Is your credit report everywhere you want to be?
Photo by: Philippe Ramakers (Stock Exchange)

These days, as more and more people have found themselves dealing with creditors on unfavorable terms and fighting to pay household bills with mounting credit card balances, consumers are inundated with calls to keep an eye on their credit report.

Receiving a credit report from each of the three reporting agencies once a year is free, and it’s also a key step in detecting fraud and preventing identity theft.

Today, UWSA discusses the credit report: how to obtain it, how to read it, and how it relates to the credit score.

Obtaining Your Free Credit Report

Though there may be similar outlets with catchy jingles advertised on television, the official website maintained by the three credit reporting companies to meet their legal obligation to provide one free credit report per company per year; other services offering “free” credit reports usually do so under the condition that the user agree to credit monitoring or another fee-based service.

Using AnnualCreditReport.com, you can easily obtain reports from Experian, TransUnion, and Equifax. The website requests personally identifying information, including your Social Security number, and asks you several questions about your major credit history and past addresses to prevent fraud. Once verified, you are able to select one, two, or all three companies to receive credit reports from. Though the details of presentation differ, these reports are all essentially the same in intent and use.

Contents of Your Credit Report

Some essential features of your credit report include …

Complete transaction history. Your credit report includes past and present credit, loan, and other financial accounts and their status. You should explore these accounts, ensure that each one was legitimately opened by you, and verify that all accounts closed in the past are designated as such. Also included is the average age of opened accounts; a higher average age indicates a longer and more stable credit history, and therefore, a lower risk.

Potentially negative items. Modern credit reports generally single out “potentially negative items” such as account defaults for your attention. The website interface permits you to open a dispute case for these items from within your credit report. “Zombie debt” and other fraudulent or abusive practices, both from identity thieves and from creditors, can be detected by examining these entries.

Total indebtedness. Many modern credit reports allow you to estimate the total amount of payments due to all of your outstanding accounts and the type of debt that each one represents. Having a high amount of credit use in relation to your total credit line or total income are major factors that might prevent you from getting loans on favorable terms, and may result in restriction of current credit lines as consumer credit stagnates.

While much of a credit report is simple and easy to understand for a non-expert, there are a large number of features and facts not mentioned here. You can only access your free credit report once per year, and once you log off from your session, you generally cannot return to it. Be sure to set aside no less than an hour to understand your report thoroughly.

What About Credit Scores?

Your credit score is a numerical representation of overall credit risk, derived from the contents of your credit report. It’s an easy shorthand to understanding the health of your credit history, and is used constantly to determine your level of credit risk. Unfortunately, credit reporting companies are not legally obligated to provide your credit score with your credit report, and have monetized this as an add-on feature. We’ll discuss the credit score specifically and describe what each score means in a future UWSA post.

Ready to leave home after graduation? Not so fast!
Photo by: Robert Linder (Stock Exchange)

Inthe last few posts on UWSA, we’ve been talking about student debt. More than any other financial challenge, even high credit card balances, student loans and debt impact the lives of millions of young people on the long term. With tuition rising each year, and the job market unsteady, some experts are recommending systematic change to help students who are dealing with creditors and trying to establish themselves financially. Should college students consider staying at home a year after graduation?

Post-Graduation Options and Your Finances

In the U.S., there’s a long tradition of uprooting and moving far from home at a fairly young age, with college serving as a “practice run.” But many students do not now have the savings or job security it takes to make a down payment on a home and obtain a mortgage at favorable terms. Further, with friends in the same situation, roommates may not necessarily be able to keep up with their part of a rental agreement. What to do? Establishing yourself for about a year in your home community can help contribute to long-term stability, but it’s not the only route. Here are some options considered.

If possible, stay in school. One of the best places to weather a recession is in graduate school, especially if your agreement to attend is made before the economy “bottoms out.” Generally, universities sign contracts with graduate students that are binding and result in a substantial level of financial support, in exchange for academic progress and some teaching responsibility. This amounts to a secure “job” and, often, favorable living conditions in an area that benefits from the university’s presence. On the other hand, pursuing graduate study mid-recession can be more difficult.

Consider staying at home. Grace periods for student loans quickly expire, and can raise your monthly cost of living by hundreds of dollars. Seeking employment close to home can eliminate some recurring expenses and allow you to pay down common household bills like high credit card balances that might have built up during college, eliminating recurring payments. Temporarily staying at home may also count favorably in attempts to get consolidation loans, as you’ll have been at the residence for longer, and pay less. You’ll also have the benefit of being able to search for work in an area you’re familiar with; and should the worst happen and you find yourself underemployed, you’re likely to qualify for unemployment deferments for your federal student loans.

Evaluate the job market carefully. If you do plan to move soon after college, don’t rush! Network with former professors, bosses, co-workers, and other students to get leads for work. Narrow down your options by finding out the average rent and cost of living in areas you might want to live or might become employed. Consider seeking professional help from a career consultant to write and develop your resume and your interview skills. And save, save, save! It’s never too early, or too late, to begin building an emergency fund, and there are always unexpected expenses when you move. The best possible situation may be to start with a company “at home” and seek a transfer into your desired area in the future, after you’ve built up some social and professional capital at your workplace. Though this isn’t always possible, try to consider your options on the long term, with your budget in mind.

Is he thinking ahead to years of debt?
Photo by: Harrison Keely (Stock Exchange)

Last time on UWSA we described the basic categories of college financial aid and how each one relates to a student’s financial future.

Now, we’ll zoom ahead a few years to discuss what happens after graduation, when both federal and private student loans fall due.

In today’s job market, a salary that can pay substantial student debts along with living costs within a short time of graduation simply isn’t guaranteed.

Knowing the ins and outs of repayment in advance can make debt management much easier.

Grace Periods, Forbearance, Deferments, and Forgiveness: What to Know

Depending on the type of loans you have, different payment plans will be available, and different criteria will be in place for grace periods, deferments, and loan forgiveness. The grace period is a time following graduation during which no payments are required and no interest accrues. For federal aid, grace periods are quite long, amounting to six months or more. Private loans vary, and may have no grace period at all.

Deferments are periods when no payments must be made, but during which interest continues to accrue. Deferments may be claimed or extended for various reasons, discussed below. Many private loans only permit deferment in cases where the student is continuing his or her studies at the graduate level and is enrolled with a full class load. However, federal loan deferments are much more flexible and there are more options.

Federal loan deferments generally last for 12 months and may be renewed or extended, either on the same basis, or based on new circumstances that also qualify. Loan forbearance is deferment in which the payee is willing, but not able to pay under the loan’s terms due to temporary financial hardship, and has similar implications.

Loan forgiveness is also sometimes possible in the case of government financial aid. Some federal workplaces allow for loan forgiveness after several years of service. There are also employers in the private sphere who may offer programs to help young employees defray the costs of their loans on the long term. In most other cases, loan forgiveness is only possible for students who die or become totally disabled.

Your Loan Deferment Options and What They Mean

Long-term loan deferment is not an answer to the problem of student debt; interest continues to accrue and larger payments will have to be made eventually. However, with an uncertain job market and economy, it’s only reasonable to know which deferments you qualify for. Here are some of the most typical ones. For information on all deferments, including complete eligibility criteria, visit Federal Direct Loan Servicing Online, the centralized resource for federal loans and repayment.

Armed Forces: Personnel who are actively serving in the U.S. military and who have agreed to serve for at least one year may qualify for deferment. National Guard service may also qualify one for deferment during a defined emergency.

Unemployment: Individuals seeking, but unable to find 30+ hours of work per week, and who expect this to go on at least three months, may qualify for a deferment for the duration of their unemployment if they continue to seek work.

Graduate Study: Students who are involved in continuing graduate-level education on at least a half-time basis usually qualify for a deferment for the duration of their program.

Tax Exempt Organization: Individuals working for a charitable nonprofit, directly engaged in service within the community that addresses the problems of poverty, may qualify for a deferment if making less than minimum wage.

Teacher Shortage Area: Qualified teachers who are working full time in a region, grade, or subject defined by the Department of Education as suffering a workforce shortage may qualify for a deferment.

Working Mother: Mothers of children who have not yet entered the first grade, and who do not earn more than $1 above federal minimum wage (currently set at $7.25 an hour) may qualify for a deferment.

Are you getting “hung out to dry” on student loans?
Photo by: mmagallan (Stock Exchange)

One of the central facts of financial life for millions of young Americans is student debt.

Indebtedness related to tuition at university is one of the major sources of long-term debt burden in the United States, ranking alongside costly medical bills as a potential source of monetary heartache for years to come; even high credit card balances don’t pose the same systemic risk.

For many students whose families lack financial resources to pay full cost of attendance, loans covering some expenses are nearly inevitable. But, with forethought and diligence, long-term debts can be minimized.

This is the beginning of an ongoing series intended to shine a light on college finance. We’ll give you the facts you need to make sure you won’t be dealing with abusive creditors the day after graduation.

Federal Financial Aid Should Always Be Your First Stop

Federal student aid comes in the form of grants and loans. Grants never need to be repaid; they are essentially a “gift” intended to defray some of the costs of education. Loans, on the other hand, must be repaid. To make things more complicated, student loans come in “subsidized” and “unsubsidized” forms. Subsidized loans do not accrue interest while the student is in school, or during deferments or grace periods; unsubsidized loans do.

Subsidized loan eligibility is based on need, according to the income of the student’s parents or guardians. In many cases of high demonstrated need, a large portion of tuition can be paid through subsidized loans. Though federal loans have favorable and flexible repayment schedules, they are obviously not preferable to grants; but federal loans are relatively easy to obtain compared to grants and scholarships, discussed below.

Students who hope to qualify for federal aid must submit a simple Free Application for Federal Student Aid each year, which is used to measure financial need. A student with need is likely to qualify for both subsidized and unsubsidized loans, but can elect not to accept unsubsidized funds, or accept a smaller amount than was offered.

There’s No Such Thing as a Free Lunch – But Grants and Scholarships Come Close

Grant and scholarship are closely related terms. A grant is any money that is provided as a “gift” to help the student pay the costs of college. In effect, all scholarship money comes in the form of a grant: but unlike federal aid, most scholarships are based on direct, academic competition (in other words, “scholarship”) rather than need.

Scholarships in varying amounts are administered by thousands of different private and public agencies, and many require essays or other types of entries to qualify. Scholarships of this kind are called merit-based, and though an individual school may offer several, for the most part it’s up to the student to find, apply, and win them. Though they are the most favorable financially, it’s usually unreasonable to expect them to pay for a very large portion of expenses over several years.

State Colleges are Often More Financially Favorable Than Private Ones

State colleges offer favorable tuition rates to state residents, often a savings of 30% or more compared to rates for out-of-state residents. State colleges may also offer a larger proportion of need-based aid. However, state colleges are subject to budget crunches that many established private institutions can weather more successfully, and this has a direct impact on aid from year to year. In sheer monetary terms, state colleges are usually much less expensive, and transferring from a state college to a more “prestigious” private university usually leads to more financial aid at the private institution.

Private Student Aid is Often a Raw Deal

The final major category of student aid is private funds from for-profit student lenders who work with banks to obtain funds on your behalf. For many, some private loans will be inevitable. However, do everything you can to budget and cut costs before going this route. Repayment terms for private loans vary and are often unfavorable. Interest rates can be exorbitant, leading to long-term debt. Some student lenders have been implicated in abusive and deceptive practices, such as paying university administrators to advocate for their loan products in financial aid offices. If you must use private aid, compare all of your options carefully, and consider getting help from an independent financial adviser.

In our next installment, UWSA will answer questions about student debt repayment. What are your options? What about debt consolidation? Even though aid does not need to be repaid until after graduation, preparing from day one can save thousands of dollars.

Don’t get “trapped” by offers that are too good to be true
Photo by: John Gardiner (Stock Exchange)

Debt settlement and debt consolidation are becoming popular options for hard-working people who are suffering from a debt burden they cannot shoulder.

Debt settlement involves negotiating with creditors for favorable terms in a good faith effort to pay down debts, leading (ideally) to reduced payment and principal amounts.

Unfortunately, hundreds or even thousands of scammers have hung a shingle claiming “debt settlement” services on the internet. These unscrupulous types not only give legitimate financial professionals a bad name, but provide none of the benefits they promise, leaving customers worse off than when they started.

In this post, we’ll provide some tools for spotting debt settlement scams.

Know a Scam When You See It!

Here are questions to ask before getting involved with any debt settlement company:

Have they attracted any complaints? In the financial world especially, it’s important to work with known professionals you can trust. Though debt settlement is possible, there are so many scammers that honest businesses can be drowned out. Before you begin working with a debt settlement company, search the Better Business Bureau for evidence of complaints. Less official, but still critical: pull up your favorite search engine and try out the name of the company, followed by the word scam.

How long have they been in business? As personal debt has exploded, so have scams. Scammers prey on those who are most in need, and because they have no intention of delivering on their promises, they can come and go under multiple names without working to establish a reputation. Be wary of companies that have not been in business long, or that neglect basic issues you’d expect from any other business; for example, a physical address. Would you trust a business that can afford to advertise on TV, but doesn’t want you to walk through the front door of their office?

Do their offers sound reasonable? Debt settlement can take some time, and though creditors would rather collect some money than none at all, glitzy up-front claims about cutting your debt by 50% or more in days should raise a red flag. It can take a while (and a lot of honest effort) before debt settlement issues are resolved and your financial situation becomes comfortable. Magic bullet solutions sell, but they don’t get results.

Do they ask enough questions? Scammers are only interested in getting money, and they don’t care how they get it, or from who, as long as they can keep doing it. Legitimate tax attorneys and other financial professionals aren’t afraid to ask uncomfortable questions that might, at first, risk turning potential customers off. But for a professional, some basics have to be established: the origin of the debt and whether you legitimately owe it are foundational. If you don’t have to do anything to qualify for debt settlement except make a payment, beware!

Are they credible? Are the claims of the company backed up by expertise from real, live financial counselors and tax attorneys? Some “credit counselors” have smoke-and-mirrors certifications, from companies that are themselves less than trustworthy, rather than hard financial and legal experience to negotiate on your behalf. Even your own creditors might be willing to disclose whether a company is legitimate if you ask – though, of course, you should take this with a grain of salt.

Don't let your expired debts "rise from the grave!"
Photo by: dhollister (Flickr)

In a previous post, we focused on debt collectors and unfair collection practices.

Today, we’ll discuss “zombie debt”: debt that continues to linger “in collection” long after it is paid.

This is a recent phenomenon, owing to the huge proliferation of third-party debt collectors and debt buyers touched on earlier.

Because of low levels of communication between these middlemen, not to mention the possibility of unscrupulous practices, different companies may attempt to collect on the same debt multiple times as it passes from hand to hand.

Zombie debt can be the result of honest error, but requires even more vigilance and persistence to solve than other forms of debt collection abuse.

The Credit Report: Key to Your Zombie Debt Arsenal

The problem of zombie debt makes it even more important to monitor your credit score on a regular basis. Negative marks on your credit report are generally removed after seven years and cannot be used as the basis of your credit score; a debt collector can attempt to manipulate this by telling credit agencies that an old debt is a new one. If the debt has “changed hands”, this ruse could go undetected unless you catch it yourself.

There are three major credit reporting agencies: Experian, Equifax, and TransUnion. The best information is obtained by reviewing your reports from all of them on a regular basis. Luckily, under the Fair Credit Reporting Act, you are entitled to a free credit report from each agency once every 12 months. The official web “hub” for ordering a complimentary report from any or all of the three agencies is AnnualCreditReport.com.

If you find an error on your credit report, it’s up to you to dispute it with the three agencies. Remember: zombie debt abuses are based on the idea that you won’t fight back! If you believe a debt collector is intentionally engaging in unfair practices, whether in regards to credit card debt, household bills, or any other transaction, communicate with them only in writing and keep copious records. Consider retaining an attorney: many zombie debts are related to violations of the Fair Credit Reporting Act, a federal law that can carry stiff penalties for those who do not follow it.

The Statute of Limitations: Sunlight to Turn Those Old Debts to Dust

Another important thing to remember is that there is a statute of limitation to any debt. After the statute of limitation, creditors and debt collectors can no longer take legal action in pursuit of the debt. The specific amount of time in each case varies by state and by the type of debt under consideration; however, every debt has a limit, and the countdown generally begins within a short time after the account first goes delinquent.

Because a lawsuit is no longer possible after that time, any claim to the contrary by a debt collector violates federal standards, which may include the Fair Credit Reporting Act and the Fair Debt Collection Practices Act. In short: regardless of fault, no one has the legal right to collect on an “ancient” debt. Any activity or claim to the contrary may constitute fraud. Consider sending a “cease and desist” letter to any debt collector you know is in the wrong; this puts them in the position of outlining the legal action they plan to take against you. In the case of real “zombie debt”, the only safe answer for them is “none.”

Have zombies lurking around your credit report?
Share you zombie stories and zombie fighting tips.

Bill collector acting like a pirate? The law's on your side
Photo by: Bill Davenpot (Stock Exchange)

Every day, thousands of Americans get calls from debt collectors.

If you’re in the middle of settlement, debt consolidation, or even in the early stages of seeking debt relief, you don’t deserve unwanted and harassing calls; and you don’t have to let them disrupt your life.

Today, we’ll discuss facts and resources to help you use existing consumer credit protection laws to your advantage and cut through the climate of fear that a small minority of abusive debt collectors create for hard-working people.

The Basic Facts on Debt Collection

Many major banks and other firms have their own debt collection wings which may be empowered to help you work with your creditor and develop payment plans and other strategies for getting your accounts current. However, depending on factors like your creditors’ policies and the age of the debt in question, many businesses “outsource” debt collection to a third-party agency.

“Debt buyers” may even purchase your debt from a legitimate creditor at a fraction of the debt’s value, in the hopes of profiting by collecting it. These agencies are less motivated to adhere to ethical standards in dealing with you; you are not their customer or client. Confusion or misrepresentation between creditors, third-party agencies, and payees can result n “zombie debts” that payees may be coerced to pay repeatedly. More on that later.

What Are Your Rights?

Under the Fair Debt Collection Practices Act, you can file a complaint against a collector for several violations. Here are some of the most common:

1) Repeated or continuous phone calls;

2) Use of abusive or vulgar language or threats;

3) Calling before 8 AM or after 9 PM, regardless of their own timezone;

4) Informing a third party about your debt;

5) Calling you at work after one warning against this behavior;

Furthermore, you have the right to request, in writing, verification of the amount that you owe and the name of the creditor. It’s advisable to send these requests via registered mail or care of a law firm; debt collection cannot continue after receipt of your verification request until after the information is provided in full. Making indisputable, written requests is a first step toward preventing “zombie debt.” You also have the right to request all communication in writing rather than by phone; but as individual collectors can often claim they were “not informed”, this should also be certified in writing.

A final option is a “cease and desist” letter, which requires the debt collector to cease communications after a final written notice that informs you of actions the collector may or will take. Written correspondence is the most direct way to deal with collectors; but if you are not ready to move to “cease and desist” or still need to gather more information by telephone, remember that in many jurisdictions you are permitted to record phone conversations as long as you inform your calling partner. Debt collectors, like many other businesses, often record calls for analysis; there is no reason you cannot gather information this way as well. If debt collectors refuse to speak to you “on the record” (and you should always be gathering records that will protect you against unlawful abuse!) they cannot continue harassing you, either. Be sure to get advice on the relevant laws, and be clear and upfront about your intentions.

How Widespread is Debt Collection Abuse?

Figures are hard to pin down, but it’s widespread enough to provoke revolt against unethical debt collectors. Over 8,000 violations of the Fair Debt Collection Practices Act were alleged in federal lawsuits over the course of 2009, and according to a recent Supreme Court decision, ignorance of the law is no excuse: collectors cannot be shielded from lawsuits by claiming they erred in interpreting the law. Plus, if a debtor wins a lawsuit under FDCPA, the debt collector may be obligated to pay court costs. More information and resources on the “debtor revolt” movement can be found in this recent CNBC article: “Learning How to Fight Back Against Debt Collectors.”

In Conclusion …

No one claims that consumers should be exempt from legitimate debt. But debt collection is now a profit industry, with more involvement by “middlemen” than ever before, and more complex relationships between the parties affected. Don’t get taken advantage of: protect yourself with a vigorous understanding of your rights, and the services of a financial adviser and legal counsel where necessary.

Photo by: Sanja Gjenero (Stock Exchange)

In today’s tight consumer credit market, it’s harder than ever for someone starting out on the road to financial responsibility to establish strong credit; and even with new legislation intended to protect credit-holders, the stakes may very well be higher now than they were twenty, ten, or even five years ago. A few key credit facts can go a long way toward helping teens and young adults establish a positive credit history that works in their favor when it’s time to start making big decisions.

Here are some useful credit tips to help the youngster in your life avoid debt as an adult.

1) You Don’t Have to Use Credit Cards to Start a Credit History

To get credit, you have to have a credit history. This might seem like a baffling contradiction at first, but remember that keeping current accounts other than credit cards can also start the ball rolling on documenting your responsible financial behavior.

Credit cards offered to students and others with weak or nonexistent credit history are often fraught with hidden perils and predatory terms that might activate unexpectedly. Collaborating with responsible adults to put another account in a teen’s name, such as a secondary telephone, builds credit and good budgeting habits at the same time.

2) Student Debt is a Different Animal From Credit Card Debt

Student debt is the “other” major category of debt that’s most likely to influence a young person’s life. If student debt climbs out of control, it can’t be eliminated by bankruptcy, and may make debt consolidation more complex, as — from year to year and semester-to-semester — it may come from multiple creditors. Student debt can easily grow beyond expectations, as payments do not occur until after graduation, but interest continues to accrue as balances mount “behind the scenes.”

Be exceptionally wary of private student loans, and double-check all information from a university’s financial aid office; a few of these have been implicated in collusion with private lenders who advertise on campus. The old age “trust, but verify” applies here. A student should never sign a promissory note without the input of a responsible adult, and preferably not without consulting an independent financial advisor first. Neglecting this step (tempting when “everyone has student debt”!) can have decades-long consequences!

3) Getting a New Credit Line is a Double-Edged Sword

Opening a new credit line temporarily reduces your credit score, but when managed effectively, larger, value-added credit lines open greater opportunities and establish more trust. No matter the size of your overall credit holdings, you should strive to use only a fraction: the ratio of your total credit line to your current balance is one of the most heavily-weighted factors in your credit score. This leads directly to the next point:

4) You Don’t Have to Use Credit Cards to Grow Credit, Either

Once you have an established credit line, you do not need to actively use it to maintain a credit score. Most creditors will eventually close a line of credit that goes unused for a prolonged period of time (a year or more) but any transaction, no matter how minor, will keep the account alive; and, if paid off right away, it can only count in your favor.

Often, credit lines will grow without much use; but you should always be aware of this, and be aware you can refuse credit line increases and revert to your previous limit if you wish. If creditors make changes to your account you are not comfortable with, those with negligible balance have added clout for negotiating, refusing, or just going elsewhere.

The credit landscape is evolving along with the legislation that impacts it; but the basic facts about credit cards remain the same. Used responsibly, consumer credit can be part of an enriching financial strategy, and it’s never too early to start setting good habits.

Photo By Declan Jewell(flickr)

Here’s another way to protect your budget – take advantage of the free account balance alert feature that many banks now offer. You can request an email you or a text message to your phone letting you know when your account balance falls below a level you specify or when your direct deposit paycheck has posted. They’ll also send reminders of when your bank payments are due, such as credit card debt or other lines of credit.

While there’s no guarantee the alerts will protect you from overdrawing your account or being charged fees you weren’t anticipating, they will let you know where you stand. If you do overdraw or get hit with fees, the alerts will allow you to take immediate steps to get back on track paying your bills if you break your budget.

You can prevent overdrawing your account, which is especially important if you’re still using a debit card. Instruct the bank to remove the ability to overspend from your debit card. Make sure the bank reduces the amount you can overdraw to $0. This is quite an important move for budget protection. It also keeps from getting into debt with the bank by having to worry about having an overdraft line of credit.

Once you’ve run out of funds, banks typically allow you to keep using your debt card as a credit card. Sometimes, they’ll even allow you to withdraw as much as $400 from ATM This allows them to charge you interest on the amount of the overdraft, which can be quite costly.

Probably the best way to limit overdrafts and otherwise spending more than your budget allows by getting rid of the credit and debit card. Just carry the amount of cash you have budgeted.

Similarly, avoid store credit cards. There’s so much advertising and so many incentives for consumers to apply for these cards and keep using them. But these are high interest credit lines that end up offering you no bargains. Not surprisingly, they are a bargain for the credit card company. You shave a few dollars off your purchase, they get hundreds in interest payments. That’s why you need to take only the money you’ve budgeted when you go shopping

These are all great ways to protect your budget and keep it working for you. Remember that it’s an important asset so you need to protect it from the biggest threat is has – your own ability to splurge and take yourself off track. .

Too Much Credit
Photo by: Andres Rueda (flickr)

Looking through some of our older articles on UWSA I found some on the subject of Debt Stacking. A few people have asked me whether this is a good idea, and whether it does what it says for people. I’ve never used debt stacking myself, though it is really just a high tech way to follow through on making sure you’re not paying a bunch of extra fees and interest to maintain multiple credit lines. That is a pretty common sense part of maintaining your credit rating. Here’s a little on making debt stacking work, and seeing if it’s right for you.

Firstly a little on what debt stacking is. The basic concept is that once you pay off a debt with a monthly payment you continue to apply the money previously allocated to the monthly payment to the payments for other debts. If you’re trying to get out of debt it’s pretty obvious that is a good idea. What is not obvious is which debts to apply the freed up money to.

Mathematically if you want to get out of debt faster there is a relationship between both the amount of a monthly payment, the balance, and the interest rate. No I don’t know the formula off the top of my head, but there are a lot of computer programs that do, and will allow you to input basic information about your debts and spit out the order in which to pay them off or ’stack’ them.

Tip number one would be not paying a lot for a program; if the goal is spending less repaying your debt and getting out of debt faster burning a bunch of money on a program doesn’t make sense. There are free tools out there to figure this information out, and sometimes professionals will offer that information free of charge or at a reduced fee as well.

One thing debt stacking does do is to avoid what is called ‘the shotgun approach’ to repaying debt. This is where one month you put a little extra on one bill, and next month you do another. Using that approach is a great way to maximize how long you stay in debt.

Tip number two, which is true of any debt repayment strategy, is stick to the plan. The benefits of debt stacking can be great, and include very reduced interest on one’s debts. These benefits drop fast though for every month you don’t make the payments in the manner suggested. If you cannot do this by yourself debt consolidation with a credit councilor or debt consolidation service might make more sense.

Debt stacking can be really helpful in repaying debt, and save you a ton of money. It is also usually free and because generally you are not modifying your repayment plan significantly it can help build your credit rating as well. The key is keeping to the plan, and knowing your limits. As always though the plan only works if it works for your.

Too Much Credit Photo by: Andres Rueda (flickr)