It’s a scary prospect: a creditor securing a judgment against you — which is probably why we get so many reader questions about the issue. A judgment represents a legal obligation to pay a debt, meaning a creditor or collector sued you over an outstanding debt and won. But that court win isn’t necessarily written in stone. Judgments can be appealed, reversed, amended or, at the very least, settled for less, depending on the circumstances and what you do next. (First step: Consider visiting a consumer attorney. Some offer free consults —and many will represent you for free if they think a collector has broken the law.)
If you’re dealing with debt collectors and facing a judgment — or are already (perhaps unexpectedly) saddled with one — we’ve pulled together answers to all the major questions that may be on your mind and where you can go from there.
How Does a Creditor or Collector Get a Judgment Against You?
In order to get a judgment against you, the creditor or collector must take you to court. If you don’t respond to a summons, or if you lose, the court will issue a judgment in favor of the creditor or collector. The judgment will be filed with the court, and once that happens, it is public record. That means it will likely end up on your credit reports as a negative item. (You can check your credit for judgments by viewing your free credit report summary on Credit.com.)
How Are Judgments Collected?
One of the main reasons you want to try avoid getting a judgment against you is that creditors may have additional ways to collect once a judgment has been issued. As we mentioned earlier, depending on your state’s laws, they may include going after your bank accounts or other property, or trying to garnish your wages. But as the saying goes, “you can’t get blood from a stone.” As the National Consumer Law Center points out in its book, “Surviving Debt:”
Even if you lose a lawsuit, this does not mean you must repay the debt. If your family is in financial distress and cannot afford to repay its debts, a court judgment that you owe the money may not really change anything. If you do not have the money to pay, the court’s judgment that you owe the debt will not make payment anymore possible.
If you aren’t sure what a judgment creditor can do to collect from you, it’s a good idea to consult a bankruptcy attorney who can help you understand what may be at risk if you don’t pay. The attorney can explain what property you own is “exempt,” or safe from creditors. You can also check out this article on how to get out of debt.
Can a Judgment Be Reversed?
Yes. In certain circumstances, you can ask the court to re-open a judgment or you can formally file an appeal. t’s also possible to have the terms of a judgment altered. And, with a few exceptions, a judgment can be discharged in bankruptcy. However, laws (and the timelines for their implementation) vary by state, so, again, if a creditor secures a judgment against you, it can be in your best interest to consult a local consumer attorney. You can find more about your legal rights post-judgment here.
Can I Settle a Judgment?
The answer to this question is often “yes.” Most judgment creditors know it is often difficult to collect judgments, especially if the debtor doesn’t have wages that can be garnished or assets they can go after. If you are able to get a lump sum of money from, say a relative, you may be able to offer that to the creditor to pay off the judgment. Just make sure you get any agreement in writing before you pay. Make sure the agreement spells out all the terms of the settlement, including the fact that you will not owe any more money after you make the agreed upon payment.
Can I Avoid a Judgment?
Another option is to settle the debt before it goes to court. The creditor may be willing to settle for part or all of the money you owe. Of course that only works if you can manage to pull together money to pay them. If you can, make sure you have a written agreement from them that states they will not pursue the debt in court if you make the payment as agreed. Then check with the court to make sure the matter has been dropped.
How Long Can Judgments Appear on Credit Reports?
Unpaid, they can remain on your credit reports for seven years or the governing statute of limitations, whichever is longer. Once judgments are paid, they must be removed seven years after the date they were entered by the court. But soon those parameters are changing: Beginning in July, the credit bureaus will exclude judgments that don’t contain complete consumer details or have not been updated in the last 90 days. (Wondering how long other stuff stays on your credit report? We’ve got you covered here.)
How Long Can Judgments Be Collected?
There is a specific time period for collecting judgments, and it also varies by state. This “statute of limitations” is often 10-20 years long. In addition, in most states it can be renewed. For that reason alone, it’s best to try to avoid getting a judgment against you in the first place. And if it does happen, it’s best to try to resolve the debt.
Can Interest Accumulate on a Judgment?
Yes. In most states, interest may be charged on a judgment, either at any rate spelled out in state law, or at the rate described in the contract you signed with the creditor. In addition, the judgment may include court costs and attorney’s fees.
Anything Else I Should Know About Judgments?
A debt collector that threatens to get a judgment against you or to garnish your wages or seize your property may be making an illegal threat. Talk with a consumer law attorney to find out if that’s the case.
And just because you haven’t heard anything about a judgment in a while, that doesn’t mean you should assume it has gone away. It’s possible that the creditor could decide at a later time to try again to collect from you. Plus, an unpaid judgment may prevent you from buying a home or getting credit at a decent interest rate. So it’s a good idea to try to resolve the judgment, either by filing for bankruptcy or by paying off or settling the judgment when you are able to.
As long as you’re alive, you have to live somewhere and, generally speaking, you have two options: Rent an apartment (or a home) and line your landlord’s pocket; or buy a home, and over time, hopefully line your own.
This premise is one of David Bach’s most important messages. The author of the New York Times bestseller “The Automatic Millionaire,” is a firm believer in the idea that real estate is critical to building wealth. In fact, he says buying a home is one of the three most important actions people can take in pursuit of financial security.
“I’ve been a lifelong proponent of home ownership,” says Bach, author of 11 best selling books. “How do you build real wealth on an ordinary income? It’s not very sexy, but it’s a simple, timeless approach: Buy a home.”
It’s not merely the act of purchasing a home that Bach advocates. The secrets to financial success that he offers in “The Automatic Millionaire,” include urging readers to pay their homes off early via an approach he calls “automatic debt-free home ownership.”
It may sound radical to some, but according to Bach, who spent nine years as a financial adviser at Morgan Stanley, the common denominator among all of his clients who were able to retire early was that they had paid off their homes early.
Here’s Bach’s approach to debt-free home ownership.
1. Establish a Biweekly Mortgage Payment Plan
A biweekly payment plan is exactly what the name implies. Instead of only making monthly mortgage payments, split the payment down the middle and pay half every two weeks.
When you make a payment every two weeks, (instead of just one per month,) you end up making one extra month’s worth of payments annually. In other words, over the span of a year, you’re making 26 half payments, which is the equivalent of 13 full payments.
“By doing this, something miraculous will happen. Depending on your interest rate, you can end up paying off your mortgage early — somewhere between five and ten years early” he says in the book.
Additional Benefits of Biweekly Payments
The biweekly payment approach also saves the homeowner thousands, if not hundreds of thousands of dollars, in interest. (Having a good credit score can help you save on interest, too. If you don’t know where your credit stands, you can get your two free credit scores, updated every 14 days, on Credit.com.)
In his book Bach provides the example of a 30-year-mortgage on a $250,000 home. If the interest rate on that mortgage is 5%, then the interest paid over the life of the loan will be about $233,139. When paid biweekly, the same mortgage instead costs about $188,722 — a savings of more than $44,000.
Establishing a biweekly payment plan merely requires calling your lender. If the mortgage is held by a large bank, they may refer you to a third-party that handles payment processing.
But one critical point Bach makes in the book is this: Before signing onto biweekly mortgage payments ask the servicing company what the fee is for the program and what they do with your money when they receive it. The second question is particularly important because some companies hang onto the extra money you’re putting toward the mortgage and send it to your mortgage holder all at once at the end of the month.
You want the extra payments applied to your mortgage as soon as possible, so that you’re paying down the mortgage faster.
You also cannot just split your monthly mortgage payment in half yourself (without talking to your mortgage holder, bank or other servicing company) and mail in payments every two weeks. The bank may send the extra payment back to you, unsure of what to do with it.
The next approach to debt-free home ownership outlined in Bach’s book is a plan he calls “No-Fee Approach No. 1.” It involves merely adding 10% to whatever your monthly mortgage payment happens to be. If your monthly payment is $1,342, pay an extra $134 dollars each month. (Sending the bank $1,467 per month instead of $1,342.)
This approach leads to paying off a home in 25 years, instead of 30, saving about $44,000. However, Bach urges making the extra 10% automatic, so that you don’t come up with excuses not to do it. In other words, have the $1,467 automatically deducted from your checking account each month.
3. Make One Extra Payment Each Year
Pick one month each year and pay the mortgage twice. Translation: Send the bank one extra payment a year.
Try doing this with some of your tax refund, suggests Bach. But no matter when you choose to do it, don’t simply send the bank a check for double the normal mortgage amount.
According to Bach this will confuse the bank. He advises writing two checks. Send one in with your mortgage coupon and the other with a letter explaining that you want the money applied to your principal.
The big takeaway according to Bach is that if you don’t buy a home, you won’t get on the escalator to wealth that home ownership provides. He says this message is particularly important for millennials who have been shying away from home ownership.
“The critical point is that one — you can buy a home. Two — you should buy a home. And three — you will be glad that you did,” says Bach.
Countless high school seniors are eagerly awaiting responses to their college applications.
Everyone wants that “big envelope” — or whatever the digital version of that is now — but that’s not the only thing bringing on the anxiety. Students are also thinking about how much this education is going to cost them.
About 85% of respondents to an annual survey conducted by The Princeton Review estimated college would cost them $50,000 or more, and of that group, 43% expected it to cost more than $100,000. (If you have student loans, or are going to need them, it’s important you think about how they’re going to impact your credit. You can keep an eye on it by reviewing a free snapshot of your credit report on Credit.com.)
That’s no subtle amount of money — an amount most people probably don’t just have lying around — so it makes sense that the level of debt parents and/or their child will take on to pay for the degree was the biggest worry for both parents and students for the past five years of the survey.
Still, 99% of respondents said they feel the investment will be worth it.
These findings are based on responses from 10,519 people (8,499 students applying to college and 2,020 parents of college applicants) in the U.S. as well as people from more than 20 other countries. The survey was conducted from Aug. 2016 through early March 2017 and appeared in the Best 381 Colleges: 2017 Edition and on The Princeton Review’s website.
As part of the survey, students were asked what their dream college would be while parents were asked what college they’d like to see their child attend if chance of acceptance and cost weren’t an issue.
Respondents named more than 510 colleges, universities and other post-secondary institutions — and, after tallying them all up, The Princeton Review came up with the top 10 for each category. Click through to find out what the results were.
Student loans are different from almost any other form of borrowing. Unlike credit cards or other unsecured debts, they can rarely be discharged in bankruptcy. (You can learn more about the implications of bankruptcy here.) Legally, it’s better to think of college and grad school debt as akin to a child support payment.
The trouble began in the mid 1970s, as student loans became common and urban legends around “deadbeat” former students started to spread. In 1976, Congress considered a dramatic change to the nature of student loans — taking them out of the bucket that makes them similar to credit cards or personal loans, and moving them into the bucket that governs criminals like tax scofflaws. Back then, Congress was wise enough to commission a Government Accounting Office study, making such a step permanent.
The study came back showing that fewer than 1% of student loan borrowers had declared bankruptcy. That led Rep James O’Hara (D-Mich.) to say it would be grossly unfair to lump them in with the deadbeats. Soon after, the U.S. Senate voted to strip the provision from a proposed bankruptcy reform bill that made college debt non-dischargeable. But for reasons unknown, a group of Congressmen in the House, led by Rep. Allen E. Ertel (D-Pa.), held firm to their conviction that student loans were creating a moral hazard. They won the day, and non-dischargability of student loans was included in the Bankruptcy Reform Act of 1978.
The 1978 limitation meant students had to try to pay their loans back for at least five years before they could seek relief in bankruptcy court. Even today, critics of the way bankruptcy laws work don’t find fault in that notion — to prevent someone from leaving school and immediately erasing their debt before making an honest effort to earn an income.
However, the 1978 law opened the door for further tightening of the debt noose on borrowers, which happened methodically over the next decades. In 1990, the repayment period before a discharge was extended to seven years. The Debt Collection Improvement Act of 1996 allowed Uncle Sam to garnish Social Security checks. Then, in 1998, the seven-year ban became infinite. Loans made or guaranteed by Uncle Sam to students could never be discharged, with very few exceptions.
Worse still, in 2005, the permanent ban on bankruptcy for student borrowers was extended to private student loans — those that have nothing to do with Uncle Sam. Private banks lending teenagers money for college now hold a “till death do us part” contract.
Times Have Changed
Steven M. Palmer, a Seattle-based bankruptcy attorney who has written about the history of student loans, said it’s important to keep some perspective about what Congress might have been thinking back in the 1970s.
In 1976, tuition, room and board cost an average of $2,275, according to the Department of Education (in current dollars). By 2015, it was $25,810.
“Back then, the cost of education was so much less,” Palmer said. “The total amount of debt was a tiny fraction of what it is today … The system has led us to where we are now, where everyone has to take out student loans. And then they are getting out of school and not able to find jobs.”
For the desperate student borrower, there is an exception to the bankruptcy code, known as “undue hardship.” But practically speaking, that’s legalese for “nearly impossible.” (Disabled borrowers may also qualify for a total disability discharge of their education debt.)
An attempt to discharge a student loan requires a separate legal process from a traditional bankruptcy, called a Complaint to Determine Dischargeability. It’s an adversarial process that can require discovery, depositions and even arguments in court against Department of Education lawyers.
This can cost the debtor 10 times the price of a standard bankruptcy, Palmer said. And an attempt to get free from student loans can easily cost $20,000 to $30,000 in fees — which still may not work. Also, said Palmer, it’s critical to remember that declaring bankruptcy is hardly easy, nor does it erase all a family’s problems.
“Many of my clients have so much they still need to end up paying after bankruptcy, my counseling is often to ask, ‘How will you be better off?’ In some cases, they are really in a terrible spot … really still pretty well screwed after the bankruptcy.”
More Calls for Reform
In 2007, Michigan Professor John A. E. Pottow wrote the definitive history of the issue in an academic paper, “The Nondischargeability of Student Loans in Personal Bankruptcy Proceedings: The Search for a Theory.”
“This is harsh and dramatic treatment, and it is worthy of scholarly attention,” he wrote.
Pottow dispensed with most operating theories using data – that bankruptcy encourages students to commit fraud, or that Uncle Sam is merely protecting taxpayers, for example. He ultimately suggested some kind of income-contingent test, which ties bankruptcy eligibility to a calculation that takes into account school costs and potential post-school income.
“In addition to being attractive theoretically, income contingency could also help a troubling trend,” he wrote. Apparently certain “sub-prime” schools target a financially vulnerable client base by upselling classes and educational programs of dubious worth, confident that they will have repayment leverage through non-dischargeability in bankruptcy. An income-contingent approach might dry up this unwelcome market.”
More recently, in a 2012 report, the Consumer Financial Protection Bureau called on Congress to make bankruptcy available to some student debt holders.
“(It would be) prudent to consider modifying the code in light of the impact on young borrowers in challenging labor market conditions,” CFPB director Richard Cordray said.
Palmer, the bankruptcy lawyer, noted giving such debtors a fresh start wouldn’t only help former students. College debt has been tied to delayed household formation, which can have a domino effect: Young graduates may get married later, start families later, buy homes later, and so on. (If this sounds like you, here’s how to tell if you’re ready to shop for a home.)
Other critics have gone even farther.
David Graeber, author of the book, “Debt: The First 5000 Years,” says the punishing student loan situation is wrecking a generation, and by extension, its future.
“If there’s a way of a society committing mass suicide, what better way than to take all the youngest, most energetic, creative, joyous people in your society and saddle them with, like $50,000 of debt so they have to be slaves?” he said at a talk in 2013. “There goes your music. There goes your culture.”
For credit card holders, interest rate hikes are never good news. Unfortunately, that’s what’s looming on the horizon.
It’s been widely reported that the Federal Reserve is contemplating an increase to the benchmark interest rate in mid-March, the first of an expected three rate increases in 2017.
Higher interest rates from the Fed ultimately translate into higher interest on your credit card debt and more money out of your pocket.
But that doesn’t have to be the case. Financial advisers suggest a variety of preemptive measures to avoid being impacted by the rising rates, or to at least soften the blow.
1. Pay Off Balances as Quickly as Possible
We’d all pay off our credit card balances now if we could, right? If you don’t have the cash to clear your cards of debt before rate hikes set in, try to pay a little more each month than you typically do, said Aaron Aggerwal, assistant vice president of credit card lending at Navy Federal Credit Union.
“If your minimum payment is $30, but you can afford to put down $40, that small bit will make a big impact down the road,” Aggerwal said.
2. Transfer Balances to a Zero-Interest Credit Card
There are varying schools of thought regarding the wisdom of transferring balances to credit cards with zero-interest introductory rates.
Michael Foguth, of Michigan-based Foguth Financial Group, said it’s a savvy approach when the alternative is paying interest on your debt each month.
“Play these companies against themselves,” he said. “If you’re a consumer and you have a balance on a credit card, and you’re paying an interest rate on that balance, go out and find someone who will buy your business…Why pay 3% when there’s zero out there? When zero is out there, go after zero.”
However, Foguth urges consumers to research various offers and figure out which one is best when considering a balance transfer. Ideally, it’s one that does not charge a transfer fee.
Also be sure to check your credit score to see if you can qualify for a balance transfer card. You can view two of your scores free, updated every 14 days, on Credit.com.
Kerri Moriarty, of Boston-based Cinch Financial, also advises consumers do the math before jumping into a zero-interest balance transfer.
“Before you make the decision to transfer…calculate how much you will have to pay each month to get rid of the debt before the zero interest expires,” Moriarty said.
If you can’t pay the debt in full before that zero interest elapses, it may not be a good idea. Often the regular interest rates for these cards are higher than what you’re paying on an existing card, Moriarity said.
What’s more, balance transfer cards are designed to get you hooked. You start spending money at zero percent and forget to stop when the introductory rate is gone.
3. Consider Using a Home Equity Loan to Pay Credit Card Balances
Another option Foguth suggests is taking a home equity loan to pay your credit card debt before the interest rate hikes take effect.
There are two big reasons why this makes more sense financially than leaving the debt on a credit card. The first is that the interest on a home equity loan is tax deductible, Foguth said. The second reason is the lower interest on home equity loans.
“The interest on credit cards is often 15% to 20% and on a home equity loan it’s around 4%,” said Foguth.
But again, you must be disciplined.
“You don’t want to go back out and rack up $50,000 of debt,” Foguth said. “If you’re going to take money out on your home, you have to pay the monthly bill.”
4. Utilize Your Cash Rewards to Make Even More Credit Card Payments
One last suggestion from financial experts to help pay down your debt as quickly as possible – use your cash rewards to make additional payments, if you have a cash-back credit card.
This approach isn’t likely to make a huge dent in the average American’s credit card debt, but as Aggerwal noted earlier, every little bit counts.
American consumers owe mountains of debt, but one of these mountains looms large over all the others: student loans. It’s astonishing to consider: Add up every auto loan in the country, and total student loan debt is bigger. Add up every credit card bill in the country, you only get about three-quarters of the way up the student loan mountain. Only mortgage debt is greater, but those with mortgages have homes to show for their debt. These days, many Americans aren’t really sure what they got in return for their oppressive student loan bills.
There is little disagreement that adult life in America without a college degree is a struggle, and it’s only going to get harder as the economy continues to modernize and manual labor continues to be devalued. So it’s imperative that America figures out how to educate its young people without bankrupting them — but it’s important to understand how we got here.
A History Lesson
In some ways, you can blame the Russians. Sputnik, and the Space Race, specifically. The federal government first got into the student loan business as a direct result of the USSR’s successful launch of Sputnik into orbit, and widespread fear that America was losing the Space Race. In fact, the law that created student loans was called The National Defense Education Act.
America has lent money to teenagers ever since, with the good intentions of helping them compete in the global economy. Today, some 44 million Americans owe student loan debt — a majority of college students graduate with at least some debt, and the class of 2016 had an average student loan debt of $37,000.
But even before the National Defense Education Act went into effect, America had committed to helping young kids who showed promise get college degrees. The federal government’s first real foray into pushing people towards college was The Servicemen’s Readjustment Act — the GI Bill — passed at the end of World War II. Colleges swelled as America repaid some of its debt to the Greatest Generation through free or discounted college.
By the 1950s, there were calls to extend what was generally considered a wildly successful program. But three terms in a row, a Senate-passed measure to increase federal funding for college died in the House. Then, on October 4, 1957, the Soviets sent shock waves through the country with their successful launch of Sputnik into space. That day Sen. Lister Hill (D-Alabama), chair of the Education and Labor Committee, read a memo from a clerk with a clever idea.
Hill latched onto the idea and National Defense Education Act was born.
Despite widespread public opinion demanding government action “in the wake of Sputnik” (the Senate history page’s words), House members were still resistant, calling federal college grants “socialist.” Other critics worried that the legislation interfered with the long-held principal that states and local communities were responsible for schooling. As debate progressed, supporters in the Senate offered a compromise: Much of the aid offered would come in the form of low-cost loans instead of grants.
That argument won the day. Dwight Eisenhower signed the National Defense Education Act in September 1958, 11 months after Sputnik’s launch. Uncle Sam was now a bank for college students.
Uncle Sam Becomes a Direct Lender to Students
NDEA loans are generally considered precursors to subsidized loans that became known as Perkins Loans.
That because it wasn’t long before the NDEA was expanded, and its inherent encouragement of defense-friendly subjects dropped. An amendment to the law signed by Eisenhower in 1964 increased funding, raised borrowing limits, and struck the provision that special consideration should be given to students who showed proficiency in math, science, engineering, or foreign languages.
By 1968, America had spent $3 billion extending student NDEA loans to 1.5 million undergraduate students.
In other words, Uncle Sam’s role as a direct lender for higher education was fairly well established by the time Lyndon Johnson’s Great Society ideas took hold. In 1965, the Higher Education Act included a further expansion of both loans and grants, this time aimed at lower-income Americans. The HEA established what we now know as the Free Application for Federal Student Aid (FAFSA), and directed the Department of Education to administer lending. Thus, the Guaranteed Student Loan (precursor to the Stafford Loan) was created.
HEA loans were different than NDEA loans in an important way, however. Students borrowed from banks, with the federal government acting only as a guarantor. That made Uncle Sam a co-signer, expanding the kind of funding available. (Since then, Congress has vacillated between preferring the co-signer role, and the banker role. Today, most federal loans are direct loans, but that could change again.)
Not surprisingly, college attendance soared, more than doubling from 1960 to 1970 (from 3.5 million to 7.5 million).
The Higher Education Act requires reauthorization every five years, each one a chance for Congress to change the law. Many of those provisions have been intended to expand the opportunities afforded by it. The 1972 Equal Opportunity in Education Act, known as Title IX, was passed to prevent discrimination based on gender. That same reauthorization also created the Student Loan Marketing Association (Sallie Mae), designed to encourage lending. In the 1980 reauthorization of HEA, PLUS loans were created, ultimately allowing parents to borrow money from Uncle Sam to pay for their kids’ college.
As Enrollments Rise, So Do Tuitions
Each loan expansion meant college attendance continued to expand, hitting 10.8 million by 1983. Today, it’s 20 million.
With more customers, and more funding, it should be no surprise that college tuition has soared right along with them. According to the College Board, annual tuition at a public (state) college averaged $428 in 1971-72. This year, it’s $9,648. During that same span, private tuition rose from $1,883 to $33,479.
So it should be no surprise that a chart showing the total outstanding student loan debt looks like a picture of the steep side of Mt. Everest. In 1999, former students owed $90 billion. By 2011, that figure had grown to $550 billion, an astonishing 550%. Since then, student loan debt has more than doubled … again.
It’s important to note, however, that while one theory holds that the history of ever-widening availability of credit has led directly to higher tuition costs and higher debt, that’s not the only possible explanation. Higher education advocates also point to reduced state government spending on state colleges. As one example, Ohio State received 25% of its budget from the state in 1990. By 2012, that percentage had fallen to 7%. Students, often via borrowed money, must pay the difference.
F. King Alexander, president of Louisiana State University, painted a bleak picture in testimony before a Senate committee during 2015. More generous federal loan programs created in the 1950s and 60s had an unintended consequence: They nudged budget-crunched state governments towards a dark solution.
“State funding for higher education sits currently around 48% to 50% below where it was in 1981,” he said. “It was assumed that any new federal funding policies would simply supplement state funding, not replace it.”
But, today, states are ”getting out of the higher education funding business, to the point that the federal government has now become the primary funding source,” Alexander said. And while schools, states, and the federal government argue about the higher math of higher education, many students are left with personal education budgets that just don’t add up. To put a fine point on it, attorney and student loan expert Steven Palmer offers this sobering example:
“In 1981, a minimum wage earner could work full time in the summer and make almost enough to cover their annual college costs, leaving a small amount that they could cobble together from grants, loans, or work during the school year,” he says in a blog on the topic. “In 2005, a student earning minimum wage would have to work the entire year and devote all of that money to the cost of their education to afford one year of a public college or university.”
A Longstanding (But Growing) Problem
It’s important to note that burgeoning student loan debt — and the inherent problems those bills present to borrowers and their families — did not go unnoticed until recently. In fact, back in 1987, a New York Times article summarized the issue in a paragraph that sounds an awful lot like something Vermont Sen. Bernie Sanders might have said during the 2016 Democratic Party primary races.
The growth of the problem is affecting not only individual lives, some authorities believe. They say the burden of debt is also chasing many students away from poorly paid public service jobs and forcing others to defer the start of a family and the purchase of a home or car, with economic and social consequences that have not been measured … Such cases worry education officials and other experts, who say that record borrowing for college threatens the financial stability of a generation of young people and their families.
At the time the article was written, the average debt for public college graduates was $7,000 ($15,000 in 2017 dollars). Since then, college tuition has risen at about four times the rate of inflation, and student debt, right along with it.
How Do We Fix Those Inherent Problems?
President Donald Trump did discuss the student loan problem on the campaign trail; his most significant proposal involved slightly more expensive, but also more generous income-based repayment plans for debtors. His plan would require 12.5% income contributions, but provide loan forgiveness earlier. The timetable for such a proposal is unclear.
The newly-minted head of the Department of Education, Betsy DeVos, said during confirmation hearings that the (then) $1.3 trillion in student loan debt is “a very serious issue,” but didn’t indicate support for any particular solution. In her testimony, there is this tea leaf:
There is no magic wand to make the debt go away. But we do need to take action. It would be a mistake to shift that burden to struggling taxpayers without first addressing why tuition has gotten so high. For starters, we need to embrace new pathways of learning. For too long, a college degree has been pushed as the only avenue for a better life. The old and expensive brick, mortar, and ivy model is not the only one that will lead to a prosperous future.
A comprehensive solution will almost certainly require another reauthorization of the Higher Education Act. The last reauthorization was signed by George W. Bush in 2008. It has been temporarily extended since then — Congress punted on a reauthorization during election season, which means it is overdue for another overhaul. DeVos told the Senate that she’s ready to get to work on that.
“I look forward to working with Congress and all stakeholders to reauthorize the Higher Education Act to meet the needs of today’s college students,” she said. The Education Department did not immediately respond to Credit.com’s request for comment as to whether there were any updates regarding DeVos’ plans since she testified.
Many issues remain on the table: Stakeholders are already arguing about enforcement of new rules against for-profit schools and the future of government direct lending vs. “co-signing” for borrowers. But the $1.4 trillion, 70-year-old problem is now an elephant in America’s living room — and no administration can make debt like that simply disappear.
What Can Students Do?
While solutions to the systemic student loan problem are unlikely to come to fruition overnight, there are some steps struggling borrowers can take to stay current on their payments — and to preclude that debt from harming their credit. (You can see how your student loans may be affecting yours by viewing two of your free credit scores, updated every 14 days, on Credit.com.)
Federal student loans borrowers, for instance, can apply for a deferment or forbearance if they’re temporarily unable to repay those bills post-college. They can also apply for an income-based repayment plan that can help lower monthly payments to an affordable level. Private student loan borrowers may also have these options available to them, but it varies by lender and there may be fees attached to certain requests. (It’s best to ask about these options ahead of time — you can find more about vetting private student lenders here.)
There are also ways to lower the cost of your college education before and while in school. These options include looking into scholarships and grants, working part-time while taking classes and attending community college for few years before transferring to a four-year institution — more on how to pay for college without building a mountain of debt here.
In MagnifyMoney’s 2017 Divorce and Debt Survey, we polled a national sample of 500 divorced U.S. adults to understand how money played into the end of their relationship.
Here are our key findings:
AMONG ALL SURVEY RESPONDENTS
More money = more problems
Among all respondents, 21% cited money as the cause of their divorce.
In fact, the more money a respondent earned, they more likely they were to cite money as the cause of their divorce.
Among people who earned $100,000 or more, 33% cited money as the cause of their divorce.
By contrast, only 25% of people who earned $50,000 to $99,999 cited money as the cause of their divorce. And the lowest income-earners, those earning $50,000 and under, were the least likely to say money was the cause of their divorce at just 18%.
Money might cause more stress for younger couples
While rates of divorce rose along with the amount of a couple’s’ earnings, the opposite seemed to be true when it came to age. Younger couples reported that financial issues drove them to divorce, while the rate went down for older couples.
Among 25-44 year olds: 24% cited money as the cause of their divorce
Among 45-64 year olds: 20% cited money as the cause of their divorce
Among those 65 and over: 18% cited money as the cause of their divorce
AMONG SURVEY RESPONDENTS WHO CITED MONEY AS THE REASON FOR THEIR DIVORCE…
Divorce often led to debt
Between legal fees, paying for your own expenses instead of sharing the burden with a partner, and other costs that come up when you choose to end a marriage, divorce gets expensive. For couples who already faced financial problems, the added expense often meant getting into even more debt.
Well over half (59%) of respondents who cited money as the cause of their divorce also said they went into debt because of their divorce. And a whopping 60% said their credit score fell after the divorce. By comparison, just 36% of the total survey group said they went into debt because their divorce, and only 37% said their credit score suffered.
Among those who cited money as the cause of their divorce…
2% of respondents said they got away with $500 or less in debt.
13% said they racked up debts of $500 to $4,999.
14% said they took on between $10,000 and $19,999 worth of debt
23% said they owed $20,000 or more
Among all survey respondents…
2% were less than $500 in debt
8% were $500 to $4,999 in debt
6% were $5,000 to $9,999 in debt
8% were $10,000 to $19,999 in debt
12% were $20,000 or more in debt
Overspending was the biggest source of tension
Nearly one-third (30%) of those who said that money was the reason for their divorce also said overspending was the most common problem they faced. Overspending can easily add up to carrying credit balances when the cash runs out — and in fact, credit card debt was the second most common money problem these respondents cited.
Bad credit was also a problem, along with other types of debt like medical and student loan debt. Most financial issues seemed to stem from bad cash flow habits, however. Only 3% said bad investments caused trouble within their relationships.
Financial infidelity was rampant
When overspending and debt become issues within a marriage, partners may feel compelled to hide mistakes and bad money habits from each other. In fact, 56% of survey respondents who said money was the reason for their divorce also admitted that they or their spouse lied about money or hid information from the other person. By comparison, just 33% of all divorcees surveyed said they lied or were lied to about money during their marriage.
Among the survey respondents who cited money as the cause of divorce…
37% said their spouse lied to them about money
8% said they lied to their spouse about money
10% reported that they both lied to each other.
Among all survey respondents…
24% said they their spouse lied about money
3% said they lied to their spouse about money
5% said they both lied about money
Most would rather keep separate bank accounts
With financial stress causing trouble in relationships, it’s not too surprising that 57% of people who cited money as the cause of their divorce said married couples should maintain separate bank accounts. Forty-three percent maintained that within a marriage, couples should keep joint accounts — even though their marriages ended in divorce.
Most failed to keep a budget
A whopping 70% of respondents who said their marriages ended due to money said they didn’t stick to a budget during their marriage. A budget is such a simple tool, but one that’s essential to tracking cash flow and understanding where money comes from — and goes.
Most don’t believe prenups are necessary
Dealing with divorce is never easy, especially when financial problems caused the separation and continue to plague couples after the paperwork is signed thanks to new debts.
Still, 58% of survey respondents whose marriage ended in divorce due to money said they didn’t think couples should get a prenuptial agreement before tying the knot.
How to deal with your finances after divorce
Here are a few tips to help you get back on your feet, financially speaking, once your divorce is finalized:
Recognize your bad money habits. Money issues can negatively impact a relationship, and even cause it to end. But they can hurt you as an individual, too.
Create a budget. Remember, most people whose marriage ended due to financial stresses didn’t keep a budget during their relationship. Doing so now will help you stay on top of your money and know exactly where it goes. That will allow you to make better spending decisions and help prevent taking on even more debt.
Don’t make major money decisions right away. If you just finalized your divorce, you may feel like you need to make major changes or choices right away. But take a moment to slow down and give yourself time to heal. You shouldn’t make emotional decisions with your money — and going through a divorce is an emotional time. Wait until you can think more clearly and rationally before doing anything with your assets, cash, or career.
Money should not be your therapy. Because divorce can do a number on you, mentally and emotionally, you may need help with the healing process. But that does not mean retail therapy! It’s tempting to spend on material things in an effort to make yourself feel better, but any happiness you feel from shopping sprees is temporary and fleeting. It can also leave you into even more debt. Put away your credit cards, stick to cash, and use your budget to guide you.
Work to rebuild your credit. 60% of people reported their divorce hurt their credit. If your credit suffered too, take steps to rebuild it. Pay down debts, make all payments on time and in full, and don’t continue to carry balances on credit cards. Try to avoid taking out too many new loans or lines of credit all at once.
You should also work through this checklist of important actions to take after your divorce:
Update your beneficiary information on your accounts and insurance policies.
Update your will and estate plan.
Make sure all of your assets are in your name only and no longer jointly held.
Cancel accounts or services you held jointly, like utilities or cable. Open new accounts for you in your name.
Allocate a line item for savings in your budget. You want to start rebuilding your own cash reserves. Set an automatic monthly transfer from your checking to your savings so you don’t forget.
Close joint credit cards and get a new line of credit in your name.
If you have children, keep careful records of expenses for them that you plan to split with your ex, in case of disagreements. Ideally, make sure your divorce agreement includes an explanation of how child care will be split and who is responsible for what, financially.
Think about whether you need to hire new financial professionals to help you. You may want to find a new financial planner and certified public accountant. You’ll want to update your financial plan to reflect the fact that you’re no longer married.
Survey methodology: 500 U.S. adults who reported they were in a marriage that ended in divorce via Google Surveys from Feb. 2 to 4, 2017.
Are you tired of paying a high interest rate on your student loan debt? You may be looking for ways to refinance your student loans at a lower interest rate, but don’t know where to turn. We have created the most complete list of lenders currently willing to refinance student loan debt.
You should always shop around for the best rate. Don’t worry about the impact on your credit score of applying to multiple lenders: so long as you complete all of your applications within 14 days, it will only count as one inquiry on your credit score. You can see the full list of lenders below, but we recommend you start here, and check rates from the top 4 national lenders offering the lowest interest rates. These 4 lenders also allow you to check your rate without impacting your score (using a soft credit pull), and offer the best rates of 2017:
A comparison tool which lets you see student loan terms all at once, with no need to give up personal information.
But before you refinance, read on to see if you are ready to refinance your student loans.
Can I Get Approved?
Loan approval rules vary by lender. However, all of the lenders will want:
Proof that you can afford your payments. That means you have a job with income that is sufficient to cover your student loans and all of your other expenses.
Proof that you are a responsible borrower, with a demonstrated record of on-time payments. For some lenders, that means that they use the traditional FICO, requiring a good score. For other lenders, they may just have some basic rules, like no missed payments, or a certain number of on-time payments required to prove that you are responsible.
This is particularly important if you have Federal loans.
Don’t refinance Federal loans unless you are very comfortable with your ability to repay. Think hard about the chances you won’t be able to make payments for a few months. Once you refinance, you may lose flexible Federal payment options that can help you if you genuinely can’t afford the payments you have today. Check the Federal loan repayment estimator to make sure you see all the Federal options you have right now.
If you can afford your monthly payment, but you have been a sloppy payer, then you will likely need to demonstrate responsibility before applying for a refinance.
But, if you can afford your current monthly payment and have been responsible with those payments, then a refinance could be possible and help you pay the debt off sooner.
Is it worth it?
Like any form of debt, your goal with a student loan should be to pay as low an interest rate as possible. Other than a mortgage, you will likely never have a debt as large as your student loan.
If you are able to reduce the interest rate by re-financing, then you should consider the transaction. However, make sure you include the following in any decision:
Is there an origination fee?
Many lenders have no fee, which is great news. If there is an origination fee, you need to make sure that it is worth paying. If you plan on paying off your loan very quickly, then you may not want to pay a fee. But, if you are going to be paying your loan for a long time, a fee may be worth paying.
Is the interest rate fixed or variable?
Variable interest rates will almost always be lower than fixed interest rates. But there is a reason: you end up taking all of the interest rate risk. We are currently at all-time low interest rates. So, we know that interest rates will go up, we just don’t know when.
This is a judgment call. Just remember, when rates go up, so do your payments. And, in a higher rate environment, you will not be able to refinance to a better option (because all rates will be going up).
We typically recommend fixing the rate as much as possible, unless you know that you can pay off your debt during a short time period. If you think it will take you 20 years to pay off your loan, you don’t want to bet on the next 20 years of interest rates. But, if you think you will pay it off in five years, you may want to take the bet. Some providers with variable rates will cap them, which can help temper some of the risk.
Places to Consider a Refinance
If you go to other sites they may claim to compare several student loan offers in one step. Just beware that they might only show you deals that pay them a referral fee, so you could miss out on lenders ready to give you better terms. Below is what we believe is the most comprehensive list of current student loan refinancing lenders.
You should take the time to shop around. FICO says there is little to no impact on your credit score for rate shopping as many providers as you’d like in a single shopping period (which can be between 14-30 days, depending upon the version of FICO). So set aside a day and apply to as many as you feel comfortable with to get a sense of who is ready to give you the best terms.
Here are more details on the 5 lenders offering the lowest interest rates:
1. SoFi: Variable Rates from 2.565% and Fixed Rates from 3.375% (with AutoPay)*
SoFi (read our full SoFi review) was one of the first lenders to start offering student loan refinancing products. More MagnifyMoney readers have chosen SoFi than any other lender. Although SoFi initially targeted a very select group of universities (it started with Stanford), now almost anyone can apply, including if you graduated from a trade school. The only requirement is that you graduated from a Title IV school. You need to have a degree, a good job and good income in order to qualify. SoFi wants to be more than just a lender. If you lose your job, SoFi will help you find a new one. If you need a mortgage for a first home, they are there to help. And, surprisingly, they also want to get you a date. SoFi is famous for hosting parties for customers across the country, and creating a dating app to match borrowers with each other.
2. Earnest: Variable Rates from 2.75% and Fixed Rates from 3.75% (with AutoPay)
Earnest (read our full Earnest review) offers fixed interest rates starting at 3.75% and variable rates starting at 2.75%. Unlike any of the other lenders, you can switch between fixed and variable rates throughout the life of your loan. You can do that one time every six months until the loan is paid off. That means you can take advantage of the low variable interest rates now, and then lock in a higher fixed rate later. You can choose your own monthly payment, based upon what you can afford (to the penny). Earnest also offers bi-weekly payments and “skip a payment” if you run into difficulty.
3. CommonBond: Variable Rates from 2.56% and Fixed Rates from 3.37% (with AutoPay)
CommonBond (read our full CommonBond review) started out lending exclusively to graduate students. They initially targeted doctors with more than $100,000 of debt. Over time, CommonBond has expanded and now offers student loan refinancing options to graduates of almost any university (graduate and undergraduate). In addition (and we think this is pretty cool), CommonBond will fund the education of someone in need in an emerging market for every loan that closes. So not only will you save money, but someone in need will get access to an education.
4. LendKey: Variable Rates from 2.27% and Fixed Rates from 3.25% (with AutoPay)
LendKey (read our full LendKey review) works with community banks and credit unions across the country. Although you apply with LendKey, your loan will be with a community bank. If you like the idea of working with a credit union or community bank, LendKey could be a great option. Over the past year, LendKey has become increasingly competitive on pricing, and frequently has a better rate than some of the more famous marketplace lenders.
In addition to the Top 4 (ranked by interest rate), there are many more lenders offering to refinance student loans. Below is a listing of all providers we have found so far. This list includes credit unions that may have limited membership. We will continue to update this list as we find more lenders. This list is ordered alphabetically:
Alliant Credit Union: Anyone can join this credit union. Interest rates start as low as 3.75% APR. You can borrow up to $100,000 for up to 25 years.
Citizens Bank: Variable interest rates range from 2.37% APR – 8.16% APR and fixed rates range from 4.74% – 8.24%. You can borrow for up to 20 years.
College Avenue: If you have a medical degree, you can borrow up to $250,000. Otherwise, you can borrow up to $150,000. Fixed rates range from 4.75% – 7.35% APR. Variable rates range from 2.63% – 5.88% APR.
Credit Union Student Choice: If you like credit unions and community banks, we recommend that you start with LendKey. However, if you can’t find a good loan from a LendKey partner, this tool could be helpful. Just check to see if you or an immediate family member belong to one of their featured credit union and you can apply to refinance your loan.
DRB Student Loan: DRB offers variable rates ranging from 3.89% – 6.54% APR and fixed rates from 4.50% – 7.45% APR.
Eastman Credit Union: Credit union membership is restricted (see eligibility here). Fixed rates start at 6.50% and go up to 8% APR.
Education Success Loans: This company has a unique pricing structure: your interest rate is fixed and then becomes variable thereafter. You can fix the rate at 4.99% APR for the first year, and it is then becomes variable. The longest you can fix the rate is 10 years at 7.99%, and it is then variable thereafter. Given this pricing, you would probably get a better deal elsewhere.
EdVest: This company is the non-profit student loan program of the state of New Hampshire which has become available more broadly. Rates are very competitive, ranging from 3.94% – 7.54% (fixed) and 2.56% – 6.16% APR (variable).
First Republic Eagle Gold. The interest rates are great, but this option is not for everyone. Fixed rates range from 2.25% – 4.10% APR. Variable rates range from 2.43% – 4.23%. You need to visit a branch and open a checking account (which has a $3,500 minimum balance to avoid fees). Branches are located in San Francisco, Palo Alto, Los Angeles, Santa Barbara, Newport Beach, San Diego, Portland (Oregon), Boston, Palm Beach (Florida), Greenwich or New York City. Loans must be $60,000 – $300,000. First Republic wants to recruit their future high net worth clients with this product.
IHelp: This service will find a community bank. Unfortunately, these community banks don’t have the best interest rates. Fixed rates range from 4.75% to 9% APR (for loans up to 15 years). If you want to get a loan from a community bank or credit union, we recommend trying LendKey instead.
Navy Federal Credit Union: This credit union offers limited membership. For men and women who serve, the credit union can offer excellent rates and specialized underwriting. Variable interest rates start at 3.13% and fixed rates start at 4.00%.
Purefy: Only fixed interest rates are available, with rates ranging from 3.50% – 7.28% APR. You can borrow up to $150,000 for up to 15 years.
RISLA: Just like New Hampshire, the state of Rhode Island wants to help you save. You can get fixed rates starting as low as 3.49%. And you do not need to have lived or studied in Rhode Island to benefit.
UW Credit Union: This credit union has limited membership (you can find out who can join here, but you had better be in Wisconsin). You can borrow from $5,000 to $60,000 and rates start as low as 2.49% (variable) and 4.04% APR (fixed).
Wells Fargo: As a traditional lender, Wells Fargo will look at credit score and debt burden. They offer both fixed and variable loans, with variable rates starting at 3.99% and fixed rates starting at 6.24%. You would likely get much lower interest rates from some of the new Silicon Valley lenders or the credit unions.
You can also compare all of these loan options in one chart with our comparison tool. It lists the rates, loan amounts, and kinds of loans each lender is willing to refinance. You can also email us with any questions at firstname.lastname@example.org.
Digging out of the debt hole can feel frustrating, intimidating and ultimately impossible. Fortunately, it doesn’t have to be any of those things if you learn how to take control.
Paying down debt is not only about finding the right financial tools, but also the right psychological ones. You need to understand why you got into debt in the first place. Perhaps it was a medical emergency or a home repair that needed to be taken care of immediately. Maybe you’d already drained your emergency fund on one piece of bad luck when misfortune struck again. Or maybe you’re struggling with a compulsive shopping problem, so paying down debt will likely result in you accumulating more until the addiction is addressed.
Understanding the why and how of your debt isn’t the only reason psychology plays a role in how you should create your debt attack plan.
You also need to understand what motivates you to succeed. Do you want to pay down your debt in the absolute fastest amount of time possible that will save more money or do you want to take some little wins along the way to keep yourself motivated?
The common terms for these debt repayment strategies are:
Debt avalanche: starting with the highest interest rate and working your way down, which saves both time and money.
Debt snowball: paying off small debts first to get the warm and fuzzies that will motivate you to keep going.
Whichever version you pick needs to set you up to be successful in your debt repayment strategy. Now it’s time to find the proper tools to help you dump that debt for good.
The first step in crafting a debt repayment strategy is to understand what you’re eligible to use. Your credit score will play a big role in whether or not you’ll qualify for products like balance transfers or competitive personal loan offers.
A credit score of less than 600 will make it difficult for you to qualify for a personal loan and will eliminate you from taking on a balance transfer offer.
If you have a credit score above 600, you have a good chance of qualifying for a personal loan at a much lower interest rate than your credit card debt. With new internet-only personal loan companies, you can shop for loans without hurting your score. Use this tool to see if you can get approved for a loan without hurting your score. Click here to get rates from multiple lenders in just a few minutes, without a credit inquiry hurting your score. For people with the best scores, rates start as low as 4.80%.
Not sure what your credit score is? Click here to learn how to find out.
Now let’s talk about the financial tools to add into your debt repayment strategy in order to dig out of the hole.
Let’s say you have $10,000 in credit card debt, and are stuck paying 18% interest on it.
You already know that putting as much spare cash as you can toward paying down your debt is the most important thing to do. But once you’ve done that, so what’s next?
Use your good credit to make banks compete and cut your rates
MagnifyMoney’s Paying Down Debt Guide has easy to follow tips on how to put banks to work for you and get your rates cut.
You could save $1,800 a year in interest and lower your monthly payments based on several of the rates available today. That means you could pay it off almost 20% faster.
Here’s how it works.
Option One: Use a Balance Transfer (or Multiple Balance Transfers)
If you trust yourself to open a new credit card but not spend on it, consider a balance transfer. You may be able to cut your rate with a long 0% intro APR. You need to have a good credit score, and you might not get approved for the full amount that you want to transfer.
Your own bank might not give you a lower rate (or only drop it by a few percent), but there are lots of competing banks that may want to steal the business and give you a better rate.
Our favorite offer is Chase Slate®. You can save with a $0 introductory balance transfer fee, 0% introductory APR for 15 months on purchases and balance transfers, and $0 annual fee. Plus, receive your Monthly FICO® Score for free.
If you don’t think Chase is for you, consider Discover, which offers an intro 0% APR for 21 months (with a 3% balance transfer fee). MagnifyMoney keeps the most complete list of the longest and lowest rate deals available right now, including deals with no fees. Just answer a few questions about how your debt and much you can afford to pay, and you’ll get a personal list of the deals that will save you the most.
It also has six tips to make sure you do a balance transfer safely. If you follow them you’ll save thousands on your debt by beating the banks at their game.
You might be scared of a balance transfer, but there is no faster way to cut your interest payments than taking advantage of the best 0% or low interest deals banks are offering.
Thanks to recent laws, balance transfers aren’t as sneaky as they used to be, and friendlier for helping you cut your debt.
Sometimes the first bank you deal with won’t give you a big enough credit line to handle all your credit card debt. Maybe you’ll get a $5,000 credit line for a 0% deal, but have $10,000 in debt. That’s okay. In that case, apply for the next best balance transfer deal you see. MagnifyMoney’s list of deals makes it easy to sort them.
Banks are okay with you shopping around for more than one deal.
Option Two: Personal Loan
If you never want to see another credit card again, you should consider a personal loan. You can get prequalified without hurting your credit score, and find the best deal to pay off your debt faster. With just one application, you can get multiple loan offers with rates as low as 4.77% here.
Personal loan rates are often about 10-20%, but can sometimes be as low as 5-6% if you have very good credit.
Moving from 18% interest on a credit card to 10% on a personal loan is a good deal for you. You’ll also get one set monthly payment, and pay off the whole thing in 3 to 5 years.
Sometimes this may mean a higher monthly payment than you’re used to, but you’re better off putting your cash toward a higher payment with a lower rate.
And you’ll get out of debt months or years faster by leaving more money to pay down the debt itself.
Want to pay off your debt and save more money in 2017? You’re not alone! According to one survey of Google search data, searches for “Spend Less/Save More” were up 17.47% from 2016. Want to achieve your get-out-of-debt goal? If so, we recommend trying one of the five strategies here.
1. The Debt Snowball
This debt-payoff method, made famous by financial guru Dave Ramsey, has you pay off your smallest debts first. The idea behind the debt snowball is that you get a quick psychological boost from paying off some small debts from the get-go. This gives you the mental momentum to keep going when paying off debt.
To start a debt snowball, list your debts in order from smallest to largest. Use any extra money to pay off the smallest balance while you make minimum payments on your other debts. When your smallest debt is paid off, snowball that debt’s minimum payment, plus your extra cash towards paying off the next debt. By the time you get to the largest debt, you’ll be throwing a lot of money at it each month. (You can see how your debt is affecting your credit by viewing two of your credit scores, with updates every 14 days, on Credit.com.)
2. The Debt Avalanche
This is similar to the debt snowball in that you pay off one debt at a time. But it’s actually the more economical method of paying off debt. Instead of paying off smaller balances first, the debt avalanche has you start by paying off the debts with the largest interest rate.
The debt avalanche is a smart method if you already have the determination to make it through a long debt payoff process without the boost of paying off a few smaller debts early on. It can get you out of debt faster since you’ll stop accumulating interest on high-interest debts much more quickly.
3. The Debt Snowflake
This is a method that can be combined with one of the above options or used to pay off debt in any order you choose. The idea here is that you find small ways to save a few bucks, and then transfer that money saved toward debt payments.
With the debt snowflake method, you’ll need to be exceptionally aware of your spending patterns. For instance, if you normally spend $10 on a lunch out at work, but pack your lunch one day, you could save $5. That $5 is a snowflake that can then go toward paying off debt.
The key to debt snowflakes is to make sure they don’t “melt.” Get into the habit of transferring “snowflake” money to debt accounts immediately, or at least on a weekly basis. Otherwise, you run the risk of that hard-saved cash being used for other purposes.
4. The Credit Card Transfer
If much of your debt is in the form of high-interest credit card balances, consider using balance transfer offers to pay off that debt more quickly. Since credit cards often have interest exceeding 15%, it’s not unusual for most of your minimum payment to go toward interest, even on a relatively small balance. If you can transfer that balance to a card with a 0% introductory annual percentage rate, you can put more money toward the principal balance each month, paying off your debts more quickly.
Be careful, though, to read all the terms of a credit card balance transfer. Most cards charge a fee for the balance transfer. If you’ll pay off the card’s balance quickly, the transfer may actually cost more than it saves. You can find more info on some of the better balance transfer credit cards here.
5. The Half Payment Method
What if you’re on such a tight budget that you can’t even squeak out some extra dollars to start on a debt snowball or avalanche? One option is to start making half of your minimum payment every two weeks. Bi-weekly payments, which may fall when you get a paycheck, can save you money over time on debts that are compounded daily or monthly based on the average balance.
The reasoning behind biweekly payments is somewhat complex. But, essentially, paying more often allows less interest to accrue between payments, which means more of your payment goes toward the principal. Plus, if you make a half payment every two weeks, you’ll actually have made a whole extra minimum payment by the end of the year!
Half payments can help even out your bank account balance and can help bring down your debt balances more quickly. Combining the bi-weekly payment method with another method for applying any extra cash you scrape together toward one debt at a time could be a powerful option for meeting your financial resolution this year.