It’s perhaps one of the most important financial numbers you should know, but many people aren’t even sure exactly what it is. If someone were to ask, would you know your net worth? Would you even know what the question meant? If you’ve never heard the term until today, fear not. Here’s everything you need to know about that pesky little number that is one of the best indicators of your overall financial health.
What Is Net Worth?
In its simplest terms, the phrase net worth refers to the overall value of your goods and possessions minus what you owe. In broader terms, your net worth is the total value of all of your assets. Take your possessions — how much you have in savings, retirement accounts, your home value, checking accounts, etc. Then, subtract your overall debt — credit cards, student loans, debt, etc. Hopefully, when you subtract what you owe from your possessions you get a positive number. The higher the number, the better.
How Can I Build My Net Worth?
A high net worth is a good thing and there are a few different ways to focus on building your net worth.
1. Tackle Debt
The main thing you can do to increase your net worth is to pay off your debt. High-interest credit card debt is a great place to start. If you have multiple cards with balances, consider paying off the smallest balance first. This way you’ll receive a little boost early in your debt payoff schedule to help bolster you through what you need to do to pay off the rest. (Check out more methods for paying down credit card debt.)
The longer you hold on to debt, the more you’re likely to pay in interest rates. There are a lot of strategies to take that might make paying off debt easier. Consolidating your loans into one place might help make your loans more manageable if you have more than one. It might even be possible to refinance to a lower interest rate. Check out all your options before deciding which one is best for your situation.
2. Make More Money
This is easier said than done, but another way to work on your net worth is to simply bring in more cash. Whether that’s asking for a raise at your current job or taking on a side gig to bring in a little extra pocket money, the more you can pad your income, the better your net worth will be.
3. Invest in Retirement
If you have an employer offering to match your 401K policy and you aren’t taking them up on it, you’re lowering your net worth. If you’re taking part in a company match or contributing to a retirement plan but haven’t re-evaluated it in a while, it’s time to reconsider how much you’re putting away, and it might be time to increase it. Remember, you don’t need to have a retirement plan through work to invest in your future, there are other IRA options are available as well.
So you have some debt that you need to pay off. If you listen to the advice of many get-out-of-debt gurus, you should pay it off as quickly and intensely as possible. They say you should never set foot in a restaurant, go on vacation, or do anything “extra” until the last credit card and student loan are paid off.
This seems like a good approach. If you can just cut out all your extra expenses — and maybe bring in some additional income — you’ll get out of debt much sooner, right?
Well, maybe not.
In fact, becoming debt-free may be quite similar to getting to and maintaining a healthy weight. The intense, fast options may seem like a good idea, but they can actually have negative consequences.
Paying Off Debt & Yo-Yo Dieting
Intense weight loss strategies can often result in what’s called a “yo-yo diet.” It’s when you lose a bunch of weight quickly only to gain it back quickly after your intense efforts are done. Even Biggest Loser contestants aren’t immune to this problem.
If you cut calories dramatically for three weeks before a big event, sure you’ll lose weight. But you haven’t made sustainable changes that will help you stay healthy over the long term.
This is similar to getting out of debt. Sure, you can cut your budget to the absolute bare bones to pay off credit cards in a matter of months. But does this approach really help you build sustainable habits — and a sustainable budget — for the long run? Maybe not.
My husband and I struggled with this early on in our marriage. We wanted to pay off our student loans and car loan desperately. So for a few months, we’d cut everything extra out of our budgets. No restaurants. No fun money. No nothing.
It would work for a bit, and we’d make some progress. But eventually, we’d get to the point where we felt so restricted, we just had to break free. And break free we did. Usually to the tune of a couple hundred dollars or more of “unnecessary” spending.
We went through this cycle for literally years until we learned to take a more measured approach to our “debt diet.” We still keep a close eye on our spending and try not to waste money. But we each have a monthly allowance for things like new clothes, our hobbies, and other personal items. And we have a date night fund so that we can enjoy each other’s company out of the house at least once a month.
This extra spending means we’re not paying off debt as quickly. But it also means that we avoid those splurges that used to throw us completely off track.
You Should Still Enjoy Life
What’s the main point of losing weight on a diet? Sure, you want to look good in a pair of jeans. But you also want to be able to move more freely, have more sustainable energy levels, and just enjoy life more.
What’s the main point of getting out of debt? Sure, you want to stop paying ridiculous interest rates on your credit cards. But you also want to free up money in your budget so that you have more options financially, so that you can enjoy life more.
So what’s the point of dieting or paying off debt if you’re miserable for months or years while you’re doing it?
When you’re dieting, you could cut out everything but salads with dry grilled chicken and probably lose weight very quickly. Or you could learn to make delicious, healthy meals that you love. And you could give yourself tiny splurges once in a while. You might see slower, steadier weight loss progress, but you’ll enjoy life while working towards your goal.
The same applies when paying off debt. You could spend on only the absolute necessities — food, housing, utilities, and transportation — to pay off debt more quickly. Or you could create a reasonable, sustainable budget that allows for frugal vacations, occasional meals out, and entertainment options you love. Again, you’ll see slower, steadier progress, but you’ll actually enjoy life while getting to that debt-free goal.
Your Approach Depends On Your Situation
Are there some times when a quick crash diet may be appropriate? Sure. Bodybuilders who are already in excellent shape will often cut calories dramatically right before an event. They’re just taking their everyday discipline one step further for a few days or weeks.
Similarly, what if you’re generally good at managing your money but just had an unexpected emergency — a broken-down vehicle or a medical emergency, for instance — that bloated your credit card debt? In this case, a few weeks or a couple months’ worth of cutting your budget to the bone to pay off the debt may make sense. Since you’ve already got good money management habits in place, you’re unlikely to rebound into more unnecessary spending.
But if you’re staring down a scale that says you need to lose 50 pounds? Research shows that slow and steady is the way to go.
And if you’re staring at massive amounts of debt? Slow and steady may work better for you, too.
Some Tips & Tricks
So how do you get started with a slower, steadier approach to paying off debt? Here are some tricks we’ve swiped from the diet world:
Make smart swaps on things you eat every day. When you’re trying to cut calories, it’s amazing how much progress you can make just by switching to a lower-calorie salad dressing or sprucing up your breakfast routine. The same goes for your finances. Try refinancing your mortgage or auto loan, renegotiating or even eliminating your cable bill, or revamping your insurance policies for painless ways to save money month after month.
The quality of your calories matters. More and more research is saying that “calories in, calories out” isn’t the end-all-be-all of dieting. High-quality foods, especially healthy proteins and fats, can keep you satisfied for longer, making cutting calories easier. Similarly, not all spending is equally satisfying. If you only have a few extra bucks a month to enjoy life, spend it on what really makes you happy. (Hint: Experiences are usually a better bet than more stuff!)
Track your progress. Weekly weigh-ins are an important part of many weight loss programs. Weighing in often helps keep you motivated — and lets you spot problems quickly so you can correct your course. When paying off debt, keep track of your debts each month. Consider using a line chart to get a visual representation of your debt dropping each month over time.
Budget calories for enjoying. Many successful weight loss programs operate with the idea of a cheat meal, cheat day, or set number of cheat calories per week. This means you know how much and how often you can splurge. Do the same for your budget. Set aside some fun money each month, and you’ll reap the benefits of staying on track without feeling miserable.
Paying off debt isn’t exactly like dieting, of course. But you can draw plenty of parallels. So when you’re trying to get debt-free, think about ways to make your progress steady and sustainable over the long haul.
Many business owners run in the other direction when they hear the word debt. But debt can help a business thrive. If you take away the stigma, you can see how it can be used to your advantage — if you know how to manage it. Here are four tips for using debt to help grow your business.
1. You’ll Grow Faster
Taking out a loan can help you grow your business, creating more opportunity for profit. A loan can be used to purchase new equipment to develop your product quicker, increase your overall inventory or help open a new location. By taking out a loan, you give yourself room to grow without making additional investments with company profits.
Before taking on a new loan for your business, make sure you have a plan. If you take out a loan without one, or if your business is struggling financially, it may set you back. However, if you leverage your debt effectively, you could be on the right track to using your debt wisely. Before making any big financial decision for your business, consider speaking with a debt attorney or financial planner to help you weigh out your options. (Disclosure: I am a debt attorney.)
2. You May Keep Ownership of Your Business
Sometimes businesses need extra cash flow to expand and continue running smoothly. By choosing to take out a loan, you will owe the lending institution interest but retain full ownership of your business. Any profits you make after paying principal and interest will be yours to keep.
If you decide to take on a partner to increase capital, you may not only lose full control of your business but be asked to share profits, so be sure to think through the options before you sign up.
3. You May Get Tax Deductions
In most cases, the IRS will allow your business to deduct the interest paid on your loan if you used it for business purposes. This tax relief means more money for you and your business — a good thing since every dollar counts for a business owner. Consider speaking with a tax expert to see if you meet the requirements for tax relief.
4. You May Build Credit & Increase Your Spending Limit
When you decide to take out a loan for your business, a lending institution is trusting you to repay the debt. If you make responsible, on-time payments, you can increase your business’ creditworthiness, or business credit score. Smart credit habits can increase your overall spending limit, lower your future interest rates and help you obtain better terms. You’ll need decent credit to take out a business credit card, so be sure to check your credit score before you apply. You can view two of your credit scores for free on Credit.com. Checking your credit is free and won’t harm your scores. It’s also a way to stay on top of your personal finances.
Using a business loan to help generate cash flow can be a way to grow your business, but it isn’t for everyone. Taking on unnecessary or bad debt can put your business at risk if you aren’t careful. Though a loan can be helpful, it’s important to be aware of the consequences in case things get out of hand. Before you shop for a loan, evaluate the possible risks, costs and benefits, and develop a proper business plan.
If you have credit card debt, you are probably paying a high (double-digit) interest rate. One of the best ways to get out of debt faster is to use a 0% balance transfer offer. At MagnifyMoney, our favorite balance transfers have no balance transfer fee. Alliant Credit Union — a credit union that anyone can join — is offering a no-fee 0% balance transfer for 12 months. Although there are longer 0% balance transfers on the market, this is a solid no-fee option that can help you save money and become debt-free faster.
One added perk: Once you become a member of the credit union to take advantage of the balance transfer offer, you will also be able to take advantage of Alliant’s other competitive products. They offer a savings account that pays 1.05% APY. They offer 2.5% cash back on a new credit card. And their mortgage and auto loan rates are some of the lowest in the country. Alliant, one of our favorite credit unions in the country, provides the value you expect from a credit union with the user interface and digital tools that you would expect from a bank.
The Alliant Visa Platinum Card is a very simple, straightforward credit card. There is no annual fee, and there are no rewards. You will probably be given a 0% intro APR on purchases and balance transfers for the first 12 months that you have the card (more on that later). Even better — there is no fee for the balance transfer. After 12 months, the APR will range from 9.99% to 21.99%, depending upon your credit score.
Unfortunately, there is one part of this card that is a little complicated — and could lead to disappointment. You are not guaranteed the 0% interest rate for the 12 months. Depending upon your credit score, the interest rate during the 12-month promotional period could be as high as 5.99%. While a 5.99% rate (especially for someone with a less than perfect credit score) could be a good deal — it is certainly not the 0% intro APR being advertised.
In order to get the credit card, you will need to become a member of the credit union. There are a number of ways that you can become a member. Some of the ways are free (for example, you live in a community in Illinois that is covered). But for most people, the easiest way to join is to make a $10 donation to Foster Care to Success. This is an organization that serves foster teens across the U.S. that are “ageing out” of the system. Once you make that contribution, you will be eligible to join the credit union and get the credit card (along with other credit union products). The application process is easy — you just need to select “not a member” at the beginning of the process, and it will walk you through the membership process as part of your credit card application.
The credit card does offer some standard credit card perks, like $0 fraud liability and rental car insurance. However, the real value is the low interest rate that can help you become debt-free fast.
If you want to earn rewards, Alliant does offer another card — the Visa Platinum Rewards Card. This card has the same balance transfer offer (0% for 12 months with no balance transfer fee). But with this card, you also earn rewards. You can earn 2 points for every $1 spent on the card. However, the APRs (after the balance transfer period) will be higher. In general, we advise people to separate their spending from their borrowing. Cards that offer no rewards tend to have lower interest rates, and cards with rewards have higher interest rates — as we see in this case. If you are looking to become debt-free, it is probably better to ignore rewards and get the lowest interest rate possible.
How to Qualify for the Card
Alliant targets people with good or excellent credit. In general, that means you have a decent chance of being approved if your score is in the mid-600s, but you have a much better chance of being approved if your score is above 700.
In addition, Alliant (like all lenders) will need to be comfortable that you will be able to afford your payments. That means you will need to have a steady source of income. In addition, the lender will likely look at your total debt in relation to your income. If you have too much debt, you will find it more difficult to get approved.
What We Like About the Card
No fee for the balance transfer.
There is nothing better than free. And with no balance transfer fee and no interest for 12 months, that is exactly what you get. Pay down as much of the debt as possible during the promotional period — because every dollar of every payment will go toward principal.
It is from a credit union.
At MagnifyMoney, we like credit unions — in theory. As member-owned organizations, credit unions do not need to worry about shareholders and should be able to offer better value and lower interest rates. Unfortunately, far too many credit unions have websites that look like they were designed in the 1990s. With Alliant, we finally have a credit union that has made the application process easy, and has a great website. Alliant is delivering on the true potential of a credit union.
What We Don’t Like About the Card
It is not the longest balance transfer.
There are a number of longer no-fee balance transfer options on the market. You can get a no-fee balance transfer for as long as 15 months from some of the leading banks in the country.
You are not guaranteed a 0% intro offer — the rate could be higher.
In the fine print, Alliant makes it clear that you might not get a 0% intro rate. The intro rate could be as high as 5.99%, depending upon your credit score. The only silver lining: Alliant is willing to give intro rates to people with less than perfect credit. But we still find it a bit annoying that you could apply for a 0% intro rate and end up with a 5.99% rate instead.
Joining the credit union costs money.
If you can’t find a free way to join the credit union, you will have to make a $10 donation. We certainly like the cause that you would be supporting. However, it is still additional money that you would need to spend in order to get access to the product.
How to Complete a Balance Transfer
Completing the balance transfer is easy. During the application process, you can provide the credit card number of your existing credit cards (where the debt is located now). Alliant will then make a payment to your existing credit card companies.
Alternatively, you can call Alliant once you have the card to complete the balance transfer on the phone.
Just remember these tips:
If you start the balance transfer close to the payment date, you might want to make the minimum payment to ensure you don’t get hit with any late charges. Although balance transfers usually process quickly — they can take a couple of weeks. And you would not want to get stuck with a late fee.
Get the transfer done as quickly as possible. The 0% is for 12 months from when you open the account — not from when you transfer the debt. The faster your transfer the debt, the more money you can save.
Alternatives to the Card
If You Want a Longer Intro Period and No Balance Transfer Fee
Chase is the largest credit card issuer in America. It offers a great balance transfer on its Chase Slate credit card. Save with a $0 introductory balance transfer fee and get 0% introductory APR for 15 months on purchases and balance transfers, and $0 annual fee. Just remember that you cannot transfer debt from other Chase products — including co-brand credit cards for airlines (like United and Southwest) or hotels (like Marriott or Hyatt).
Barclaycard is the American credit card division of Barclays Bank. Barclays is a large British bank. With Barclaycard Ring, you can get 0% intro APR for 15 months on a balance transfer and no intro balance transfer fee — so long as you complete the transfer within 45 days of opening the card. Just remember: Barclaycard only accepts people with excellent credit.
Who Benefits Most from the Card
If you have credit card debt that you think you can pay off in a year, this is a great option. With no balance transfer fee and 0% interest for one year — you can pay down your debt quickly. If you think it will take longer to pay off your debt, you might want to consider a longer balance transfer from a more traditional bank.
Once the introductory period is over, interest will start to accrue at the standard purchase interest rate on a go-forward basis. Interest during the introductory period is waived — so you do not need to worry about a retroactive interest charge.
In the short term, your credit score will probably take a small hit (5-10 points) because you applied for new credit. However, over time, a balance transfer can increase your credit score with proper practices. This is because while new credit makes up 10% of your credit score, the amount you owe accounts for 30%. By using a balance transfer, you will reduce your interest rate. That should help you get out of debt a lot faster.
With summertime right around the corner, millions of Americans will pile into cars, planes, and trains and head off for summer vacation.
In the 2017 MagnifyMoney Vacation Debt survey, we asked 500 U.S. adults how they are planning to pay for their summer getaways.
Alarmingly, we found a significant number of vacationers are willing to drive themselves into debt for some fun in the sun.
The average American will spend $2,936 on their summer vacation in 2017
1 in 5 vacationers (21%) will go into debt to pay for their summer getaways
People who already have debt are twice as likely to use debt to cover some vacation expenses as people who are debt-free: 30% vs. 13%
Vacationers who plan to use debt to pay for their vacation will also spend nearly twice as much as the average vacationer: $4,351 vs. $2,936
Summer vacation FOMO is real: 31% of people say they feel pressured to go on vacation even though they’d rather pay off debt.
Summer Vacation: The Ultimate Debt Trap?
Summer vacation will set the average American back nearly $3,000 this year, according to the survey.
But an alarming number of travelers will be going into debt to finance their getaways.
One in five (21%) of respondents said they plan to go into debt to pay for vacation, according to the survey.
Among those who said they plan go into debt to pay for vacation, a whopping 71% admitted to already carrying some credit card debt.
People who already have debt are more likely to turn to debt to pay for vacation (30%) than those who are debt-free (13%).
Using debt to pay for a big trip may not seem like a big deal. But our survey shows using debt can lead people to spend more than they might spend otherwise.
When we looked at respondents who said they are planning to take on debt to pay for their vacation, we found that they were likely to spend significantly more on vacation than their peers.
On average, survey respondents said their vacations will cost $2,936 this year. And they plan to cover 20% of that expense ($595) with some form of debt.
On the other hand, people planning to go into debt said they will spend nearly twice that amount on their vacation — $4,351. And they’ll use debt to cover an even larger share of their total vacation expenses — 38% vs. 20%.
On the flip side, vacationers who have no debt will spend the least on vacation and plan to cover just 14% of their total vacation costs with new debt.
Vacation debt can easily stick around for months or even years to come, depending on how much debt a consumer already has to contend with.
Let’s say a person pays for their vacation expenses on a credit card with an average APR of 16%. They spend $1,670. If they make only minimum payments each month, it would take them over five years to pay off the debt, and they would pay $822 in interest charges.
When it comes to vacation, credit cards are king
The vast majority of respondents who said they will use debt to pay for some of their vacation expenses will use credit cards.
FOMO + Vacation Debt
It’s evident from our survey that outside societal pressure to take a big summer vacation can push someone to spend outside of their means.
Nearly one-third (31%) of people who already have debt say they felt pressure to go on vacation anyway.
The pressure is even worse for people who said they are planning to go into debt for vacation. Nearly half (46%) said they felt pressure to go on vacation even though they’d like to pay down some of their existing debt.
People who planned on taking on debt to pay for their summer vacation were also less likely to say they would be willing to skip a summer vacation to pay off their debt.
More than half (53%) of people planning to go into debt for vacation would be willing to skip vacation to pay off debt.
Meanwhile, 60% of people who have no debt said they’d be willing to skip a vacation to pay off debt.
Millennials Rack Up the Most Vacation Debt
Millennials may spend more on vacations than older generations, but it’s Gen Xers and Boomers who are more likely to fund their vacation expenses with plastic.
On average, 18-35 year olds said they will spend $3,163 on vacation and take on $725 of debt in the process. By comparison, respondents age 35 and older will spend $2,761 on vacation and cover $495 of it with debt.
Millennials were slightly more susceptible to peer pressure as well. Just under half (49%) of 18-35 year olds who plan to go into debt for vacation said they feel pressured to vacation rather than pay off debt. Comparatively, 44% of those age 35 years and older who said they plan to go into debt for vacation also said they felt pressure to do so.
Methodology: MagnifyMoney commissioned Pollfish to conduct an online survey of 500 U.S. adults who plan to take a vacation this summer and are responsible for most of the cost of the vacation. Responses were collected April 15 – 26, 2017.
The debt snowball method attacks smaller debts first, regardless of interest rate. The goal is to motivate you with small victories in order to go on and gain confidence to pay off larger debts. The debt avalanche method focuses on paying down debt with the highest interest rate until you pay off the balance with the lowest interest rate.
How Much Can I Throw Toward My Debt?
The math for your budgeting process is super-simple: Monthly income minus monthly expenses equals the amount of extra money you can apply toward your debt each month. The emphasis is on extra money because you’ll still want to pay your minimum debt obligations to avoid getting behind on your payments.
Note: If you still need help with the math because you’ve got to actually figure out how much you spend each month, you can use an app that connects with your bank to add up all your expenses. Check out services like Mint.com, YNAB, or Personal Capital to help you get quick figures around your income and spending along with categories for each.
Though the math is not too complicated, the harder part could be increasing the gap between your income and expenses to actually have a surplus in your budget.
Unless you’ve got little to no wiggle room in your budget, you don’t have to start cutting expenses quite yet. However, there are some expenses that are discretionary and should be omitted from your equation until you’ve tamed your debt load.
For now, just get a baseline of what you should have left over at the end of each month once all your bills and expenses are accounted for. If it’s $15, great. Start there. If it’s more, even better.
Once you get this number, use it to pay more on your debt than is required. So if your minimum payment is normally $50, pay $65 with your $15 surplus. It can be the smallest debt or the account with the highest interest rate. What matters now is that you do something to get into the habit of making extra payments on debt and accounting for it in your monthly budget.
How to Apply This Rule in Various Scenarios
If you budget with a goal in mind, the purpose of your money becomes clearer. Any kind of money that turns out to be extra should be applied to debt to reduce your balances. But the key is being mindful of extra money, even when it doesn’t seem to be extra.
For example, getting a raise is a reason for some people to increase their standard of living. They might move to a place with a view or buy that lavish SUV they’ve been eyeing for a while. If you’ve committed extra funds to a purpose (paying off debt), the decision is made for you far in advance of you actually getting the money.
The same goes for your income tax refund check. You might bank on this money every time income tax filing season comes around. While many people are planning spring break trips and shopping sprees with this money, you’ve got to make up your mind that this money is already earmarked for debt repayment.
Finally, there’s always that unexpected windfall: an inheritance, a settlement, or any type of money you never saw coming. This might be one of the most difficult chunks of money to part with for the sake of paying off debt. After all, you didn’t know it was coming, and maybe you didn’t have to work too hard for it.
In this case, it’s pretty tempting to want to splurge and blow it all on something you think you deserve. Things can get complicated at this point. But if you keep following “the rule,” this money is technically already allocated, and your debt repayment budget suddenly becomes easier to stick with.
Keep Widening the Gap Between Income and Expenses
This is the fun part. Why? You get to be creative and have more control over your debt repayment timeline. Want to get out of debt fast? Then you’ll have to figure out how to make your income outpace your expenses. It could mean adding a side hustle to the mix or getting more aggressive with cutting out or decreasing expenses.
Adjusting Your Tax Withholdings
If you pocket a large tax refund each year, ask yourself why. It is likely because you are paying too much in income taxes throughout the year. If that’s the case, you can change your tax withholdings through your payroll department to keep more money in your pocket throughout the year. It will mean a smaller tax refund come tax time, but you’ll have more cash on hand to put toward your debt with each paycheck.
There are more than a few ways to decrease your income tax liability. From IRA contributions to tax tips for entrepreneurial endeavors and other tax credits and deductions, there should be one or more things you can do to owe less on your tax bill.
Cut Expenses Where You Can
There are so many ways to save money on so many things. You can start small with things like eating out and having cable and work up to saving money on housing costs or refinancing student loans.
Then there are the diehards who go full monty and go through full-on spending freezes on things like takeout and travel. The list of cost-cutting measures can get pretty long, but you get the point: Go through your spending with a fine-tooth comb and find out where you can save and what you could cut.
Increase Your Income
Creating another stream of income sounds gimmicky, but there are ways to do it without getting caught up in scams. You can find a part-time job, provide consulting services on the side, or even start a mini-business like dog walking or car washing. It shouldn’t be anything that will cost you tons up front to start, and it shouldn’t hinder your ability to keep your full-time job.
You may find that you have to try a few things before you come up with the perfect combination of low overhead, quick to start, and profitable. That’s OK. Just keep plugging away until something clicks. It’ll be more than worth it to add that extra income to the budget for paying off more debt even faster.
Remember the Golden Rule: Excess Cash Goes to Debt
It all comes down to committing your cash to a purpose ahead of time. No matter how your financial circumstance changes, you’ll know what to do when you’ve got a surplus of money.
You’ll have to come up with a list of things you are willing to do to increase your cash reserves, but if you keep the goal in mind of continually applying extra funds toward debt, you’ll save on interest and also pay down your debt faster.
It’s a question as old as debt itself: Should I pay off one loan with another loan?
“Debt reshuffling,” as it’s known, has garnered a bad reputation because it often amounts to just trading one debt problem for another. So it’s no wonder the news that Fannie Mae would make it easier for homeowners to swap student loan debt for mortgage debt was met with some caution.
It’s awfully tempting to trade a 6.8% interest rate on your federal student loan for a 4.75% interest rate on a mortgage. On the surface, the interest rate savings sound dramatic. It’s also attractive to get rid of that monthly student loan payment. But there are things to consider.
“One thing we stress big time: It worries me, taking unsecured debt and making it secured,” said Desmond Henry, a personal financial adviser based in Kansas. “If you lose your job, with a student loan, there is nothing they can take away. The second you refinance into a mortgage, you just made that a secured debt. Now, they can come after your house.”
The Cash-Out Refinance
The option to swap student loan debt for home debt has already been available to homeowners through what’s called a “cash-out refinance.” These have traditionally been used by homeowners with a decent amount of equity to refinance their primary mortgage and walk away from closing with a check to use on other expenses, such as costly home repairs or to pay off credit card (or student) debt. Homeowners could opt for a home equity loan also, but cash-out refinances tend to have lower interest rates.
The rates are a bit higher than standard mortgages, however, due to “Loan Level Price Adjustments” added to the loan that reflect an increase in perceived risk that the borrower could default. The costs are generally added into the interest rate.
So what’s changed with the new guidelines from Fannie Mae? Lenders now have the green light to waive that Loan Level Price Adjustment if the cash-out check goes right from the bank to the student loan debt holder, and pays off the entire balance of at least one loan.
The real dollar value savings for this kind of debt reshuffle depends on a lot of variables: The size of the student loan, the borrower’s credit score, and so on. Fannie Mae expressed it only as a potential savings on interest rates.
“The average rate differential between cash-out refinance loan-level price adjustment and student debt cash-out refinance is about a 0.25% in rate,” Fannie Mae’s Alicia Jones wrote in an email. “Depending on profile [it] can be higher, up to 0.50%.”
On $36,000 of refinanced student loan debt — the average student loan balance held by howeowners who have cosigned a loan — a 0.50% rate reduction would mean nearly $4,000 less in payments over 30 years.
So, the savings potential is real. And for consumers in stable financial situations, the new cash-out refinancing could potentially make sense. Like Desmond Henry, though, the Consumer Federation of America urged caution.
“Swapping student debt for mortgage debt can free up cash in your family budget, but it can also increase the risk of foreclosure when you run into trouble,” said Rohit Chopra, Senior Fellow at the Consumer Federation of America and former Assistant Director of the Consumer Financial Protection Bureau. “For borrowers with solid income and stable employment, refinancing can help reduce the burden of student debt. But for others, they might be signing away their student loan benefits when times get tough.”
Risking foreclosure is only one potential pitfall of this kind of debt reshuffle, Henry said. There are several others. For starters, the savings might not really add up.
Crunch the Numbers. Alllll the Numbers…
“You don’t just want to look at back-of-a-napkin math and say, ‘Hey, a mortgage loan is 2% lower than a student loan.’ You’ve got to watch out for hidden costs,’ Henry said.
Cash-out refinances come with closing costs that can be substantial, for example. Also, mortgage holders who are well into paying down their loans will re-start their amortization schedules, meaning their first several years of new payments will pay very little principal. And borrowers extending their terms will ultimately pay far more interest.
“We live in a society where everything is quoted on a payment. That catches the ears of a lot of people,” Henry said. “People think ‘That’s a no brainer. I’ll save $500 a month.’ But your 10-year loan just went to 30 years.”
There are other, more technical reasons that the student-loan-to-mortgage shuffle might not be a good idea. Refinancers will waive their right to various student loan forgiveness options – programs for those who work public service, for example. They won’t be able to take advantage of income-based repayment plans, either. Any new form of student loan relief created by Congress or the Department of Education going forward would probably be inaccessible, too.
On the tax front, the option is a mixed bag. Henry notes that student loan payments are top-line deductible on federal taxes, while those who don’t itemize deductions wouldn’t be able to take advantage of the mortgage interest tax deduction. On the other hand, there are caps on the student loan deduction, while there’s no cap on the mortgage interest deduction. That means higher-income student loan debtors who refinanced could see substantial savings at tax time.
In other words, it’s complicated, so if you’re considering your options, it’s probably wise to consult a financial professional like an accountant who can look at your specific situation to see what makes the most sense. (It’s also a good idea to check your credit before considering any refinancing or debt-consolidate options since it’ll affect your rate. You can get your two free credit scores right here on Credit.com.)
As a clever financial tool used judiciously, a cash-out student loan refinance could save a wise investor a decent amount of money. But, as Henry notes, the real risk with any debt reshuffle is that robbing Peter to pay Paul doesn’t change fundamental debt problems facing many consumers.
“The first thing to take into consideration is you still have the debt,” he said.
About two years ago, Brian LeBlanc was fed up. The 30-year-old policy analyst from Alberta, Canada, had struggled with his weight for years. At the time, he weighed 240 pounds and had trouble finding clothes that fit. He decided it was time to change his lifestyle for good.
LeBlanc started running and cutting back on fast food and soft drinks. He ordered smaller portions at restaurants and avoided convenience-store foods. About a year into his weight-loss mission, his wife Erin, 31, joined him in his efforts.
“The biggest change we made was buying a kitchen food scale and measuring everything we eat,” Brian says. “Creating that habit was really powerful.”
Over the last two years, the couple has shed a total of 170 pounds.
But losing weight, they soon realized, came with an unexpected fringe benefit — saving thousands of dollars per year. Often, people complain that it’s expensive to be healthy — gym memberships and fresh produce don’t come cheap, after all. But the LeBlancs found the opposite to be true.
Erin, who is a payroll specialist, also managed their household budget. She began noticing a difference in how little money they were wasting on fast food and unused grocery items.
“Before, we always had the best intentions of going to the grocery store and buying all the healthy foods. But we never ate them,” she says. “We ended up throwing out a lot of healthy food, vegetables, and fruits.”
Before their lifestyle change, Brian and Erin would often eat out for dinner, spending as much as $80 per week, and they would often go out with friends, spending about $275 a month. Now, Brian says if they grab fast food, they choose a smaller portion. Last month, they only spent $22 on fast food.
What’s changed the most is how they shop for groceries, what they buy, and how they cook. Brian likes to prep all his meals on Sunday so his lunches during the week are consistent and portion-controlled. They also buy only enough fresh produce to last them a couple of days to prevent wasting food.
Shedding pounds — and student loan debt
Two years after the start of their weight-loss journey, they took a look at their bank statements to see how their spending has changed. By giving up eating out and drinking alcohol frequently, they now spend $600 less a month than they used to, even though they’ve had to buy new wardrobes and gym memberships.
With their newfound savings, the LeBlancs managed to pay off Brian’s $22,000 in student loans 13 years early. Even with the $600 they were now saving, they had to cut back significantly on their budget to come up with the $900-$1,000 they strived to put toward his loans each month. They stopped meeting friends for drinks after work, and Erin took on a part-time job to bring in extra cash. When they needed new wardrobes because their old clothing no longer fit, they frequented thrift shops instead of the mall.
When they made the final payment after two years, it was a relief to say the least.
Now the Canadian couple is saving for a vacation home in Phoenix, Ariz., which they hope to buy in the next few years, and they’re planning to tackle Erin’s student loans next. They’re happy with their weight and lives in general, but don’t take their journey for granted.
“There were times we questioned our sanity and we thought we cannot do this anymore,” says Erin. But they would always rally together in the end.
“There are things that are worth struggling for and worth putting in the effort,” Brian says. “Hands down, your health is one of those things.”
How Getting Healthy Can Help Financially
Spending less on food isn’t the only way your budget can improve alongside your health. Read below to see how a little weight loss can tip the scales when it comes to your finances.
Spend less on medical bills. Health care costs have skyrocketed in the last two decades, but they’ve impacted overweight and obese individuals more. A report from the Agency for Healthcare Research and Quality stated that between 2001 and 2006, costs increased 25% for those of normal weight — but 36.3% for those overweight, and a whopping 81.8% for obese people. The less you weigh, the less you’ll pay for monthly health insurance premiums and other expenses.
Buy cheaper clothes. Designers frequently charge more for plus-size clothing than smaller sizes. Some people claim retailers add a “fat tax” on clothes because there are fewer options for anyone over a size 12. It might not be fair, but it’s the way things are.
Save on life insurance. Your health is a huge factor for life insurance rates. Annual premiums for a healthy person can cost $300 less than for someone who is overweight.
Cut transportation costs. Biking or walking to get around is not only a cheap way to exercise — it’s a cheap way to travel. You’ll be saving on a gym membership and limiting gasoline costs in one fell swoop. Bonus points if you go the whole way and sell or downgrade your vehicle.
Tens of millions of Americans are pursued by debt buyers, speculators who buy the rights to collect their overdue bills. Yet few consumers realize this growing segment of the collection industry may offer them a chance to slash their delinquent debts by as much as 75%.
A MagnifyMoney investigation examined the business practices of debt buyers as detailed in disclosures to their investors. Here’s how the game is played:
Buyers purchase massive bundles of unpaid consumer debts with face values that often total billions of dollars. Those are the bills that banks, credit card companies, and other creditors give up trying to collect.
Those debts are bought at deeply discounted prices, averaging roughly 8 cents on the dollar.
The buyers only expect to recover a fraction of the original amounts owed. Their target is to recover from 2 to 3 times more than they paid.
The bottom line: Debt buyers can turn profits that meet their goals by collecting merely 16% to 24% of the original face values. That knowledge can be useful to savvy debtors who choose to negotiate a settlement for less.
Debt buyers “absolutely” have more flexibility in negotiating with consumers, says Sheryl Wright, senior vice president of Encore Capital Group, the nation’s largest debt buyer. Encore offers most debtors a 40% discount to settle, according to the company’s website.
“There could be an advantage in terms of negotiating a favorable settlement,” says Lisa Stifler of the Center for Responsible Lending, a nonprofit consumer advocate. “Debt buyers are willing to – and generally do – accept lower amounts.”
Stifler warned that debtors should be cautious in all interactions with debt buyers and collectors. (See “Tips to fight back against debt buyers and debt collectors” later in this article.)
In the world of debt buying, the numbers can vary. The price of bad debt portfolios ranged from 5 to 15 cents on the dollar during the past two years, according to corporate disclosures of debt buyers. The variables include the age of debt, size of account, type of loan, previous collection attempts, geographic location, and data about debtors – plus shifts of supply and demand in the bad debt marketplace.
What remains constant is the debt buyers’ goal of recovering 2 to 3 times more than the purchase price they pay for the accounts.
It is a different business model than that of traditional debt collection agencies, contractors that pursue bills for a percentage of what they recover. In contrast, debt buyers may often be more willing to wheel and deal to settle accounts with consumers.
Debt buyers raked in $3.6 billion in revenue last year – about one-third of the nation’s debt collections, according to the Consumer Financial Protection Bureau’s latest annual report.
Information is scarce on the inner workings of hundreds of debt buyers who operate in the U.S. An accurate count is not available since only 17 states require buyers to be licensed.
Of the more than 575 debt buyers that belong to the industry’s trade association, only three are publicly traded entities required to file disclosures last year with the federal Securities and Exchange Commission. MagnifyMoney looked into reports from two of those companies and found telling insights into an industry typically secretive about its practices.
An “Encore” of unpaid bills
Encore owns nearly 36 million open accounts of consumer debt in the U.S. through its subsidiaries Midland Credit Management, Midland Funding, Asset Acceptance, and Atlantic Credit & Finance.
During 2016, Encore invested $900 million to buy debt with a face value of $9.8 billion – or 9 cents per dollar. On average, the corporation recovers 2.5 times more than it pays for debt portfolios – the equivalent of 22.5 cents per dollar owed, according to its annual report to the SEC.
In that disclosure, the San Diego-based operation details how it tries to get debtors to pay.
Encore boasts that its proprietary “decision science” enables it “to predict a consumer’s willingness and ability to repay his or her debt.” It obtains “detailed information” about debtors’ “credit, savings or payment behavior,” then analyzes “demographic data, account characteristics and economic variables.”
“We pursue collection activities on only a fraction of the accounts we purchase,” stated Encore. “Consumers who we believe are financially incapable of making any payments … are excluded from our collection process.”
The rest of the debtors can expect to hear from Encore’s collectors. But the company knows most won’t respond.
“Only a small number of consumers who we contact choose to engage with us,” Encore explained. “Those who do are often offered discounts on their obligations or are presented with payment plans that are intended to suit their needs.”
While the company offers most debtors discounts of 40% to settle, relatively few take advantage of that opportunity.
“The majority of consumers we contact do not respond to our calls and letters, and we must then make the decision about whether to pursue collection through legal action,” Encore stated. In its annual report, the company disclosed it spent $200 million for legal costs last year.
In a written response to questions from MagnifyMoney, Encore refused to reveal the number of lawsuits it has filed or the amount of money it has recovered as a result of that litigation.
“We ultimately take legal action in less than 5% of all of our accounts,” says Wright. If Encore has sued 5% of its 36 million domestic open accounts, the total would be roughly 1.8 million court cases.
Portfolio Recovery Associates has acquired a total of 43 million consumer debts in the U.S. during the past 20 years. Behind Encore, it ranks as the nation’s second-largest debt buyer.
Its parent company, PRA Group Inc. of Norfolk, Va., paid $900 million last year to buy debts with a face value of $10.5 billion – or 8 cents on the dollar, according to its 2016 annual report. Its target is to collect a multiple of 2 to 3 times what it paid.
It is a high-stakes investment. The company must satisfy its own creditors since it borrows hundreds of millions of dollars to buy other people’s unpaid debts. PRA Group reported $1.8 billion in corporate indebtedness last year.
PRA Group declined an opportunity to respond to questions from MagnifyMoney. In lieu of an interview, spokeswoman Nancy Porter requested written questions. But the company then chose not to provide answers.
Asta Funding Inc., the only other publicly traded debt buyer, did not respond to interview requests from MagnifyMoney.
Tips to fight back against debt buyers and debt collectors
All types of bill collectors have a common weakness: They often know little about the accounts they chase. And that’s a primary reason for many of the 860,000 consumer complaints against collectors last year, according to a database kept by the Federal Trade Commission.
Be sure the debt is legitimate first
In dealing with collectors, you should begin by questioning whether the debt is legitimate and accurate. You can also ask who owns the debt and how they obtained the right to collect it.
In 2015, Portfolio agreed to pay $19 million in consumer relief and $8 million in civil penalties as a result of an action by the CFPB.
“Portfolio bought debts that were potentially inaccurate, lacking documentation or unenforceable,” stated the CFPB. “Without verifying the debt, the company collected payments by pressuring consumers with false statements and churning out lawsuits using robo-signed court documents.”
One unemployed 51-year-old mother in Kansas City, Mo. fought back and won a big judgment in court.
Portfolio mistakenly sued Maria Guadalujpe Mejia for a $1,100 credit card debt owed by a man with a similar sounding name. Despite evidence it was pursuing the wrong person, the company refused to drop the lawsuit.
Mejia countersued Portfolio. Outraged by the company’s bullying tactics, a court awarded her $83 million in damages. In February, the company agreed to settled the case for an undisclosed amount.
Challenge the debt in writing
Within 30 days of first contact by a collector, you have the right to challenge the debt in writing. The collector is not allowed to contact you again until it sends a written verification of what it believes you owe.
Negotiate a settlement
If the bill is correct, you can attempt to negotiate a settlement for less, a sometimes lengthy process that could take months or years. By starting with low offers, you may leave more room to bargain.
Communicate with collectors in writing and keep copies of everything. On its website, the CFPB offers sample letters of how to correspond with collectors.
As previously noted, debt buyers generally have more leeway to negotiate settlements since they actually own the accounts. A partial list of debt buyers can be found online at DBA International.
In contrast, collection agencies working on contingency may be more restricted in what they can offer. They need to collect enough to satisfy the expectations of creditors plus cover their own fee.
As part of a settlement, the debt buyer or collector may offer a discount, a payment plan allowing the consumer to pay over time, or a combination of the two.
“Through this process, we use a variety of options, not just one approach or another, to create unique solutions that help consumers work toward long-term financial well-being and improve their quality of life,” says Encore’s Wright.
A settlement doesn’t guarantee the debt will be scrubbed from your credit report
“We believe the changes in our credit reporting policy provide a tangible solution to help our consumers move toward a better life,” says Wright.
However, Encore’s new policy does nothing to speed up the removal of any negative information reported by the original creditor from whom the company bought the debt.
Check your state’s statute of limitations on unpaid debts
Before any payment or negotiation, check to see if the statute of limitations has expired on the debt. That is the window of time for when you can be sued; it varies from state to state and generally ranges from three to six years.
If the statute of limitations on your debt has expired, you may legally owe nothing. If the expiration is nearing, you can have extra leverage in negotiating a settlement. But be careful: A partial payment can restart the statute in some states and lengthen the time a black mark remains on your credit record.
Respond promptly if the company decides to sue
If you are sued over the debt, be sure to respond by the deadline specified in the court papers. If you answer, the collector will have to prove you owe the money.
If you don’t timely answer the complaint, the burden of proof may switch to you. A judge may enter a default judgment against you – or even sign a court order to garnish your paycheck.
Seek help from a lawyer or legal aid service if you have questions, but be careful of where you turn for help. The CFPB warns consumers to be wary of debt collection services that charge money in advance to negotiate on your behalf. They often promise more than they can deliver and get paid no matter what happens.
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