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  • The Pros and Cons of Settling Your Debts

    This is a guest post from John Ulzheimer, credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling. If you would like to guest post at Chief Family Officer, please review the CFO Guest Post Policy.

    Over the past four years we’ve unfortunately had to become familiar with the term “short sale,” which is actually a settlement accepted by your mortgage lender. And while mortgage settlements have become a common practice over the past few years, the process of settling other debts, such as credit card debt and debts being worked by collection agencies is a much more established process.

    Debt settlement works like this: You owe someone a large or not so large sum of money. For whatever reason you are unwilling or are otherwise unable to pay the creditor the entire amount. You approach the creditor or the creditor approaches you with an offer in compromise, which is a fancy way of saying that they are willing to take less than the full amount due and call it even. If you take advantage of their offer then you have “settled” the debt.

    Settled in Full Versus Paid in Full

    There is considerable confusion of the final status of a debt that has been settled. Some people suggest that it has been paid in full. Others suggest that it has been settled in full. Neither is actually true.

    Paid in full is reserved for consumers who did, in fact, pay the entire amount due to the creditor resulting in a fully exhausted debt, or a $0 balance. Settled in full is a contradiction of terms. Settlement, by definition, means to pay less than the full amount so a debt cannot be settled in full, ever. But, a debt can certainly be settled and left with no monies due. The appropriate and unnecessarily formal way to refer to a settled debt is that it has been settled and now has a $0 balance.

    Self Help or Third Party Settlements

    A settlement can be negotiated a variety of ways. Consumers can hire 3rd party debt settlement companies, that will charge a fee, to facilitate the settlement process or, they can attempt to negotiate a settlement on their own. And, there’s even a chance that the lender will reach out to the consumer and begin the settlement discussions proactively.

    Using a 3rd party debt settlement company can cause some problems with your creditor. First, the settlement company will likely instruct you to stop paying your lender and to start paying them directly. This accomplishes a couple of things. First, your payments to the debt settlement company will begin to build a war chest of money that the settlement company will eventually use to make settlement offers to your lenders. Second, some people would suggest that by not paying your lender for several months that they are getting desperate for payment and will be more flexible when considering your settlement offer.

    Of course consumers can negotiate with their lenders on their own. This not only saves the cost of the debt settlement company’s fee but it also might yield a settlement as good as one negotiated via a 3rd party.

    Impact To Credit Reports and Credit Scores

    Settlements are considered to be “major derogatory” items by all credit risk scoring systems, including FICO and VantageScores’ credit scoring models. And, when you choose to settle a debt the lender will almost certainly report that disposition to all of the credit bureaus. On a credit report, the debt will include language such as “Settlement accepted on this account”, “Partial payment plan”, or “Settled for less than full amount.” Regardless of how it’s reported to the credit bureaus, the impact is still the same.

    Just because a settlement appears on your credit reports doesn’t mean that it’s going to automatically have a severe negative impact to your credit scores. For example, if the debt already shows as being in default on your credit reports, it likely already has a negative impact. The fact that it is eventually updated to show as being a settled debt doesn’t add to the already negative impact.

    However, if you have clean credit reports and solid credit scores and you settle a debt that is not already in default and has no late payments associated with it, then the reporting of the settlement will likely result in a significant reduction in your credit scores. The length of time the settlement will be reported is seven years from the default date. Depending on what your scores were before you settled the debt, you could expect to see your scores drop over 100 points.

    Settling a Collection Agency Debt

    When you settle a debt with your original creditor, like a credit card issuer, you really are causing them to lose a considerable amount of money. However, when you settle a debt with a collection agency or a debt buyer you are not at all causing them to lose money. To the contrary, when you settle a debt with a collection agency, they are likely making a large profit on the debt.

    When collection agencies or debt buyers purchase a defaulted debt from a creditor or service provider they do so for pennies on the dollar. They are able to purchase your defaulted debt for so little because they are likely purchasing hundreds of millions of dollars of defaulted debt at one time and can command a very low “per dollar” price. When they purchase the debt, they become your creditor. You no longer have a relationship with the original creditor and any payments must be made to the collection agency.

    Still, this is not always bad news. If they purchased a $10,000 defaulted debt from your credit card issuer, they likely did so for a few hundred dollars or less. That means even if they can collect a few thousand dollars from you, they’ll make a huge profit by purchasing your debt. Clearly this means they’ll be more open to settling for considerably less than the original loan amount.

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    5 Ways to Teach Your Kids to be Money Smart

    This fantastic guest post is from Kyle James, who owns Rather-Be-Shopping.com, a website that specializes in helping families save money with coupons, frugal living tips, and personal finance advice to make their paycheck go as far as possible every month.

    As a father of three kids, (age 5, 8, and 11) I have always struggled with the best way to teach them to be smart with money and understand what a dollar truly represents. I don’t want to send them off into the real world with the notion that they are entitled to certain “things” and don’t have to work hard for what they want. I feel that would be a huge disservice to them and could very well lead to a life of battling credit card debt and financial misery. So I put a plan into place to teach them to be money smart.

    They Gotta Earn It

    My daughter loves horses. I mean really is completely horse crazy. She takes weekly riding lessons at a cost of $35 a pop which adds up pretty quickly. My wife and I found the perfect way for her to earn the money for her lessons. Our neighbor is out of town for 2 weeks out of the month and needed someone to take care of his three horses and various chickens. My daughter stepped up to the plate to take care of the animals and the money earned equates to the cost of her riding lessons. It is the perfect situation as she sees the value of hard work and earning the money herself for the lessons. If you can find similar situations for your kids it is a great way to introduce the idea of having to work towards a goal.

    Allowance, Yes or No?

    I am not a fan of giving kids a weekly allowance without jobs or chores attached. My wife and I give our kids a list of jobs that need to be accomplished in order to receive an allowance and it removes any sense of entitlement. You want some money every week? I am cool with that, but here is what needs to be done to earn it.

    The Power of Savings

    My wife and I opened a savings account for each of our three kids soon after they were born. When they receive money from family members on birthdays, or Christmas, we tell them they have to save a percentage of it. Then when the bank statements show up in the mail I make a point of having them look at them. It is a great way to introduce the concept of investing and compounded interest. They are always fascinated that the bank pays them money to keep their money safe. Even if the interest rate pays them pennies, they still think it is pretty cool.

    In Order To Receive, You Must Give

    Do you have a child who is constantly whining about wanting a certain toy or video game? I think all parents can relate to this in one way or another. Try the tip of telling them that in order to receive something they first have to do something selfless for someone else. Ideas include going through their closet and donating gently used toys or clothing to children in need, or helping an elderly neighbor with chores around their home. Be doing this you instill the idea of just how lucky they are to have what they have and the many blessing in their life. At this point you can choose to reward your child for their selfless acts.

    Personal Responsibility

    I feel the idea of personal responsibility with money is incredibly valuable to teach kids. If they choose to blow their allowance on a cheap toy that breaks within 15 minutes, well, that was their choice and they have to live with the consequences. I have seen this play out many times in my home and amazingly the choices always get better and better. It can be very hard to watch your child make a bad decision but in the end I feel it is the best way to teach them to make good ones. It is deep in our DNA to learn from our mistakes and not make them again.

    These tips have worked with my kids but I can’t guarantee they’ll work with yours. I’d love to hear what does work with yours! Different thoughts and opinions about teaching kids to value money and what it represents will make us all better parents and eventually create money smart young adults. I look forward to your comments.

    Ed. note: What do you think, CFO readers? I’m on the fence about allowances, especially …

    Quirky Ways to Make Extra Money

    This is a guest post by Kyle Taylor, who writes about how to make extra money at www.ThePennyHoarder.com.

    Making extra money is as popular a financial goal as paying off debt or cutting your spending. When you’re just making ends meet, it can be tempting to try to make extra money through traditional channels such as freelancing or taking on a part-time job.

    But what about having a bit of fun when it comes to making extra money? What about doing something that’s not the norm? Chances are the pure novelty factor of doing something unique will help you keep a sustained effort to continue to bring in the extra dollars.

    If you’re looking to boost your bottom line, consider some of these quirky options:

    Become a Tester

    There are countless medical and cosmetic research tests happening daily. Why not cash in on this opportunity by finding some where you fit the company, university or hospital’s required specifications?

    As long as you’re being smart by not putting your body or health in jeopardy and you understand all of the aspects of the study and potential risks/side effects, becoming a tester can be a fun, interesting way to bring in some extra money.

    One other option is to peruse the websites of local universities. A lot of social science departments (psychology, anthropology, ethnology) run studies and need volunteers to complete simple tasks or interviews. In exchange for your time, you’re often rewarded with money, free parking and even free meals.

    Embrace the Odd Job

    Maybe you’re a yard work or house cleaning pro. Perhaps you’re a handyman who enjoys DIY projects. Whatever your hidden talents and interests may be, consider doing odd jobs to boost your cash flow. You can post your services on websites like Craigslist or you could respond to help wanted solicitations you may come across.

    Sell Your Gift Cards

    If you’re holding onto a bunch of gift cards for stores or services you know you won’t use, consider selling them to make some extra cash. You can easily post them on eBay or other sites for a percentage of the face value and once they’re sold, that’s extra money straight to your pockets.

    Rent Out Your Space

    No, this doesn’t mean taking on a roommate or giving up your privacy. What we’re talking about here is renting your outdoor space out to people who need it. Think garages, parking spots, boat docks, vacant land you own, etc. If you’re someone who lives in the city or are located close to attractions or event locations, renting out your parking spot could easily fetch you a few hundred dollars a year (or more!).

    With locations close to event arenas, don’t discount the option to rent out your yard/driveway for temporary parking for the event-goers. If the location where you’re renting is close to a popular destination or area, check out the rates commercial garages are charging to get a sense of how to price your space. Come in under the commercial guys’ rates and you’re sure to be on your way to more money.


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    Guest Post: Types of Reward Credit Cards and How to Evaluate Them

    This is a guest post by Mr Credit Card from www.askmrcreditcard.com. Mr Credit Card reviews credit cards. He has also compiled a list of what he thinks are the best credit card deals available.

    Firstly, I would like to thank Cathy for giving me the opportunity to write this guest post.

    If you are like Cathy and have no credit card debt (or rather, you pay off your credit card bills in full every month), then you should be taking advantage of rewards that credit cards offer. In this post, I’m going to run through the types of rewards (mainly reward programs and cash rebate cards) that are available and and how to evaluate them.

    But first, let me just say that there are probably three types of reward cards that folks should consider. And your choice really depends on how you would use them.

    The first category are airline credit cards. These cards (to be honest) are only for those who are true frequent fliers of a particular airline. For example, if you are always flying on United, then there is a case to be made for getting a United Airlines credit card. The advantages of getting an airline card are:

    • Most will allow you to earn double miles for every dollar you spend on the card when you buy their airline ticket
    • The higher end cards allow you to earn points towards elite membership status
    • The higher end cards also have perks like free companion ticket once a year
    • Allows you to use your card for club lounge access

    The main disadvantage of these cards are:

    • They charge an annual fee (sometimes over one hundred dollars)
    • Their interest rates aren’t particularly attractive (never carry a balance with airline credit cards)

    It is obvious that unless you are a jetsetting business executive or or business person that flies a lot, you are better off getting regular rewards credit cards.

    The second type of reward cards are those offered by the credit card issuers themselves. Most credit card issuers have reward programs that are more well rounded and cater to those who want to earn points for rewards, but are not exactly frequent fliers. Here is what a typical reward program would look like:

    Typical Reward Program – A typical reward program has a few types of rewards. They are :

    • Travel Rewards
    • Gift Cards
    • Merchandise
    • Cash Rebates
    • Charities

    Travel Rewards – Let’s start with travel rewards. Traditionally, this has been the most popular form of rewards. After all, who would turn down a free airline ticket? There are a few types of travel rewards that are available in any given reward program.

    • Transfer points into air miles- Only a couple of programs allow you to transfer reward points you have earned to air miles. Examples would be the American Express Membership Rewards Program and the Starwood Preferred Guest Program. This form of travel rewards would suit those who are members of multiple airlines’ frequent flier programs.
    • Use Points and Book Flights – This is the more traditional way of using points for air tickets. With a frequent flier program, you are subject to the airlines’ blackout dates and quotas for that particular flight for those who redeem air miles. The credit card reward programs always say that their has more flexibility because they do not have to use a particular airline but can use any airline. An example of this system is to use 25,000 points for a round trip domestic economy flight.

      But this system is not all rosy either. Very often, you have to book your flights 21 days in advance, stay a Saturday night and very often, you will not get your preferred flights.

      If you are a last minute type of person or do not like weekend stays, or if you like searching for your own deals, then this method of reward redemption probably does not suit you

    • Do Your Own Booking – To get around the issue of restrictions, many programs now allow you to use points to book any flights you want on your own. You can then submit your expenses and get a statement credit. The Discover Escape Card uses this method, as does the Amex Blue Sky. Some like Citi’s thank you network allow you to book any flights or hotels from expedia.com. This method of redeeming points for travel rewards will suit the true bargain hunter because you can hunt for the best deals. This method is probably the most flexible.

      However, please be aware that some programs allow you the flexibility to book whatever flights and hotels you want but you have to use their own “in-house travel agent” which itself is subject to the seats and quotas made available to them by the airlines and wholesalers.

    Merchandise Rewards – Credit card reward programs also allow you to exchange points for merchandise. Most programs are stocked up with many items from Apple iPods to coffee makers to digital cameras. I personally prefer not to use my points to exchange for such items because I feel you always need too many points for the particular price points. Still, if you do not want to pay for a new coffee machine and you have enough points, that’s one way to get a free one.

    For merchandise, it is really hard to evaluate which program is better. The items keep changing and the points requirement may change from time to time as well.

    Gift Cards – You can also exchange points for gift cards. There are some aspects to consider before you a card. The better programs allow you to exchange for example, 1500 points for a $15 card, or 5000 points for a $50 card. The not so good ones require, say, 2000 points for a $15 card or 6500 points for a 5000 card.

    If you are a gift card junkie, then the thing that you want to watch out for is if your favorite retailers are on the merchants list. And also, how many merchants do they have as their partners?

    Cash Rebates – If you are looking to earn cash rebates, I would suggest getting a dedicated cash back credit card. That is because most reward programs pay less than 1% cash rebates (you get 1% for the most basic cash rebate cards!) and only pay 1% when you redeem for lots of points! You should not even bother with them.

    Charities – There will be some of you who are very charitably inclined and would like to donate cash or points to charities. Well, most reward programs do have charity partners. Some like Membership Rewards and Capital One have over a million charities that you can donate to. Others have less, but may have exactly the charity that you were thinking about.

    Other perks – Credit Card issuers have become innovative in the types of rewards that they offer. Citi’s Thank You Network for example, allows students to use points to pay off their student loans. They also allow you to use points to reduce your mortgage principle.

    Online Shopping – Cathy has pointed out that she uses Swag Bucks for her searches and makes money by referring friends and earning Swag Bucks. Well, credit card companies have the same features. Swag Bucks is essentially a big affiliate shopping portal. Credit card companies have the same arrangements with merchants as well. So for example, if you have a Discover Card and you decide to shop at landsend.com, rather than going to landsend.com directly, you could log in to your Discover account and go to landsend.com from there. If you do that, you could earn 5% rebates off what you spend and charge on your Discover Card.

    Other cards like Chase are now beginning to implement such programs. Others like shopamex.com do not let you earn discounts or cash rebates, but allow you to earn extra points or use your reward points to shop for what you want.

    How Do You Choose a Reward Card?

    The key to choosing the right reward card is to actually know:

    • How much you spend a year?
    • What sort of rewards you would like to redeem your points for?
    • Whether these rewards are available in the program

    If you do not intend to use reward points for travel or any of the types of rewards available in a typical reward program, then the third type of reward card to consider are cash back credit cards. In fact, if you combine the right card with coupon clipping, you will save even more at the supermarket.Here are some tips to choose the right one:

    • Choose cards that pay more than 1% rebates – Generic cards pay 1% rebates for every dollar that you charge to the card. Avoid these, there are better ones out there
    • Look for cards that pay 3% to 5% on things like gasoline supermarket, travel, restaurants etc
    • Make sure you can earn unlimited rebates
    • Decide how you want to receive your cash rebates – some send your checks automatically, some require that you request a check and some automatically give you a statement credit

    How to choose a cash back credit card that’s just right for you?

    The first thing you have to do is to write down all that you charge to your card. And also categorize your spending into the following categories:

    • Travel
    • Gasoline
    • Supermarket
    • Dining
    • Internet Shopping

    There are other categories that you can slice and dice but most cash back cards come with these spending categories. The next step would be to do research on the cash back cards that major issuers have and see which card will give you the most rebates. The is a very tedious task but well worth it because with the right card, you can earn a few hundred dollars in cash rebates in a year.

    So I guess that’s it from me. Remember, if you pay your bills in full every month, then take advantage of rewards that credit card companies offer. If you are the sort of person that cannot control your spending when you have a credit card in your wallet, then you should perhaps stop using a credit card and just use cash. Just bear in mind that using cash may not work for everybody!.

    Here are some other resources for reward programs:

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