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Posts Tagged ‘debt’

3 Signs You’re a Financial Train Wreck Waiting to Happen

As a Money Coach, I am often contacted by someone who claims to be a hot financial mess. In fact, many people think that they’re financial train wrecks just waiting to happen.

Actually, some of them are right: their economic circumstances are indeed dire. But some people are simply excessively worried, at a loss for how to fix a problem, or are being overly dramatic about their situations. How can you tell the difference?

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What Should We Do About Large Loans and Debt We Can’t Pay?

Author: The Money Coach

A subscriber of AskTheMoneyCoach wanted a solution to their debt problems. Here is the person’s circumstances and question:

Q: After being unemployed for a year, almost losing our house and caring for a teen that has special needs, it is proving impossible to pay off the loan we have for our sons high schooling of $140,000.00. We have now consolidated our credit card debt but the consolidation company says the school loan can not be included. What choice do we have to help pay or reduce that loan with Key Bank? I am afraid it will drain us totally and I have two other children. One to start college next year and my husband are in our 50′s and 60′s We can never stop working for
sure! Any hope?

Continue reading “What Should We Do About Large Loans and Debt We Can’t Pay?” »

Four Surprising Insights About Getting Out of Debt

Author: The Money Coach

If you have recently started on the long journey to improve your finances and get out of debt, you have probably hit a few real and imagined obstacles by now.

Perhaps you did not get the raise that you were expecting, or even worse, you’ve lost your job altogether.

Maybe you’ve been kicking yourself as you reflect upon all of the stupid spending mistakes you’ve made that got you into debt in the first place. Or even worse, you are blaming someone else like your spouse, partner, your parents or the bank that lent you the money in the first place.

To help you eliminate debt, here are four things that I’ve learned about getting out of debt.

1. It’s Not About the Money

Most of us erroneously think that the biggest drawback of being in debt is the amount of money we have to pay to banks and creditors. We bemoan all the cash that goes down the drain in the form of interest. Or we rail about high fees, late payments and other charges tied to having debt.

But the real price tag of debt isn’t the financial cost associated with owing others. It’s the toll that debt takes on every area of your life.

Debt wreaks havoc on you emotionally and physically, causing physical and mental stress. Debt also stresses relationships, leading couples to argue more or divorce. These are more significant, in my opinion, than the financial cost of debt.

2. You Have More Power/Leverage Than You Think

Debt can often feel like bondage — and for good reason. When you’re deep in debt, you’re essentially a slave to your creditors. But despite the fact that you may owe thousands, or even tens of thousands of dollars to banks or other financial institutions, you have more leverage than you may think.

For instance, if you are facing high-interest rate credit cards, you have the power to call up your credit card company and negotiate.

Banks send out billions of credit card solicitations annually. And if you’ve been paying your bills on time, the bank doesn’t want to lose your business. So simply calling up the issuer or your Visa or MasterCard and asking: “Is this the best rate you can offer?” could get you better terms. Unfortunately, too few consumers do this. They think: “I’m just one small customer” or “The bank is going to say ‘No’ anyway.”

3. It’s NOT Someone Else’s Fault

We’d all like to blame someone else for our debt woes and our financial problems. The “irresponsible” ex spouse who ran up the bills. The “stingy” boss who wouldn’t give us a raise. Or maybe even the “greedy” bankers who gave us credit and loans in the first place!

But to get out of debt, you have to accept responsibility for your predicament. You have to think about the choices YOU made, the things YOU did – or did not do – that led to your current state of financial affairs.

It’s only by seeing your own level of personal responsibility that you become empowered. You have to start to think: “If I got myself into this mess, I have the power to get myself out of it.”

Even if you got into debt through seemingly no fault of your own (perhaps because you were downsized, went through a divorce, or had big medical bills in the family), you should review what happened and think about how you could have financial protected yourself and safeguarded your household against such unforeseen events.

Could you have had a bigger savings nest egg? Could you have had more insurance? Instead of blaming others, focus on what you could have done to help avoid the situation or what’s within your power that you can do to fix the problem now.

4. Paying Off High Interest Rate Debt First Isn’t Always the Best Strategy

Here’s a bit of financial advice that you’ve likely heard over and over: Pay off your high interest rate credit card debt first. Unfortunately, it’s also bad advice that doesn’t fit everyone’s circumstances.

Some people shouldn’t worry about high-rate debt because, frankly, the interest rates on their debts aren’t really that high at all. They should focus on paying off cards with the highest dollar balances. Other should go after cards with the lowest dollar balances. How do you know which is best? Think about what bothers you most — and then attack your area of pain.

If you’re stressed out because your cards are all maxed out, then you need to pay off cards with the highest dollar balances first. If you’re finding it hard to keep it with so many credit cards, because you’ve got a wallet full of plastic, then you should pay off the cards with the lowest dollar balances first. As you pay off cards, then use the money you had been paying to double up on the next card.

The main reason you shouldn’t always pay off your high interest rate debt first is because that strategy can takes many months – if not years – before you see your balances start to budge. For most people, that’s way too long and depressing.

Who wants to fight against debt month after month only to see that the $170 they paid on a Visa card only covered $17 worth of the principal balance and the other $153 went toward interest? Little wonder that people don’t stay motivated or stick to a payoff plan when the only advice they get is: pay off high rate debt first.

So instead, use a payoff strategy that lets you get an immediate emotional boost from seeing that your plan is working. That will keep you motivated and on track to becoming debt-free.

All Debt Is Not Created Equally – Why Credit Card Debt Wrecks Your Credit Score

Author: The Money Coach

Debt is a massive problem in America. We’re up to our eyeballs in debt of all types: mortgage loans, credit card debt, student loans, automobile loans, and more.

Even though home values have plummeted, the average mortgage balance in the U.S. is nearly $200,000; the typical family carries a monthly credit-card balance of $10,000; the average college graduate owes more than $20,000 in student loans; and the median car note now exceeds $27,000. Is it any wonder that Americans owe $2.4 trillion in consumer debt, excluding their mortgages? Throw in another $14 trillion or so in home loans, and it’s clear why our collective debt won’t go away any time soon.

From a credit standpoint please understand that the type of debt you’re carrying matters tremendously when it comes to your overall rating. (See the FICO credit score formula).

I’ve experienced firsthand the impact that being weighed down with debt has on one’s credit. I’ve also heard from countless individuals all around the country whose credit scores were suffering due to their having “bad” debt.

What precisely counts as “bad” debt? Nearly 100% of the time it’s credit-card debt.

If the balances on your Visa, MasterCard, American Express, or Discover cards have gotten out of control, you’re likely doing serious damage to your credit. But other types of debt aren’t good for your credit rating either, such as a department-store card you opened to get 10% off your purchase or the retail credit account you got to buy household furniture. Don’t feel bad if this scenario describes you. I’ve made the same mistakes.

Your FICO score is tied strongly to the credit-card debt you have. In fact, did you know that 35% of your FICO score is based on the amount of debt you have? With regard to this percentage, FICO is overwhelmingly concerned with your current credit-card debt. Let me explain why.

The Differences Between Mortgage, Installment and Revolving Debt

The FICO scoring system evaluates three forms of debt in your credit files: mortgage, installment, and revolving debt.

Mortgage debt is very straightforward. This is the house note you have on your primary residence, the home-equity loan or line or credit you may have, and the mortgage you pay if you’re lucky enough to have a vacation home or investment property. In short, if you own a piece of real estate, and you have a loan for which the house is collateral, you have some form of mortgage debt. Generally speaking, this is the most highly rated form of debt in the FICO^â scoring system.

Next is installment debt. This refers to one-time loans that you are paying off over time by making fixed payments at regularly scheduled intervals.

For instance, assume that you received a $10,000 student loan five years ago and are now repaying it. You may be making $125 payments every month. In this case your loan balance declines every month, part of your payment reducing the principle and part repaying interest on the loan.

The same scenario applies to car loans. In both cases, the lender knows exactly what its risk is at any given time: the outstanding balance on your loan. But the lenders also know that your balance isn’t going to rise. Thus installment loans are “good” forms of debt from a credit-scoring standpoint. They are unlikely to hurt your credit ranking as long as you pay on time.

The last debt category, however, represents a potential minefield for lenders and borrowers alike. Revolving debt, such as credit cards, is the riskiest from a lender’s standpoint because the lender has far less control over this debt, and you call the shots in many ways.

Banks Take on More Risk With Credit Cards

Assume, for example, that you have a MasterCard with a $5,000 credit limit. Your balance one month might be $1,900, but last month the balance was $1,255, and the month before that it was $1,641. As it stands, neither the lender nor FICO^â has any way of knowing how much you’re going to charge in any given month. They can try to predict it—and they do try—but they can’t know with certainty whether you will charge $30, $300, or even $3,000 on your card in the following month.

Revolving debt isn’t scored favorably in the FICO^â model because no one knows how much you will pay on your credit-card balance. You might decide to make minimum payments; you might opt to pay $500 against the overall balance; or you might decide to pay off the entire balance.

Whatever the case, the payment amount is pretty much up to you, provided that you meet the mandated minimum. But that’s not much, since most banks and credit-card issuers require only that you pay about 4% of the outstanding balance in any given month.

This means that on a card with a $1,900 balance your minimum payment would be just $76 while the bank’s exposure is still $1,824. The latter is the amount of money at risk for them if you don’t pay up for any reason.

Moreover, if you fail to pay, that credit-card balance due is no longer a “risk-weighted asset.” It swings over to the “non-performing” asset section of the bank’s balance sheet. Extending credit via credit cards can be a high-stakes enterprise. When a bank approves your credit-card application, it basically is agreeing to let you take out a loan. Issuing that credit card can be far riskier than making a loan to someone buying a car because in the latter case the bank knows exactly how much the monthly payments will be.

Speaking of cars, one final difference between installment loans, such as auto loans, and revolving debt, like credit cards, demonstrates why the latter is deemed riskier.

A car loan is a secured loan. If you don’t pay what you owe, the lender can come to your house and repossess the vehicle. (And don’t even think about trying to hide it around the block when your payment is past due. I tried that many years ago while I was in college, but the repo man still found my Hyundai Excel and hauled it away.)

A credit card, on the other hand, is an unsecured form of debt. If you charge $800 on your Visa card for that flat-screen TV you just had to have, what is the bank going to do if you don’t pay your credit-card bill? They can’t come into your house and snatch that 40-inch TV off the wall. So they’re mainly stuck with reporting you to the credit bureaus if your payment is 30 days or more late.

Of course, your account could go into collection, or they could get a judgment against you if they felt it was worth the time and money to go those routes.

The central concept you need to understand is that secured loans, whether it’s on real estate or automobiles or something else, are always less risky to lenders than is unsecured debt such as credit cards. As a result, that unsecured debt on your credit report, courtesy of the cards in your wallet, will always get judged more severely in the credit-scoring world.

In summary, not all debt is created equally. Credit-card debt is the form of debt most closely watched by the credit industry because it’s unsecured and largely controlled by your choice of spending and payments. Credit cards are more frequently used than other form of debt too, thereby providing more insights into your overall financial habits.

Ask The Money Coach

Posts Tagged ‘debt’

3 Signs You’re a Financial Train Wreck Waiting to Happen

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What Should We Do About Large Loans and Debt We Can’t Pay?

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Four Surprising Insights About Getting Out of Debt

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All Debt Is Not Created Equally – Why Credit Card Debt Wrecks Your Credit Score

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