If you are not prioritizing your debt, you may find it difficult to make any headway in paying it off promptly. One of the keys to money management is knowing how and where to spend your money, and taking the time to prioritize your debt has many benefits. First and foremost, if you are managing your money correctly and handling your debts well, your credit score will be generally be higher. Next, you’ll be able to pay off your debts in less time. If you want to get started with your debt prioritization and reduction plan, here is an easy guide to help you on your way.

1. Determine which is more important – high balances or high interest rates (or both).
If you have a credit card that has a very high balance but a low interest rate, this may not be as urgent as a credit card that has a medium balance and a very high interest rate. Take a hard look at the total amount of interest across all your cards as well as your balances. In many cases, the medium balance may actually end up costing you more, especially over the long term. Paying that off first can free up extra money that could be used to tackle the high balance card next.

Conversely, if you have a credit card that has both a very high balance and interest rate, naturally this would be the one that you would want to tackle first.

2. Determine how much you are paying on each card.
If you are struggling to make your payments on one card, but the others are a breeze, paying off that one card quickly is a smart priority to have. Figure out exactly how much you owe, add in what you spend every month on each card and see which cards are dragging you down. By targeting these first, you’ll be able to free up more capital in a few months that can be used to pay off the remaining cards.

3. Loans or credit cards?
If you have a mix of bank loans, credit cards and other forms of credit, you’ll need to decide which one should be targeted first. Typically, traditional loans will have much lower interest rates that credit cards, but there are exceptions to this rule. Take a hard look at just how much money you are paying out every month, and then look at it over the long term as well. If you have a long term loan that will cost you an additional $2000 in interest over several years, paying that off first can be very beneficial.

Once you have your priorities figured out, make a list of what you plan to pay and how quickly you want those debts taken care of. That will help you stay on track and assist you in getting everything paid off in less time. Prioritizing your debts is one of the best ways to easily get a hold of your finances, before they get out of control.

Source: [CNNMoney.com] — The eagerly anticipated foreclosure prevention program unveiled Wednesday by President Obama targets 9 million borrowers for help – are you one of them?

The $75 billion effort, dubbed the Homeowner Affordability and Stability Plan, boils down to two basic solutions:

First, the government is aiming to help more homeowners refinance to take advantage of new low interest rates.

Second, it provides incentives to lenders and servicers to restructure your mortgage to more affordable levels.

Official guidelines won’t be unveiled until March 4, but here’s how to know whether you’ll likely be able to take advantage of either of these options.

Help for those seeking refinancing This part of the program targets borrowers who have kept current on their mortgages. Many of the homeowners in this group have been unable to lower their housing costs through refinancings because of falling home prices.

Right now, if you’re underwater on your mortgage, owing more than the home’s market value, forget about qualifying for a refi. In fact, at least 20% equity in your home is now a must, unless you’re using an FHA loan.

The new guidelines should help. Even homeowners with debt that exceeds home value by 5% could be eligible. And there will be no prepayment penalties. But your loan must be owned or backed by Fannie Mae or Freddie Mac.

The Administration estimates that this will enable up to 5 million homeowners to obtain lower interest rate mortgages.

Who’s not eligible. Homeowners whose property values have dipped severely, putting them underwater by more than 5% are out of luck.

Those with “jumbo” mortgages also don’t qualify – only those with “conforming’ mortgages do. To be absolutely sure what kind of loan you have, you need to check with your servicer or lender after March 4. But in general, until the past year, loans above $417,000 were considered jumbo mortgages, and Fannie Mae and Freddie Mac were not allowed to buy and guarantee them.

All borrowers will have to prove they have sufficient income to be able to keep up their loan payments, though what would be sufficient proof wasn’t yet clear.

Mortgage modification help for at-risk borrowers Homeowners in default or at risk of default may qualify for loan modifications, which restructure the terms of loans.

Anyone with high combined mortgage debt compared to income or who is underwater may be eligible for a loan modification.

Borrowers with high levels of other debt, such as car loans and credit card debt exceeding 55% of their incomes, may still qualify for a modification but they’ll be required to accept debt counseling in a HUD-certified program.

If you qualify, your servicer or lender will reduce your monthly mortgage payments to 31% of your gross income.

The payment would stay there for five years and then gradually revert back to the conforming loan rates in place at the time.

The reduction would come mostly through interest-rate reductions, though in some cases, principal reduction also would be an option.

Borrowers would also receive incentive bonuses of up to $1,000 a year for five years for making payments on time.

President Obama estimated 3 to 4 million homeowners could benefit from the new modification procedures.

Who’s not eligible. Speculators, those who bought homes for investment purposes, do not qualify for help — all homes must be owner/occupied.

The program will also not reward homebuyers who were irresponsible in their borrowing. All applicants will be closely examined by lenders and those who acted unscrupulously by, for example, misrepresenting their incomes in no-doc loan applications, would not qualify.

And, in order to protect taxpayers from excessive expenses, no loans will be modified unless it results in a net savings compared with the costs of foreclosing. Finally, rates would not be lowered below 2%.

That will disqualify many borrowers who simply can’t afford any reasonable mortgage payment because of illness, for example, or job loss.

“[The plan] will not reward folks who bought homes they knew from the beginning they would never be able to afford,” said Obama. “In short, this plan will not save every home.”

No mortgages for amounts above conforming loan limits would be eligible.

No matter where you turn in the media these days, you likely will find ads urging you to check your credit score — but you might not know that a new way of determining credit scores is being rolled out this spring, and it will affect the way your credit is calculated.

Fair Isaac Corporation originally developed the FICO score method of rating consumers’ credit histories. The three major credit reporting agencies – Equifax, Experian and TransUnion – each report consumer credit scores based on the FICO formula. This year, Fair Isaac will unveil a new version of its FICO credit scoring formula, called FICO 08 (because it was originally scheduled to appear last year).

The credit score is a number between 300 and 850 that measures an individual’s creditworthiness based on credit history. Scores are calculated using mathematical methods that incorporate credit history, amount of credit used and available, number of late and on-time payments, whether any payments due are in default, and other variables. The score also is often called a “credit rating,” which can be broadly categorized simply as “poor,” “fair,” “good,” or “excellent.”

FICO 08 is intended to help lenders better gauge actual risk by better differentiating good customers who have made one mistake from people who have multiple delinquent accounts. Ultimately, FICO 08 aims to help lenders better identify people who are most likely to default on loans. This new credit scoring template has both positives and negatives for consumers. 

The positive

• Authorized user status cleaned up. In the past, credit rating for spouses who did not have their own credit cards, but were “authorized users” on their husband or wife’s card, was based on joint history. FICO originally said being an authorized user would not provide any credit rating. This decision was because a few years ago, some companies started to rent “authorized user” status — charging people with poor credit to “borrow” the credit rating of someone with good credit. The practice skewed credit for those individuals. But because people who are authentic authorized users protested vigorously, FICO 08 will instead tweak the system and retain authorized users’ credit.  
• Small problems hurt less. Individuals who had a small debt (less than $100) go to collections will not feel as much impact from that collection process. Previously, if you missed a $25 parking ticket, or you moved and the dentist sent your bill straight to collections, it could turn into a negative mark on your credit. While FICO 08 is not a license to run up bills, individuals will not pay as severely for a misunderstanding under the new template.
• Big picture matters more. With the older system, one big problem, such as a vehicle repossession, could torpedo your entire credit score. Now, if all other accounts are in good shape, one serious issue will not matter as much.

The negative

• More impact from less credit. Available credit will be a greater part of credit scores. Credit scores have always evaluated how much credit used as a percentage of available credit. But now that figure will weigh more heavily into the overall score. This change is especially important now, because some creditors are lowering credit lines, reducing the total amount of credit available. In addition, having fewer open and active accounts will have a negative effect on the score.
• A mix of accounts is needed. Credit scores will benefit most from a mix of credit cards and personal loans. If you have student or auto loans, this type of combination of loan types will help a score.
• Closed and unused accounts hurt. If you are paying off debt, closing those cards can decrease your credit score. Rotate the one credit card you use (and pay off monthly), or set the cards aside, but do not close the accounts. And if a creditor closes your account – they must notify you 30 days in advance – call to ask that they reverse the decision. To keep cards active, have a monthly bill, such as telephone, charged to a card. Set up an automatic payment or a personal reminder to be sure you do not miss a payment. 

While the formulas used to calculate your credit score have changed, the main elements of a good credit score remain the same: using a variety of credit options, maintaining low balances that keep plenty of credit available, using credit responsibly and paying all bills on time and in full.

A new system for determining your credit-worthiness, FICO ’08, rolls out this Thursday, and there’s nothing you can to do stop it. By these 6 changes, ye shall be judged:

1. Spouses and children can improve their credit score by being an authorized user on a credit card account, but that’s it. No more piggybacking off strangers.
2. Debts less than $100 that go to collections will matter less.
3. They will look at the total picture more. A single repossession, for instance, won’t matter as much if everything else looks good.
4. Having less available credit will drag down your score more.
5. Diversity matters more. A mix of healthy auto, personal and student loans would bring up a score.
6. Closing accounts will bring down the score.

Though companies will start using it to make decisions about you right away, it may be months or even years before the scores are commercially available to consumers. So, just like in middle school, they’re quietly judging you behind your back, and no, you can’t see inside the black and white composition notebook.