Chosen by voters as Yahoo's "Best Answer", you may find this advice extremely helpful to you as well. Here's the original question: "My husband and I ...
Chosen by voters as Yahoo's "Best Answer", you may find this advice extremely helpful to you as well. Here's the original question: "My husband and I have high credit scores and are not behind on our bills. But are overwhelmed with the amount of debt we carry, credit card debt that is. Should we resort to debt settlement or continue to make minimum payments for the next five years. At this point we can only make minimums.
Great question! The answer depends on your situation, your goals and what's most important to you.
Let's start with your situation...
The fact that you have high credit scores and have not fallen behind means you have something to lose (your perfect payment history) if you choose debt settlement.
While debt settlement has a negative impact on your payment history (more so if you've never been late, not so much if you've already fallen behind), debt settlement also has a POSITIVE AFFECT on your debt-to-income ratio and utilization because the accounts are paid to a zero balance on your credit report. You can also do credit repair and credit rebuilding (usually within 6-12 months) after you complete debt settlement.
Let's first get clear about exactly how your credit will be affected. The other two important areas of your credit are your debt-to-income ratio and utilization and both are greatly improved through debt settlement.
How Important Is Your Credit Score?
Remember, credit "score" is not everything... Credit "worthiness" (your ability to get a loan) is more important, especially long term.
A question to consider is this: What do you need your credit for? Most keep their credit in good shape so they can get into deeper and deeper debt, only to pay more and more interest.
But Is Your Credit Really Even "Good" Right Now?
Having a perfect payment history (about 35% of your credit) and a good credit score is nice, but other factors could be crippling you.
Let's take a look
Debt-to-income ratio (DTI) is the amount of money that you're obligated to pay each month towards your debt. Take the payment due on every bill you have and divide it by your net income. Example:
Mortgage - $1450, Utilities - $300, Credit Cards - $600, Autos (payments and insurance) - $1200, Student Loans - $300. The total is $3850. If this person's net income (after taxes) is $6,000, his DTI is approximately 64%, and he is in very bad shape if he needs to borrow money. If, on the other hand, his monthly net income is $24,000, his DTI is only 16%. This is a great place to be!
If you can keep your DTI ratio at or under a third (33%) you will be in a great spot with lenders. Over 45-50%is crippling to your credit, regardless of credit score, because you simply cannot afford any more debt. This means you are not "credit worthy."
If your debt-to-income ratio is too high now, then you're basically crippled, and concerns about debt settlement affecting your credit simply don't make any sense because your good payment history has only gotten you into so much debt that lenders will no longer extend you any more credit. Many people find themselves in this exact situation.
Credit Limit vs. Current Balance - The least known factor in Credit
The third area of your credit to consider is your "utilization" or "debt-to-credit-limit ratio". The way this works is very interesting. This is probably the least known factor that affects your credit, but is just as important as payment history to your score.
Each account you have has a credit limit and a current balance. If that current balance is less than 50% of your credit limit, that's a positive factor. If you have an account that's over 50% "utilized" (balance over 50% of the limit), then it's a negative factor and bad for your credit worthiness. If your balances get to the limit, or over the limit, then this is a crippling factor to your credit.
Take a look at your accounts... is any balance over 50% of the limit?
Keep these three factors in mind when evaluating your credit worthiness: payment history, debt-to-income ratio and utilization
What's The Big Idea?
Most of the time, worrying about your credit rating when you're drowning in debt is like worrying about how your front yard looks when you house has just burned to the ground.
I don't know how much debt you have or what your interest rates are. These are critical factors in your decision.
Most important is this, the "BIG IDEA": STOP paying interest and START EARNING interest, ASAP! This is critically important if you ever want to retire, and makes all the difference between a life of wealth or a life of slavery (seriously).
Why Credit May Be important, But CASH Is King
You mentioned paying minimums for the next five years. If you could pay off your debt in 5 years with minimum payments, then:
a) you have a small amount of debt and low interest rates, and b) you don't have enough debt for debt settlement.
Take a look at the cost and time it takes to pay off debt with minimum payments if you are paying what the average American pays in credit card interest...
Debt (Pay Off Amount, Principle & Interest, making Minimum Payments) Number of years to pay off making minimums at 19%:
Credit may be important, but cash is king. It is your cash flow that makes you wealthy, not your credit rating. So for you to make the best choice, you and your husband must decide what's most important: credit or cash flow.
Consider your goals:
What To Do If Credit Scores Matter More Than Debt Relief
If credit is ultimately most important to you, then you must cut your expenses to the bare minimum and put EVERY DOLLAR you can towards paying off your debt. Consider using an accelerated pay off plan to get out of debt ASAP.
Debt Settlement, The Fastest Way To Pay Off Debt, Might Also Be Good For Your Credit
Debt settlement can most likely get you debt-free fastest. My average client is completely out of debt in 28 months.
Usually, debts are cut in half, and often payments are cut in half as well. Payments are almost always significantly reduced during the program.
While debt settlement has a negative impact on your payment history (more so if you've never been late, not so much if you've already fallen behind), debt settlement also has a POSITIVE AFFECT on your debt-to-income ratio and utilization because the accounts are paid to a zero balance on your credit report. You can also do credit repair and credit rebuilding (usually within 6-12 months) after you complete debt settlement.
Of course, all that money you're currently paying in minimum payments will be back in your pocket, usually within 24-36 months. What would you do with all that extra cash flow? Investing these savings to EARN INTEREST can make all the difference for your financial future... and that's the BIG IDEA!
If you are shopping around for a debt settlement program, BE CAREFUL! The industry is filled with ignorant sales people who will steer you into a "bad program" for their own gain. They don't always have your best interests in mind.
I'm serious, watch out...
The Ethical Debate Surrounding Debt Settlement
Debt settlement, a process where debtors and creditors agree to reduce the outstanding balance owed, is a subject of ethical debate. While some view it as a practical solution for those in financial distress, others question its moral implications. This article delves into the nuances of debt settlement, examining its impact on individuals and the economy, and exploring the moral considerations it raises.
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