This Month: The Feds are raising interest rates so the time to tackle consumer debt is now. Learn how to move beyond shame and regret and face your debt. Read why the best ROI you’ll ever have comes from paying down your credit cards today. All generations carry consumer debt: see the breakdown. Learn how to talk to your loved ones about their debt.
- Gen Z & younger millennials: $22,000 – Student loans are the highest source of debt followed by credit card balances.
- Older millennials: $42,000 – Credit card balances are the leading source of debt followed by student loans.
- GenX: $39,000 – Home mortgages are the No. 1 source of debt. Credit card debt is the No. 2 source.
- Baby boomers: $36,000 – Mortgages are the top source of debt followed by credit cards and car loans. A third of baby boomers have less than $25,000 put away for their golden years.
Despite recognizing that debt is dangerous waters, Americans are jumping in with both feet and struggling to stay afloat. – Emily Holbrook, Director of Planning, Northwestern Mutual.
How to Transform Hopelessness Into Hope
Step 1) Discovery
If you don’t know what the disease is, you cannot treat it. Period. It’s not easy at first to pull up all of your accounts and write down how much you owe and the interest rate you’re paying. Swallow your pride, look at your situation square in the face, and take a deep breathe. You can’t begin to move on from money regrets until you can actually quantify your current financial strengths and weaknesses. Knowledge is power when it comes to repairing your finances.
Step 2) Research Your Options
Once you know where you stand, it’s easier to see where you can go. Everyone’s situation is going to be different. But what may be the same for a lot of us is that we can’t keep living like we have been and expect to get away with it in the long game. Ask yourself the deep questions and try to answer honestly:
- If I use limited zero interest balance transfer cards, I will have to move my money again eventually or end up in a worse situation. Do I want to have to worry about this?
- Would these balance transfer cards be better for me or worse for me than, say, consolidating all of my debt into a personal loan with a lower interest rate?
- Can I cut my living expenses by moving to a different area?
- Is my industry holding me back from earning more income?
- Could I handle a side gig on top of my full-time job?
Step 3) Action
After researching, make a plan and take action. You might decide to use balance transfer cards, consolidation loans, or pick up a part-time job. Your plan could require you to refinance something or liquidate assets. It may even involve completely changing your lifestyle, where you live, where and how you work, or what you drive.
No matter how bad you think it is now, it could be worse. And if you do nothing, it will get worse. The pre-emptive strike for financial disaster is to stop the bleeding, start the healing, and be patient with yourself. It doesn’t matter how bad you think it is, the only thing that matters is that you start.
The pre-emptive strike for financial disaster is to stop the bleeding, start the healing, and be patient with yourself.
In June 2018, the Federal Reserve increased the target range for the federal funds rate by .25%, up to 2%. Credit cards have variable rates. Variable rates connect to the “prime rate,” and the prime rate ties to the federal funds rate. When federal funds rates increase, interest rates increase.
Now is the time to aggressively pay down your credit card debt before accumulating more of it due to rate increases.
Don’t Pay Only Minimum Payments
Credit card companies want you to only pay the minimum because it maximizes their profits. But the longer you take paying off your debt, the more you will pay in interest. Even increasing your minimum payment by 50$ can cut years of interest off your debt.
Paying down the lowest balance first while continuing to make minimum payments on your other cards gives you a psychological advantage. Once you’ve paid off the lowest balance, throw that extra money at the next card.
Balance Transfer Cards
Eliminate 100% of interest if you transfer your balance to a balance transfer card and pay it off during the 0% introductory period (usually 6-21 months.)
Shop around for a balance transfer card that comes with:
- low/zero up-front fees
- low/zero interest during the intro-period
Tip: Make sure to keep your credit cards open after paying the balances in full because it can affect your credit utilization score on your FICO report if you close the accounts.
Home Equity Line
Equity lines of credit usually have a lower interest rate than any other type of bank loan. The downside to using a home equity line of credit to pay off credit card debt is that, because you’re switching from unsecured debt to secured debt, you risk losing your property if you were ever to stop paying on the debt.
Ask Your Creditor to Reduce the Interest Rate
Call your creditor. Ask for a supervisor. Let them know you were approached by another creditor who was offering you a lower rate on a similar card but that you’d rather stay with them if they’d be willing to reduce your interest rate from 15% down to 8%. Negotiate to an amount somewhere in the middle.
Debt Relief Programs (A Last Resort to Avoid Bankruptcy)
You make payments to the debt relief company and they make your monthly payments to your creditors, but at the reduced interest rate which they have negotiated on your behalf. Be careful! These programs require your account to go delinquent so that your debts get written off by your original creditor and sold to a third party. This is how these companies can negotiate a lower balance/interest rate. Your credit score will take a nose dive, but it won’t be as bad of an impact on your credit report over the long-term as a bankruptcy.
1. You’ll get the best guaranteed ROI possible
Look at it this way: If you have a $10,000 credit card balance with a 17% interest rate and you pay it off immediately, it costs you $10,000. But $10,000 paid off using minimum payments over the next 10 years, will cost you $20,000. Therefore, your ROI by paying it off immediately is 100%. You can’t get that kind of return on investment in the stock market.
2. You can take advantage of economic crisis rather suffer from it
You need some room for life to happen. And life happens. If you are strapped with credit card payments and a crisis hits, you won’t be in any position to weather it. You will still have to make minimum payments every month. And even if you file for bankruptcy you can’t discharge your student loan debt.
But if you prioritize paying off high-interest debt, you can set yourself up to actually profit when the market tanks. Stocks go on sale, and real-estate drops dramatically. When that happens, only those who have cash in the bank can take advantage. By eliminating high-interest debt and accumulating that cash, you set yourself up to be able to take advantage of economic crises, rather than becoming a victim of them.
3. Learning to live frugally has additional benefits
If you force yourself to stop spending and start paying down high-interest debt, you might realize something life-changing: you quickly adjust to not having those “extras” in your life, and don’t really suffer in their absence. This can lead to a complete mindset shift allowing you to free up more of your life and time, and save and invest the money you have gotten accustomed to not spending.
Even though it is more common than not to carry debt, it’s very difficult to talk about. Money and emotions are tightly intertwined. Debt, in particular, incites shame, guilt and fear. It’s especially problematic because it can drive people to spend even further above their means in an attempt to prove financial stability to themselves and those around them.
Start The Conversation
If you’ve experienced similar struggles, be transparent about your own journey. Acknowledge the difficulty of talking about money. Don’t guilt trip or give them ultimatums. Give them hope. You want them to come away feeling empowered, not attacked. Let them know you are there for them for support, motivation and guidance.
Explore Real Debt Relief Options
Sometimes people in debt are simply overwhelmed and don’t know where to start. Try to get a rough understanding of the type and extent of their debt so that you can go into your conversation with a rough idea of the options available to them, including the pros and cons of each. By researching some options and evaluating them alongside your loved one, you could be their catalyst for change.
Many credit card issuers offer cards with zero or low introductory interest periods as a marketing tool to gain new customers. If you use these properly, you can take advantage of the 0% APR period (usually 6-21 months) to pay down what you owe, save tons in interest, and pay down your debt faster.
1 – Know What You Owe
Break down all of your debt. Note your balances and interest rates. Get an estimate of your current credit score so that you have an idea of which balance transfer cards you have a chance of getting.
2 – Compare Balance Transfer Offers
- APR (annual percentage rate): Note whether the card is low interest or zero interest. Also note what the normal interest rate will be after the introductory period. If you don’t pay your balance off by then, this would be your new interest rate.
- Balance transfer fee: Some balance transfer cards (but not all) charge a 3-5% fee upfront. If you’re carrying a really high balance, this could translate to a lot of money.
- Length of 0% APR offer: Understand the length of the zero/low interest rate offer and make sure that you can make a dent in your balance during that time.
- Annual fee: Few balance transfer cards charge an annual fee. But make sure you check this anyway.
3 – Choose the Card That Suits You Best and Apply
It’s very easy to apply online for a balance transfer card. Make sure you have your information handy as you’ll need to provide some basic personal and financial data such as your name, your address, your Social Security number, and your income.
4 – Transfer Balances
Once you are approved, transfer your balance. Most likely you will do this online. Make sure to gather all the information you’ll need to transfer your balances over before you start the process. Details to gather include your credit card account numbers, bank names and addresses, and your current balances.
5 – Create a debt payoff plan
This is the point: to be able to pay off your balance as quickly as possible before the APR switches to a normal rate. Be aggressive here. This is only a window of opportunity. Take some time to look at your monthly bills, your bank statements and credit card bills, and your pay stubs to create a simple, monthly budget. Figure out if there are any areas in your spending you could cut, at least temporarily. Your goal is to throw as much at the balance as possible while you are not incurring interest on your debt.
Warning: Avoid using your cards at all costs. Do not make the mistake of transferring a balance from a card, and then continuing to use that card. This can quickly turn a good opportunity into an even worse situation.