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How to Pay Off Your Debt

Lesson 4 of 8

Other Attack Methods

Erin Lowry/Broke Millennial

How to Pay Off Your Debt

Erin Lowry/Broke Millennial

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Lesson Info

4. Other Attack Methods

Lesson Info

Other Attack Methods

We're gonna talk about two other options here today. And I was actually a little hesitant to bring up the balance transfer to be completely honest, especially when we're talking about a get your financial life together bootcamp because this can almost feel like a magic bullet opportunity but the problem is with the balance transfer, this is something that you really need to have earned the right to use it. It's a privilege not a right is actually how I would put it. If you are in credit card debt because of perhaps compulsive shopping or just compulsive overspending, it's hard for you to get it together, a balance transfer is probably not gonna be a good idea. If you are in credit card debt because a medical emergency came up and that's how you financed it or something happened with your car and that's how you financed it and you don't have a history of being in credit card debt, this might actually be a great option for you. And when we get to personal loans, that's something that we ...

are gonna be consolidating all of you debt into one monthly payment. And again you're coming back to your psychology of money. For some people, they feel the need to go through the pain more or less of the debt snowball or debt avalanche, in order to feel that pain of having to go through paying off each individual debt because to them, that's going to make sure that mentally they never do it to themselves again where with personal loans, you're gonna be consolidating everything into one monthly payment and you might feel like oh, it's almost like an easy out. I've got a deadline, I know when I'm getting out of debt, it's now one easy payment and it might then make it easier in the future to justify putting credit card debt back into your life. So I'm still gonna talk about these because I think they're important because I don't know the situation of your debt but do keep in mind that some people out there would vehemently disagree with me for even telling you about them because they feel like you should be going through the pain of paying them off a more traditional way because this feels like an easy out. So here's how a balance transfer works and you might have gotten a mailer at some point whether or not you have credit card debt you at some point have probably gotten a piece of mail that said something like, hey, you can get a 0% balance transfer on this credit card. We're gonna work through what that actually means. So you have debt at what I will call bank A and that debt is at something like 18% APR and you're trying to pay it off. Well bank B comes along and says hey, we're gonna give you 0% APR, so no interest for 18 months if you move your debt from bank A over to us, bank B. Now the reason you would want to be moving your debt is because if you are paying on a 0% APR credit card, there is no interest rate. That means every single penny of your monthly payment is actually going towards the principle balance, that amount you owe and I'm gonna work through with an actual example so you can really get a sense of what I'm talking about. So we're gonna have our friend Gabby here who just moved to New York City. Between the cost of moving, getting some professional clothing for her new job, furnishing her apartment a little bit, going out with coworkers, within a few months, she has found herself at about $4,000 of credit card debt and her bank is charging her 17% APR on that $4,000 of debt. That's a pretty average interest rate. A lot of times with credit cards we're gonna be talking about 15% to 25% in interest and she's paying $170 a month towards that card. That's the minimum she owes and man, it feels like that debt is just not going down. Every month it just kind of seems to be consistently staying at around $4,000. So at this rate it's gonna take Gabby two and a half years and cost her about $900 in interest to pay off that $4,000 in credit card debt. But then she finds a balance transfer offer. So she takes an offer from bank B. She's gonna move her $4,000 of credit card debt to a 0% APR for 18 months offer. That means for 18 months, she does not have to pay a penny in interest. Now she is going to have to pay a 3% fee in order to do this, it's called a balance transfer fee, very common, and that's gonna obviously cost her about $120, so it's 3% of the balance you're moving. So 3% of $4,000 in Gabby's case and then she's just going to be paying it off on that 0%. Now even with this 3% fee, Gabby is actually only going to be paying $180 in interest and fees and she'll be done paying off her debt in 25 months. So she's still just paying $170 a month towards this debt but because every single penny is going towards her principle balance and it's paying down so much faster, she's only going to end up paying that eight, or the APR on her card, the 17% APR on that tiny little balance she has left when she loses the promotional interest rate at 18 months. So what happens on a balance transfer is if you don't pay off the entire balance by the end of the promotional rate, you're gonna kick into whatever normal interest rate it would charge you. So let's say Gabby's gotten it down to like $ at month 18 so at month 19, they're gonna charge her probably around 17, 18%, but it's on such a small balance with her monthly payment she's gonna pay it off quickly. So even with that fee, it's a savings of $720 for her to have done the balance transfer and she could have increased her monthly payments to about $230 a month and she would have been completely done, only had paid the fee in order to get out of debt by the end of 18 months. Now of course this is assuming that Gabby never gets in any more credit card debt throughout this period of time and that's why I say a balance transfer is not a privilege. You have to earn the ability to do it because if you continue to put yourself into a debt cycle, there's really no point in doing that and you're just going to keep perpetuating this credit card debt cycle for yourself. Now of course there are traps when it comes to a balance transfer. They're not just trying to be benevolent to you. They are trying to get you to move over your debt because they think you've already put yourself in credit card debt once and it's very lucrative for us when you do this, they're thinking you're probably gonna do it again. So here are some of the ways that they might trip you up. For starters, you have to be a new customer. If you have credit card debt on a particular credit card with bank A, you can't move that debt to just a different credit card at bank A because in they're mind, they're thinking, we already have your debt. Why are we going to give you a 0% offer when you're already paying us 17, 18%? So just know you do need to be a new customer because that bank B is trying to lure your business away hoping that you're gonna screw up and you're gonna end up paying us that sweet sweet interest. You need to complete your balance transfer pretty much immediately. If you apply and you get approved, you don't wanna wait around because the clock does start ticking most of the time pretty much immediately. So if you wait for two or three months to move the balance, well you've lost two or three months of your promotional 0% offer. The other thing to know is sometimes if you don't do it within 60 to 90 days, the bank's like, we're taking this offer away from you anyway. So if you do it, make sure you move it ASAP. Always always always pay on time 'cause what can happen here is if you miss a payment even once, they not only are going to remove your promotional rate of 0%, they'll probably kick you into what is known as penalty APR so it's not the quote unquote modest normal interest rate which still is pretty high, it's a penalty interest rate which typically is north of 20% and that's really high. You need to know the difference between having interest that is waived or interest that is deferred and that is a big catch that can happen with balance transfer cards. So if the interest is waived, it means that you are not going to have to pay any interest on the promotional period timeline. So in that 18 months that they might have given you 0%, if you are not done paying it off at the end of 18 months, they will not retroactively be charging you interest. They'll only charge you interest on the little balance that's remaining that you're trying to pay off. So thinking back to Gabby, Gabby didn't get completely out of debt at the end of 18 months, it took her 25, so the few hundred dollars she has left, they were not saying oh, well you didn't finish so we're gonna go back and actually charge you all that interest you thought you saved. So guess what deferred is? Deferred is then saying, ha ha, you didn't pay it off in time. Got you, we're actually gonna charge you all that back interest that you thought you had saved. So if you're ever applying for a balance transfer, make sure you wanna see the term waived. If you see deferred interest, you do not wanna be applying for that product. Same on any sort of loan. Any time you see the word deferred, that usually means if you don't finish it off in a certain period of time, they're gonna retroactively get you. Do not spend on this card because you can end up in the debt cycle again and the reason I say this is the goal here is to be paying down debt as aggressively as possible. So you don't wanna be getting a balance transfer card that you're also trying to get a reward sign on bonus on. This just needs to be purely straight and simply your balance transfer card. You're just paying money to pay off that credit card debt because what can happen is if you start getting new charges, it can kind of start to get confusing about well, which is the new charge, which is the existing debt that I had and then if you almost without being aware of it, you can start to accumulate new credit card debt because you're not totally paying off the new charges you're making every month. So the easiest thing to do if you're going to do a balance transfer, get the new card, don't put it in your wallet, don't connect it to anything, just be making your monthly payment to get out of the credit card debt. Don't put any new charges on the card. Banks obviously do not love this piece of advice but this is the most effective way to be paying down a balance transfer. So those are common traps. Before I move on, any other questions about balance transfers? Alright, thank you. Personal loans. So a personal loan is really a way to think about consolidating your debt. You are not going to get that sweet 0% interest. There's generally definitely going to be a little bit of a higher interest rate here, but the goal is that you're gonna take multiple forms of debt, bundle them together and hopefully have a lower interest rate. Personal loans typically especially if you have healthy credit history and a high credit score, have a lower interest rate than a credit card. Credit card you might be at 17, 18%. A personal loan maybe you're around five, six, seven, eight. So that is going to save you not only time but a lot of money in the course of paying off your debt and if you're struggling to pay off let's say three different credit cards, you can consolidate them all together with a personal loan so it's one easy payment and you know because you know the terms of the loan exactly when you will be done paying it off. So it gives you a firm getting out of debt end line deadline so it can be motivating for people as well and just kind of take a little bit of the mental bandwidth off your plate that it's just one easy payment. So an ideal applicant for a personal loan is going to be somebody with a high credit score, looking at really 720 plus, healthy credit history, no late payments, you've got strong history, maybe quite a few years. They generally wanna look at your employment record, make sure that you are well employed. Well if you're not, if you're self employed, they might wanna see like two years worth of tax returns in order to prove income, make sure there's a steady flow of income and remember back in segment one yesterday we talked about this idea of debt to income ratio, so how much debt you have relative to your income on a monthly scale, not annually because maybe you're making $40,000 a year but you have $70,000 of student loans. So don't panic, it's monthly not annually and they wanna see a ratio of less than 40%. So this is somebody who is going to get an ideal interest rate on a personal loan. I'm not saying that you won't get approved if this isn't your profile but this is the person who's going to get a lower, more competitive interest rate if you will. Now I mentioned this when I talked about credit scores yesterday, this idea of comparison shopping. If you only apply at one place for a personal loan, you'll only know the rate that that particular institution is willing to give you. You really wanna go out and comparison shop and find the best deal, just how you would do for almost any other product in your life, you wanna go out and find the absolute lowest interest rate and if you're going around and checking at a couple different lenders, generally within a 14 day window, the credit bureaus understand that what you're doing is shopping around for the best rate, so it's not gonna annihilate your credit score. I know sometimes that makes people nervous. So please do comparison shop and get yourself the absolute best option if you're gonna go the personal loan route. Now same with balance transfers, there can be tricks and traps along the way here. So here are a couple things you do not wanna see if you are applying for a personal loan. One is an origination fee which is generally just a fee that they charge you up front to give you the loan in the first place. One, you don't want it because it's extra money that you're having to pay and plenty of places don't have them so why not go find a place that doesn't do it. Another thing to know is you need to find out how the origination fee is actually dispersed because for some of them what they'll do is they will take the fee out of the amount of money that you're borrowing. So let's say you needed to borrow $5, and it has a 3% origination fee so that's a fee of $150 but if you needed that full $5,000 and that's not the amount of money that ends up in your bank account and you actually ended up with $4,850, that can be a problem for you. So if they are charging you an origination fee, you need to kind of bake that into the amount of money that you ask for so that the amount of money you need ends up in your account. Pre-payment penalty. So if you start to aggressively pay down your debt, that is awesome but not for your lender because that means your paying less interest over the life of the loan. So sometimes they kind of get you by charging you a pre-payment penalty so if you pay it off early then they're still kind of recouping some of the money that they have now lost because you paid it off quickly so you really just don't ever wanna see the words pre-payment penalty attached to your personal loan at all. And pre-computed interest is pretty much the same thing. They kind of front load your payment with extra interest in the beginning to make sure that if you do aggressively pay it off, they will have already gotten your money out of you in interest payments early on. So just another term you do not wanna see in your loan contract for a personal loan and there are options out there that do not have any of these as well. Before we move onto what to avoid, any questions about balance transfers or personal loans? Yes? So it seems like what you're telling us is there's a lot of got you-ness from banks when you're trying to take care of debt and you're giving so much valuable information but if someone wants to go to a website, are you gonna cover this in financial products that'll give you a little bit of heads up like where to go, who to avoid, et cetera? I'm not gonna name names on who to avoid, but I will say you can go to financial comparison websites, MagnifyMoney, Bankrate, and NerdWallet are all examples of different websites where they compare financial products and yes, we will be talking about that more when we get into picking better financial products for you, but those are three websites you can go to to do some basic research and I just also want you to know the terms because you might just plug in the term personal loan into a search engine and it comes up with a bunch of different options, some of which are gonna be unique to your area. It could be a credit union in your area, a particular community bank that's unique to your location that I'm not gonna necessarily be aware of that might be the best deal for you, so do make sure you also look up your local opportunities as well.

Class Description

One of the worst parts of carrying debt is the shame it induces. Too many people feel embarrassment and guilt about their debt, as if they’ve failed in some profound way. But the facts are that the average American adult has $4,717 in credit card debt, and more than 44 million Americans hold nearly $1.5 trillion in student debt, so there’s no reason to feel burdened by this unfair stigma.

Instead, you need to focus on taking proactive measures to deal with your debt or prevent it from ever accruing. Erin Lowry will explain some of the complex aspects of credit card and student loan debt, help you get rid of that overwhelming fear that you’ll never conquer your debt, and show you how to create a plan of action to attack your debt head on.

In this class, you’ll learn how to:

  • Design a strategy that either pays off your debt gradually or quickly.
  • Use balance transfers to avoid high interest rates.
  • Find loans that will help, not hurt, your bottom line.
  • Understand the differences between federal and private student loans.
  • Figure out if you’re eligible for student loan forgiveness.
  • Get help from charities or loved ones if you’re really in trouble.

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Jay Valencia

Erin covers a lot of ground and she delivers it all with an approachable vocabulary. This is a series of classes well worth watching.