Over the last two years, I have received more questions about student loans than I got in the previous two decades combined. The reason is brutally simple: Not only is college more expensive than ever, but because of the recession, it’s also the hardest time in decades for college graduates to find decent employment — and thus earn the money they need to be able to pay off their loans. This financial double-whammy is crushing a generation of young people under a mountain of debt.
According to the most recent U.S. Department of Education statistics, two out of every three students who graduated from college in 2008 financed their education at least partly with student loans, with the typical borrower starting out their working life owing around $23,000. In 2009, the total amount of federal student loans outstanding topped $605 billion.
The private student loan market is a largely unregulated “wild west” market, but experts figure it accounted for another $300 billion or so — bringing the grand total to around $1 trillion.
And with this in mind, let’s look at how you should borrow money for school — and ultimately pay off those loans so you can get on with finishing rich!
1. Get the Facts and Understand the Problem.
In the past I have argued that student loans are not only a good investment but also that they are a more intelligent form of debt than, say, a bank loan you might take out to buy a car. But in recent years, I have begun to see some problems with student loans.
To begin with, people who borrow money for college often don’t really understand what a serious commitment they are making. It’s generally easier to get a student loan than it is to borrow money to buy a home or a car or get a credit card — and yet student loans are the most difficult loans to get out of if you get into financial trouble.
Another problem is that an increasing number of people are being forced to take out private student loans, which generally have variable interest rates (meaning they can get more expensive) and are virtually impossible to refinance.
And perhaps most troubling of all, the value of a higher education simply isn’t as much of a “sure thing” as it used to be. When you borrow money for school, you’re betting that you will be able to afford to pay back the loan after you graduate. But these days, with unemployment high, many college students wind up graduating into a world of no income — and lots of debt.
2. Know What Kind of Loans You Have.
There are two types of student loans — government and private. Before you can start evaluating the repayment options, you need to determine which kind you have. If you’re not sure, check the paperwork: If there’s any reference to a Stafford Loan, Perkins Loan, Federal Direct Loan Program, or the Federal Family Education Loan Program, congratulations! You have a government loan, which means you are eligible for a number of different repayment options. This is not the case with private loans. With them, you’re basically stuck with the repayment terms that you agreed to when you took the loan out.
3. Understand Your Repayment Options.
If you have government loans, you are eligible for two standard repayment plans. The 10-Year Plan is the default option. You make fixed payments each month for 10 years, and at the end of the decade, your loan is paid off and you own your diploma debt free. You can also opt for a 20-Year Plan, which will stretch out your repayment period. This will lower your monthly payments-but it also will increase the amount of interest you’ll pay over the life of the loan. Since your goal should be to become debt free for life, the 10-year plan is generally your best option.
Let’s plug in some real numbers to see if this makes sense. Imagine two students who both paid for college with $25,000 federal Stafford loans:
- Student A chooses the standard 10-year repayment plan. As a result, he’ll have to make monthly payments of $287.70 for 10 years, at the end of which he’ll be debt free. In all, he will have paid a total of $34,524.14, of which $9,524.14 will have been interest.
- Student B chooses the extended 20-year plan. Her monthly payments will be only $190.83. But after 20 years, she will have paid a total of $45,801.70, of which $20,801.70 will have been interest.
In other words, opting for the 20-year repayment plan increases the total amount you will end up paying by roughly a third — in this case, more than $10,000. This is not a good way to get rich!
4. Consolidate Your Loans.
Most students who borrow take out multiple loans from multiple sources. Once you graduate, it can become something of a nightmare to keep track of all these loans. This is why most students choose to consolidate their federal loans. (Private student loans are in their own separate universe and cannot be consolidated with federal loans.) Consolidation not only combines all your obligations into one monthly payment, it also cuts down on the paperwork. What’s more, there is never a fee for consolidating federal loans and you can choose to extend your repayment term.
While students with federal loans can consolidate with any lender, it is always a good idea to consolidate into the federal direct loan program. That’s because there are some loan forgiveness programs that are open only to people with federal student loans.
5. Learn the Difference Between Deferment and Forbearance, and Investigate Loan-Forgiveness Programs.
The official government website for federal student aid, Student Aid on the Web , defines a deferment as “a temporary suspension of loan payments for specific situations such as re-enrollment in school, unemployment, or economic hardship.” If you have subsidized federal loans, this can be a very good deal, since interest will not accrue during a deferment. However, if your loans are unsubsidized, interest will accrue.
If you don’t qualify for deferment but are experiencing financial difficulty, you can apply for forbearance, which will temporarily postpone or reduce your payments. The catch here is that interest will continue to accrue even if your loans are subsidized. Most private student lenders also offer forbearance and deferment options, but there are no uniform policies governing private student loans and you are completely at the lender’s mercy. Check with your lender to find out your options.
If you qualify for a loan forgiveness program, whatever balance remains on your loan will be wiped out without penalty. One of the best-known loan-forgiveness programs is for federal employees. If you work for the federal government for 10 years and make 120 on-time monthly payments, any remaining balances you owe on federal student loans will be forgiven. Many states offer their own programs that help public employees pay off their student loans, but a word of warning: These programs can quickly evaporate in times of financial crisis. You can learn more about loan-forgiveness programs on the FinAid website.
6. Ditch Your Loans ASAP (Especially Your Private Ones).
The fastest way to get rid of student loans is to live beneath your means and pay them off as quickly as you can. If you’ve got private loans and you want to have any chance of finishing rich, it is imperative that you move paying them off to the top of your list of financial priorities.
This is why: the adjustable rates on private loans make them ticking time bombs. If you have both private and federal loans, I believe you should make paying off the private loans your first priority — even if the interest on your federal loans is higher. If you have a mix of private and federal loans, use IBR (income-based repayment) or an extended payment plan to keep your federal loan payments as low as possible and throw all the money you can at your private loans. They’re that dangerous.
7. Don’t Forget to Deduct Your Interest Costs When You File Your Taxes.
Don’t overlook the income-tax deduction on student loan interest. This deduction is calculated as an adjustment to income, so unlike the home mortgage interest deduction, you do not need to itemize your deductions in order to qualify for it. Assuming you’re in a 25% tax bracket, this deduction could save you as much as $625 per year.
8. Think Before You Borrow.
If possible, keep your borrowing to the absolute minimum and never, ever take out any private student loans. Don’t sentence yourself to a lifetime of indentured servitude in pursuit of a sweatshirt with a nice name on it. This may sound harsh, but student loans should cover only a small portion of your college costs. There are plenty of other, better ways to pay for college — savings plans, scholarships, and part-time employment. Remember, people have been working their way through college for as long as they’ve been giving out degrees.
9. Do your Homework and Shop Around For the Best Loan.
There are a mind-numbing variety of programs, each with a mind-numbing set of rules and conditions. The difference between the wrong loan and the right one can be the difference between a miserable life and a great one. Here are some tips on where to go for information and help:
The best information will come from the school you are looking to attend. Reach out to the student-aid department for information about the various programs and how to apply.
There isn’t a better resource for information and advice on private loans than FinAid. This website contains everything you need to know about borrowing money for private student loans. But as I mention above, tread carefully before loading yourself up with private loans.
FastWeb bills itself as “the leading scholarship search provider for every student, whether you’re in high school or a mother of two returning to school,” and with 34 million users, the boast is probably justified.
Before you start your studies, do your homework: get a student loan education and explore all your options before you borrow. And to find more student loan tools, info and to read real success stories from people who found student loan freedom, go to finishrich.com.
My friend Alice had been a loyal, responsible user of her credit card since 1998. While she normally paid off her monthly bill in full, she had recently lost her job and as a result she was currently carrying a balance of about $10,000. Her interest rate had always been rather low — about 9% — but she checked her statement to see what her current rate was, and to her shock, she discovered that her credit card was charging her 29%!
“It must be a mistake,” she thought. So she called the phone number on her credit card. Was her rate really 29% or had she misread it? The customer-service representative who took her call explained that the credit card company had raised everyone’s rates to 29%, regardless of their payment record or credit history.
When she got off the phone, Alice did the math. Here’s what it looked like:
$10,000 (interest rate 9%)
Total cost to pay off with 2.5% minimum payment: $14,192
$10,000 (interest rate 29%)
Total cost to pay off with 2.5% minimum payment: $85,547
At 29% interest, there’s a $71,355 difference!
Not surprisingly, Alice was really mad. I told Alice to bring her statement to me and we would call the credit card company together to see what we could do to negotiate her rate down. I am going to share with you the six things Alice and I did, so you can do exactly the same thing for yourself and save thousands by lowering the interest rate on your credit cards. Keep in mind that Alice did not achieve instant success. However, she did ultimately make progress, and so can you — let’s get started!
1. Find Out How Much Interest You are Paying.
Go get your latest credit card statements. Your Annualized Percentage Rate (APR) should be listed at the very top or the very bottom of the statement. If you can’t find it or, like Alice, you aren’t sure you’re reading it correctly — call your credit card company and simply ask them what your APR is.
2. Shop For a Lower Rate.
Do an online search of your credit cards (using each card’s exact name) and compare the interest rate you are currently paying to the rate each of your card companies is offering to new customers. In Alice’s case, we were able to find out in less than five seconds that her card was offering new customers who qualified, an APR of just 13%, plus 30,000 frequent-flyer miles once you charged $750. That’s adding insult to injury. This is the type of information you want to know before you get on the phone to ask your credit card company for a lower rate.
3. Compare your Rate to National Averages.
You can get the latest credit card rates, along with national averages, at websites like bankrate.com, creditcard.com, cardweb.com, credit.com, and lowcards.com. The following chart from cardtrak.com shows the different rates that credit card companies currently offer different types of borrowers:
|Jan 2010||Jul 2009||Jan 2009|
|Super Prime (for the most creditworthy||10.59%||9.69%||8.99%|
|Prime (for average borrowers)||15.44%||14.99%||13.77%|
|Sub-Prime (for below-average borrowers)||26.01%||22.99%||21.67%|
|Punitive (for borrowers with missed payments, are behind on payments, have exceeded their credit limits, or have poor credit scores)||29.99%||29.12%||29.99%|
|Promotional (for new customers)||5.77%||3.33%||2.66%|
|Note: Average Rates based on FICO Credit Scores.
Super-Prime = 760–850; Prime = 660–759; Sub-Prime = 500–659.
4. Figure Out the Rate You Should be Paying Based on Your Credit Score.
Before you start calling your credit card companies, determine what category your credit score should qualify you for. If you don’t already know your credit score, go to www.finishrich.com and get your free trial of Debt Wise which comes with a FREE Equifax Credit Score. If you have signed up for your free trial of Debt Wise already, you can get your credit score by logging into your account and clicking on the “credit score” link in the middle of your Debt Wise homepage.
If you have a “super prime” credit score, your credit card company shouldn’t be charging you the regular “prime” rate. If it is, ask it why when you call the company. Remember, unless you make the effort to get your interest rates down by asking for a better deal, your rates are going to stay high, and it’s going to be harder for you to get out of debt.
Ready? Great! Let’s pick up the phone and start what I call the “Credit Card Rate Negotiation Game.”
5. Call Your Credit Card Company.
When you call the credit card company, your job is to USE YOUR KNOWLEDGE. You have become smarter about your debt and know what kind of rates are being offered, so there’s no reason for you to be afraid to ask for a better deal. However, assume that the first person you speak to is going to say, “Sorry, I can’t help you.” This is what the first tier of customer-service representatives are generally trained to say. If this happens, simply respond by saying, “Well, then let me speak to someone who can help me. Please connect me with your supervisor.”
When you make this request, the customer-service rep may say, “I’m sorry — no one is available right now.” Don’t accept this. Instead, tell them you want their name and ID number, so you have a record of whom you spoke with. Then insist they put a supervisor on the line immediately. Since I first began taking this approach, I have never been unable to get a supervisor on the phone.
Once you’ve got him or her on the line, explain your situation. Start by going over your current rate, tell them your credit score, and ask why your rate is higher than it should be. Compare your rate to what competitors are offering and ask if they would be willing to work with you to give you a better deal.
Credit card companies lower rates all the time, every day of the year, every hour of the day! I worked with one couple that had 12 credit cards, and we were able to ultimately get all but one of them to lower their rates to below 5%. In some cases it took multiple calls, but the effort paid off in the end.
Ultimately, Alice wound up taking advantage of an offer she got in the mail — for a card that was offering new customers 0% interest for six months! She applied and transferred her balance from her old card to her new card. True, she had to pay a transfer fee of $300, but for six months there wouldn’t be any additional charges on her debt. Because she read the fine print on her transfer agreement (something you should always do), she knew that if she were just one day late on even one payment, the rate on her new card would be increased retroactively to 25%. So she made a point not to be late — ever!
6. Ask About Forbearance or Debt Management Plans.
When all else fails, there is one last resort that can ultimately get your rates lowered. The credit card companies know that millions of their customers are in financial distress. It may be because you lost a job, had an illness in your family, or are simply earning less than you used to earn (what they call being “underemployed”).
What the credit card companies will often do in such cases is review your situation, and based on what they find, they may decide to work with you to restructure your debt. This restructuring can include lowering your interest rates to zero for a period of time (usually six months to a year), lowering your minimum payments, suspending over-the-limit penalties or annual fees — or all of the above.
There are two basic types of hardship plans for people with credit card problems: Forbearance Plans and Debt Management Plans (or DMPs). I have coached people who had credit cards with interest rates as high as 29% who were able to get their rates cut to zero as a result of signing up for one of these plans.
One downside of enrolling in these programs is that your credit card company may report this to the credit bureaus — and if it does, this could lower your credit score. But not all the card companies do this. To find out whether yours does or not, make sure you read the fine print before you sign the contract. The truth is that even if enrolling in a forbearance program affects your credit score in the short term, it’s better than falling behind on your payments or not being able to reduce your debt because you’re paying so much in interest.
The reality is your credit card company is not going to lower your rate if you don’t ask. So, when you do call them, make sure that you have all your information prepared and organized if you want the best results. The same goes for entering a Forbearance Plan or DMP to lower your interest rates — you need to make sure that you do your homework so you can be in control of your finances and make the right decision for yourself. For more resources and information on credit cards and managing your money, check www.finishrich.com.
I’m excited to review David Bach’s new book entitled, Debt Free For Life! I’ve been a fan of David’s books since his very first bestseller, The Automatic Millionaire. David writes in a very easy to understand, logical sort of way which allows readers to follow his advice easily.
I remember the first time I picked up one of his books, I was at Barnes & Nobles. I sat in a corner for an entire hour and read the book from cover to cover. Sorry David! I know I should have bought it instead, but I was practicing my frugal ways at that time in my life. Actually, I still am.
For someone who is in debt, and who has never read any of David’s books, I highly encourage you to read his latest, Debt Free For Life. Given I’ve read practically every single one of David’s books, it’s hard for me to learn anything new. That’s somewhat of bummer since I was hoping there would be something as innovative as the “latte factor” was 10 years ago. Still, if you’ve only read one or two of his books and are on a mission to pay down debt, this book is perfect for you.
One of the best things about book reviews is access to an author’s mind. I ask David five burning questions to challenge him beyond the plain vanilla, and to my delight he answers most of them quite directly. Hope you guys enjoy the insight! There are three books to giveaway at the end of the interview!
FINANCIAL SAMURAI QUESTIONS FOR DAVID BACH
1) Why do you think people get into such deep debt? One of my theories on Financial Samurai is that people get into debt because it feels great to spend money you don’t have. Otherwise, you wouldn’t do it. Once you get into debt, it feels so great to pay down debt and get out of debt. In essence, debt provides pleasure both ways and people really like debt. Thoughts?
Personally, I don’t know anyone who “likes” debt. Even people who feel great spending money usually feel anxious and horrible when the bills come in, and people I’ve counseled out of debt certainly don’t try to get into debt again so they can feel great paying it off a second time. Two generations ago, people paid cash for everything, held mortgage-burning parties, recycled tinfoil. That philosophy and way of life has disappeared and people get themselves deep into debt because they can.
Our society has incentivized borrowing more – you can open another credit card if you need more credit, or get a tax deduction on that house you can’t afford. The good news is that I see more and more people who want to pay down debt and save money. If anything, the great recession has woken us up to the financial reality that we can’t afford to be in debt anymore.
2) You read stories about people who get into $50,000 and $100,000 levels of consumer debt. How does this happen? Isn’t everything regulated and logical from a business stand point? In other words, the only way you can get into $100,000 worth of debt is if the credit card company approves your credit limit because your income is large enough to warrant it so.
Unfortunately, we were in an era that became permissive of debt and even seemed to encourage it. We have billions of dollars of advertising to get us to buy things we don’t need, a multi-billion dollar credit card industry that tells us the good life can be ours for the taking when we use their credit cards, banks that loan us money for homes they know we can’t afford, subprime lenders who tell us we’re “silly” to keep equity in our homes when we could “cash it out” to pay off our credit cards, and a tax system that promotes heavy borrowing by offering tax deductions. We’ve been sold a bill of goods, or a bill of debt, and now we have to pay.
In addition, many people who are deep in debt get in trouble by taking on multiple credit cards and spending beyond their means. The problem with credit card debt is that most people do not understand the insanity behind the minimum payment math—specifically, how long it will take you to pay off your current balance and how much it will cost you if you only make minimum payments. In Debt Free For Life (www.finishrich.com/debtfree) I reveal how the debt companies imprison you with basic math to keep you in debt for life. By learning their games, you’ll be able to fight back and win—and achieve real financial freedom.
3) One of my main recommendations for success is to stop being delusional. For example, if you are a terrible student who received a mediocre job and earn a mediocre salary, it is delusional for you to think that you should live like a person who makes much more by spending much more. Instead, recognize you are destined for a mediocre lifestyle, and spend accordingly. Hence, do you think people who go into debt are more delusional than those who don’t have problems with debt? Is there a self-esteem and psychological aspect to the entire debt situation?
In my experience, it’s easy to get into debt. I can relate – I had problems with spending and credit cards in college. What set me straight was my Grandma Rose. She told me what we all know but have a hard time committing to: don’t spend money you don’t have. Each person‘s situation is different – and their reason for taking on debt will be different. Someone that believes they can spend more than what they can afford is not necessarily delusional – they may just be misinformed and as I said before they are probably mislead.
One psychological state that I can be positive about when it comes to debt is the mindset of when you are completely free of debt or on a solid path towards a debt free life. The moment you start on my Debt Free For Life (www.finishrich.com/debtfree) plan, you will begin to feel better. Just knowing you have a plan in place to pay down your debt in the right order, the right way—a plan you can carry out yourself that will save you thousands of dollars in interest fees and cut years off your indebtedness—will truly lighten your burden, however light or heavy it might be.
Debt creates fear. Not having it creates peace of mind. This may sound like a cliché, but its true. When you have less debt, you will feel more FREE. You will have fewer worries, less stress, less tension and fewer fights at home. In short you will have less fear and more serenity.
The problem is most people don’t know how or where to start. This is why I wrote my new book. To give people a step-by-step plan to get out of debt—no matter how much you owe. In addition, I have teamed up with Equifax, one of the leading nationwide credit reporting agencies to create a revolutionary online tool called Debt Wise™. What’s great about Debt Wise is that it has taken my DOLP system and made it automatic. As a result, in literally seconds you can see how much debt you have, what order to pay it off in, and how long it will be until you are debt free. Debt Free For Life includes a FREE 30 day trial of Debt Wise.
4) Your book advocates now getting completely out of debt, and not play semantics between good and bad debt. Is this a knee-jerk reaction to the economic crisis and any personal crisis you may have recently experienced? So many businesses have succeeded through the use of debt. What about the choice of going to a great school that costs $40,000 a year in tuition and
going into debt vs. going to an unknown school for only $5,000 a year. How does one weigh the choices?
Last winter, a friend asked me about ‘good debt’ vs. ‘bad debt.’ I started giving her the standard answer about how good debts are debts you incur to buy things that can go up in value (like a home, business or college education) while bad debts are things that will depreciate or go down in value (like credit card balances). But then I had kind of an epiphany and realized, this recession has changed everything. Home equity has been dropping—by trillions of dollars over the last few years and people with college degrees are looking for jobs.
The truth is, that when you’re in debt, it doesn’t matter what you borrowed money for. The only thing that matters is whether or not you can afford to pay it off. When you can’t afford to make the payments, the only difference between “good” debt and “bad” debt is that the “bad” variety can destroy your life much more quickly. Now I’m not saying all borrowing is bad. The ability to borrow money helps us function as a society and borrowing to build assets – like a business – can make sense, if you have a real plan to repay your debt.
5) Do you think there’s a correlation with people who get into debt and those who have compulsive, addictive tendencies? In other words, those who go to the extreme and cut up their credit cards may have a propensity to do other unhealthy things such as over eating, watching too much TV, playing too many video games, smoking, and so forth? Is it possible to have a balance instead?
All types of people are in debt – as a country we have a debt problem. However, when you decide to get out of debt you will have to sit down and look at what behaviors got you into your financial situation, addictive or not. You see plenty of stories about people who are compulsive shoppers with thousands of dollars of credit card debt—but you do not have to have these tendencies to land yourself in excessive debt – it is all situational. If you have an addictive tendency that costs money and you do not have enough to support that habit—there will most certainly be a correlation.
With this said, it is possible to find balance – but you need the support and action plan to do so. What I recommend is that you first try and take control with my Debt Free For Life action plan. In the book you will find the tools and information necessary to take control of your finances and start your journey towards debt freedom. I also encourage everyone to join my Debt Free Challenge. Challenge participants will be automatically entered to win a debt busting $10,000! You do not have to be compulsive or have addictive tendencies to fall in the trap of debt; joining this challenge will help you keep a balance through the use of free information and support.
After taking the challenge, it’s time to stop digging yourself further into debt. Taking little steps can help – for instance, I’ve come up with something called the Latte Factor®. It’s based on the simple idea that all you need to do to build wealth is look at the small things you spend your money on every day and see whether you can redirect that spending to pay off debt or invest in your retirement. Putting aside as little as a few dollars a day for your future rather than spending it on little things like lattes, bottled water, fast food and so on can make a difference between accumulating wealth and living paycheck to paycheck.
TO WIN ONE OF THREE BOOKS
* Tweet this post. (1 point)
* Comment as to why you think people get into uncontrollable debt. (2 points)
* If you have a blog, link back to this contest. (5 points)
The contest ends one week from today on Friday, Feb 11th at 11:59pm PST!
Book description: Hard cover, 265 pages, retails for $19.99 pre-tax. That’s $22 in California after tax!
For more information about David’s book visit www.finishrich.com for free resources and tools.
Not everyone has the knowledge and discipline to get out of debt by themselves. Many people — maybe you’re one of them — need someone to take them by the hand and walk them out of debt. There is nothing wrong with this.
My recommendation, if you decide you need some outside help, is that you consider working with a non-profit credit-counseling agency. According to the two major non-profit credit-counseling trade associations — the National Foundation for Credit Counseling (NFCC) and the Association of Independent Consumer Credit Counseling Agencies (AICCCA) — some eight million people came to member agencies for help in 2009. So if you need help, trust me, there’s no reason to be embarrassed. You’ve got plenty of company.
Let’s take a look at eight ways that a great non-profit credit counselor can help you:
1. They Will Offer You a Free Counseling Session.
Before they ask you to sign up for anything, most good nonprofit credit-counseling agencies will spend at least 60 to 90 minutes with you reviewing your entire debt situation and overall financial position FOR FREE. (Some reputable firms do charge an up-front consultation fee, but it’s very small-usually less than $100.) A common first question is, What brings you to us today? They may then ask you about your short and long-term goals. The idea of this is to encourage you to think beyond the immediate problem of getting out of debt and start looking forward to a brighter future.
2. They Will Help you Look Closely at Your Financial Reality.
First, they will look at what you earn and your expenses. Then they will look closely at your debt, how much you owe, what kind of interest rates you are paying, and how much you are wasting in late fees and over-the-limit penalties. Based on all this, they can figure out if you might be able to get yourself out of debt simply by changing your financial habits, or if you need to enroll in a Debt Management Plan (DMP).
3. They will Create a Spending Plan or Budget for You.
There’s no point in trying to pay down your debt if you don’t create a spending plan that allows you to live within your means. Creating this plan or budget is a critical part of what a good non-profit counselor will do for you. They will study where your money is going and make recommendations about where you can and should cut back in order to get your finances under control.
4. They Will Work With You on Secured Debt as Well as Credit Card Debt.
A good counselor will review both your secured debt (where you put up collateral, such as a mortgage) and your unsecured debt (where you don’t, such as most credit card debt). The goal will first be to make sure you can buy groceries, keep the lights on, and pay your rent or mortgage. Then they will look at the best way to deal with your credit card debt and other unsecured obligations.
5. They Will Recommend a DMP — But Only if it Makes Sense for You.
A Debt Management Plan is a payment plan where your credit counselor negotiates with your creditors to work out an arrangement designed to make it possible for you to get out of debt within three to five years. Millions of cash-strapped credit card customers have enrolled in such plans in the last few years. In most cases, a DMP will:
- Create a three- to five-year plan to get your debt paid off.
- Lower the interest rate on your debt — usually to below 10% and sometimes much lower.
- Get your credit card company to stop charging you over-the-limit fees, annual membership fees, and late payment penalties.
- Freeze your credit card accounts until your balances are paid off. Some credit card companies will actually close your account and make you apply for a new card once your debt is paid off.
It is important to note that a reputable non-profit won’t recommend a DMP to just anyone. According to the National Foundation for Credit Counseling, about one out of every four people is able to sustain a DMP. A DMP can’t really help you if you still can’t afford to make your payments even after your interest rates are lowered and your penalty fees are waived.
6. They Will Level With You About Your Need to File For Bankruptcy.
According to the NFCC, about 10% of all credit-counseling clients probably should consider bankruptcy. A good credit-counseling agency will let you know right away if you are in that 10%. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, you’re not allowed to file for bankruptcy without first working with an approved credit-counseling agency, and a good agency will provide you with legally required pre-filing counseling. What a good counseling agency won’t do is push you to use a particular bankruptcy lawyer. (I talk about finding a good bankruptcy attorney in Chapter 14 of Debt Free for Life).
7. They Will Provide You with References and Testimonials.
Most reputable non-profit credit counselors take great pride in the success stories of their customers — and they should be willing to provide you with references from people they have helped. If you’re considering a credit-counseling agency that wasn’t recommended to you by someone you know, ask them for the names of three former clients whose situations were similar to yours and who might be willing to talk about their experiences.
8. They Will Happily Explain Their Fees Up Front.
Any honest, accredited non-profit credit-counseling agency will be happy to explain exactly how much they charge and put it in writing. Many won’t charge you anything for the first appointment. In most cases, you will have to pay a monthly fee if you enter a DMP, but this, too, should be nominal — usually $50 a month or less. If you can’t afford to pay, most non-profit consumer counseling organizations will still work with you. Both the NFCC and AICCCA membership guidelines say that consumers cannot be denied service based on inability to pay.
The road to financial freedom can be long and arduous so if you feel that you need some outside guidance to get your finances on track you will need to find the right agency to help you.
To find a reputable credit-counseling agency, contact the NFCC (800-388-2227) or the AICCCA (866-703-8787). If you feel like you may not necessarily need the assistance of a non-profit credit counselor but still want some help to keep you on track while getting out of debt, visit my website finishrich.com for financial info and resources. Also be sure to check out debtwise.com for a do-it-yourself online debt reduction tool I’ve created with Equifax to help you automate your way out of debt.
Your credit score impacts your ability to get out of debt and stay out of debt. The worse your credit score, the higher the interest rate you will be charged on money you borrow. The better your score, the less your debt will cost you and the quicker you’ll be able to pay it off.
So it’s not only important to know your credit scores from all three major credit rating bureaus — Equifax, TransUnion and Experian — but to know how to raise your score. The simple truth is that raising your credit score isn’t that hard if you know what to do.
Over the years I’ve coached literally thousands of people on how to fix their credit scores, and based off of that experience I have developed a 12-step action plan to raise your score quickly and keep it there. Regardless of where you start from, if you follow this plan and utilize the online tools I discuss — in six months your score will be higher than you ever thought possible.
Step 1: Get Your Credit Report and Check it For Errors
Under the Fair Credit Reporting Act, the Big Three credit bureaus are required to provide every consumer who asks with a free copy of their credit report once a year. You can get yours by going to annualcreditreport.com. This step is important because it is extremely likely there are errors.
A study by the National Association of State Public Interest Research Groups found that one in four credit reports contain a mistake serious enough to keep you from getting a loan, credit card or in some cases a job.
Once you get your report, go through it with a fine-tooth comb. If you find any errors (for example, late payments that were actually paid on time or credit limits that are lower than they should be), get them corrected as quickly as possible. You can do this by sending the credit agency a certified letter that explains what information was inaccurate, including copies of documents (such as bank records) that verify your claim, along with a copy of your credit report with the disputed issue highlighted.
Under the Fair Credit Reporting Act, the credit-reporting agencies are required to correct inaccurate or incomplete information in your report within 30 days. Go to the “Free Stuff” tab at www.finishrich.com to access sample correction letters. Also, go to Finishrich.com and sign up right now and take advantage of the free Debt Wise 30 day trial. By signing up, you will be entitled to a free Equifax Credit Score, so you can see where you stand.
Step 2: Automate Your Bill Paying.
This may be the most important tip. Missing payments or being late on payments can quickly ruin your credit score. For this reason, I strongly recommend that you use your bank’s online bill-paying service to automatically transfer a pre-set amount every month from your checking account to cover at least the minimum payments on all your credit accounts. I have practically every bill of mine automated in this way. You can also use your credit card company online bill payment system to notify you through email when you are close to going over your credit limit, which can help you avoid more damage to your score.
Step 3: If You Have Missed Payments, Get Current.
It’s never too late to clean up your act. Get yourself current as quickly as you can and stay current. Your score will begin to improve within a few months, and the longer you keep it up, the more noticeable the increase will be. The negative weight that FICO gives to bad behavior like delinquencies lessens over time, so as long as you stay on the straight and narrow, those black marks will eventually disappear from your record for good.
Step 4: Keep Your Balance Well Below Your Credit Limit.
Of all the factors you can control — and improve quickly — how much you owe is probably the most powerful. Since the credit crunch, credit card companies have been cutting customers’ credit limits without warning.This can be devastating to your credit score. Say you’ve got a $1,000 balance on a card with a $2,000 limit-and then the card company slashes your limit to $1,000. Suddenly, you’ve gone from 50% credit utilization to being maxed out, which can shave 45 points from your credit score. The credit bureaus recommend that you keep your usage below 33% of your available credit.
Step 5: Beware the Credit Card Transfer Game.
For years, people have saved money by transferring high-interest credit card balances to low-interest cards.This can still be helpful, but be aware that using one credit line to pay off another sets off credit score alarm bells — even if all you’re doing is consolidating your accounts. All other things being equal, your credit score will be higher if you have a bunch of small balances on a number of different cards rather than a big balance on just one or two.
Step 6: If You Rack up High Balances, Pay Your Card Bill Early.
The “Amounts Owed” part of your credit score is based on the balance due listed on your most recent credit card statements. So even if you pay your bills in full each month, running up high balances can still hurt your score. Avoid this problem by paying down all or part of your bill before the end of your statement period, thus reducing the balance that will be reported to FICO and the credit bureaus.
Step 7: Hang On To Your Old Accounts
Part of your credit score is based on how long you have had credit accounts. Closing old accounts shortens your credit history and reduces your total credit — neither of which is good for your credit score. Keep the older accounts open even if you aren’t using them.
Step 8: Use Your Old Cards.
The credit card industry has gotten much stricter about closing inactive accounts. This can hurt your credit score, since it reduces the average age of your credit accounts. To prevent this from happening, you should pull out your old cards and start putting at least one charge on them every month.
Step 9: Demonstrate That You Can Be Responsible.
The best way to raise your credit score is to demonstrate that you can handle credit responsibly — which means not borrowing too much and paying back what you borrow on time. Don’t open new accounts just to increase your available credit or create a better variety of credit. You should open new credit accounts only if and when you need them.
Step 10: Shop For Loans Quickly.
When you apply for a loan, the lender will “run your credit” — that is, send out an inquiry to one of the credit-rating agencies to find out how credit-worthy you are. Too many such inquiries can hurt your FICO score, since it could indicate that you’re trying to borrow money from different sources. Of course, you can also generate a lot of different inquiries by shopping for the best mortgage or auto loan. The FICO scoring system is designed to allow for this by considering the length of time over which a series of inquiries is made. So, try to do all of your loan shopping within 30 days.
Step 11: Know the Difference Between a “Soft Inquiry” and a “Hard Inquiry.”
The credit bureaus all recognize the difference between you checking your own score (a “soft inquiry”) and lenders checking your score (a “hard inquiry”). While too many hard inquiries can lower your score, soft inquiries don’t count at all. Feel free to check your score as often as you want.
Step 12: Buy a 3-and-1 Report And a Credit-Monitoring Package and Identity Theft Service.
Your credit score and credit report are so important that it makes sense to pay for a 3-and-1 Report (which provides you with your credit scores from the three bureaus) as well as an identity theft monitoring service. In most cases, these services will cost you between $14.95 and $19.95 a month — I personally pay for these services myself because I think it’s worth the investment.
Congratulations! You now know more than 95% of all Americans about what may well be the most important influence over your financial life — your credit record and score. Make lifelong monitoring of your credit part of a debt-free lifestyle! For more resources and tools go to finishrich.com.
You’re probably ready to begin getting out of debt. But I’ve learned that if you want your motivation to stick, you need to be really clear about why you want to be out of debt. I’m going to ask you seven simple questions about your debt. Don’t get nervous. There are no RIGHT answers — only honest answers. By answering these questions, you can see whether or not you’re really ready to make this journey.
By the way, if you are married or in a committed long-term relationship where you share finances, discuss these questions with your partner. Working on your money together significantly improves the chances of succeeding financially and of staying together happily as a couple.
1. Why Do You Want To Be Debt Free For Life?
You could write, “I’m carrying $10,000 in credit card debt, and it stresses me out, and I’m worried every month when the bills come. I’m paying 19% in annual interest, and I feel stupid wasting this money — so the faster I pay it down, the better. I know when I pay it off I will feel GREAT.” That’s a simple answer, but you get the idea. Then again, you might read that question and come up with a deeply personal, more spiritual reason.
2. Why Are You in Debt?
My goal with this question is not to have you beat yourself up, but rather to have you face the truth about how you got where you are today. Did something tragic happen, like a medical problem? Did you lose a job? Did you buy a bigger house than you could afford? Did you live beyond your means? What happened? Answer the question from your heart as honestly as you can.
3. How Much Debt Do You Have?
If you completed the DOLP worksheets from last week, you should have a clear idea of your total debt. Go ahead and just write it down now: “I estimate that my total debt (house, cars, student loans, credit cards-you name it) as of [today's date] is $________.
4. What Percentage of Your Income Goes to Pay Interest Charges on Your Debt?
This may be the most eye-opening question. If you’ve completed the DOLP worksheets, you can use that information. If you haven’t, then pull out the most recent statement for every loan you have — mortgage, car loan, student loan, and credit card. You’re going to use this information to figure out exactly how much of your monthly payment goes to interest charges.
For example, say your mortgage payment is $2,000 a month. Chances are that less than $150 of that goes toward paying down the principal. The rest is going to interest. Look at this for each loan; call your lenders for the facts if you have to. Once you add up all the interest you are paying, you may find that more than half your take-home pay is going right into the lender’s pockets — without helping you make one inch of financial progress.
Now it’s time to figure out the percentage of your pay that goes to interest:
- My total interest payments each month are:
- My take-home pay each month is:
- (Divide your total interest payments by your take-home pay.)
- The percentage of my take-home pay that goes to pay interest charges is: ____ %
5. Who Can Help You Get Out Of Debt?
If you follow the plan I lay out and use the tools I provide, you should be able to get yourself out of debt. But maybe you’re not the do-it-yourself type. Maybe you feel you’ll need a professional credit counselor to help guide you through the process. If that’s true for you, then great — write it down. And even if doing it yourself is not a problem for you, if you have a family, you are going to need their support to get out of debt. It’s hard to get out of debt if the people around you are spending you back into it. So if you have a spouse and/or kids, you may want to add them to your answer here. Also, you should definitely add me to your list — because I am committed to helping you. I can start by offering you a free trial to my new revolutionary debt reduction tool called Debt Wise. Learn more about this tool and get your FREE trial by clicking HERE.
6. What’s The Worst Thing That Could Happen if You Don’t Get Out of Debt?
It’s important to face your fear about debt. What is your life likely to look like in the future if you don’t deal with your debt? Facing your fear about your debt is not being pessimistic — it’s being honest. The more honest you are right now, the better. So tell yourself the truth. Write down your worst-case scenario. It will motivate you to act decisively to start dealing with your debt.
7. When Will You Start to Get Out of Debt?
Below you will find the “Debt Free For Life Pledge,” which I’ve created to mark your new commitment to leading a debt-free life. By signing it, you are making a promise not to me but to yourself and your loved ones — a promise that you are truly headed toward a new life of financial freedom. Signing this pledge you will be automatically entered to win $10,000 to put toward paying down your debt! Here is how you join the movement — you can just copy and paste the pledge below and sign it (without entering to win the prize). If you want to join the challenge community and the chance to win $10,000 go to www.finishrich.com and take the Debt Free Pledge online or go to directly to the challenge site by clicking HERE http://www.debtwise.com/debt/
THE DEBT-FREE FOR LIFE PLEDGE
I __________________________ [insert your name] commit to being out of debt by __________ [insert date]. I believe that paying down my debt and being DEBT FREE FOR LIFE is critically important, and I am ready to work to make it happen.
I will start my journey to being out of debt on __________ (insert date).
Congratulations on taking the time to read my questions and answer them. I’m proud of you. Now let’s continue working on getting out of debt!
As seen on AOL’s Walletpop:
Today, I’m going to share with you a system to help you get out of debt called DOLP, which stands for “done on last payment.” The DOLP system is the cornerstone of your Debt Free For Life plan. I’ve talked about it for over a decade, and I’ve taught it to millions of people. It’s simple and it works. Are you ready? Let’s get started with a real-life example of someone who has used the system to great success.
First, get all the statements from every credit card account you have. Now get some folders and create a file for each different credit card account and label it appropriately (e.g., “Capital One Visa”). From now on, you will put all of your statements and payment receipts for this particular account in this particular folder. For each folder, write the amount you currently owe. Every time you make a payment, you’ll write the new (lower) debt amount and the date.
Now, make a list of each credit card account and its current outstanding balance, starting with the smallest debt and working down to the largest. In this way you will figure out exactly how much you owe and who you owe it to:
Figure Out Your Other Debts
Next, gather up all the statements for your mortgage and related debts, such as second mortgages and home-equity loans. As you did before, create a file for each debt, label it (e.g., “Wells Fargo home mortgage”), and on the front of the folder write the total amount you currently owe. Do the same for any car loans, student loans or other personal loans. Now add up all of this other debt and record it as follows:
The purpose of the DOLP plan is to build “debt-reduction momentum.” Here’s how you do it.
Step One: Fill Out the DOLP Worksheet
You’ll find an interactive version of the DOLP Worksheet here. In the first column, write in the name of the loan account. In the next column, write the balance you owe, followed by the minimum payment due. The fourth column is for the payment due date. For the moment, hold off on filling this one in.
The last two columns are for the loan’s DOLP Number and its DOLP Ranking. These are the heart of the DOLP system, and figuring them out (which we’ll do next) is super easy.
Step Two: Calculate the DOLP Number For Each Account
To figure out each account’s DOLP Number, divide the outstanding balance by the minimum monthly payment. For example, if you owe $500 on Visa and your minimum payment is $50, take the $500 and divide it by $50, which would give your Visa account a DOLP Number of 10. The 10 represents how many monthly minimum payments (not counting interest) it would take to pay off your debt.
After you’ve finished with your credit card accounts, do the same for your other debts. With most closed-end loans, such as mortgages and car loans, the remaining number of payments is listed on your statements. If it’s not, leave the space for the DOLP Number blank. We’ll come back to it later.
Step Three: Assign Each Account a DOLP Ranking
This is easy. The account with the lowest DOLP Number is ranked #1, the account with the second lowest is ranked #2, and so on.
Step Four: Calendar Your Due Dates
Now fill in the “payment due date” column in the worksheet for all of your loans. Add these due dates to whatever calendar system you use. Set your calendar alerts to remind you of all your payment due dates at least five days ahead of time. This should prevent you from making any late payments, which can cost you an absolute fortune.
Step Five: Fast-Pay Your Debt — The DOLP Way
Each month, make the minimum payment on every credit card account … except the one with the lowest DOLP Ranking. For that card, you make as big a payment as you can manage-ideally, at least double the minimum.
Once a card has been paid off, bury it and start attacking the account with the next lowest DOLP Ranking.
DOLPing is simply a matter of prioritizing your debts and then fast-paying the right card down. It takes time, effort, and commitment. But with your new-found knowledge, plan, and willingness to take action, you’ll make steady progress.
Click here to follow more of my Debt Free for Life program on WalletPop.com.
As seen on AOL’s Walletpop:
Debt can destroy lives, families, marriages, relationships, business — even countries. So this year my mission is to help one million people pay down a billion dollars in debt and start a new, debt-free life. Care to join me on this journey?
I’ve just written my twelfth book, Debt Free For Life; The Finish Rich Plan for Financial Freedom. What follows is a condensed version of what I believe are the 10 most important decisions you can make in 2011 to crush your debt and buy back your freedom.
Getting out of debt is much harder then getting in. You can help yourself by taking advantage of the free one-day download of Debt Free For Life on WalletPop, available for today only! The book is filled with powerful tips and techniques, and can be your guide to a debt-free life in 2011. Click here to download your copy.
I’ll be your guide for a 10-week counseling session on WalletPop, starting today.
Ready? Let’s get going!
10 Steps to Get Out of Debt in 2011
1. Decide You Want to Get Out of Debt. It sounds obvious, but the truth is that all progress begins with making a real decision. If you have more debt than you want, you need to decide that enough is enough, and that it’s time to be debt-free once and for all. Are you ready to decide? Make a public pledge right now by registering at Debtfreechallenge.com and be entered to win $10,000, which would go a long way toward putting a dent in your debt this year.
2. DOLP Your Debt Away. DOLP stands for “done on last payment.” Among other things, Debt Free For Life will teach you my DOLP method for getting rid of credit card debt. First you “stack your debt,” then you “rack your debt,” then you “hack your debt.” That is, you see how much you owe and who you owe it to, then you figure out the order in which you should pay it off, and then you start making the minimum payment on every card except the one you’ve designated your number one priority debt. Once you’ve paid off that card, you focus on number two, and so on until every card is paid off. You can download my DOLP worksheet here.
3. Go Online and Go Automatic. In my opinion, one of the best online debt-reduction tools around today is Debt Wise, an offering of Equifax, the giant credit bureau. I love this tool so much, I’m endorsing it. What’s great about Debt Wise is that it has taken my DOLP system and made it automatic. As a result, in literally seconds you can see how much debt you have, what order to pay it off in, and how long it will be until you are debt free. You can get a free trial of Debt Wise by clicking here. There are similar free tools available from other companies like Intuit’s Mint site, which also has a lot to recommend it. But only Debt Wise automatically pulls your debt data from your credit file. With the others, you have to access all your various accounts manually.
4. Get a Better Rate. Some of you are paying as much as 29.99% in credit card interest — even though you’ve never had a single late payment. Don’t accept this. Go to websites like creditcards.com, lowcards.com, or bankrate.com to find out the rates your credit card company is offering new customers. Chances are you are paying up to 10% more than they are. Debt Free For Life contains a chapter about how you can use this information to renegotiate your card rates down or, failing that, get yourself a new card with a better rate.
5. Do the “Debt Math.” If you make only minimum payments, it will take you more than 23 years to pay off a credit card balance of just $5,000. My suggestion is that you make at least DOUBLE the minimum payment on your number one priority debt. In this way, your debt could be all paid off within three to five years — maybe sooner. Read your statements today — the new Credit Card Act by law requires lenders to show the “debt math” of minimum payments.
6. Raise Your Credit Score. A low credit score will cause lenders to charge you a high interest rate, which makes getting out of debt even harder. For that reason, raising your credit score in 2011 is an important goal. Other than paying down debt, and paying your bills on time (every time), length of credit history, types of credit used and new credit — the fastest way to raise your credit score is to make sure there aren’t any mistakes on your credit record. By law, you are entitled to one free copy of your credit report every year from each of the “Big Three” credit bureaus (Equifax, Experian and TransUnion). Make sure to check your report for errors, and if you find any, go to the credit bureau’s website and use their online tools to request a correction.
7. Accelerate Your Mortgage Payments. When I was a financial adviser, I noticed that all my clients who retired in their 50s had one thing in common: no mortgage. And they all did it the same way: They paid a little extra every month. If they couldn’t afford the payments on a 15-year mortgage, they paid extra on their 30-year loan (either by adding 10% to their regular payment, making one extra payment a year, or switching to a “bi-weekly” payment plan). Make 2011 the year you adopt this extra-pay plan; it will get rid of your mortgage by as much as six years early, and save you thousands in interest.
8. Avoid debt consolidation loans or debt settlement offers. Every week I receive letters from people who paid $500 to $1,000 up front to “professional” debt counselors who promised to get rid of their debts. In most cases, they got little or nothing for their trouble. If you need help, stay away from the “for profit” debt-settlement agencies and instead look for “non-profit” credit counseling services. You can get referrals through the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. Check out WalletPop’s recent series on the many dangers of debt consolidation companies as well.
9. If You Don’t Have the Cash, Don’t Buy It. That’s what my grandmother Rose used to say, and it’s advice that still holds up. If you want to get out of debt, you have to change how you spend money and the best place to start is to not borrow money to buy stuff you don’t absolutely have to have.
10. Make it a Family Affair. Go team! Make getting out of debt a family, friend or team project. One of the videos we’ll be hosting in coming weeks here on WalletPop tells how a woman named Genevieve paid off more than $70,000 in debt by creating a support team to help her achieve her goal. Getting out of debt can be tough. Having friends and family cheer you on makes it easier and more fun. Go build a team for 2011 to get out of debt!