Credit Card Blog

As an increasing number of credit card companies are agreeing to settle cardholder debts, it’s important that individuals recognize that there may be minor tax consequences associated with the settlement. A debt settlement is when the creditor allows the account holder to pay less than what is owed and consider the account paid in full.

A partially or fully forgiven debt through a settlement is sometimes considered as taxable income by the IRS and must be reported on your tax return if you saved more than $600 during the settlement. So if you owed $5000 on your credit card, and settled for $2,500 you would have to report $1,900 as income ($2,500 minus $600). The credit card company that settles the debt will send you and the IRS a Form 1099-C reporting the forgiven amount.

There are exceptions to having to count the forgiven debt as income, for individuals who are insolvent at the time of the settlement. Insolvent means you owed more than the fair market value of your assets.

A settled debt typically is marked as such on your credit report as well, which is better than a bankruptcy, but not as good as “paid in full” or “paid as agreed”.

If you do end up having to pay taxes on the amount of debt forgiven, chances are you will still come out ahead than if you continued to struggle and repay that debt with 27% interest and credit card late fees.

If the weight of your credit cards is becoming too much to bear, here are some tips to shedding some fo that excess weight from credit counselors and financial experts:

Stop Using Plastic: One of the most common sense approaches to losing weight is to eat less. Losing credit card debt starts by putting a stop to using them. Use cash instead of plastic and as research has proven, you’ll spend less money. Pay off your existing credit card debt as quickly as possible, and when you are debt free – use a single card for a few small purchases a month to maintain your credit score since eliminating them completely can lower your score and make it difficult to borrow money in the future.

Consider a Debt Settlement: Settling your debt can allow you to pay much less than you owe on your credit cards but keep in mind that anything forgiven over $600 must be reported on your tax return as income. You pay taxes on the difference even though it was “interest income”, but in the long run it may be a good strategy for getting out from underneath credit card debt. If you settle with the card issuer. Also – request that it be noted on your credit report as “paid in full” or “paid as agreed”, some credit counselors claim creditors will do this and save you the credit damage that comes with a “settled” notation on your credit report.

Because there are so many scams out there that claim to help individuals deal with credit card debt but only end up making the situation worse, look for free credit counseling from a HUD-approved counseling agency.

With an increasing number of people reporting that their credit card limits are being lowered, it becomes even more important to try to pay off credit card balances as soon as the statement arrives rather than carrying a balance from month to month.  It’s no longer just a matter of whether the interest rate is low enough to make it reasonable to carry a balance and make just a minimum payment – now you need to be concerned of a credit card company lowering your credit limit and hurting your credit score and causing you over-the-limit-fees.

It used to be you had to make your payments late to get a credit limit decrease.  Now, with credit card companies attempting to lower their risks of lending money in a tough economy, the major credit card lenders are reducing limits on everyone – regardless of how they make payments or not.

A lower credit limit will increase your debt utilization ratio – meaning that even without spending more money on credit you’re suddenly using more of your available credit (since less is available to you) and therefore become a higher risk in the eyes of creditors should you go looking for new credit.  You also might notice your credit score drop due to lowered credit limits.

In some cases, credit card companies are reducing the credit limits of customers to below the amount that the cardholder has already spent.  For example, if you’ve had a $2,000 credit limit and used $1500 of it, you could be hit with an over-the-limit fee when the credit card company lowers your available credit to $1490.

Pay off credit card balances as quickly as possible to avoid these problems and unnecessary fees.

You may feel a little put off by the financial headlines that have been floating around. It seems that you can’t go anywhere without hearing the terms ‘credit crisis’, ‘credit crunch’, and ‘credit freeze’. That can be intimidating for people who want to start building their credit history right now. How will they build up their credit when nobody’s offering any?

The experts have some advice for consumers in this situation. First, consider applying for a credit card through your bank. You’ll have a better chance of getting credit if you apply at a place where they know you’re capable of managing your money.

If that doesn’t work, get a secured credit card. These cards use your own money as collateral, so there’s no risk to the card issuer. Anyone can obtain a secured credit card. Best of all, your timely payments will be reported to credit agencies, improving your credit score and opening the doors to more credit in the future.

Finally, consider taking a credit card even if the terms aren’t what you’d hoped for. Nobody is getting a great deal right now, though this will change when the economy starts to recover and credit card legislation goes into effect. For now, count yourself lucky if you get approved for any unsecured card.

What you don’t know about your credit score can hurt you. That’s according to Liz Pulliam Weston, author of “Your Credit Score, Your Money & What’s at Stake”. Weston recently shared some tips with card holders who want to raise their credit scores and keep them high.

Tip 1: Missing a payment is the kiss of death to your credit score. One missed payment can drop your score 100 points, and the higher your score, the bigger the fall. Make your payments on time, every time.

Tip 2: You must distribute your purchases. A single large purchase that nearly maxes out one credit card is worse for your credit score than several smaller purchases spread out over many cards. Try never to charge more than 30% of your total availble credit on any one card.

Tip 3: It’s easier than ever to clean up your credit report. Order the FICO credit score, which is most likely the one your lenders are using to evaluate you. You can dispute the incorrect items online with the click of a mouse!

By following these simple tips, you can make the most of your credit score, even during the credit crunch. Good luck!

One of the ways that you can keep tabs on your credit is to get a periodic credit report in order to see what is contained therein. This is a good idea to help make sure that the information is legitimate. If it is not, it can drastically affect your score and keep you from being approved for loans or worse you could be paying a higher interest rate than you would otherwise pay.

You are allowed to check your credit report one time for free each year. The Federal Trade Commission has a web site than you can go to and find out more about getting your free report. The address is: www.ftc.gov/freereports. On this website you will find instructions for how to get your free report and even what to do if you find errors on it and how to dispute them.

If you find that you need to take action in clearing up errors, it does take some foot work on your part in collecting the information to substantiate your claim, but if you take the time to do that, then you can be successful. The process is: gather information, send a letter with copies not originals to the reporting company. And finally, contact the creditor about the error as well.

This is not an easy or enjoyable process but must be done to keep your credit report clear of errors.

You can get your credit score from any of the three major credit bureaus.  People recommend getting your score and viewing your credit report several times per year, just to make sure there are no errors or problems that you need to address.  It also helps you see whether you’ve got “good” credit before you apply for lending.

The problem is, most of the credit bureaus use their own scoring models when a customer requests their credit score.  You may get a score that is considered “low” on the FICO scoring model, but what you may not realize is the score you got from the credit bureau isn’t even your FICO score!

Most lenders rely on the FICO score when determining your credit worthiness.  The FICO score was developed by Fair Isaac Corp, and is a number that falls in the range of 300 and 850.  Most lenders consider scores over 720 great.  You can purchase your FICO score from MyFICO.com, from either Equifax or TransUnion.  Experian stopped selling FICO scores to consumers, but still release the data to lenders.

Beginning February 14th, consumers will no longer be able to access their Experian credit scores or credit reports through the Fair Isaac Corporation (FICO). This is a move which surprised some, but which others insist is the logical result of bad blood that has been brewing between FICO and Experian for some time.

The FICO credit model is the model most widely used by lenders to determine if a consumer is credit-worthy. Experian will no longer distribute its FICO credit scores to consumers or other agencies. It will continue to distribute them to lenders, leaving consumers in the dark with no access to their Experian score. (Experian will supply a proprietary credit score to consumers, but it’s not the one lenders use to make credit decisions.)

In 2006, FICO filed a lawsuit against all three of the major credit bureaus, accusing them of anti-competitive practices. The suit was eventually dropped against Experian, but there is some speculation that the lawsuit contributed to the current parting of ways.

Consumers can still visit myfico.com to receive their TransUnion and Equifax credit scores and reports.

If you are trying to pay off a credit card, here is a method that you can adopt which will pay the balance off much quicker while avoiding excessive interest charges.

High Interest, Long Term. If you have a balance of $5,000.00 on a credit card with 17% interest and a 3% minimum payment, you will incur interest charges of $4,119.00 and a 14 year term of paying off that card! That is if you only pay the minimum amount due every month.

Increase Your Payments. Now add this into the mix: make a half payment every 14 days and you will eliminate the balance in three years and 18 weeks and only pay $2,521.00 in interest. How does saving over half in interest and paying off much sooner sound?

The requirement here is that you begin by making sure that your regular monthly payment is paid by the due date. If you fall short of this, then you will still end up with late fees, high interest rates and a spotted credit record. So, if you begin this process, stick to the rules and make it work.

The reason that this works is because credit card companies are required by law to credit each payment that they receive when they receive them. What you are doing, then, is paying extra towards the principle on the balance. But, adding to that is the fact that since you are making an extra payment every two weeks, you will end up with 26 payments per year which is equal to 13 monthly payments, not 12. A complete extra month’s payment is applied to your balance. Now, that is smart thinking.

It can be very frustrating to pay your bills on time, only to b thanked with higher interest rates and lower credit limits. It’s happening to lots of good card holders, though, as card companies scramble to minimize their losses.

If you’ve been informed of changes to your cardholder agreement, you might be tempted to close your account and find a better deal. You’ve got the right idea, but instead of closing your account, it’s better to pay off your card balance and leave the account open.

This is because your available credit to debt ratio is an important number. If you have plenty of credit that’s available but untapped, it tells lenders that you know how to handle your finances. You will be perceived as less of a risk, and your credit score will go up.

If you close out your credit card accounts, you will decrease your amount of available credit. This won’t do anything good for your credit rating, and might even bruise it. So keep those accounts active, but stop using the card if the terms are too bad. Just be sure to make a small purchase every few months to keep the account from being closed due to inactivity.