FISCAL FITNESS: Getting Out of Debt


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  • It’s almost impossible to survive today without a credit card. Credit cards make it easier to reserve hotel rooms and rental cars, and are a safer way to order goods online or through the mail. Using a major credit card (I.e. Visa or Mastercard) to buy big ticket items also offers additional protections.
  • There are good and bad uses for credit. A good use is convenience—meaning you pay the balance off in full every month, thereby avoiding finance charges. Another good use is to finance an asset, such as a college education or a home. When you use credit, make sure it’s for a good reason.
  • Many people find that the more they use credit, the more they need to use credit in order to make it between paydays. Fall behind and credit becomes even more of a problem as additional finance charges and late fees accumulate. On top of that, you may see your interest rates (and payments) go up.
  • Installment credit is usually associated with the purchase of an item, such as furniture, where you make a monthly payment for 12 months (or more) until the balance is zero. In most cases, you can’t add new charges so the balance goes down with each payment. With revolving credit, you pay a percentage of the balance for the monthly payment and you can continue to make new charges up to your credit limit.
  • If you don’t make payments for a secured debt, the creditor will repossess whatever collateral was offered. In most cases, the collateral is the item purchased with credit, such as a home, furniture, or appliance. With unsecured debt, there is no collateral. Unsecured creditors are the first to call when a payment has been missed. When money is short, unsecured creditors should be lower priority for repayment than secured creditors. Of course, missing a payment to an unsecured creditor does impact your credit score and will likely lead to late fees and additional finance charges.
  • With credit cards you can keep charging up to your CREDIT LIMIT as long as you continue making the minimum payment in a timely manner.
  • Many creditors want you to make only the minimum payment because doing so generates a lot more interest income for them. When a creditor allows you to skip a payment (such as when you paid more than the minimum amount on the last bill or occasionally, around the holidays as a “special gift” for being such a good customer), they aren’t doing you any favors because the interest still accumulates.
  • Once you get into trouble with credit cards, it’s often hard to make it from one month to the next without using the credit cards for routine expenses or to pay for unexpected expenses such as a car repair or medical bill. It’s a good idea to set some money aside each month for emergencies—those unexpected expenses that come up from time to time. A good rule of thumb is to save 3 to 6 months of living expenses for emergencies. Keep in mind that 3- to 6-months is a goal to work toward; a goal that will become much easier to achieve when you are debt free.
  • If you’re having trouble making the minimum payments on your credit cards, you should seek the help of a professional credit counselor. They have agreements with creditors that often mean a significant reduction in the total amount you’ll need to repay to become debt free. Fiscal Fitness: Choosing a Credit Counselor offers a variety of points to keep in mind when shopping for a credit counselor.
  • Using a home equity loan or line of credit to pay off credit card debt means you switch Unsecured debt to Secured debt. Consequently, if you are unable to pay you could lose your home. You may be surprised at how willing your creditors are to work with you. It’s worth your time to call and ask for a reduction in the interest rate or perhaps to waive late fees and over-limit fees that might have been charged to your account. The worst thing that could happen is that they’ll say no.
  • Instead of paying a little extra on each of your credit cards, make only the minimum payment on all your debts but one, and apply every extra penny you can find to that one payment. You’ll save the most in finance charges if you apply all your extra dollars to the debt with the highest interest rate. Make a commitment to pay the same amount towards debt reduction each month until you are debt free. For example, if you have five credit cards and pay each one $50 per month, keep paying $250 each month until you are debt free.
  • With very few exceptions, applying all your extra dollars to the debt with the highest interest rate will save you the most in finance charges and take the shortest time to repay all your debt. Sometimes it’s worth picking the loan with the lowest balance or shortest term to get a quick pay-off from eliminating one of your debts.
  • FISCAL FITNESS: Getting Out of Debt

    1. 1. FISCAL FITNESS: Getting Out of Debt
    2. 2. OBJECTIVES <ul><li>Discuss the advantages of reducing debt. </li></ul><ul><li>Learn strategies for reducing debt. </li></ul><ul><li>Discover Power Payments </li></ul>
    3. 3. CREDIT IS A USEFUL TOOL <ul><li>Safe </li></ul><ul><li>Convenient </li></ul><ul><li>Widely accepted </li></ul><ul><li>Easy to use </li></ul>
    4. 4. Used wisely, credit helps you reach important goals
    5. 5. Credit can be a ball and chain
    6. 6. TWO MAIN TYPES OF CREDIT <ul><li>Installment </li></ul><ul><li>Fixed payment </li></ul><ul><li>Fixed time period </li></ul><ul><li>Usually secured by collateral </li></ul><ul><li>Revolving </li></ul><ul><li>Payment varies </li></ul><ul><li>Open-ended time period </li></ul><ul><li>Usually not secured </li></ul>
    7. 7. SECURED vs. UNSECURED <ul><li>Debt is secured with collateral, i.e., a cosigner or property </li></ul><ul><li>If you fail to make payments, the creditor seizes the collateral </li></ul><ul><li>For this reason, secured debts are higher in priority </li></ul><ul><li>Credit card, medical debt and other debts without collateral or a cosigner are unsecured </li></ul><ul><li>Creditors have nothing to seize, and are typically more aggressive about collections </li></ul>
    8. 8. CREDIT CARDS <ul><li>Revolving credit </li></ul><ul><li>Interest rates vary for similar cards </li></ul><ul><li>May charge annual and other fees </li></ul><ul><li>Require monthly minimum payment </li></ul><ul><li>Unsecured (unless deposit required) </li></ul>
    9. 9. THE AVERAGE HOUSEHOLD <ul><li>Has 5.6 credit cards </li></ul><ul><li>Owes $2,580.79 in credit card debt </li></ul><ul><li>Pays as much as $1000 per year in finance charges </li></ul>
    10. 10. AVERAGE BALANCE & NUMBER OF CREDIT CARDS (1995) $2,580.79 5.6 TOTAL $50.00 1.5 Other $244.56 1.1 Diner’s, etc. $195.95 2.0 Gas Cards $821.03 3.2 Store Cards $2,537.29 2.4 Bank Cards BALANCE NUMBER CARD TYPE
    11. 11. What you should know about... MINIMUM PAYMENTS <ul><li>Typically just 2% of outstanding balance </li></ul><ul><li>Most of the payment is interest </li></ul><ul><li>Extends the length of time for payback </li></ul><ul><li>Increases finance charges </li></ul>
    12. 12. An example: <ul><li> You owe $1,000 on a credit card </li></ul><ul><li> The minimum payment is $20 </li></ul><ul><li> The APR is 18% </li></ul>
    13. 13. <ul><li>Pay only the required 2% minimum: it will take 19 years and 4 months, and cost you more than $1,931 in interest. </li></ul><ul><li>Pay $20 per month: it will take 7 years and 2 months to pay off the card, and cost more than $860 in interest. </li></ul><ul><li>Pay $50 per month: it will take only 2 years to pay off the card, and cost less than $200 </li></ul><ul><li>in interest. </li></ul>
    14. 14. Getting out of debt... <ul><li>Saves money </li></ul><ul><li>Gives you more flexibility </li></ul><ul><li>Frees up money for other purposes </li></ul><ul><li>Is a good investment </li></ul>
    15. 15. Keys to getting out of debt: <ul><li>STOP using credit! </li></ul><ul><li>Assess your situation. Do you need help? </li></ul><ul><li>Consider options </li></ul><ul><li>Use Power Payments </li></ul>
    16. 16. STOP using credit! <ul><li>Leave credit cards at home </li></ul><ul><li>Close accounts and cut up cards </li></ul><ul><li>Keep a card for emergencies--and use it only when you must </li></ul>
    17. 17. ASSESS YOUR SITUATION <ul><li>List all your debts (balance, minimum payment and APR) </li></ul><ul><li>Can you afford your minimum payments? </li></ul><ul><li>Can you afford to make extra payments? </li></ul>If not, you may need help to repay your debt
    18. 18. OPTIONS TO CONSIDER <ul><li>Ask creditors to reduce interest rates </li></ul><ul><li>Consider transferring balances to lower-rate cards </li></ul><ul><li>Think about using home equity—but beware! </li></ul>
    19. 19. USE POWER PAYMENTS <ul><li>Make the minimum payment on all your debts BUT one. </li></ul><ul><li>Add every extra penny to that one “power” payment. </li></ul><ul><li>When that debt is paid, apply that payment to another debt until all debts are repaid. </li></ul>
    20. 20. POWER PAY STRATEGIES <ul><li>Apply extra payment to: </li></ul><ul><li>Loan with highest interest rate </li></ul><ul><li>Loan with lowest balance </li></ul><ul><li>Loan with shortest term </li></ul>
    21. 21. Complete the PowerPay® “Credit Payment Worksheet”
    22. 22. RETURN THE FORM <ul><li>How long to get out of debt </li></ul><ul><li>How much you will pay in interest </li></ul>You will receive an analysis which shows for each strategy:
    23. 23. Use this information to develop your debt reduction plan
    24. 24. QUESTIONS?