Let’s start with your situation…
The fact that you have high credit scores and have not fallen behind means you have something to lose (your perfect payment history) if you choose debt settlement.
But, let’s first get clear about exactly how your credit will be affected, because along with the negative impact to your payment history, the other two important areas of your credit, your debt-to-income ratio and utilization, are both greatly improved through debt settlement.
How Important Is Your Credit Score?
Remember, credit “score” is not everything… Credit “worthiness” (your ability to get a loan) is more important, especially long term.
A question to consider is this: What do you need your credit for?
Most keep their credit in good shape so they can get into deeper and deeper debt, only to pay more and more interest.
But Is Your Credit Really Even “Good” Right Now?
Having a perfect payment history (about 35% of your credit) and a good credit score is nice, but other factors could be crippling you.
Let’s take a look…
Debt-to-income ratio is the amount of money that you’re obligated to pay each month towards your debt (that’s your credit cards, +your car, +your student loans, +your mortgage, +whatever else you have = the total amount you’re obligated to pay towards debt each month) vs. your net monthly income.
Now if that monthly amount is under a third of your net income then that’s GOOD. If it goes over a third then it becomes BAD and it’s a problem.
You can have a perfect payment history (never have missed a payment), but if your debt-to-income ratio is too high then you’re effectively crippled when it comes to credit worthiness, or your ability to get a loan. You’re not credit “worthy”, even though you may have a good credit “rating”.
You want to keep your debt-to-income ratio at or under a third to be in the best light with lenders. Over 45-50% is crippling to your credit, regardless of credit score, because you simply cannot afford any more debt.
If your debt-to-income ratio is too high now, then you’re basically crippled, and concerns about debt settlement affecting your credit simply don’t make any sense because your good payment history has only gotten you into so much debt that lenders will no longer extend you any more credit. Many people find themselves in this exact situation.
Credit Limit vs. Current Balance – The Good, The Bad And The Crippling
The third area of your credit to consider is your “utilization” or “debt-to-credit-limit ratio”. The ways this works is very interesting. This is probably the least known factor that affects your credit, but is just as important as payment history to your score.
Each account you have has a credit limit and a current balance. If that current balance is less than 50% of your credit limit, that’s a positive factor. If you have an account that’s over 50% “utilized” (balance over 50% of the limit), then it’s a negative factor and bad for your credit worthiness. If your balances get to the limit, or over the limit, then this is a crippling factor to your credit.
Take a look at your accounts.. are any balances over 50% of the limits?
Keep these three factors in mind when evaluating your credit worthiness: payment history, debt-to-income ratio and utilization.
What’s The Big Idea?
Most of the time, worrying about your credit rating when you’re drowning in debt is like worrying about how your front yard looks when you house has just burned to the ground.
I don’t know how much debt you have or what your interest rates are. These are critical factors in your decision.
Most important is this, the “BIG IDEA”:
STOP paying interest and START EARNING interest, ASAP!
This is critically important if you ever want to retire, and makes all the difference between a life of wealth or a life of slavery (seriously).
Why Credit May Be important, But CASH Is King
You mentioned paying minimums for the next five years. If you could pay off your debt in 5 years with minimum payments, then a) you have a small amount of debt and low interest rates, and b) you don’t have enough debt for debt settlement.
Take a look at the cost and time it takes to pay off debt with minimum payments if you are paying what the average American pays in credit card interest…
Debt (Pay Off Amount, Principle & Interest, making Minimum Payments) Number of years to pay off making minimums at 19%
$10,000 ($26,276.59) 42 years, 9 months
$20,000 ($74,464.22) 53 years, 3 months
$30,000 ($112,651.77) 59 years, 4 months
$40,000 ( $150,839.39) 63 years, 6 months
$50,000 ($189,027.02) 67 years, 1 month
$70,000 ($265,402.22) 72 years, 2 months
$100,000 ($379,965.06) 77 years, 7 months
$150,000 ($570,903.04) 83 years, 8 months
While credit is important, CASH IS KING, and CASH FLOW RULES, right?
So for you to make the best choice, you and your husband must decide what’s most important: credit or cash flow.
Consider your goals.
What To Do If Credit Scores Matter More Than Debt Relief
If credit is ultimately most important to you two now, then you must cut your expenses to the bare minimum and put EVERY DOLLAR you can towards paying off your debt in an accelerated fashion in order to get out of debt ASAP.
You’ll need an “accelerated debt pay-off plan” if this is the case…
Accelerated debt pay-off plans come in three main types. In each, you pay the minimums on each account, and put all the additional money you can afford towards ONE account. This is often called your “margin”.
The three approaches are:
1) List your debts in order of the highest interest rate and pay down the highest interest account first until it’s paid off, then pay down the next highest interest rate account and so fourth, until your debts are eliminated…
2) List your debts in order of the current balance, paying down the account with the lowest balance until it’s paid off, then pay down the next lowest balance account, etc., until your debts are eliminated…
3) Take the current balance of each account and divide it by the minimum payment (= division number), then list your debts by this division number from the smallest to the biggest, paying down the account with the lowest division number until it’s paid off, then pay down the account with the next smallest division number, and keep going until you’re debt free…
Any of these three approaches will usually get you out of debt in about 5-7 years IF you are committed to budgeting and putting as much money as possible towards paying off your debt. It requires self discipline and long term commitment.
You will have no negative affect on your credit this way.
However, you mentioned you are overwhelmed with the amount of debt you have and can only make the minimums, so an accelerated plan doesn’t sound like a solution to get you out of debt anytime soon.
Debt Settlement (The Fastest Way To Pay Off Debt) Might Also Be Good For Your Credit
Debt settlement can most likely get you debt free fastest. My average client is completely out of debt in 28 months.
Usually, debts are cut in half, and often payments are cut in half as well. Payments are almost always significantly reduced during the program.
While debt settlement has a negative impact on your payment history (more so if you’ve never been late, not so much if you’ve already fallen behind), debt settlement also has a POSITIVE AFFECT on your debt-to-income ratio and utilization because the accounts are paid to a zero balance on your credit report.
You can also do credit repair and credit rebuilding (usually within 6-12 months) after you complete debt settlement.
Of course, all that money you’re currently paying in minimum payments will be back in your pocket, usually within 24-36 months. What would you do with all that extra cash flow? Investing these savings to EARN INTEREST can make all the difference for your financial future… and that’s the BIG IDEA!
If you are shopping around for a debt settlement program, BE CAREFUL! The industry is filled with ignorant sales people who will steer you into a “bad program” for their own gain and to your detriment.
I’m serious, watch out…
Here To Be An Asset To You,
Jesse Niesen
DebtGoToGuy.com
