People who borrow money generally understand that they will eventually need to pay borrowed money back to the lender. This understanding, whether codified in a contract or not in any particular case, makes lending and borrowing money work as an economic mechanism. It’s interesting that regardless of what’s written in a contract, most debt can be legally ignored. Borrowers may feel bound by their pride to honor commitments, but every state in the country has laws that prevent lenders from chasing after deadbeat borrowers after a certain amount of time.

Time-barred debts are subject to a statute of limitations. After a certain amount of time passes with a borrower unable or unwilling to pay back a loan, the lender will no longer be able to sue the borrower for uncollected debt. The lender can still contact the borrower and try to convince him or her to pay back the loan, but the lender’s legal rights to the funds are limited.

This doesn’t mean that it’s a good idea to wait for the statute of limitations to pass on all your debt in order to avoid your obligations. There are consequences if you don’t pay back debt. Most importantly, the three credit reporting bureaus will significantly decrease your credit score, and it could take a long time for that number to return to normal. This will affect your ability to qualify for more loans, mortgages, and credit cards in the future.

This is a dilemma many homeowners have considered recently; with the market value of houses sharply decreasing in the last few years, and the resulting financial reality of owing the bank more on the mortgage than the house is worth, some in this situation have considered walking away from the house and mortgage. In some cases, this could be a tactic that is more financially responsible than continuing to sink money every month into a depreciating asset. Families considering this option have to weigh the consequences, including not being able to qualify for a mortgage again for many years, against the emotion-based drive to honor financial commitments.

Although lenders are legally barred from suing borrowers after the statute of limitations for a particular debt has passed, they might still try. If you’re able to show a judge that the debt is time-barred and no longer legally collectible, you have nothing to worry about other than the consequences.

Credit cards and other open accounts like home equity lines of credit, written contracts, oral agreements, and promissory notes may have different statutes of limitations, and each differs by state, as well. Here’s a list by state of time-barred debts.

The clock starts ticking on the statute of limitations from the day you miss your first payment. The moment you send a payment to the lender, no matter how small, the clock resets. For example, if the statute of limitations on credit card debt in your state is seven years, and it’s been six years since you’ve made a payment, you may determine that it makes more financial sense to refuse to make a payment for one more year rather than negotiate with the lender. If you are in financial difficulty and don’t expect to ever be able to pay off the debt, paying even a small amount means you’ll need to wait another seven years after making the small payment before you’ll be legally protected from paying back the debt.

Not all debt is time-barred; student loans backed or issued by the government have no statute of limitations. Anything you borrow under any of the loan programs that qualify in this category can never be ignored. The lenders are often willing to negotiate the terms in order to help you make payments you can afford, but these students loans are, for the most part, legally stuck with borrowers until the lenders are satisfied.

A few questions for discussion:

• Do you think it’s right that borrowers can avoid agreements by patiently waiting for the statute of limitations to pass?
• Have you ever been sued for debt you didn’t need to legally pay back?
• Have you inadvertently restarted the clock by paying a small amount to a lender when it might have been better to wait?
• Are you dealing with the credit consequences of letting a debt expire?

Note: I am not a lawyer, and nothing written on Consumerism Commentary constitutes legal advice. Always check with an attorney before making any decisions regarding the law.

Photo: Dave Stokes
Federal Trade Commission

The original version of this article, Debt Collections: Do You Have To Pay?, is copyrighted by Consumerism Commentary.

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Misuse of credit can destroy a family’s financial life. A household can crumble under the weight of debt, whether it has increased from a poor house-purchasing decision, a drastic change in the real estate market, a shopping addiction, an unexpected medical bill, or the lack of preparedness for an emergency. It’s no surprise people consider debt to be “bad.”

Is there any situation where debt can be “good?”

I have a problem with the good debt vs. bad debt argument. Good and bad are polar opposites, and most issues tend to sit somewhere on a spectrum between two extremes. In fact, issues don’t often sit; they can shift position. The requirement to declare anything, particularly “debt” as a concept, as either good or bad is oversimplification. There’s a tendency to want to make issues simple. Catchy soundbites reducing issues to the most basic terms attract people, and no one ever won a Presidential election while talking about nuances.

People who are looking to sell you something, like car salesmen, college recruiters, investment professionals, and real estate brokers, are more likely to be willing to point out how debt can be used effectively.

• In real estate transactions, debt allows more families to afford a house, and in some cases, that could mean a healthier environment for raising children. Leverage also helps you reflect a higher rate of return if your home value increases and you decide to sell.
• If you can borrow money at a low interest rate and use that cash to invest at a higher rate of return, you are using someone else’s money to benefit yourself financially. You can pocket the difference in interest rates or rates of return.
• Getting a college education increases your lifetime earning potential, and going into debt for a bachelor’s degree could pay off.
• If you work in a career where image is important, a higher-priced and otherwise-unaffordable car could help you succeed in your business.

Risk makes debt dangerous. There’s a risk that house prices go down. Since the housing bubble burst, that risk should be more apparent. Leverage may amplify your return, but it also makes losses more severe. You could lose your house. If your hot investment doesn’t pan out, you might not be able to pay back your borrowed money. If you find yourself in a career not earning much money, you could struggle to pay off your student loan debt. Using debt to focus your image doesn’t always pay off.

You can only determine whether a risk, like borrowing, is worthwhile after the fact. Hindsight provides perspective. If borrowing allowed you to triumph financially, it was “good” debt. If the debt was unmanageable or caused financial ruin, it was “bad” debt. Taking on debt to purchase an asset that increases in value would always be “good,” while using debt to finance an asset that decreases in value would always be “bad.” The problem is being able to accurately predict the future. The assets we hope will increase would be a house, an investment portfolio, lifetime earning potential, and career opportunities.

The determination of whether debt is “good” or “bad” also depends on the individual or household involved. What could be a good use of debt for one family might not be a good use for another.

There are often other options rather than increasing debt. While it may be expensive to attend an out-of-state private college, you could save money by enrolling in an in-state public college or by taking advantage of grants and scholarships. The Consumerism Commentary Podcast interview with Zac Bissonnette, author of Debt-Free U: How I Paid for an Outstanding College Education Without Loans, Scholarships, or Mooching off My Parents, can offer more insights on how to obtain a valuable college degree without going into debt.

If you are able to postpone desires until you’ve diligently saved for a purchase, you can avoid debt and its possible pitfalls. Not everyone has the opportunity to save, though. A college graduate without any money might need to buy work-appropriate clothing in order to get a job. The credit card comes out, and she buys a week’s worth of outfits to get her to the first paycheck. This may not be “good” debt, but if she didn’t earn and save enough money while achieving her degree, it could be a short-term necessity.

Then again, another way to look at this need for credit to prepare for the first week in a professional environment is an excuse for not following a solid financial plan over the course of her higher education and the start of her life as an adult.

In another example, a savvy investor could use borrowed money to invest in a business that succeeds. Financial analysts can often determine whether a risk is acceptable, and individual investors can use the same approach. For example, if you could borrow a sum of money at an introductory rate of 0% APR on a credit card for 12 months with no fee, as new customers of this Discover More Card offer can do right now, deposit that in a savings account with 1% interest, you can keep the proceeds as long as you pay the credit card bill on time each month and in full by the end of the introductory period. Back when interest rates were higher, this “credit card balance arbitrage” was a more worthwhile endeavor.

Today, however, most investments that would make borrowing money from a 0% APR credit card worthwhile are riskier than a savings account. Even when the safe interest you could earn was more favorable, there was always a risk of missing a credit card payment and owing penalties and interest to the issuer. If you completed the arbitrage scheme and succeeded in increasing your bank account balance, you’d consider that debt to be good. If not, the debt would be bad.

Do you believe that all debt is bad debt, or are there some situations where it’s worthwhile to pay interest and accept the risk of defaulting?

The original version of this article, Good Debt and Bad Debt, is copyrighted by Consumerism Commentary.

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If you want to know how much credit card debt Americans have, don’t ask the borrowers. For years, economists have sought debt data from both borrowers and lenders for credit card debt and four other debt categories. Borrowers report their debt balances by responding to household surveys, like the Survey of Consumer Finances. Lenders report debt to the credit reporting bureaus such as Equifax.

Relying on self-reported information for studies is always a risky approach if you’re planning to make any scientific assumptions based on the data. Everybody lies. Or, in some cases, people think they know the answer to a question about how or why they do something, but the truth remain undetected. Asking a population of consumers if they will transfer all their money from a big bank to a credit union will always result in overstating the number, as people tend to respond as if they were their ideal versions of themselves. Surely, a quantifiable question such as their debt balances shouldn’t be subject to this kind of error.

In fact, for most types of credit card debt, the self-reported balances match the issuer-reported balances. In only one category is there a discrepancy: credit cards.

Binyamin Applebaum from the Economix Blog explores some of the possible reasons that consumers misreport credit card debt. Among the possibilities:

Shame

Most of the other debt categories reported, such as student loans and home mortgages, tend to be socially acceptable. A consumer who feels embarrassed about a behavior or a state of being, there’s a chance he or she will be less willing to report it on a survey. Personal bankruptcies, on the other hand, could also be embarrassing, but households report them correctly.

Ignorance.

The study comparing the two debt reporting approaches show that single people report their credit card accurately while households do not. Household surveys are generally answered by only one person within the household, and that person may not be aware of the other person’s debt, even if the family has chosen to combine accounts.

Interpretation.

If someone were to ask me how much credit card debt I have, I’d say I have none. My latest balance sheet (net worth report) shows that is false. At the end of each month, I have a balance on my credit cards. I pay my credit card balance in full every month before it is due, but a snapshot on any date would show that I have a balance. People like me might report that they have no credit card debt, particularly if the question is not explained well on the survey. The issuers see it differently. They report a balance to the credit bureaus even if the issuers expect (or would expect if they note patterns) the borrower to pay in full.

When correcting for these issues, the researchers who conducted the study comparing the two reporting techniques still couldn’t explain the remaining discrepancy. Issuers reported more than twice the amount of credit card debt borrowers reported. The only possible conclusion is that people just don’t know how much they owe on credit cards. The study concludes that “uninformedness” is the problem. People just don’t know how much credit card debt they have, even if statements make this information easily accessible, at least on a monthly basis.

Two important steps in taking control of your finances are to take an inventory, finding where you stand in every financial account including debt, and to track your money, knowing how much is coming in and going out, and when these changes happen.

Do you know how much credit card debt you have? Do you think it matches what your credit card issuers say you have?

Federal Reserve Bank of New York [pdf] via Economix

The original version of this article, Under-reporting Personal Household Debt, is copyrighted by Consumerism Commentary.

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This article is by Consumerism Commentary staff writer Smithee, who is juggling about a dozen clients and creative projects as a freelancer.

It’s been a year since I was laid off and decided to become a full-time freelancer, and it’s been six months since my wife and I made a risky decision to move the family from Dallas to San Diego. Overall, we think moving was the right thing to do, but there are a few things keeping me anxious.

I’m writing this update from the Starbucks near the house we’re renting in San Diego, because Starbucks has air conditioning, and the heat and humidity in the house were too difficult to ignore. The good news is that today is only about the tenth day that it’s been too hot in San Diego since we moved back in April.

Productivity

As I hoped, moving to a place with nice year-round weather has had a good effect on my ambition and productivity levels. Some people like warm weather, but I found that Texas’s six-month-long summers would infect my outlook and attitude, creating tense and downright depressing work relationships.

In addition, working for myself means I can create my own hours and I’m not suffering from road rage or dealing with the rising gas prices. To be fair, though, San Diego’s rush hour is literally only an hour long, which is a level of sensibility I never saw in New Jersey, Seattle, or Dallas.

Most days I even have enough time in the morning to sit down and eat breakfast outside, which is part of my American dream.

Moving is expensive

Including fixing up the old house, packing, storing and moving all the stuff, animal medicine and drama, paying an agency to rent out our house in Dallas and $4,600 for the first & last months’ rent plus a security deposit in San Diego, moving wasn’t something we could do with cash on hand. We’ve created over $10,000 in credit card debt for the privilege of living somewhere better, and it almost always seems like the right decision.

Long-time readers might remember that I spent over a decade with thousands in credit card debt, before I finally buckled down and, with the help of a respectful salary, wiped it out over about nine months. I hate credit card debt, and knowing those balances are out there building interest against me causes some anxiety. The silver lining is that the “San Diego debt,” unlikely my legacy solo debt, is something that my wife and I are both contributing toward reducing, so it should go away that much more quickly.

The best part about our move (financially speaking) is that we’re saving at least $200 a month on air conditioning, which is the same amount more that we’re paying for housing. If we didn’t have to spend so much on rent deposits and agencies, it’d basically pay for itself. Over time, it will.

Debt reduction strategy

We’re not really reducing debt in a meaningful way, yet. At the moment, my wife has the big dependable salary. My work sometimes generates large paychecks, but freelance work is not reliable, so I’ve been spending more time finessing and futzing with each month’s household budget instead of putting payments and savings on auto-pilot.

I’ve been using the 50/30/20 guideline, and in the months where I have large freelance income, we’re able to save quite a bit. I know what I’m supposed to do is keep saving until we have three months’ worth of emergency savings available, or put it toward credit card debt and then build emergency savings.

What I want to do is use it to pay off the car loans early. One is on a schedule to expire in January, and the other one in June of next year. They add up to over $1,000 a month, and unlike the credit card debt, they always require the same regular payment amount, or else bad things happen.

In fact, once the car loans (and the old IRS installment) are completely paid off, we could fulfill all of our “needs” (the 50 part of 50/30/20) with just my wife’s salary. If things go the same way they have been, and if there aren’t any expensive emergencies, isn’t it smarter to free up $1,000 a month for saving or debt payments?

That’s the trick, isn’t it? You’re supposed to assume there will be emergencies that require you to have saved up a lot. I’ve never had that much saved in my life, but I’ve also never been hit with a truly expensive emergency, and I am impatient to be out of debt.

Photo: robsettantasei

The original version of this article, Smithee Update: Six Months in San Diego, is copyrighted by Consumerism Commentary.

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The concept of multitasking, for a person, is a myth. When someone says they are multitasking, they are quick task shifting. We can move our attention quickly from one task to the next, and shift back again, but it’s practically impossible to focus on two different things at the same time. To excel at anything requires undivided attention. Just ask an athlete who performs at world-class levels; the intense focus required to achieve at high levels doesn’t allow for multitasking.

It doesn’t take an Olympic athlete’s training and dedication to be successful when paying off debt, though. A solid debt repayment plan does not require 100% of someone’s focus. Should is require 100% of someone’s cash flow, though? To focus on paying off debt, should households suspend other financial goals like saving for retirement and setting up an emergency fund?

Saving in an emergency fund

An emergency fund is so important that it should be at least started before embarking on a plan to aggressively pay off debt. Without an emergency fund, if an emergency were to befall a household while all extra cash is designated for paying off debt, the only option for meeting the needs of that emergency might be going further into debt. With an emergency fund, you may have delayed the target date for being fully debt-free, but if an emergency occurs you’ll be able to handle at least part of the financial problem. A cash cushion will make paying off debt easier and will reduce stress levels.

If you can save just $1,000 in a high-yield online savings account, you’ll start a debt reduction plan from a much more stable position. It would be even better to have one month’s expenses saved away, with the rule that these funds would not be touched unless faced with a true emergency. Although the Debt Snowball and the Debt Avalanche prescribe putting all extra cash flow to paying off debt, establishing an emergency fund should be a parallel goal.

Saving for retirement

Saving or investing for retirement should, for the most part, be not put on hold, either. Don’t decrease your 401(k) contribution with the intent of putting extra money towards debt. You should invest enough to take advantage of any company match, because that could be an automatic 100% return for your money, and you can never get that back if you skip it. 401(k) contributions are tax deductible, another benefit you’ll lose if you reduce your contributions.

If your debt load is significant and ceasing your retirement contributions is the only way you could just meet your minimum payments, it may be justified to forego the benefits of investing in a 401(k) in favor of defaulting on your debt. However, in most cases, you should be able to keep your retirement investing steady., and any raises or bonuses you receive, sometimes automatically invested for the future, should be used for accelerating your debt payoff.

Saving for other goals

Saving for other purposes, like buying a house, paying for your children’s education, or taking a vacation next year, can be important, but paying off debt is a primary goal that outweighs other savings. These are “wants” or luxuries. Paying off debt is a necessity for having a financially independent life. You can delay buying a house, postpone a vacation, or even find different ways to fund college tuition.

To seriously take on the goal of paying off debt and to have an expectations of results, it’s imperative to put aside unnecessary desires and focus on the task at hand. For the last ten years, a friend of mine has been trying to get out of debt, or at least she says she has been. Yet, she continues to make life choices that involve spending more money than she has, and always has an excuse ready to go to justify the decisions in her own mind. I don’t judge people for their choices. I’ll support all friends in the way they choose to live their lives, but she might be happier in the long run once she decides to seriously prioritize getting out of debt.

Making sacrifices is never fun, and it’s easy to feel that middle class consumers deserve certain luxuries like television, Internet access, and cellular phone service. Many middle class consumers consider these to be necessities and wouldn’t dare cutting them from their lives, but if the trade-off is spending the rest of their lives indentured to credit card issuers and other lenders while leaving their income generation possibilities up to the whim of an employer, a few sacrifices today will make life better in the future.

“Earning” your debt interest rate

This doesn’t address the financial return of saving and investing for the future. It’s common to say that paying off debt is a guaranteed “return on investment.” That is, if you are paying off debt with an interest rate of 15%, you “earn” 15% by paying it off faster. Then, this fake ROI is used as a reason for prioritizing debt repayment above investing. The interest rate you “earn” for paying off debt is compared with expected return from investing to determine which approach should have priority. A 15% APR debt should be paid off before investing in the stock market with a 6% to 8% long-term estimated return, and investing in the stock market should be prioritized above paying off a 3% APR loan.

This is absolutely the wrong terminology to use. Debt is a result of spending money. You’re earning nothing by paying off debt, you’re spending less. You’ve already spent more than the value of the items you purchased with debt, so all you’re doing by paying off debt faster is cutting your losses. It’s important to do this, but you’re not earning anything like you would, potentially, with an investment.

Nevertheless, the interest rate comparison is fine for prioritizing debt. Unless you have a spending problem, it makes sense to hold onto a 0% APR balance as long as possible, but something like an emergency fund should not be looked at as an investment or compared to paying off debt. Assume money in a savings account earns a 0% return, but recognize that the importance of having the cushion ready to supplement your income with the loss of a job or an unexpected medical expense.

What changes would you make to your spending and saving plan if you decided to accelerate your debt payoff plan?

The original version of this article, Should You Stop Saving and Investing When Paying Off Debt?, is copyrighted by Consumerism Commentary.

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The “Debt Snowball” is one of the most popular methods for approaching a variety of debts, with the intention of paying them off. The process has existed for as long as debt has been around, but the method has been commoditized, packaged, and popularized by a variety of personal finance experts, gurus, and speakers. Dave Ramsey is the biggest proponent of this method, having written extensively about the success he has seen as a result of paying off debt while adhering to the Debt Snowball method.

I’m not a fan, but the Debt Snowball method and its proponents get a few things right.

Dave Ramsey is correct in that those who stick to this plan are more likely to reach their goal of paying off debt than those who do not think about and create a road map. Furthermore, I applaud Dave for admitting, although in fine print often missed by followers, that the Debt Snowball method is less efficient, more expensive, and slower than other methods. Many of Dave Ramsey’s disciples, both successful and not, accept Dave’s reasoning for the promotion of the Debt Snowball above other methods, despite not having considered the alternatives.

However, as the Debt Snowball method has been proven to be successful, it’s worth outlining the process for anyone who is looking to pay off debt.

The Debt Snowball

The Debt Snowball is a method of prioritizing a collection of debts. This collection could include credit cards, loans, a mortgage, anything with a monthly payment, but it is most often associated with credit card debts. Credit cards are usually easy to illustrate because at any particular time for each credit card, you know what the balance is, you know what the interest rate is, and you know what your monthly minimum payment is.

Starting the Debt Snowball process relies on having more than enough cash flow to meet more than just the minimum payments to your debts each month. If you can’t pay the minimum payments, you must talk to your creditors to change your terms, earn more money, or a combination of both.

Prioritize your debt accounts from smallest balance to largest balance. The core philosophy of the Debt Snowball method is that it’s better from an emotional perspective to pay off small balances first. When that first, small debt is paid off, it provides a psychological boost of a “quick win.” That, in theory, motivating adherents to continue along the path of paying off debt.

To pay off debt using the debt snowball method, you make the minimum payment to each debt except for the debt ranked first on your list. To this most important debt — defined by the Debt Snowball method as the debt with the smallest remaining balance — you pay the minimum plus any extra cash you have budgeted for accelerated debt repayment. This extra payment could be the remainder of your monthly after-tax, after-savings income, it could be your cash flow plus a transfer from your savings, or it could be a set dollar amount each month. Regardless of the amount, you throw this extra money to your prioritized debt until it is paid off, then the next month you take the same minimum payment you were paying to that first debt, add your extra cash flow, and pay this larger amount to the second-most important debt. (And that second-most important debt is now the first, because the original first has been eliminated.)

Keep in mind that some loans treat these extra payments differently. It’s best if you contact them to ensure your payment will go to the loan’s principle. Furthermore, if you intend to use this method with your mortgage — often an individual or household’s largest debt — you should ensure you are not penalized for making larger payments.

To summarize:

• To start, you need: enough cash flow to handle at least your minimum monthly debt payments.
• Prioritize your debt by: remaining balance, from low to high.
• Each month: pay the minimum payments plus extra to your top-ranked debt.
• Celebrate when: each debt is paid off, and prioritize the next debt account.

The Debt Snowball ignores the interest rate, the real cost of any particular debt. Even if a small debt is less expensive than a large debt, it’s prioritized higher. This is where a perfect follower of the Debt Snowball method will end up paying more in interest fees than a perfect follower of a method that prioritizes debt by interest rate, like the Debt Avalanche. (As far as I know, I was the first person to call this method the Debt Avalanche, but its name is taken unabashedly from the Debt Snowball).

The Debt Avalanche method is mathematically superior. Anyone who adheres to this method will pay off debt faster and pay less money than anyone who adheres to the Debt Snowball method. This adherence is what gurus like Dave Ramsey focus on. The Debt Snowball is more likely to see success because of the psychological boost of a “quick win.” The truth, however, is that the same psychological boost can be created with the Debt Snowball. Depending on the configuration of debt, the first “quick win” may not be delayed much, first of all. Additionally, a simple motivational technique will often suffice — rather than celebrating the first full debt payoff, celebrate a milestone, like the first $1,000 paid off or the first $10,000 paid off. Whatever it takes to motivate you, you shouldn’t be confined to the particular parameters of the Debt Snowball method. If this type of motivation is important to you, make it yourself — it will be more meaningful.

Plus, just the knowledge that there is a method that will cost less and take less time than the Debt Snowball is enough motivation for some. While gurus sometimes freely admit that the Debt Snowball is inefficient, the message doesn’t get across to all students, and some might feel thoroughly disappointed when they discover they could have spent less money and less time in debt with just a simple shift in priorities.

Subscribing to any method of getting out of debt is a positive thing. No matter what you choose, just thinking about the process and creating a plan is much better than approaching debt repayment haphazardly, and it’s infinitely better than doing nothing at all. I’m all for anything that gets people paying off debt and becoming financially independent. I think it’s a disservice to preach a certain approach without addressing the alternatives.

In fact, I prefer a hybrid method to repaying debt, one that looks at more than just balances and interest rates, particularly when an individual’s debt load is a variety of borrowing types.

Have you had success paying off debt with the Debt Snowball method?

The original version of this article, The Debt Snowball, is copyrighted by Consumerism Commentary.

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As a very last resort, employees with active 401(k) retirement accounts have an option to take out a loan against their future. Borrowing money is never a good position to be in, but if you’re borrowing money from yourself, you ease the pain. 401(k) plans permit borrowing at interest, and paying interest to yourself can help improve your finances in retirement.

The existence of a 401(k) account is often used as an excuse for not creating an emergency fund; if a loan is available at any time, why settle for low high-yield savings accounts when your money could be put to better use? This isn’t a valid argument as elucidated by the dangerous drawbacks of 401(k) loans.

Most people who take out 401(k) loans stop contributing new earnings to their 401(k) plans. Not only is the withdrawn loan not earning more or increasing value in your retirement account, you’re not adding new investments.

One of the most popular emergencies requiring more cash is the loss of a job. If you lose your job, you won’t be able to take a loan from your 401(k). Additionally, if you already have a 401(k) loan when you lose your job, it will be due within 60 days or less. At the same time you need cash, you’ll need to pay back your loan or suffer income taxes plus a 10% penalty. According to a recent study by Aon Consulting, 70 percent of workers who lose their jobs while having an active 401(k) loan default on that loan (pdf).

Even if the 401(k) loan is paid back in full, there’s another drawback. The interest on the loan is considered income, and therefore taxed, twice. When you pay interest back to the 401(k) account, it is paid with your regular income, which would be included on your tax return as taxable income. Once that interest is in your 401(k) account, it is mixed in with the before-tax contributions, if your loan was from the before-tax portion of your 401(k). When you retire and you withdraw your funds, the full amount of your before-tax contributions and their earnings will be subject to income tax. You could also argue that the principal portion of the loan payback amounts are taxed twice as well, because a 401(k) loan payback is not considered tax-advantaged and does not reduce your taxable income like a 401(k) contribution.

Congress is currently mulling legislation to limit 401(k) loans. If the law passes as it currently stands in bill form, employees could only take three loans against their 401(k) at a time. Repeated borrowing just sounds like trouble. The law would allow employees to continue contributing to 401(k)s while a loan is outstanding. I would think if any extra money is available, it would be better served paying off the loan rather than making new investments. I suppose it could be more tax efficient this way, but paying off debt should be a priority, even if the borrower is the same individual as the lender. Third, the law would ban 401(k) accounts from issuing debit cards that allow investors to use retirement funds as a transaction account. This sounds reasonable.

Some 401(k) plans might be more restrictive than the law. In most cases, borrowing from a 401(k) is just a bad idea. It’s tempting in emergencies, though, particularly for households that have not been able to create an emergency fund. A 401(k) loan should be a last resort. If you get stuck and are unable to pay the loan, the government takes a big chunk. On a $10,000 loan, assuming 25% federal taxes, 5% state taxes, and a 10% penalty, you’ll only be able to keep $6,000.

Have you or would you borrow from your own 401(k)?

The original version of this article, Don’t Take Out a Loan From Your 401(k), is copyrighted by Consumerism Commentary.

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Although I’m not a financial professional and I don’t normally give advice, I’m relatively comfortable offering some opinions when it comes to strategy. A reader presented this question to me recently. I’m open to answering questions as long as the answers don’t involve giving stock picks or legal advice.

My wife and I recently moved across the country, going into debt in order to throw our lives into upheaval. We both have contract positions, so our income tends to fluctuate. At the moment, it’s steady, and we can pay our bills have some left over to pay off our debt. I’m concerned that this won’t always be the case and our income might drop, requiring us to live on credit again because we don’t have enough savings to cover our expenses other than savings accounts that have been designated for things, like taxes. I really want to get out of debt, though, and I’d like to put all of our extra income to paying off debt.

Being in debt can be demoralizing, especially for someone who has been reading at least one personal finance blog for several years (as I believe this reader has). In this case, we’re not dealing with debt that some might consider good, like student loan debt, or for some tricky manipulators, 0% balance transfers. Credit card debt for regular expenses, the type of debt that isn’t paid off immediately at the end of the month, is universally considered damaging to a family’s finances in the long term. Financial education creates a strong aversion to this type of debt.

Yet, attacking credit card debt with the full force of anything left over from a paycheck is not always a good thing. While the feeling of eliminating debt is great, without some cash ready to be deployed in the vent of an emergency, that credit card will return. For some people, emergencies just tend to keep happening, because anything you haven’t saved money for has become an emergency.

If there are savings accounts designated for other expenses, they could be usurped by a formal emergency fund for now, but if these cash accounts are being held for tax bills, as employers often don’t withhold taxes for consultants working independently, then it’s best to leave these accounts alone. If the savings is designated for a new camera or next year’s vacation to Cabo, the better financial decision is to shore up the emergency fund before using the money to head to the shore.

He’s a fan of the Balanced Money Formula, which suggests creating three buckets for after-tax income. 50% of the net income goes to “needs,” 30% to “wants,” and 20% to “savings.” In our discussion, the reader considered splitting the savings category into 10% savings (in the form of an emergency fund) and 10% paying off credit card debt. I originally placed debt under the savings banner when describing a method of budgeting based on Maslow’s Hierarchy of Needs, but that might not be appropriate.

The minimum monthly payment to credit cards must fall under “needs,” because if these payments are not met, the credit card issuer will penalize the borrower with higher interest rates. In the worst case scenario, the debt could go into collections and ruin the borrower’s credit rating. This is a costly mistake. But where do extra debt payments fall in?

When paying off high-interest credit card debt is a goal, it’s more important than wants. If you’re going with the Balanced Money Formula, debt elimination is a need or a want. If there is no existing emergency fund, the last 20% for contributing to a savings account should also be prioritized as a need, and this supersedes the need to pay extra money towards credit card debt beyond the minimum payments. If the only after-tax income you have after paying the necessary bills is less than the 50% for wants and savings, you’ll find that extra debt payments and building up a savings account compete for priority.

Starting the emergency fund should be the winner of that battle. At least get an emergency fund started with maybe $1,000, $2,000, or the cost of one month’s worth of expenses in the bank.

Once that has been accomplished, return to the Balanced Money Formula. At this point, you’d be able to pay down debt faster than the minimum payments alone while continuing to build an emergency fund.

Photo: peasap

The original version of this article, Pay Down Debt or Build an Emergency Fund?, is copyrighted by Consumerism Commentary.

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Three months ago, a healthy 49-year-old business man walked into a Citibank office in Jakarta, Indonesia to discuss the matter of a $5,500 debt on his Citi Platinum credit card. The events that followed are unclear, but four hours later, the man left Citi offices in a wheelchair. Citi cars drove him to a nearby hospital where he was announced dead.

Lawyers for the man’s widow allege that debt collectors physically harassed him in the office, pursuing a debt repayment of the equivalent of $12,000 including interest. He received a beating that eventually led to his death. The widow is suing Citi for $348 million. Citi’s lawyers contend that while there was some intimidation involved, the man died of unrelated causes.

The concept of debt in the developed world is not only mainstream, it’s interwoven in the fabric of the economy. Punishment for debt or consequences for owing money to another party are not severe. Debtors don’t go to jail, but in some circumstances, any income they generate can be transferred directly to creditors — essentially enabling indentured servitude (or worse, slavery). In Indonesia, like the United States, it is apparently customary for creditors to hire debt collectors to intimidate debtors, but unlike the United States, this intimidation can be severe. In this country, harassing phone calls, even to relatives and friends, is the practice of the seediest corporate-style debt collectors. Physical harassment for debt obligations is not the norm here, unless one deals with shady illegal practices.

A business moving into another region of the world needs to be aware of the local customs and the requirements for doing business. In some countries, it may be hard to build a business without a special application fee to the government, call it what you will. Business practices and expectations differ around the world. The promise of financial gain from having a presence in a developing nation like Indonesia is a strong incentive to enter the country for business, and for that company to succeed, it must adopt local customs and practices. Where those practices conflict with a code of ethics established for operation domestically, it can be tricky for a company to find the right balance that allows them to succeed in country while maintaining a moral standing.

Having a customer die in your office, particularly during an admitted session of intimidation, whether due to the intimidation or not, could be a pesky public relations problem. It sounds like Citi may not be to blame directly for this death, but a corporation would not permit this type of intimidation in the United States.

Bloomberg, Huffington Post

The original version of this article, Citigroup Accused in Death of Customer, is copyrighted by Consumerism Commentary.

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To someone with debt, receiving an inheritance can feel like winning the lottery. Occasionally, an heir doesn’t realize money will be coming her way and hasn’t planned for the windfall or thought about her options. Even those who do plan often realize that contemplating options for managing a potential windfall is quite different from making decisions once that money is in hand. There is a tendency to have a riskier approach to managing money until the windfall arrives in the bank account. Often, preservation instincts kick in and prevent people from taking action.

Whether to use extra money to invest or pay off a mortgage is a common concern. Economists look at the numbers. If, after taxes, you can earn more in interest or appreciation by investing the funds than the amount of interest you’ll save by paying off a mortgage early, it is a better financial decision to invest rather than accelerate debt repayment. In its most simple approach, this ignores that the savings from paying off a mortgage early are guaranteed, and finding a rate that would beat the mortgage for investments could be very risky.

A Consumerism Commentary reader offered the following question:

I am a single 53-year-old female with a 13-year-old daughter still at home. My mother passed away recently and I inherited a little over one hundred thousand dollars. My mortgage payoff is $41,000 and I have a second that is $14,000. My Lutheran Brotherhood rep tells me to invest all of it and to not pay off my mortgage since I only have seven more years on the loan at 5% interest. My gut tells me that I should pay off my mortgages to be totally debt free. Any thoughts would be greatly appreciated.

Nothing beats finding and working with a trusted financial planner when handling these questions. Being debt free is obviously important to this reader. Paying off debt is a burden. Every month, the work you do generates income already designated for someone else. Debt may not be slavery, but you will never fully own your income and the work you do to create that income until you are free to do what you want with all of your (after-tax) income.

The representative may have positioned 5% as being a low interest rate. It’s not a terrible mortgage interest rate, and you might even be benefiting from the home mortgage interest tax deduction. With only seven more years left in the loan, however, the biggest tax benefit is behind you because the majority of each mortgage payment goes to the principal of the loan rather than interest.

Can you beat 5% by investing the $100,000? It’s possible, but not guaranteed. A Lutheran representative should be aware of the risks; recently, Thrivent Financial for Lutherans was one of a select number of organizations that lost almost all of its investments due to a risky and possibly fraudulent investment scheme at J.P. Morgan. A proper mix of simple stock and bond index funds could beat 5% in the long run, but performance over shorter periods of time, like a decade, could be worse than the 5% you’d achieve by paying off the mortgage.

Even if you use $100,000 to pay off the remaining mortgage balances, you’ll still have $45,000 left, so it’s not an all-or-nothing question. Going further, if you strongly feel that investing is a better way to secure your financial future but you also feel strongly about reducing debt, you might be more comfortable using the windfall to pay off half of your remaining mortgage balance, leaving a larger remainder to invest. This would give you the benefit of exposure to stocks for the long-term while greatly reducing your monthly mortgage obligations or allowing yourself to finish paying off the mortgage a few years earlier than expected. If your daughter is 13 now, she may move out in five years. That could be a good time to downsize your living arrangement to save money, and when that happens, you may feel more comfortable if your house were to be completely paid off by then.

One other thing to consider is whether the representative you spoke to is also representing an organization like Thrivent Financial for Lutherans. This is a non-profit organization designed to help the community of Lutherans succeed financially through prudent investing. Due to his affiliation, he would suggest investing. Not only is it an acceptable choice and probably not a terrible decision, but his affiliation with the organization would certainly sway his advice towards the benefits he can provide. If you walk to a car dealership an ask a salesperson, “Should I buy a car or pay off my mortgage?” you can expect the car salesperson to suggest buying a car — from him.

This question is open to anyone who would like to comment. Should this reader use a $100,000 inheritance to pay off the remaining $55,000 balance on the 5% mortgages or invest the entire windfall?

The original version of this article, Reader Question: Invest $100,000 or Pay Off Mortgage, is copyrighted by Consumerism Commentary.

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For as long as I’ve been reading about smart money management, “live within your means” has been the underlying mantra that, when uttered repeatedly and internalized, will result in a much more fulfilling life overall. By living below your means, you are sure to come out the end of each month with a net worth higher than the previous month’s, except for any poor investment performance. Building a financial future means eliminating debt and adjusting your wants and needs to be manageable within the income you receive.

Or does it? Laura Rawley argues that economists see this concept — the idea that one should only consume without acquiring debt — as limiting. Consumption smoothing is the idea that someone with an earning potential that resembles an upward slope could do better by enjoying life (and spending) early on rather than delaying consumption until a time when taking advantage of increased income would be less fulfilling. In other words, shop now so you don’t have more money than you know what to do with when you’re eighty years old.

There are obviously a number of faults with this approach. To name a few:

• Borrowing at a young age based on future income potential is risky. What if your income never hits that upward slope?
• Buying a BMW and going into debt now rather than a slightly used Honda Civic with cash could prevent you from making more meaningful investments.
• If you grow accustomed to living beyond your means now, unless you’re willing to make a significant change in attitude, your desires will just be greater later on, and your income will never catch up.

Nevertheless, there is a lot of value in the idea of enjoying life while you’re living it. You can’t put off all of your wants until later. The best option is to find affordable ways to handle the desires that may be beyond the reach of affordability, but lifetimes are relatively short when compared to the span of a culture.

Also, certain types of spending are likely to enhance your earning potential over time, and it is worthwhile to take some financial risks. Borrowing for a college education is often used as an example — but don’t forget there are ways to get a quality education without spending a lot of money. Personal preference and skills play roles — if everyone chose career and education paths based on likely return on investment, we might all be engineers studying in schools outside the United States.

In her article, Laura Rowley provides the example of a novice author who hires an editor, beyond her means, with the hopes of securing a deal for her first book faster. This is more of a business expense rather than the consumption, but it shows how taking a risk by laying out some of your own financing can be helpful in getting a jump start in a career. A better example pertaining to consumption could be the novice real estate agent who, in order to secure clients interested in more profitable locations, will buy accouterments that signal luxury, like expensive cars and fancy clothes. Again, these are still business expenses for which there is an argument that a little “investment” is necessary for financial success.

For most people, the concept of living within one’s means should be the general philosophy for spending, but balance is important. Life is short, so enjoy it. The more you can find ways to enjoy it that still allow you to live within your means, the more fulfilling your life will be now and in the future. If you’re in control of your finances, spending today to take advantage of the idea of consumption smoothing is not the worst thing in the world. One shouldn’t, however, use consumption smoothing as an excuse for making poor financial choices that ignore the consequences of increasing consumer debt.

Yahoo Finance

The original version of this article, Don’t Live Within Your Means, is copyrighted by Consumerism Commentary.

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A few years ago, a friend of mine quit his job at a bank to focus on his own company. That can be a risky life change by itself, but in addition to his change in income, he and his wife were expanding their family. While I’m sure they would have been fine remaining in their apartment for a few additional years to ensure the new business could provide income, they wanted to purchase a house right away.

The mortgage broker they were talking to must have been very good. When they signed the paperwork for the adjustable rate mortgage, they were paying less per month (not including insurance and taxes) than the cost of rent in their old apartment. The premise could be valid. An adjustable rate mortgage allows you to qualify for a lower rate now while you’re earning less. Despite many studies that have recently declared that real income has been steady or has decreased for most workers over the past decade after taking inflation into account, most people have an impression that they can handle the increase in mortgage cost later because they’ll be earning more money.

For this particular friend, the decision to go with an adjustable rate mortgage paid off. His business found success early and he did not have a problem when the interest rate recently jumped. The situation could have easily gone the other way; in fact, it almost did. He managed to sign a major client at the right time, and it moved his business into profitability. Without the one client, his finances would have been in trouble.

Another friend of mine, when buying his second house, considered an interest-only mortgage. This is another good option to increase cash flow in the short term, but it means larger expenses later on. Unlike adjustable rate mortgages, if you’re paying only interest, you’re not building any equity in your home. In the beginning of mortgage repayment, building equity would be slow, anyway, but it’s helpful to start paying down the principal as soon as possible.

In the days of the runaway real estate market, homeowners could increase their equity just by watching the value of their home increase, but there are few locations where that strategy would work.

Along these same lines, homeowners would often take advantage of double-digit increases in value by refinancing their mortgage and walking away with cash. Enterprising individuals often find this cash helpful for making improvements to their home — and these improvements only pay off in terms of enjoyment of the living space, not future resale value — or investing in their own business.

Adjustable-rate mortgages, interest-only mortgages, and cash-out refinancing aren’t always mistakes. These could be the right options for many people, and several years down the road, one could look back and determine each one was, for any particular person, the best choice. These techniques often probe to be financially devastating if the housing market crashes, your income doesn’t increase as expected, or your business fails.

When plans don’t work out and the mortgage becomes too tough to handle, a family could find itself facing foreclosure.

The original version of this article, Three Big Financial Mistakes That Could Be Devastating, is copyrighted by Consumerism Commentary.

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This is a guest article by Glen Craig, the publisher of Free From Broke and Parenting Family Money. See how he currently deals with his family and finances and find out how you can too. In the article, Glen shares his story of how moving back with this parents provided a second chance for his financial life, mirroring a similar experience in my life. It’s a common thread with the “Boomerang Generation.”

Once upon a time there was a care-free bachelor. He had his own apartment, a full-time job, lots of credit card debt, and virtually no savings. That person was me.

I moved out of my parents’ place before I understood what it really meant to take care of my finances myself. I got by, though. My rent was paid on time, as were my utilities, but over time, my credit card debt grew. And when I say I got by, what I really mean is I was living paycheck to paycheck, crossing my fingers that I’d have enough money until my next paycheck came.

Living on your own is expensive. I don’t need to tell you that. And the money for all of the little things had to come from somewhere. Dishware? Credit card. New broom? Credit card. Going out? Credit card. CD player dies and I need a new one? Credit card. You get the picture.

I managed to get thousands of dollars in credit card debt, and all with just about zero savings.

I knew it was no way to live. I hated seeing my credit card debt growing without anything to really show for it besides my CD collection. (Remember those?)

So I started to wise up and figure out how to get rid of my debt. I called up my credit card companies to get my interest rate lowered. I made sure to get my bills paid on time after getting hit with a bunch of late payments. I did what I could to pay more than the minimum. I even transferred a balance or two to new cards with zero balances so I could pay my debt off faster. I stopped putting so much on credit — if I couldn’t pay for something, well I couldn’t get it.

I saw my debt going down but not by as much as I wanted.

Then an interesting thing happened: I lost my apartment.

I was living in a converted one-bedroom apartment basement in a house. What I didn’t know was that the house wasn’t zoned to be two-family. Somehow the city found out and I was forced to leave the apartment. What to do? My rent was pretty reasonable where I had been — and know I knew why. Finding a new apartment would mean higher rent, a bigger security deposit, and probably paying a broker’s fee to get a place. That was a lot of money I would need up front, and remember, my savings were hardly existent at the time.

Quite honestly, I felt choked just thinking of how I was going to afford another apartment. I mean it, I felt sick. I was just getting to the point where there was a dent in my credit card debt and I was slowly starting to put away money into my savings. I was even getting smart about retirement, upping the percentage I was putting into my 401(k) at work.

There was another choice, but it wasn’t pretty: move back in with my parents.

Look, I love my parents, and they have always been there when I needed them, but giving up my freedom was a hard pill to swallow! The alternative was going back to just eking by on my paycheck because I had to pay more in rent every month.

I sucked it up. I needed to retreat and build myself back up financially before I could live on my own again. It was the only way to even have a real financial future.

My parents were awesome and welcomed me back with wide-open arms. I agreed to pay them a rent for my room and utilities, an expense that was much lower than any rent I would find.

It wasn’t easy. Moving back with my folks and my sister brought back a lot of memories, wounds, and arguments. If I was going to start-over with my finances in order to put my financial future on the right path, I would have to make sacrifices, and this was one of them.

Moving back with my folks meant that my paycheck stretched much farther than it had in a long time, but I didn’t go and blow it all. I tried to be smart about this second chance. I started putting money away in savings. I had heard about this online bank, ING Direct, that I took a chance on, socking away a good amount of savings every month. I increased the percentage that was going into my 401(k). This was a little bit after a stock market crash, so I was purchasing the funds in the plan relatively cheap.

Next was the credit cards. I was putting a lot into savings, but after some time it dawned on me that I was still paying a lot in interest on my credit card debt. I was paying more than the minimum payment, mind you, but there was still a lot of debt to take care of.

What was the point of saving more money if I was still losing on credit card interest? I switched things up and attacked my credit card debt. I put all I could into paying off that debt. With my new lower rent and expenses it didn’t take long to pay of my credit cards entirely. You don’t know how good it felt to mail out that last check!

With the next paycheck after paying off the credit card debt, I started putting money back into savings. I realized something. For the first time in I don’t know how long I actually had a positive net worth! I wasn’t in debt anymore. It was such a liberating and validating realization. The money in my paycheck was mine again and wasn’t slated for a credit card company. Yes!

It was a tough road, but after many years of increasing my debt without a whole lot to show for it I was able to come out ahead again.

Fast forward many years. I’m now married to a beautiful woman with three awesome kids. We just moved into our first house this past summer, a house we purchased with a down payment of more than 20 percent, in large part because I was able to wake up about my finances and take steps to improve my situation. And we have zero credit card debt.

If you told me when I moved out for the first time that I would move back with my parents, and it would be one of the best financial decisions I would make, I’d have told you that you were crazy. But it was one of the best moves, by far.

Here’s the moral of this story. You’ve heard other people say it, but if I can get out of credit card debt then anyone can. It’s about being able to make the sacrifices. For me that meant moving back with my folks. What does it mean for you to get out of debt?

Photo: erix!

The original version of this article, Moving Back With The ‘Rents to Take Care of My Finances, is copyrighted by Consumerism Commentary.

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I always like questions about debt pay-off strategies because they’re partly about math and partly about psychology. The numbers are very important, and debt payoff strategies should not be planned or implemented without a good understanding of the long-term financial consequences. There are some cases where, from a personal perspective, it makes sense to formulate a plan that costs more in the long-run but alleviates other problems during its course.

That’s why I strongly encourage people to take a look at the Debt Avalanche method for paying off credit card debt before they blindly go with a different but popular solution. I understand why people are drawn to a strategy that theoretically takes longer to become debt-free and costs more in interest, and I have no problem with that choice as long as they recognize the long-term financial consequences of spending more money than necessary.

Today, a reader wrote in with a question about his debt payoff strategy.

I have $2,000 on a credit with 0% interest for a year and a car loan of $3,000 with 5.4% interest. My wife and I will owe big on student loans in Janaury and I want to get my car and/or credit card paid off fast. Should I pay extra on credit card payment or car? How important is it to pay off the 0% in one year, the interest will shoot up to 10% in April 2012.

I’ll answer the second question first, because it may have a bearing on the answer to the first question. It’s important to pay off the 0% balance in one year. First of all, although the credit card company is indicating the “go-to” rate will be 10% in April 2012, this is likely a variable rate. Most credit cards are using variable rates to get around the Credit CARD Act’s stipulation that makes it more difficult for credit card issuers to change (fixed) interest rates. It may be that when the introductory rate expires the rate on the balance is higher than 10%.

Also, when introductory rates expire before the balance has been paid in full, in some circumstances the go-to rate can be applied to the entire charged balance during the introductory period. That’s rarely the case with 0% APR balance transfer promotions, but it’s more common with deals that feature a limited-time 0% APR on purchases. I found that out personally with a store credit card once. Even with one dollar left of the original amount charged during the introductory period, one would likely owe back interest on the full $2,000 or more initially charged. Always pay off balances incurred during promotions before the introductory period expires. These 0% APR balance transfer deals are often great, but only if you abide strictly to the terms and take extra effort not to jeopardize your promotional rate.

I don’t know the rest of this reader’s financial situation, but given what was included in the note, my suggestion and my answer to the first question is to determine what payments are necessary to pay the $2,000 before the last bill is due in April 2012 and make that a priority. If the readers determines it would take $167 a month to pay the balance before the interest rate would increase, and if the cash flow is available, pay at least that much. Play it safe and get the balance paid off a little early, if possible. At the same time, pay the minimum or more to the car loan and student loan. When the student loan payments start in January, that will cut into your ability to pay off the car and the credit card. The reader can prepare for that by striving to pay off the credit card even faster.

Without knowing the reader’s cash flow, I wouldn’t be able to offer more specific suggestions.

The original version of this article, Pay Off Car Loan or 0% APR Credit Card First?, is copyrighted by Consumerism Commentary.

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Experian is a credit reporting bureau, but it may be more accurate to characterize the company’s business as one focused on consumer information. The data they collect on people, even those with no relationship with the company, are substantial. This information was used to determine that the average consumer owed more than $4,200 in credit card debt in 2010.

Considering Experian’s methodology, it’s easy to legitimately dismiss that number. The company has very little data on people who do not have credit cards, so it’s fair to say that this number, if it amount is an average, is an average calculation for just those individuals or households that have credit card debt. It does include, however, those who pay off their bills in full every month, even though these credit card users have no revolving balances.

Using this information, the company ranked cities in the United States by average credit card debt. Here are the top 25 according to Experian’s study. Absent from this list are the major metropolises New York City, Los Angeles, and Philadelphia, where one might assume the majority of spending would take place.

CNN Money

The original version of this article, San Antonio: City With the Most Credit Card Debt, is copyrighted by Consumerism Commentary.

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If you’re ready to get out of debt and willing to create a video about it, you could win $1,000 or other prizes from the folks at LendingClub and PerkStreet Financial. Submit a video of you shredding your credit card to qualify for the chance of winning a $1,000 grand prize in the form of a Visa gift card. Every week, the contest organizers are selecting additional winners of a $50 Visa gift card every Wednesday through the end of January. Two Visa gift cards totaling $600 will be provided to the winners of the “Most Creative Shred” award.

The awards don’t end there. Here is where this gets interesting for Consumerism Commentary readers, specifically. All Consumerism Commentary readers who submit a video will be eligible for an additional prize of between $125 and $300. If you do create a video of your shredding and submit it to the content, let me know as soon as possible so I can consider your submission for this exclusive award.

How to enter the contest

1. Cancel a credit card. I mentioned this morning that even credit cards with rewards programs can hurt your bottom line. Even those who use credit cards as a tool to track expenses and earn rewards could be doing more harm than good to their finances. Regardless of the rewards, if you carry a balance unnecessarily, just get rid of the card.
2. Record a video. Be creative! Show an interesting method of destroying your card, write a skit to be performed by you and your friends, or sit down in front of the camera and tell your story. Be careful not to show your credit card number in the video!
3. Submit your video. Visit ShredYourCreditCard.com to share your creative project with the world. When you register for the submission, make sure you let them know you heard about the content from Consumerism Commentary! This way, I’ll be able to vote for your submission.
4. Vote for your video and encourage others. This is partially a popularity contest, so make sure you vote for your submission every day. Get the word out to your friends — and to me — so you accumulate more votes.

Check ShredYourCreditCard.com every Wednesday to see if you’ve won a weekly prize. The $1,000 grand prize and $600 “Most Creative Shred” award will be announced on December 31.

About the sponsors

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Shred Your Credit Card in the news

Here’s a clip from a local news program about this contest.

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One of the most popular services available surrounding tax season is also one of the most expensive. Refund anticipation loans (RALs) are great products from a lender’s point of view; they are low risk and they are expensive. From a customer’s point of view, they provide a means to get cash when a household files its tax return rather than waiting for a check from the IRS. Tax preparation services like those offered by H&R Block sell these expensive loans in partnership with banks and other lending institutions. Since most customers who use these products need cash right away, they seem to be more willing to pay the high fees associated with these loans.

With the IRS sending direct deposits faster than ever, one might wonder why these products, and their cousins, the refund anticipation checks, are so popular. Millions of Americans simply don’t have bank accounts. Living paycheck-to-paycheck, these families see little need to store their money somewhere safe because they have nowhere to store it. I am amazed that 40% of H&R Block’s clients used these products last year considering the high fees. I consider refund anticipation loans one of the worst forms of debt, second only to pay day loans.

While I understand the function of thees products in the marketplace, I don’t like the concept of charging someone in a difficult financial situation to borrow his or her own money — and charging the borrower a high fee from an annual interest rate perspective. In a perfect world, no one would be living paycheck-to-paycheck, unable to make the rent or mortgage payment, and one step away from homelessness, but the reality is that many households are facing these troubles.

In 2011, H&R Block will not be offering refund anticipation loans. A federal regulatory agency, the Office of the Comptroller of the Currency (OCC) has barred HSBC from offering these products. HSBC was H&R Block’s exclusive partner for refund anticipation loans. The customers who would be interested in these products will be directed to refund anticipation checks as a similar alternative, although it doesn’t provide the cash as quickly as a loan.

HSBC is not the only bank offering refund anticipation loans, and I am unsure why the OCC has singled out this one bank. If the bank was handling the sales of these loans in a reputable manner, the regulation should be applied consistently across all institutions. For H&R Block, these loans provided a significant portion of revenue, $130 million in 2010. Earlier this year, when HSBC was considering on its own not offering the refund anticipation loans to H&R Block, the tax return agency sued the bank.

Unless the situation changes, competitors like Jackson Hewitt will still be able to offer this product to their customers. TurboTax does not offer refund anticipation loans.

H&R Block, Wall Street Journal, Fox Business

The original version of this article, No More H&R Block Tax Refund Anticipation Loans, is copyrighted by Consumerism Commentary.

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Consumerism Commentary reader Yana wrote in yesterday to let me know about some changes in the terms for Wells Fargo’s Direct Deposit Advance service. At first, I was surprised that this service exists. At its core, the credit product offered by Wells Fargo is basically a payday loan, though it comes from a reputable financial institution rather than a shady operation — or shadier, depending on your opinion of financial institutions.

My surprise faded quickly. Wells Fargo’s service is fairly low-risk from the bank’s perspective, particularly when compared with typical payday loans. Companies that pay salaries through direct deposits from companies are generally more reliable than customers who need to show up with their next paycheck. Those who use this service are already customers of the bank and have gone through any necessary background checks. Yet, the bank can still charge over-sized fees, just like payday loan companies. In Wells Fargo’s case, the fee is $2 for every $20 borrowed.

Even within Wells Fargo’s own list of frequently asked questions about the Direct Deposit Advance service, the bank warns customers that the product isn’t right for all customers:

It is important to note the Direct Deposit Advance service is a relatively expensive line of credit intended to assist with short-term borrowing needs and is not recommended as a solution for your long-term financial needs. Alternative forms of credit may be less expensive and more suitable to your long-term financial needs.

If the bank is steering you away from its own product, it’s best to stay away. Tellers might recommend this product to customers who come to the window without any warnings about price, however, and customers who are worried about being able to pay their bills might not be looking online for more information about the product before signing up.

The terms of the Direct Deposit Advance service have changed to further keep customers off the program. Habitual borrowers will find that their credit limit will gradually decrease if they continue to use the service, to the point at which borrowing against a future deposit will be prohibited for a period of time.

Gradually reducing a credit line could be an effective way to move people off of credit, but it could make living difficult for any household that has grown accustomed to having the credit available. A better solution might be counseling with a qualified individual who can help look at the household expenses and develop a plan for rising above paycheck-to-paycheck living.

What do you think of Well Fargo’s plan to gradually ween habitual users of the Direct Deposit Service off this expensive credit product?

The original version of this article, Wells Fargo Direct Deposit Advance, is copyrighted by Consumerism Commentary.

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A new regulation goes into effect today, potentially limiting the profitability of debt settlement companies. These companies can no longer ask for up-front fee payments from customers wishing to settle debt; clients need to pay only after the companies provide results.

In other words, for-profit debt settlement companies, including those masquerading as non-profit entities, must speak with your creditors and present your debt repayment plan before you make your first payment. In the current situation, these companies collect the payment in advance to make sure you can cover your debt before reaching out to the creditors to negotiate terms and formulate a plan.

While this sounds like a good rule designed to protect consumers from ineffective debt settlement companies, there are holes in the regulation that allow most companies to operate as before, often taking payment in advance and never delivering results.

The new regulation only applies to debt settlement companies selling their services over the phone. If you visit a debt settlement company in person, or if a representative comes to your door to explain the process, they can still collect the up-front fee. Additionally, attorneys are exempt from the new rule, and many debt settlement companies qualify as attorneys.

Not every debt settlement company is nefarious, but for those struggling with debt these highly-advertised companies seem like the only option. Sometimes speaking with creditors directly can produce results, and many Americans never bother to try to negotiate before giving up. Failing that, the National Federation of Credit Counselors is a non-profit organization that can help pair consumers with a legitimate, helpful debt counselor.

Federal Trade Commission press release, July 29, 2010

The original version of this article, Debt Settlement Companies Can Easily Skirt New Rules, is copyrighted by Consumerism Commentary.

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I’ve written several times on Consumerism Commentary, and other people have written and said many times as well, that debt is slavery. In fact, there is a popular book on the topic aptly titled, Debt is Slavery. It’s a convenient metaphor; if slavery is working without the benefit of enjoying the fruits of your labor, being in debt is similar.

Deep in debt, any extra money you have after paying for living expenses is designated to pay off debt. Like slavery, you cannot save money for your future. There is no such thing as retirement for someone who is debt or someone who is enslaved; you must work until the day you die, or until you pay off your debt, for the benefit of a master.

The metaphor doesn’t sit well with me. Debt is a financial reality that is difficult, but slavery is much more than that. Calling debt slavery minimizes the gravity of what it really means to be enslaved. Slavery relegates an individual to property, bought and sold like a piece of furniture or cattle. While it may feel that way for someone working for a living, meeting their expenses paycheck-to-paycheck or even falling deeper in debt, it’s not even close. Even in debt, you are free to make your own choices. You have the freedom to live your life as an individual, even if building your future is out of the question at the moment.

While in debt, you can work harder, possibly earn more money, and even develop your skills through education. Eventually, you can qualify for better jobs, earn more money, get out of debt, and build your future, no matter how out of reach that may feel. This is far removed from the conditions of slavery.

Slavery and debt are both serious issues and there are similarities. However, the common aspects are superficial at best. Debt will trap you. When your money doesn’t stay with you in order to pay interest to credit card companies and lenders, it’s understandable to feel like you’ll never get ahead. The possibility exists, and people in debt have options for improving their lives regardless of the difficulty. The same options aren’t available to slaves without the threat of death.

What do you think? Is it fair to claim that debt is slavery?

Photo: kudumomo

The original version of this article, Your Opinion: Is Debt Slavery?, is copyrighted by Consumerism Commentary.

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According to the latest statistics from the Federal Reserve and the publisher of FinAid.org, the total amount of money Americans have borrowed on government and private student loans at $830 billion has surpassed the total American consumer balance on credit cards, only $827 billion.

As the Wall Street Journal mentions when sharing this information, this is partly due to a decrease in credit card debt in addition to an increase in student loans.

I recently read a preview of Debt-Free U: How I Paid for an Outstanding College Education Without Loans, Scholarships, or Mooching off My Parents. The author, Zac Bissonnette, is a student at the University of Massachusetts and an entrepreneur, and his book takes a look at a number of common assumptions about college education, and the financing thereof, and explains how student loans are unnecessary in almost all cases.

Zac will be a guest on an upcoming episode of the Consumerism Commentary Podcast, and we’ll discuss how to graduate college without debt and how to choose a college.

Student loan debt is usually considered “good debt.” Since you are borrowing to pay for a college education and degree that will increase your earning potential over the course of your life by much more than the cost of that degree, it’s often considered a good investment. A small tax benefit helps to make student loans more attractive.

When there are opportunities to save money on an education by attending a state school rather than a private school, or even attend community college for two years before completing a degree somewhere else, and when the name of the school on the degree is not important (which may or may not be the case), a student loan looks like less of a deal.

In addition, student loans will stick with you even after declaring bankruptcy. The government can garnish social security payments and tax refunds if you default on student loan payments.

Are student loans “good debt?”

The original version of this article, Student Loan Debt Surpasses Credit Card Debt, is copyrighted by Consumerism Commentary.

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Last week I talked about the need for my wife and I to decide on a new savings goal. We had been saving ten percent of our paychecks each month in the Joint Savings Account, which allowed us to do some fun things and avoid credit cards, but wasn’t really a place for money to grow. We had to keep the goal at ten percent because I was focused on eliminating my credit card debt. Now I’ve done that, so it was time to re-examine our options.

I made a copy of our Household Budget spreadsheet and started playing around with the percentage number. Ten percent wasn’t getting us anywhere, and fifty percent wouldn’t leave any room even for buying new clothes. We eventually settled on twenty-five percent, which we’ll try for a few months and change later if we need to. At twenty-five percent, we’ll be saving $1,217 a month between the two of us, which will give us a one-month emergency fund in four months, and a three-month buffer in eleven months. I doubt we’re going to make it a full four months of saving before we decide finally to get a professional to come trim these trees or fix some other part of the house, and that doesn’t worry me. As long as we’re not spending frivolously, and especially as long as we’re not creating new debt, then we’re on the right track.

The twenty-five percent goal also means something else: even if I increase my weekly personal spending to $180, which isn’t hard to do if I want to have regular haircuts and keep taking improv classes, I’ll still have $1,000 a month left over. I read through the comments on last week’s update, and I took another look at Dave Ramsey’s Drive Free, Retire Rich video, and I think I’m coming around to the idea of making extra principal payments on my car loan.

If I directed the entire $1,000 every month toward the principal on the car loan, the payments would stop fourteen months early, I would save over $1,300 on the loan, and of course we would reduce our joint monthly expenses by $575 (I’m working with a 10.15% interest rate… pathetic, I know), which would enable us to save even faster.

Am I overlooking any other, smarter ideas?

The original version of this article, Our New Budget Could Mean Extra Car Payments, is copyrighted by Consumerism Commentary.

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I’ve had thousands of dollars in credit card debt since 1997. I remember applying for a job in March of 2001 which I calculated would help me erase my credit card debt in about twelve months. I didn’t get that job. Nobody got that job, in fact, the entire web design sector was crashing, and I had just moved to Seattle. Almost two years ago on this very website I declared that I would be free of credit card debt six months later. That didn’t happen, either. I admit that this problem is almost entirely my fault, even though circumstances beyond my control have made the problem worse, like a 10% pay cut from last Spring that still hasn’t been fully restored (even though we’ve hired two new people).

But in January of 2010, I decided (again) that enough was enough, and I started posting regular debt updates, and limited myself to spending only $100 a week. I thought it would be plenty, but on weeks that required gasoline or a haircut or car maintenance, well, it didn’t always work out as planned. On the upside, I have more than one source of income, and I’ve been able to maintain a regular schedule of paying about $1,300 a month toward that debt.

It hasn’t been a joy funneling every dollar I could toward the ghost of debt that has been haunting me for thirteen years. We missed an entire growing season in the backyard because we didn’t have the money to pay someone to fix the faucet, to say nothing of every other home improvement project that was put on hold.

Thanks to the obligation to post regular, detailed updates, I found places I could be saving more money, and on May 7th, I was able to completely pay off one of my two credit cards. Now here I am, on the cusp of paying off the second, and last, credit card that I ever hope to carry a balance on. No, I really mean it this time. I got paid today, and between that and the extra money from side jobs, I am able to bring the balance to just a couple hundred dollars.

Now, even if I double my weekly budget for myself, and ignoring side jobs and the restoration of my proper salary, I’m still going to have $1,100 a month that I don’t owe to anybody. I can’t stress this enough: this is completely new territory for me. First, of course, I’m going to throw a party. There will be good wine and delicious snacks. You can’t talk me out of that.

After the party, though, I’m conflicted about how best to deal with the extra income. We still have car loans and a mortgage, but I don’t feel a strong compulsion to pay those down faster than is scheduled. I know that most of our very smart readers will encourage me to start saving toward a three- or six-month emergency buffer. When I look at the three-month number of $12,820, I feel the same dread I used to feel when my credit card debt totaled a similar number. Suffice it to say that I’ve never saved even 10% of that amount in my life, and I’m shocked that we go through that many expenses in just three months, but we do.

At present, mostly because of my previous credit card payments, my wife and I put 10% of our leftover income into a joint savings account. If we kept it to 10%, we’d meet our three-month buffer in twenty-six months. If we bumped it up to 50%, we’d meet the same goal in five months, and we’d have about $200 each for weekly expenses. In reality, we’ll probably settle on something higher than 25% but lower than 50%. There are still all those household projects to take care of, vet bills, maybe some occasional new clothes, etc.

All of the above assumes that both of us want to stay at our current jobs, earning the same salaries, which isn’t necessarily true. We both have strong creative urges that are better fulfilled at the kind of projects you find outside of offices, and if we could still live without fear of homelessness, either one of us might be persuaded to seek a job with a lower salary and fewer hours and/or brain requirements, so that we might have more opportunities to pursue those creative projects.

If you sympathize with that, or even if you don’t, I’d love to hear your story in the comments below.

The original version of this article, No More Credit Card Debt, Now We Need a New Budget, is copyrighted by Consumerism Commentary.

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I consider payday loans one of the worst forms of debt. That being said, in states where these services are still legal, they provide a way for struggling individuals to afford necessities like food and housing until their next paycheck, for a fee. Unfortunately, many borrowers don’t simply use their paycheck to pay back the loan and move on when it is due. One loan is often rolled into the next, for another fee.

A typical fee for a payday loan is $17 per $100 borrowed. That fee is due when the loan is repaid, usually within one or two weeks. While this cost of the loan could be considered a 17% fee, an annual rate is used to compare payday loans with other loans. The annual interest rate for a consumer loan from a bank may be 10%, but the payday loan works out to an annual rate of almost 450%, assuming the loan carries a term of two weeks.

The operative phrase is “a term of two weeks.” How is it rational to compare these two products using an annual interest rate? Only if the loan is extended and renewed repeatedly does it become a significant financial burden worthy of the interest rate stigma of 450%.

I am not defending payday loan companies. These lenders prey on individuals and families in desperate financial situations, often with nowhere else to turn. There is a strong possibility of borrowers falling into a spiral of increasing debt with back-breaking fees, and this is why these products are becoming illegal in more states. Arizona is the latest state, banning predatory loans with interest rates higher than 36%.

I do, however, believe the numbers used in the argument against payday loans are often illusory. Should loans due within two weeks annualize their fees into interest rates to face comparison with long-term loans?

The original version of this article, Payday Loans Fees and Interest Rates: Fair Comparison?, is copyrighted by Consumerism Commentary.

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Earlier this year, I suggested starting the decade off right by paying off debt. In general, debt is something that should be eliminated. Credit card debt is expensive and often unnecessary, personal loans generally carry a cost to personal relationships as well as interest, and mortgages hang around forever and make you a renter who still must pay for maintenance rather than a true owner.

On the other hand, businesses use debt strategically even when they have cash available, so why can’t people? Well, businesses, if operated well, often have teams of well-paid financial analysts who know how to determine whether assuming debt will likely be a profitable solution. You and I have just you and me.

Although I dislike rules of thumb, one that may help in this decision states you should go into debt only to invest in appreciating assets or assets that provide a positive cash flow. This is the crux of the good debt vs. bad debt argument. How do the most typical uses of debt stand up to this rule of thumb?

A car fails the test. The value of a vehicle decreases over time and produces a negative cash flow. You have to pay expenses like maintenance and fuel to operate the vehicle properly. One should not go into debt to buy a car unless absolutely necessary because you will certainly spend more money with a car loan that you would otherwise. A car won’t provide you with any income to cover your loan unless you’re using your car in business.

A house, however, is a tougher decision. Over long periods of time, houses appreciate at a rate similar to inflation, but they produce negative cash flows (maintenance expenses) just like a car. But many people don’t have hundreds of thousands of dollars available in cash when they buy a house, so they are willing to take on the risk of debt.

Student loans are interesting. What are you buying when you pay tuition? Certainly nothing you can photograph like you do when you document your household inventory. Education builds an income-generating asset: your mind and its ability to think and do. An education will help you increase your cash flow because you’ll be qualified for better jobs and you’ll likely earn more money. That qualifies as an appreciating asset, so under this rule of thumb, going into debt for an education could be worthwhile.

Buying a house and renting it out might be a good candidate for borrowing. By making some assumptions about how much you expect to earn from rent and how much you expect to pay for maintenance expenses, you can use the Net Present Value formula in Excel to determine whether you should proceed with the purchase and what kind of financing you should accept.

Savvy investors use leverage to increase their returns in the stock market. By using borrowed money to buy stocks, traders count on the stock’s value increasing so they can pay back the lender with the proceeds and keep the rest. The problem with trading on margin like this is that if the value of the stock decreases, you will have to pay pack the loan with your own money.

In the best case scenario, leverage is used when the returns from the investment cover more than the cost of debt in the form of interest to be paid. This ensures you’re making money on your investment above the ability to pay back the loan. Leverage gone wrong can destroy your finances, take down a business, or collapse an economy.

Lexically related: If you haven’t already, take a look at the television show Leverage on TNT. It has nothing to do with finance, but it is well-written.

The original version of this article, Good and Bad Uses of Leverage, is copyrighted by Consumerism Commentary.

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Happy Friday. It’s been about a month since my last credit card debt update, and I’m pleased to report that I’m still committed, and the plan continues to work. The weather is getting annoyingly warm, which is usually the time I start engaging in (metaphorically) self-destructive behavior, but I’m in the home stretch now, and aside from the iPhone 4, I can’t even think of something expensive that I’d want to buy for myself.

Between my wife and myself, we’ve got a long mental list of improvements we’d like to make to the house, and I’ll probably be taking a hard look at our household budget soon to see what improvements I can make to that in the absence of credit card debt. In the last month, we bought a $300 grill for the backyard. We hadn’t planned ahead to do that, and I was a little worried that day, but it turns out we could afford it without any trouble. It’s counter-intuitive, but it’s actually less painful to spend a few minutes outside grilling some meat than to heat up the kitchen for hours to cook the same thing.

We still don’t have any real savings to speak of, but I’ll be talking more about that later. For the moment, and maybe for the last month ever, this isn’t about my household, it’s about me.

Debt Totals

Here’s where things stand right now:

Since I started the debt updates on January 26th, the combined debt has gone down from $6,828 to $1,392.73.

Looking at the numbers in that last paragraph, roughly $6,800 compared with roughly $1,400, it doesn’t look like such a big difference. We live in a world where newspeople casually toss around millions and billions of dollars, but the process I’ve been going through, when it’s done, will mean a huge difference in the way I live my life. If I don’t change anything else about how things are budgeted, I will end up with extra money. That’s a foreign concept to me; I understand a lot about saving and growing money in theory, but not in practice.

Anyway, I’m happy with this. $1,400 seems manageable, but $6,800 seemed like a mountain I’d never be able to climb. My friends, I’ve had credit card debt since 1997, right after I got out of college and started working in the world. In retrospect, I know exactly where I went wrong, but now I see the light at the end of the longest tunnel of my life, and in a very real way, I have Flexo and you guys to thank, not just for the income of a second job, but for inspiration as well.

Next time you see a debt update from me, credit cards should be little more than a footnote.

The original version of this article, Smithee Debt Update, Mid-June 2010, is copyrighted by Consumerism Commentary.

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According to an online poll conducted by the National Foundation for Credit Counseling (which exists to encourage you to set up a payment plan, but that doesn’t necessarily make their data suspect), Americans are more likely to pay more toward their credit card debt since their statements were re-designed to show just how awfully long it would take to reach a zero balance if they only paid the minimum.

I was super-excited to see my first re-designed statement a couple months ago, and while I still think it (and we consumers) could benefit more from seeing a graph with thick red lines instead of just a number, it seems to be having a pronounced effect. The NFCC asked the following question on their home page and got what look to be statistically significant results:

Credit card statements now provide a snapshot of how long it would take me to get out of debt if I only paid the minimum amount due each month. This information…

A. Has inspired me to pay more each month = 25%

B. Makes no difference because I’m already paying as much as I can each month = 55%

C. Makes no difference because I already pay my balance in full each month = 7%

D. Made me call the credit counseling agency number listed on my statement = 12%

Note: The NFCC’s April FLOI was conducted via the homepage of the NFCC Web site from April 1-30, 2010 and answered by 2,003 individuals.

The original version of this article, New Credit Card Statement Design Means Lower Balances, is copyrighted by Consumerism Commentary.

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Happy Vacation-makes-finances-a-bit-messy Friday! It’s been about a month since my last credit card debt update. Since then, we managed to pull off something akin to a coup or a miracle. With help from my wife’s bonuses (which are only considered miraculous because mis-management at her company makes those difficult to realize), we were able to have a nice six-day vacation without putting anything on a credit card.

Well, not anything more. Sometime last Fall, I put the price of the ‘Con we went to on the Newer Credit Card, totaling about $1,300. It’s exciting for me to think that if we decide to go back again next year, the tickets can be paid for without credit card interest.

But since then, my wife saved up enough to spend a roughly equal amount for airfare, car rental, and lodging & meals for the days before and after the ‘Con. Well, some of the post-Con expenses were paid for jointly, and the pet sitter costs came out of the Joint Savings account. That’s what I meant earlier when I said vacation makes finances a bit messy. Looking at our purchases online, it’s intimidating to try to make sense of all the things we spent money on, but the real messy part is that I forgot to take out my usual $100 in cash on Saturday to use this week, so I’ve been using my debit card for the last couple of days.

But when I look at the credit card balances, I know I’ve been doing the right thing.

Debt Totals

Today is a payday, and including the credit card payment scheduled for tomorrow, here’s where things stand right now:

Since I started the debt updates on January 26th, the combined debt has gone down from $6,828 to $2,668.23.

The most recent credit card payment (just one card, not two!) was $659 instead of the planned $765, because my wife and I decided to be a little nice to ourselves and get an electric lawnmower. But I’m still on track to be free of credit card debt sometime in July. The annoying thing is that this card doesn’t let me make more than two payments in a month.

(Deep breath.)

At some point, when I think about our household debts, I’m going to have to start including car loans and the mortgage, but I can’t yet bring myself to do that, those totals are just too big.

P.S. The other miraculous part is that while we were gone for nearly a week, our mostly-not-smart dogs didn’t destroy any of the furniture. I think it helped that the evening pet sitter visit was an hour long instead of half an hour. Based on previous vacation experience, I was prepared (psychologically, not financially) to come home and immediately need to buy a new couch. The current one isn’t in good shape by any measure, but I think it can wait until we can buy a new one without using credit.

The original version of this article, Smithee Debt Update, Mid-May 2010, is copyrighted by Consumerism Commentary.

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I mentally separated my two credit cards into “Legacy Debt” and “Newer Debt”. The former has been with me on a variety of cards, banks, and interest rates since 1997, but in the last couple of years I consolidated it onto one card that I haven’t used to purchase anything. I’ve been paying it off with nothing but the money I make from side jobs like writing for this blog, because I’m using day job leftovers to pay down the Newer Debt, which today stands at $3,158.62.

However, while I was arranging some spending money for our vacation this weekend, I found that my personal checking account had enough in it to bring the Legacy Debt card to $0. Actually it ended up at $0.68, because I was estimating the amount while waiting for a haircut:

Of course, just before I wrote this I sent another 68 cent payment, so by Saturday it should be exactly zero, give or take unknown monthly finance charges.

Now, I can plan to combine the “side job money” with the other $765 per paycheck that goes toward the Newer Debt, and I can decimate it that much faster. But before that happens, I think I should take a moment to reflect:

Photo credit: Bob Jagendorf

The original version of this article, Legacy Credit Card Debt: Gone, is copyrighted by Consumerism Commentary.

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On the surface, it seems like it would make sense to enroll in a biweekly mortgage payment plan. In theory, these biweekly mortgage programs offered by lending servicing companies work by allowing you to send half of your monthly mortgage amount every two weeks. As a result, you make two “extra” biweekly payments each year, reducing the total number of months it takes to pay off the mortgage.

There are some misconceptions or disadvantages, though, so it pays to read the fine print before you sign up for one of these plans.

• You may not save on interest. While it sounds like sending a payment earlier in the month will reduce the amount of interest you need to pay, that is not necessarily the case. Furthermore, even if you send a partial payment early, your loan servicing company may just hold onto your funds in their own account before sending one monthly payment to the lender.
• You might pay more. Loan servicing companies often charge extra fees for biweekly payment plans. You may need to pay an up-front fee of over $400. If not, the company will likely charge a transaction fee for each payment you make or a monthly fee for remaining within the program.

If your loan agreement allows it, you would most likely be better off creating your own accelerated payment plan.

• Check with your lender to make sure you will be allowed to send a payments early.
• If you are allowed, ask whether you will be charged a fee for prepaying your mortgage. This fee punishes consumers who want to be more responsible about their mortgage payments.
• Next, ensure that the lender will credit the funds to your loan right away rather than waiting until the end of the month.
• Furthermore, you must indicate that any payment above the amount you owe each month should be applied to reducing your principal, not interest, to reduce the total amount of interest you pay over the course of the loan.

If the lender responds with favorable answers, pay extra each month, ensuring to note on your payment coupon that the extra funds should be designated towards the loan principal.

Don’t forget to consider investing rather than accelerating your mortgage repayment. Depending on your goals, your time horizon, and your plans for leaving your current house, prepaying your mortgage may not be the best financial decision.

The original version of this article, Biweekly Mortgages: Do It Yourself to Save Money, is copyrighted by Consumerism Commentary.

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Happy Friday. It’s been just about a month since my last debt update, and I’m feeling relatively successful at it. I’m still on track to get rid of it by July, having eradicated $1,267.39 in the last four weeks.

Aside from the satisfaction of persistence, there’s actual good news: as of yesterday, my employer has brought my salary halfway back up to what it was a year ago. We all took a 10% pay cut in April of 2009, and the company’s leaders are finally, but cautiously, optimistic about growth in 2010, so they gave us “raises” equal to 5% of what our salaries used to be, and hopefully will be again.

After taxes, this means an “extra” $115 in my twice-monthly paycheck. This should’ve meant that on April 15th, instead of making a $650 payment to my “newer” credit card debt, I could make a $775 payment. Unfortunately, around the same time that the “raises” were happening. my shoulder pain from sitting in a crappy desk chair was getting unbearable. From previous experience, I know that my employer is not one to take quick action to remedy a health problem, so I got fed up and got a new chair. (Maybe they’ll offer to reimburse me. Who knows.) Coincidentally, the chair and a footrest cost a total of $115.71.

Debt Totals

Here’s where things stand right now:

Since I started the debt updates on January 26th, the combined debt has gone down from $6,828 to $4,230.

And starting at the end of April, I should have another $115 to add to each credit card payment.

Of course, I have some typical and atypical admissions to make concerning the things I put on plastic, instead of using cash.

Things I Put on Credit Since the Last Update

• Enterprise Rent-a-Car – $17.29 – This is a perfect example of why we should always check our statements, line by line. I didn’t know this was here, and I’m not sure why it is. Renting the car while they worked on my 60k service should’ve been free. I suppose I should call and ask about this.
• Toll roads – $120 – Apparently, I’ve been driving a lot these past four weeks. Roughly once a day I wonder if I should take surface streets more often, but I always end up deciding that I’d rather just get home soon.
• Mobile phone service – $85.36
• Web hosting – $16.25
• Google AdWords – $2.24
• Usenet service – $2.99 – as promised, I lowered this to cover just what I need in a given month
• Podcast subscription – $5.00
• Various entertainment things purchased through PayPal on Amazon and iTunes and CDBaby – $40.99 – I am shamed.
• Lawn maintenance – $64 – I should switch this over to use the debit card for our joint account.

Unfortunately, that’s not all. I also used my debit card a few times since the last update.

• Comedy at the Improv – $23.93 – I went out on St. Patrick’s Day to support my improv teacher and other local comics, and you’re probably familiar with that stupid “two item minimum” thing.
• Rifftrax version of “New Moon”, and others from Rifftrax – $6.93 – This is so awesome.
• Convenience store something – $3.16 – I have no idea what this is.
• Parking for my standup comedy practice – $3.00
• The afore-mentioned new office chair and foot rest – $115.71 – a necessary evil, I’m afraid

So, the things that I feel at-least-slightly guilty about total about $80 for the last four weeks, the same time period that I got rid of $1,267 in debt. End result: go me!

You can cheer me on and/or witness my money minutiae on Twitter if you want to.

The original version of this article, Smithee Debt Update, Mid-April 2010, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

This is a guest article by Jeremy M. Simon. Each Tuesday, his Credit Score Report column addresses a CreditCards.com reader’s question on credit scoring. He selects questions that either best reflect a common reader concern or that highlight some particularly interesting aspect of credit scoring.

Today, Consumerism Commentary is hosting the weekly question-and-answer session with a query from Amber about her credit history.

Dear Credit Score Report,

If I am offered a settlement by a credit card company or an affiliate (debt collector), how will this affect my credit history? I am not in a good position due to the fact that I am more than 90 days behind. However, I want to repair my credit, not make it worse. Any information would be appreciated that may help in my decision. –- Amber

Hey Amber,

If you enter a debt settlement program — and repay a loan for less than you borrowed — expect your credit score to take a substantial fall.

Debt settlement typically allows struggling consumers to repay their outstanding loans for less than the amount of the original debt. However, that process will cause your FICO score to plunge by up to 125 points, and you may get hit with a big tax bill. The good news, experts say, is that better options might be out there, and a good credit counselor can help you sort them out.

“Settling the debt may or may not be the right action depending on her overall financial situation,” says Rod Griffin, director of public education at credit bureau Experian. “There may be better alternatives.”

That ‘s because debt settlement will impact both your credit score and your wallet. Here’s how it works: Once the card issuer (or affiliated debt collector) accepts your smaller repayment, it will appear on your credit report and impact your ability to borrow for years. “Such a notation will be viewed negatively by lenders,” says Rod Griffin, director of public education at credit bureau Experian. “The record will remain on her report for seven years from the original delinquency date of the debt.” During that time, your lower credit score could mean difficulty borrowing money, higher insurance costs, getting denied for apartment rentals and missing out on job opportunities. Additionally, since the Internal Revenue Service views forgiven debt as income, a settlement could cost you at tax time. That makes debt settlement an expensive option. Still, that isn’t reason enough to rule it out. “Settling debts for less than originally agreed will likely hurt her credit scores at first, but doing so could reduce her debt load and allow her to begin reducing other debts she may have,” Griffin says. “The result, over time, is that her credit scores would begin to improve.” If you do decide to go through with a settlement, experts say you shouldn’t agree to anything over the phone. Get the contract in writing and read it carefully before signing.

If debt settlement isn’t for you, experts say borrowers in your difficult position have four main options:

• Remain delinquent.
• Come up with extra money to make payments.
• Work with a credit counselor.
• Declare bankruptcy.

Let’s take a look at these options, one by one.

Remain delinquent. At this point, Amber, your credit score has probably taken a major hit due to your delinquency. “If she’s already 90 days behind, she’s already got serious damage,” says Sandy Shore, a senior counselor with New Jersey-based consumer credit counseling agency Novadebt. That’s confirmed by data released last year by FICO, creator of the most widely used credit scoring model that bears its name. FICO acknowledged that a single 30-day late payment can cause your score to drop by up to 110 points. You’re currently three times as late with your card payment — and are only getting later as time passes.

Come up with extra money to make payments. So where can you find the money to repay that debt? Start by making a budget: Take a serious look at your finances, comparing the money you earn each month with the amount you spend. You may be able to earn more money (maybe you can find extra work?), decrease expenses (do you need cable TV?) or sell items (do you really need a TV at all?). Use any extra money to pay down your debt and prevent further damage to your credit score.

Work with a credit counselor. Of course, for many of us, budgeting isn’t an easy process. If you need outside assistance to get a handle on your finances, seek out a credit counselor. You’ll have to pay for their services, but these financial experts can really help. “A good credit counselor will find out what the problem is, how she got into this mess and do a budget,” says Shore.

To locate a reputable counselor in your area, seek out a member of the Association of Independent Consumer Credit Counseling Agencies (AICCCA) or the National Foundation for Credit Counseling (NFCC). Both organizations’ Web sites offer a way to search for local credit counselors via “find” links on their left-hand toolbars. The counselor you select can make arrangements with your creditors, enabling you to make affordable monthly payments toward eliminating your debt, provided your budget allows it. “A good credit counseling agency will not recommend you go on a debt management program unless you can afford it,” Shore says. Entering a debt management program won’t directly impact your credit score, although it can make future borrowing more challenging.

Bankruptcy. You can also weigh the cost of filing for bankruptcy. Declaring bankruptcy means you don’t have to repay the debt, although that filing will cause your credit to drop even more sharply than a debt settlement — by as much as 240 points, according to FICO. To fully consider what’s involved in bankruptcy, have a free or low-cost initial consultation with a bankruptcy attorney (or even several attorneys) to discuss the details of your specific situation. Shore says to remember that just because you visit an attorney doesn’t mean you have to file for bankruptcy. Additionally, if you do decide to file, “there are ways to re-establish credit after bankruptcy,” she says.

In the end, experts say working with a credit counselor is the best choice overall. “They can help analyze your financial situation, offer possible alternatives to regain control of your personal finances and teach you how to avoid making the same mistakes in the future,” Griffin says.

Good luck!

The original version of this article, How Debt Settlements Affect Credit History, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

The last three weeks have been pretty lousy for my push to get rid of the credit card debt before summer (summer? When did I decide that? Just now, I guess). With a total balance of about $5,500, and making payments of at least $1,300 a month, you’d think it’d be a straight path to zero balances. When I started the debt updates on January 26th, my total credit debt was $6,828. If everything was going as planned, the debt should now be at $4,200. I’m an entire month off schedule.

I can account for two big chunks of that: $200 for improv classes and, just yesterday, about $500 for my car’s 60,000 mile maintenance. It’s the kind of car maintenance that’s so involved they give you a free rental car for the night and ask you to come back the next day. The rest is that insidious “$5 here, $30 there” behavior that has plagued me for years.

Bad Habits, Good Habits

But, just like every news story about our economy recovering, signals are mixed. I actually think that slowly, my behavior is trending toward “responsible”. This last weekend I made a one-day trip to Austin, TX to attend a memorial party for an old friend, and by the time I got home on Saturday, I was definitely over-budget for the week, even ignoring the impending car maintenance. I have the sort of personality where once I fail a little bit, I feel like failing more and giving up. I had spent more on gas than usual, which led to treating myself to a couple of fast-food meals on the ol’ debit card.

On the other hand, a few days previously when we came home to find our cat had passed away, we had enough in our joint savings account to pay for a proper funeral, of sorts.

I’ve also had a cold for the last two weeks. Feeling sick breeds germs, not good behavior. This morning, knowing I hadn’t saved enough during the week to pay for a fill-up at the gas station, I was resigned to holding on to just a few dollars to get me through to Saturday morning, when I can start fresh with $100. My attitude toward the whole thing was poor enough that I nearly stopped at Starbucks on my way to work. Fortunately, I remembered that I also have a responsibility to myself to eat lunch.

I just looked, and I have $11 until tomorrow morning. I should be able to find something cheap for lunch and bring back the rental car with a full tank. I think there was at least a quarter-tank in my real car when I dropped it at the dealer yesterday. I hope it’s enough to get back to work, and then go home again. It should be.

Debt Totals

Here’s where things stand right now:

Normally, I post this table right after making the big payment toward the Newer Debt. I haven’t done that for this update, because I’m not sure if that 4,807 number includes a $50 hold from the rental car company. Either way, I did just this morning make a payment of $150, which is what I had leftover after the 60k service. Possibly, the net change since the last update is one penny.

Things I Put on Plastic Since the Last Update

• iTunes – three moments of weakness, totaling $6.78
• Google AdWords – $8.35 – I got my first royalty check for a funny movie I made, and I thought it’d be worth trying to advertise for it again
• Donation to the DNC – $30 – I mentioned this last time and said I’d be canceling it, not because I’m disillusioned, just broke. This was the last one; I finally got through to them after the snowstorms
• Podcast subscription – $5 – this one won’t be going away
• Highway tolls – $40 – ugh
• Mozy.com – $9.90
• Snacks on the way to Austin – $2.99
• Extra gas for the trip – $25.44
• Jack in the Box – $4.97
• Whataburger – $7.91

The silver lining here, is that past trips to Austin would cost many hundreds of dollars, some of which would’ve gone on a credit card. From a logical perspective, it was a silly, brief trip, but friendship isn’t always logical. And while we were there, my wife won a free pass to next year’s SxSW Interactive. Normally when we go to Austin during SxSW, we just hang out with our friends instead of actually spending money on badges. Once the credit card debt goes away, I’ll have to decide if I want to get a badge, too.

You can cheer me on and/or witness my money minutiae on Twitter if you want to.

The original version of this article, Smithee Debt Update, Mid-March 2010, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

It’s been a couple of weeks since I shared details of my push to get rid of the credit card debt. I’ve been diligently taking out exactly $100 from the ATM to spend from Saturday morning through Friday night. That’s just for daily, personal purchases that don’t contribute to the house as a whole, though. As I suspected, it hasn’t left me with many opportunities to do something nice for my wife, and this past fortnight has forced me to keep mentally reminding myself of a few things.

It can’t all be tasty

It’s still not second nature for me to think of my weekly $100 as partially being spent on boring and annoying things like gasoline and haircuts, to say nothing of clothing. I tend wrongly to assume on a Wednesday that, “oh, I still have $50 for lunch this week,” when it’s really closer to $20.

I also really want to be the kind of husband who frequently brings home flowers, but it just doesn’t seem practical, yet.

No month is going to be normal

It seems like there’s always something abnormal showing up to make the budget be a little off. Earlier in February I paid another $200 for Level 3 Improv classes, so I had to remember to make a credit card payment of $450 for March 1st instead of $650. (I’m making payments on the higher, newer debt at a rate of $1,300 a month, but doing it twice a month to help bring the interest down more.)

It’s also sort of vacation season. We did a fantastic job this past weekend in San Antonio not going hog wild with the spending, but it’s still a tendency of mine to want to whip out the plastic when confronted with temptation, especially if I’m drinking. There’s another mini-vacation coming up in Austin during SxSW, where we have a tradition of meeting our old-school nerdy blogger friends.

Stop cheating!

Okay, so even though I used my debit card recently at Starbucks, it was because it was after the time I was supposed to go to the ATM, but I hadn’t made it there, yet. When I did find an ATM, I managed to find one that would give me $90 instead of $100.

But here are the things that got added to the newer card since February 13:

• MyFax – $10 – I almost never use this online fax service, but it seems like a really handy thing to have. I’ll make a to-do to decide one way or the other
• Mozy.com – $9.95
• Toll roads – $40
• Web hosting – $22.89 – this number fluctuates a lot, primarily because I have more domains than I know what to do with, and I can’t ever bring myself to cancel them.
• FedEx Kinkos – $8.29 – this was actually for work, so I should get it reimbursed. I almost never pay for things on behalf of my employer, so I’m not even sure what form to use, if form there be. New to-do.
• Cinematic Titanic – The Alien Factor – $9.99 – there it is. I spent $10 that I shouldn’t have on a goofy, fun movie. I’ll have to remember to find the $90 ATM again tomorrow.
• iTunes – $1.09 – Ack, I did it again! I couldn’t resist buying the Metallica song “Wherever I May Roam.”
• Mobile phone bill – $95.36 – this is $10 more than usual because of the Haiti thing.

So, I had two moments of weakness, but I have a way to make it up to myself. The particularly annoying thing about this past fortnight is that I had to get another haircut after just 10 days, because the first time I sought out a proper manly barber, he did a terrible job, and two days ago my head looked like a dirty blond helmet. I don’t know, I think his eyesight is going, because the straight razor performance was abysmal, too.

What about the legacy debt?

For paying down the legacy credit card, I’ve only been using “extra” money: the cash that comes in from jobs like writing here. This year I switched payments from my name to our little corporation, and the corporation just got paid for the first time. What I’m supposed to do now is have the corporation pay me a “reasonable salary” and then use that money to pay down the credit card.

Does anybody have advice for figuring out what a “reasonable salary” looks like?

You can cheer me on and/or witness my money minutiae on Twitter if you want to.

The original version of this article, Smithee Debt Update, February 26, 2010, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

This was a pretty good week for saving money. Last weekend, I took my strict $100 out of the bank for the next seven days, but I also ordered a small-ish present for my wife, which cost about $50. As a result, I set myself a challenge to see if I could spend $50 or less of the cash I had on hand, to make up the difference.

Remarkably, I managed to do that. I still have $56 in my wallet, and it’s just about time to head back to the ATM. So my plan would be to withdraw only $50, eventually evening everything out. This would work, except for two things: 1) it’s nearly impossible to find an ATM which stocks $10 bills, and 2) the Level 3 improv classes start today, which cost $200.

The other sad news is that the monthly cycle on my “newer debt” card means that finance charges were applied, so I’m afraid the balance on that card is more than it was the last time I updated you.

Did I Use Plastic for Anything?

• I spent $9.95 to file my taxes electronically (the tax bill itself was $5,437, but it’s okay, we used the Withholding Calculator earlier last year and had saved enough)
• and that’s about it!

Near Future Issues

If I can find one, I’m going to try to get a proper manly haircut and shave at an old-fashioned barber. I really don’t know how much to expect to spend on that. I’m used to spending less than $20 on a haircut, but those are always mediocre, and they don’t grow in properly.

And just now, my wife asked me to check and see how much it would cost to turn the basic cable service back on. I just officially canceled the regular TV service (after having merely suspended it as a trial), and Verizon sent me some boxes to return the DVRs. Unfortunately, this happened on the first day of the Winter Games, and though I thought we were doing fine without live TV, some of the events are quixotically being played on CNBC. Yes, the business channel.

So, it’s not smooth sailing, but at least I made it into the boat.

The original version of this article, Smithee Debt Update, February 13, 2010, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

In my most recent debt update, I re-committed to spending a fixed amount of money on discretionary items during the week, instead of trusting my self-disciplined use of a credit card. I got $100.00 out of the ATM last Saturday, and the experiment began.

See, I’m still not sure if $100.00 per week is reasonable. It seems like it should be, but I was born in 1975, and humans seem to learn pretty early on how much a dollar is worth, after which it’s difficult to re-learn a new value. Some small part of me still has trouble paying more than $5.00 for a shirt, for example. I’m pretty sure that I’ve gone through periods in the past using “only” $100.00 a week, without any trouble, and it was a nice round number.

How’d I Do?

So, now it’s Friday, how much do I have left? $35 and some change. (And it’s the change part that might be the worst of all. I hate carrying coins.)

The dangerous bit here is that the car is running low on gas, and I suspect I’ll have to fill up on the way home. The last time I filled up 11 days ago, it cost $22.65 (thanks for the info, Fuelly!), so I should plan on at least $25.00. That leaves about $10.00 until mid-day Saturday.

Did I Make Any Mistakes?

By Monday morning, I hadn’t spent any of the $100.00, and I was feeling cautiously optimistic. Of course, that also means I hadn’t done anything nice (anything nice that requires cash) for my wife over the weekend. I used to be in the habit at least of buying breakfast on Saturday or Sunday.

But on Monday, two big things happened, things that last week I would not have considered big. My teammates at work have a regular monthly lunch date, and we went to California Pizza Kitchen, which cost roughly $20.00 including a tip. But given that I still had pizza leftover for lunch the next day, it evened out to about $10.00 for two days, and that only happens once a month, anyway.

The other big thing is that I brought in some shirts for dry cleaning. I go through bouts of enjoying the feel of a starchy shirt, and here in Texas, you can’t wear long sleeves for at least six months of the year, so this won’t be a permanent problem. Fortunately, I took a chance on the Cleaner/Tailor that is the closest to our house, and because it’s a Mom & Pop (literally) business, they’re inexpensive and careful. They don’t lose buttons, they replace missing buttons. And the bill was twice as high this week because I brought in some slacks to get the frayed hems fixed, which cost $8.00 Some brief research online indicates that $10.00 is a normal price for that, and it’s certainly cheaper than buying new pants.

Sure, But What Did You Use Plastic For?

Ah, you know me too well. I’ve used my debit card for two things since I decided to go cash-only:

• Before I went to the bank to use the ATM, I went to Walgreen’s, ’cause I thought they had a Chase ATM, but they didn’t, and I ended up buying two pints of ice cream for $3.98
• On Wednesday night I needed to park downtown, and I didn’t trust the electronic meter very much, so I used another $3.00 on the debit card for that.

So if you remove that (rounding up) $7.00, I actually have $28.00 left, most of which will go toward gasoline later today.

All the Plastic, Dude

Okay, okay. I’ll check and see what got added to the problematic credit card since the experiment began on January 27th.

• $17.99 went toward Usenet access. This is one of those regular, automatic charges that people tend to forget about. I don’t use that for as many things as I used to, certainly not $18 / month worth, and I’m making myself a to-do to re-evaluate that.
• $30.00 to the DNC? I don’t recognize this, but it probably came from a commitment to make contributions until a particular law is passed. I’d still like to be able to do that, but as we can see, I can’t afford it. To-do #2.
• Huh. This thing is saying I used the credit card for $12.32 at Chik-Fil-A on Monday. Even if the transaction date is off by a day or two, this is still troubling because I don’t remember going to Chik-Fil-A. $12.32 looks like two people’s worth. Maybe my wife will remember this? Regardless, I’m wondering if maybe I just used the credit card accidentally out of habit. I’ll put it in a different place in my wallet, and the resulting confusion should remind me not to use it.
• I spent $2.99 on an episode of Leverage through iTunes (man, that’s a great show). Officially, this should come out of our joint account. I should create a spreadsheet to keep a tally of joint expenses that go on my credit card. It won’t add up to much, I don’t think, but just to be safe.
• I also spent $0.99 on the song “Swinging on a Star” (the one from the “Hudson Hawk” soundtrack, of course). Before I re-committed, I was spending a lot on music, especially movie soundtracks. On the list of areas where I need to exercise more restraint, music purchases is definitely in the top three.
• I made a regular, automatic $5.00 donation to the producer of some of my favorite podcasts. I don’t want to stop making this donation, because I want to think that someday I can also make a living that way. Maybe I should just switch it to my bank debit card? What do you think?
• And the pending payment from today: $40.00 for tolls. I don’t know what to do about this. I like the tollway, it makes my commute a good 15 minutes faster. How much more would I be spending on gas if I took surface roads? I don’t know.

What Does the Future Hold?

Clearly, I didn’t make it through the week spending only $100.00. Compared to previous months, I made huge strides forward, but I didn’t meet my goal. It probably seems worse, because the month rolled over in the middle of the first week and several automatic monthly payments were made, totaling about $93.00. Assuming there aren’t more of these at other times of the month, that’s $23.25 per week that I wasn’t accounting for. I think I can get rid of most everything except the tolls.

Is there anything else I forgot to look at, or consider changing?

Photo credit: Tony the Misfit.

The original version of this article, Smithee’s First Week With Only $100, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Imagine your income were sliced in half while your debts remained the same. How would you prioritize your payments? For those who have only credit cards, I’ve always suggested using, or at least understanding, the Debt Avalanche, but that doesn’t take into account other debts you might have such as personal loans and the mortgage.

Over the past couple of years, more consumers in precarious financial conditions due to unemployment or an otherwise lack of income have decided credit cards should be higher on the prioritization list than the mortgage. By the end of 2009, twice as many people were delinquent with their mortgage payments while current with credit card payments than were delinquent with credit card payments while current with mortgage payments. This is according to a study by the credit reporting bureau Trans Union, a company with millions of data points at its figurative fingertips.

Part of this might be due to the credit crunch and lower balances on credit cards in general, but it also may be due to the frequency of foreclosures and the general tendency for people to lose faith in the value of their homes as they watch the real estate market crumble. Many homeowners are giving up and walking away from houses with mortgages they can’t afford. If the only punishment is a tarnished credit report, there isn’t much of an incentive for people to keep paying money if they’re not building equity.

Also, families in financial trouble still need at least the basic necessities: food, water, and shelter. For those without a solid emergency fund, credit cards are the most typical financing strategy in times of need. You can even use a credit card to pay your mortgage.

I see the rationale for prioritizing these bills; if a credit card is revoked, someone may not be able to procure the necessities of life. A mortgage should be prioritized higher than credit cards, however, because the mortgage is secured debt. Your house is collateral. The bank that holds your mortgage can take away your house if you don’t pay. Even though some people are comfortable abandoning a house that has declined in value, it’s not a smart move. There’s a good chance real estate value will eventually return, so as long as you have a reasonable interest rate and have been paying down the principle of the loan, sitting tight will pay off.

Credit cards are unsecured loans. Knowing that this type of debt is a lower priority, credit cards will do whatever they can to get you to pay. They will call you, bother your neighbors, sell and even your debt to a collection agency who will do worse. The credit card issuers know that you won’t pay unless they make it seem like you’ll be in major trouble if you don’t send a check. Meanwhile, banks are ready to take your house if you don’t pay, even though most banks are struggling companies and don’t want to take on real estate that is performing poorly in the short term.

If you have to choose between making a mortgage payment and a credit card payment, choose the mortgage. Do you agree or disagree?

The original version of this article, Which Should You Pay First: Credit Cards or Mortgage?, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

A lot of things seem to be coming into place for me lately. Not in the “I finally have enough money that I can stop worrying” kind of way, but more in the “I’m finally acting like a grown-up” kind of way. It’s about time, given that I’m almost 35, but I finally have the proper mindset to take care of things like dishes, laundry and vacuuming without feeling put upon.

I don’t stop on the way home for an ice cream treat anymore, and even when I go to Starbucks, I just get a regular coffee. This happens about once a week, when I can’t bring myself to drink the lousy, incredibly wasteful coffee at work. I realize how ridiculous it sounds for a 34-year-old to be proud of these changes. And there have been times in my life when I’ve had much better self-discipline than I’ve exhibited in the last few years.

Unfortunately, the one thing I could never get myself to do was exercise. Of course I’ve heard the same things you have about the runner’s high and the lovely endorphins and the “good burn”. I would try every now and again, and I never encountered those good feelings, just anger and discomfort… enough anger and discomfort to convince me to stop exercising.

Granted, it’s not good for anybody to live a sedentary lifestyle, but it’s particularly problematic for someone with ADD like myself. Exercise opens up the brain to more activity, and helps even regular people focus, which means that with enough exercise, I can learn to focus as much as a regular person. I spent some time a few years ago on ADD medication, which helped me learn to pay more attention to myself, even after I stopped taking it (long story).

And during my most recent bout of attempting to exercise, I paid more attention, and suspected that the origin of my “exercise anger” was the sweat that was running down my head. So after a few weeks of forgetting about it, I managed to pick up a sweatband. I think I got two for $2.00.

You might remember sweatbands from the 1980s. People of a certain age just hear the word “sweatband” and the image of Olivia Newton John in neon colors jumps out solidly in our minds and we start humming “Physical”. I admit that part of my hesitation to try a sweatband was the fear of what I would look like. This isn’t a picture of me, but it’s not far from reality, either.

A few weeks before I started writing for this site I bought a not-so-fancy elliptical machine, with every intention of getting into an exercise routine. Of course, the tickly, itchy, annoying sweat became a problem, and unfortunately, the machine has a terrible habit of making squeaking and crunching noises. Thankfully, I have another secret weapon in addition to the headband: noise-canceling headphones (which of course I paid too much for).

So now, I’m coming home, and after doing the dishes, taking out the garbage and the recycling, yadda yadda, I go change into a bright orange swimsuit, put on some cheap velcro sneakers, slip on my headband and my headphones and listen to a podcast or two on the elliptical machine. I look like a total idiot, and I’m not going to pretend I enjoy the workout, but at least I don’t end up frustrated and angry.

In addition to all of that, the credit card that I call “legacy debt” is below $1,000 for the first time since the 1990s (it was just below $2,000 the last time I mentioned it in November), and the newer card hasn’t gone up as a result. And over the weekend, I instituted the plan to spend only $100 a week. I took out $100 from the ATM and so far haven’t spent any of it.

Photo credit: trokairchardalus.

The original version of this article, Lifelong Problem Solved for $2, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

The last time I talked about my credit card debt here, one of our community said that he didn’t know the specific numbers of my problem, and it got me thinking that I’ve probably lost sight of one of the main reasons I wanted to be writing here in the first place: to keep myself honest. I feel worse about my behavior when other people know about it.

So, here is exactly where I am:

I have one credit card that lives in my wallet (and it does seem like it’s alive sometimes), the Charles Schwab Signature Visa. I’ve been using it instead of my bank debit card for daily purchases because I get 2% back from the money I spend, and I thought I could handle the temptation. The current balance is $5,724, obviously more than I should have spent since I last paid it off, which I should be doing every cycle. The interest rate is 13.24% and the last finance charge was $74.49.

I have one other credit card currently owned by Chase that was cut up a long time ago, and represents the remaining debt I started building up in 1997. The remaining balance on it is $1,104. The interest rate is 12.24% and the last finance charge was $11.92.

In my bank account is $10.17, because the last time I got paid, after making the necessary transfers to cover monthly expenses, I had $1,000 leftover, which I sent immediately to the nice people at Charles Schwab. The only money that gets used to pay off the Chase card is what I earn from my side jobs.

And now I’m thinking that I should probably forgo the 2% cash back on the Schwab card and go back to using my debit card for daily purchases. I thought I could rely on my self-discipline not to spend more than I could pay back, but it looks like that wasn’t true. Bummer.

Now, I guess I just need to figure out what is a reasonable amount to let myself spend during an average week. I can’t really go on historical data, because I’ve been doing it badly for quite a while. So, ignoring the credit cards for a second, after contributing my share of the family expenses, I have $1,723 leftover every month. I’m going to try restricting myself to $100 a week, which will enable credit card payments of about $1,300 instead of $1,000.

I don’t know if I can afford breakfast, lunch, gasoline, and doing something occasionally nice with my wife on $100 a week. But if I’m going to get serious, I have to get serious now. Summer weather is going to start in about a month, here in Texas, and when it’s hot outside, I get depressed, which turns to self-destructive behavior like spending too much and eating Chocolate Zingers. I need to make this a habit so I can avoid that.

Thanks for listening, you’ve been a good ear. You don’t mind if I come to you with my problem again in the future, do you? I hope it’ll seem rosier, then.

The original version of this article, Smithee Debt Update, January 2010, is copyrighted by Consumerism Commentary.

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I suppose you could live your entire life without going into debt, though modern middle class society in the United States seems to be designed to require at least some debt. Even if young adults can complete their education without taking on student loan debt, just about all new homeowners need a mortgage in order to afford a house. In some cases, debt is just a cost of middle class living.

Some debt products should just be avoided, however.

1. Payday loans. To qualify for a payday loan, you would need to prove a history of income. The will would provide you a short-term loan, with the balance and fee due within weeks. Those fees could be $15 to $30 for every $100 borrowed, which on a two-week loan could be considered a 390% interest rate. If you aren’t able to pay off the loan when it is due, you can renew it for an additional fee.

Most people who take out payday loans fall into a cycle of debt, renewing their loans or going back to the lender often. It’s rare that someone in a short-term financial fix borrows money at a high rate for a few weeks and pays the loan off in full.

2. Refund anticipation loans. These were marketed heavily a few years ago, and now that we’re heading into tax season it’s likely we’ll see more ads. Refund anticipation loans are often offered by the same company you might use to help file your taxes. If your income tax return forms show that the government owes you money, for a fee, these companies will be willing to offer you your anticipated cash now.

You can adjust your tax withholding at your job to make sure you’re not due a large refund when you file your taxes. There are few good reasons to keep paying the government more than you need to every week or two when you receive your paycheck. The “forced savings” rationalization is not a good reason.

3. Gambling. For the sake of your kneecaps, you don’t want to find yourself in debt to a bookie. Movie drama aside, gambling is always a losing endeavor in the long run. It can be an addiction, so seek help if gambling is controlling your life. One problem is sunk costs. Once you start losing, you want to make up for your losses, taking larger risks.

If you’re a stock trader relying on the margin for making purchases, you might as well be gambling.

4. Rent to own. If you have young children in school beginning to learn to play a musical instrument, you are likely encouraged to rent the instrument from the store. The rental programs are generally designed to either buy the instrument after some time or return the instrument to the store when the student loses interest. This is the best rent to own scenario.

Once you start renting electronics and furniture, you will generally get a bad deal. It’s likely you’ll pay much more than the cost of the product by renting, and you will likely be charged a high rate of interest.

5. Debt used to finance a depreciating asset. One rule of thumb dictates that debt should only be used to pay for an asset that increases in price. For that to make sense, the price of the asset should increase at a rate higher than the rate of interest on the debt. The only problem is that you can’t consistently predict whether the price of an asset will increase.

Cars, unless they are collectible items, would not qualify under this rule. I would argue that if you need a car to earn money, the benefits of its use might outweigh the cost of the loan. And even a reliable used car could cost more than someone on the first day of his first job might be able to afford.

A few years ago, I knew many people who thought that real estate prices could never go down, conveniently excusing the fact they had no equity in their house. Banks were eager to let them buy their houses with hardly any down payment. If they were forced sell after their house values dropped 20%, they would be in financial distress. And worse, if they were no longer able to afford their mortgage, they might have to foreclose.

What other forms of debt should people avoid?

Take the Debtbuster Challenge to win some goodies from LendingClub. If you do have high-interest debt, consider consolidating your debt with LendingClub or another peer-to-peer lender. Your rates might be better than what you would find from a bank. If you list your loan after clicking here but before the end of January, the company will send you a LendingClub tee-shirt or back pack.

Photo credit: Dan4th

The original version of this article, The 5 Worst Forms of Debt, is copyrighted by Consumerism Commentary.

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This article is presented by Kelly Whalen, Consumerism Commentary staff writer.

Like many Americans my family has debt. We are working diligently to pay off our debt. We’ve slashed expenses, given up hobbies, and even become a one car family.

We have a plan. A timeline. We’re constantly working on creative ways to shave some money off our monthly expenses, to earn more by selling stuff we don’t need, or by taking on side work.

There are days, and sometimes weeks, when fighting this fight against debt is incredibly difficult. The timeline to being debt-free seems like it will last forever. I worry about a devastating financial emergency, and sock money away like crazy. Then I start to worry about cutting back too much, and we find some frugal way to have fun as a family.

Then there are days like today where I was adding up numbers in my head all day, and trying to figure out how I could make it all work. Knowing that the only way to make it work was to continue to work hard, and save, and pay down debt.

Here’s what we are doing right:

• Automatically investing in my husband’s 401k: We get the full match. No use in throwing free money away.
• Automatically saving for our emergency fund: It started tiny, with only 1% of our income from each paycheck, but I bump it up as we find expenses to cut.
• Snowballing debt: We have a spreadsheet that orders all out debts from A-mortgage.
• Upping the ante: We put 25% of our after tax (after 401k, after savings) income to our debt.
• Expense Checkups: Every month or so I go through all our expenses and spending to see if there is anything we can cut. I usually find somewhere we can reduce something, even if it’s only $5/month, that’s an extra $60/year which gets us that much closer to our goal.
• Holding Periods for Purchases: While we spend very little on anything other than food (from the grocery store-no eating out!), when we do need something or want something we use a “hold” period. Just like a store, we will hold that purchase for a day or two, and then decide.

I try to remind myself on the days when I am struggling emotionally that we are doing so much right. One of the most rewarding things is to see our debt decrease every month. We have a debt chart that hangs on the wall, and it’s so satisfying to mark off another block of that chart.

I’m sure we have area for improvement, what other methods would you suggest to pay off our debt faster? What worked for you to get out of debt, or keep yourself from getting in debt?

The original version of this article, Debt Relief: Reminders of What You Are Doing Right, is copyrighted by Consumerism Commentary.

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Welcome to the 10s! It is unlikely this year will resemble Arthur C. Clarke’s classic science fiction novel. Rather than preparing for contact with intelligent life from another world, we could prepare for the coming years by making sure we have the tools and attitude for financial success.

Here is one way to start the decade off right: pay off debt.

Paying off debt is one of the top new year’s resolutions but resolving to get out of debt is not enough. To be successful, a plan is necessary, and that plan should be more than just the Debt Avalanche, Debt Snowball, or other methods for prioritizing your debt. The most important part of getting out of debt is identifying and solving the root cause. Simply paying off your balances solves the symptoms, but might not affect the underlying condition that is causing the problem.

People find themselves in debt for different reasons. The most talked-about cause for getting into debt is excessive spending. Here is what happens when you spend more than you earn. If your family’s income is $4,000 per month but you spend $5,000 per month, your net worth decreases every month. You can pay part of debt from your income but if you pay off more, it has to come from your savings. Once your savings is depleted you have no choice but to continue adding debt at a faster rate.

Furthermore, if you pay only the minimum balances on your credit cards, either by choice or by necessity, while still adding to your debt load, you simply will not be able to get out of debt until you change your behavior.

Spending money whether it’s to buy products, experience the best of what life has to offer, or to feed a psychological or physiological habit like drug addiction can be dangerous because for some people, it creates a good feeling. We’re designed to seek out anything that causes us to feel good, some individuals more than others. Spending itself can become a physiological habit like a drug. To solve this underlying cause, where spending it an addiction, it’s helpful to talk with a psychologist or other doctor.

In other situations, a family can find itself in debt if a source of income disappears. The loss of a job can be devastating to financial stability. For a family with one income source, when the one person generating income loses a job and can’t replace the income with a new job right away, the family must live off savings for a time. In today’s economy, many people are having hard times finding jobs, so this situation could last a long time.

When a sole job is lost, consider two things. All adults of working age in the family could look for ways to earn income even if the former sole income provider has to take a lesser job while looking for one that would fully restore income. Also, find ways to reduce living expenses.

Two-income families have a buffer. For these families, the chance of losing all income at the same time is lower than the chance for one-income families. Regardless, when there are bills to pay every month, the income needs to be there.

Another reason for getting into unmanageable debt is an expensive emergency. Medical bills, particularly when insurance won’t cover a necessary procedure, can be the cause of debt even for families who are otherwise financially capable. Sometimes, medical debt can be avoided with a solid cash emergency fund, but let’s be clear: If you are involved in a major accident after being laid off from your job and COBRA coverage has expired, or if you haven’t been able to get your own insurance coverage due to a pre-existing condition, no normal emergency fund is going to cover your $500,000 hospital bill.

You have options, such as negotiating with the hospital and looking towards charitable funds that help in these situations. Even when these options have been exhausted, you could still be saddled with several hundred thousand dollars of debt. In cases like these, the medical emergency is the root cause of debt, and theoretically an individual can return to proper financial health if the massive debt can be paid off.

Once the root causes of your debt are recognized, acknowledged, and solved, the actual process of paying off debt will be much more successful.

This article is part of a series called Start the Decade Off Right on Consumerism Commentary.

Photo credit: bartificial

The original version of this article, Start the Decade Off Right: Pay Off Debt, is copyrighted by Consumerism Commentary.

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As I mentioned yesterday, the path to getting out of debt can sometimes be aided by consolidating your credit cards or loans. You might, for example, transfer your credit card balances to the one card with the lowest interest rate. With credit card issuers’ current practices, that will likely be a variable rate, subject to change.

I also suggested investigating options from peer-to-peer lenders. My own experiment with peer-to-peer lending as a lender failed because the intended borrower was restricted from using the service by his state. However, if your state allows you to find a loan at a rate that matches your credit risk, this could be a worthwhile option.

I am in favor of removing banks from the lending process, and peer-to-peer lending has matured into offering some of the best deals in the industry. Lending Club is currently running a promotion for new borrowers, sweetening the deal for those who either want to consolidate their credit card debt or want to borrow money for any other reason.

The promotion is called the DebtBuster Challenge. All you need to do is check to see what interest rate you qualify for before January 15. If you decide to list your loan with Lending Club through one of the links here, and you commit to repaying the loan within three years, you will receive a care package containing a Lending Club t-shirt, a backpack or sport pack, and orange pens which the company claims are famous.

the Consumerism Commentary Podcast interview with Renaud Laplanche, co-founder and CEO of Lending Club, and Rob Garcia, senior director of product strategy and the brain behind the DebtBuster Challenge. Most of the interview focuses on peer-to-peer lending from the standpoint of the lender or investor, but there is important information for borrowers as well.

Four other blogs whose authors are serious about encouraging people to get out of debt are joining Consumerism Commentary in the DebtBuster Challenge: Debt Free Adventure, How to Get Out of Debt, Debt Kid, and The Digerati Life.

Here are 50 actions you can take right now to pay off debt. Last year, I boiled down getting out of debt to six (plus one) steps.

Take the Lending Club DebtBuster Challenge this Holiday Season, Lending Club, December 22, 2009

The original version of this article, Free Gifts From Lending Club’s DebtBuster Challenge, is copyrighted by Consumerism Commentary.

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Along with losing weight, getting out of debt is the most popular New Year’s resolutions in the United States. In general, this resolution like all others tend to be forgotten within weeks. If you resolve to getting out of debt this coming year, here are some ideas for not losing sight of that goal.

Don’t focus on zero debt, focus on financial freedom. Debt is at worst slavery, at best willful indentured servitude. If your family takes home $2,500 per month from your job after taxes, but your credit cards, loans, and rent or mortgage total $2,000 each month, you work only one-fifth of your hours for yourself. The remaining four-fifths of your time at your job is exclusively for your creditors. You might as well just hand your paycheck over or work off your debt directly with the credit card companies. Unlike slavery, you are free to leave this arrangement, your job, at any time by quitting and looking for another job with a pay increase, but that is not always a simple or practical solution.

If it motivates you, think about what you would do with your freedom from debt. Without having to pay credit card companies, you would have the freedom to choose where your take-home pay goes. If you want to save up for a vacation, place pictures of your favorite getaway spot around your house.

Replace bad habits. Excessive shopping can be a habit. Many compulsive shoppers who go into debt do so because shopping helps them deal with difficult emotions like anger, frustration, and stress. The excitement of shopping helps to temporarily improve a person’s mood. But this habit can be replaced with a healthier alternative.

If starting a shopping trip helps you deal with difficult emotions, replace shopping with jogging, running, or another physical activity. While the act of spending money improves the mood of habitual shoppers, physical activity improves anyone’s mood. This is due to endorphins, natural, mood-altering chemicals released by the body in both situations.

Make getting out of debt fun. The concept of “fun” is personal. One thing that I find fun, someone else might find mundane. When I was in debt, I liked watching the colorful monthly reporting graphs in Microsoft Money get close to crossing the x-axis of $0 net worth. I fully understand that might not motivate everyone the same way.

You could treat yourself to a movie night every time you pay off a credit card. Celebrate at every possible milestone.

Visualize your debt reduction. Losing weight is easy to visualize. I’ve seen videos posted online involving time-lapse photography to illustrate weight loss over time. One photograph is taken each week at the same location and in the same position, so when played consecutively from start to finish, the change over time is apparent. You can do the same with your debt. Here are a few visualization tips:

• When you pay off a credit card, cancel the service and cut it up using a shredder. Save the plastic confetti in a bag and watch it expand as you blow through card after card.
• Look at your credit card statements before you go to sleep each night. The bad dreams you have will subside when your statements are small enough that they don’t cause anxiety.
• Here is an extreme option: If you’ve paid off 20% of your mortgage, paint 80% of your house in a color you don’t like. Once a year, determine how much more you’ve paid off, and paint the corresponding amount in a color you do like. You’ll be encouraged to pay off your mortgage in full just so you can live in a house painted the way you prefer.

Do something positive every day. The key to making a resolution stick is to keep it in front of you every day. If your loan or credit card allows you, and if you are not charged an extra fee, make small payments every day before you go to work. Look at your net worth in Mint if it reminds you of your goal. Work an extra hour if it means you’ll get more money for paying off your debt.

Recruit your family and friends. Having a support system is vital, but many people don’t want to let people know about their financial troubles. I think it’s important to have at least one person you trust to talk to about financial issues. It helps to share goals like this because they are often not real until they are spoken out loud with a witness. If no one is aware of your goal to pay off debt, it’s easier to admit defeat without offering 110 percent of your effort.

Consider your financial options. To truly get started you need to make some financial decisions. It is true that anything you do is better than nothing, but you need to have a plan. First, can you consolidate your debt onto one low-rate card? Call your credit card issuers and ask; the phone numbers are on the back of each credit card. Do you qualify for a loan through a peer-to-peer network? If you have a good credit score, you might find favorable loan terms.

Decide how fast you want to get out of debt and how much you want to pay. If you want to pay the least and succeed the fastest, you’ll want to examine the Debt Avalanche method. If you believe that a small success earlier on the path is important to keep you motivated, check out the Debt Snowball. Research your options and give it thorough thought.

What tips do you have for keeping a New Year’s resolution to get out of debt?

Photo credit: stevendepolo

The original version of this article, Getting Out of Debt: Make That New Year’s Resolution Work, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

We’ve updated our list of the best online savings accounts, so if you haven’t checked in recently, take a look at the latest reviews and interest rates.

As a teenager I was fascinated by Douglas R. Hofstadter’s book, Gödel, Escher, Bach: and Eternal Golden Braid. The book explores set theory, computer programming, logic, philosophy, genetics, music, Zen, and art. Between each chapter are fun interludes. They take the form of scripted scenes featuring colorful characters like Achilles, Tortoise, and Crab. In most of these interludes, the characters discuss a concept such as recursion or a fugue while the script itself illustrates that same concept.

The book introduced me to the philosophical tug-of-war between reductionism and holism. Reductionism is the belief that an explanation of a system can be valid only if it focuses on the smallest elements of that system, whereas holism is essentially the opposite: the whole is greater than the sum of its parts, and the only way to explain a system is to look broadly, all but ignoring the components.

Reductionism and getting out of debt

The concept of reductionism can be used to help get out of debt. Debt itself is a mathematical concept. You are in debt because the balance of your assets is less than the amount of your liabilities. Each purchase worsens this condition, and if interest is involved, a $100 purchase could cost multiples of that amount in the long run. If never paid off, the true cost of any purchase approaches an infinite number of dollars.

Emotional spending is often, but not always, the cause of debt. Purchases are made without regard to financial condition, enabled by access to easy credit. Sometimes debt is caused by unexpected expenses without a cash cushion to cover surprises, and occasionally even the best emergency fund can’t save people from finding themselves in debt. Focusing on and eliminating the various root causes of debt, eliminating each, and evaluating your progress at every step are all reductionist approaches to getting out of debt.

The Expense Coffee-Related Drink Factor is a reductionist approach, as well. If you have a daily habit of excess, like drinking a $4 drink from a boutique coffee shop when it would cost $0.20 to make your own, eliminating this expense fits with the reductionist philosophy. A reductionist would also creating a specific plan for paying down debt once excess income is available, whether the plan is the Debt Snowball, Debt Avalanche, or something in between.

The reductionism approach, if followed faithfully and tailored specifically to unique circumstances, will engender success. However, this may be missing an important part of the debt reduction process.

Holism and getting out of debt

One might look at their financial situation with a holistic philosophy. Rather than focusing on the specific causes of debt and a predefined path for eliminating debt, it may be worthwhile to look beyond these details and at the total self. These are some questions that trigger holistic thinking and evaluation:

• What kind of person am I?
• What are the aspects of my self that define who I am?
• What are my most important values?
• Why have I not focused on sound financial management?
• How would others benefit from my financial condition if it were stronger?
• Am I satisfied with the balance of power between myself and those to whom I owe money?
• Why do I feel I am not in control of my financial situation?

While these are all questions that are somewhat separated from the specific actions taken when dealing with money, the answers describe a character. The whole self provides insight that can help someone improve a financial situation and life. Holism and reductionism are by definition mutually exclusive, but that shouldn’t prevent someone from using aspects from both philosophies to increase the probability of financial success.

You could eliminate bad habits, cut up your credit cards, and pay off your debt, but if you haven’t evaluated your identity and your relationship with money, you are treating only symptoms. Likewise, if you redefine your values and begin to re-frame your locus of control without thinking about the consequences of your purchases, you may feel better about yourself but the financial damage will still exist.

Do you lean more towards holism or reductionism? Or are you just a fan of GEB:EGB?

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The original version of this article, Getting Out of Debt: Reductionism and Holism, is copyrighted by Consumerism Commentary.

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This is a guest article by Laura, a twenty-something woman working to improve her finances and reduce debt. She writes about personal finance for college students and grads at Green Panda Treehouse.

We’re buying a town house and it has a been a huge learning process. We have been running the numbers and making sure everything works budget wise. While looking through some books and blogs, I noticed some people mention getting a 15 year fixed rate mortgage instead of a 30 year fixed rate mortgage.

Talking with friends and family, many of them advocate getting a 30 year mortgage and paying it off in 15 years. Their reasoning is this gives you some flexibility. I wanted to run the numbers and see if this is a viable solution.

How much money you can save with a 15-year mortgage

Many people may not realize the financial upside of having a fixed 15-year mortgage. Besides paying less total interest, they typically have lower interest rates than 30-year fixed mortgages. Most of your money in the beginning of your mortgage payments goes to interest. As you move further and further along, more and more of your money goes towards principal.

If you’re in the market for a new or refinanced mortgage, consider visiting Quicken Loans. Quicken continues to offer some of the lowest mortgage rates available today.

Comparing a $200,000 fixed-rate mortgage for 30 years at 5.25% and a mortgage for 15 years at 5%, you get the following results:

You save a total of $112,901.39 in interest going with the 15-year fixed mortgage. Could you use that $112,901.39 for something else?

The downside of a 15-year mortgage

The downside for a 15-year mortgage is the same as any other mortgage: affordability. If you can afford a 15-year mortgage comfortably, congratulations. This is a great option for paying less interest over the life of the loan.

If money will be very tight with a 15-year mortgage and you are a bit hesitant with the monthly budget, you have two options:

• Wait until you have enough buffer room in your monthly budget for a 15 year. Save up while you’re waiting and put down a larger down payment.
• Decide to get a 30 year loan and come up with a plan to accelerate your loan.

You also have to weigh the opportunity costs of the money difference. That extra money could be redirected to investing more into the stock market for retirement or some other financial decision.

Will you pay a 30-year fixed mortgage in 15-years?

Dave Ramsey mentions the statistic that more than 97% of people who planned to pay their 30-year mortgage in 15-years do not. He has seen from his personal experience running his program that people lack the will power to keep up regularly with mortgage payments.

Ramit also observes that many people believe that they are the exception to the rule. This can lead some to not prepare properly. You may plan on paying your mortgage in 15 years, but if you rely on pure will power, you can set yourself up for failure.

Why pay off a mortgage sooner?

There are a few reasons why someone wants to pay off their mortgage sooner than 30 years. One popular reason is that they want the “peace of mind” in owning their home outright. If they lost their job, or if they experienced a pay cut, people would feel better knowing they did not have a mortgage hanging over their head.

How to accelerate your mortgage payments yourself

You can accelerate your payments even if you have a 30-year fixed rate mortgage. Automating payments can help you pay off your mortgage sooner and avoid some mental barriers to staying focused on your goal. By not managing the payments personally on a on a monthly basis, you can increase your chances of paying off the mortgage a lot sooner.

1. Start by examining your budget line by line. Know exactly what your actual income and expenses are. This will save you time from adjusting payments often as you realize you overestimated what you can put in.
2. Have a buffer. If you don’t have a fully funded emergency fund, consider getting that taken care of before accelerating mortgage payments.
3. Set up an automated payment plan. You can go through your mortgage company or you can go through your online bill pay. Note: Some mortgage companies offer programs to send extra payments but they cost you some money.
4. Start off with an extra payment that leaves you some wiggle room. As you get a raise in your income, increase your accelerated payments little by little. By adjusting it every year or so with your raise, you are accelerating your payments without missing the money.
5. Automation is key. You can build your payments up through the years while still having money to invest for retirement, save for other goals, and pay your bills.

This automated system can give you some flexibility in case your income decreases, like a pay cut or lay off. You simply pause or lower your extra payments and put them into your savings account as needed.

If you’re in the market for a new or refinanced mortgage, consider visiting Quicken Loans. Quicken continues to offer some of the lowest mortgage rates available today.

Even if you don’t hit the 15 year mark, you will still save tens of thousands of dollars by avoiding more interest payments. Think about it, you’re saving couple of years of salary for less than an hour of work spent on a phone call and online bill payment! I think that’s a great trade off.

Mortgage contact information

If you’re going through your mortgage company, check with them to see if there is a prepayment penalty or any fees associated with the accelerated payments.

• Bank of America: (866) 642-0987
• Chase: (866) 461-5953
• Citi: (800) 283-7918
• MetLife: (888) 638-6964
• Wells Fargo: (866) 234-8271

What about you?

What kind of mortgage do you have? Are you prepaying it? Why or why not? What suggestions do you have? Please also share your experience working with the mortgage company on prepaying your loan.

The original version of this article, Paying Off a 30-Year Fixed-Rate Mortgage in 15 Years, is copyrighted by Consumerism Commentary.

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Yesterday I received an email from a Consumerism Commentary reader who has a question about her mortgage refinancing options and is looking for advice. I tend not to offer too much personal advice, but I responded with some thoughts and offered to open up the discussion to other readers. Please read through and see if you have any thoughts for Heather. Please feel free to leave a comment after this post.

Hi. I’m a long-time reader of your blog, occasional commenter, and I thought you might have an opinion. My husband and I are looking for advice.

We paid $319,900 for our house almost four years ago. We put $120,000 down and got a 30-year fixed at 5.875%.

We were looking at refinancing and were offered 5% with one point, making the total loan around $196,000. We anticipated our house currently being worth roughly $220,000. Using the Fannie Mae Refinance Plus Program, since we did not previously pay mortgage insurance, we would not need to again.

Our appraisal just came in at $190,000. If we want the same rate, we’d now need to pay 2.3 points, which would put our loan at roughly $198,700, which is both a much larger up-front cost but more distressing, it immediately puts us upside down.

We’re not sure if this is still a good decision. Do you have any thoughts?

I initially responded to Heather some additional questions to clarify her situation. Here are more details.

Q: Do you intend and reasonably expect to stay in the house or do you think you might sell and move within the next few years?

A: We are reasonably planning to stay in this house. (In my ideal world, we’d move closer to where I work, but in real life, after having lost so much value and sinking $60K into structural repairs, we’re not going anywhere.)

Q: Are the monthly payments unmanageable with your current mortgage?

A: Our monthly expenses are not unmanageable at all. Besides the mortgage, we have one car loan and one student loan, but no other debt. Both of us are teachers, and both of our districts both gave pay cuts and increased copays/deductibles. So while expenses aren’t necessarily going up, our income went down. My husband decreased his 457 contributions, which I didn’t agree with but it was a fight not worth fighting.

Q: How do you intend to use your freed-up cash flow (such as invest, pay other bills that are being neglected, save, etc.) if you don’t mind sharing.

A: At this point, the $120-ish per month that we’d save would really allow us not to cut back as much. I have a few side interests that I’m hoping will turn profitable, but in the short term, I can’t count on that at all. (I’m good with ideas and with doing, but I’m not good at marketing/selling myself. Working on it.)

Also, we gave the nice refi guy $495 to lock the rate and get the ball moving. At least $350 of that is not refundable, as it paid for the appraisal. I don’t know at this point if the remaining $145 is refundable or not.

We need to get him an answer in the next couple of days, as far as I know.

Happy to answer any other questions as wanted/needed.

Do you have any suggestions for Heather? Please feel free to leave your thoughts in the comments.

The original version of this article, Help a Reader: Move Forward With Mortgage Refinance?, is copyrighted by Consumerism Commentary.

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There are many differing opinions about whether you can assign a quality like “good” or “bad” to debt. In general, I tend to believe that if debt is providing access to a necessary asset, like an education, a car, or a house, debt is at the least understandable. With debt, there is always a risk, and when you owe money to any other entity, you are often forced to live by their rules. So if freedom, financial and otherwise, is a goal, one of the major strategies on the path towards that goal is to eliminate your debt.

In an economic environment where your income is more at risk, you may choose to beef up your emergency fund rather than pay off debt. In other situations, debt is often not worth the interest you are required to pay.

Here are 50 things you can do right now to help you get out of debt. Some of these tips will directly help you pay off debt while some will help you save money so you have more cash available to eliminate that debt.

1. Link your debt account to your savings account and set up automated payments.
2. Stop using your credit cards.
3. Decide on a debt repayment method like the Debt Snowball method that makes sense for you while understanding the pros and cons of each.
4. Plan a party for each milestone, but don’t go into debt in order to celebrate.
5. Pay cash.
6. Empty the change from your pockets into a change jar each day.
7. Deposit that cash each month and transfer the amount to your larges or most expensive debt.
8. Make a second mortgage payment or car payment each month if you’re not penalized for doing so.
9. Cancel magazine subscriptions and divert that money towards your debt.
10. Postpone your vacation until you are out of debt.
11. Track your spending.
12. Stop watching television, particularly the commercials.
13. Don’t fall for Keeping Up With the Joneses; they’re in more debt than you.
14. Avoid scams and gurus that promise to make you rich quickly.
15. Learn how to cook rather than dining out.
16. Downsize your lifestyle: move into a less expensive house or apartment.
17. Divert the full amount of your raise directly to your debt.
18. Sell your unneeded stuff on eBay or Craiglist.
19. Give away anything you can’t sell.
20. Dispose of anything you can’t give away.
21. Put your credit cards in a cup of water in the freezer.
22. Call the credit card issuers to selectively cancel your credit cards.
23. Review your three free annual credit reports to ensure you’re aware of all of your debt.
24. Get your free credit score from CreditKarma as often as you like.
25. Involve your family and friends by letting them know of your plan.
26. Start a personal finance blog to chronicle your debt reduction adventure.
27. Use the library rather than buying books at the bookstore, renting movies from Netflix or the store, and buying CDs from Amazon.com.
28. Realize the ability to eliminate debt is completely within your control.
29. Use extra time to turn your hobby into a money-making business.
30. Modify your budget and find room to use more of your income to pay off debt.
31. Grow your own food in a garden.
32. When you need to replace your car, buy a used model with a great track record.
33. Wait before adopting the latest technologies until they are no longer the “latest.”
34. Remove the temptation to spend on things you like rather than the things you need.
35. Use smart credit card balance transfers to make your debt less expensive.
36. Improve your health to lower your health care expenses, and use those savings to reduce debt.
37. Quit smoking to save money and health expenses.
38. Read more blogs and personal success stories about getting out of debt.
39. Cancel your cable service.
40. Gradually increase your thermostat one degree each week during the summer or decrease it one degree each week during the winter.
41. Eliminate expensive hobbies that do not provide a return on your investment.
42. Stop trying to time the market and invest in individual stocks, and use that money to pay off your debt.
43. Downgrade your phone from your expensive iPhone or BlackBerry plan to a basic service without extra features.
44. Set up motivational reminders or alerts in your calendar software.
45. Save first, then spend, for everything.
46. Create subaccounts at ING Direct to identify money destined for eliminating debt.
47. Organize your bills in a system that ensures you won’t lose them or pay them late.
48. Always pay your bills on time, the earlier the better.
49. Don’t acquire more debt.
50. Speak up! Be part of a community; any tough task is made easier by working together and sharing ideas.

The original version of this article, 50 Actions You Can Take Right Now to Pay Off Debt, is copyrighted by Consumerism Commentary.

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While it’s great to avoid debt whenever possible, if you have to deal with federal student loans, including Stafford and PLUS loans, you might qualify for some better deals starting July 1.

Interest rates will be at the lowest rates in years. If you can consolidate, lock in rates after July 1. They will be at the lowest levels since the inception of the federal student loan program. The interest rate for graduates who are in a grace period is 2.00%.

Former students now in the process of repaying their variable rate federal student loans will be able to lock in a rate of 2.50%. Parents who have taken PLUS loans will be able to consolidate at 3.38%.

There aren’t many places to find cheaper money than this, but there are a few of limitations:

• Former students who have already consolidated are not eligible for these low rates.
• These rates are only valid for loans originated before July 1, 2006.
• Borrowers who are still in school do not qualify for consolidation.

There is more good news.

Income-based repayment. If a borrower is not earning enough to make monthly payments, they can apply for income-based repayment. The lender can extend the life of the loan and lower your payments to 15% of your income.

Student loan forgiveness. Borrowers who work for non-profit companies or the government will qualify for student loan forgiveness. After 120 payments (ten years), the government will write off any balance remaining on the loan. Student loan forgiveness applies to people who do not work for the public sector as well if they are repaying on an income-based repayment plan. In this case, 25 years of payments are necessary before the remainder of the loan will be forgiven, but will be considered income for tax purposes.

Rates for new student loans. Subsidized Stafford student loans will sport a new interest rate of 5.6% if the first disbursement is taken between July 1, 2009 and June 30, 2010. This is the second of four annual interest rate drops for new loans.

Increased Pell Grant scholarship maximum. Low and middle-income families might qualify for a Pell Grant scholarship. The maximum a student might receive from this federal program will increase on July 1 to $5,350.

These programs can save families thousands of dollars throughout the life of the repayment.

The original version of this article, Changes to Student Loans Coming July 1, is copyrighted by Consumerism Commentary.

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On a macro level, debt was a force behind the incredible economic expansion over the past two centuries, and the availability of debt at the family level played a role as well. Despite all that debt has brought society, many financial gurus and authors vilify debt and explicitly call the idea of borrowing money “evil.” Typical mass-produced financial advice often calls for avoiding debt as much as possible. Is this a realistic goal in economically developed nations in the twenty-first century?

For some, it is. There is no doubt that there are many ways families can survive and thrive while avoiding the need to borrow money at all. Avoidance of all debt can be a struggle for most families, particularly in today’s United States. Are the sacrifices worth the effort?

To join in this discussion, you must accept that debt is not evil. All forms of money are tools to simplify the exchange of goods and services. As tools are objects with no inner consciousness, they can neither be good nor evil, as these words indicate a nature of intentions. Intentions require a sophisticated neural network, something lacking as much in money as it is lacking in a doorknob.

If you’re still with me and you agree that borrowing money is not an evil concept, you might also agree that the tool of debt could possibly be used for both wise and unwise decisions, designed by the active neural networks in human beings (the tool-wielders).

From a pure numerical viewpoint

Even though amounts and values of money are normally symbolized by numbers, money is never solely about digits on a ledger. If it were, there would be only one reason to go into debt: an opportunity to use someone else’s money to earn more money than what is borrowed — a sure thing. If I offered you $10,000 without interest with the only caveat that you repay me slowly each month and in full by the end of twelve months, it would be wise to accept the offer, invest the $10,000 in a safe investment like a high-yield savings account, pay me back, and keep the interest you’ve earned for yourself without much effort.

This is what credit cards have been offering, though less frequently recently, with 0% balance transfer offers, or so they’d like you to believe. If you look deeper, there are usually some risks:

• The credit card companies might drop the promotion.
• If you fail to make a payment in time, even if your check arrives on someone’s desk one minute too late, you will owe interest to the credit card.
• The bank might lower the interest rate you are earning in the savings account to a point where the exercise is not worthwhile.
• Your credit score will decrease due to an increased utilization ratio, forcing you to pay more for new loans or mortgages.

The numbers are trickier when you question whether to take on debt at a higher interest rate with the possibility of earning more from a riskier investment, like stocks. Here you have to weigh the probability of not earning more than the interest you will be charged for borrowing the money.

In the end it is a judgment call. You could devise complex algorithms to help you to decide whether to borrow money at one rate for the possibility of earning a higher return on an investment, but anything can happen.

Debt for education

One of the most prominent rationalizations for accepting debt for education, like student loans, is from the purely mathematical viewpoint. People who go to college earn more throughout their lifetime than people who do not. The numbers show that in many cases, money spent for college, including interest payments lasting ten years after graduation, are worthwhile thanks to increased career opportunities and salaries. On average, an individual with a Bachelor’s degree will earn twice as much as an individual with only a high school diploma, though the statistics will differ depending on the field of study and the career.

Thus, it often makes mathematical sense to enter into debt to obtain a Bachelor’s degree, if necessary. There are ways to avoid education debt, such as having parents who have earned and saved enough money to fully fund the education, choosing a free or less expensive school, obtaining grants or scholarships, or even working. When these options fail, the possibility remains that choosing to attend and graduate from a certain college and accruing debt will be a better decision than not earning the degree at all.

Student loans can generally be found with low interest rates or with a portion of the interest being subsidized by the government because it is in society’s best interest to produce a well-educated workforce and thinkforce.

Your career’s start-up expenses

When a new company is formed with a visionary idea, there are often required start-up expenses. These include finding real estate for an office or storefront, furnishing the office or acquiring inventory, hiring employees and paying them salaries, and spreading the word about the new business. I like to compare this process with a recently-graduated student entering a career. Unless the business has received help from investors (who often require that they become part owners), these start-up companies rely on loans.

Similarly, in some cases new employees can be excused for using debt to put them in a competitive position for starting their careers. Dressing appropriately and presenting a professional appearance requires expenditures for which a newly-minted graduate may not be financially prepared. (This is one reason I suggested the gift of clothing or gift cards for recent graduates.) Attending networking events, sending out resumes and traveling to interviews are all start-up expenses that must be financed in order to land the right job.

That first job is an important indicator of the remainder of your career, particularly if you remain in the same career path your entire life (as fewer people do). The better placed and paid you are in your first job, the higher your income will be throughout your career.

If necessary, a moderate amount of debt at the point you start your career will provide the opportunities to place you in a better position for future earning.

Owning a house

Thanks to the prevalence and availability of debt, consumers have reached higher and higher beyond their means. In the 1960s, median house prices were about 2.5 times the median annual household salary and at the height of the housing market in the early part of this century, the multiple was around 5 (source). Saving to pay for a house with cash could take years or even decades.

During the height of the housing frenzy, many families were willing to take on debt using the above numerical viewpoint. House prices seemed to go up without fail, and the prospect of earning more by leveraging a house purchase with debt seemed to make financial sense. Unfortunately, the underlying assumption that real estate prices always increase proved to be incorrect and many families were hurt due to over-leverage.

But that doesn’t mean that it’s never wise to buy a house with help from a loan. Buying a home should not be a purely financial decision. Families often want to create a stable home environment, and settling down in a location with the intent to stay for several decades is a key component of that idea. Furthermore, families with children want to ensure that the free public education offers a quality experience, and regions known for excellent education, in high demand, will often be more expensive.

A mortgage, while a decades-long debt sentence, is not evil. It makes sense for families to live in the best location they desire if they can afford the debt payments.

When else is debt worthwhile?

If you accept debt into your life, there are sacrifices you will need to make. You will also need to accept other sacrifices if you refuse to enter debt. It comes down to personal choice. Is it crazy to be willing to accept debt, as long as it is affordable and well-purposed? Or do you agree with idea that money is a non-intentioned tool, to be used in whatever situation logically calls for it? Are there any other instances where it can be a smart decision to take on debt?

Photo credits: mathplourde, snapped_up

The original version of this article, When Going Into Debt is Worthwhile, is copyrighted by Consumerism Commentary.

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