The Fair Debt Collection Practices Act (FDCPA) is designed to protect consumers from harassing behaviors on the part of debt collectors. It is important to know your rights under the FDCPA, and be ready to report violations of the act.

Debts Protected by the FDCPA

Most personal, family and household debts are protected under law. Money you owe on your credit card, as well as auto loans and mortgages, are protected. You are protected from those who regularly collect debts.

For instance, collection agencies, lawyers and companies that buy delinquent debts are all consider debt collectors. When they attempt to collect a debt, they have to follow certain rules, and avoid engaging in practices that might be considered:

• Unfair
• Abusive
• Deceptive

Get a Debt Collector to Stop Calling You

Debt collection calls can add a great deal of stress to your life. Chances are, you already know that you owe someone money, and that it needs to be paid. If you want the debt collection calls to stop, there is a rather simple procedure: Ask, in writing, for them to stop calling you. Write a letter requesting that the contact stop, and send via certified mail (so there is a record of the collector receiving it). Make sure you keep a copy for yourself.

Once the collector receives this letter, the only contact that can be made with you is to inform you that no further action will be taken, or to let you know that further action is coming (such as a lawsuit). You can also stop the contact by designating a representative. If you make it clear that an attorney is representing you regarding your debt, the debt collector must contact him or her, rather than you, to make arrangements.

Note, too, that debt collectors can’t call you at your place of work if you tell them (on the phone or in writing) that you aren’t allowed to get those types of calls while working.

Verifying the Debt

In some cases, you might think that you don’t even owe the debt! And, even if you do owe on it, debt collectors must send verification of the debt. Within five days of contacting you, a debt collector must send out a validation letter telling you how much you owe, the creditor you owe the money to, and steps you can take if you don’t believe you owe the money.

Keep records of contact, and the date on the letter, since a debt collector not adhering to the standards can earn you some reprieve. You also have the right to ask for proper documentation of the debt, including a copy of the bill that you are supposed to pay.

What Debt Collectors Can’t Do

In the past (and sometimes still today) strong arm techniques have been used to scare people into paying the debt — even if the debt isn’t theirs, or they can’t pay. Here are some practices that are forbidden to debt collectors:

• Threatening violence against you.
• Use of obscene language while speaking with you.
• Publicly humiliation by publishing a list of people who haven’t paid (although this information can be given to your attorney, spouse and the credit bureaus).
• Making false statements, including claiming they represent the government or some other organization that they don’t, and misrepresenting the amount of money that you owe.
• Implying that you will be arrested or a warrant will be issued if you don’t pay your debts.
• Depositing a post-dated check early.
• Threatening to take your property or garnish your wages (unless allowed by law in your state) without a proper court order.
• Calling you at inconvenient times, including before 8 a.m. or after 9 p.m. your time.

While you should repay your debts when you can, there is no reason to bow to harassment. You do have rights, and you should make sure you claim them.

Unfortunately, that’s just not the way the system works anymore. Your credit report is a convenient compilation of your financial habits and history, and it is easy to use the information in your credit report — or even to use your credit score — as an indication of what sort of risk you might pose in a number of financial situations.

Judging You Based On Credit History

Anymore, an increasing number of people are making judgments about you based on the information found in your credit report. You may rankle at the injustice, but it’s still there. Here are some of the ways that having a bad credit score can hurt you — even if you don’t want to borrow anything:

Opening a bank account: Believe it or not, there are actually some financial institutions that will run a credit check on you before allowing you to open a deposit account. Before you can open a savings account or a checking account, you might have to submit to a credit check.

Banks want to know, especially in the case of savings accounts, that you are likely to park a big chunk of money there — and leave it for a while. Plus, even though overdraft fees are a big moneymaker for banks, they don’t want someone who habitually goes in the red, and your credit report could provide a clue.

Insurance premiums: Many insurance companies check your credit score when deciding on your insurance premiums. My insurance company regularly sends me a letter telling me that my credit score has resulted in a discount on my car insurance premium.

Over time, a good credit score can mean hundreds of dollars saved in car insurance premiums. If you don’t pay attention to having good credit, then there is a good chance that it will cost you.

Rentals: What landlord wants to have to worry about whether or not you are going to make your monthly payments on time? As a result, some landlords will check your credit before approving your application.

In some cases, you might have to live in a less desirable rental if you don’t have good credit. (Of course, if you already have a home, this doesn’t matter as much.)

Certain jobs: My brother in law was subjected to a credit check when he applied to be a security guard. He was rejected because some companies have concerns that someone with poor credit might be vulnerable to bribes.

Certain employers might want to take a look at your credit report before hiring you. If it looks as though your habits might not have been the most responsible, you might be passed over.

Building Your Credit
It’s frustrating for people who are trying to be financially responsible and avoid debt of any kind – only to find out they don’t have a good credit score since they have no credit history.  The good news is you don’t have to go into major debt to build your credit score.

One option is to start using a credit card, and pay off your balance monthly.  If you only charge what you have money to pay for it can help you improve your credit score while at the same time keeping you debt free.

Another option is to use secured loans to build up your score.  Banks may not be willing to give you a regular loan if you don’t have a credit history. What you can do is $1000 into a 12 month CD, then use the CD as collateral for a secured loan.

Jim and Laura are a typical American couple. They just got married last year after dating for four years. Jim is a manager of a local department store and Laura is a school- teacher. They make a combined salary of $100,000 a year, and look forward to raises and increased incomes in their future. They have around $3,000 in their savings account— which seems ample since they are certain they’ll continue to make more money each year—and both drive new cars.

Spending Spree

Jim and Laura go shopping whenever they want and pretty much buy anything they like without thinking twice. In addition, they eat out most nights of the week but try to keep it cheap; they usually don’t spend more than $30 for these dinners.  

After renting an apartment for six months, they decide it’s time to buy a house.  Even though it’s just the two of them right now, they want at least a 2,000-square-foot house because children are on the horizon. Jim and Laura find the “perfect” house but it’s a little above the amount they wanted to spend.

Their Realtor® tells them that it’s not a problem. They can sign up for a five-year adjustable rate mortgage (ARM) and by the time it adjusts, they’ll have so much equity in their house they can just refinance. The housing market is strong and they’re confident their home will go up in value considering the prime neighborhood it’s in.

Both Jim’s and Laura’s parents live in much smaller homes but, after some talk, the couple feels they deserve this larger house because they work so hard and all their married friends are getting big houses too. Jim and Laura sign on the dotted line and their American Dream begins.

Never Enough Money

Fast-forward five years. Jim and Laura are now the proud parents of a little boy, James, and a girl, Sarah. After having James, Laura took eight weeks off from teaching to stay home and loved every minute of it. She wanted to stay home longer but they went through their savings on that 10-day Caribbean cruise before she got pregnant.

Laura began to feel very upset at having to send James to daycare but there was no way around it—they needed her check to pay the bills. Jim saw how unhappy she was and one night decided to have a talk.  It was very encouraging and they both agreed to make a change and start saving so Laura could eventually stay home.

This change lasted a few months before they started spending their entire paychecks again on things such as new clothes and dinners out.  Last year Laura had Sarah and was only able to stay home with her for four weeks before having to return to work. She now spends over half of her take-home pay on daycare expenses. Laura dreads going to work and hits the snooze button at least five times every morning because she hates getting up to face another day.

Jim is not doing much better. He’s had to lay off most of his salespeople. The raise he was promised every year did not happen. There are even rumors that his job might be the next to go. He’s started to look for other jobs but nobody seems to be hiring in his area of expertise.

Bad to Worse

To make a bad situation even worse, Jim and Laura’s five-year ARM is scheduled to adjust this year and their monthly mortgage payment will increase by $500.  The house has dropped greatly in value and Jim and Laura are underwater on their loan so they cannot refinance.

In addition, after James was born, Jim and Laura began to use their credit cards again with the promise of paying them off in full each month. That plan didn’t pan out and they now have $10,000 in credit card debt.

They both have a lot of trouble falling asleep at night and don’t feel optimistic about either their marriage or their future.  They have started arguing more and more—something they never did in the good old days—and these arguments usually concern their finances. What was supposed to have been their American Dream has turned into a scary nightmare!

Your Money

Not a pretty picture, is it? I hope your story is not like Jim and Laura’s but, unfortunately, I know a lot of people can relate to this couple in one way or another. The great news for Jim and Laura (and maybe you too) is that life allows us to learn and adapt and change.

Jim and Laura are obviously an example not to follow—but we can learn so much from them.  Many people don’t see the need to learn about money and how to manage it correctly. They bury their heads in the sand and don’t want to be worried about the true state of their finances because, if they did, they might have to change their spending habits.

The thing is, if you continue to make poor financial decisions, these actions will eventually come back to haunt you.  Even if you make $5 million a year but spend $6 million, you’ll wake up one day and find that you are broke. The great news is that it doesn’t have to be this way. We can educate ourselves, find examples to emulate, create goals and take action.

Editor’s Note: When Danny first contacted me I noticed he had already written one book “How to Survive on a Teacher’s Salary”.  So he’s definitely writing about an area where he has personal experience, trying to make ends meet on a small salary. 

My wife used to be an elementary teacher and it was interesting to see how teachers, making similar amounts of money, used that salary in different ways.  Some managed it well and never complained and some didn’t know how to handle their money and always seemed to be scraping the bottom of the barrel at the end of the month. 

So if you’re running dry at the end of the month and want a way to stretch your dollars farther, check out Danny’s book, Teach Yourself (and Your Kids) How to Live Wealthy with Little Money .

Would you agree that taking a pill to cure us has become ingrained into our trips to the doctor?  When we’re in pain or sick we hope there’s a pill we can to make our troubles disappear.

Sometimes it’s possible and the little purple, yellow, or pink pill our doctor prescribes us does make us feel better… at least for a while.  But many times the pills we find only treat the symptoms of our underlying illness or pain. 

The pills are great for short term relief or for getting our symptoms under control but when we stop taking them the same nasty pain creeps back into our nerve endings.

Disease of Debt

Obviously debt is a “man-made disease”.  There’s no virus or gene that determines whether you’ll go into debt.  Some people end up in debt as a result of their own decisions, others find themselves broke due to an illness or accident.

However we get into debt, there are tools that can temporarily help us shuffle our cash and pay our bills to stay afloat another month.  These tools are our “debt pills” but unfortunately, they only treat our symptoms.  Cash advances, pay day loans, credit cards, home equity loans, or money borrowed from friends and family help us get by but they don’t address the root cause of our debt.

In fact, some times these “debt pills” come with such high interest rates that we’re actually worse off after we absorb the pills than we were before.

Temporary Relief

Fortunately, I can say we haven’t been in that position when it comes to debt but I have faced my share of medical “magical pills”.  Usually the way it plays out is that I’ll have some problem that’s being caused by behavior (posture, eating habits, repetitive stress, etc). I’ll spend money to go see the doctor and have tests done and buy medicine.  The medicine will help but when it’s gone, if I haven’t changed my behavior, the pain will still be sticking around.

In reality, it takes a while to “fix” whatever I’m doing that is causing me the pain.  Debt’s the same way, it’s not something that you can cure overnight.  Even if someone gave you enough money to pay off your debt it wouldn’t necessarily be “cured”.  You’d be free of it for a while but if the source of the debt wasn’t taken care of then eventually it could surface again.

A Family in Debt

I know a family who learned this lesson the hard way several years ago, the Baker family.  They found themselves pretty deep in consumer debt and finally realized that popping debt pills wasn’t helping, they needed to attack the source of the debt.  So they sold almost everything they owned, went through a major mental transformation, and focused most of their energy on paying down their debt.

A few years back the dad (Adam) actually started up a blog to write about their battle with debt and called it Man vs Debt.  Now that the Baker’s have paid off all their consumer debt and pay cash for everything, Adam is on a quest to help others win their struggle with debt.

You vs Debt

Adam just released a course called You vs Debt that walks you through the steps of beating your debt, the same steps that he and his wife went through to pay off the money they owed.  Since they were figuring it out as they went along, it took them over a year to pay it down.  Now since they’ve “been there, done that” now they share everything they learned so that others in debt can squash the “debt pill” mentality and get thiers paid off much faster.

It’s a pretty cool story, here’s a video where he talks about the debt they were in and how they were borrowing from one credit card to make payments on a different card (you have to scroll down a bit to get to the video).  I think it’s pretty brave of him and Courtney to be so open about their mistakes and that they invested so much of themselves in creating a course to help others beat their debt.

So if you’re struggling with debt, definitely check out You vs Debt to hear their story and see how they beat their debt.

Without further ado, here are my top ten ways to get out of debt.

1. Start a Business – Why do you think I spend all of my free time on writing about personal finance?  Sure, I enjoy my writing business, love my clients, and often times find my work to be in many ways a privilege.   But all that said, I am working a second job for a reason: to pay off my oppressive student loan debt.  Now you don’t have to start a freelance writing and copy business like me; in fact–there’s enough competition already– so please don’t!  But I’m sure there is a specific talent and/or interest you have that can be easily monetized.

As a teenager, most of us made a few extra bucks cutting grass for neighbors or babysitting.  At a bare minimum, that is the type of “business” that you should be able to start with little trouble.  When starting a business to pay off debt, you may want to put more of an emphasis on low-overhead/low-risk businesses.  The last thing you need when you’re trying to make extra money to pay down debt is to end up saddled with even more debt should your business be unsuccessful.

For some people perfect “side business” is doing something online, like running a blog.  Although online businesses take time to start generating cash, they are an easy “first business” that require relatively low initial expenses.

2. Work Part-Time – Although a part-time job may not be as sexy, creative, or as good for your soul as starting a side-business, it’s still another way to generate additional income that can be used to pay down your debt.  Remember that the faster you pay off your debt, the less interest you will end up paying overall.  Paying off my debt is almost as difficult as dropping a ring in Mount Doom, so I’ve at times worked part-time, full-time, and run a business simultaneously.

3. Getting a Raise/Working More Hours – Of course, all this talk of additional income sources is nice, but let’s not forget about what is likely our major income source: our full-time jobs.  Now proceed with caution when asking for a raise, particularly during tough economic times – you don’t want to make an enemy of your boss during layoffs.  However, with the right amount of research, planning, and preparation you can make a good case for a raise or promotion.

If you currently have some trepidation about asking for a raise, then perhaps you can figure out a way to work more overtime.  Now if you’re a salaried employee like me–and therefore not legally entitled to overtime–then this won’t help.  But there have been years where I’ve seen my dad generate 50%-75% more income than his base pay merely from overtime (he gets time and a half for overtime).  It won’t be fun working all those additional hours, but being in debt isn’t exactly a day in Disneyland either.

4. Avoid Debt – I know, I know.  What a cheater!  I’m writing a top ten list about ways to get out of debt and now I’m taking the easy (or as I like to call it, the “Ashton Kutcher”) way out and saying something as stupid as “avoid debt in the first place.”  But here’s the thing, even assuming you’re already in debt, it remains key to avoid additional debt.  If you’re working day and night at your freelance graphic design business to pay off your student loan debt, but then you’re also simultaneously generating credit card debt, then that’s the very definition of being counterproductive.

5. Sell Stuff – If you want to go with one of the laziest ways to make extra money, then simply sell some of your stuff.  Who hasn’t sold some old textbooks or made a few extra bucks with a yardsale?  Ok, probably most rich people, but they likely don’t have a ton of consumer debt, either.  If you want to join them in the trust fund arena, then you can’t be too proud.  So go out and sell that old stuff— it might be tough if you’re bit of a hoarder, but it’s worth it to pay off debt.

6. Cut Out Major Unnecessary Expenditures – Sorry, you probably shouldn’t be going on a fancy vacation when you have six figure student loan debt.  (hypocrite alert: my wife and I totally just did that ourselves).  Upgrading your car that works fine but no longer looks cool, buying a big screen television, or redoing your kitchen are also probably not options right now.

I never said being in debt is fun.  I’d rather have someone wake me up each night with a solid punch to the stomach than have the six figure chain around me that is my student loan debt.  But unfortunately, I’ve yet to find a way to trade my debt for midnight sucker punches.  So instead I have to deal with an outdated kitchen and feel like a huge hypocrite for going on one vacation in the past three years.  As will you, although hopefully not that second part.  It shouldn’t be hard to have more willpower than I do.

7. Cut Out Minor Unnecessary Expenditures – In personal finance circles, it’s often referred to as the “Latte Factor.”

We all like to believe that if we simply give up our morning coffee, then all of our personal finance problems will instantly be resolved.  That’s not the truth (unless your debt is so minimal that I have to question why you’ve made it this far in the article in the first place); but it won’t hurt either.  I’ve traded in Cable for Netflix (may have to soon trade back), I’ve given up fancy cell phones and gummy bears at the movie theater (matinee, too, by the way…and definitely no 3-D glasses).

I’m still as in debt as ever, but again, it can’t hurt even if it doesn’t help as much as we perhaps like to believe.

8. Become a Budget Monster – Most people from my generation will remember the seminal pioneer/avatar death of your friends game Oregon Trail.  A big part of that game, besides diphtheria and floating oxen across rivers, was the allocation of resources.  Any board game nerd will know that resource allocation is also the basic theme of games such as Monopoly and Settlers of Cataan. Budgeting (i.e. the allocation of resources) is a key part of paying off your debt.  You need to make sure you have as much money left over as possible to pay down your debt.  You accomplish this through budgeting.

9. Research the Tools Available to You – Consolidation, loan forgiveness, bankruptcy (hopefully not, but hey it’s sometimes the only option), credit agencies, and on and on.  There are a lot of tools out there to help you should your debt get out of control.  Just make sure you do your research and don’t get scammed. Being in debt can make you feel desperate and there are plenty of con-artists out there looking to take advantage of you.

10. Fight Back – There are plenty of companies you have relationships right now that find ways every month to get you to pay more money than you need to for the products or services they provide. It’ll take some time to research your options and to work the phone but there are ways you can cut hundreds of dollars of expenses by fighting back against companies that overcharge and under-deliver.

Conclusion

What have I left out?  How else can you get out of debt?

Although divorce is the probably the last thing on your mind when you get engaged and get married there a few things to keep in mind before you start merging your finances with your new husband or wife.  Since almost half of marriages in this country end in a divorce (many of them due to problems or fights over money) it’s worth your time to think these money issues through.  Obviously I’m not a lawyer so this isn’t legal advice, just a few things to be aware of before you get married or if you find yourself contemplating divorce.

Prenuptial Agreements
Prenuptial Agreements are a step some people consider before getting married. They tend to only protect what you come into a marriage with–so anything earned during the marriage likely will still be subject to marital division. However, since each jurisdiction likely has different laws and regulations, you should seek an appropriate expert in your jurisdiction. Many people find prenuptial agreements somewhat unsavory and some might be insulted if you ask them to sign one. I think the obvious reason is that people probably don’t want to start a marriage already contemplating the possibility of divorce.

Debt
When you get married it’s best to have a plan as to how you will pay your individual debts. Some people will decide that the debt they enter a marriage with should never become a joint responsibility. Others will jump right in and commingle their debt. It’s really a potential problem, however, when there exists a great disparity in each party to the marriage’s debt load. The same goes for money brought into a marriage. Sometimes it can be easiest to get married when you’re both young and poor : )

If you’re not careful, you might end up like my friend who’s wife brought 50K of credit card debt into their marriage, convinced him to pay it off with a second mortgage in his name, then left him shortly after.

Inheritance, Gifts, Family Money
This is another issue that can cause problems in a marriage or during a divorce. Do you decide to commingle your inheritance or do you intend keep it separate to perhaps protect it in the event of a marital breakdown? When your parents put the down payment on a house are they still alright with that arrangement if your marriage doesn’t work out?

Wills
What about your will? Have you made sure you have kept it up to date both when you get married and afterwards in the event that you divorce?

Paperwork
Are you both familiar with how the bills are paid, the state of your finances, and how to access the money? People tend to get hostile or suspicious during a divorce. You’re both going to want to know where the marital funds have been kept and that neither party is hiding money from the other.

Attitude
I have an acquittance who’s a divorce lawyer and he says the most costly thing in a divorce is the parties dislike of each other. He’s seen clients waste a lot of money rather then settling–and they pay out of their anger. Having a great attitude and trying to stay friends even after a divorce can make both parenting and your finances easier to deal with post-separation.

Divorce and Money
Divorce is a difficult subject to write about, and I know it’s not the most fun topic to read about either. However, I’ve seen friends go through a divorce and think it’s important that anyone who is married or contemplating marriage at least know some of the issues that could come in to play if later on the marriage doesn’t work out.

Everyone says “that would never happen to me,” and I hope it doesn’t, but it may save both of you a ton of time and money in divorce legal fees if you have an idea of these types of considerations even when your marriage is going great. I should mention again that I’m no expert in law so I’d suggest getting expert/legal advice if you’re facing a divorce.

That said, I hope this will help you understand some of the issues in this oftentimes sad but still important part of personal finance. What are your thoughts and experiences on money and divorce?  Did you/would you ask for a pre-nup?

Your Burden of Uncertainty
If you’re anything like me, then your finances probably feel like a constant tight-rope walk. It’s like in Monopoly when you’re not sure if you should build more houses or wait until you make it past the other players hotels first. That in-between feeling can be one of the most difficult things to deal with in mapping out your financial future.

I always say when playing Texas Hold’em that I want my hands to be either really great or really bad so I don’t get caught in between. Of course there’s a lot more (hopefully) on the line when it comes to balancing savings with debt repayment. This post will discuss some of the things you might wish to consider when determining how to allocate your resources between paying down debt and wealth building.

Balancing Investing With Paying Off Debt
For those of you who are not yet familiar with my story, my wife and I both currently earn decent salaries, but we also have a combined six figure student loan debt obligation. Tired of the debt/savings guessing game, I recently met with a financial planner to discuss the issue of balancing debt with wealth building. I suggest you meet with your own expert, but I wanted to address some of the concerns I was advised to consider when allocating resources. I am twenty-seven years old, and of course everyone’s balance of debt repayment vs. wealth creation will be different. But I think this will remind you of some of the factors to consider.

The Biggies: Age, Salary, Debt Load, Retirement Age
These factors shouldn’t shock anybody as they’re pretty standard considerations. When considering how much money to allocate to debt repayment, you should have an overall goal of when you wish to retire and the type of lifestyle you hope to enjoy once you do retire. Your age, salary and debt-load will all be factored in to determine the achievability of your investing goals.

Interest Rate on Debt
Another factor you will need to consider is the interest rate attached to the debt. Obviously if you have burdensome credit card debt, then it might be best to forego wealth creation–because it is unlikely you will be able to earn a higher rate of return on your investments than you owe on your credit cards.

Other Debt Factors to Consider
Is your debt dischargeable in bankruptcy? Does the debt provide significant tax benefits? How about this important question: are you able to meaningfully consolidate your debt or perhaps convert it into a user-friendly home equity line of credit? You need to know everything you can about your debt to determine how quickly you should try and pay it off. You must also consider how many years you have left in your payoff schedule.

Do You Have An Emergency Fund?
It’s always important to remember that when you pay debt off in advance, you are possibly taking away your ability to fund a future emergency. For example, my student loan debt repayment is $1,500 per month. That amount will be consistent until the day I pay the debt off in full. If I pay an extra $5,000 towards my principle, it only changes the repayment schedule timeline, not the monthly payment amount. So, even if I paid an extra $5,000, the next month I will still owe $1,500 for my monthly payment.

What I might not be able to do, however, is now survive a job loss. Consider also the flexibility of your debt. Federal student loans are often very flexible in terms of changing your repayment schedules or if you are seeking forbearances or deferments. If you lack an emergency fund then are there other means of support such as help from your family if things ever took a turn for the worse?

Small Window of Opportunity for Retirement Savings
Remember that you only have a small window when it comes to maximizing your retirement savings. In your twenties, you have a once in a life-time opportunity to make your money go further by investing as much as you can into your retirement funds now. The miracle of compounding interest should then help take care of the rest. The financial planner that I spoke with recommended that my wife and I pay $4.00 towards savings/retirement savings for every $1.00 that we put towards paying off our (massive) debt early.

Your Level of Comfort With Risk
As stated above, your comfort with investing risk will determine how much money you mentally need to keep in savings. It will also affect how aggressive you will be in choosing your investment allocation. Generally, investing in more aggressive stock-heavy retirement plans will lead to a higher rate of return and thus make the path to retirement easier.

Employer Match
If you receive a 401(k) match or other similar benefit, then you are really “throwing away free money” if you do not maximize that benefit each year. This too is a consideration when balancing investing with paying off debt early.

Conclusion
As I stated at the beginning, this is by no means a complete list; but I wanted to go over some of the basic factors you should consider when sitting down to map out how you will balance investing/savings with paying off debt early. What other factors would you personally consider in reaching this determination? How do you personally balance investing with paying off or paying down debt?

I’ve never personally dealt with carrying around debt on my credit card but said I’d be willing to check out his advice when Bach’s team asked me to review that part of his book.  The previous chapters talked about organizing and prioritizing your debt  – at this point in the book, the emphasis is on reducing the amount of interest you’re paying on your card or cards.

Finding the Best Interest Rates

The approach he suggests is one of negotiation, and in any negotiation it always helps to enter into it with as much information as possible.  The main idea is that you’re likely paying more interest than you could be so you should compare yourself against people around the country to see how much room there is to negotiate.

The book gives you a worksheet to track the balance and rates on each card and the progress of your negotiations.  Bach suggests finding out right away what rate new customers are paying on the same card that you have.   Then he breaks down the different interest rate categories based on your FICO score :

1. Super-Prime
2. Prime
3. Sub-Prime
4. Punitive
5. Promotional

His chart shows you which category you’d fall under and what interest rate you should expect to pay – based on your credit score.  Obviously if there’s a big gap that can be a talking point when you call up the credit card company.

Your Credit Score

If you don’t know your credit score, Bach recommends trying out a program from Equifax called DebtWise.  In an earlier chapter he explains how he came across the tool and worked with Equifax to add features that basically took the system he’s been teaching for paying off credit card debt and automates all the steps. 

Anyone who buys his “Debt Free for Life” book gets a DebtWise free trial for one month – I’ve never used the service but I agree that free is good.  Similar to other free credit score options available, if you remain a customer after the trial the service has a monthly fee.

Negotiating Your Debt

Once you know your credit score, what interest rate your score should qualify you for, and the interest rate being given to new customers you have enough information to begin negotiating.  Bach gives you several strategies for overcoming common obstacles when negotiating your interest rates.

There’s not a lot that Bach writes about that you couldn’t eventually figure out on your own but his tips can definitely save you time – and when you’re paying high interest rates time is money.   Bach’s big advantage is that he’s worked with thousands of people to get out of debt in his career so he’s seen what tends to work and what doesn’t.

In my opinion, the best feature of the book are all the examples he gives of former clients and what did, or didn’t work for them. Since I tend to learn better through examples and stories, I think these are the most useful parts of his book. I remember reading about Bach’s Latte Factor concept in his book “Smart Couples Finish Rich” right after my wife and I were married.  Some of the tales he shared of his former clients still stick with me to this day – so pay attention to those sections and learn from the experiences of others so you don’t make the same mistakes yourself.

One of his stories in this book explains how a client went through all his steps and was able to lower their interest rate.  However, it wasn’t as low as they’d like so she ended up signing up for a balance transfer card that gave her 0% interest on her balance for 6 months while she worked on paying it off.  I think this is a good example of how there’s no one right way to accomplish your finance goals – and sometimes you have to try several different things to find the best one for you.

Forbearance & Debt Management Plans

If negotiation doesn’t get your rate lowered and you’re really struggling because you lost your job, were injured, or are just earning less – then you can talk to your credit card company about restructuring your debt.  These are cases where companies are willing to work with you because your ability to pay back the money you owe has been dealt a major blow. 

Since this sometimes involves drastically lowering your interest rates and minimum payments, the credit card company does their homework to make sure you really have suffered a hardship and aren’t just trying to get out of money you agreed to pay.

The book explains how Forbearance and Debt Management Plans work and things you should be aware of before deciding to take that approach (such as frozen credit and damage to your credit score).  He also discusses alternatives to these strategies, such as credit counseling, and devotes a chapter later in the book to the topic.

Improving Your Credit

When it comes to your credit score, the saying “the rich get richer” seems to apply to the whole system.  People who have high debt to income ratios and a long history of good credit can borrow money at the lowest interest rates.  Of course, these are the people who probably have the least need to borrow money – in contrast to consumers with bad credit and high debt levels who are more likely to run into desparate times and need access to credit.

Once you’re in debt it can be tough to improve your credit score in order to borrow at lower rates. Next week I’ll cover another chapter in Bach’s book that explains how your credit score works and different ways you can raise it.

Emergency funds are like New Years Resolutions, everyone likes the idea of having them but not enough people actually put in the time and effort to see it through.

If starting an emergency fund is something you want to do but have been putting off, I can’t really say I blame you.  It’s not easy to find the money to put away, I bet I can probably list out most of the top 10 reasons you don’t have an emergency fund:

1) Mortgage/Rent Payment
2) Car Payment
3) Heating/Cooling Bills
4) Insurance Premiums
5) Groceries
6) Medical Bills
7) Child Care
8 ) Credit card/Student loan Debt
9) Gas Prices
10) Taxes

Your expenses may be in a slightly different order but we all have pressing money needs and it’s not uncommon to barely squeak by or come up short at the end of the month.

Expenses, Expenses, Expenses
If you look at those expenses, they don’t even include disposable spending like clothing, cable, internet, cell phones, dining out, gifts, travel, movies, sporting events, kid’s activities, etc.

The list also doesn’t include any money that you might save for the future like retirement accounts, a college fund, or a down payment for a house.

It’s possible you spend most or all of your paycheck just paying the necessary bills.  Then if you have any left over some probably goes towards disposable purchases and perhaps some is saved for the future. So how much does that leave for your emergency fund?

Paying Your Bills
Like I said, it’s hard to blame you for not building an emergency fund when you have your money committed to so many other things every month.  What would happen if you did stop paying some of those top ten bills?

You might start getting letters and phone calls about turning off your service, canceling your policy, taking away your property, pursuing unpaid taxes – or it could mean less to eat or not being able to visit the doctor when you’re sick. Do you agree those are no debate expenses, ones that you have to pay every month or you find yourselves facing some serious consequences?

If you’re nodding yes, then you probably won’t like what I’m about to say.  Those top reasons you don’t have an emergency fund are the exact same reasons why life as you know it could someday be saved by your emergency fund, or ruined by the lack of one.

The Emergency Fund Dilemma
The expenses you must pay each month are probably the main reason why you’re not building an emergency fund. Yet, those expenses are the same ones you may desperately need your emergency fund to pay someday.

The nasty thing about emergencies is that they tend to come in groups – the first can create a chain reaction that quickly spawns other disasters and before you know it you’re looking at a stack of bills that you can’t possibly pay.

Your Money Machine
Right now you may have figured out a balance between your income and expenses and tuned it to the point where you can pay your bills and potentially have some left over each month.  Think of it like an engine, if you keep adding gas/oil and keep your foot on the pedal then life keeps moving forward.

But what happens when a piece of your money machine has a problem? A typical example is losing your job, the main income creating part of your system. When that piece breaks down, the pieces that depend on it start to have trouble.

If you have an emergency fund that can replace even a portion of your income for a few months then the whole engine doesn’t come apart leaving you dead in your tracks.  You’ll have to slow way down, spending as little as possible and doing everything you can to replace your income – but at least you can keep on rolling along.

Total Systems Failure
On the other hand, if you don’t have an emergency fund and you can’t fill the income gap lost from your lost job then suddenly you can’t pay all your expenses.  You might decide to keep paying your mortgage or rent so you have somewhere to live but that might mean you have to stop your car payments. 

When they repossess your car, it’s harder for you to get around to look for new work – the best jobs may be on the other side of town and it’s tough for you to scout out work and get to interviews.  Not only that, now your credit has suffered because you defaulted on your car loan and you lose the ability to borrow more money, at least at a reasonable interest rate.

If you’re already approved for a credit card you can use it for a while to get by and just make the minimum payments.  However, you’ll probably quickly hit your spending limit – not to mention you’re stating a cycle of high interest debt that you’ll be caught up in for years to come.

Once you’re in the hole financially, it’s tough to climb back out and things could get continually worse.  For example, if you cancel your health insurance to save money and skip preventive visits you could find yourself down the road with a big medical bill that you have no way to pay for.

A total failure of your money system can take you from doing okay to being in big trouble financially in a pretty short period of time.

Will You Ever Start an Emergency Fund?

As bad as this all sounds, it’s just hypothetical.  It may never happen to you or might not happen for another 20 years.  The whole experience sounds horrible but you probably don’t feel imminent danger and those necessary monthly expenses demand to be paid every 30 days.

So, like I said – with demanding expenses and only a possibility of total financial systems failure at some point in the future – I can see why it’s tough to make yourself start an emergency fund.  You tell yourself that you’ll start putting money away as soon as you reach a financial milestone, but then you get there and priorities have changed and your money goes somewhere else instead.

I hope for your sake that you’ll never be in a position where you need to dip into an emergency fund.  But knowing the way the world works I’m afraid that can’t be the case for everyone.  So I also hope that you’ll keep the image of total systems failure in the back of your head and someday, maybe soon, will figure out a way to start putting away some money every month for your emergency fund.

A hundred years ago, or even several decades ago, it was pretty difficult to buy something if you didn’t have the money. However, access to credit in today’s economy makes it relatively easy to spend money that you don’t have.

Should You Borrow Money?

We were faced with this decision yesterday when invited to go on a trip with some good friends of ours.  We really wanted to go but we recently visited California for my wife’s birthday so our travel funds were depleted.  Not to mention that I just mailed in the biggest check I’ve ever written in my life to paydown and recast our mortgage.

Even though we didn’t have the money on hand to pay for all the travel, we knew we’d eventually have it.  We could have paid for everything on credit and paid it off later but we make it a habit to pay our credit card bill in full each month so that wasn’t something we were willing to do.  Still, we really wanted to go on the trip so having to tell them that we didn’t have the money was tough.

Of course everyone’s decision making process will be different based on your financial situation but there is one thing that’s true for everyone trying to decide if they should borrow money or not, you should make the decision with care or you might end up regretting it.

Steps to Spending Money You Don’t Have

Here are some high level steps to take if you find yourself looking to spend money you don’t have.

1) Estimate the cost of what you need/want.
2) Figure out how much you can afford to spend.
3) Determine how much money you’re short.

Once you know how much more cash you need you can consider ways to get that amount without borrowing it.
 
4) Look for places you can “find money”.
5) Estimate how quickly you can get the money.

Now you have a feel for what you need and how long it would take to come up with that money.  If you cant wait that long or can’t figure out ways to “find money” (like earning extra money or re-prioritizing areas of your budget) one potential step is borrowing money. 

How you choose to borrow the money can have a big impact on the premium you’ll pay for spending money you don’t have.

6) Determine who you’ll borrow from.
7) Calculate the cost of borrowing the money.

You can get quick and easy access to credit if you have a credit card in your wallet, however, you’ll pay pretty high interest rates until you pay the money back.  One option is to apply for a loan with your local bank or through an online bank where rates can sometimes be cheaper. 

You’ll have to weigh your different options for borrowing the money.  For example, you’ll have to apply and go through a funding process if you choose to borrow from a peer to peer lending site like Prosper or Lending Club.  In contrast, you can get a pay day loan right away but the cost will be a much higher interest rate.

Summary

At the end of these steps you’ll know approximately how much money you need, where you can borrow it from, and what it will cost you. Then you’ll have enough information to decide whether or not it’s worth it to spend money you don’t have.  I hope these tips can help you make that decision.