This Weeks Top Five on Money and Credit

Here are this weeks Top Five on Money and Credit, in no particular order...

1. The true cost of a bad credit score by My New Choice
2. No Credit Needed writes about "Managing My finances Firefox, ING Direct, online billpay, and you need a budget"
3. 73 Debt Elimination Tips from Zen Habits
4. Some good posts from bloggers on The Mint Blog "What's a sound financial lifestyle"
5. The Frugalist offers The Frugality Cheat Sheet (note the finance tips starting at #48)

What Debt Settlement Companies Won't Tell You

An excellent article appeared today on smartmoney.com about the downside of using a debt settlement company. Personally, in my years of banking, we have worked with very few of these companies. Why? Because as a creditor, we could offer the debtor a much better deal by working directly with them instead of through the debt settlement company. By working directly with the debtor, we're able to negotiate a settlement plan directly, eliminating any 'fair share fees' or other costs that detract from repaying the debt.

What debt-settlement companies won't tell you

1. Debt settlement may not be right for you Debt settlement is a niche solution that's right only for a small segment of the population, says Charles Phelan, founder of ZipDebt.com, who coaches consumers on do-it-yourself debt settlement. But don't expect to hear that from a debt-settlement company. "People working the desks at the debt-settlement companies are working on commission and have the incentive of bringing as many people as possible," he says. You could be a good candidate for debt settlement if you're heading toward bankruptcy, but don't qualify for filing Chapter 7, Phelan explains. (Under Chapter 7, most of your unsecured debts are written off, but you'll most likely have to sell some property including your home). "Most people who can qualify for Chapter 7 in all likelihood lack the cash flow to make debt settlement work for them," he says. Debt settlement, in other words, might be a viable alternative to Chapter 13, which sets up a three- to five-year schedule with your creditors to repay your debts. (For more details on qualifying for Chapter 7 or Chapter 13, read our story.) Likewise, if you can scrape up the cash to pay off your debts in a debt-management program, where you work with a debt-management company to pay off your balances in full but with lower interest rates, then debt settlement isn't the best solution. 2. Your credit will suffer Creditors don't settle unless you're severely behind on your payments. That means one thing: Debt settlement is damaging to your credit. Just how damaging it is depends on your track record. If you're already behind on payments, your credit will suffer less than if you've managed to avoid delinquencies and credit charge-offs. 3. You could get sued With bankruptcy, creditors have to stop collections efforts as soon as you file. That's not the case with debt settlement. Even if you inform your creditors of your efforts to settle, they won't stop trying to collect, Phelan says. Worst-case scenario, they could sue you for the amounts you owe. Should that occur the only way to avoid a black mark on your credit record would be to pay off the debt in full. 4. There are tax consequences Debt settlement is a taxable event. Any forgiven balance that exceeds $600 is taxable income, says Linfield. "Sometimes that tax event can put people in worse shape than they were in to begin with," she says. Consider this: If your tax rate is 15%, $5,000 of forgiven debt will carry a $750 tax liability. That's a debt that the IRS won't forgive. (Read our story for advice on what to do when you can't pay your taxes.) One exception: If you're insolvent — namely your assets are less than your liabilities — you can petition the IRS to waive that tax liability by filing form 982. 5. Our services might be illegal While the laws regulating debt-settlement companies vary greatly by state, it's worth noting that 12 states currently prohibit for-profit debt management. Since debt-settlement companies are for-profit entities, they're not allowed to practice there. Those states are Arizona, Georgia, Hawaii, Louisiana, Maine, Mississippi, New Jersey, New Mexico, New York, North Dakota, West Virginia and Wyoming. If you live in one of those states, remember: It is illegal for for-profit debt-settlement companies to contact you and work with you, even if they're based in another state. "Many companies do it anyway," Linfield says. "And that's a big red flag."

Don't know what a credit score is?

I just read about a telephone poll that Bankrate conducted. They telephoned over 1000 adults 18 years old or older and asked them about their credit scores. This poll is part of Bankrate.com 's program called 'Guide to Financial Literacy'

What they found is surprising to me. Especially after all the recent attention given to identity theft and the high cost of credit! Here is a link to the findings.

Of the adults polled, 32% of them have never checked their credit report. I suppose it isn't something that most people think about everyday, but you'd think that mere curiosity would motivate people to check at least once!

Its not surprising then to discover that 45% of these adults don't know what their credit score is, and many are confused about the difference between a credit report and a credit score! I guess then they wouldn't know much about getting a free credit report!

As Bankrate says, "not using the information could cost consumers a significant amount of money."

"Credit scores touch every aspect of a persons life", said Cheryl Allebrand, senior reporter at Bankrate.com . "Whether or not you will pass an employment background check, how much you pay for car insurance, and the type of mortgage for which you qualify can all be affected by credit scores."

So, those are the the findings of the poll taken by Bankrate.com. Another obvious reason why we need financial literacy programs in our schools

What's the point?

What are mortgage loan points? You've heard them talked about, but never really understood what they are? Well, guess no more!

Points are fees that a borrower pays the lender at closing in exchange for a lower rate; think prepaid interest. These points are a percentage of the loan amount. Two points on a $150,000 loan would cost you an additional $3000 in closing costs. So, what's the benefit? That depends. There could be a big benefit, or none at all.

Let's say that you're financing $150,000 for 20 years. You decided that you will pay two points in exchange for a loan rate that is one half a percentage point lower. This means that you're paying $3000 interest in advance for a lower loan rate. How will this benefit you?

A $150,000 loan over 20 years @ 6.75% carries a payment of $1,140. Now lets say that you pay two points, and the rate is lowered to 6.25%. Now the payment is $1,096. So, in exchange for $3000 up front, you save $44.00 per month in payment. You will need to have this mortgage for a minimum of 68 months to break even ($3000 divided by $44.00 = 68). After that, you're actually saving money. Over the life of the loan you would pay about $10,000 less in interest charges by pre-paying $3000 up front. This results in a $7000 savings for you. Is it worth it? That's for you to determine. Here's a nice calculator on Bankrate.com .

You should consider other places that you could invest this money and the tax benefits associated with mortgage interest. You should also consider whether or not it is realistic to expect you will have the same mortgage five years from now. Hope this helps!

BTW- Be sure to check out the latest Carnival of Personal Finance hosted by The Digerati Life!

Ten Top Things You Should Know

If you haven't already, visit CNN Money's "Money 101". This is a 'Step by step guide to gaining control of you financial life".

There are 23 lessons covering topics like setting priorities; making a budget; basics of investing; health insurance; taxes; kids and money; controlling debt; etc.

This list of Top Things You Should Know is from Lesson 9 "Controlling Debt"

1. Americans are loaded with credit card debt.
The average American household with at least one credit card has nearly $9,200 in credit card debt, according to CardWeb.com, and the average interest rate runs in the mid- to high teens at any given time.

2. Some debt is good.
Borrowing for a home or college usually makes good sense. Just make sure you don't borrow more than you can afford to pay back, and shop around for the best rates.

3. Some debt is bad.
Don't use a credit card to pay for things you consume quickly, such as meals and vacations, if you can't afford to pay off your monthly bill in full in a month or two. There's no faster way to fall into debt. Instead, put aside some cash each month for these items so you can pay the bill in full. If there's something you really want, but it's expensive, save for it over a period of weeks or months before charging it so that you can pay the balance when it's due and avoid interest charges.

4. Get a handle on your spending.
Most people spend thousands of dollars without much thought to what they're buying. Write down everything you spend for a month, cut back on things you don't need, and start saving the money left over or use it to reduce your debt more quickly.

5. Pay off your highest-rate debts first.
The key to getting out of debt efficiently is first to pay down the balances of loans or credit cards that charge the most interest while paying at least the minimum due on all your other debt. Once the high-interest debt is paid down, tackle the next highest, and so on.

6. Don't fall into the minimum trap.
If you just pay the minimum due on credit card bills, you'll barely cover the interest you owe, to say nothing of the principal. It will take you years to pay off your balance, and potentially you'll end up spending thousands of dollars more than the original amount you charged.

7. Watch where you borrow.
It may be convenient to borrow against your home or your 401(k) to pay off debt, but it can be dangerous. You could lose your home or fall short of your investing goals at retirement.

8. Expect the unexpected.
Build a cash cushion worth three months to six months of living expenses in case of an emergency. If you don't have an emergency fund, a broken furnace or damaged car can seriously upset your finances.

9. Don't be so quick to pay down your mortgage.
Don't pour all your cash into paying off a mortgage if you have other debt. Mortgages tend to have lower interest rates than other debt, and you may deduct the interest you pay on the first $1 million of a mortgage loan. (If your mortgage has a high rate and you want to lower your monthly payments, consider refinancing.)

10. Get help as soon as you need it.
If you have more debt than you can manage, get help before your debt breaks your back. There are reputable debt counseling agencies that may be able to consolidate your debt and assist you in better managing your finances. But there are also a lot of disreputable agencies out there.