Using Cash vs. Using Credit
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Over at MoneySavingMom.com, Mom gives us her take on using cash over credit. We both see eye to eye on this point. Anyway, her post is excellent and caused a great discussion of over 150 comments. Here’s a brief snippet:
Cash or credit? Why or why not?
I’ll start: We don’t have credit cards, we don’t want credit cards, and, like Dave Ramsey, we think buying on credit is stuupiid (insert Dave Ramsey’s voice on that last word for the full effect!).
We stick to cash only for every purchase possible (yes, real dollar bills and coins, people! Remember what those are?), pay our bills with checks (though we’re looking into switching to online bill paying), and use our debit card only when necessary (online purchases, etc.).
And yes, I know we’re missing out on the free hats, umbrellas, T-shirts, and other cheap perks the credit card companies give out when you sign up. Um, ever wonder why they give out those freebies in the first place? It’s because most people will pay them back for at least 50 or 100 hats or umbrellas or T-shirts in the years to come. Sorry, but you can keep the “free” perks.
We’re also missing out on the higher cash-back percentages we could get by buying on credit. However, we decided to switch from a cash-only system to using our debit card almost exclusively for six months about two years ago. Guess what? We found that we spent a lot more money when we paid with a card. It was so easy to whip out and use. Pulling cash out of an envelope means we think a lot harder before we make the purchase. Do I really need this? Do I have the money for this? Can I buy it somewhere else for less money?
Read the rest by clicking here.
What debt settlement companies don’t tell you
1. Debt settlement may not be right for you
Debt settlement is a niche solution that’s right only for a small segment of the population, says Charles Phelan, founder of ZipDebt.com, who coaches consumers on do-it-yourself debt settlement. But don’t expect to hear that from a debt-settlement company. “People working the desks at the debt-settlement companies are working on commission and have the incentive of bringing as many people as possible,” he says.
You could be a good candidate for debt settlement if you’re heading toward bankruptcy, but don’t qualify for filing Chapter 7, Phelan explains. (Under Chapter 7, most of your unsecured debts are written off, but you’ll most likely have to sell some property including your home). “Most people who can qualify for Chapter 7 in all likelihood lack the cash flow to make debt settlement work for them,” he says. Debt settlement, in other words, might be a viable alternative to Chapter 13, which sets up a three- to five-year schedule with your creditors to repay your debts. (For more details on qualifying for Chapter 7 or Chapter 13, read our story.)
Likewise, if you can scrape up the cash to pay off your debts in a debt-management program, where you work with a debt-management company to pay off your balances in full but with lower interest rates, then debt settlement isn’t the best solution.
2. Your credit will suffer
Creditors don’t settle unless you’re severely behind on your payments. That means one thing: Debt settlement is damaging to your credit. Just how damaging it is depends on your track record. If you’re already behind on payments, your credit will suffer less than if you’ve managed to avoid delinquencies and credit charge-offs.
3. You could get sued
With bankruptcy, creditors have to stop collections efforts as soon as you file. That’s not the case with debt settlement. Even if you inform your creditors of your efforts to settle, they won’t stop trying to collect, Phelan says. Worst-case scenario, they could sue you for the amounts you owe. Should that occur the only way to avoid a black mark on your credit record would be to pay off the debt in full.
4. There are tax consequences
Debt settlement is a taxable event. Any forgiven balance that exceeds $600 is taxable income, says Linfield. “Sometimes that tax event can put people in worse shape than they were in to begin with,” she says. Consider this: If your tax rate is 15%, $5,000 of forgiven debt will carry a $750 tax liability. That’s a debt that the IRS won’t forgive. (Read our story for advice on what to do when you can’t pay your taxes.) One exception: If you’re insolvent — namely your assets are less than your liabilities — you can petition the IRS to waive that tax liability by filing form 982.
5. Our services might be illegal
While the laws regulating debt-settlement companies vary greatly by state, it’s worth noting that 12 states currently prohibit for-profit debt management. Since debt-settlement companies are for-profit entities, they’re not allowed to practice there. Those states are Arizona, Georgia, Hawaii, Louisiana, Maine, Mississippi, New Jersey, New Mexico, New York, North Dakota, West Virginia and Wyoming. If you live in one of those states, remember: It is illegal for for-profit debt-settlement companies to contact you and work with you, even if they’re based in another state. “Many companies do it anyway,” Linfield says. “And that’s a big red flag.”
Courtesy of SmartMoney.com
Carnival of Personal Finance 134: Building on the basics
Mrs. Micah, who runs a personal finance blog, has posted a long list of links to good articles on personal finance. My article 3 Retirement Tips for Late Starters was included. I have included a shortened version of her post below. Enjoy!
- Mike from Clever Dude’s Finance and Life teaches us how to Rehabilitate Your Finances. I really like Mike’s metaphor for nursing our finances back to health. He lays out a series of steps based on his own back rehab.
- Grace from GRACEful Retirement reminds us that There’s More to Life Than Money. She reviews How Starbucks Saved My Life: A Son of Privilege Learns to Live Like Everyone Else
(affiliate) and discusses his life choices. Real food for thought.
- The Mighty Bargain Hunter suggests that when we start budgeting, we follow this pattern: Budget, track expenses, then budget.
- Eden from Finance and Fat agrees with Lynnae. He’s Remembering Why I Never Want Another Credit Card.
- Brip Blap has some ideas for educating others about personal finance in How to Talk to Your Teenager About Personal Finance.
- Aspire To Wealth by following Millionaire Rule 4 Set Up Automatic Saving.
- Money Challenge has some plans for staying on target with an $80/month gas budget this year, including 8 tips for Saving on Gas.
Mortgage company won’t let us sell the house!
Dear Dave,
My wife and I recently moved, but we still own our old house out of state and owe about $122,000 on that mortgage. We took out a 125% mortgage to allow us to do debt consolidation and give us extra cash. We owe about $34,000 on that second mortgage, so now we owe $156,000 on the house and it’s only worth $150,000. We’ve been trying to sell it for six months with no luck. We’re still paying the mortgages on that house plus we have a mortgage on our house here in Michigan. We can’t do this much longer. What should we do?
From Chad
Dear Chad,
You’re now a living example of why you should NEVER take out a 125% mortgage under any circumstances!
Call the company that holds the second mortgage on your original house and tell them where you are. Let them know that you’re ready to hand them the keys unless they’re willing to work with you. Remind them that at the moment they have a partially-secured second mortgage for $34,000, of which around $10,000 or more is unsecured. You can make payments on a $34,000 loan, but you can’t make the payments of a $156,000 loan, which is the total of your two mortgages on that house.
Then, get them to admit that you don’t have a collateralized loan. They already know this, but it needs to come out of their mouth. Suggest that they allow you to sell this property for less than $156,000 and you will sign a note for the difference. For instance, if it sells for $136,000, the mortgage companies get all of the proceeds and you sign a note with them for $20,000. See if you can get them to sign a partial release under those circumstances.
If they’ll do that, you can reduce the price of the house and put an “Owner Desperate” sign in the yard to get that thing sold. You’ve got about a 50-50 chance of them accepting this kind of arrangement.
If your credit is still clean, another idea is going to a local credit union and borrowing $15,000 or $20,000 on a signature loan to pay down this second mortgage to the point where you can sell the house for enough to pay it all off. If you go that route, I wouldn’t send the money from the signature loan until you’re ready to pay off the house off altogether. That way you aren’t stuck with yet another payment until the house sells!
- Dave
Tell your money what to do!
Having fun Christmas shopping? Well, once Christmas is over, it’s time to transition back to a normal daily routine. Don’t sigh, though! This is also a time where you can start fresh and make your money work for you! Here are some key points in developing and sticking to your budget this month:
Write it down. A budget is not a form of medieval torture! It is YOUR game plan, where you tell your money what YOU want it to do. This isn’t rocket science! Just give every dollar a name on paper. Get free budgeting forms.
Stay away from places that tempt you to spend. If you have a problem sticking to a budget, it could be that you are immature. It could also be that you can’t stay out of the mall! Know where you tend to spend the most money and don’t tempt yourself!
Get out those envelopes. Try the envelope system. Take some envelopes, write the budget categories on the envelopes, and use only the allotted money to purchase specific things. If an envelope is empty, don’t buy anything else in that budget category. Easy as pie.
Stay motivated! Don’t give up! A budget is there to help you. It is a tool you use because you have hope that your financial situation can and will get better. One thing that can steal your hope is dwelling on the failures of the past or the fear that you will never get to the end. To avoid this, break your plan down into smaller goals. You can change your financial picture. You can change your family tree. Stay motivated!
