment history. This makes sense since one of the primary reasons a lender wants to see the score is to find out if (and how promptly) you pay your bills. The score is affected by how many accounts have been paid late, how many were sent out for collection and any bankruptcies. When this activity occurs also comes into play when defining credit history. The more recent the negative activity, the worse it will be for your overall score.

A great way to establish good credit history going forward is to setup autopay or automatic withdraw. Most places that bill you offer services that will automatically pull the amount due from a credit card or bank account. Just remember that if you use a credit card for autopay that you also setup autopay on your credit card account too to make sure that nothing is being paid late.

30 percent of the score is based on outstanding debt. If you currently own a home, car, and have credit cards, you most likely have some debt. Never max out credit cards or leave them open with no activity. The rule of thumb is to keep your card balances at 25 percent or less of their limits. A great way to see immediate raises in your credit score is to take care of credit cards first. Choose to pay down the credit card with the highest interest rate or the cards that you are late on payments. Another great financial tactic is to pay one extra house payment a year to your lender. On a typical 30 year loan, you will shave 8 years off the total and end up paying your home off in 22 rather than 30.

15 percent of the score is based on the length of time you’ve had credit. If you’ve just graduated from college, you most likely have a short credit history and are more risky to loan money. The longer you have established credit, the more likely a lender will loan you the money you need. This is based on open accounts and your credit score will not be able to take in account for anything that has been closed. Just remember that while you may have a longer credit history, if that history was full of negative things like late payments and collections it won’t matter how long of a credit history you have.

10 percent of the score is based on new credit. Typically your score will go down for awhile after you have opened up a new line of credit. The major factor of this percentage comes from inquiries. There are two types of inquiries; soft and hard. A soft inquiry does not affect the credit score and usually involves a quick glance at your score. A hard inquiry does lower your credit score and typically is a result of actions initiated by you in an effort to obtain credit. If you open 2 new credit card accounts, take out a private bank loan, and attempt to buy a new car, your score will go down…the good thing is that your score will rebound from these inquiries.

10 percent of the score is based on the types of credit you currently have. This category consists of 4 types of accounts:

• revolving (credit cards, lines of credit, HELOC)
• loans
• public records (bankruptcy, liens)
• collections

Some types of accounts can really help you score as long as you are paying them on time such as a student loan, car loan, mortgage, and credit cards. If you have ever had a public records such as a bankruptcy, tax lien, or a collection, your credit score is going to be negatively affected. Beware of companies that claim that they can remove a bankruptcy or a collection off your credit report. These items will eventually not be detrimental to your credit score so time often is the best answer for dealing with these actions in your credit history.

New research shows borrowers with a weaker credit rating may now have to choose between six personal loans with rates of between 14 and 24 per cent and five loans charging between 50 and 70 per cent interest. Hugo Shaw, of the independent financial advisers Bestinvest, advised borrowers to protect their credit ratings. “If you need to borrow some money and you have anything other than a near perfect credit history it’s going to be expensive,” he said.

“The disparity between the direction of base rates and interest rates on unsecured loans makes clear companies are preying on those people whose finances are not in tip top condition. “

But before you apply for a mortgage, credit card or personal loan there are steps you can take to improve your credit status and encourage lenders to look more favourably at your application. Even those who consider that they have a good credit history should request a copy of their credit file to ensure that all information held on you is both accurate and up to date. Credit files are available for free from the credit agency Equifax, and should be checked regularly. There is another reason why borrowers should check their credit file regularly: to ensure that their details are not being used by a third party for identity theft. If you do spot discrepancies, alert the lenders concerned at the earliest opportunity.

The following tips should help.

• 1. Assert your right to vote If you aren’t registered to vote, or haven’t updated your details after moving house, lenders are likely to give you a wide berth. They use this register to protect themselves against fraud and check that you are who you say you are.
• 2. Sever old relationships When you apply for credit, it isn’t just your details the potential lender will scour. It will also check the credit history of your spouse or anyone else with whom you have a joint bank account or loan. In some cases lenders make mistakes and also check the history of those who live at the same address, or may have in the past. This is why it is important to get a copy of your file to ensure that no one else’s poor credit history is dragging your score downwards. If you are divorced or separated, make sure your ex’s details are expunged as soon as possible.
• 3. Cancel out of date credit cards Many people switch cards frequently but fail to cancel old agreements even if they no longer use the card. But these lines of credit will still appear on your file, which can make lenders wary about the potential size of your total debt – some may fear that you will “max out” these cards and then struggle to meet repayments. Make sure the arrangements are terminated and that this is logged on the file. Likewise, if you do not need the full credit limit given on a card, ask your lender to reduce it. It may make you look a better risk when you come to remortgage.
• 4. Get yourself a reputation Lenders want to see that you have a record of managing credit sensibly. So if you are a first-time buyer consider taking out a credit card six months before making your mortgage application. Of course, you’ll need to make sure that you pay off the balance in full each month, and on time, to avoid interest payments.
• 5. Scour the small print Ensure that you take a close look at all the information on your file to ensure it accurately reflects your current circumstances. Lenders may not always inform agencies of any changes straight away, so if you notice information is outdated ask your lender to inform Equifax immediately - or contact them yourself. Keep a watchful eye for rogue accounts or charges caused by identity theft or fraud and for duplicate entries of your unpaid balances.
• 6. Never miss a mortgage payment This is a cardinal sin as far as lenders are concerned, and viewed more seriously than missed credit card or loan repayments. If you are struggling to make a mortgage payment, talk to your mortgage lender as early as possible; they may be able to switch you to an interest-only loan or lengthen the mortgage term to lower the monthly payment (although this will mean you pay more interest in total).
• 7. Ensure details are the whole truth and nothing but the truth Make sure that information you provide on applications is accurate and truthful. Inconsistencies can have a negative effect on your credit score and may be considered fraudulent.
• 8. Enquire without a trace When you’re just researching loans, credit cards or mortgages, make sure that you don’t unwittingly allow lenders to make an application and search your credit report. Some websites will allow you to compare loan prices, for example, without conducting a full credit check. Lenders should not access your credit history until you expressly request them to, and when they do it will leave a trace on your report. Lenders can get nervous if they see too many of these “footprints” on your file and may refuse credit as a result. This is because they can interpret multiple credit checks as evidence that you are desperate for as much credit as possible, or that fraudulent activity is being planned.
• 9. Settle old debts If you have defaulted on credit or had a court judgement against you, it will be noted on your Equifax credit file. Even once “settled”, some lenders restrict their lending to those who have had a Judgement in the past 12 months. Therefore it is important that, as soon as the status becomes settled, you ensure that your lenders inform the credit reference agencies and that your credit report is updated accordingly.
• 10. Include additional information where necessary, add further information about previous credit problems. If such problems were after redundancy or divorce, for example, and your financial situation has since improved, you can add a note explaining this. Likewise, if you have been a victim of identity fraud in the past, make sure that any credit problems caused by this are removed from your Equifax file. If they are not your fault, they should not be there. Remember that your Equifax credit file changes constantly, so it’s important to check regularly that it is still accurate and that no one else is running up debt in your name.

In the United States, a credit score is a number based on a statistical analysis of a person’s credit files, that represents the creditworthiness of that person, which is the likelihood that the person will pay their bills. A Credit Score is primarily based on credit report information, typically from one of the three major credit bureaus: Experian, TransUnion, and Equifax.

There are different methods of calculating credit scores. FICO, the most widely known type of credit score, is a credit score developed by Fair Isaac Corporation. It is used by many mortgage lenders that use a risk-based system to determine the possibility that the borrower may default on financial obligations to the mortgage lender. The credit bureaus all have their own credit scores: Equifax’s ScorePower, Experian’s PLUS score, and TransUnion’s credit score, and each also sells the VantageScore credit score. In addition, many large lenders, including the major credit card issuers, have developed their own proprietary scoring models.

Americans are entitled to one free credit report within a 12-month period from each of the three credit bureaus but are not entitled to receive a free credit score. The three credit bureaus run their own sites, where users can get each of their free credit reports. Credit scores are available as an add-on feature of the report for a fee. Obtaining a free credit report or buying a credit score from the agencies has some disadvantages relative to alternative ways to obtain your report or score. If the consumer disputes an item on a credit report pulled using the free system, the credit bureaus, under the Fair Credit Reporting Act (FCRA) now have 45 days to investigate, rather than 30.

Alternatively, consumers wishing to obtain their credit scores can in some cases purchase them separately from the credit bureaus or can purchase their FICO score directly from Credit Score 360. Credit scores (including FICO scores) are also made available for “free” through subscription to one of the many credit report monitoring services available from the credit bureaus or other third parties, although to actually get the scores for free one must use their credit card to sign up for a free trial subscription of the service and then cancel before the first monthly charge.

Under the FCRA, a consumer is entitled to a free credit report within 60 days of any adverse action (e.g. being denied credit, or receiving substandard credit terms from a lender) taken as a result of their credit rating. The FICO credit score ranges between 300 and 850. The VantageScore score ranges from 501-990.

Using a credit card can become a sure-fire way for many consumers to slip into debt, it has been claimed. Although conceding that it can be “very difficult to live without a credit card” in modern society, the Thrifty Scot states that cards are “the leading cause of debt problems” among British consumers.

The personal finance portal advises those who are worried about credit card debt to stop using their plastic to make purchases, clear the existing balance and then cancel the account with their card provider.

“Unless you keep a tight rein on your borrowing habits, it is quite easy to get caught up in borrowing over and over again until you reach the point that it is no longer feasible to consolidate your debts,” the website explains.

It also warns against the use of store cards, which can also contribute to serious debt problems. “Having a charge card for the store makes it very convenient and easy to purchase items on the spur of the moment that you don’t really need,” the Thrifty Scot says.The Federation of Small Businesses recently urged the government to impose a cap on credit card interest rates.

I’ve been spending a lot of time on the road lately travelling over the Festive season, and I’m struck by the number of radio ads for debt settlement services that boast they can cut a consumer’s credit-card debt by half or more.

“So scared you can’t answer your phone anymore?” they ask. “We’ll get creditors off your back.”

I know from my own experience that many of these outfits make promises they can’t keep. Shortly after my wife and I bought a house in Santa Fe, N.M., in December 2005, I began looking for ways to cut our debt, which we had let creep up over the years. Like millions of Americans, we received credit cards in the mail during the 1990s. For many folks, these 0% offers were too good to pass up, and some made the mistake of confusing easy credit with income.

Unfortunately, if you lost your job or got sick and you were late with a payment, the interest rates could skyrocket from 0% to 30% virtually overnight. That was in the agreement that came with the pre-approved card, but most people never bothered to read the fine print. Compounding matters for debtors was a concept known as “universal default.” If you missed a payment on one card, other creditors would automatically raise their rates even if you had been paying them on time.

We fell behind on our credit-card payments and that’s when we started to learn the facts about debt problems. They are not pretty but over the next year we will try and help people out before they get into bad trouble. Good Luck!

A recent survey reveals that the abilities to shop online and manage money are major reasons consumers get prepaid debit cards, reasons that also position the cards as a smart way to spend amid economic concerns this holiday shopping season.

“Concerns about the economy have consumers looking to control spending and avoid debt, therefore many are seeking new ways to pay for gifts and manage their money,” said John Chaney, PreCash Chairman and CEO. “Cash isn’t always an option because there’s a lot you can’t do without a card. Consequently, many are turning to prepaid debit cards like our Vision Card, to stay on budget while maintaining access to financial services like shopping on the Internet, reserving a hotel room for holiday travel, paying their bills or accessing direct deposit.”

The PreCash survey of its Vision Premier(SM) Prepaid Visa® Card users revealed that the top five reasons people get a prepaid card are:

1. To pay bills
2. They wanted a Visa card
3. They wanted direct deposit
4. To avoid carrying cash
5. To shop online

With the holidays just around the corner, the survey findings come on the heels of rising interest rates and recent studies saying banks fees are growing.

“Prepaid debit cards are a flexible alternative because bill payment, direct deposit and not having to carry large amount of cash give people ways to manage their money, and the cards come without the risks of overdraft fees or increased debt,” adds Chaney. “With the Vision Card, consumers can’t damage their credit and they can spend only the money that’s loaded to the card.”

Prepaid debit cards are not only attractive to holiday shoppers on a budget, but appeal to the 75 million financially underserved consumers in the U.S. Under banked consumers using the Vision Card can avoid check cashing fees, manage their money via online account access, track their balance with e-mail and text alerts, and transfer money to friends and family. Like traditional debit and credit cards, a major card network, Visa, brands The Vision Card. Similarly, a regulating bank issues it. The foremost difference is that you don’t need a bank account or a line of credit to get the Vision card. Vision is accepted everywhere Visa debit cards are accepted, and it provides access to cash at millions of ATMs worldwide. Cash is loaded onto the card at retail locations or via direct deposit.

With the current economy crisis more and more Americans are taking out payday loans, the number of loans being taken out has risen by a hefty 40 per cent in just 6 months. Many blame the need for these loans on the prices of food and fuel. A payday loan shop manager who did not wish to be named commented that the majority of payday loan providers offer a maximum term of 30 days and very high interest rates. However My Pay Day Loan offers a $1500 Cash Advance at a great rate.

Sometimes a short term loan is all you need

With the upcoming festive season many people see the need for a payday loan as crucial, due to tight lending criteria’s many can’t borrow from banks, building societies or get a credit card. Those unable to repay the loan after 30 days could face serious financial strain.

All this means a major headache for the Us government as they worry all this borrowing will result in a January debt nightmare. A government spokesman commented we are slowly correcting the economy crisis but at this time of year people feel pressured to spend money on food, drink and presents usually money they simply do not have, this worries the government hugely. We want to strongly encourage people to stick to a budget and not to overspend, however as Christmas approaches that can be difficult and a $1500 Cash Advance can help on a temporary basis.

Like so many questions, the answer is: It depends. If you have significant equity in your home, absolutely. If you don’t, it’s getting harder to answer that question, especially when our government keeps giving people who owe more than their homes are worth so many reasons not to pay. Last week, the government announced a program that will substantially lower payments for many homeowners who have little or no equity, but only if they are at least 90 days delinquent. Critics say the plan, which applies to loans owned or guaranteed by government wards Fannie Mae and Freddie Mac among others, could encourage people to suspend payments.

Elected officials have been chipping away at that by blaming the foreclosure crisis largely on predatory lenders. In a campaign fact sheet, President-elect Barack Obama says he “recognizes that the real victims in the subprime mortgage crisis are not the lenders, but the millions of borrowers who followed the rules and whose only crime was taking out mortgages that lenders told them they could afford.” Last year, Congress started removing some financial hazards of default when it passed a bill that temporarily waives the income tax on mortgage debt that is canceled when a homeowner is foreclosed upon, sells a home for less than the remaining debt (a short sale) or gets a loan modification that reduces the principal balance. The tax waiver originally applied only to debt on a primary residence canceled in 2007, 2008 or 2009. Last month, in the bailout bill, Congress extended the waiver until 2013.

The government is making it easier for you to walk away from your mortgage.

There are exceptions: The waiver applies only to debt that was used to buy or improve a primary residence. If you took out a home-equity loan or did a cash-out refinance to buy a car, you’ll still owe tax on that debt if it is canceled. For state income taxes, California has partially conformed to the federal law, but only for debt canceled in 2007 or 2008. The Federal Housing Administration is offering two programs to help homeowners get more-affordable mortgages, FHA Secure and Help for Homeowners. Neither requires borrowers to be current on their payments. The program announced Monday goes a step further by requiring homeowners to be late. The Streamlined Modification Program, sponsored by the government agency that oversees Fannie Mae, Freddie Mac and 27 loan servicers, promises to swiftly reduce payments for certain homeowners who appear to be on the verge of foreclosure.

To qualify, you must be at least 90 days delinquent and live in the home as your primary residence. You must owe at least 90 percent of the home’s value. It’s fine if you owe more than it’s worth. Your mortgage must be owned or guaranteed by Fannie Mae and Freddie Mac or held by one of the participating loan companies. If you meet these requirements and can document your income, your servicer will reduce your monthly mortgage payment - including property taxes, insurance and association dues - to 38 percent of your gross income.

The reduction can be accomplished in one or more ways:

• – Reducing the interest rate, but not below 3 percent. (The new rate, if below market, goes back to a market rate after five years.)
• – Extending the term of the loan up to 40 years.
• – Reducing the principal on which monthly payments are calculated. Unpaid principal is added to the loan balance and due when the homeowner sells or refinances. The reduced interest payments never have to be repaid.

If you owe more than the home is worth, the plan will only reduce principal down to 100 percent of market value, according to an official for the Federal Housing Finance Agency, which supervises Fannie Mae and Freddie Mac. If all three of these maneuvers can’t reduce your payments to 38 percent of income, you won’t get a fast-track modification but could still request a customized deal, says the official, who spoke on the condition of anonymity. The streamlined process looks only at income, not assets. If you refinanced your home to buy a Mercedes or own another home, you won’t be expected to sell them to pay your mortgage.

Peter Schiff, president of Euro Pacific Capital, predicts that many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible. They could stop working overtime or, if two spouses work, one could quit. After the modification, they could try to boost their income again. “This is a once-in-a-lifetime opportunity,” Schiff says. “People are going to feel like complete morons if they don’t participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn’t afford.”

The government is offering loan servicers $800 for every homeowner they get into the plan. Schiff predicts that loan agents “will be cold-calling people trying to get them into it. Just like they encouraged people to overstate their income to get a bigger loan in the first place, now they will encourage them to understate their income to qualify for a smaller loan.” To prevent fraud, the government says a borrower “must certify that he or she experienced a hardship or change in financial circumstances, and did not purposely default to obtain a modification.” The housing agency official doubts that people will stop paying just to get a modification because it will hurt their credit record, and that will make it harder to get a loan and possibly a job. “Credit bureau reports are checked by employers. They’re taking a big risk missing three payments just to get a lower rate,” she says. An existing lender who sees your credit score deteriorate could also cut back on your credit and possibly raise your rate.

Risking your credit score for a lower rate “sounds like a game of chicken on the lending highway,” says Craig Watts, a spokesman for Fair Isaac, which markets the FICO credit score. A 90-day delinquency will hurt your score, but not as badly as a foreclosure. How many points it takes off depends on other things in your credit file, such as the number and severity of late payments on other accounts. In the latest version of FICO, which is just being rolled out, “one isolated delinquency will do less damage to your score than it has in the past,” Watts says. Consumers who suffer a severe delinquency can rebuild their scores over time by paying all credit accounts on time and keeping their balances low.

“If it was me and I was certain that I could keep my home even after missing a couple payments by working out a deal with the lender, I’d be for keeping the home,” Watts says. “Your score will bounce back.” Schiff predicts that many homeowners will reach that conclusion and that the new program will cost Fannie and Freddie far more than expected. Although the mortgage giants are under a government conservatorship, the housing agency official says that any losses under the program will not be paid for by taxpayers unless Fannie and Freddie exhaust their reserves.

Even with a full-time job, Raul Garza had piled up a modest mountain of credit card debt. His Target store card was brimming every month. His American Express plastic was loaded up with $8,000 in charges, mostly for gas, groceries and household expenses. He bought a new Kirby vacuum from a door-to-door salesman – and charged it. By last spring, the tally had swelled to an uncomfortable $18,000.

Although the 55-year-old San Antonian says he was paying a little over the minimum payment each month, it was like chipping away with a teaspoon. Worried he’d never dig her way out of debt, Garza turned to one of the hundreds of “debt settlement” companies that promise, for a fee, to eliminate consumers’ unpaid bills by negotiating with their creditors.

In ads that blaze across TV screens, radio airwaves and computer screens, they promise results like “getting out of debt easy … while saving you thousands!” In Garza’s case, that’s not exactly how it turned out. After making $250-a-month payments since June to a San Antonio-area company, Garza says he’s financially worse off than when he started. Not only have his credit card bills not been whittled down but, by following the company’s advice to stop making payments, he says he’s now getting calls from creditors.

“I’m scared. I now owe them even more money because of late fees and interest,” said the state employee, who asked that his real name not be used. He’s one of thousands of consumers nationwide each year who sign up with so-called “debt settlement,” “debt relief” or “debt negotiation” companies. By whatever name, they can be risky. And – in an economy hobbled by layoffs, foreclosures and a credit crunch – they’re attracting more interest from overloaded consumers.

Stephen Cox, spokesman for the national Better Business Bureau, said there’s been a recent “spike” in inquiries from U.S. consumers asking about debt negotiation companies. Based on nearly 100,000 inquiries last year alone, he said, “our complaints will be up in 2008.” Gayle Weller, consumer protection analyst with the state Attorney General’s Office, said her office has seen a similar surge in calls. Some debt companies, she said, “play on people’s ignorance and their desperation.” Plenty of consumer groups warn consumers to be wary.

Folks in financial hot water can find themselves in “water that’s even hotter,” said Barry Goggin, president of the Better Business Bureau of Northeast California, based in West Sacramento. “Sometimes they’re grasping at life preservers without knowing who’s holding the other end.” In California, debt settlement companies are loosely regulated by the state Department of Corporations. Earlier this year, state Assemblyman Ted Lieu, D-Torrance, authored a bill to ramp up regulation of debt settlement companies, which he says have been “operating under a decades-old law not designed for the current environment.” His bill, designed to protect consumers from getting “scammed by a bad company,” would require more stringent licensing, caps on fees and more consumer disclosures. It passed the Assembly this year but died in a Senate banking committee. Lieu plans to revive it in 2009.

There are plenty of reputable companies out there to provide debt counseling and money management. To find the right one requires some homework. If you’re trying to get your debts reduced, try the do-it-yourself approach first, say Weller and other consumer advocates. Call your creditors directly and ask about better repayment terms and lower interest rates. If that’s not successful, look for a company that provides credit counseling. “If you need help managing your money, there are reputable credit counseling organizations that can advise you, help you develop a budget, and offer free educational materials and workshops. They can sit down with you and discuss your entire financial situation … to solve your money problems,” said Federal Trade Commission spokesman Frank Dorman.

A Debt Management Plan or DMP creates a payment plan to assist a client in full repayment of their debt. Therefore, the debts are not charged off, but instead paid in full. There is no negative impact to one’s FICO score because of repayment through a DMP, unless that client misses payments. Missed payments are equally negative whether the individual is on a DMP or repaying on their own. The concept that paying back the credit cards at reduced rates will harm one’s score is completely incorrect. In fact, the client’s score will likely improve due to the reduced debt load. This is a common misconception that prevents potential clients from seeking credit counseling.

Also be careful about jumping too quickly into a “debt management plan,” or DMP, where you pay a monthly fee to a company that pays down your debts, based on lowered rates it negotiates with your creditors. Even if your credit card debts get paid off at reduced rates, those charge-offs can cause long-term damage to your credit rating. As the BBB’s Goggin put it: “Your bad debts will drop your credit score like a ton of bricks.” For more tips on how to choose a debt settlement or credit counseling company, see accompanying box to the right.

From certain parts of the country we’re getting a lot more questions about real estate. Real estate is fine in some areas, but in places like Michigan and California, in fact from most of the Sand States there are a lot of people fighting foreclosure.

Are you noticing an uptick in calls from people in financial distress?

We hear from people in financial distress when the economy is good and bad. What’s changed is that we’re hearing from a lot of scared people. They are watching the TV news and panicking about the doom and gloom that’s being reported. Turn off the TV and focus on your situation. It’s not as bad as the drama queens on TV are presenting it. But don’t get me wrong; there are some hurting people. But most people will be OK if they live on less than they make, save for emergencies and get rid of their debt.

What leads people to get into a situation where they are crippled by debt?

They don’t bother. They don’t know where their money is going or what they are doing with it. If people would take the time to sit down and do a budget, they would actually have a clue about their money. Instead they wander around like Gomer Pyle on Valium and wake up at retirement and think, “Shazam! Where’s all my money?”

What are the key steps to getting out of debt?

The first thing you have to do is set up a written budget, and you must do this every month. We have more information here. If you don’t have a budget, then you don’t know where your money is going. You don’t build a house without a blueprint, so why spend your money without one? Give every dollar of your income a name before the month begins. Once you are current with all your creditors, you need to save $1,000 for a rainy-day emergency fund. Bad things do happen, so you need to be ready for them. This won’t cover all the big things, but it will cover the little things until you are able to pay off your debt and create a fully funded emergency fund. Remember, though, this is not for vacations or for buying things - this is for emergencies only. Now that you have a budget and you have $1,000 in an emergency fund, you can start your Debt Snowball. The Debt Snowball is simple to understand, but it requires tons of effort.

You’ll need to list all your debts in order of smallest payoff balance to largest. We do not list them in order of interest rate, because it is important to have some quick wins. After you have listed your debts, pay the minimum payment to stay current on all the debts except the smallest. Every dollar you can find from anywhere in your budget goes toward the smallest debt until it is paid off. Once the smallest is paid, the payment from that debt, plus any extra money, goes toward the next smallest debt. You continue this snowball so that by the time you get to the bottom, you have an avalanche.

Does the typical person, with an average of 10-plus credit cards, have a basic lack of financial knowledge? Or are we Americans insufficiently disciplined with our finances? Do we have both problems?

It’s a combination of both. Many people aren’t taught how to handle their finances, and that is sometimes how they get into the situation of having 10-plus credit cards. But because they aren’t disciplined with their income, their spending habits get out of control, and they can’t seem to get rid of those credit cards. People need to learn more about money so they know what to do with their money.

In a weak economy, does fear help serve to correct bad financial behavior?

No. The most disturbing thing in this weak economy is some people’s reactions. Don’t react based on fear or panic.

With 401(k)s shrinking with the stock market, do you have any advice for alternative savings vehicles?

You don’t need an alternative. The key is to think long term. One hundred percent of the 10-year periods in the stock market’s history have made money - including the years after the Great Depression. Keep investing steadily, and think long term.

How much money should the average American try to save per paycheck?

As a rule of thumb, I suggest that people save 15 percent of their before-tax gross income for retirement. But I also suggest that you should pay off all your debt, except for your house, before you start to save or continue to save for retirement. This might be hard for some people, but things will be fine if you don’t focus on retirement for a few months while you get the rest of your financials in order. If you pay off all your debt first, you’ll be able to save more for retirement than you ever thought.

What advice do you give people about spending for the holidays? Are there simple steps to avoid major traps and overspending?

People need to be reasonable and look at the amount of money they have coming in and what they are able to spend on Christmas this year. Make a list of everyone you need to buy a gift for, how much to spend on each person, total it, and this is your Christmas budget. People get into the mall, don’t know what they are looking for or how much they want to spend and then come out spending way more than they wanted to or could afford. If you are in a situation where you are not able to spend as much as you normally do for Christmas, don’t! Of course, it’s hard to tell your kids that Santa may not bring them as many toys as their best friend next door, but don’t go into debt just so you can keep up with the Joneses! If you set a Christmas budget and pay for everything in cash, you won’t spend more than you can afford. And don’t buy yourself anything while you’re shopping! Last year 69 percent of people bought themselves a gift while doing their Christmas shopping. Christmas is a time for giving to others, not yourself!

What should young people know about money, and how do parents make those lessons clear?

Young people need to know everything they can about money. They need to know how to earn money and how to spend, save and give. The best way parents can teach their children this is by doing it themselves. Parents need to remember that their children are watching them, and they need to straighten up and show their children what they are doing and why they are doing it.