Defaulting on a student loan doesn’t mean missing a couple of payments. Default is the result of a long delinquency in payments, and it is not a situation in which you want to find yourself.
In fact, defaulting on your loan may result in being sued, having your wages garnished, and missing out on tax returns that are diverted by the federal government to pay off your federal loans.
What can you do if you’ve gone into default?
Attorney Daniel Gamez specializes in representing people who need legal help with their student loans. He has different recommendations for federal loans than he does for private ones. Let’s take a look.
Federal loans: Forbearance, deferment, and income-driven repayment
A forbearance allows you to pause repayment on your loan for a set period of time. Deferment works the same way but has an added advantage: you don’t accrue interest during the time off. Typically, you can call the lender to explain your situation and discuss what you can afford, and they will work to get you back on track.
“The lenders want to save costs related to debt collection lawsuits. Plus, they can write off their losses. Usually, you can reach a debt settlement before you are sued for having this debt in default. Once your debt settlement is complete, you can then start rebuilding your credit and moving on with your life,” he says.
Gamez shared a story of one of his clients who was able to work through a default with their federal student loan:
“Our client defaulted on her federal student loans years ago when she lost her job and could no longer afford the payments. She received a notice from the U.S. Department of Treasury that they had intercepted her federal tax refund to apply towards the balance.
She came to us to see what could be done with her student loan. We were able to help her get into a loan rehabilitation program in which she will make nine monthly payments of $5.00 per month to get her loan out of default.
Once she completes these payments, her account will be brought current and all negative reporting will be removed from her credit reports. She will then go into repayment on the loan, but will likely qualify for lower payments through an income-driven repayment plan.
A Loan Rehabilitation is a great way to get defaulted student loans back into repayment as long as you follow through with an income-driven repayment plan post-rehabilitation. Loan rehabilitation can be tricky, but with proper counseling and representation, this will be a huge benefit to those in default.”
Do you need a lawyer to help with loans in default?
You can try to settle private loans or get into a federal loan rehabilitation program on your own. The Federal Student Aid website has a lot of helpful information on how to do this.
Gamez advises talking to a debt relief attorney or student loan lawyer first and says you should never have to pay for advice upfront. “Go to an attorney who offers a free consultation to go over your particular situation,” he suggests. “The advantage of going to a debt attorney is that they can wind up saving you quite a bit of money and stress.”
He explains that the debt collection companies who go after borrowers in student loan default have vast resources of attorneys who “do nothing but sue people all day, every day,” says Gamez.
He adds, “It’s extremely beneficial for the borrower to hire a debt attorney who has a proven track record of helping people get out of student loan default.”
Be wary of debt relief companies
While Gamez thinks it’s a good idea to seek advice from a debt relief attorney, he warns you to be wary of debt relief companies. “These companies are often caught up in scams preying on already vulnerable consumers in default.”
Student loan debt relief companies charge borrowers fees to enroll in federal consolidation, forgiveness, and repayment plans, but these programs are free through their loan servicers. Borrowers often realize this too late after they’ve already paid a debt relief company hundreds of dollars.
Selling debt relief is legal, in theory, and has been compared to income tax preparation services. But lines are often crossed by shady companies that are violating consumer finance protection laws.
The best way to seek help
If you have defaulted on your federal student loan, contact The U.S. Department of Education for help. They will work with you to figure out the best way to resolve your default.
If you have defaulted on a private student loan, first contact your lender to see what options they offer for getting your loan back on track. But don’t settle right away, because you might be able to get a better deal with a different lender.
That being so, it’s important to shop around to ensure you’re not settling for just any offer – you want to be sure you’re getting the best offer.
According to a report by the American Institute of Economic Research, student loan debt is on the rise. In 2003, student loans made up a little more than 3% of debt, but in the first quarter of 2017, student loans made up over 10%.
The delinquency rates for student loans are also rising. In 2017, the delinquency rate on student loans was at 10%. Before the Great Recession, the percentage of borrowers behind on student loan payments was closer to 7%.
The default rates are lower at Sallie Mae, says Rick Castellano, vice president of corporate communications for the consumer banking and loan company. Castellano says that roughly 98% of Sallie Mae’s customers are successfully managing their payments and less than 2% default annually.
“That number has been pretty consistent. Our private student loans are underwritten, meaning we assess the stability, ability, and willingness to repay before making a loan, ” he explains.
You can’t get away from paying student loans, which aren’t even cleared in a bankruptcy. Some borrowers may qualify for student loan forgiveness, but that is rare.
So if you have stopped paying your loans and don’t have a plan in place with the lender, consequences can be dour.
Here’s what you can expect to happen if you stop paying:
1 – Your credit scores will be negatively impacted
The number of payments missed will start to appear on your credit report around the 30-day mark, and your score will start dropping.
2 – Eventually, you’ll go into default
Federal student loans are usually considered in default after 270 days of non-payment. Private loans vary. Depending on your contract with the lender, missing one payment could be considered defaulting, though most companies will allow for more than one missed payment before considering your loan in default.
3 – Tax refunds can be taken away
If you have a federal loan and are in default, the federal government can intercept your tax refund and use it as repayment on your student loan. If you’re married and filing jointly, your spouse’s refund is also at risk.
4 – Garnished wages
A federal student loan allows the government to garnish (or take away) 15%. You can challenge this garnishment, but you don’t really want your employer to know that you’re not paying your bills, do you?
5 – Co-borrowers are in trouble
If your mom is on your loan as a co-borrower, she is also in trouble if your loans default.
6 – You can be sued
It’s highly unlikely that you’ll be sued if you have a federal loan, but private companies have been known to go after defaulters.
Millennials are getting better at managing their money
A new study by Sallie Mae surveyed college students ages 18 to 24 about how they spend and save their money. Despite the rise in delinquencies, the study revealed positive trends.
Castellano says, “It is encouraging to see that more than three-fourths of college students pay bills on time, and six in 10 never spend more money than they have available. Also, college students are putting money aside each month. More than half save at least some money every month, and 24% report having an emergency fund.”
These promising trends may be a result of the financial crisis. Many of the study’s participants grew up during the worst years of the Great Recession, which may have led them to adopt behaviors that promote sound credit management.
Get help
If you’re currently behind on your student loans, there are a couple of things you can do before you go into default and are affected by consequences such as wage garnishment.
Here are three options to consider:
1 – Forbearance or deferment
If you’re having trouble making payments, you may be able to pause your payments by using a forbearance or deferment. This will give you some time when you won’t be required to make payments. Deferments are the better choice because you usually won’t have to pay interest accrued during your time away from the loan. During forbearance, interest accrues at the normal pace.
2 – Income-driven repayment plan
An income-driven repayment plan can help you lower your federal student loan payments by adjusting the amount you owe based on your income. This does not apply to private student loans.
If you’ve already gone into default and need help, consider hiring a student loan lawyer or a student debt settlement company that can negotiate settlements with the lenders to lower the amount of the loan.
But whatever you do, don’t ignore your student loans. Figure out a way to make payments and move into the future with a healthy credit score and fewer worries.
Refinancing can help you avoid the consequences of ignoring your payments altogether.
To get started on a refinance, review all the top lenders and make a side-by-side comparison to find the best one for you.
Many of us carry student loan debt. Unfortunately, though, not everyone can easily make on-time payments to pay off that debt. That’s when problems begin to arise. Perhaps you’ve gone into delinquency or default, and the loan company has decided to sue you.
If you are having problems with student loan repayment, whether you are at fault or not, a student loan lawyer may be able to help.
What is a student loan lawyer?
A student loan lawyer is an attorney who specializes in helping borrowers navigate the complicated web of student loans.
Daniel Gamez, an attorney, and head of Gamez Law Firm focuses exclusively on helping individuals in debt. He explains, “As part of my practice, I developed this niche of helping borrowers with their student loan debt when they could not pay them back.
A large majority of this focus is on private student loans (those not backed by the Department of Education). My goal is to negotiate settlements with the lenders where my client’s total debt amount is lowered, and that reduction is paid out over an extended amount of time, with no additional interest accruing.”
Gamez decided to specialize in this field about six years ago when he first learned that private student loans were eligible for settlements. A potential client came to his office with unsolicited offers to settle her defaulted student loan debt.
“She had never been able to make payments, and the lender referred her accounts out to a collection agency, much like what you see happen with defaulted credit card debt,” recalls Gamez. They were offering to settle $42,000 in loans for $9,000, payable in a lump sum.
It was at this point that Gamez realized private student loans were in play for settlement purposes. “I found that a need existed to help people who aren’t able to pay back their private student loans. That includes helping them by negotiating settlements and also defending them if they get sued on their private student loans.”
6 reasons why you need a student loan lawyer
1) Aggressive collection letters and phone calls
“This is usually the trigger point for someone to contact me,” says Gamez. “Most of the people who contact me are scared and overwhelmed with collection activity and the possibility of getting sued.”
2) Served with a lawsuit for defaulted private student loans
“If the lender is successful in getting a judgment against the borrower, they have the option to garnish their wages, levy on bank accounts, or place a lien on their property. These options vary from state to state. It’s common for people to tell me they want my help to avoid a wage garnishment or bank levy,” says Gamez.
3) Help with federal repayment programs
“Federal Student Loans are a different beast, but they offer so many repayment options if you cannot afford the regular payment. The programs are free to sign up for, and you can do them without legal representation. However, I have found that some people are scared that they will mess things up if they try to do apply for these programs on their own. I always counsel potential clients on this fact, that they can do it alone. Some still request that I help them with it.”
4) Get loans out of default through a Loan Rehabilitation
“There are many articles and warnings out on the internet and issued by different entities advising people not to pay for this type of service. Yes, it is true that you can do it without paying someone else, but I have found there is a population of people that would rather pay someone to do that for them.
I think of it as being similar to filing your taxes versus hiring a tax professional to do it for you. I make it clear in my fee agreements that the client acknowledges that they could do this on their own, but they have decided to retain me as their attorney to do so for them. Then I try to make the process as transparent as possible because I have a duty to advise my client of this fact.
5) Disputing the amount you owe on your account
6) Disputing that the entity trying to collect has the legal right to do so
Real life examples
Gamez says one of his clients had a student loan in default with Navient, a spin-off company of Sallie Mae. Once your loan goes into repayment with Sallie Mae loans, they switch over to Navient for repayment and collections if you default, explains Gamez.
This client owed Navient $156,866.47 for five private student loans that she could not afford to pay. They went into collections and eventually wound up with an out-of-state collection law firm.
“My client was fortunate enough to have relatives who would provide her with the funds to settle the debt. We were able to settle her private student loans for $50,019.73, payable in two payments. She needed that time to secure the funds from her relatives. We saved her $106,846.74. That is the largest reduction I have received from a client on a private student loan,” says Gamez.
Gamez says he’s worked with other clients who had similar results. “We have been able to achieve settlements that reduce the loan balances by 50-60% of the total due, with those payments spread out for extended amounts of time. I would say anywhere from 24 to 84 months, and those settlements all come interest-free.”
The cost to hire a student loan lawyer
As with all legal costs, the amount can vary a great deal depending on a number factors including the balance on the accounts, whether or not the account is in litigation, and the number of accounts a lawyer will be working with.
Gamez usually charges a flat fee and says that he cannot make guarantees to his clients. He adds,”But I have found these lenders to consistently settle often for much less than is claimed due. I don’t recall having any clients who have balked at my fees. Most are more than happy to take their student loan problems and dump them on my lap.”
Other options for student loan repayment
Hopefully, your student loans haven’t gone so wrong that you need to seek help from a lawyer. If you’re not in serious delinquency or default and aren’t worried about being sued, consider loan consolidation or refinancing instead.
Freedom Debt Relief is the largest debt resolution company in the U.S. Based in San Mateo, California, Freedom Debt Relief helps debtors negotiate down debt and avoid bankruptcy. Customers commonly seek out these services when they can’t afford monthly payments and home refinancing or debt consolidation are not options.
$8 billion
Amount of debt Freedom Debt Relief has resolved for +500k clients since 2002
In December of 2010, after just eight years in business, Freedom Debt Relief became the first debt resolution company in the country to resolve a total of $1 billion in consumer debt. Now, as of 2018, it has resolved over $8 billion, and more than 500,000 clients are enrolled in its services.
To know more about Freedom Debt Relief, here’s an in-depth review of its services.
How does Freedom Debt Relief work?
The process of achieving debt relief through this company starts with a free evaluation. A Certified Debt Consultant will speak with each potential client, explaining a variety of strategies that are available. Together, the client and consultant can determine if Freedom Debt Relief would be a good solution.
If a client is interested in taking the next step, the consultant will work to customize a program to the client’s needs. The main goals include saving the client money, resolving debt in a shorter amount of time than it can take with other options, and setting a monthly deposit amount that is financially comfortable.
Here’s how the program works:
You deposit money into an FDIC-insured Dedicated Account each month. Your account can be tracked
Federal Debt Relief (FDR) analyzes your debt and creates a negotiation strategy.
When you have enough funds and the strategy is set, FDR will begin negotiations on your behalf by contacting the creditors you owe.
The creditors and FDR will come to a settlement that will offer you savings.
You will be presented with this settlement, which you can authorize or reject.
If you authorize the settlement and it is paid in full, the creditor will report the new status to the credit bureaus.
FDR works towards settling all of your debts so you can move on and start rebuilding your credit.
(If you are trying to decide which is better for you, bankruptcy or debt settlement, read this.)
How does Freedom Debt Relief charge customers for its services?
You may be wondering, “What’s in it for Freedom Debt Relief?” When the company negotiates a settlement on one of your debts, and you authorize it, they will charge a fee. There are no up-front fees.
How does Freedom Debt Relief affect your credit?
Any debt settlement or debt negotiation program, including Freedom Debt Relief, can negatively impact your credit. Here is why. Typically, you will stop paying your creditors, and instead, will invest money into a dedicated account with the company. This will result in missed payments on your existing debt, which appear on your credit report and will hurt your score. When a debt is settled for less than the original amount and marked resolved on your credit report, your score will also drop.
However, the damage done to your credit by a debt settlement is significantly less than the damage from filing bankruptcy. Further, it shows that you did your best to fulfill your obligations rather than giving up, and unlike bankruptcy, it will not show up on public records.
Eligibility
To enroll in FDR’s services, you need to have at least $7,500 in unsecured debt, and you must be experiencing legitimate financial hardship. Note that this company can not help with secured debt, which involves loans backed by collateral such as auto loans and mortgages. Federal student loans are also not eligible for the program, though some private student loans will be allowed.
How to get a free evaluation
To get a free evaluation, you simply visit the website and click “Get Your Free Evaluation.”
Here’s how it works:
Enter the amount of debt you have.
Answer whether you are behind on your payments.
Select the state in which you live.
Provide your contact information.
Then, wait for Freedom Debt Relief to get in touch with you to share the next steps.
Freedom Debt Relief pros and cons
Before you decide whether to move forward with this option, it is always important to do your research. The benefit here is that Freedom Debt Relief is a leader in the industry. With over $8 billion in resolved debt under its belt, it has experience in negotiating with creditors and getting settlements. When a creditor is speaking to a knowledgeable FDR representative who knows the ins and outs, they aren’t going to be able to play games. Too often, when an individual borrower calls a creditor, the creditor might try several tactics to get the customer to pay more than they need. So having an expert on your side can be a big benefit.
The main drawback is that debt settlement will hurt your credit initially. To take this route, you will have to accept taking a hit to your credit score now to resolve your debt and start rebuilding.
Another thing to consider is that forgiven debts are taxable income, so you will have to pay taxes on the amounts forgiven at the end of the year. Exceptions do exist. Find out more about debt settlements and taxable income here.
WEIGH THE PROS AND CONS
Compare the pros and cons to make a better decision.
Pros
Freedom Debt Relief is very experienced
The company works to reduce the debt you owe
It can help you avoid bankruptcy
There are no upfront fees
The process can speed up the time needed to repay debts
So, should you enlist the help of Freedom Debt Relief to help you handle your debt? If your debt is unsecured and over $7,500, you will qualify. But this decision is not one to make lightly.
On the one hand, you can reduce your debt owed, avoid bankruptcy, have knowledgeable consultants on your side, and speed up the time it takes to resolve your debt. On the other hand, your credit score is going to take a hit. There are no guarantees. You will have to pay fees for the services and will have to pay taxes on the debt that is forgiven.
Whether the pros outweigh the cons will depend on your situation. For example, if you can consolidate your debt through a personal loan or home equity loan, that would be a better route with fewer disadvantages.
If you can’t, you could also consider a credit repair agency, which can help you manage your repayment plan. However, that will likely cost you more than a debt settlement, and it can take longer.
Debt settlement is for those who are okay with taking a risk and sacrificing some points on their credit score to settle their debts quickly and at a lower cost. It is the last resort before filing bankruptcy.
Keep in mind that while Freedom Debt Relief is a leader in the industry, it isn’t your only option. (Compare Freedom Debt Relief with the best settlement companies of 2018.) If you believe debt settlement is the route for you, be sure to compare at least three firms to get an idea of your options. Read reviews, compare debt fees, note pricing models, and find out the minimum debt requirement of each company. To see a collection of top firms side-by-side, see our in-depth reviews page here.
If you have a balance on a high-interest credit card and are looking to pay it off, balance transfers are a good idea. There are many credit cards out there that even offer promotions to get you to open an account and transfer your debt.
For example, some offer up to two years to pay off your debt interest-free. Others waive balance transfer fees to make it even more inexpensive to move your debt.
But while balance transfers are a great way to pay off debt fast, they can harm your credit if you’re not careful.
Here’s how balance transfers affect your credit score
Similar to just about everything credit-related, there’s no way to know for sure exactly how your balance transfer will impact your credit score. There are a few different factors that go into that calculation:
How much you’re transferring
The credit limit on your new card
Whether you open or close an account to do the transfer
How long it takes you to pay down the balance
Now, let’s go into detail for each factor.
How much you’re transferring
While it’s normal to transfer debt from just one card to a new one, some banks allow you to make multiple transfers from different banks. Depending on how much debt you have on multiple cards, moving it all into one place can spike your credit utilization.
“Credit utilization is a part of your credit score calculation and is defined by the amount of credit you use as compared to your credit card limits,” says Wendy Moyers, a Certified Financial Planning™ professional.
For example, say you have the following credit cards:
A Card: $3,000 balance / $10,000 credit limit
B Card: $1,000 balance / $5,000 credit limit
C Card : $500 balance / $2,000 credit limit
“After timely payment, the credit utilization ratio is the second highest factor in calculating your credit score,” says Moyers. “The ideal credit utilization ratio is below 30%,” both on each card and across all cards combined.
For the above cards, your credit utilization would be as follows:
A Card: 30%
B Card: 20%
C Card: 25%
Combined: 26%
As you can see, all of these are at or below the recommended threshold. But if you transfer all of those balances to a new card, your credit utilization on the new card could spike. Of course, we need to know the credit limit on the new card to know for sure.
Calculate how much debt you currently have, then consider the next factor.
The credit limit on your new card
Now that you know how much debt you have look at the credit limit on the new card you’re transferring your balances to. In this scenario, let’s say Card D has a credit limit of $7,500.
If you were to transfer all three balances, you’d have a $4,500 balance on the new card, giving you a credit utilization of 60%.
Of course, this is counteracted a bit by the fact that you now have a 0% utilization on the other three cards. But your credit is still likely going to take a hit with the new high balance.
Whether you open or close a card to do the transfer
Every time you apply for a new credit card account, the hard credit check the lender does during the application process can knock a few points off your credit score. What’s more, adding a new account immediately lowers the average age of all of your accounts.
Since the length of your credit history is one of the factors that go into your credit score, a lower average age of accounts can have a negative impact on your credit score.
Closing a credit card can also negatively impact your credit score. That’s because by closing it, you no longer have that available credit to help lower your aggregate credit utilization.
How long it takes you to pay down the balance
While transferring a balance can spike your credit utilization, that doesn’t mean the impact on your credit score is lasting.
In fact, your credit utilization is calculated on a monthly basis. So, if you do the transfer in one month and pay off the entire balance the next month, your credit score will bounce back immediately.
If, however, your balance transfer results in a high credit utilization and it remains high for months while you pay down the balance slowly, the negative effects on your credit score will remain in place until you get the balance down to a more favorable level.
So, is a balance transfer worth it?
Although doing a balance transfer can hurt your credit score, it’s important to weigh the costs of the interest you’re currently paying against the negative effects. If you have high interest rates and big balances, transferring your debt to a card with a 0% APR promotion for balance transfers can save you hundreds of dollars, if not thousands.
Also, consider whether you’re planning on applying for credit in the near future. If you’re not, it doesn’t matter if your credit score dips for a few months. Once it gets back to where it needs to be, you’ll be in good shape again. That said, it’s important that you run the numbers before applying for a balance transfer card.
Also, compare cards from several different credit card companies to make sure you’re getting the right one. If you’re a business owner, consider a business credit card instead.
The more time you spend planning your balance transfer, the easier it will be to get as much value with as little negative impact as possible.
“Recognize that each of these actions may also affect your score, so it is important to be careful what solution you decide,” says Moyers. “The most important decision being to reduce your credit card as much as possible.”
We’ve all made mistakes, and that includes mistakes with credit. But while some elements of fixing your credit score require time and patience, there are other things you can do that can make a difference more quickly.
The second-biggest factor in your credit score is how much you owe. It makes up 30% of your FICO credit score. A big part of that number is your credit utilization rate, which is calculated by dividing your credit card balances by your credit limits.
For example, if you have a card with a $5,000 and a $10,000 limit, your credit utilization rate for that card is 50%. Because credit card companies report balance information every month, any changes that occur are reflected immediately the following month.
Experts recommend keeping your credit utilization rate below 30%, but it’s best to go as low as possible — as long as it’s not 0%, which signals that you’re not using credit at all.
It’s impossible to know exactly how many points you can recover by doing this. Your FICO score is made up of your full credit history, and everyone’s credit profile is different. But if you manage to pay down a balance from a 75% credit utilization rate to a 10% rate, that could make a big difference fast.
Other ways to increase your credit score fairly quickly
Paying down your balances can be the most effective way to increase your score quickly, but there are other ways to do so that you should consider.
Ask to become an authorized user
Credit card companies allow account holders to add authorized users to their account. For example, if you want your wife or kids to have a card tied to your account, you can request that. As a result, the credit card companies report the account history for those authorized user accounts.
This means that you can get the benefit of the full history of someone’s credit card just by getting added to their account. “Ask family and friends until you find someone with the ideal credit card,” says Joshua Crum, owner at Rebuild Repair Credit. “It should have a long, positive history with a low credit utilization rate.”
Crum also points out that you don’t even need to use the card to get the benefits of the account.
Get a secured credit card
The most important factor in your credit score is your payment history. And while you can’t go back in time and get rid of late payments, you can start making on-time payments right now.
One good way to do that is to get a secured credit card. Unlike traditional credit cards, secured cards require you to put down a deposit, usually equal to the credit limit you want. You can then use the card as you would a normal credit card.
Note: A secured card is not like a prepaid debit card. You don’t load money onto it, use it up, and reload it. The deposit stays with the credit card issuer to protect itself in case you default, and you get it back when you close the account.
“Put as much as you can afford down on a secured credit card,” says Crum. “The more, the better, as this will be your credit limit. Use this card responsibly, keeping your balance low and every payment on time and well above the minimum.”
Doing these things may take longer than paying down your balances on other cards, but they go a long way in establishing a good payment history, which is crucial to rebuilding your credit.
Credit repair
In some cases, your bad credit score may not be entirely your fault. Identity theft and creditor or credit bureau errors can hurt your credit if you’re not careful. Get a free copy of your credit report through AnnualCreditReport.com and review it for possible errors or accounts you don’t recognize.
If you find one or more, you can try to work with the creditors and credit bureaus yourself. Or, you can hire a credit repair company to do it for you. It may take a little time for them to sort things out, but once they do, you should see the errors or fraudulent accounts fall off by the next reporting cycle, says Crum.
While there are a few things you can do that will quickly make a difference in your credit score, a full fix and return to excellent credit status does take time.
“For a typical lightly damaged credit file, expect around a year to complete a full rebuild and repair,” says Crum. He notes, however, that some cases can be resolved sooner or take longer than that. “There are too many variables to give an exact estimate.”
The important thing is that you look at all of the negative things that are impacting your credit score and work toward finding solutions.
Be sure to use a credit monitoring service throughout this whole process to keep an eye on your score and see how your actions affect it. The sooner you start working to improve your credit, the sooner you’ll reach your goal.
Your credit utilization rate is specific to your credit card usage and is meant to determine how much of your available credit you’re using.
The number is calculated by dividing your balance by your credit limit. So, if you have a balance of $3,000 on a card with a $10,000 credit limit, your credit utilization ratio is 30%.
The number is calculated based on each card you have and across all your cards collectively. For example, say you have another card with a $2,000 balance and a $3,000 credit limit. As a result, you have three credit utilization rates:
$3,000 / $10,000 = 30%
$2,000 / $3,000 = 67%
$5,000 / $13,000 = 38% (combined)
What is the best credit card utilization rate?
While many experts recommend keeping your credit utilization rate below 30%, “there is no hard and fast rule,” says Liran Amrany, founder and CEO of personal finance app Debitize. “In general, you want to be as low as possible, though not 0%, as then it looks like you are not using any credit at all.”
Amrany is on the right track. Experian has used its consumer data to show that those with the best credit scores use just 8% of their credit card balances. In contrast, those with a nonprime credit or worse use 59% or more of their available credit. That doesn’t mean you should keep a balance on your card. But you do need to use the card from time to time for it to be considered an active account.
How to keep your credit utilization rate just right
Your credit utilization rate is calculated monthly. As a result, “often the fastest way to improve your credit score is to improve your utilization,” says Amrany.
To make sure your credit utilization rate is just right, start by calculating it. The good news is that you don’t need a credit utilization calculator — the math is simple. Take each of your open credit card accounts and calculate your credit utilization rate by dividing the balance by the credit limit.
If you have any high rates, your next course of action depends on whether you carry a balance on your card or you pay it off in full each month:
Carry a balance
If your credit utilization rate is always high because you carry a high balance on your card, find ways to pay it down to keep it low. Consider no longer using the card in the meantime to avoid running the balance up again, especially if you’re close to maxing out your card.
Pay off in full
If you have a high credit utilization rate but always pay off your balance each month, your credit can still take a hit. One way to solve the problem, says Amrany, is to “pay off most — but not all — of your credit card balances right before your statement date.” That’s because most banks report your utilization based on your statement balance.
Some other tips to keeping your credit utilization rate low include:
Set balance alerts
For example, if you have a $10,000 credit limit and you want to keep your credit utilization rate below 15%, set an alert for when your balance reaches $1,000 so you know that you can only spend $500 more before the statement closes.
Ask for a higher credit limit
The higher your credit limit, the more you can spend on the card without running up your credit utilization rate. This is especially helpful if you have a low credit limit on a starter card. Just keep in mind that requesting a credit line increase often results in a hard credit check, which can knock a few points off your credit score.
Make payments throughout the month
Building on Amrany’s proposal, make multiple payments on your credit card throughout the month to keep your utilization rate low. This is especially helpful if you tend to use your card a lot.
Don’t believe this myth
Having a 0% credit utilization rate is not ideal because it signals that you’re not using credit at all. Because of this, some suggest that you shouldn’t pay off your whole statement balance by the due date, essentially leaving a balance each month that generates interest.
This, however, is a common misconception, says Amrany. “It’s completely false. In fact, the bureaus don’t even know if you pay your statement balance in full every month or carry a balance month to month.”
And he’s right. If you take a look at your credit report, all you’ll see is your last reported balance — again, usually your statement balance — and whether you’ve made on-time payments. There’s no mention at all of how much you paid or whether you paid the balance in full or only partially.
The bottom line
Your credit utilization rate is a big part of your credit score. Keeping it as low as possible is one of the keys to achieving excellent credit. By knowing what your rate is and using the above tips to keep it low, you’re on the right path.
If you can’t get a credit line increase or you simply want to add some available credit to lower your utilization rate, check out some of the best personal and business credit cards to see if one fits your needs.
When you’re in over your head with debt, you might feel there is no way out. In those cases, turning to a debt settlement company might be a good option. But be aware of all your options, and study the terms and fees involved, as well as any impact a settlement might have on your credit score. Here’s what you need to know to find a reputable debt settlement company.
Simply put, a debt settlement is an agreement to pay your creditors less than you owe. And reputable debt settlement companies can help you do this.
While debt settlement does hurt your credit score, it is better than declaring bankruptcy. It can also signal to future lenders that you’re serious about settling your debts.
Keep in mind, debt settlement companies are different from debt consolation companies. Debt consolidation companies seek to combine all your debt with one creditor, usually at a lower interest rate than before. Debt settlement companies seek to lower your debt with individual creditors.
But before you proceed, it’s important that you know if debt settlement is the right option for you – and if it is, how to choose a legitimate, trustworthy debt settlement company.
Is a Debt Settlement Company Right for You?
Enlisting the help of a debt settlement company only makes sense if your debts are large (usually more than $7,500). If your debts are large, the amount you pay a debt settlement company will be less than the overall amount you owe.
That’s the benefit of these firms. Because debt settlement companies employ professionals with specialized training and experience in negotiating settlements, you are usually able to get a better deal with creditors than you would otherwise.
Featured Debt Relief Companies
- Money Back Guarantee - No Monthly Consultancy Fee - Minimum Debt Owed $10,000 - AFCC Member - IAPDA Member
Ask if the company is licensed to work in your state. Also, ensure there are no other consumer complaints on file about the company.
Check whether the company has been involved in any lawsuits with regulators or has been charged with deceptive or unfair practices.
What are the Terms and Fees?
Debt collection agencies are prohibited from charging any upfront fees before they settle your debt. Steer clear of any firms that do.
Some may charge monthly maintenance fees. The best companies only charge performance-based fees. Under those fees, you would not pay if the company does not successfully settle your debt.
Make sure you understand the settlement terms and the monthly payments you have to pay. When you work with a debt settlement company, you may be asked to set aside funds in a separate bank account. Those funds are still yours. You are entitled to the interest on those funds and can withdraw them at any point.
Debt settlement firms must tell you how much money or what percent of your outstanding debt you have to save before it negotiates with a creditor on your behalf. Don’t forget to ask what that amount is.
Be aware of all the fees the company can charge. Every time the debt settlement firm settles a debt with one of your creditors, it can charge you a portion of its full fee. Some may charge a fee that’s a percentage of the total amount you save through the settlement.
Make sure they are explicit when explaining what fees they charge and any conditions attached.
Beware of Overpromises
When searching for an organization to help you, keep in mind that many so-called debt settlement companies have been found to be little more than scams. Some promise to settle all your debts for just a small fraction of what you owe. Or they say they can erase your debt in one year. (Two to four years is more common).
Others deceive consumers about the risks involved. They may not tell you, for example, that most consumers don’t settle their debts and debt collectors may continue to call. According to the Federal Trade Commission, don’t work with any debt settlement company that:
touts a “new government program” to bail out your personal credit card debt
guarantees it can make your unsecured debt go away
tells you to stop communicating with your creditors, but doesn’t explain the serious consequences
tells you it can stop all debt collection calls and lawsuits
guarantees that your unsecured debts can be paid off for pennies on the dollar
How Much Guidance Will You Receive?
The benefit of enlisting a debt settlement company is that you have professionals on hand to answer your questions and concerns. Go with the company that makes you feel comfortable.
Look for companies that have dedicated professional advisors or arbitrators. Check if they’re accredited by the International Association of Professional Debt Arbitrators (IAPDA) or the American Fair Credit Council (AFCC).
The firm must also educate you about the risks involved in debt consolidation. For instance, if the company asks you to stop paying your creditors, it should tell you about the negative consequences. That might include lowering your credit score or having your credit card company charge you additional fees.
Debtmerica Relief has helped 20,000 consumers lessen their debt burdens on credit cards, personal loans, business loans, collection accounts, and medical debt.
National Debt Relief has helped over 100,000 families with services, such as debt settlement and credit counseling. It charges a fee of 20% of the initial balance amount, though that fee can vary based on how much you owe and how much relief the company helps you achieve.
Pacific Debt Inc. operates in 27 states and has a fee that works out to about 4-8% of the debt when calculated over the course of a three- to four-year program.
All of these companies will work with you to figure out how much you can legitimately pay off each month. They will take stock of your entire financial situation. They won’t require upfront fees and will not overpromise.
These are the things you should not compromise on when looking for a company to help with your debt issues.
Struggling with debt problems can seem overwhelming. It doesn’t have to be. Armed with enough knowledge about the types of solutions out there, you can make better financial decisions for your family and your financial future.
Getting into financial trouble can be overwhelming. Many people shove it under the rug, but that only works for so long. There comes a time when you need to face the music and find the best way out.
In 2016, 794,960 Americans chose to file bankruptcy, according to U.S. Federal courts. Is that the best choice for you, though?
We are going to examine filing for bankruptcy and negotiating a debt settlement. You’ll learn what each route entails along with the eligibility requirements, costs, and pros and cons.
Let’s get started by taking a look at bankruptcy.
Bankruptcy
In general terms, most of us know bankruptcy means throwing our hands up and waving the white flag to surrender financially.
However, more specifically, it is a legal proceeding for people who have outstanding debts that they can not pay. It can allow you to get a fresh start, but it does come with costs.
The two bankruptcy options individual debtors should know about are chapter seven and chapter 13.
Chapter seven debt relief
Chapter seven bankruptcy is also known as a “liquidation” bankruptcy. When you file, a three to 6-month process begins in which an appointed chapter seven trustee manages your case. They determine if you have any eligible assets they can sell to repay your creditors.
However, in many cases, debtors don’t have any eligible assets. The definition of eligible assets in chapter seven cases varies by state. For example, some have exemptions for your home or car up to a set amount.
Once the trustee sells your nonexempt assets and the filing goes through, they will discharge your debts.
Eligibility
To qualify, you need to prove that you can’t repay your debts. You can do so by showing that your current monthly income is less than or equal to the median income in your state for your family size.
If your income is too high, you can still qualify via the “means test.” It looks at your larger final picture, including expenses and taxes. If you don’t qualify, chapter 13 bankruptcy is an alternate option.
The chapter seven filing process
If you do qualify, the process involves the following steps:
1) File a petition with the bankruptcy court in your local area.
2) Provide the court with a schedule of liabilities and assets, current income and expenditures, executory contracts, and unexpired leases. Additionally, you need to provide a statement of financial affairs.
3) Give the trustee your tax returns for prior years and those undergoing filing during the case.
4) Submit proof of credit counseling and any debt repayment plan you create during the counseling.
5) Submit additional proof of income and financial accounts.
6) Pay a $245 filing, a $75 miscellaneous administrative fee, and a $15 trustee surcharge (can be waived in certain cases).
Total cost=$335
What happens after filing bankruptcy?
Once you file, “automatic stays” applies. This means that creditors can’t contact you to collect what you owe anymore. Initiation or continuation of lawsuits, wage garnishments, and phone calls from creditors will stop. All of your property and debts are handed over to the bankruptcy court.
You will also have to visit the courthouse for a creditors meeting 21 to 40 days after filing the petition. This is a meeting of the bankruptcy trustee and your creditors. During it, you will be sworn in and will answer questions about your financial affairs and property.
The trustee will determine if your case is an abuse of chapter seven or not, and will identify if you have any property that is not exempt from liquidation. The trustee’s goal is to repay as much as possible to creditors from your assets. A decision will be made and given to the court within 10 days.
After the bankruptcy process is complete, all qualifying debts will be gone. The exceptions are child support, tax debts, student loans, secured debts you are paying, and debts which are not dischargeable due to reasons such as fraud or malicious acts.
Chapter seven pros and cons
WEIGH THE PROS AND CONS
Compare the pros and cons to make a better decision.
Pros
Shorter process than other bankruptcy types
Discharge debts relatively quickly, restart building credit right away
No requirements for a repayment plan
No limit on debt amount or solvency
In many cases, a debtor’s assets are exempt from liquidation
Grounds for denying an individual debtor a discharge are narrow
Easier to explain to future lenders than a list of debt payments, repossessions, and defaults
Some types of debts cannot be forgiven (liens on property, taxes, etc.)
Case is subject to approval (cannot be considered an abuse of the law)
Must meet eligibility requirements
Stays on credit report for 10 years, three years longer than chapter 13
Can’t file bankruptcy again for six years
Case may undergo conversion into chapter 13
On public record
Now let’s look at chapter 13 bankruptcy.
Chapter 13 debt relief
Chapter thirteen is a bit different. Instead of canceling debts and possibly repaying them through the sale of qualifying assets, you use your income to make payments toward a portion of your debt.
It’s also known as the “reorganization” bankruptcy or the “wage earner’s” plan. If your income is under the median in your state, you get a three-year plan. If it is over, you will get a five-year plan.
Eligibility
You have to make enough income to meet the payment obligations. Further, your secured and unsecured debt obligations have to be below the maximum set limits. The maximum limit for unsecured debt is $394,725, and $1,184,200 for secured debt.
The chapter thirteen filing process
The process for filing chapter thirteen bankruptcy is the same as filing for chapter seven. However, you are required to set up a repayment plan.
What happens after you file?
Once you file, efforts on the part of debtors to collect from you will stop, like with chapter seven.
While repaying your debts in full is not a requirement, you will need to use your disposable income to make payments toward it. Certain debts take precedence over others.
At the top of the totem pole are alimony, child support, some tax obligations, and employee wages. Next, are regular payments on secured debt and then unsecured debts you have fallen behind on.
When the plan ends, any remaining debts will be eligible for discharge as long as you are current on any child support or alimony payments and you have completed the credit counseling course.
One of the most prominent benefits is that chapter 13 stops foreclosure proceedings and allows you to pay your mortgage back over time. You can also reschedule other secured debts and extend them over the payment plan.
Total cost= $310 in filing fees plus repayments according to the plan you create.
Pros and cons of filing chapter 13 bankruptcy
WEIGH THE PROS AND CONS
Compare the pros and cons to make a better decision.
Pros
Save your house from going into foreclosure
Keep all your nonexempt assets
Discharge remaining debt after repayment plan finishes
13 bankruptcy comes off of your credit report three years earlier than chapter seven
Cons
Have to make payments on debts according to repayment plan
Longer bankruptcy process of three of five years
Bankruptcy appears on your credit report for seven years
If you would like to avoid a bankruptcy on your credit report and the filing process that goes with it, debt settlement may be better for you.
What is debt settlement?
A debt settlement is when the debtor pays the creditor a percentage of their total balance to settle the debt. It is also known as credit settlement, debt negotiation, or debt arbitration. Only unsecured debts are eligible, such as personal loans, credit cards, and medical bills.
How does a debt settlement work?
The process of debt settlement is as follows:
1) Contact the creditor
2) Explain your situation and request a debt settlement
3) Negotiate
4) Come to an agreement, get it in writing, and pay the amount
Key things to know before calling
There are a few things you should know before calling up your creditor, such as:
They don’t have to agree to any debt settlement
The only reason they will is if they think doing so will protect their bottom line. If you are struggling to keep up with the payments and are likely to default, it is in the creditor’s best interest to take a lump sum from you.
They can see your transactions and credit report
Remember the creditor will be able to look over your recent transactions and your credit report. This can work for you or against you. For example, if you are spending money at nice restaurants and keeping up with all of your other obligations, creditors won’t believe you are struggling.
It’s best to stop using the card several months before calling in for a settlement. It will also likely work to your advantage if you have been struggling to keep up with your payments.
Everything is negotiable – Even debt
Remember, this is a negotiation. It’s best to start with a low offer, around 30% of your balance, and try to settle for 50% or less. It may also help to mention that you are trying to settle with multiple creditors, as it will create competition for your money.
Debt settlement companies or DIY
Some debtors enlist the help of debt settlement companies to help them settle their debt. “Now regulated by the Federal Trade Commission (FTC), these businesses work on a consumer’s behalf to lower the principal balances they owe. Final agreements can obtain savings of 50% of the total debt (before fees),” says Andrew Housser, Co-CEO of Freedom Debt Relief.
Housser explains, “A debt negotiation firm does not make monthly payments to creditors, but rather negotiates directly with the consumer’s creditors while the consumer accumulates funds for the settlement through a monthly program payment.
Debt negotiators charge consumers a fee for their services, typically a percentage of the debt enrolled or a percentage of the debt reduced. These fees must be charged after the firm has successfully negotiated the debt.”
While you can do it on your own, an expert that handles settlements regularly can help. But make sure to choose wisely and ask the right questions, as this type of company is known to have some bad apples that prey on struggling debtors. Whether you decide to handle the negotiations yourself or have a company do it for you, be sure to get the agreement in writing. You don’t want the account going to collections after paying a lump sum to settle.
You may be wondering, “How much does debt settlement affect your credit score?” Like a chapter 13 bankruptcy, a debt settlement will stay on your record for seven years.
Total costs: A percentage of your debt, and the payment to the debt settlement company (if you use one).
While debt settlement can help you avoid bankruptcy and an account going into collections, it does have its drawbacks. Here’s an overview of the pros and cons.
Is a debt settlement a good idea?
WEIGH THE PROS AND CONS
Compare the pros and cons to make a better decision.
Pros
Settle the debt for a percentage of the amount you owe
Can typically resolve all debt in two to four years
Only pay for services after debt gets resolved
Repayment terms are typically better than with a Chapter 13 bankruptcy, according to Housser.
Cons
Heavily impacts your credit report for two to four years
Collection agencies or creditors can continue to contact you and can take legal action.
Stays on credit report for seven years.
Negatively impacts your credit score.
You have to save up a lump sum.
You have to settle with each creditor.
Have to pay debt settlement company if you hire one for help.
Alternative options
In addition to bankruptcy and debt settlement, there are three other consumer debt relief programs. These include debt consolidation, a debt management plan, and a balance transfer.
Debt consolidation involves combining debt from multiple sources into one loan, resulting in one easy-to-manage payment. Best case scenario, you get an interest rate on the consolidation loan that is lower than the average of all the rates you were previously paying. The drawback is that you may not be able to get approved for a high enough amount or a low enough interest rate if your credit is in bad shape.
A balance transfer involves transferring a balance from one account to another to reduce the interest rate. It is typically a good option if you have a credit card with a high interest rate. You can potentially transfer the balance to a card with a 0% APR promotional period.
Debt management plan
A debt management plan (DMP) typically involves a debtor working with a credit counseling agency to develop a debt repayment plan. The agency then presents the plan to creditors and requests to lower the interest rates and fees. Then, the debtor makes the payment to the agency, which pays the creditors. The plans typically last for four to five years.
Find the right debt solution for you
Debt relief programs work for many people. However, the right solution will vary from person to person. You will need to examine your situation and carefully weigh the pros and cons of each option.
Chapter seven bankruptcy might be the best route for someone with numerous delinquent accounts who meets the eligibility requirements and doesn’t have any nonexempt assets they care to keep. It is fast, affordable, and lets you get a new start quickly. However, Housser says, “This should generally be considered a last resort, as it destroys a credit rating for many years.”
Chapter 13 bankruptcy may be best if you don’t qualify for chapter seven, have assets you want to keep, and have both secured and unsecured debts. It will also look better to future creditors than a chapter seven filing and can help you save your house.
Lastly, debt settlement might work best for someone who has fallen behind on only unsecured credit accounts and has nonexempt assets they want to keep. It will likely be more affordable than a Chapter 13 repayment plan and will come off the credit report sooner than Chapter 7.
To see if you qualify for debt settlement (without hurting your credit score), click here. You can also browse our list of top debt settlement companies to help you find the best one for your situation.
As cyber thieves become savvier, identity theft continues to rise. According to the 2017 Identity Fraud Study conducted by Javelin Strategy & Research, 2016 was the worst year ever for identity theft.
$16 billion
amount stolen by cyber thieves from 15.4 million U.S. consumers in 2016
Their study found that cyber thieves stole $16 billion from 15.4 million U.S. consumers.
Cyberattacks on companies that hold sensitive financial information are also becoming more prevalent. In September 2017, cybercriminals stole the personal data of 143 million U.S. consumers from credit reporting agency, Equifax.
“In today’s connected world, identity theft is ubiquitous,” says Steven Bearak, CEO of IdentityForce, a company that provides identity theft detection, support, and recovery services.
Says Bearak, “Fraudulent new account openings and account takeovers are very common. Fraudsters often have your account communication rerouted, keeping you in the dark so that the theft can continue longer.”
Consequences of identity theft
The repercussions of having your identity stolen are far-reaching and potentially devastating. Your credit score is likely to plummet. You’ll most likely need credit repair.
Credit Force estimates that victims of identity theft spend up to 600 hours or more struggling to retain their stolen identities.
To understand the far-reaching effects, here is a sampling of what an identity thief can do in your name:
Apply for credit cards
File fraudulent tax returns
Apply for a job
Lease an apartment
Open bank accounts
Obtain a driver’s license and passport
Buy and finance a car
Get a mortgage
How do you stop identity theft?
How do you protect your credit and your overall identity? When it comes to identity theft protection tips, Bearak’s top tip is to remain vigilant.
According to Bearak, everyday activities may unknowingly put you at risk. “Sharing phone numbers, home addresses, and email addresses can open the door for thieves to get deeper access to personal information.
They can use that information to access your medical records, credit card numbers, tax returns, and retirement and bank accounts. Avoid sharing personal information unnecessarily.”
Another way to remain vigilant is to monitor any changes in your credit and identity profile. You can do this on your own or purchase identity theft protection. Such services offer monitoring of your personal information for signs of identity theft.
These companies also offer recovery services to help you deal with the aftereffects of identity theft. Some companies include access to your credit reports and scores.
Free or paid identity theft protection?
Free identity theft protection options exist, including the federal government’s IdentityTheft.gov website. You can report an identity breach on the website. They then offer you a personal recovery plan and guidance.
The identity theft protection companies that charge a fee generally offer more services. They monitor your credit and personal information. Some just monitor for credit card fraud, while others include social security number theft.
There are even companies that monitor the dark web where information, such as social security numbers, is bought and sold.
You’re alerted when there’s suspicious activity surrounding your credit or identity. If you discover fraud early enough, you can avoid extensive financial damage.
Identity theft protection companies also assist with identity recovery, including paperwork and phone calls. Some offer identity theft insurance.
How do I get identity theft protection?
Securing identity theft protection is fairly straightforward. Once you determine the company you would like to use, log on to their website and sign up. They will ask you a variety of questions regarding your financial situation and personal identity.
Is identity theft protection a waste of money? Pros and cons
To decide if identity theft protection is right for you, it helps to compare the advantages and disadvantages. Here are the pros and cons.
WEIGH THE PROS AND CONS
Compare the pros and cons to make a better decision.
Pros
Constant monitoring of your information/data
Various options regarding services (For instance, some companies offer to monitor for entire families, including children)
Potential financial reimbursement for whatever is lost if your identity is stolen under their watch
Many companies offer a money-back guarantee–if you’re not satisfied with their services
Assistance navigating the required paperwork and phone calls if your identity is stolen.
Cons
There is a recurring cost. You’ll usually pay from $18 to $25 a month.
Identity theft insurance may lack transparency. Read the fine print carefully. There are exclusions.
Identity theft protection can’t shield you from everything. Says Bearak, “No matter what anyone says, you can’t stop all types of identity theft. However, receiving alerts when something suspicious occurs goes a long way toward protecting your identity.”
The bottom line
There are no guarantees, but given what your identity is worth and the consequences of having your identity breached, it can be a good idea to get identity theft protection. Professional identity theft protection can help you protect the good credit you’ve worked hard to build.
Says Bearak, “The identity theft landscape is continuously evolving, with new scams being designed every day to steal personal information. We will continue to see data breaches rise and become even harder to stop. This again means that we all need to be even more vigilant with our personal information.”
If you’ve experienced identity theft and are in need of credit repair options, consult SuperMoney’s Credit Repair Reviews page.
