Europe may be thousands of miles away, but its debt troubles weigh heavily on US markets. Remember the uproar that ensued when the U.S. lost its coveted AAA- credit rating this August? Well, watch out: credit-rating agency Standard and Poor’s decided last night to put 15 of the 17 European countries that share the euro currency on “negative credit watch” (financial speak for “50-50 chance we’ll downgrade you soon”). But does the credit crisis in Europe mean anything for investors here at home? You bet.

You might have noticed the value of your 401K or mutual fund bouncing up and down more than usual. (In September and October you probably saw it fall hard, only to see it rally in November.) You can thank the troubles in Europe for a large part of this volatility. Even portfolios with few European holdings may see wild swings, since uncertainty in Europe feeds into doubts about much of the world’s economy.

Europe’s Got Issues

It’s no secret Europe has a debt problem. Several of the nations that share the euro currency have rung up tons of debt in the last few years. It’s a simple problem, really: they don’t earn enough money (through taxes) to cover their expenses. Take Italy, for example: Its debt of 1.9 trillion Euros is equal to 120% of all the goods and services it produces in a year! Investors are nervous that the Italians might one day just give up and default on their loans, so they are requiring them to pay more in interest to borrow money. But that just makes things even harder for Italy, since higher interest rates make it harder to pay down the debt — and that makes it even likelier that they’ll default. Ouch.

Standard and Poor’s (S&P for short) is one of three major credit rating agencies who assign a risk level of the bonds issued by a country or company, creating a rating score(AAA is the highest score, representing the lowest risk). The higher the rating, the lower the interest rate paid. It is just like your credit score: You will normally pay less interest on your credit card if you have an 800 vs 600. (Have you updated your credit score on Mint.com yet?)

Yesterday, S&P threatened to lower the credit ratings of 15 out of the 17 members of the eurozone (the other two members, Greece and Cyprus, are already in trouble).  S&P wants the eurozone to come together to solve the structural problems with the common currency. If they don’t, then everyone will suffer. So even countries like Germany and the Netherlands, which have a relatively manageable debt load, could now stand to lose their AAA rating – something that the market hadn’t anticipated.

European Contagion?

Stock and bond markets around the world are more interconnected today than ever before. There is a fear that an S&P downgrade could cause investors to abandon the European debt market, which would not bode well for the continent. If the Europeans fail to solve their problems, the common currency could collapse, throwing Europe into recession — which would have repercussions here at home. For example, companies in the US that do business in Europe could see their orders dry up, forcing them to lay off workers. That could start a chain reaction, eventually pushing our economy into the dumps!

News of the potential downgrade caused stock markets in Asia and Europe to fall this morning. Here at home, stocks opened lower. While the fundamentals of those companies haven’t changed, the market fears that a possible recession could wipe out their future earnings. That means your stocks are probably down today. If you have a mutual fund, chances are it is down today because a lot of mutual funds invest only in stocks. If you invest in electronically traded funds (ETFs) to get some exposure to the hot commodity market, you too are seeing red.

S&P will be watching what happens at a critical meeting of European leaders scheduled for this Friday in Brussels. If S&P is happy with the solutions the Europeans come up with, they will leave the ratings alone. But if the Europeans fail to live up to their expectations, they’ll likely be downgraded. If you want to know where your stocks are headed in coming weeks, you might want to brush up on your French.

Cyrus Sanati is a frelance financial journalist whose work has appeared in dozens of leading publications, including The New York Times, BreakingViews.com, and WSJ.com. Follow Cyrus on Twitter @csanati

Portugal, Ireland, Greece, Spain and Italy have all had their turn in the credit crisis spotlight lately. But no matter which European country markets cast their scrutiny upon this week, it’s debt that’s at the heart of the issue. Click on “expand infographic” above to view how the debt of major European countries has evolved from 2000 to 2010.

In the United States, there has been great debate surrounding the federal government’s “debt ceiling” — the maximum debt the U.S. government can assume. Since the U.S. government recently received a downgrade on its credit rating from S&P — one of the primary agencies responsible for evaluating the creditworthiness of nation-states — all issues pertaining to paying down debt are becoming particularly important for the U.S. government.

1. Track Everything

2. Balance the Budget

4. Generate Rental Income.

Simit Patel is an independent currency trader and the founder of InformedTrades. He resides in San Francisco, California. Simit Patel is a trader, writer, and technology entrepreneur. Simit blogs via Contently.com.

Last month, the credit rating agency Standard & Poor’s lowered its outlook on U.S. debt to “negative,” suggesting that the United States’ top-flight “AAA” credit rating is vulnerable to a downgrade, which could send interest rates up, make it hard for businesses to get capital, and put the brakes on economic recovery. But the U.S. isn’t alone; here’s a look at where other major world economies rank on the credit rating spectrum, plus an sampling of smaller countries whose shaky ratings put them in the category of “speculative” investments.

(iStockphoto)

Every once in a while it’s important to take a moment and give yourself a little reality check, especially when it comes to the world of personal finance. I think it’s about that time. What you’re about to read is going to come across as coarse, but you need to hear these things in an unvarnished manner.

Here are four things you probably don’t want to hear about credit — but you should.

1. Banks are not your friends so don’t expect them to act like they are

Bank of America recently announced plans to implement a $59 annual fee on about 5% of their cardholder accounts in April.  The reaction was swift and emotional. OUTRAGEOUS, ILLEGAL, IMMORAL!!  One reader even called them “mean spirited,” yet a $59 annual fee is 16 cents a day.  It’s less than you spend getting your hair done, going out to dinner, running up a bar tab, etc.  In the grand scheme of things, $59 is a drop in your bucket.

It’s clear that many of us have unrealistic expectations when it comes to banks and credit card issuers.  These companies are FOR PROFIT organizations.  That means they’re in it strictly for the money, your money.  They don’t care about your personal situations, they don’t care about your excuses, they don’t care that the dog ate your checkbook.  They want to be paid, they want to make money, they want to make MORE money and they want it to come from YOU.  The sooner we stop thinking about banks and credit card issuers like we think of our family and friends the better off we’ll be.  And finally, if you don’t like annual fees, take your business elsewhere.

2. It’s your job to choose good bank products

Let me repeat that; it’s your job to ensure that the credit products you choose are actually good products. DYODD = Do Your Own Due Diligence. I have a friend who sends me stock tips from time to time and he always ends his emails with DYODD. What that means is “Don’t complain if you buy a dog.”  That same acronym applies to bank products.

If monthly fees are going to be offensive to you, don’t choose pre-paid debit cards. If annual fees are going to bother you, you probably shouldn’t open a credit card because there’s no guarantee that your “no fee” card won’t have an annual fee next year. If a $5 ATM fee is going to infuriate you, don’t use that bank’s ATM machines. And finally, if paying interest is going to drive you crazy, don’t revolve balances. Avoiding offensive bank products is actually quite easy.

3. Getting into debt was your choice

I know, I know… you didn’t ask you to lose your job and you have to survive and credit cards are your only way to pay. That’s a reasonable, in not fully acceptable, excuse for being in debt. But, “The banks kept giving me more credit cards” is not. In general, pulling out that little piece of plastic and swiping it is a voluntary act, regardless of how or why it got in your wallet. If you don’t want to get into debt them don’t use credit. Trust me, I’m fully aware that some people are addicted to credit cards. For those people, avoidance is the right strategy — and you know that was hard for me to write.

4. Credit is a privilege, not a right

This has to be my favorite one. How many advertisements for credit (and insurance) have you seen or heard with this tagline… ”get the savings you deserve?” I can assure you that no bank or insurance company believes that you “deserve” anything. Further, if you want to do business with them then you’ll have to earn the privilege of doing so.

You don’t deserve a card, a mortgage loan, a car loan, or any other credit related product. Remember, at the end of every dollar you borrow from a bank there’s an investor. That investor might be the Federal government, a hedge fund, a pension fund, a non-profit organization, or a consumer.

Every single entity on the “lender” end of the equation has a right and obligation to ensure that whoever they’re letting borrow their money is going to pay it back. It’s because of that obligation that there’s a hurdle between you and their money. That hurdle has gotten harder to jump over during the past few years, which is probably not a bad thing.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger forMint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow him on Twitter here.

photo: SqueakyMarmot

Got the holiday spirit yet? Walk into a shopping mall and you’ll walk out with plenty. Retailers are already playing Christmas carols, sporting red and green decorations and, of course, with America’s biggest shopping holiday (a.k.a. Black Friday) right around the corner, you’ve got ample opportunity to succumb to one of the worst sins in personal finance: credit-card abuse.

Millions of Americans are in danger of falling in debt over the holidays, if anything, because of the sheer pressure to buy, buy, buy.

So this week, we decided to focus on just the opposite: let’s talk about reducing debt and managing credit wisely. Below, we feature four debt questions from the Mint Answers community, along with some of the responses from members like you.

Click on the links to read more answers or to chime in with your response.

What credit card should be paid off first? Higher bill or higher interest?

I have two credit cards. One has a higher balance, with a lower interest rate than the other. The other has a lower balance, but high interest. Which should I try to pay off first? Making minimum or close to minimum payments is getting me nowhere.

Answer:

Financial math says you should pay for the card with the higher interest rate first.

Debt Snowball says you should pay the lowest balance off first then roll the payments into the next lowest debt.

Both methods point to the same card in your situation.  I can’t think of any reason to pay the low interest/high balance card first.

More answers to this question>

Should I cancel my credit cards?

I have two credit cards that I signed up for to raise my credit score. I have to pay monthly for them, so I really would like to cancel them. However, I was told this could hurt my credit. Now that my credit is in better shape, should I keep these credit cards or cancel them?

Answers:

1. Part of the score is based on a percentage of how much of your total available credit is being used.  By canceling cards you will reduce available credit which can hurt your score.  Additionally, the length of time an account has been open also has a big effect.  A lot of people (including me) keep around a card that isn’t the best one they have, but is the oldest. 

As for your question on whether or not you should cancel them…that’s up to you and your life circumstances.  Although I have great credit, I have never applied for a loan and probably won’t for 10 more years.  I think I just maintain my credit score for the sake of maintaining it.  But hey, never know.  Life happens and you might need a strong credit score when it does.

2. If you are paying a fee, cancel them.  Period.

If you can’t get a card without a fee, let your credit repair itself by paying other bills on time.

Never, ever, pay a fee for the sake of “protecting” your credit score.  It will never make enough of a difference to offset the cost.

More answers to this question>>

Should I cash in my 401K to pay off credit cards?

I think my credit cards are charging me more interest than my 401(k) is earning. Should I cash in the 401(k) to pay them off or will that hurt me more in the long run?

Answers:

1. Your credit card is most definitely charging more than your 401(k) is presently earning.  But consider the implications of cashing your 401(k).  It gets taxed at the marginal tax rate as income tax, then you pay an additional 10% penalty on top of that. 

To use a real example, I am in the 25% federal marginal tax bracket.  That means 35% of the 401k cash out amount is taken from me.  That’s before we consider state taxes.  Cashing out will cost you quite a bit, consider stopping contributions and tightening your budget until the debts are paid off, if possible.

2. Can you take out a loan from your 401(k)?  If so, this is almost certainly the better option.  You wouldn’t pay any taxes on that, and you would be getting a fixed return on your money at a time when the market is poised for a correction.

It would be very hard to justify cashing out your 401k to pay off credit cards.  Depending on the exact circumstances and numbers, it may even be better to file for bankruptcy (though not typically.)

If you are getting any decent matching contributions (.5:1 or above), do not cut down what you’re putting in below that level, or you’d be losing out on more money by doing that than by cashing out and taking the tax hit.

More answers to this question>>

How do I escape the Debt cycle?

I have experienced significant debt, as have most Americans in this day and age. I have attended classes trying to teach myself how to become debt free, but many principles of the classes don’t translate well into daily practice. Do you have any advice on how to better follow guidelines and advice set forward in debt management programs when considering the randomness of life?

Answer:

1) Stop borrowing money.
2) Pay of your debt.

If your expenses exceed your income, start getting rid of expenses until they don’t (and as many more as you can after that.)  Don’t buy things you don’t need.  The less debt you have, the more you can afford on the same income because you’re not throwing money away on interest.  Which of these concepts are difficult?

More answers to this question>>

Do you have a money question that you feel has no black-or-white answer? Go to Mint Answers and ask away! While you’re there, feel free to answer questions from other community members. Come back often, as we introduce new enhancements to this feature.

photo: AMagill

Beyond the turmoil of mass layoffs, rising unemployment and plummeting real estate values, the stock market crash of 2008 and ensuing financial crisis brought many Americans into the harsh reality of living in debt. As we struggle, as a nation, to recover from the economic duress we are now facing, a great many families also struggle to overcome debt.

As they say, the family is the bedrock of society. Help the family overcome debt, and we help the nation get back onto its feet. Here is a collection of resources that may help you gain a fresh perspective on beating debt.

We All Have Blind Spots from DaveRamsey.com gets into the heart of why we have debt: fatal financial blind spots. With today’s capitalistic society dangling the “Faster, Bigger, Better” mantra in front of everything and everyone, we need to choose to resist. We need to see our finances through realistic lenses. Learn from this article by Jon Acuff and be honest with yourself, should you need a financial paradigm shift.

Could debt be good? Lazy Man And Money shows a different perspective on debt in his article Finance 101: Good Debt vs. Bad Debt. It explains which loans or credit options you should try to avoid, and what better alternatives you can choose. Choosing to deal with “good” debt versus “bad” may actually be a shrewd way to handle one’s finances.

For those who’d like to start paying off their debt, here are 3 Strategies To Envision Your Way To Debt Freedom. As they say, everything really starts with a thought. So let’s up the ante and create an entire plan for reducing your debt. Engineer Your Finances shows you how.

One other crucial component to overcoming debt is the blueprint or game plan you develop to address it. Check out Do-it-Yourself Debt Reduction at Credit.com. This is a detailed plan which tells you how to evaluate your finances and to negotiate with your creditors. It suggests strategies that you can try on your own to eliminate your debt.

It’s also good to realize what may stop you from going full throttle on your efforts: 31 Causes Of Failure #5: Lack Of Self Discipline by BripBlap shines a light on one of the most formidable obstacles you have to financial freedom. Take note of the lessons in this article so you can strengthen your commitment to your cause.

As we’ve mentioned, it’s important to keep motivated in order to stay dedicated to debt reduction. Here are 3 Steps to Staying Motivated While Paying Off Debt by Couple Money.

Should you need more incentives and motivating factors for getting out of debt, you may want to think about how Debt is A Surprising Cause of Obesity. This article shows us that indebtedness is a factor in causing obesity in people. Why? It’s because having less money (which is typically the case for those who have a lot of debt) can lead to making poor food choices. High-calorie, high-sugar foods tend to be cheaper, while healthier options tend to cost more. Check out Deliver Away Debt for more on this matter.

Last, a great plan to obliterate debt requires great tools to get it executed. The Digerati Life suggests that we Use A Debit Rewards Card To Skip Holiday Debt & Save. It can effectively reinforce our efforts to avoid debt and to eventually become financially free.

Imagine yourself moving from debt to financial freedom. You’ll get rid of the stress as the creditors are pushed out of your life. When you’re worrying less about money, you’ll be able to make more time for family and friends, stick to a better diet, improve your health, take worry-free vacations, and even obtain a peaceful night’s rest. Let’s keep our eyes on those goals!

Silicon Valley Blogger (SVB) runs The Digerati Life and The Smarter Wallet, where she writes about  general personal finance topics such as investing, budgeting, debt management and small business ideas.

photo: quaziephoto

Everyone knows the story.  Unemployment is up. FICO scores are down.  Home values are down.  And because home values are down, home equity has disappeared for millions of homeowners.  And since home equity was the financial safety net millions of consumers used to pay off their credit card debt, well, you know the rest.  Let’s just agree that, right now, millions of consumers have no way to pay off all of their credit card debt.

There are a variety of ways to get out of credit card debt, right?  You can budget your way out of debt.  You can file bankruptcy.  You can enroll in a debt management plan (DMP) through one of the member organizations of the National Foundation for Credit Counseling, commonly referred to as Consumer Credit Counseling Service (CCCS).  You can work with your credit card issuer directly and seek help through one of their hardship programs.  You can attempt to settle the debt on your own.  Or you can enlist the services of a debt settlement company.

Opinions vary on these options.  They all have their pros and cons.  The purpose of my article isn’t to explore each option.  I’ll do that soon. 

The purpose of this article is to explore debt settlement as an option. 

Settlement is quite an easy concept to understand.  You agree to pay your credit card issuer an amount of money less than what you really own them and they consider the debt to be paid in full.  So, if you owe John Ulzheimer’s Bank $10,000 and I agree to accept $5,000 as “full payment” then you have settled your debt with John Ulzheimer’s Bank.  The bank reports the settlement to the credit reporting agencies and sends you a 1099 for the forgiven amount.  Settlement, incidentally, is considered one of FICO’s Seven Deadly Sins.

Settlement can be accomplished by working directly with your bank.  You do not have to hire someone to do this for you.  That’s a myth. In fact, many credit card issuers won’t even work with debt settlement companies so you have no choice but to deal with them directly.  This is okay because all creditors have their version of a “Remediation” department, which is where you’ll likely end up if you call them asking for a settlement deal.

Now, let’s move on to the debt settlement companies.  You’ve all seen their commercials.  Distraught couples staring at their credit card statements magically turning into happy families playing with puppies in their front yard, all thanks to ye ole friendly debt settlement company.  Heck, there’s even a version that has excerpts from one of President Obama’s speeches and a picture of a government building in the background.  It’s clearly intended to come across as a governmental program.  Of course, it’s not a government program.

Here’s how they work.  First they find out how much debt you have.  This is to determine if you’re even worth doing business with.  If you have too little debt then they won’t make enough money working with you.  That’s why their ads contain statements like “If you have more than $10,000 in credit card debt call now…” If you have enough debt, in their eyes, then they’ll sign you up.

When you sign up they’ll tell you to stop communicating with your credit card issuers.  I’m not kidding, they really tell you this.  That means no more payments and no more return calls.  The hypothesis here is to get your credit card issuer so desperate for payment that they’ll accept a settlement offer. 

At the same time you’ll be asked to make monthly payments to the settlement company.  Why?  Because you’re creating a war chest that serves two purposes.  First, this is where their fees will come from.  Second, this is where the settlement offer will come from.

After several months, or longer, there will be enough money for them to make some sort of offer to the credit card issuer.  The issuer may accept the offer, or they may decline the offer.  Either way, your fees to the settlement company have been paid.

So what happens during the period of time you’re paying the debt settlement company (and ignoring your creditors)?  Well, since that’s not a part of the commercials I’ll have to be the one who breaks the bad news.

1. Your credit will be trashed. 

The credit card issuer will report the ascending level of late payments to the credit bureaus, which remain on your credit file for seven years.  Now the debt settlement guys will say “well, your credit is probably already trashed so no big deal.”  Wrong, new (and numerous) late payments help to lock in lower scores for additional time.  And it gets worse…

2. The card issuer will likely enlist the services of a 3^rd party collection agency to collect the debt. 

This means a brand new collection will be reported to your credit files. Again, this remains for seven years.  And, these guys can pull your credit reports to find you and determine your ability to pay them.  That means you’ll have to explain collection inquiries.  You’re supposed to ignore these guys as well.  And it gets worse…

3. That knock at your door…yeah, that guy is called a process server. 

Your credit card company or a collection attorney has sued you for nonpayment of the debt.  You can’t ignore him like you’ve been ignoring your credit card issuer.  If you do choose to ignore the summons you’ll lose by default for not showing up to court.  This is called a default judgment.  And yes, the judgment can show up on your credit report for seven years.  And it gets worse…

4. Become familiar with the term “Writ of Sequestration.” 

In English this is either legal garnishment of your wages or seizure of your assets.  If your wages are garnished your employer will now be made aware of your defaulted debt problems because they’re the ones who will hold back a portion of your salary.

You’ve totally lost control of the situation because you chose to ignore your creditors, at the request of a company trying to profit off of your debt situation.  Smart?  Or not?

And, just to tie a nice bow on the top of this one, the Attorneys General in the states of Florida and Alabama have shut down major debt settlement networks because, and I quote, “they’re a scam because consumers get no value for their fees.”  I’ll write soon about the DSCPA (Debt Settlement Consumer Protection Act), which will put most of these guys out of business.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and the author of the “credit history” definition on Wikipedia.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  He has served as a credit expert witness in more than 70 cases and has been qualified to testify in both Federal and State court on the topic of consumer credit.

The majority of people who walk, talk and breathe also carry debt. Whether it’s a mortgage, a student loan, a car loan — or the good (bad) old credit card debt, most Americans at some point in their lives borrow. And when that time comes for you, it pays off — literally — to understand how much that debt truly costs you. That means you shouldn’t just look at your monthly payment or the original amount you’ve borrowed. Do the math, and you may realize that the type of loan you are pitched may not best serve your needs — or that, after all, the cost of that loan doesn’t justify your need for the product you are planning to purchase with it. In this infographic, new credit-management website CreditSesame.com shows you, with specific examples, the potential true cost of the most common types of consumer debt.

The Real Cost of Your Debt provided by CreditSesame.com.

photo:  Joshua Davis

On August 15, new overdraft rules went into effect, preventing banks from imposing overdraft fees on debit and ATM card transactions unless the customer actively opts in to have that feature.

The new rules have been largely hailed as consumer-friendly, with one caveat: they did not address the practice of reordering how multiple debit-card and check transactions post to one’s bank account. Many banks post transactions not in the order in which they were made, but from largest to smallest in terms of dollar amount. That practice, according to consumer advocates, effectively causes many people to overdraw their accounts sooner – and more often.

Consider this example: you only have $100 in your account and in one day you charge $5 at the coffee shop, $25 at a bookstore and an $80 at the supermarket. If the bank debited those transactions in the order you made them, you would overdraw your account just once and be charged one overdraft fee. But if it reordered those transactions from largest to smallest, you would overdraw your account twice and be charged two overdraft fees.

Now, a federal judge in California has taken issue with that practice. Last week, just as the media was getting busy reminding consumers of the new overdraft rules, Wells Fargo (WFC) was ordered to pay more than $203 million in compensation to customers who were charged overdraft fees thanks to reordering transactions in this way.

Wells Fargo collected nearly $1.8 billion in overdraft fees in California from 2005 to 2007. The bank plans to appeal the court decision.

If the decision is upheld, consumers have a lot to win, says Ed Mierzwinski, Consumer Program Director for the U.S. Public Interest Research Group. “Reordering checks is a gimmick banks use to increase overdraft fee revenue,” he says.

Even if the ruling is overturned, however, Mierzwinski expects that new Consumer Financial Protection Bureau that starts in 2011 will ban the practice.

In the meantime, consumers should set up low-balance email or text-message alerts from their bank, Mierzwinski suggests, and link their checking accounts to a credit line or a savings account, so that if they do withdraw their account the bank would make a transfer for a much lower fee.

The bigger question is, of course, how this court decision may affect the industry. With this practice now in the limelight, could other big banks take the lead and abandon it preemptively?

Greg McBride, a senior financial analyst at Bankrate.com, says he doesn’t think that’ll happen. Consumers have actually expressed preference that their largest payments are honored first because they are typically more important. “It’s cheaper for them to pay a $35 overdraft fee than pay a late fee on their mortgage payment,” he says “What they don’t want is to pay a $35 fee on a $3 transaction for a bagel and coffee and it’s important consumers are given that choice.”

Still, McBride adds, the frequency with which consumers encounter this practice will go down as a result of the new overdraft rules.

Jim Sinegal, associate director of equity research at Morningstar says this court decision will at the very least cause more people to focus on the fairness of overdraft fees.

“It just doesn’t make sense to charge a $35 fee for a potentially $1 dollar loan,” he says. “I think we are going to see a lot more pressure on those fees.”

As a result of the new overdraft rules – and, potentially, of this latest development with reordering transactions — banks might not be able to charge as much in overdraft fees. But, as usual, they will find other ways to make money. “Banks will find a way to pass some of these costs to their customers in different ways,” Sinegal says.