There is a mountain of debt amassing in America, and more alarmingly, the entire globe. That doesn’t mean that you have to add to it. In fact, the opposite is true. Now more than ever, it is important that you aggressively reduce your debt. In order to do this, you must first take inventory of the bills and debt that you currently have. List your debt in terms of categories. Write down your rent, mortgage, auto loans, credit cards, loans, bills, etc.

The first step to an effective debt reduction plan is to bring any delinquent bills current. Again, list your past due bills and call each one. Advise these companies that you intend to pay these bills and would like to discuss payment options. You will be very surprised to find that many companies are willing to negotiate payment arrangements.

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First and foremost, be smart; never send sensitive information over email. For your protection, we have included a secure contact form to be used instead. The contact form can be found under “Contact Us”. In addition, to email security, it is important to keep your browser current. Keep current on the automatic updates sent by the browser. Also, ensuring your anti-virus software and firewall protection are constantly operating is another sure best practice.

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Please refer to this article published by the Federal Trade Commission.

http://www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt060.shtm.

Over the past decade, the answer was to borrow your way out of debt. Simply refinance your mortgage or tap into home equity on your home that just doubled in value. Consolidating your debt seemed like something that made sense as it lowered your payment, reduced your collective interest rate, and afforded you a potential tax deduction with the increased home interest payments. The problem was that consumers were just kicking the can down the road. Debt has a way to continue to grow, and eventually it will lead to your inability to make your payments on a timely basis. When that happens, your credit score will drop drastically, and you will be left with a mountain of debt and no way to borrow your way out.

Even if you didn’t amass a mountain of debt, but only missed a few payments, that’s no big deal, right? Well, it’s definitely not the end of the world, but it will mean that your world is more expensive from now on. If you have anything less than an excellent credit rating, anyone who will loan money to you will want to ensure that they are adequately compensating for the risk they have lending to you. In other words, if everyone with a credit score identical to yours has a default rate of 10%, then that means the lender has to assume that you have a 10% chance of defaulting on your loan. If everyone with a credit score 50 points higher than yours has a 5% chance of defaulting, then that applicant has a lower chance of defaulting.
In plain English, the lower your credit score, the more likely you are to not pay your loan back fully. The lender is then taking a risk to lend to you, and as such, they will only do so at a higher interest rate.

Now, payday lenders will tell you that these are short term loans and no one will ever pay interest for the entire year, to ever get to that 120% figure. That logic is flawed, however, because to continue with the comparison to the bank, a loan that is paid back to a bank within one month that quotes a 10% annual rate will really only be closer to 0.8% interest using the payday calculation.

To use real dollars, let’s assume you borrowed $1000 from a payday lender who has quoted you a 10% monthly rate. Say you paid it back in exactly one month (payday lenders typically require payment sooner). To calculate your interest charge, simply multiply the amount borrowed $1000 by the monthly interest rate 10% ($1000 x 10% = $100). That doesn’t seem bad, does it? The problem is that most payday lenders will charge rates much in excess of this. Now let’s assume you borrowed the same $1000 from a bank at a 10% annual rate. To calculate your interest charge, simply multiply the amount borrowed $1000 by the monthly interest rate of 0.8% (simple average monthly rate). Your interest charge would be $8 for the month ($1000 x 0.08% = $8). That’s a saving of $92 in interest.

Unfortunately, for many payday lending customers, going to a bank isn’t a viable option. This could be because they have bad credit. Payday loans are not a scam; they are an option for people that don’t have many other options. However, they are hardly an effective financial tool no matter what your situation is. A finance charge of $100 on $1000 is a hefty fee to pay to advance yourself money a few weeks. The purpose should really be life threatening before you even consider such a loan.

Okay, let’s assume you pulled your credit history and it turns out you did miss an electric bill, and a mortgage payment, and you had a car repossessed, and you have you delinquent student loans. This is what underwriters will call a “bad file”, or another term is a “soup sandwich”. Does this mean your days of borrowing are over? No. The hardest thing to realize is that there is a lender out there for anyone. Just know that you will probably have to pay higher interest rates for the money you want to borrow, so don’t borrow frivolously.

You have determined that you have bad credit and that you really need to borrow this money for something important; important enough to potentially pay 25% interest on this amount. Where do you look? The first question to ask yourself is whether or not you have collateral (i.e. a home, a car, retirement plan, or life insurance) that has equity and you can borrow against it. Some of these options are favorable since they do not require a credit application, which effectively levels the playing field for you and ensure that you won’t pay a different interest rate than everyone else. Those options are limited to life insurance, retirement plan, or share loan lending (share loans are loans taken out against deposit accounts you have at banks). If you don’t have anything you can pledge as collateral, then you can go the secured route. Lenders will usually allow you to put up a lump sum to act as a security deposit against money you would like to borrow. This is common with credit cards that are designed to help you build credit. Be careful with these as they are typically laced with hidden fees and charges designed to eat into your security deposit. Finally, applying for unsecured debt should be the last option. If you have a damaged credit history, this will mean that the loans either have shorter terms or higher interest rates.

Sometimes, the situate dictates that you have no choice and you have to accept these unfavorable terms. Just remember to pay on time and start building your credit back up. Try to make this a short period of your life, so that in the future you can enjoy credit on your own terms.

Alright, so you went to a bank and got shot down, end of the road, right? Wrong again, there are many peer-to-peer lending sites popping up on the internet which allows investors to loan to people that banks typically won’t. Even if you don’t feel comfortable going that route, you could always approach subprime lending institutions. These companies typically have higher interest rates, but their credit guidelines are much more lenient. If all else fails, and you only need money over a short period of time, payday loans and pawn brokers will have high interest rate loans available for you.

Bad credit only limits your options, it does not eliminate them. Just be smart about where you attempt to get loans. Remember that interest rates will be higher and terms will be less favorable, so only borrow if you absolutely need to.

As more and more people with bad credit histories approach lending institutions, these lenders are realizing that many individuals have gone through isolated cases that caused their damaged credit history. Given this, credit standards have relaxed over time and now the chances for getting approved is much greater, especially for those applicants that have collateral.

The easiest types of loans to get approved for with bad credit are secured loans; namely, mortgages and home equity loans. These loans allow a person to borrow money while using a home as collateral. Your credit history and capacity to pay will determine how much you can borrow. Get familiar with the term LTV, which means Loan-To-Value. Using simple math, it represents the borrowed amount divided by the current market value of the home. For example, assuming you want to purchase a home that is worth $200,000, and the mortgage lender advises you that they will loan you up to 90% LTV; then that means they are willing to let you borrow 90% of the value of the home, $200,000 ($200,000 x 0.90 = $180,000). In this example, you would have to have enough cash to pay the difference, plus any settlement costs. If you already own your home, you could either refinance your mortgage (and take cash out), or tap into your equity via a home equity loan. Home equity loans are a cheaper alternative to refinancing your mortgage because they have much lower closing, or settlement, costs. Their repayment options are typically limited to no more than fifteen years, however, whereas mortgages will normally go up to thirty.

If you are not a homeowner, other options still exist. If you work for a company that offers a 401k program, you may have an opportunity to borrow against your vested balance. These loans do not require credit approval, since you are borrowing against your own money, and will usually only have very small loan fee amounts associated with them. If you have equity in your vehicle, you can also borrow against it. Try to avoid “cash for title” loans if possible. If you have a car that is less than five years old, you can usually get a loan through a bank a reasonable rate.

Even if you do not have collateral there are more options. Keep in mind however, that most of the more attractive credit options are not available to you. When you hear “zero interest for six months” or “zero down”, those are offers designed to attract people with great credit histories. That being said, it is not impossible to get credit, just be mindful that it will be at a higher rate and less attractive terms.