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4 Guidelines for Paying Down That Credit Card Debt

April 14, 2013 by Average Joe 10 Comments

If you’re like me, then the past month or two of your life has involved getting your financial ducks in a row in order to file your taxes. Now that tax season is essentially over, it’s a good time to take a look at your credit card situation before you take a much-deserved break from obsessing over your finances. If you’ve got any significant credit card debt, then you’re probably thinking of the best strategy to go about paying off that debt. As a former victim of credit card debt, I know that drowning in debt is not fun, and often leaves you feeling trapped. However, I’m here to tell you that you can get that debt paid off, and it’s easier than you may think as long as you are responsible with your spending. In addition to being responsible, stick to the four guidelines below to get that debt paid off most effectively.

Pay down your highest APR credit card debt first. This point is the most important, and should probably go without saying, but I’m going to say it anyway. If you have several different credit cards that you’ve accrued debt on, you need to pay off the balance that is charging you the most interest first. If you fail to get those high-interest credit card balances paid down, then you will find yourself falling deeper and deeper into the debt hole.
Always make the minimum payment. Sometimes it may seem as if there is no end in sight to the debt you have accrued. Since I’ve personally been through this myself, I know that there is an end in sight. However, if you fail to make your minimum payments each month, your credit score is going to take a pretty significant hit so that even when you have all your debt paid off, you will end up with a poor credit score, which isn’t going to be useful when it comes time to buy a house or car. Generally, the minimum payment each month isn’t a huge amount of money, so do everything you can in order to get that minimum payment in.
Consider a balance transfer. If you have a decent credit score but have accrued sizeable debt on credit cards that charge high interest rates, it may be in your best interest to consider a balance transfer in order to consolidate your debt onto a credit card with a 0% APR introductory period on balance transfers. Not all balance transfer credit cards are created equally, however, so you will want to make sure you compare credit cards so that you can find a card that offers a long 0% introductory APR period. The longer the intro period, the more time you have to get that debt paid off without accruing any interest.
Get rid of debt before trying to save. Generally, the credit card debt you accrue will charge a much higher interest rate than the interest you will earn on cash that you save. While it’s always smart to have a small stockpile of cash for extreme emergencies, most of your income should go to paying down that debt. If you try to save most of your money before paying down that credit card debt, you’ll be stuck in debt for much longer than you need to be, as well as hurting your credit score.

This article was written by Logan Abbott. Logan is the editor of MyRatePlan.com, and a personal finance and credit card expert with over a decade of experience.

Post-Holiday Distress: Did You Spend Too Much?

December 27, 2012 by Average Joe 27 Comments

Stop. Take a deep breath. That feeling of dread? It’s just the holiday spirit leaving your body with each passing breath. It’s your own fault… everyone knows not to look at the receipts on the day after!

If you were smart, you planned ahead. You created a holiday account at the beginning of the year so by the time November rolled around, you had cash on hand for cherry-picking the best deals.

If you were smart, you stuck to your budget and didn’t let stress, competition, irresistible deals, or last-minute price hikes to knock you off your plan. You made a list of people and charities you wanted to recognize, set a price per gift, stuck to your list, and got your shopping done early.

That’s if you were smart.

But if your candy cane and cookie euphoria is dissipating with every thought of your credit card statement, you’re not alone. It’s engrained in our culture: Thanksgiving is to overeating as Christmas is to overspending – lavish spending you’d never consider otherwise.

The pressure to GIVE is powerful; our senses may leave us entirely. When we shop, we anticipate the warm embrace and feeling of joy WE create when a gift is received. It’s awfully noble. But if you’re like me, today is the day you watch your kids and realize just how little use your gift will get (I will never buy a robotic pet again!).

So what’s next?

Budgets are fluid. They require constant reevaluation. If you overspent, it’s time to reconsider your budget for the coming months. You won’t be able to see any viable options without a clear picture. If you didn’t before, go back and write down what you spent.

Chances are, it’ll make you feel better. You’ll realize that, while you had a bad month for your budget, you aren’t completely out in the cold. Because, you see, most of the year… You were smart.

If you’re not feeling better, take solace knowing that it’s possible to mount a comeback.

A few years back, holiday spending tipped my credit card balances over the edge. I wasn’t smart. I thought I was – it makes sense to open up store credit cards to save 10%, right? Wrong. It wasn’t until too late that I realized I wouldn’t be able to make the minimum payments on so many cards.

I knew enough to see that with accumulating interest, everything I could afford to pay towards my various credit card bills would be going straight into the creditors’ pockets while my debt level remaind constant. Classic debt spiral.

What did I do? Consolidate. Debt consolidation sounds ominous, but it’s far worse for your credit to fall behind on payments. You can take advantage of low interest rates on balance transfers and merge your debt to one account, or seek a consolidation loan to pay off your principal balances. If you have good credit history, you may be able to achieve a lower interest payment or a longer payment period. Managable. You can handle that.

The moral of the story? I’ll say it again:

Stop. Take a breath. Enjoy what’s left of the holidays. You’ve got options.

Photo: TopGold

Thanks to Jennifer Willard for taking over the blog responsibilities today while Joe & OG search for more egg nog. Jennifer has a new blog, Crayons & Coins. She also writes for Credit Guard, a non-profit debt counseling company.

5 Biggest Refinance Concerns

October 5, 2011 by The Other Guy Leave a Comment

This will end up in the toolbox, but because only yesterday I posted an exciting post on the reasons why you should consider NOT refinancing, today I think it’s appropriate to post some of the concerns a good advisor might have when a client is considering changing a home loan.

There are so, so many variables to consider—to cliché this article as quickly as possible—your head will spin.

Let’s forget the smart-talk and just jump into the list:

1) Cash flow. This is the primary hook mortgage companies use to secure your signature on the bottom line. Like a fish to the worm, all a lender has to say is that “you’re gonna save $300 per month!” and we’re all lining up drooling for debt.

(Apparently the only offer credit card companies need to bait the hook is a free NASCAR blanket, but that’s another story.)

Comparing cash flow isn’t as important as knowing how you’re going to use your new free cash each month. If you plan to use the funds for a boat down payment, you may wish to reconsider. However, if you can set up an automatic payment to alleviate some other debt or save into your child’s college fund, I’m on board.

Final analysis: Just like you shouldn’t eat hamburgers every day just because they tastes good (lesson learned!), you shouldn’t choose to refinance based on cash flow alone.

2) Length of loan. If you’re close to paying off your mortgage, why would you sign up to start over again? I’ve seen people refinance to a lower rate and smaller payments, only to be in debt for 27 years longer than necessary. If you’re craving cash flow, are there other areas of your life that can be cut to avoid a mortgage refinance.

Final analysis: Compare terms before signing on the dotted line. Dying with debt isn’t as fun as your weird brother-in-law makes it sound.

3) Know thyself. Mortgages aren’t always about math and the “logical move.” I’ve met some pretty broke professors during my time advising families. Instead, often taking on new debt is about knowing yourself. Can you handle flexibility? Will you pay extra Here are some options:

– Use a portion of your savings to shorten the loan terms. Ask the lender if they’ll complete a rate-and-term mortgage, where your payment drops but the length of the loan stays the same. If not, ask what shorter terms are available. You may be surprised that the lender will offer you a lower rate on shorter-term loans.

– Throw your savings toward larger payments to pay the loan down early. Personally, I like this option. But once again, know theyself. This would have been the worst option for many of my clients.

Here’s why I like the last option: things happen. When you’re in financial trouble, I like the flexibility of being able to stop paying extra on the mortgage. I have a built-in safety net when times are tough…and over the next several years, who knows what’s going to happen?

I also trust myself to pay extra on the loan. Can you say the same? If not, lock yourself in on a shorter term to force yourself to pay more. You’ll be thankful you did.

Final analysis: What is your money personality? Are you desperately seeking boundaries or do you prefer long walks in the rain hand-in-hand with flexibility?

4) Terms. Mortgages, friends, aren’t free. I know. Before you swoon you may wish to sit down. But before you flip out and rush the refinance train, let’s compare costs with benefits. Does it make sense to save a few bucks if you’re going to spend much of your savings in expenses.

Here’s an easy, worthwhile math problem. If you’re going to save $200 per month and the refinance expenses are $2,400, it’s going to take a whopping two years before you realize a dime of cash flow savings. Additionally, you won’t wrap your arms around any interest rate savings until much later in the mortgage. For more on that topic, read this post.

There are no-point, no-cost mortgages available, but they aren’t free either. When a mortgage company agrees to let you off the hook on fees, they’ll recoup the money they lose by jacking up your interest rate a little. Many advisors prefer this again—although they know it’s a higher rate–for flexibility reasons. For me, it always depended on the client and how high the fees would have been if we’d just paid them.

In this market, I kind of like paying fees up-front. Knowing that historically rates haven’t bumped this low often, there’s a great chance I’ll never refinance again. By getting the fees out of the way now and maybe even paying points to get them even lower, I can save a ton of money now.

Final analysis: Fees are a reality. Decide where you’d rather get hit instead of letting the bank just smack you!

5) Total debt scenario. Many families separate their credit card debt, car payment and home loan from each other. My brother doesn’t like the different foods on his plate to touch. I’ve never understood either of these.

Think of yourself as a company. All that your board of directors is worried about is the bottom line. Create a total debt repayment strategy. Now you’ll analyze your home debt more wisely:

– Can I take care of some credit card balances while refinancing? Note: remember rule #3 above? If you’re just going to keep using the credit card, all you’re doing is taking short-term consumer debt and turning it into long-term debt against your house. If you can’t control your credit card spending you don’t want to lose your home.

– What is the refinanced loan going to do to my debt picture long term? Will I now have a mortgage in retirement? While my kids are in college? Are there ways to restructure your debt to avoid these upcoming cash flow crunches?

Final analysis: You read the entire map when headed on vacation, not just the next few miles. Include all the variables in your analysis and view your family financial picture as a business to make better decisions.

One area some may be surprised I didn’t include with these five factors. Don’t try to guess the future direction of interest rates. That’s betting, which is a losing game. Evaluate the current opportunity and whether changing course will help your family or not. Don’t get too interested in your refinance market horoscope.

Joe

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