What is your home equity? It’s simply the difference between how much your house is worth according to the latest appraisal and how much you still owe the bank. Your home equity increases over time as you pay down your mortgage and as the value of your home appreciates. The value of your home is based on a professional appraisal and takes into consideration the condition of your home, the neighborhood, the type of property, size, land evaluation, taxes other loans and services, and the current market value. Home equity loan refinancing will depend upon the increase in equity to determine how much money you can borrow.

You can benefit from a home equity loan refinancing plan compared to other types of loans because these loans are secured. That means that the lender may be able to repossess your home if you fail to pay. This helps lenders in home equity loan refinancing plans to give you a lower interest rate than if you did not already have any equity and had to get an unsecured loan. The minimum equity should be at least 30 percent.

Some types of home equity loan refinancing:

Home Equity Loans: These are second mortgages that are secured with the equity of your home. They usually offer fixed interest rates that are lower than the interest rates established on your home mortgage. In many cases the interest payments on the principal are tax deductible. Various terms of financing are generally available.

Cash-Out refinancing: This is a loan that replaces your existing loan and offers either an adjustable or a fixed interest rate. This loan gives you the opportunity to take out some money based upon the accumulated equity built up in your home.

HELOC: Home equity line of credit is a second mortgage with an adjustable rate. You can borrow in a lump sum or in installments. Your payments and interest will be based upon the actual amount that you borrowed, not on the full amount of the line of credit. Your have a running line of credit meaning that if you pay back what you have borrowed or part of what you have borrowed, the borrowing amount will readjust so that you will have that money to borrow again.

Streamlined Home Equity line of Credit: This arrangement offers a running line of credit based on the equity of your home but without many of the usual refinancing loan requirements, such as income verification and perfect credit standing. There is less paperwork, and the loan is issued faster. These loans are mainly offered to homeowners already dealing with the same bank or mortgage institution for their first mortgages.

Don’t neglect to consider the disadvantages of home equity loan refinancing. You are securing the loan with your home as collateral. If you fail to make the payments, you may lose your home. Market values are always changing, and now they’re actually declining in many parts of the U.S. If your home declines in value after you take out your home equity loan refinancing, you may end up with negative equity in your property.

Consider also the purpose of your loan. Remember that renovations will add to the value of your home, and therefore increase your equity. But if you’re using the cash for credit card consolidation, you can possibly save with lower payments to begin with, but you may end up having to make monthly payments for longer than it would have taken you to pay off the credit cards or other debts.

For more information and to compare refinancing loan offers from lenders who compete for your business, visit our resource page on comparing home loans.

Finding Unsecured Debt Consolidation Loans

It’s true that unsecured debt consolidation loans are harder to get when you have bad credit, but some lenders are willing to help you some of the time. These are often lenders who specialize in bad credit loans or sub-prime loans. Some such lenders offer personal loans having fixed monthly payments that you can use to consolidate your debts into one larger monthly amount.

Most unsecured debt consolidation loans with bad credit will have some features in common. First, they will require a higher interest rate than secured loans. Sometimes it’s much higher. For example, if you can get a home equity loan (which counts as a secured loan) for debt consolidation, you might be paying 10 percent interest if your credit is shaky. But an unsecured personal loan might cost you at least twice as much in interest if you have bad credit.

Choosing the Best Unsecured Loan for You

The best strategy is to compare lenders. Get quotes from two or three and look for the best terms and interest rate. That’s how you can find the best solution for your specific situation. And don’t rule out a secured debt consolidation loan. These are usually more affordable, especially when you have bad credit.

Resources for Unsecured Debt Consolidation Loans

For more information on specific companies who provide bad credit loans, see our resource page about unsecured debt consolidation loans with bad credit.

In reading this week’s submissions I found many to like, and two that really stood out. They are hereby awarded the Necessary Virtues Order of Merit for outstanding contribution:

• Mark Shead’s outstanding piece on The Debt Mindset from Debt Consolidation. It begins provocatively:
  

  “Many people just expect to be in debt. It is part of their world view…”

• The current installment of Erek Ostrowski’s invaluable series, Getting Out Of Debt (Part 2) from Verve Coaching. I look forward to the next article.

Here are all those that made the cut listed in mostly chronological order, with a little treat at the end. Enjoy!

Matt Hutter kicks it off with tips on How To Avoid Using Credit Cards and the benefits of purchasing with cash rather than plastic.

Next is a timely seasonal offering from Ririan with 20 Fabulous Tips To Holiday Spending that range from proper planning to debt avoidance to identity theft protection.

From Andy at Money Walks comes 5 Reasons why people are in debt, including a wake-up call for university students to graduate debt-free.

Andy Boyd offers us a refreshingly honest and direct look at his personal finances and his plans for getting out of debt in My Credit Card Debt Repayment Plan. This is a valuable contribution in that it’s all practice and no theory.

Next we have a great series of tips from Joe Caterisano on How to save money. He points out that small changes in our behavior can reap large benefits.

From Free Money Finance comes How to Pay Off a Boatload of Debt Quickly, a helpful, concise summary of an article originally published on MSN MoneyCentral.

Mark Shead contributes a very thought-provoking piece on The Debt Mindset. He points out how much our lives are influenced by our past experiences and our present associations. Highly recommended, particularly for anyone who has struggled to change their behavior in relation to money and debt.

From Waller we have a wonderfully passionate and practical article on Reducing Debt With A Snowball. If you’ve been making minimum payments on your credit cards, you have to read this!

Erek Ostrowski continues a valuable series with Getting Out Of Debt (Part 2). This installment is all about making detailed plans to achieve specific goals that contribute to your overall goal. The most important part? Follow your plan!

Trent tells us that debt has driven him to some pretty desperate measures in the past, including surviving for a month on only $10 worth of food. He gives us twenty tips on how it can be done in Nourishment on a Desperate Income.

From Steve Faber we have Debt Elimination Scams to Avoid – You’ll Just Pay Twice, which gives details of two scams that prey on desperate debtors.

The next article is really a call for discussion from Ben, who asks What was the World Like Before Credit Cards?. You can post your answers on his blog.

Jim clarifies a distinction that many find mysterious in Student Loan Deferment vs. Forbearance. If you have a student loan, make sure you know the difference.

From the Prince of Thrift we hear that the worst of the worst get the Lemon Award for Bad Banking, and the finalists are… Lemon Award Finalists Named on CreditCard.org’s Website.

Next Sagar Satapathy presents a comprehensive set of 101 Financial Tips you Never Learned in High School (but should have). Be sure to read all the way to tip 101!

Joe Caterisano returns with What is a FICO score?, offering a concise guide to the factors that comprise your FICO score.

Henry of Binary Dollar continues his personal chronicle with The Race to $0: December 2006 Net Worth (+$3,284). He continues to retire his student loan while adding substantially to his retirement savings.

No Credit Needed contributes this Sure-fire Debt Reduction Process. It’s simple and it actually works. You just have to be willing to follow it.

And to round off this week’s offerings, we have a humorous Ode To Prosperity from Madeleine Begun Kane.

Next week’s host, on December 11, is Blunt Money. Thanks for visiting, and happy holidays to all!

2. A budget empowers you to take control of your money instead of letting your money control you.

3. A budget can improve your marriage. The number one cause of marital strife is money. Your budget is a neutral tool to help you and your spouse communicate rationally about money. It can help to give you a common purpose and to minimize arguments about money.

4. A budget helps you prepare for emergencies. The top causes of bankruptcy are sudden unanticipated expenses or job loss. When you have an emergency fund, you are much more likely to get through a situation that would otherwise sink your financial ship.

5. A budget makes money available so that you can use it on the things that really matter to you rather than impulse purchases.

6. A budget can help get out of debt or stay out of debt.

7. A budget gives you peace of mind. You won’t lie awake at night due to worry about your finances.

Budget Q & A

What exactly is a budget?

A budget is a realistic reflection of your current financial situation plus a projection into the future based on reasonable predictions. So it’s both a snapshot and a plan.

I’m new to budgeting. What’s the best way to get started?

First, do your homework. There is lots of budgeting advice available in bookstores and online. You can download our favorite budgeting guide for free in e-book form right here.

Second, keep track of your actual expenditures for at least a month. Write down every penny. You’ll be astonished at the money leaks you discover.

Third, plunge in and make your first budget. It will undoubtedly need tinkering and adjustment, so don’t let the desire for perfection stop you in your tracks. Make a budget, compare your actual expenditures to the budget, and see where you have to change the budget or your spending. It’s a process, not a single destination.

Looking for a way to organize your budget online? There is one service we recommend above all others. Click here to find out more or click here to get started right away with a free trial.

It seems as if the storefronts offering these dangerous loans have sprung up overnight on many street corners. They’re also advertising on TV, billboards and elsewhere. They make it so easy to get that extra few hundred dollars to tide you over when money is tight.

Don’t fall for the pitch. If you can’t afford to pay all your bills one month, you are much better off trying to arrange an alternate payment schedule with your creditors instead of risking your credit rating with a cash advance loan. Payday loans may be fine in a true emergency, but the payday loans cycle gets very unaffordable very fast and can ruin your credit rating.

They also include unlimited free access to your credit score and credit reports, just as an extra bonus. Their trial offer of 30 days for $1.00 is hard to beat. Try it for yourself and continue if you see the value.

Do you know what’s on your Credit Report?

By Steve Diamond

Credit card offers, they’re everywhere! They appear in your mailbox. They pop up while you’re surfing the Internet. They’re in slick brochures next to the cash register or gas pump. They’re in full-page ads in the Sunday papers.

If you need a new credit card, how do you choose? You should evaluate each offer carefully, and to do that you must understand these essential terms.

Annual Percentage Rate (APR):
The interest rate charged on your account balance. (But see “Balance Calculation Methods,” because the rules for computing interest from your balance and your APR can vary.) Your statement will usually show the APR and a monthly and/or daily rate based on the APR that’s actually used to calculate your monthly interest. There may be several APRs applicable to different portions of your balance, for example an introductory rate, a regular purchase rate, and a regular cash advance rate.

A fixed APR is set by the credit card company, which can generally change it with as little as 15 days advance notice, especially if you run afoul of any of the “gotchas” in the terms. These “gotchas” are often very consumer-unfriendly. For example, many companies these days reserve the right to raise your rate if you’ve been late on a payment to another, unrelated company.

A variable APR is tied to some widely used economic index, such as the Prime Rate. It may be stated as “prime + x%, currently y%,” for example “prime + 7%, currently 13.5%.” This means that when the Prime Rate is 6.5%, your APR is 13.5%. When the Prime Rate goes up or down, so does your APR. But beware, because some of the same “gotchas” apply to variable APRs as to fixed APRs. Read the fine print. It may state that if you’re late with one payment, your APR will no longer be variable but will rise to an exorbitant fixed rate, usually over 20%.

The penalty APR is the rate to which your APR will immediately be raised when you violate any of the “gotchas” in the terms. This rate is usually at least 50% higher than the regular APR. Again, be sure to read the fine print to see what situations will trigger the penalty APR. You’ll often see these: failure to pay this or any other account on time, exceeding your credit limit on this or any other account, excessive credit balances on your accounts in aggregate.

Balance Calculation Methods:
These are important to understand, because your APR is only part of the story when it comes to calculating the interest you’ll be charged each month. The other part is how the balance is calculated to which the APR is applied. In any case the balance is multiplied by the daily or monthly interest rate. But the balance calculation is not as straightforward as you might think.

1. Two-Cycle Balance. This is the worst method from a consumer’s point of view because it can lead to the highest interest calculations. Unfortunately, it’s also becoming the most widely used method. To calculate the balance, add together the average daily balances for the current billing period (sometimes even including new charges) and the previous period. Here’s why this is so unfriendly to you. Say you have run a balance for a few months and finally pay it from $200 down to zero at the end of May. You think it’s safe to use the card in June for a new $100 purchase, and if you pay the $100 by the end of the June grace period, you won’t owe any interest on it. But you’re wrong. Since your average daily balance in May was not zero (say it was $120), and since you used the card in June, your interest will be calculated on May’s average balance again, so even if you pay the whole June purchase in June, you will still owe additional interest. In other words, you must wait two months, allow the account to cycle once with a zero balance, before it’s safe to use it again — “safe” in the sense that you won’t incur extra interest if you pay the balance in full by the end of the grace period.

2. Average Daily Balance. This was once the most common calculation method and is still popular. Add the daily balance for each day in the billing cycle, then divide by the number of days in the cycle. Depending on the terms, this may or may not include new charges.

3. Adjusted Balance. This is the best method from a consumer’s point of view, but it’s rapidly going the way of the dodo. Take the balance at the beginning of the billing cycle, then subtract any payments or other credits recorded during the cycle. Do not include new charges during the cycle. For example, if your beginning balance was $1200, and you paid $400 during the cycle, the balance to which your monthly rate will be applied is $800, regardless of any new charges.

Balance Transfer:
This means that you’re charging card X to pay off (all or part of) the balance on card Y. So the balance is, in effect, transferred from card Y to card X. Why would you want to do this? Usually to take advantage of an introductory low interest rate when applying for a new card. Look closely at the terms. Sometimes these introductory rates last only a few months. The best ones are for the life of the balance. You will often have to pay a transaction fee equal to 3% of the balance transferred. Sometimes these fees are capped at $75 or so. Be sure to see whether or not the transaction fee exceeds what you’ll save in interest. If so, don’t do it. Sometimes the credit card company will agree to waive the fee, especially on a new account. Don’t be afraid to ask.

Cash Advance:
A cash loan charged immediately to your credit card account. Usually there is no grace period for paying off a cash advance, which means you’ll be charged interest starting from the day of the loan, even if you pay it in full by the end of the billing cycle. Also this type of charge may have a higher APR than purchases or balance transfers. Check your terms. Note that some kinds of transactions, like buying casino chips or lottery tickets, may be treated as cash advances. This can also apply to writing a purchase check to your own bank account. Be sure to read the fine print.

Credit Limit:
The upper limit on your account balance. Exceeding it may result in penalties. Be very careful if your balance is close to the limit (“maxed out”), because you can exceed it without charging anything new if you fail to pay enough. Remember that just because the company has approved you for a certain limit doesn’t mean you can afford to take on that much debt.

Disclosure Chart:
An important portion of the Terms and Conditions statement. It’s a little bit like the Nutrition Statement on a food package because the law dictates what has to be listed here. If you can’t stand to read all the fine print, be sure that you read this part.

1. fixed APR or APRs after any introductory rate(s) have expired
2. rule(s) for calculating variable APR(s) if applicable
3. grace period
4. annual fee if applicable
5. minimum per-cycle finance charge
6. additional fees if applicable, such as cash advance fees
7. balance calculation method
8. late payment and delinquency fees
9. over limit fees

Grace Period:
The time, calculated from the account cycle date, during which you can pay the balance in full without having any interest charged. This usually applies only to purchases, and only if you’ve paid the previous month’s balance in full and on time. (Sometimes even that’s not enough. See “Two-Cycle Balance” calculation method for an additional “gotcha.”)

Pre-Approved:
This can be very misleading. It doesn’t mean the company is guaranteeing to issue you the card in the offer. It just means they chose you to receive this offer based on some general screening of your credit report. They always reserve the right to deny or alter the offer based on a more detailed examination of your records.

Banish these myths from the way you handle your credit! Your score will be as good as it can be when you know the truth about how these actions affect your credit score.

Damaging Myth Number One: Closing inactive accounts will raise your score.

This is a widely held belief, but it’s false. Closing accounts, whether or not they have zero balances, whether or not they’re inactive, will often lower your scores. Why? Because part of your credit score is based on the ratio of your credit card debt to your total available credit. If you close a zero-balance account with significant available credit, this ratio gets smaller. It’s as simple as that.

On the other hand, you can also have too much of a good thing (too much available credit compared to your ability to pay). If you’re concerned that this may be true in your case, then you can close zero-balance accounts that you don’t need. If you plan to close more than one zero-balance account, wait a few months in between. Each closing will initially affect your score adversely, and it can take months for the scores to be adjusted upward.


Damaging Myth Number Two: It doesn’t matter what balance is on each card; it’s the total that counts.

Again, this is untrue. Another part of your score is calculated by looking at the debt to available credit ratio on each card individually. Ideally, keep this under 30% on every one of your cards. For example, if your credit line on a card is $2500, keep the balance below $750.

Pay your debt down instead of moving it around to other revolving accounts. Moving it around (for instance, moving balances to zero or low interest credit cards) can lower your scores. With all the offers for low initial rates, many consumers are moving their credit card balances over and over again, trying to keep their accounts at the lower rates. If you’re moving balances among accounts that you already have open, and if you can do it without going over 30% on each account, then this is okay. But if it means applying for a new account each time, don’t do it. Each application will lower your score.

Damaging Myth Number Three: More accounts and greater available credit always means a higher score.

Not true. Don’t open new accounts you don’t need trying to increase your available credit. It can backfire. You need only four open and active accounts to establish great credit scores. Apply for credit only as you truly need it.

Many folks fall for department store promotions. The offer to get 10 or 20% off if you open an account may look like a great deal, but the activity can be detrimental to your credit scores. Don’t open accounts thinking it will raise your score, as it may not help at all. Have credit cards, but use them wisely. It is actually viewed that someone that has a good history of responsible credit use is a lower risk than someone with no credit cards at all. For the best score, ideally you should have a mix of installment credit (cars, furniture, etc) along with credit cards and mortgages.

Damaging Myth Number Four: Your credit reports are complete and accurate, even if you never make sure of it.

If you have ever had a collection account, judgment or tax lien, don’t assume that the creditor, collection agency or taxing body will report the resolution to all three bureaus. That goes for erroneous reporting you find on your report too. Don’t assume that because you paid off a collection, judgment, or lien that it is immediately reported to the bureaus. Even when you close an account, it is often not efficiently reported as such to all bureaus. It is not uncommon to see such activity reported to just one bureau, even when the adverse account was being reported on your credit report by two or all three bureaus.

Unfortunately, agencies and creditors are quick to report you when you owe them money or have made a recent mistake, but they can be very slow to report the final resolution to that account when you have paid them. This problem is magnified when there has been a bankruptcy. Accounts that have been involved in a bankruptcy may have been moved between the creditors and various collection agencies long before the filing for bankruptcy protection. The creditor is reporting the account as delinquent and is likely reported it as a charge-off.

But the creditor has also sold the account to a collection agency, hoping to get a small percentage of their loss back if the agency can collect anything. This goes for credit cards, department store accounts and even installment loans like auto loans. The account is sold back and forth between creditors and agencies.

The problem is that after one files for bankruptcy protection, and after the time has passed that it takes to successfully bankrupt the debts, the accounts may be sold multiple times. In addition, it is not uncommon to see an account go to collection after it has been discharged in a bankruptcy. You are thinking that you have a fresh start to rebuilding your credit after the bankruptcy, yet there may be new collection accounts dated after the discharge which has a huge impact on your already damaged credit scores.

What’s the remedy? Watch your credit reports like a hawk! No one else cares nearly as much as you do about making sure they’re accurate. You have to follow up with each individual bureau and supply them with copies of your discharge and lists of creditors to insure that everything is reflected accurately on your overall credit report. It can take years to see a rise in your credit scores if you don’t follow through with this. It is your responsibility to watch any such activity and make sure that all three bureaus have the most recent and accurate information possible. You can write and/or file online disputes with each individual bureau and supply copies of paid receipts and any correspondence you may have to insure that your record is recent and correct.

Resources

You have the right to one free copy of your credit report per year from each of the big three credit reporting agencies. They don’t have to be requested at the same time. For more information go to AnnualCreditReport.com.

These are the big three credit reporting agencies:

Experian
NCAC
PO Box 9556
Allen TX 75013
888-397-3742
http://www.experian.com/

TransUnion
Customer Disclosure Center
Trans Union Consumer Relations
PO Box 2000
Chester, PA 19022-2000
800-888-4213
http://www.transunion.com/

Equifax Information Services
P O BOX 740256
Atlanta, GA 30374
800-997-2493
http://www.equifax.com/

• Why did you use your credit cards? For many, spending money has nothing to do with needing the items that are purchased, but to have an outlet or even as a habit. If these are problems that you may have, dealing with them is necessary before finding a way to get a credit card debt solution.
• Do you trust yourself to not use your credit cards again? The method that you choose as a credit card debt solution needs to be one that you can succeed at. If you are not sure that you can trust yourself to not use the credit cards as you pay them off, cut them up.
• Are you willing to work for the rewards of having a debt free life? For some, working for the goal is motivation and the way to go. For others, taking their losses through filing bankruptcy and struggling for the next ten years is a better solution. Where do you fit in?

The credit card debts solution that you choose can only work if you are willing to make it work. For example, many people find themselves struggling without seeing a reward for a while before they get over the hump and start seeing positive things happen. If you cannot handle that struggle and wait, other options may be a better choice for your credit card debt solution instead. Determine which method is right for you in credit card debt solutions and then get started.

What You Need To Do Now

To make credit card debt elimination your goal, you need to find a way to stop using the cards, to pay them off and then to learn to use them wisely. To help you to reach the first two of these goals, here are some tips that you need.

• Realization. It is important to understand that when you make a purchase with a credit card, that each of those items is costing you more than what that receipt says. It will cost you more in interest, in late fees, in over the limit fees and over and over again. You need to realize that you are throwing money away when you use your credit cards unwisely.
• Stop Spending. Cut them up, freeze them, hide them in the bottom of a drawer. Whatever you do, you need to stop using your credit cards at least at this point. If you pay them off and then stop at a store, you are more likely to use them again and start the cycle over. Or, for some, making a $50 payment means that now they can spend another $50. You have to commit to stop spending.
• Pay them down with all that you can. It takes cutting corners to make sure that you can pay down the credit cards. It will cost you thousands of dollars in interest if you only pay the minimum payment every month. You need to pay as much as you can and as often as you can.

Credit card debt elimination can only happen when you make it your goal. The rewards are many and the road is hard. But credit card debt elimination is your goal.