Is it a Good Idea to Consolidate Credit Card Debt Into a Consumer Loan?

A lot of people would rather consolidate all their credit card debts in one place to do away with multiple due dates, interest rates, minimum payments and other hassles. If you qualify for a consumer loan, this could prove to be a good move for your sanity as well as for your credit score. But there are potential drawbacks.

Interest Rates

Depending on your credit, consumer loans can have much lower interest rates than credit cards, especially if you've missed a payment or two and your card rate has hit the default rate, which can be as high as 29 percent. On the other hand, if you've missed many payments, your credit score might not enable you to get the lowest rates. Find out the range of loans at a bank or credit union you do business with and calculate what the difference in interest rate might be. If the difference is negligible, moving your debt won't cost you and still might give you peace of mind.

Credit Ratings

The Fair Isaac Corp., which calculates credit scores, uses a complex mathematical matrix of information about the kinds of credit you use, the length of your credit history, your payment history and your credit utilization --- meaning the size of your balance vs. the amount of credit you've been extended. According to MSN Money, it looks more kindly on debt owed through an installment loan than it does credit card debt. So moving your debt to an installment loan could help. On the other hand, since old credit is considered more favorable than new loans, it could hurt.

Benefits

With a consumer loan, you owe one amount with one interest rate and it's due every month at the same time. Therefore it's easier to budget that payment every month. There's no variable rate like there is with some credit cards and you know exactly by what date it will be paid off. So there's more peace of mind.

Risks

If you consolidate your credit card debt onto an installment loan, however, you should cut up your cards, or at least put them away where you won't easily access them. Don't cancel your accounts, because that can hurt your credit rating. Just make sure that once you've freed up those cards and added a consumer loan, you don't get tempted to use them before the loan is paid off.

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Advantages & Disadvantages of Credit Risk

Credit risk is the risk that a borrower will be unable or unwilling to pay back a lender as agreed. When making loans, lenders of all types attempt to analyze the advantages or disadvantages of lending to particular borrowers by attempting to determine their credit risk and overall creditworthiness. The field of credit analysis is huge, and firms continue to spend large amounts of money to try to determine where to invest their money without taking on undue credit risk.

Credit Risk Defined

Credit risk is an investor's risk of loss, which arises from a borrower who does not make payments as promised. This can be a consumer who doesn't make a payment on a loan, credit card or mortgage; a business that doesn't pay an employee's wages or doesn't pay an invoice when due; or even a government that does not make a payment on a bond. Analyzing credit risk is an important part of many investing decisions, and complex programs and significant resources are often used to determine whether an investor can pay back his obligation or whether he will "default" on the obligation. As such, credit risk is sometimes referred to as "default risk."

Types of Credit Risk

Many types of credit risk exist, which sometimes are referred to in specific terminology. Any increase in costs associated with a borrower not making payments as agreed can be loosely classified as credit risk. For example, even if a credit card customer does end up paying his bill, if the lender has to make collection calls or resort to a collection agency, this increase in cost is a version of credit risk. More specifically, "default risk" is the risk that the party does not and cannot pay as agreed (over and above a simple increase in collection cost) and is sometimes referred to as "counter-party risk." When the borrower is a government, credit risk is often referred to as "sovereign risk."

Credit Analysis: Advantages and Disadvantages

Firms, governments and all types of creditors engage in credit analysis to determine to what extent they face credit risk associated with their investments. In weighing the advantages and disadvantages of making a certain type of investment, firms utilize in-house computer programs to advise on reducing and avoiding risk (or transferring it elsewhere) or use third party help, like examining rating agencies' estimations of creditworthiness from companies like Standard & Poor's, Moody's, Fitch Ratings and others. After lenders use their own models and the advice of others to rank customers according to risk, they apply this knowledge to reduce credit risk.

Methods to Reduce Credit Risk

Lenders use a variety of means to reduce and control credit risk. One way lenders reduce credit risk is by using "risk-based pricing," in which lenders charge higher rates to borrowers with more perceived credit risk. Another way is with "covenants," whereby lenders apply stipulations to a loan, such as borrowers must periodically report on their financial condition, or such that borrowers must repay the loan in full after certain events (like changes in the borrower's debt-to-equity ratio or other debt ratios). Another method is diversification, which can reduce credit risk to lenders as well as a diversified borrower pool is less likely to default simultaneously, leaving the creditor without hope of recovery. Besides these, many firms utilize credit insurance or credit derivatives, such as "credit default swaps," in an attempt to transfer risk to other firms.

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How to Reduce the Total Debt Ratio by Selling Stock

You don't have to know what a debt ratio is to know that freeing up capital and paying off your creditors will improve the ratio. There are several ratios used to measure debt including debt to equity and debt to assets. In both cases, a ratio of more than 1 indicates that a company has more debt than equity or assets, respectively. In fact, most banks will accept stock for collateral on a loan and will sell the stock should the company default on the loan.

Instructions

1

Review the formula for calculating debt to assets. Debt to assets is a ratio that indicates what proportion of debt a company has relative to its assets. The exact formula is "Total Debt" divided by "Total Assets."

2

Review the formula for calculating debt to equity. Debt to equity is calculated by dividing "Total Liabilities" by "Total Stockholder's Equity." Both of these line items can be found on the balance sheet. Investors use that information to understand how much debt is being used to finance assets.

3

Determine how much stock must be sold in order to improve the ratio. The ideal debt ratio depends on the industry. Look up the average industry ratio on an investment research site on the Internet. This will give you a basis for comparison.

4

Determine a dollar amount, then divide the current share price of the stock into the dollar amount in order to determine how many shares you will need to sell in order to bring the debt ratio down.

5

Contact your broker and make a trade to sell this number of shares. Use a limit order (instead of a market order) in order to guarantee your price.

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How to Avoid Identity Theft When Renting an Apartment

When you start your apartment search, you'll notice that many apartment landlords ask you to fill out an application to evaluate your creditworthiness. On the application you must provide your Social Security number, current address and other very personal information. It is natural to have concerns about identity theft.

Instructions

1

Collect a complete listing of apartments that you want to visit when you proceed with your search.

2

Research each apartment complex that you're interested in before you visit. You can use an online service like Apartment Ratings, Apartment Reviews or the Better Business Bureau to find out the reputation of the apartment management company or landlord before you continue your inquiry. Check specifically for any complaints of identity theft by past applicants or renters. Narrow down your list of apartments to look at based on the information you gather.

3

Visit the remaining apartments on your list and narrow the list down yet again to two or three final options. Only submit your information to the rental companies at the top of your list to minimize the number of rental applications containing your private data.

4

Ask each landlord for his policy for storing and destroying private data before you submit an application. The Disposal Rule of the Fair and Accurate Credit Transactions Act requires landlords to safeguard the information and dispose of it when no longer needed. Get a copy of the landlord's policy in writing and if the landlord refuses, move onto the next option on your list. Some landlords could mismanage or keep the information on file indefinitely, which puts your identity at risk. If you do not get the apartment or choose another company, visit the complex again to retrieve your application from the landlord.

5

Hire a rental agent to look for an apartment on your behalf as another option if you have identity theft concerns. You have to pay an additional fee for this service, but in many cases the agent is familiar with reputable apartment rental agencies and landlords in the area.

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Forms for Voluntary Forbearance

Forbearance is a source of relief during financially difficult times. Most of the time, forbearance is sought for student loan payments. The lender will agree to a reduction in payment amount or a brief interruption in payments while the debtor gets back on his feet. Forbearance should be used carefully, because the debtor is still responsible for accruing interest on the debt. This is a voluntary process, started by filling out a simple form.

Types of Forbearance

Before you apply for forbearance, you need to know what kind you will need. One factor is whether the loans are federal or private. You will deal with different lenders and different forms if you borrowed from the government rather than a bank. One difference is that private lenders may want to negotiate an extension of the time for repayment, or make arrangements for smaller payments. With federal loans, the forbearance process is more structured and involves a break from payments.

Eligibility

The cause for the forbearance also matters. Some commonly accepted causes include enrollment in school, poor health problems and financial problems; in some cases there is excessive debt forbearance. All of these are widely accepted reasons for eligibility. Other reasons include active duty military service and, in some cases, entering the Peace Corps or Teach for America.

Where to Find Forms

The first place to go for forbearance forms is your lender. Many times they are located on the lender's website. Federal loan forbearance forms can be found on the Department of Education Federal Student Aid program website, and at larger federal lenders like Sallie Mae and Access Group. In most cases you can download the form and fax or email it back to the lender.

Other Types of Forbearance

There is another type of forbearance, in the real estate arena. It is meant to save homeowners about to default on their mortgages. With this type of arrangement, the lender may consent to delay foreclosure if the borrower agrees to catch-up his payment schedule within a certain amount of time. The best way to take advantage of this forbearance option is to negotiate with your lender.

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Do I Need a Foreclosure Lawyer?

You absolutely should have a lawyer when negotiating a foreclosure. A competent real estate attorney with a reputable background and experience in foreclosures can offer much-needed legal advice. It is important to be informed whether you are trying to save your house from foreclosure or are voluntarily walking away in a strategic default.

Scam Artists

The Federal Trade Commission strongly recommends against so-called "foreclosure rescue firms." The firms are sometimes headed by foreclosure lawyers. Various state attorney generals have filed lawsuits against foreclosure rescue companies after learning that they charged homeowners large up-front fees and never delivered any real services. Some homeowners have been evicted while believing the foreclosure rescue firm was successfully negotiating with the bank when in fact nothing was happening.

Realistic Expectations

A reputable foreclosure attorney can help protect your rights but may be unable to stop foreclosure unless you are willing to file for bankruptcy. The attorney can file frivolous lawsuits aimed at slowing down the foreclosure process, but should be focused more on avoiding the foreclosure through discussions with the lender if that is what you want. If you are voluntarily walking away, the attorney's chief responsibility is warning you about the consequences.

Alternatives to Foreclosure

A good attorney can tell you about various alternatives to a forced foreclosure, such as loan modification. Loan modification allows all the terms of the loan to be changed to make the mortgage more affordable. The interest rate can be dropped and the monthly payment lowered. Missed payments can be tacked onto the end of the loan, and the term of the loan can be switched from adjustable to fixed so that the payments never increase.

Strategic Default

The attorney also can help you avoid financial repercussions from a strategic default. Some people who are able to make their mortgage payments simply decide to walk away when their home dramatically declines in value because of a recession or housing bust. The value of a home can drop by a third or even half if the home was purchased at an inflated price. That and minimum down payments leave some people owing more for their homes than they are worth.

Deficiency Judgment

Lawsuits and judgments are possible in strategic defaults and other types of foreclosure. An attorney can warn about this during the foreclosure process. CNN reports that in many states lenders can file lawsuits to collect money lost when your home is foreclosed and sold at auction. The lender can sue you for any remaining balance after the auction, resulting in a deficiency judgment signed by a judge. The judgment is a court order requiring you to pay the difference in a lump sum or installments. An attorney negotiating your foreclosure should request a written promise from the lender not to file suit against you after the foreclosure is completed.

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How to Apply Utility Payments to Improve Credit Rating

Utility payments are usually not factored into credit reports unless the bills become delinquent. This is because the utility companies don't bother reporting customers to the credit bureaus because of the hassle of doing so. Despite this, if you request it from the utility company, you can get a current account reported to the bureau. It's just a matter of making it worth the company's time to report your account. Such accounts in good standing can improve your credit rating, but only if the utility company consents to report to the bureaus.

Instructions

1

Request copies of your credit report from the three major credit bureaus (Transunion, Equifax, and Experian). You can acquire your credit report either online or on paper by visiting the websites of the credit bureaus and following all posted instructions. You're also entitled to one free credit report per year from each bureau so long as you have a valid social security number. Follow the link to the Annual Credit Report web page in the resources below for more information on how to get it. Look at your credit reports to determine if your utility accounts have already been reported. Utility accounts in good standing can build up your credit history, improving your chances of winning approval for loans and credit cards.

2

Contact your utility company using the phone number on your bill and request that it begin reporting your current account to the credit bureaus. All utility companies have accounts with the credit bureaus, so it doesn't necessarily cost them anything extra to do so. Some companies will provide the service as a courtesy to an existing customer, while others will request a fee for reporting the account. You can get electricity, water, heating, and other utility bills reported to the agencies. There are some third-party companies that can perform this service for you, but it's relatively simple to make the reporting request yourself.

3

Monitor your credit report for the new account by ordering a new report at least 30 days after your request for utility bill reporting has been accepted. Check to make sure that the bill payments have been reported accurately. Utility bills in good standing will not have a massive affect on your credit score, but the information builds the length and quality of your credit history. If you have a "thin" credit history (approximately less than 10 credit entries on your report), this technique can make you more attractive to lenders.

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