Tips For Dealing With Credit Card Debt

photo courtesy freedigitalphotos.net

Struggling with credit card debt can cast a black cloud over every aspect of your life. The longer you stay in debt, the more damage you’ll end up doing to your credit rating. That in turn will make it harder to get a loan in the future for important borrowing like a home mortgage. Not to mention that fact that debts limit your spending power in the present, restrict your options, and generally have a negative effect on your emotions and outlook.

So it pays to get on top of your debts as soon as possible – but how? Here are a few tips you can start applying today to turn your debt situation around.

Negotiate with Your Lender

In many cases you can actually negotiate with your credit card company in order to make paying your debt easier. There are several options available here – for example, you may be able to have your interest rate lowered. You may be able to extend the period you have to pay before you start incurring more penalties, or you may be able to have some fees waived altogether. In any case, the first step is to contact your lender and see if there’s a way you can reduce the burden of the debt.

Pay the Most Expensive Debt First

If you have multiple credit card bills, you need to work out which one is costing your the most in interest and focus solely on paying that bill first. That’s the fastest strategy for paying off the debt. You know to work out which bill is costing you the most in interest – the sooner you pay that bill, the less interest you’ll incur and the lower the overall amount you have to pay back will be.

Make Debts the Priority

Often people end up in credit card debt to begin with because they can’t manage their money and try to live beyond their means. If you have bad financial habits, they’re the reason you’re in debt – and they’ll keep you in debt if you don’t change them. You’ll need to develop the self-discipline to say no to non-essentials until you have your debts handled. If you’re in debt, don’t go spending money on concert tickets and most definitely don’t take on any more debts.

Debt should only be used for things that will help you get to a better financial position in the future – things like buying a house, starting a business or getting an education. If you take out a new debt every time you want to buy a consumer item on impulse – new shoes, a car, a holiday – you’ll just keep digging yourself into a deeper hole.

Summing Up

Credit card debt may seem like it’s impossible to beat, but with a few phone calls to your credit card company and a change in your financial habits and mindset, you can start turning your life around from today.

How To Qualify for a Home Equity Line of Credit (HELOC)

A home equity line of credit can be a smart choice for many borrowers. As opposed to other types of borrowing, a HELOC generally carries a lower interest rate than a credit card or an unsecured loan, and for most people, the interest on a home equity line of credit is tax deductible. The biggest downside, is that if you default on your loan, you could lose your house.

To qualify for a home equity line of credit you need to have equity in your home and the income to pay the loan back. It helps to have a decent credit rating to keep your interest rates down.

Especially in today’s market, the hardest qualification for most people will be finding the equity in their home. As a rule of thumb, most lenders will want your total debt against your home to be no more than 80% of your home’s value. That is including the home equity line of credit.

If you don’t have enough equity in your home there are just two ways to change that. One is to pay down your mortgage and reduce the debt against your home, the other is to increase the value of your home.

If you are looking at taking out a home equity line of credit, you probably don’t want to spend the money to pay down your debt. That leaves increasing the value of your home as the only option to increasing the amount of equity in your home. While you can’t do anything to improve the housing market, you can make improvements and repairs to your home that would increase its value.

You need to show the banks that you have the income to repay your home equity line of credit. If your income is too low, consider paying off credit cards and other debts to make room for the HELOC.

A home equity line of credit is a good option for many people. With it’s low interest rates and favorable tax status it may be worth the time and effort to increase your equity and your ability to pay.

How To Improve Your Credit Score

It is no secret that in general, I think it is best to be totally debt free. Just take a look at my series on Debt Free Forever. However, there are times when credit is necessary, and even if you are on a cash basis, there are times when a good credit score is important.

Here are a few tips from the Federal Reserve System for improving your credit score.

1. Get Your Free Credit Report

Don’t listen to the catchy jingles and the hype. There is only one place you should go to get your free credit report and that is www.annualcreditreport.com. This is the free credit report site authorized by the Federal Reserve and you wont’ need to sign up for anything to get your free report. By law you are entitled to one free credit report from each of the three major credit reporting companies. You don’t need to get them all at once. Spread them out throughout the year and you can keep close tabs on your report.

Once you get your free credit report, then check it carefully to make sure it is correct. If you find anything that is incorrect, or you disagree with, contact the credit reporting agency and they will tell you how you can correct the mistake, or at the very least, add a comment to your credit report stating your side of the story.

2. Don’t Miss A Credit Card Payment

Not only are missed or late payments damaging to your credit report, they are costly! Late payment fees of $29 or more can add up quickly. Through your bank’s automatic bill pay set up an automatic payment for at least the minimum payment on your credit card. Set it to send the payment a week before it is due. That way you know you won’t be late on your payments, and you can always send in extra payments if you want to pay your credit card off more quickly.

3. Don’t Max Out Your Credit Cards

Staying well below your limit not only avoids costly over limit fees, it also improves your credit score. Companies like to see that you have plenty of credit available. It shows that you can control your spending. If you have a credit card that is close to the limit, quit using it and make an effort to make more than the minimum payment and pay down the balance.

Just three simple steps to improve your credit score. It won’t happen overnight, but the results will be worth it.

Don't Pay Off Your Credit Cards! – Not This Foolish Way

It should be clear by now, that here at Money, Debt and Taxes we are big fans of paying off your credit cards.  But when it comes to paying off your debt, it is amazing how much bad advice is out there, even from trusted sources.

Recently I came across an article on The Motley Fool website titled “9 Ways to Pay Off Debt”.  As I read through the article I was screaming at my computer NO, NO DON’T DO THAT!   So here is an abbreviated version of the Motley Fools’ suggestions, and my not so humble comments.

#1. Pay More Than The Minimum Payment on your Credit Cards
So far, so good. I have no problem with this suggestion.   Unless you pay more than the minimum payment it could take you 10 years to pay off your credit card debt.

#2. Snowball Your Debt Payments
Still OK, in fact I am a big fan of debt SnowBalling.  You can read more about debt snowballing at Wipe Out Credit Card Debt.

#3. Cash Out Your Savings Account
WHAT! Excuse Me? Is this the Motley Fool, or some hack. Why would you do that?  The argument the Motley Fool gives is that savings accounts pay a very low interest rate.  You “earn” a better rate of return by paying off a higher interest rate credit card, than you do by leaving that money in a savings account paying a lower interest rate. From a strictly numbers point of view that might be correct, but from a “learning how to manage your money” point of view that is a terrible suggestion.  What do you do if your car breaks down and you don’t have an emergency account?   An emergency account is an essential if you want to get out of debt forever.

#4. Borrow Against Your Life Insurance
I can’t tell you how many ways this is wrong.  First, this is not a way to pay off debt. This is a way to transfer debt.  Second, you can’t borrow against a term life insurance policy, so the Fool is assuming that you have a whole life policy. So you are going to borrow against your life insurance, you may not ever pay it back, so your beneficiaries will get less than you paid for.  I am not fond of whole life insurance, but this just seems like one way to make a bad investment even worse.

#5. Finagle Family and Friends
The idea is you borrow money from family and friends to pay off your other debt.  Once again, you are not paying off your debt, you are changing your creditor.  This has to be one of the worst suggestions of the bunch.  Money issues can be deadly for friendships and devastating for families.  Don’t ever borrow money from friends or family.  Not if you want to keep your friends and stay on good terms with your family.

#6. Get A Home Equity Loan
Sigh, once again we are trying to solve our debt problem by getting more debt.  Plus, we are changing unsecured debt for secured debt.  If you don’t pay off your credit cards you can ruin your credit rating. If you don’t pay off your home equity loan, not only do you ruin your credit rating, you can lose your house.

#7. Borrow From Your 401(k) Plan
Do I sense a theme here?  Are we paying off debt, or are we just moving it?  I know, if it is good enough for the US government it is good enough for you. So if you borrow from your 401(k) plan, what is to stop you from just running up your credit cards again?   Now, if you have been following all this foolish advice, you have tripled your debt, alienated all your friends and family, lost your home, and now you have no money for retirement. (Plus you’ve lost many of the tax benefits a 401(k) plan provides.)  But that is OK, the fools have a plan for you…

#8. Renegotiate With Your Creditors
Yes, your creditors will love you when you call them up and say you can’t pay.  They will be so excited to lower your interest rate and maybe even forgive some of the principal.   You could even call one of those “Secrets The Credit Card Companies Don’t Want You To Know” companies and totally destroy your credit rating.  But that won’t matter, you have to fools to advise you.  Next step please…

#9. File For Bankruptcy
News Flash, this is not paying off your debt!   This is forcing your creditors to accept little or nothing for the debt you have incurred.  In very rare circumstances, bankruptcy is the only option, but for most people, learning how to manage their money will enable them to pay off their debt, save their credit rating, and avoid bankruptcy.

I am afraid I have lost a whole lot of respect for those Motley Fools.   Of their 9 Ways to Pay Off Debt, only 3 are actually ways to pay off debt,  4 just transfer the debt to a different creditor, and 2 involve forcing your creditors to accept less than you owe.

As one commenter mentioned, paying off your debt is really simple.  There is no magic formula.  You just need to do two things.  Make your debt payments, and pay for everything with cash.  Whatever you do, don’t be a fool and follow the advice of the Motley Fool.

If you are serious about getting out of debt I highly recommend Dave Ramsey’s Book The Total Money Makeover. It helped me to become debt free and has changed the financial future of thousands of people.

What To Do When You Can’t Pay Your Taxes

April 15th has arrived, and you don’t have enough money to pay your taxes.  What are you going to do?

First of all, don’t panic. You are not alone. Every year thousands of people come up short when it comes time to pay the IRS.   Here is what you can do when you can’t pay your taxes.

First of all, file your tax return on time.  Pay whatever you can with your tax return.   This way you won’t be subject to the failure to file penalty, which can be as high as 25% of the tax due.  If you won’t have your tax return completed by Apirl 15th, you can file an extension.  But the extension is just and extension of time to file, not an extension of time to pay.

If you know you will be able to pay your taxes within the next few months, you can file and extension with a payment, and then file your tax return and pay the rest of your tax bill at that time. You will still be subject to interest and penalties, but you may be able to avoid the  convenience fees that come with paying your taxes by credit card, or the set up fee the IRS charges for an installment agreement.

But if you have a  really large tax bill, one that might take years to pay off, you are going to have to accept the fees and either  pay your taxes with your credit card, or you can request a payment plan (also known as an installment agreement) from the IRS.

To pay your taxes by credit card you need to go through an authorized payment company.  They will charge you a convinience fee, which is around 3% of the amount that you are paying.  You can find out more about paying by credit card here.

If you can’t or don’t want to pay your taxes by credit card, you can request a payment plan from the IRS. If you owe less than $25,000 and expect to be able to pay your taxes within 3 years your payment plan will usually be accepted. The IRS will charge you a user fee of $105.  You can get the fee lowered to $52 if you have your payments automatically debited from your bank account.  Low income taxpayers may qualify for an even lower fee. You can apply for an installment agreement online here.

Once you have your current taxes taken care of you need to make sure that you are not in the same boat next April 15.  If you are self-employed you will need to pay more with your quarterly estimated tax payments. If you are an employee, you need to ask your employer to withhold more taxes from your paycheck. I know it hurts, but that is the only way to avoid owing next year.

How To Get Out of Debt – Debt Free Forever

This is the fourth post in a series that will explore how you can become debt free, and stay debt free forever. Future posts will talk about when you should and should not use credit cards for purchases. Why you should care about your credit score, how to save money on every day expenses, will credit repair companies help you or hurt you and much more. Make sure to subscribe to our feed so you don’t miss a single installment of this series.

So it has been awhile since my last post on how to get out of debt and stay debt free forever. How have you been doing? Have you paid off a credit card yet? Have you managed to go a month, a week, or even just a day without using your credit card? If not, don’t worry. It takes time to change your spending habits. Just keep trying, eventually it will all come together for you.

In my last post, The Credit Card Payoff Plan, I gave you a plan for paying off debt when you have a little extra cash each month. But what do you do if you don’t make enough money to meet all of your expenses? What do you do if you need to use your credit cards just to pay your bills? How do you manage to pay off your credit cards if you don’t have enough to make the minimum payments each month?

First you have to realize that you are in serious financial trouble. And it is going to take some major changes in how you deal with money to get yourself out of it. You must really commit yourself to getting out of debt. It is not going to be easy. However, you can’t just keep ignoring the problem. The longer you let it go on, the worse the problem will get.

Do not be tempted by payday loans and other such offers of easy credit. These types of loans have high fees and interest rates and are set up so that you will just get yourself deeper in debt, and pay more fees to the payday loan company. The more money you have going to fees and interest, the less money you have to pay off your debt!


Sometimes the only answer will be bankruptcy. And when you are deep in debt, bankruptcy can seem like the easy way out. After all, to be able to walk away from all your debt, and all your money problems can be very appealing. But understand, that unless you change how you manage your money, you will soon find yourself deep in debt again. Also, bankruptcy will damage your credit score. This affects you not just when you are trying to get a mortgage or a car loan. Auto insurance companies will charge you more for your car insurance if you have a bad credit score. You may find it difficult to rent a house or an apartment, and with many employers looking at credit scores, you may even find it hard to find a job. If at all possible you should avoid bankruptcy and work to pay off your bills.

You will also hear many companies advertise that they can negotiate with your creditors and settle your debt for pennies on the dollar. Don’t believe it! Often these companies are scams. They will ruin your credit and run away with your money. For more information on these companies read my post on Secrets the Credit Card Companies Don’t Want You To Know.

There are legitimate credit counseling companies that can help you work out a budget, and a payment plan that you can afford. They will talk to your credit card companies and get you a little breathing room. But you are still going to need to pay off the debt. You can find legitimate credit counseling companies and more information on debt at The National Foundation for Credit Counseling.

So, if you don’t want to declare bankruptcy, and there are no secrets that will make the credit card companies happily settle for less than you owe them, what are you to do? There are only two ways you are going to get out of your financial mess. You need to spend less money and/or make more money.

I can hear you already. I know you think there is no way you can cut back anymore, there is no way you can make more money. And I am going to tell you, that you are probably wrong. Almost everyone I helped get out of debt thought there was no way they could spend less or earn more. And with only one exception, they were all wrong! Sometimes they had to make some dramatic changes. One person sold their large home and moved into an apartment. Others have realized they didn’t really need that second car, they could live without a cell phone, and that cable television is a luxury! You need to look at every place you spend money and find a way to spend less. The more money you can put to paying off your debt, the sooner you will be able to add back those extras in life that most people consider necessities. In my next How To Get Out of Debt post I’ll go into more detail on how to make dramatic cuts in your spending.

Along with cutting back your expenses, you are going to need to make more money. In some ways this can be easier than cutting back on expenses. By taking a second job, or starting a part time home business, you may be able to keep some of your comfort items and still pay off your credit card debt. But please don’t be taken in by any of the get rich quick scams. You don’t need to spend money to find out how these make money schemes work. Use free sources like the internet and your local library to learn about legitimate ways to earn extra money. You can also take a look at my Work From Home Blog to learn about legitimate work from home opportunities. Don’t overlook the little ways to make some money. A weekend spend picking up aluminum cans from the side of the road might net you enough to make a minimum payment on one card. And don’t think of it as just earning enough to make the payment. You are also saving late payment fees and interest. In a later post I’ll talk more about ways to bring in a little extra money.

So to sum it all up, if you are in the position where you don’t have enough money to make even the minimum payments on your credit cards, you are in serious financial trouble and you will need to make dramatic changes to get yourself back on the right track. Finding ways to drastically cut expenses, and ways to make more money will enable you to pay off your debt, and get to the point where you can live Debt Free Forever!

Eliminate Tax Debt with an IRS Offer in Compromise

Are your unpaid back taxes overwhelming you? Are you looking for tax debt relief?  If you don’t think you will ever be able to pay off your tax debt, you may be able to eliminate a large portion of your tax debt with an IRS Offer in Compromise.

With an Offer in Compromise, the IRS may agree to settle your tax debt for less than you owe.

There are three types of Offers the IRS will accept to settle a tax debt.

Doubt as to Collectibility
If you can show that you do not have the assets or the income to pay off the tax debt, the IRS will take what they can get, and write off the rest of your tax debt. Be warned, it is the IRS that determines how much you need to live each month, and what your assets are worth. But if you have no assets, and your income is not enough to meet the IRS’s definition of required living expenses, you have a good chance of having your offer in compromise accepted.

Doubt as to Liability
If can show that there is uncertainty as to whether or not you actually owe the taxes assesed, the IRS may be willing to settle for considerably less than the original assessment. If you believe the tax examiner interpreted the law incorrectly, or failed to consider all the evidence submitted, it may be worth requesting an offer in compromise to settle your tax debt.

Effective Tax Administration

Believe it or not, the IRS will reduce your tax debt if you can show that paying it would create an extreme hardship, or would be unfair under the circumstances. Once again, if you can sway the IRS to your point of view, it is possible to eliminate thousands of dollars in tax debt.

If you think that you might benefit from an Offer in Compromise, see the IRS website for more information, and for the forms required.