But how are you supposed to avoid these scams, especially since at the time when you are being approached you are most likely feeling vulnerable and extremely eager to get out of your present situation?

Below I’ve outlined clear signs and things to avoid when dealing with loan modification and other companies that deal with foreclosures.

How to Avoid Foreclosure Scams

• Objectively Go Over the Offer: One of the best ways to avoid a scam is to objectively look at what you are dealing with. Take the emotions out of the circumstance (no matter how difficult it will be to do this), and go over the deal with the same gusto as you would when comparison shopping for a car. What is your gut telling you? Do you have any sneaking suspicions, and is the person you are dealing with answering all of your probing questions?
• Know the Limits of Help: No one can help 100% or even 90% of homeowners facing foreclosure. Always be suspicious of guarantees in this industry, and realize that you might be in a situation that will need to run its course (without the help of a company).
• No Information Should be Hidden Up Front: Companies offering you a deal have an obligation to tell you how it works before you sign up. If the offer sounds like you need to pay for something in order to receive more information, then walk away.
• Get it in Writing: According to the FTC’s MARS Rule, it is illegal for a company to charge you anything before giving you an offer for a loan modification or other type of loan relief in writing. On top of this, they must also provide a document from your lender showing the changes to your loan if you decide to accept your lender’s offer, as well as disclose all fees to you. All of this information should make you feel good about dealing with a company; any lack of this information should leave you suspect about who you are dealing with. It should be noted that a lawyer can charge you an upfront fee, so long as they meet certain requirements, such as they are licensed in the state where you live or your house is located, as well as they put any fees collected into a client trust account and notify you of any withdrawals.
• Scrutinize Ads for Suspicious Language: No company can guarantee a modified loan to you. Any language in an advertisement with a guarantee, or that says 90%-100% of clients receive help is very suspect. In addition to this, filing a bankruptcy will not stop your foreclosure; if a company is promoting this, it is fraudulent.
• Scrutinize Ads for Language Mandated by the FTC: According to the FTC, a company advertising for help with mortgages must use certain language, such as declaring that the company has no affiliation with the government, the company has not been approved by your lender or the government, and the company must disclose that your lender may not approve a loan modification. Even though the company may advise you to stop making mortgage payments, they are required by law to tell you that this may result in you losing your home and it may damage your credit. For a complete listing, check out the FTC’s website.
• Read All Documents Thoroughly: Do not go into robo-sign mode when signing any type of contract. Read through all of the pages, and write down any questions you have. Make sure you get answers to your satisfaction before signing onto anything.

Have you or a family member been offered foreclosure help, only to find out it was a scam?

More on Foreclosures

• 4 Foreclosure Scams to Watch Out For
• 7 Ways to Fix Your Credit After a Foreclosure
• Buying a Foreclosure
• 5 Scary Foreclosure Fiascos

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In 2009 there were approximately 900,000 foreclosures, followed by 1.2 million foreclosures in 2010. There was a decline of foreclosures in 2011 to 804,423. On top of the foreclosures and desperate people, there was the introduction of a government-sponsored initiative for mortgage modifications — truly making this a perfect storm for scammers.

Not surprisingly, the amount of foreclosure scams and the type of scams have increased dramatically. I’d like to discuss some of the more prevalent ones to watch out for.

Types of Foreclosure Scams

1. Rent to Buy: The scammer will promise to purchase your home and rent it back to you until your financial situation improves. You have to give the con artist your title in exchange for this deal. The promise is that once you are back on your feet, you have the option to repurchase the home. Unfortunately, what happens is the scammer does not pay your mortgage on your behalf (signing over the title does not relieve you of the mortgage liabilities), so eventually you are foreclosed on and evicted after having paid the “new owner” rent over a period of time. With the average amount of time between defaulting on a mortgage loan and foreclosure procedures being 492 days, you can see how lucrative this scam would be. The FTC outlines another variation to this scheme where the “new owner” raises your rent over a period of months to the point where you have to move anyway. Then, they are free to sell the house and walk away with your equity.
2. Finding a Buyer for You: Scammers may promise to find a buyer for your home and give you a portion of the profits, but only if you move out and sign over the title to them. You transfer the deed, they rent the house out and collect rent from a new owner, and meanwhile your lender proceeds with foreclosure. At the end you are still on the hook for the mortgage (transferring the deed does not transfer the financial liability).
3. Phantom Counseling: For an upfront fee, these scammers promise to negotiate a deal with your lender that will save your house and reduce your payments. The problem is that they never deliver on the deal. On top of this, some phony counselors have you make your mortgage payments to them while they are “negotiating” a deal with the lender, leaving you in an even more precarious state once you figure out what is going on.
4. Bait-and-Switch Loan Documents: Scammers will give you a stack of papers to sign so that they can “modify your loan” or to get another loan to make your mortgage current. Hidden in the stack of papers is one that actually signs your deed over to them.

Cost of Foreclosure Scams

There are many costs to foreclosure scams beyond just the financial cost to homeowners and the economy. Other costs include emotional and relationship tolls, as well as downgraded credit scores.

• Emotional Toll: The emotional toll is probably the biggest one. Getting ones hopes up after almost losing their home, only to be deceived and left in a worse state than before can have a huge impact on someone. Many homeowners are in relationships and/or are raising families, and the stress level can negatively impact everyone involved.
• Decreased Credit Score: Even though one could argue that someone who is close to foreclosure would probably have their credit impacted anyway, many of these scams leave the homeowners on the hook for unpaid mortgages and therefore add to a bad credit score. See 7 ways to fix your credit after a foreclosure to see what a foreclosure will do to a credit score.
• Cost to Homeowners and the Economy: The Joint Economic Committee of Congress estimates that the average foreclosure costs $77,935, while preventing a foreclosure costs $3,300. This average includes the costs to the homeowner, neighbors, lenders, etc. Foreclosure scams that directly deal with homeowners (such as the ones in this article) take even more money away from people’s bank accounts and put that money into the pockets of scammers.

Each of these foreclosure scams involves a person clearly taking advantage of someone. Yet along the process there are many times where asking the right questions or doing due diligence would perhaps have saved a homeowner from continuing on with the offer.

Stay tuned for the next article in this series where I discuss how to avoid foreclosure scams.

More on Foreclosures

• 7 Ways to Fix Your Credit After a Foreclosure
• Buying a Foreclosure
• Is Squatting in a Foreclosure Acceptable?
• 5 Scary Foreclosure Fiascos

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Benefits of Being Debt-Free

1. You’ll save money. You won’t be paying interest on your debt, so you’re automatically spending less. And once you get rid of debt payments for good, you can put money in the bank…and use it instead of credit cards when unexpected expenses pop up.  
2. Debt-free = stress-free. Well, maybe not quite – after all, there will probably always be more things to do than hours in the day! But you will have less financial stress when your debt is paid off. No more tracking payment due dates, no more juggling bank accounts to stretch paychecks and no more worrying about how you’re going to save for the next big expense when you’re still paying off the last big expense.
3. Your life is your own again. My mom always says that when someone has a financial stake in your life, they have a non-financial stake in your life too. If you owe money to family or friends, they will be entitled to an opinion on every move you make – from buying new clothes to eating at an expensive restaurant. Even if your debt is all owed to financial institutions you might find that it has an impact on your life choices – like if you can’t get a mortgage for that house you’re in love with, or can’t replace your banged-up car because you owe too much on it.
4. Your debt won’t control your choices. If you have a certain number of payments to make, you need a certain amount of income – so if you hate your job but it pays the bills, you can’t quit. When your debt is paid off, you can find a job that works for you and your family, as long as it brings in enough to prevent you from going into debt again.
5. It’s good for your family. You’ll be in a better position to fund family bonding opportunities like a spontaneous beach trip, or day at the amusement park. If you have young children, living a debt-free life will be a wonderful example of living within your means. If an adult child needs help, you might be able to provide it. And if, by chance, something happens to you, they won’t be left with the burden of your debt.

Start with a Commitment

There are many more reasons to get out of debt, and even more ways to do so. The most important thing is that you commit to a plan, and then start with step 1. It won’t be easy, but the best things in life never are. Know that you can do it – no matter how much debt you have, or how much money you make, it is a near certainty that people have paid off more with less. GOOD LUCK!

Have you recently eliminated your debt, or committed to doing so? Tell us why in the comments!

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Bankruptcy 101

Bankruptcy allows a company or individual to be protected under the law while debts are cancelled and/or repaid.

Chapter 7 Bankruptcy. The most commonly used chapter of bankruptcy is a Chapter 7 bankruptcy. Under this type, individuals’ assets are collected and sold for cash with the proceeds going towards creditors—think liquidation.

Chapter 13 Bankruptcy. Chapter 13 bankruptcies are for individuals that have a steady source of income (but can also be used by small businesses). In this plan the entity or person must settle all of its debts within 3-5 years with a plan that they develop. Foreclosures and/or collection actions are temporarily halted and the debtor gets to keep their property. Plans are based on the debtor’s ability to pay, not based on the amount owed. Large corporations (and some individuals) can use a Chapter 11 bankruptcy in order to keep their business open. Under this chapter, all collection activities must cease while the organization goes through the complex and expensive process of reorganizing.

Chapter 12 Bankruptcy. Family farmers and family fishermen can file a Chapter 12 bankruptcy should they need to. The requirement is that they have steady annual income (though seasonal income is fine as well). This is a cheaper option than filing a Chapter 11.

Chapter 9 Bankruptcy. There is also a Chapter 9 bankruptcy available to municipalities only and involves reorganization, not liquidation.

It’s also important to note that cancelled debt is considered taxable income by the IRS: Tax Return Bankruptcy Debt.

Weird Bankruptcies

Below are some particularly interesting and weird cases of bankruptcy by organizations that you don’t typically see declaring bankruptcy. Each of these bankruptcies occurred in small or large part due to the downturn in the economy.

• Dodgers (Chapter 11): In June of 2011 a judge approved a $150 million bankruptcy financing agreement. Baseball Commissioner Bud Selig accused the Dodgers owner Frank McCourt of “siphoning off more than $100 million in club revenue and driving the Dodgers into a liquidity crisis.” He is also accused of using this money to live a lavish lifestyle, and driving away game attendance due to fans’ dislike of him (attendance was already down due to the recession). The Dodgers have accused Commissioner Bud Selig of not approving a multibillion-dollar TV deal which would have helped the cash-strapped team.
• Vallejo City Council (Chapter 9): This city of 117,000 residents was faced with a $16 million deficit in June of 2008 for the coming fiscal year (July), and voted to declare bankruptcy. This was brought about mainly due to a substantial decrease in property tax, sales tax, and transfer fee collection due to the slumping housing market.  City employee salaries account for 80% of spending, and they could not get the employees to concede to any decrease in pay and/or benefits.
• Temple Hills Christian School (Chapter 11): The church that runs this school, the Progressive Baptist Church, owed $2.86 million on its mortgage and at least an additional $1.88 million in overdue state and federal taxes when they filed in 2009. The property includes a church, a school building, a gymnasium and a four-bedroom house.
• Archdiocese of Milwaukee (Chapter 11): In January 2011 the archdiocese of Milwaukee declared bankruptcy amid multiple lawsuits from molestation victims. On a website created to explain the bankruptcy, the archdiocese explained that there had been $12 million in settlement costs. In order to help pay these settlement costs, the archdiocese has sold off some property, mortgaged properties, liquidated savings, liquidated investments, and eliminated some programs and services. Specifically in November of 2010 there was a court decision made that insurance companies were not responsible towards the payment of any of these financial settlements.
• Sun-Times Media Group (Chapter 11): This company operates 59 newspapers, including the Chicago Sun-Times. Jeremy L. Halbreich, Chairman and Interim Chief Executive Officer of Sun-Times Media Group said that the bankruptcy is a result of the decrease in newspaper subscriptions, the economic downturn, and a significant, pending IRS tax liability dating back to previous management. These newspapers are still in operation.

Do any of these surprise you? Which bankruptcies have caught your attention in the last few years?    

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At some level, the crossover point is the reason all of us work and save – so that, one day, we can do what we want instead of what we have to do to live. There’s also a new calculator to calculate your own crossover point. If you’re lucky, you’ll hit that point at or before you plan to retire – if you’re not, you may have to work past retirement age or figure out a way to spend less.

Over the last few weeks, I’ve been contemplating what to do about a different kind of crossover point – the point at which liquid savings exceeds debt. I give informal financial advice to a number of family members and friends. At least two are at or near the point where the money they have in savings (not retirement or investment accounts, but cold, hard, earning-1%-or-less cash) exceeds the amount they have remaining to pay in debt. They can use the savings to become debt free – but ultimately be left with an empty bank account. Alternatively, they can continue to pay the debt in monthly installments – racking up more interest but also able to breathe a little easier about their cash cushion.

Crossover Scenarios

Some scenarios are very easy – if you’re paying off debt at 15% or higher and you have cash in savings that you have absolutely no need for, pay off the debt! The cases where it becomes really hard to decide whether to use savings to pay off debt are the ones in which there is no clear cut answer – the ones where the debt is a car loan or student loan at 6% interest or less, and the cash is earning 1-1.5% in savings or CDs. Yes, mathematically you are losing money each month you continue to contribute to savings instead of paying off debt. But it still might make financial sense over the next few years to go ahead and keep the cash. For instance, if you have an old car, you might be saving your cash for maintenance and/or a new car. Depending on your age, you might need the cash for upcoming big purchases like a house, wedding, your child’s college payments or a retirement cushion. If your job safety is a little shaky, you might want to hoard cash as a super emergency fund in case of a layoff. While hardcore followers of Dave Ramsey would say that you should NEVER have cash savings that exceed your debt balance, the reality is that for a variety of reasons – it happens.

Steps to Evaluate Payoff

When people ask me if they should use savings to pay off debt (or, for that matter, to make a large retirement contribution or similarly tie up the funds), this is the general advice I give them. Note that this assumes that you have made a commitment to stop incurring new debt and are generally trying to become debt free!

1. Run the numbers. Then run them again. What debt do you have remaining, and how high are the interest rates? Why exactly are you saving cash, and when do you plan to spend it (creating your own dollar plan can help with this step)? How much cash do you have right now, and how much can you add to it in the months or years before you need it (remember that you can add the funds you were previously using to pay off debt)?
2. Pay off high-interest debts no matter what. Simply put, it makes no sense to continue to pay interest rates of 12-15% or higher if you have the money to pay off that debt - many credit cards fall into this category. If you have the money in savings to knock out these balances in full, do it. Unless you need the cash in the next 4-6 months, you can probably find a way to replenish it before you need it – take on extra shifts at work, cook a little extra at home, etc.
3. Keep no-interest debts for the time being. Conversely, it makes no sense to pay off a 0% loan early as long as the 0% rate will continue until the loan is completely paid off. Pay the minimum on these debts until you either pay them off or have absolutely nothing left to do with the cash you have on hand.
4. Use the funds you don’t need to pay off debts, highest interest first. Say you’ll need $10,000 in two years for a house down payment, and can contribute about $2,000 a year to your savings account. That means you only need $6,000 right now – so if you have $7,000, you can use $1,000 to pay off debt. Start with your highest interest rate debts in order to save the most on interest. But if the interest rates are all within a few percentage points and you can knock out several small debts with your excess savings, you might want to do that instead.
5. Continue paying remaining debts monthly. If you can’t pay off your debts with your unneeded cash, keep paying using whatever methods you were before – snowball or some other. If you can curtail adding to your savings account in favor of paying off debt faster, even better.
6. Repeat every 4 – 6 months. Simply put, things change. In a few months, you might find you need less cash than you originally thought, and you can erase more debts. You might get a raise and be able to hit savings goals faster, freeing up money for debt payments. Or you might find out that layoffs are coming, you need a bigger cash cushion, and you need to slow down debt payments to rebuild your cash reserves. Regardless, repeating this exercise every few months will ensure that you pay the least amount of interest on your debts while also maintaining enough cash to meet your needs.

Now it’s your turn – would you liquidate savings to pay off debt? What if you knew you might have big expenses coming up? And a related question: should you pay off debt now even if you might have to incur more later (such as for graduate school or a financed car)? Or keep paying interest now to build up savings and avoid paying interest later? Tell me why in the comments!

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One of the most common practices was having robo-signers sign documents without verifying the information. For example, Jeffrey Stephan, a foreclosure specialist with GMAC Mortgage said that he signed about 10,000 foreclosure affidavits per month without personally verifying the documents. You can imagine the type of nightmare scenarios this caused as thousands of homes were wrongly foreclosed on (it should be noted that the fed investigated and found that there have been no wrongful foreclosures).

Foreclosures Gone Wrong

Because of this practice, things got out of hand. Several very weird stories surfaced as a result of robo-signing, and because no one personally reviewed the records involved, the homeowners were often met with confusion and denial when they attempted to work it out with their lender. Here are some examples:  

1. Foreclosure on a Paid-for Home: Bank of America recently foreclosed on a couple in Naples, FL who had never had mortgage to begin with. In 2009, Warren and Maureen Nyerges purchased a home out of foreclosure from Bank of America and paid $165,000 in cash. The paperwork issue occurred when the Nyerges were not identified as the new owners and were mistakenly thought to be the property’s previous owners. Four months after moving into the home the couple was given a notice of foreclosure from Bank of America. Calls to the bank did not help matters. Finally the couple took BofA to court and won; the judge ordered that BofA pay the couples’ attorney fees. When the bank failed to pay the fees, the couples’ lawyer got permission to seize the bank’s assets (sort of foreclosure in reverse!). The bank finally paid up.
2. Mortgage Lender Goes Under and Man gets Foreclosed on: Tom Woods in Tampa, Fl faithfully paid his mortgage. When his mortgage bank went under, it was sold to Bank of America. Some of the paperwork was lost in the process, and soon a foreclosure notice was sent to Woods. The bank had no record of anything, and a lawyer had to get involved. The foreclosure was signed by a robo-signer.   
3. Mistakenly Repossess Home and Belongings, Including Pet Bird: Angela Iannelli came home in 2009 to a ransacked home she had paid her mortgage for on time (except one payment). Furthermore, Bank of America had not sent her a notice of a 60-day deficiency nor given her 30 days to fix it, as required by state law. Bank of America had hired contractors to cut her power lines, padlock her doors, and otherwise winterize her home (pouring antifreeze down her drains, cutting water lines, etc.). The contractors even confiscated her pet parrot (a blue macaw). Her blue macaw was returned to her, but she had to drive 60 miles in order to retrieve him.
4. Foreclosed on for Modifying Loan: Steve Curtis, the mayor of Layton, Utah, applied for a loan modification in March in 2010. Bank of America agreed to a loan modification trial that lowered their mortgage payment by $350, which would help Curtis who had been underemployed for 9 months. In December 2010, they came home to a notice of foreclosure. Apparently their payments were being sent to escrow because they were under a loan modification program. The departments within BofA did not communicate, and so the payments showed up as delinquent in the system. Crazy enough, even with lawyers involved the the Curtises will have to pay all reinstatement charges and the legal fees Bank of America racked up when they foreclosed on the Curtis’ home in order to save their home.
5. Bank Takes Cremation Remains in Wrongful Foreclosure: Once again, Bank of America is behind this one. A woman was, admittedly, behind on her payments. She sought a loan modification, and was assured by BofA that her home would not be foreclosed on while seeing this loan modification. After her husband died from a road rage accident, she intended to take over the mortgage (the mortgage ended up in probate court upon his death). She sent in a check for $15,000 to catch up on payments and taxes, as ordered by the judge. She was never given ownership of the house, and then the economy tanked, which led her to ask for a loan modification. Papers were lost, and she was not even notified of the foreclosure sale.

Have any of you experienced a wrongful foreclosure, or do you know of someone else who has?   

More on Foreclosures

• Is Squatting in a Foreclosure Acceptable?
• 7 Ways to Fix Your Credit After a Foreclosure
• Buying a Foreclosure
• Would You Walk Away from Your Home?

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I’d like to know why you chose to make an all cash purchase as opposed to financing. I suspect the decision was easier since you plan to hold on to the property for the long term. But, was your decision entirely about skipping the financing costs and interest obligation? What about the risks of locking up that much of your cash at the outset when buying property? I get mixed messages about the value of paying cash versus financing when investing in real estate. What’s your opinion?

I’m glad you asked Terri, because I’m sure you’re not the only one who wants to know!

Cash Trend on Vacation Homes

While we were in the process of buying, there was a helpful CNN article that FMF sent to me about vacation home prices falling and the popularity of buying distressed properties. The part that caught my eye was how common cash deals are becoming:

One factor depressing sales was the difficulty in getting mortgages due to tight credit markets. Buyers often did an end-around this problem by paying cash. Nearly 40% of vacation home sales were cash deals.

Cash Offer in Negotiation

When we made an offer on our vacation home, our main goal was to pick up the property for a cheap price. Here were some of the impacts that went into our decision to buy with cash:

Quick closing. We knew in advance that the bank wanted a quick closing. And the fastest way for us to facilitate this was to avoid financing which would have dragged the closing out for weeks.

Lower purchase price without a financing contingency. I’ve frequently read that it makes no difference to the seller whether or not the buyer is obtaining financing. However, when we sold our condo to an all cash buyer, I can guarantee you that we were more inclined to take their offer at a lower price because it eliminated the contingencies, which also eliminates a lot of risk for the seller in this market. I’m sure many of you will disagree with me, but we did lower our maximum price we were willing to pay by about $3000 when we made the decision to offer all cash.

Skip the closing costs. We didn’t have to pay any points, fees, or closing costs that banks require, including an appraisal. For a property under $100,000, eliminating closing costs meant a lot of savings percentage wise.

High interest rates. Because we will rent out the vacation home that we purchased when we aren’t using it, it doesn’t qualify for the traditional second home financing with attractive interest rates. However, since we won’t be exclusively renting it either, it doesn’t qualify for standard commercial financing either. It fell somewhere in between; the best rate we found was a 3/1 ARM rate at 5.75%. Not exactly what I consider an attractive interest rate right now.

Dealing with banks. Finally, let’s be honest, I’m not exactly golden in the eyes of banks. At the time of purchase, I had about $180,000 in dirt cheap balance transfer money on credit cards. In the past I’ve successfully shown our local banks the assets to offset the balances, but sometimes dealing with underwriting at an unfamiliar bank isn’t worth the time and effort…. especially, when they suggest that I should pay off some of it so their computer program will work better!

Leveraging Assets

While it made sense to make an all cash offer to obtain the property, long time readers know it’s very out of character for me to make a cash purchase without using leverage to potentially increase the rate of return.

And don’t worry, I still firmly believe in leverage and cheap financing! In this particular case, I just didn’t believe a traditional bank mortgage was the right place to get the money.

That’s where my newest credit card extravaganza comes into play. It’s pretty hard for me to willingly accept a 5.75% 3/1 ARM from a bank when I can easily beat that rate with credit card balance transfers.

Credit Card Financing

Here are some of the other offers I used to pull it all together:

Penfed Life of Balance Offer. To get started, just as we were finalizing our purchase, Pentagon Federal Credit Cards rolled out the 4.99% for the life of the balance transfer with no fees. So we already had the bank offer beat. (They’re offering it until June 30, 2011 if you are interested in using it for something).

Life of the balance transfers are attractive, since it eliminates the risk of having to roll it over to a new card (especially since it gets harder and harder to get new offers once we cross the $250,000 mark in unsecured outstanding credit). However, my goal was to finance the entire property at an average interest rate of 4%. So I also wanted to combine the Penfed offer with others that would offer lower rates when factoring in the length of the balance transfer and the fees.

Citi 21 month balance transfer. Citi Platinum Select MasterCard: 0% balance transfer for 21 months with a 3% balance transfer fee.

Discover 18 month balance transfer. Discover More Card: 0% balance transfer for 18 months with a 4% balance transfer fee.

Bank of America Mail Offer. I read about a trick at FatWallet in the Bank of America system right now to get a 0% balance transfer with 0 fees. If you got the 4.99% offer in the mail on one of your BOA cards, you can log in and elect a $100 balance transfer. Log out, and log back in and the offer changes to a 0% with 0 fee offer. Not only did it work like a charm, but Bank of America called to offer to make it one big balance transfer at 0%.

Alternative Financing

So Terri, I hope that explains my reasoning for what looked like a cash offer on the surface. I still feel that leverage is a profitable way to increasing wealth. And even though I avoided traditional bank financing, I have been working hard to put together a less expensive route to financing the property. Obviously, my route is risky and not for everyone, but I feel that the savings will outweigh the risk in the long term.

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For many people, large amounts of student loan debt are the only thing standing in the way of being debt-free. Even if you choose the standard repayment option on a small-dollar non-consolidated loan, you will be making minimum payments for 10 years. In many cases, you can double the total loan amount when taking interest into account. If you take an extended repayment option, your payments will be lower but your total amount paid will be even higher. Just like making extra payments on a 30-year mortgage can result in nearly the same results as a 15-year mortgage without the obligation, making larger payments on an extended or graduated plan can help bring your total payments closer to those of the standard repayment option. And making extra payments on a standard plan can mean student-loan freedom even faster.

Should you pay extra?

The largest argument for paying extra on your student loans is getting rid of debt and reducing the total amount of interest paid over time. Much like a mortgage, though, there are many reasons for not paying your loans off as soon as possible. For one thing, interest rates are typically low. Student loans should almost certainly be the last priority, except for maybe your mortgage, in any debt repayment plan. Those making under $70,000 ($145,000 if filing jointly) receive a tax deduction for student loan interest, so your student loan is actually costing you a little less to hold on to than you might think.

In a good interest rate environment, you might be paying less in interest than you would earn by parking your money in a high-interest savings or money market account. For instance, new loans right now have an interest rate less than 5%, which some accounts used to earn and could again in the future. And those with a higher risk tolerance might choose to contribute more towards retirement and invest in stocks or bonds rather than pay down low-interest debt.

How fast you choose to pay off your loans depends on your personal circumstances as well as your attitude toward carrying debt.

Payment amount matters

If you do think that paying more than the minimum and zeroing out your student loans ahead of schedule may be for you, the following graphs might interest you. It’s amazing what even an extra $50 per month can do for debt eradication!

For these graphs, assume that a student has one loan for each of four years of college. To keep it simple, I assumed these were all subsidized and so no interest was accrued. The balances and interest rates at the start of repayment are as follows:

• $3,000 at 6%
• $4,000 at 6.2%
• $5,000 at 6.8%
• $5,000 at 4.5%

We looked at standard payments for consolidated and non-consolidated loans. For each payment option, we looked at paying the minimum, adding $50/month, and paying double the minimum.

As you can see, consolidating your loans spreads the minimum payments out over 15 years rather than 10. If your loan amounts are higher, consolidating can actually spread payments out over as much as 30 years, significantly increasing the total amount of interest paid. Even in this case, paying minimum payments on consolidated loans can cost you about $3,000 than minimum payments on non-consolidated loans. And adding $50/month to your minimum payments saves you $3,000 on consolidated loans and about $1700 on non-consolidated loans. If you are fortunate enough to be able to double your minimum payments, you can pay off non-consolidated loans in just over 4 years! And doubling your consolidated minimum payment will still help you eliminate your student loans in less than half the expected time.

The bottom line: extra payments matter. If you can make them, do!

Check out all of the posts in our Student Loan series!

• Part 1: Student Loans: The Basics
• Part 2: Student Loan Repayment Options
• Part 3: Student Loans: Consolidation
• Part 4: Student Loans: The Effect of Extra Payments

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After graduation, you might want to consolidate your loans. Consolidation refers to the act of taking out one loan equal to the sum of all your loans (since you would likely have one for each year you were in school), paying off the initial loans with that sum, and then making one payment to pay off the consolidation loan. You do not actually receive the money from the consolidation loan – the government or private lender performs the consolidation for you to ensure that all underlying loans are paid off in full.

We will focus on how to consolidate federal loans from the government eligible for consolidation. Check with your private lender for information on how to consolidate private loans.

Benefits of Student Loan Consolidation

The largest benefit of school loan consolidation is having one payment with one due date. This helps ensure that it is easy to pay your bill on time, and prevents you from having to decide which individual loan to target first. Other benefits are a uniform interest rate and terms and a clear understanding of the principal balance and accruing interest.

When to Consolidate School Loans

Most people who consolidate do so immediately after graduation. You will likely receive information on consolidation during exit counseling at your college. The government will also mail you consolidation information during your grace period (the 6 months after graduation when you do not have to make payments). You can consolidate loans at any time as long as you haven’t done so in the past. If you have a consolidation loan already, but acquire one or more new student loans, you can reconsolidate all the loans together.

Things to Consider When Consolidating Student Loans

An education student loan consolidation loan makes sense for most people, but circumstances do vary. Make sure to consider the following factors when deciding whether to consolidate:

• Pay-off Options: Consolidated loans and individual loans used to have different pay-off options. With the new student loan legislation, all loans are made directly by the government. As such, pay-off options are similar for all types of loans. You can choose standard repayment, extended repayment, graduated repayment, income-based repayment and income-contingent repayment. The repayment options that you can choose from depend on your income and total loan amounts. The government provides this calculator to help you see all options for your specific situation. For more information, see “Choosing a Repayment Option.”
• Consolidation Term: When you consolidate, your total timeframe for repayment may be extended. The standard repayment term for most student loans is 10 years; consolidation loans may allow you to pay over as many as 30 years. If it is important to you to pay off your loans as soon as possible, you may want to be “forced” to do so by keeping standard repayment on separate loans rather than consolidating.
• Monthly Payment amount: Your monthly payment amount will vary depending on the payoff plan that you choose and the total length of time that you are in repayment. Consider your monthly income and expenses to help decide which monthly payment amount makes the most sense for you.
• Total Pay-off Amount: The monthly payment amount and repayment term will determine the total amount you pay on your student loan, which is made up of both principal and interest. A lower monthly payment and longer term will mean more interest paid and a larger total pay-off amount. This in turn can reduce the cash you have available for other goals like buying a home or saving for your own child’s college tuition.
• Consolidation Benefits: The government may offer an interest rate reduction if you consolidate your loans, sign up for automatic payments or make a certain number of payments on time. The government may also forgive loan balances after a certain number of years if you make below a certain amount and/or enter specific professions. These benefits change depending on the types of loans you are consolidating and when you do the actual consolidations. But make sure you research benefits available to you as part of your decision on whether to do student loan debt consolidation or not.

How to Consolidate Student Loans

If you are ready to consolidate your loans, you should do the following:

1. Decide which loans to consolidate: Remember that you do not have to consolidate all loans. For example, if you have 8 loans for 4 years of undergrad and 4 years of med school, you can choose to only consolidate 6 and pay the other 2 off separately. You might want to do this if you want to quickly pay down small-dollar loans with high interest rates.
2. Calculate interest rate: Make sure you know what your combined interest rate will be. Since consolidation loan interest rates are now weighted, your combined student loan consolidation rates will not be any more or less than if you kept your loans separate. Even still, knowing your combined interest rate is important for the next step.
3. Research repayment options: Last week, we focused exclusively on the different types of repayment options and helping you choose the one(s) that make sense for you. It is vital that you research and understand your repayment options before consolidating. Take note of the monthly payment, length of repayment, and total amount of interest paid for each option. You want to strike a balance between an affordable monthly payment and paying as little total interest as possible.
4. Consolidate: Finally, follow the easy steps provided by the Department of Education at their Consolidation Information Center to actually apply for and obtain the consolidation loan.

Check out all of the posts in our Student Loan series!

• Part 1: Student Loans: The Basics
• Part 2: Student Loan Repayment Options
• Part 3: Student Loans: Consolidation
• Part 4: Student Loans: The Effect of Extra Payments

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After graduation, you typically have a 6 month grace period before loan payments are due. Interest does accrue during this period, so if you are a position to make payments earlier you might want to do so!

During your grace period you will have to choose the payment plan that you wish to follow. They offer varying terms, including varying repayment lengths. In general, lower monthly payments means longer repayment – and more overall interest. But since some repayment options and/or careers offer loan forgiveness after a certain length of time, picking the option with the lowest interest over time might not actually be your best bet.

Read on for more on the differing options and which might be best for your own situation. Your interest rate will remain constant no matter what repayment option you choose. Note that repayment options for consolidation loans may have slightly different terms.

Standard Loan Repayment

• Overview: Basic student loans repayment with fixed monthly payments; shortest term and lowest interest overall.
• Available for: everyone.
• Length of repayment: 10 years for individual loans, up to 30 for consolidation loans depending on the total amount of the consolidation loan.
• Loan Forgiveness: up to $17,500 for those who teach at least 5 years in a low-income elementary or secondary school; remaining balance after 120 payments for those employed full time in public service jobs.
• Choose this if: You have no other debt, can afford the minimum payment and/or wish to complete repayment with as little interest in as little time as possible. If the minimum payment is a stretch, you might consider another option but strive to make extra payments, getting as close to the standard payment as possible.

Graduated Loan Repayment

• Overview: low payments initially (equal to at least the monthly accruing interest), monthly amount increases every 2 years.
• Available for: everyone.
• Length of repayment: 10 years for individual loans, up to 30 for consolidation loans depending on the total amount of the consolidation loan.
• Loan Forgiveness: up to $17,500 for those who teach at least 5 years in a low-income elementary or secondary school.
• Choose this if: you can’t afford monthly payments on the standard plan; you are entering a low paying job but expect a rise in income over time; you are focusing on higher interest debt first but will have more to contribute in future years.

Extended Loan Repayment

• Overview: Extends payments over 25 years, can be offered with fixed payments or graduated payments that adjust every two years, as above.
• Available for: Those with more than $30,000 in Direct Loan debt.
• Length of repayment: 25 years.
• Loan Forgiveness: up to $17,500 for those who teach at least 5 years in a low-income elementary or secondary school; remaining balance for those employed full time in public service jobs, after 120 payments that are equal to or greater than the standard repayment amount.
• Choose this if: You cannot manage payments over a shorter period of time. Be very careful when judging your ability to manage payments for another plan – this plan will result in more interest paid and thus a higher total repayment amount.

Income Based Repayment (IBR)

• Overview: Extends and lowers payments to make them affordable based on your income and the size of your family. Most people will pay less than 10% of gross income in student loan payments.
• Available for: Those who would owe less under IBR than under the standard plan, as calculated by the Department of Education.
• Length of repayment: up to 25 years depending on your payment.
• Loan Forgiveness: All remaining debt after 25 years; up to $17,500 for those who teach at least 5 years in a low-income elementary or secondary school; remaining balance for those employed full time in public service jobs, after 120 payments that are equal to or greater than the standard repayment amount.
• Choose this if: your debt payments under other plans would be a hardship, your income is so low that your remaining (forgiven) debt over 25 years would be substantial.

Income Contingent Repayment (ICR)

• Overview: Payment is based on your income and recalculated annually. Unpaid interest is capitalized annually (meaning that you pay interest on previously accrued interest).
• Available for: Everyone, although in certain cases your payment might actually be higher than the Standard repayment plan (e.g., if you have a very high income relative to your student loan debt).
• Length of repayment: up to 25 years depending on payments.
• Loan Forgiveness: up to $17,500 for those who teach at least 5 years in a low-income elementary or secondary school; remaining balance for those employed full time in public service jobs, after 120 payments that are equal to or greater than the standard repayment amount. Any remaining debt after 25 years is discharged, not forgiven – and you will owe income taxes on the discharged amount.
• Choose this if: you absolutely have to. Because of the interest capitalization and taxation on the discharge of remaining debt, IBR is likely a better choice for anyone who truly cannot afford a higher payment. If you don’t qualify for IBR, you probably don’t need to choose ICR.

Final Thoughts on Student Loan Repayments

The Federal Government has a great loan repayment calculator that breaks down your repayment options, showing the length of repayment, monthly amount and total amount for each option. You can run the numbers for both consolidated and non-consolidated loans by entering either “yes” or “no” when asked “Add to Consolidation?”

While you must choose a repayment plan before beginning repayment, you may choose to switch plans if your circumstances change. Unconsolidated loans can be consolidated in the future, but once you consolidate you cannot unconsolidate. Remember that in general it is better to pay less interest over time, which means that higher payments over a shorter repayment period are likely your best option. But if your student loan is one of many debts, you are trying to save for a house or other big purchase, or your financial situation is likely to change dramatically over time, you may choose to deliberately stretch out your payments, even if you can technically afford to pay more. You may also choose to accelerate payments – something we’ll talk more about in a future post!

Check out all of the posts in our Student Loan series!

• Part 1: Student Loans: The Basics
• Part 2: Student Loan Repayment Options
• Part 3: Student Loans: Consolidation
• Part 4: Student Loans: The Effect of Extra Payments

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College costs are increasing at over twice the rate of inflation. At the same time, rising unemployment and falling stock prices could make it difficult for the average family to save enough for college. It’s no wonder that more and more students are turning to student loans to help finance their educations. Recent student loan legislation brought the biggest reforms to student loans in quite some time. Over the next few weeks, we’ll give you a primer to securing the right undergraduate and graduate student loans, consolidating loans after graduation and paying off the loans in a way that makes sense for your circumstances. Let’s dig in!

Types of Student Loans

Federal Loans: When a student applies for financial aid through a college, part of the package is likely to consist of Federal Direct loans. These direct loans can be either subsidized or unsubsidized, where subsidized means that interest does not accrue while the student is in school at least half time. There are limits to how much a person can borrow each year of school (currently $27,000 total for a dependent student borrowing for 4 years of school), and further limits as to what portion can be subsidized federal student loans. Because of the recent reforms, loans are made directly from the government and interest rates and other characteristics of federal loans are fixed.
PLUS loans: PLUS loans are federal loans that can be offered to parents as part of a student’s financial aid package. They can also be offered to graduate students. They have higher interest rates than Federal Direct loans. Payment begins 60 days after full disbursement, but can be deferred while students are enrolled half-time. Note that interest does accrue during any deferral. Student loan interest will be reported on form 1098.
Private student loans: While the government is no longer guaranteeing student loans made by third-party institutions, many banks and other private lenders such as Wells Fargo and Sallie Mae do still offer some type of “student” loan. The difference from student loans of old is that these primarily work like any other personal loan – interest rates can be adjustable and your credit history will greatly impact the amount and terms that you receive. If you have to take out private loans, look at several financial institutions for the best terms.
Other options: Some states and individual schools also have their own loan programs. Check with your own state and/or school for details.

How Much is Too Much?

As mentioned before, your school will limit your loan amount based on your financial aid eligibility, up to the maximums allowed by the federal government. But there are no maximums on private loans, and some students may not even need to take the full amount approved by the school. Parents who have explored college funding options should not need to take the maximum allowed for PLUS loans.

I once heard that your total amount of student loans (undergraduate and graduate) should be no more than 1 year of your expected salary when you finish school. If you are planning to be a doctor or lawyer, you might need to take out those amounts. But my total student loans amounted to about 1/3 of my salary out of college – and I can’t imagine having a payment three times what it is! So in my opinion, loans equivalent to one year’s salary may be too much debt, especially with the unstable job market!

In general, you should strive to take out as little as possible, especially if you need private loans to further subsidize your education. Tuition, fees and books are a given as those are necessities for making it to graduation. Be judicious when taking out money for living expenses – a place to sleep and basic groceries are living expenses. A beer fund and designer clothing are luxuries.

If you are plan to help your kids pay for college some day, you can give them the gift of minimal or no debt by saving as much as possible now. But for the vast majority of students who do need some sort of outside assistance, it pays to be judicious when taking on debt. Stay tuned for thoughts on consolidating and paying off that debt!

Do you have student loans? Do you wish you had taken out less money, or different kinds of loans? Please share your thoughts or questions below – you may see them answered in a later post!

Check out all of the posts in our Student Loan series!

• Part 1: Student Loans: The Basics
• Part 2: Student Loan Repayment Options
• Part 3: Student Loans: Consolidation
• Part 4: Student Loans: The Effect of Extra Payments

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For example, mortgages and student loans are classified as good debt, and auto loans and credit card debt are often classified as bad debt.

I don’t agree. Classifying a debt based on the underlying asset makes no sense mathematically.

Expensive Debt vs Cheap Debt

Let’s look at it from a different angle. Right now, I like to focus on obtaining cheap debt at 3% or under. And some of the best places to get cheap debt are from 0% balance transfer credit cards and auto loans.

You can get a 2.99% auto loan at Penfed right now. And you don’t have to use it for a new vehicle, you can use it to refinance your current auto loan, use it to replace other higher interest rate debts, or even turn around and invest it in the 5% Certificates at Pentagon Federal.

Why on earth would we classify these as bad debts when they are cheaper than the good debts right now?

There’s really no such thing as a bad debt. The worthiness of debt should be assigned based on the price of the debt: cheap or expensive.

Leveraging Debt

Debt is nothing more than a tool to use for leverage. As a society, we have way too much emotional attachment to debt.

I’ve mentioned in the past that we used Creative Debt Reduction Strategies to do things like using a 4% student loan to pay for part of our mortgage (which has since dropped to 3%), and used credit card balance transfers at 2.99% to finance a rental.

Now, before you tell me I’m crazy, you know I’m not going to advocate taking on debt to finance lavish trips or buy the latest gadgets. The debt I’m referring to is strictly used for the following:

• Financing a house you would purchase anyways.
• Refinancing debt you already have.
• Financing semi-stable investments with higher projected returns.

Mental Accounting

To let yourself accept this strategy, you have to mentally stop assigning debt to certain assets. For example, while I do carry a 1.9% car loan… it’s not money that was used to purchase the car; the money was instead used to replace part of our mortgage at 4%.

Now the debt that was used to pay for our house is spread across a mortgage, a student loan, a car loan, and 3 credit card balance transfers that will run for life. We save several thousand dollars a year by maximizing the uses of “bad debts”!

Taxes

One of the differences in comparing interest rates is obviously the tax impacts. I convert everything to an after tax interest rate to compare the interest rates.

Action Plan

I’m planning to hit up Penfed for some cheap money with their fantastic auto loan right now. In addition, I have my eye on a few new credit card offers that came in the mail. I’m also still working on finding a way to borrow money from readers directly.

So next time you look at a debt, instead of evaluating it on good or bad, try to mentally classify it based on cheap or expensive!

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Now that you’ve done your mid-year financial checkup, is a financial fast up next?

What is a Financial Fast?

From Singletary’s article: “During this fast, you will not shop or use your credit cards. For three weeks you must refrain from buying anything that is not a necessity. And by necessity, I mean the bare essentials, such as food and medicine. You will refrain from going to the mall or retail stores…No restaurant meals…You can’t stop for coffee…You are not permitted to buy gifts or gift cards.”

The fast also includes eliminating all plastic from your life – including both credit and debit cards – and getting serious about creating a budget and paying off debt.

Taking Fasting to Extremes

Singletary’s idea of debt fast isn’t really anything new – after all, I myself preach the benefits of a “no-spend weekend” every now and then. But this pretty extreme, advocating staying nearly spend-free for almost ¾ of a month! What I find most difficult about this financial fast is the idea of no gifts – while it’s true that it’s easy to go overboard on spending, I don’t think we should be discouraged from giving appropriate gifts if we really can afford them.

For someone just starting on the path to good financial management, I question whether a financial fast is really the best approach. If you are in deep debt, or have no money saved for retirement, or simply spend every single penny of your paycheck every single month, getting your finances in order is truly a marathon. Sprinting out of the gate will get you ahead – but might make getting to the finish line that much harder.

I liken the idea of a financial fast to an actual fast – or at least a really strict diet. If a diet tells me I can only eat grapefruit for three weeks, I’m liable to do it for one day and then eat double the next day to make up for it – ditto cutting spending then making up for it by going on a shopping binge. If a diet tells me I can’t have a piece of bread, ever, I’m likely to just decide not to do the diet at all. I feel like the financial fast falls in the latter category – if I can’t buy a birthday or wedding gift, or even a single cup of coffee, I might decide to avoid the program altogether.

Should you fast?

I do think a financial fast would be good for some people. Specifically, a financial fast is for you if…

• You’re generally good at managing your finances, but feel like challenging yourself to go the extra mile.
• You need a little extra cash or want to generate extra income to meet a savings goal or pay off that last bit of debt.
• You are really committed to getting in financial shape this year, but you’ve already fallen short on your New Year’s resolutions and need that extra something to kick you into gear.

On the other hand, some people either just don’t need or are just not ready to take this drastic step. A financial fast might not be right for you if…

• You are just learning the basics of personal finance. Instead, check our our list of best personal finance books and start learning about budgeting, debt reduction, and savings, and take your transformation one step at a time.
• You are generally judicious with your money and avoid major financial mistakes.

If you decide to do the financial fast, or something like it, I’d love to hear from you in the comments! Just make sure that to reap the benefits by avoiding splurging once your fast is over. And if you decide not to do it just yet, that’s ok – there are plenty of other ways to jump on the path to prosperity!

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Student Loan Reform Bill

The federal government has officially ended the bank-based system of distributing federally subsidized student loans through the passing of the Student Aid and Fiscal Responsibility Act (SAFRA), which was included in the health care bill signed into law on March 30, 2010.

This has been in the works for quite some time; over the past five months or so when I signed into my Sallie Mae account, the loan manager tab became separated by “loans owned by the government” versus ones that are not owned by the government. This is because with the drying up of the credit markets in 2008, the government stepped in and purchased the government-backed student loans from lenders such as Sallie Mae and Bank of America. The Department of Education has already directly purchased $52.3 billion in loans from private companies through the Loans Purchase Commitment Program, and now they own roughly 80% of all student loans.  

So how will this new law affect students?

Where to Get Your Student Loans

Beginning on July 1, 2010, students will go to designated private lenders, who are competing for the contracts from the US Department of Education. Included in the Obama student loan reform, private lenders must lend loans from the Direct Loan Program to students at the same rates, terms and benefits.

Expanded Financial Aid

More than $40 billion in Pell Grants will be available now due to the health care bill student loan provision, which will roughly double the total amount of funding available for Pell Grants. The Federal Pell Grant will be awarded according to the Consumer Price Index from 2013-2017 at an estimate of $5,550-$5,975. Currently the maximum Pell Grant awarded for 2009-2010 academic year is $5,350, with an added option for receiving an additional disbursement of $2,675 in the summer.

Help to Community Colleges

The government will now be saving an estimated $67 billion by directly loaning to students and cutting out the middle man in the student loan bill. The government plans to use $2 billion of this money to bolster community colleges, which are becoming a much more popular and viable education option for working adults and older students.

Student Loan Forgiveness Program

The student loan bill expands the existing income-based student loan repayment program (IBR). According to a White House press release, students who borrow money starting July 1, 2014 will be able to cap their student loan repayments at 10% of their discretionary income (currently it is 15%).

After 20 years of consistent, on-time payments, a student’s loans will be forgiven. Furthermore, public service workers (teachers, nurses, military service) will have debt forgiveness after 10 years.

More Student Loan Information

• Student Loans: The Basics
• Student Loans: Repayment Options
• Consolidation: Coming Soon
• The Effect of Extra Payments: Coming Soon

Check out the entire health care series:

• Part 1: Individual Mandate
• Part 2: $250 Medicare Donut Hole Checks
• Part 3: Health Insurance for Young Adults
• Part 4: 1099 Changes in Health Care Bill
• Part 5: Flexible Spending Account Changes
• Part 6: Health Savings Account Changes
• Part 7: Student Loan Forgiveness Program

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Foreclosure leaves a big black mark on your credit report, and can drop your credit score by up to 150 points, making it hard for you to get new credit in the future. And with foreclosure expected to keep rising through 2010, many people are facing the prospect of life – and building credit – after foreclosure. If you or someone you know is facing a foreclosure, know that there is hope. While it will take seven years for the foreclosure to completely drop off your credit report, you can still take steps today to improve your credit and raise your credit score.

Strategies for Improvement

1. Choose future housing wisely: Wherever and whenever you find your new home, be honest with yourself about what is affordable – taking on too large of a housing payment ended in foreclosure. This time, limit housing payments to no more than 28% of your total income, and total housing and other debt payments to 36%. Set aside money for your housing payment before paying any other bills or making any other purchases. If at all possible, make future housing arrangements before foreclosure proceedings begin. This will make it easier for you to find someone willing to rent to you, without regards for the damage the foreclosure will do to your credit.
2. Use existing credit wisely: Since it is unlikely that you will be able to get new credit immediately after a foreclosure, it is important that you are very smart with any existing credit. This means doing everything in your power to avoid other bad marks on your credit – stay current on all accounts that are reportable to credit bureaus, including credit cards, student loans, auto loans, housing payments, utility payments, medical payments, and even library accounts. If you have open revolving credit (credit cards), use it to the extent that you can pay the balance off in full each month – the point is to keep your accounts open and prove you can be responsible with credit, without going further into debt. This will improve your credit score.
3. Pay down debt: If you have existing debt, paying it off will result in increases to your credit score. If your new housing is substantially cheaper than the mortgage you had to foreclose on, use any extra money to jump start your debt payments. Use the snowball method, avalanche method, or whatever other method you want – the point is to get a plan and stick to it. Every time you reduce a balance, your credit score will climb – and zero balances will reward you psychologically as well as on your credit report/score.
4. Live within your means: Understand your income and expenses – then create a budget and stick to it. If your current expenses exceed your income, you need to spend less or earn more. Anything else will just create more financial problems, and thus more problems on your credit report. Living within your means will prevent you from acquiring any more debt and allow you to get back on track.
5. Get help: If you feel in over your head even after getting rid of a mortgage payment, it may be time to get help from a professional. Check with your church or community center for any programs that will allow you to get financial counseling for free. Otherwise, check out non-profit organizations such as GreenPath or Consumer Credit Counseling Service. A personal credit counselor can help develop a personalized plan to get you back on track.
6. Monitor your progress: Throughout the process of rebuilding your credit, use free methods to check your credit score and credit report every 6-12 months. This will allow you to watch as your efforts pay off in the form of a higher credit score – but also lets you check for and dispute mistakes, to improve your credit as quickly as possible.
7. Wait: Unfortunately, the best way to repair your credit after a foreclosure is simply to let time pass – as you move further away from the foreclosure, it will have less of an impact on your credit score.

Moving Forward

Rebuilding your credit after foreclosure can be a long and frustrating process, but it can be done. If you put your mind to creating and executing a plan, you can find relief in just a couple of years.

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