I’ve received several questions lately from young adults, just out of school, who are finding it difficult to make ends meet. Here’s one from Ryan, who is feeling overwhelmed by debt:
I’m 21 years old, working a full-time job and a part-time job, and going to school part-time on weekends and evenings.
After high school graduation, I immediatley fell into credit card debt, which I’m still drowning in. I had barely any financial guidance from my parents, and now have started some pretty terrible money spending habits. I think I’ve finally crossed the threshold that my expenses have overgrown my monthly income.
I’ve already called my credit card companies and negotiated a lower interest rate, and canceled them both. Right now I am making all the minimum payments (some on time), but I feel like I’ve finally hit a wall. I’ve tried the debt snowball, but it seems as soon as something is paid off, something unexpected comes out of nowhere.
I’ve been thinking about programs like Novadebt to consolidate everything and start again, but I’m worried about my credit score. I know that when you get involved with programs like this, you can’t be able to be approved for a car loan or mortgage for a few years in the future. I thought that if Novadebt can pay off my debts, it would be better to just pay one bill a month and I might just have the opportunity to start saving some money.
Can you give me some advice?
First, Ryan should stop taking on new debt. He needs to make sure not to sabotage himself. It sounds like he’s taking steps in the right direction. If he can stop spending and begin flexing his frugality muscles, he’ll be able to attack his debts without losing ground.
Next, Ryan needs to establish an emergency fund. He’s had trouble with the debt snowball because unexpected expenses keep cropping up. By saving $500 (or $1,000) as insurance against the unexpected, he’ll be able to follow his plan without being sidetracked.
Speaking of which, while digging out of my own debt nightmare, I’ve found it valuable to make a spending plan. This isn’t a budget, but a rough estimate of upcoming income and expenses. When I draft a spending plan, I write down all the money I expect to receive between now and the end of the year. I also list known expenses: every debt, every monthly bill, every special occasion (such as Christmas). After examining my cash flow, I create a list of financial priorities. This can be intimidating at first, but if you are patient and persevere, your cash flow will improve in time, and your debt will diminish.
After Ryan does these things, he can concentrate on the debt snowball. Or, if he decides it’s best, he can seek the help of Novadebt or some other consumer credit counselor.
What advice do you have for Ryan? What has helped you pay off your debts? What can you tell him about credit counseling and its effects?
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Ryan, my best suggestion is to talk to a nonprofit CCCS. My experience is that people on CCCS have a notation placed on their credit report stating either “Slow pay” or “Paid via credit counseling”. Neither of these is as good as paid in full and on time, but both are better than past due or charge off. It will impact your credit rating, but if the alternative is that the accounts are past due, slow pay is the far better option. I would echo those who say not to worry about your credit rating now. Take the hit, as small a hit as you can, get it paid, learn the skills to avoid debt in the future, and you’ve got the rest of your life to enjoy a good credit score.
If you’re worried about a car loan in the next few years, maybe the best strategy there is once you’ve got the debt squared away, sock some of that newly excess money in a “car account” in a high yield savings account. Even if you have to pay a little more for the money you have to borrow, if you can pay part or all of the cost of the car when you buy it, you can take a shorter term loan which will alleviate a lot of the pain of the highter interest. Then, when you’ve paid the car off on time, that will further help your credit score, and you’ll have a paid for car! Yay!
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Ryan, I would suggest Consumer Credit Counseling Services as well. I turned to them when one of my low-interested credit cards was purchased by another bank who jacked the rate up to 26% and refused to lower it for me. CCCS got the rate lowered to 6% and what you pay them is low. It’s not an ideal solution perhaps but it was better than 26% interest, which at the time was burying me.
I also agree that you need to draw up a budget and write down every penny that you spend. I find that so helpful, not only because you see where your money is going and can better keep your spending down, but it gives you real peace of mind. I certainly slept a lot better once I started doing this! Good luck!
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Addressing several points:
For what it is worth, I was in my mid-30s before I ever heard the phrase “consolidation loan” without the suffix “trap”.
Cars: In the US, not having a car is not really an option if you want flexibility in employment. You can live in areas with public transit, but then without a car you are limited in job options to what you can walk to or can get close to with the local transit. I will get hate comments, but people saying ditch the car are generally not thinking it through. Remember that you need a certain population density for public transit to be possibility, and most of the land area in the US has nothing like that density. If you are not in or near a medium-to-large city, you need a car, period. If you have a job outside the normal work day, (7AM to 8PM or so maximum range), you can only do the mass transit thing in insanely dense cities such as New York. I live near Detroit, and in under 20 minutes, I can drive to places where the local parody of mass transit does not go. A cheap car should be considered, no car at all is unrealistic in most places.
On a related note: Something I have been doing for therabouts of 30 years, drive path planning. All those years ago, the price of gas drove me to plan out my driving to minimize distance and trip count the the maximum degree feasible on any given day. This means thinking about what you need to do and working out what your options are. My shopping trips are usually done on the way home from work. I plan out the stops as best as I can, but a fair percentage of the time, I have to trade off distance and time to allow for refrigerated stuff that cannot safely be left out for any length of time and has to go straight home from the purchase point. If I need to go somewhere after work, I don’t go home first. I have other strategies. Hmmm, I sense another article possibility.
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re: comment 50
CCCS is not sponsored by the credit card companies. CCCS does not show on your credit as a Chapter 13 bankruptcy. These statements are both complete falsehoods. Clear Debt Solutions is EXACTLY what I was referring to when I talked about companies who allow your debts to charge off to negotiate settlements. I saw people all the time who went with these clowns when I worked for the credit card company (note: I do not work for them any longer, nor do I have any attachment or interest in them). They sent us letters forbidding us to contact their clients, and had their clients send all their money directly to them. They take a cut off the top, and when your accounts have charged off and been sent to 3rd party agencies, they negotiate a 50% settlement and pay them out of what is left of the client’s money. In the meantime, the client has a charge off on their credit from the original creditor, a collection agency account showing as a settlement (NOT paid in full), and if the unpaid amount of the debt after the settlement exceeded $600, you have to pay the IRS taxes on it as it is considered income.
Please, please, please stay far away from any of these debt settlement companies. They are truly bad news.
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Just a few suggestions on the entertainment front:
My husband goes once a week to a friend’s place. They play card games (no gambling), watch sports on TV, or play video games. It’s fun, and it doesn’t cost much – about once every 6 weeks, it’s his turn to bring beer.
When I go out with my friends, it’s for lunch or just coffee. Still nice, but doesn’t cost as much. Around here, there’s also hiking and beach volleyball.
Don’t avoid all of your friends. Good friends are important.
Oh, and I would echo those who suggest CCCS.
There are a couple of disadvantages that I’ve heard of, but these are usually said by the same person who says that they’d go with them again if they did it over.
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Awesome thread!! I have little to offer for advise as I am in a similar boat, but much to take away. I just want to thank you all for your non-judgmental advise to people who have the guts to suck it up, expose their personal dilemmas, and be humble enough to ask for help in the form of guidance and information….So that goes without saying that Raul can F*&K off with his self-righteous BS that is no doubt rooted in an extreme untreated inferiority complex due to an underlying personality disorder…they do make drugs that can make you feel better so that you don’t have to be an ass to other people in order to feel like you are better Raul…Perhaps you clicked in the wrong forum?… well, let me help re-direct you… http://ehealthforum.com/health/bipolar_disorder.html There ya go buddy. Get well!
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Listen Ryan,
All is not lost. First what is your highest debt interest rate? Which bill charges you the highest interest rate? That is the debt you want to concentrate on, pay that debt off first. Second, do you have any assets, namely a house? If you do you can consolidate your debt using the equity (if any) to get a lower interest rate and avoid shady debt consolidation services. Third, stop spending money dude, I mean, if you don’t need it to sleep, eat or transportate to your work, get rid of it. You are on what we call a “debt treadmill” and if you don’t take affirmative action, you’re going to find that you feel like you are “working all the time and getting no-where”. Any money you “invest” should be to increase your earning potential. Which means, you need a better job and the education necessarey to obtain said job. Ask your employer how to get a raise and what the company needs, then think of a way to fill that need. If they don’t have an answer, then you need a new job and a new resume I might add. In short Ryan you need to be a “cash and carry” type of person until you learn a little more about debt and earning and “how the system works”. Start off though by paying off your high interest debt and that should start you off in the right direction.
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An idea that might help with the student loan/school costs is to join AmeriCorps. They have positions where you get a very low living allowence for serving for 4 months and then you get about $1,000 for school. Most of the organizations are very flexible with the times you can work so you can work around your other obligations. There are positions with more hours for up to a year of service as well, but as a minimum time of 1/4 time member you could slightly boost your monthly take home (last year it was about $400 a month for minimum time). The experience looks good on a resume and they will ussually work with you to provide more job skills and sometimes some of yourclass time can count to if it is approved with what you are doing in your service.
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It looks like Ryan’s on the right track. Definitely track expenses on a spreadsheet. It can be an eye-opener.
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hi ryan.
what everybody else said.
I have a friend who was in the same boat as you. she was crying and working two jobs. at the same time there was a fresh ‘starbucks” in her hand morning, noon, and night. so watch where those dollars go! good luck!
ditto on the jerrold mundis book. mary hunt and dave ramsey books also.
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oh! and also pack a lunch and plan your meals.
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I joined American Consumer Credit Counseling 3 years ago when I had too much credit card debt. The CC companies refused to give me lower rates when I called, though I had always paid on time, because my balances were all near the limit and I had too many cards. ACCC reduced my interest rates to below 10%, some even at 0%. I didn’t include all of my cc’s on the plan, as those certain companies didn’t reduce my interest rate with the plan and the advisor recommended that I pay those off myself and leave them open (without using). As these were lower balances, I worked hard on paying them off. Now I only use my credit union credit card, which I pay off when I use it. I will be completely out of debt within the next 2 years on the plan, including my (low) car payment. I wouldn’t have been able to do it this fast without ACCC, as my interest rates were really what was hurting me. I’ve also learned to live more frugally (though there is still room for improvement) and will soon be increasing the amount I pay each month to get everything paid off even more quickly. I am also working hard on building a decent savings (check into the on-line savings accounts (HSBC or ING), as the interest rates are excellent), and contribute anything that you can, just to give yourself a cushion. Sell things on craigslist (you’d be surprised about what people will buy) that you no longer need. Even if you only make enough to fill your car with gas, that’s still more than you had before, especially if the item isn’t something you need. Sell your old textbooks if you haven’t already. I believe there are several websites for which to do this.
You caught some flack about the statement about not learning better from your parents. I don’t believe you were implying that it was their fault. I know exactly what you mean because I wasn’t taught anything financial either and it’s a fact that people learn from example. The good news is, we can change what we have learned. There is no need to leave nasty comments to someone who is reaching out for help. Good luck–I hope that you figure out what will work best for you soon!
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Common misconceptions in the credit and debt industry are everywhere, Jen. Having been in the banking, collections, lending, and debt settlement industries, I have seen the good and bad of all programs. I don’t mean to sound like a know-it-all, or come off as being rude, but I believe that your views of CCCS and debt settlement are misinformed. Here are my views about credit counseling and debt settlement.
Regarding CCCS, Credit Counseling Companies typically lure you in by saying they’re non-profit, but they’re actually paid for and sponsored by the credit card companies. Having done much research on this fact, they use crafting wording to say that they are separate from credit card companies, even though they are not. Here’s how it works, you pay them a one-time initiation fee of around $50.00 and they charge a small service fee for each credit card you put into their program. Then they have you pay them one payment and they disperse it to the creditors for you each month. They also try to lower your interest rates for you and the amount of time to get out of debt usually between 4 to 7 years, which means your monthly payments, will be the same if not higher.
Here are the challenges with that program:
1. Most people have a cash flow problem more than they do an interest rate problem. Since they don’t reduce your monthly payments, they have about an 85% drop out rate because most people that are struggling and looking for help can’t afford to make those payments.
2. The other challenge with those programs is that it will look like a Chapter 13 Bankruptcy on your credit report because you’re using a 3rd party to pay your bills. That’s similar to what they do in a Chapter 13, where you pay a trustee of the court and then they pay the creditors for you each month. So, lenders, especially Mortgage Companies look at credit counseling programs worse than a bankruptcy because of the fact you’re using a 3rd party to pay off your debt.
Here’s some accurate information about debt settlement and Clear Debt Solution:
The debt settlement program we have you do you have to qualify for, but it’s not based on good credit or home equity. If you do qualify:
1. We’re going to contact your creditors within the first 90 days, through a Limited Power of Attorney document, that you sign, to inform them that you are in the program with us.
2. We’ll negotiate your debt down 40-60% of what you currently owe. So essentially you’ll end up paying a fraction of the total debt that you owe. The reason for that range, is because some creditors are more aggressive than others, namely CITI and Discover.
3. Then, we will set you up with one monthly payment that’s affordable to you, and that money goes directly into your own settlement account that we use to settle your debts.
For your settlement account, we recommend Global Client Solutions, a third party trust account through Rocky Mountain Bank & Trust. Global is FDIC approved and will be set up in your name only which means you’re not sending us money each month but instead you’re sending yourself money in a secured account you control. Only you have access to your account. We don’t have any control of your money. Also you will be able to view your funds online 24 hours a day.
So how the program works is real simple. You will no longer be making minimum payments to the creditors and neither will we, instead you will be paying you’re your settlement account on a monthly basis.
Once you have accumulated enough funds in your settlement account to pay off one of your creditors at around 40 cents on the dollar, you will make a one lump-sum payment to the creditor, pay them off in full, and you’ll be free and clear of that debt forever.
We will repeat that process with your remaining creditors settling one at a time until each creditor has been paid out of the program within 36 months or less.
For Example:
Let’s say you owe Chase Bank $10,000. We would typically settle with them for $4,000 dollars, which is 40 cents on the dollar.
And let’s say for easy math your monthly payments are around $400 dollars, per month. After 10 months, you would now have $4,000 dollars in your settlement account to settle with Chase and pay them off in one, lump sum payment.
Your account would go back to zero and we would start this process over with the next creditor until all the debt has been settled.
Now, while you will get late reporting on your credit report, but once that debt is settled, then it gets updated. You see, once you have settled the debt, we have a provision in the settlement agreement requiring the creditor to remove and replace all the derogatory information (late reporting and charge off’s) with “Paid”, “Paid in Full” or “Settled in Full” with a “Zero Balance.”
Under the Fair Credit Reporting Act, the creditor has 30 days by law to report this to the credit bureaus.
Towards the end of the program the credit will begin to repair itself because you’re eliminating 30% of what your score is based on and that’s how much debt you owe.
Your credit score can go up after the first account has been paid off, as long as you’re current with all your other obligations because the credit bureaus are very slow in their reporting.
Lastly, everyone keeps talking about credit and protecting what is left of your credit score. What good is your “good credit,” if you can’t use it? You can’t refinance your interest rates with your credit cards, without them altering your account with them. If you do credit counseling, then they will lower your interest rates by switching it from a revolving account to an installment account, thus you wont be able to use the lines of credit, or credit cards, again. So, you have to ask yourself, when your debt is out of control, what’s more important to you “getting out of debt” or “your credit?”
Bottom Once you take care of the debt, the credit will take car of itself.
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In regards to the taxes, Jen, you are partially right. Banks are supposed to report canceled debts exceeding $600 to the IRS and you are supposed to report the same as income on your annual tax return. However, the IRS permits you to write off any “income” from canceled debts up to the amount by which you were “insolvent” at the time. Insolvent means you have more money going out in expenses each month than coming in.
So, unless you have a positive net worth, which is highly unlikely if you’re deep in debt, then you won’t have to pay taxes on the forgiven amounts.
I’ve been a certified tax preparer and use to help out family who own and operate over nine H&R Block branches throughout Northern California. I currently use them and my experience to advise clients, but also recommend that they consult their own tax advisor specific to their own situation.
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I sympathize with Ryan. He is trying to get out but they keep dragging him back in (paraphrasing Godfather). I think part of the reason he wants to turn to a debt consolidator is he needs someone to talk to, a group, someone on his side.
Before he goes into consolidation, check and see if there a free debtors anonymous support group. Just like there are weight loss groups, I think debtors should get together in groups because there’s more power with a group, and you don’t feel alone. They help motivate and are nearby.
He needs to sit down and do a budget/debt assessment by himself (or with a friend/family member) so he can really see if he is past the tipping point of debts/fixed expenses greater than income. He needs to know just how bad (or not so bad) it is.
This may sound controversial, but my younger sis is going through what Ryan is. I saw the writing on the wall years ago and tried to offer advice, but she never revealed how bad it was until it got to the point where she’s almost maxxed out. I sat down with her and helped her budget. She was about $100-200 over in debt/expenses than what she earned each month with no savings. Because he is 21, he might also be able to do this, but I contacted other family members and each “lends” her $50 a month for a certain number of months. She promises to repay but we know we might never get it back. There were concessions she had to make (like no credit cards!) but giving her that bit of breathing room allows her to actually be able to dig herself out of the pit. Yes, we helped her and some may see it as an out, but sometimes, that is what family is for. She still has to pay off her debts herself (my dad offered to loan her the entire amount she owes and I had to convince him not to–she doesn’t know that btw) but I think good will come out of all the bad. She went from someone with the attitude she would be in debt the rest of her life to realize she could get out of debt in 4 years. It gave her hope and I think someone like Ryan needs that.
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Ryan,
Good job on working two jobs and taking classes. I am doing the same thing. I was in a similar situation when I was 21, now I am 27 and am still trying to get things together.
Here are a few strong suggestions.
1) Unplug your TV and computer! Only plug back in for special occasions. (If it’s not unplugged it’s really easy to turn it back on.)
It sounds crazy, but think of the time zaps that these devices drain from you. With TV, think of the amount of brainwashing that commercials put in our lives.
2) Do not enter stores unless you have a list. And only buy what’s on a list. NO Exceptions!
3) Get a Crockpot and use it at least 2 times a week.
4) Pack lunches every day!
5) Hang out at the local library more often; you can get free movies, books, music, etc. for entertainment.
6) Track every expense.
7) If you want to drink, buy it at your ABC store or your supermarket (depending on your state) and invite friends over for a movie night (from the library)
These are the first steps that will get you on the right track.
Good luck.
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