On Debts and Credits

On Consolidating Credit Card Debt

2013-02-18T10:00:00.000-05:00

Having too much credit card debt can make your situation more stressful. In turn, you may try to find alternatives that may free up some cash monthly, as well as get rid of your debts quicker. One option many are turning to is consolidating their credit card bills.

Here is a look at when you should do it:

If you have high interest rates on one or more cards

If you have a good credit score, there’s no reason you should pay high interest rates. Instead, look for an affordable loan that can consolidate your debt onto one account. By doing this, you could save some money and pay off your bills quicker. For example, if you are paying on a credit card with a balance of $5,000 at an interest rate of 15 percent, and you can receive a loan for that amount for 8 percent, you almost halve the amount of interest you will have to pay. As a result, it will allow you to tackle your principal more with each payment, thereby allowing you to pay off the bill faster.

If you want to lower your minimum payments

Many times you can save cash monthly by consolidating. If you are making payments to multiple creditors, your amounts will vary monthly. Meanwhile, by rolling all of this debt into a low-interest loan, you will only have to make one monthly payment, which could save you money.

While credit consolidation does offer some benefits, it’s not for everyone. Here is a look at some reasons why you shouldn’t consolidate.

Don’t consolidate without first speaking with your lender

If your account has a high interest rate, speak with your creditor to see if they can lower it. They may be willing to lower it as a way to keep you as a customer. Your goal first should be to see if your lenders can offer more favorable terms; if they cannot, then think about consolidation.

The reason for this is simple. Many do not know that when you transfer a balance from one creditor to another, that new lender may request you close the old account. This can affect your credit score negatively, as one of the factors in determining your score is length of accounts. Therefore, keep this in mind before doing it.

If you can’t afford your monthly payments

It’s easy to fall behind on bills, and if you have, you might be tempted to transfer your balances to give you some time to catch up. The only problem with this is you are trying to solve a long-term problem with a short-term solution. If you have problems making payments, speak with your lender to see if they can help. Additionally, you can consult a credit counselor, who will help you develop a budget; that way you can develop good financial behaviors. You could also contact a debt settlement firm for help lowering your debt.

To take advantage of balance transfer rates

Many credit card issuers offer teaser rates, which is where they promise a lower interest rate if you transfer your balances to them. The only problem with this is the teaser rate is temporary, and depending on your credit, after that term expires your interest rate will increase. While these are not bad programs, be sure to understand all of the terms before committing to one.

Rolling all of your debt into one payment can be beneficial if it‘s the right solution for you. By developing a budget and understanding your options, it can help you determine whether this is the best course of action for you take.

Common Debt Reduction Options

2013-02-18T09:00:00.000-05:00

The average amount of household credit card debt in the US was almost $16,000 in the middle of 2012. With economic factors, many people have only seen their debt go up since then. It’s extremely common for individuals and families to feel overwhelmed by their debt and it’s often difficult to see a way out, but there are debt reduction strategies that work without massive amounts of extra cash on hand.

Debt Consolidation

A possible way to get your debt under control is to consolidate multiple accounts into a single loan. With competing information published online and elsewhere, the question is debt consolidation a good idea? constantly gets asked. Whether or not this is a viable solution for you depends on which debt consolidation option you choose.

There are three options when it comes to consolidation: (1) finding a company that will provide loans to consolidate revolving credit accounts, (2) using equity in your home to refinance and pay off other debt, or (3) you can work with a debt consolidation company to negotiate a lower interest rate with your creditors (and hopefully a lower monthly payment). Benefits of consolidation include:

A single monthly payment that helps you budget and keep track of finances
Lower interest rates that save money on debt payments in the long-term
A reduction in the amount you have to pay each month

Since consolidation can impact your credit report, leave you without open credit accounts or create a future situation where you are upside down on your mortgage, you do want to be careful. With that in mind, opting for option #3 typically makes the most sense for people. However, make sure you weigh all the options, read the fine print and understand the possible impact on future finances before you opt to consolidate.

One Bill at a Time

Another strategy that personal finance experts often talk about is paying down debt one bill at a time. Many people make the mistake of thinking that they need a large lump sum of money to make a dent in debt. All you need is a little extra money each month. Imagine a simplified model where you owe the following:

$500 on a store account with a $50 minimum payment,
$1,000 on a credit card with a $75 minimum payment, and
$8,000 on a car with a monthly payment of $200.

Perhaps living expenses run $1,000 per month. When you throw in those monthly payments, you need $1,325 just to pay bills and living expenses. For this hypothetical situation, consider that you bring home $1,500 per month, which is $175 more than you need. You could decide to spend $50 on entertainment and extras, save $75 and use the remaining $50 to pay extra on debt.

That $50 may not sound like much, but if you use it to put $50 a month extra on the store account, you could pay it off in less than ten months. Then, you have $100 extra because you no longer need to pay the minimum on the store credit card. Putting that money on the credit card each month allows you to pay it off in less than a year. Now, you have $175 extra to pay on the car every month. It becomes a snowball effect!

Whether you consolidate or attempt to tackle debt one bill at a time, making a conscious decision to reduce your debt is a valuable choice for the future. Do not get discouraged at the time it takes to get your finances in order. Just work each day to make better choices, save money and reduce debt.

Curing Your Holiday Debt Hangover

2013-02-11T10:00:00.000-05:00

Now that the holiday bills have arrived, many face the daunting task of whittling down the mountain of often high-interest credit-card debt before it gets out of control. here are five tips on how to detox your finances this year.

1. Tally up what you owe. First on the debt to-do list is to take stock of the damage. That means reviewing credit-card bills, bank statements and other accounts to determine how much you owe and how that translates into monthly payments.

2. Draw up a payment plan. One oft-advised strategy for borrowers carrying balances on two or more credit cards is to rank the cards by their interest rates and then make the biggest monthly payment on the card with the highest interest rate. For the rest, make only the minimum monthly payment. the process is repeated once the card with the highest rate is paid off.

3. Consider a balance transfer. For those who don't have a pile of cash that they can draw upon to pay down their debt, the next-best option is to lower the interest charges. One option is to consolidate your card balances into another card with a lower interest rate.

4. Make a budget, follow it. Make a budget of your fixed household expenses, such as your mortgage or rent, utilities, car loan, insurance and so on. carve out a realistic amount of money for more variable costs, such as gas, groceries and entertainment. Once you figure out a monthly plan that allows you to pay down your card debt, stick with it.

5. Get help. Feeling overwhelmed by debt? Counseling agencies approved by the U.S. Department of housing and urban development offer free credit counseling, advice on making a personal budget and dealing with creditors.

How to Recover from Expensive Debts

2013-02-11T09:00:00.000-05:00

Are those back-to-school bills, lingering holiday debt and the remnants of a Christmas credit binge still hurting your household finances?

The answer may be to consolidate debts, which can dramatically cut the amount of interest you are paying. But financial experts warn that if you are not disciplined, debt consolidation can come back to bite you in a big way.

Debt consolidation is simply rolling a group of debts - such as store cards and credit cards that typically have a high interest rate - into one, easier-to-manage loan. It can be a personal loan, another credit card or even your mortgage.

For example, the interest rate of 20 per cent on a $10,000 credit card debt will cost you $2000 a year before you even put a dent in the outstanding loan. On a personal loan with a 9 per cent rate, that drops to $900 a year and for a mortgage rate at 6 per cent it's just $600.

However, paying a lower interest rate on repayments means nothing if your overall debt continues to rise.

MBA Financial Strategists principal Mark Borg says consolidation can push people deeper into debt by allowing them to borrow more money.

"This can be the case if they consolidate their credit card balances but don't change their spending habits," says Borg, an AMP financial planner.

"Their credit cards might be back to a zero balance for the first time in months, but they then could be tempted to redraw on the cards all over again.

"A simple way to guard against this is to cut up the credit and store cards."

Borg says that before taking out any debt consolidation loan, make sure the cost of the new loan - interest, fees and charges - is much lower than what is being paid on the existing debts.

Personal loans Borg says rolling debts into a personal loan is one of the most common forms of consolidation, and has the advantage of a set repayment plan and having just one repayment to worry about.

"Personal loans generally have lower interest rates and fees than credit cards and store cards, helping some people to repay their debts sooner," he says.

Community CPS Australia chief financial officer Wayne Matters says personal loans can reduce the amount you need to pay on a weekly basis.

"Personal loans are flexible and give you more time to pay off the debt - typically a year or more, allowing you to spread the repayments," he says.

Credit cards It may seem odd to address a credit card debt problem by taking on another credit card. But introductory interest-free or low-interest credit cards can be an option to reduce the overall interest cost, as long as you understand how they work.

"Be aware that such offers are usually only for a limited time, and only for the initial amount you transfer on to the card, before it reverts to the standard interest rate," Matters says.

"Make a budget to determine whether you can pay off your debt in the introductory time period. Otherwise it could end up costing you a lot more once higher interest rates apply."Mortgages Consolidating debts into your mortgage will deliver the lowest interest rate, but can be costly over the long term.

"While the interest rate is lower, the repayment period is a lot longer - which means you could be paying interest on those Christmas presents for the next 20 years," Matters says.

"Develop a budget to make extra repayments off your mortgage to clear the extra debt."

Matters suggests crunching the numbers on free calculators available on most financial institutions' websites, and talking to lenders about the positives and negatives of a debt consolidation strategy.

Smartline Personal Mortgage Advisers executive director Joe Sirianni says consolidating should be used as a once-off measure. "It's not something you do regularly as means to manage your credit card debt," he says.

"If you have consolidated, your aim then should be to ensure that you pay off that consolidated debt as quickly as possible and never get into the same position again.

"That means using your credit cards sparingly, paying out the balance every month and putting as much money as possible into your home loan."

Student Loan Debt: How Much is Too Much?

2013-02-06T10:00:00.000-05:00

Many college graduates wait for their first loan bill before they become aware of the size of their student loan payment.

According to a recent study by NERA Economic Consulting, 40 percent of college graduates with federal loans couldn’t recall receiving any consultation with regards to their student loan debt. One of the most stunning findings was that respondents thought they understood their finances while in college, but their understanding deteriorated upon graduation.

Too many students walk into the financial aid office, receive a promissory note, and assume a future starting salary will be more than enough to cover repayment. However, loans are granted with the expectation the borrower knows how much debt is too much. Before you start taking on loans to pay for your degree, you need to know how much student loan debt you can afford.

Your Budget with $25,000 in Student Loans (72 percent of student loan borrowers). While no one wants to pay student loans, $25,000 in education debt is manageable for the average professional earning $30,000 to $40,000.

Depending on a student’s eligibility, most (if not all) of this debt would be in government loans. Based on a 20-year term, installments would be around $150 per month. Looking at consumption data from the Bureau of Labor Statistics, it’s about the same amount the average household pays in a year for a used car. It’s slightly more than one-tenth of the average housing expense.

Your Budget with $50,000 in Student Loans (16.5 percent of borrowers). This is where graduates really start to feel the burden of student loans. Monthly payments are around $450, largely because private loans are necessary above $31,000 in tuition costs.

It would be a tight budget for someone earning between $40,000 and $50,0000. Student loans would be a large portion of the budget. You’d be paying about as much for loan payments as you would for food. Food is usually the third largest category in a household’s budget. Your monthly loan repayment would be about a third of what you are paying in housing costs.

Your Budget with $75,000 in Student Loans (6 percent of borrowers). The average college graduate would probably need to move back in with mom and dad at this point. It’s either that or find lots of roommates.

You would likely be paying about $750 per month in student loans. The average graduate with a four-year degree earns about $43,000. At this income level, your loan payments would be your second-largest expense next to housing, and would be close to what you are spending in food and transportation combined. You would need to take drastic action to make loan payments, probably by foregoing any retirement savings and cutting back on entertainment. Even so, you might not be able to find ways to make ends meet. Someone earning around $60,000 could probably afford this payment more comfortably.

Your budget with $100,000 in Student Loans (almost 2.5 percent of borrowers). If you are taking out $100,000 in loans, you had better be a doctor—or remodeling your old bedroom at your parent’s house on mom and dad’s dime. Monthly loan payments would be up around $1,075 and could easily eat up at least half of the average graduate’s take-home pay.

At this point, you are essentially making a second rent or mortgage payment each month. While you may have a place to live, you have no money for other important things like food, transportation, and clothing. Since it’s a choice between paying student loans or rent—and student loan payments are not optional—you are definitely headed back to mom and dad. Keep in mind, the shortest loan term is 10 years, which means you are going be 32 before you move out.

You’d need to earn between $80,000 and $90,000 to afford this payment comfortably.

Your budget with $150,000 in Student Loans (almost 2 percent of borrowers). Even a third job likely wouldn’t be enough to ease the burden of the average graduate who’d amassed $150,000 in student loans. Monthly payments would be around $1,7000 or most of your take-home pay. You’d easily need a six-figure salary to fit this expense into your budget.

The bottom line: Easy access to student loans is a good thing. Most people need to take on debt if they are going to graduate and reach their full career potential. However, the availability of student loans is a double-edged sword, as many borrowers take on debt levels that far exceed the reality of future starting salaries.

If you are borrowing or plan on borrowing for college, make sure you’ve thought long and hard about how much you can borrow based on a reasonable starting salary. It’s that—or pray your parents don’t change the locks.

How to Get Out from Your Credit Card Debts

2013-02-06T09:00:00.000-05:00

If you have credit card debt, it can truly feel like you are hitting your head against a brick wall. There is no feeling quite like the worry created when the bills fall through your door. The start of 2013 is now fully upon us and now is the best time to start thinking about your debts and formulating a plan that will help you to take back control.

The first step, before you start working off these debts is to open up about how much you owe. Collect all your cards and look at your minimum payments, how much credit you have left and what your total repayment value is. This way you can be 100% sure what exactly you owe and how long it will take you to pay off these debts.

1. Balance transfers to consolidate your card debts.

0% balance transfer credit cards are always advertised heavily at this time of year, and are a great approach for those of us with low debt amounts. If you are struggling with paying the minimum at the moment, then this may be the answer for you. Firstly look for a card that offers a 12 month balance transfer, there are many that only offer 6 - 9 months, which is not going to help if your credit exceeds R25,000.

Once you have transferred your balance then you can be assured that you are only paying what you owe. If you increase your payments and stick within the 12 months then you will be debt free in no time.

2. Budget and plan to pay more than the minimum.

Paying the minimum you owe each month, seems simple in theory, but in the long run you will be paying most of your money towards interest rather than clearing your debt. Making larger payments each month is a great way to reduce your credit card debt, but can be difficult if you are working on a budget.

To work towards upping the value of your payments you may need to revise your current budget, which can mean making small changes to your spending. Look at the small things you buy regularly, such as that Latte on the way to work - that 8 rand everyday can soon add up to a larger monthly payment towards your card debts.

3. Categorise your card debts.

This is specifically for those of us with multiple credit cards. Remember at the start when I mentioned how we should all know 100% what we owe, this is exactly why; if you don't know what you owe then it will be difficult to see clearly what categories of debts we have!

Work your way through your cards. Place those with small manageable amounts on one side, with larger valued cards on the other. Any debts that can be written off straight away, do so, the sooner these are paid the better. For the larger values that are left, either consolidate these cards or look at exactly what you can pay to get these closed efficiently.

4. Debt Restructuring.

This is the final step to take if all else fails. Debt restructuring is simply asking your lenders to re-negotiate your current interest rates as you can't make the payments they are requesting. A lot of people don't believe this will work for them, but remember the lenders want their money back just as much as you want to be debt free, so by explaining your situation they are likely to want to help.

Whichever plan of attack you decide upon, you need to remember why you want to be debt free whether it's to help you save for the future, or so that you can get a good night's sleep; making small changes now will help towards this in the long run.