Debt Consolidation

The Facts About Debt

Does Debt Stacking Really Work?

Filed under: Banks, Debt, Debt Consolidation
Tags: , , , , — Written by: Lyuda
March 29, 2010

Too Much Credit
Photo by: Andres Rueda (flickr)

Looking through some of our older articles on UWSA I found some on the subject of Debt Stacking. A few people have asked me whether this is a good idea, and whether it does what it says for people. I’ve never used debt stacking myself, though it is really just a high tech way to follow through on making sure you’re not paying a bunch of extra fees and interest to maintain multiple credit lines. That is a pretty common sense part of maintaining your credit rating. Here’s a little on making debt stacking work, and seeing if it’s right for you.

Firstly a little on what debt stacking is. The basic concept is that once you pay off a debt with a monthly payment you continue to apply the money previously allocated to the monthly payment to the payments for other debts. If you’re trying to get out of debt it’s pretty obvious that is a good idea. What is not obvious is which debts to apply the freed up money to.

Mathematically if you want to get out of debt faster there is a relationship between both the amount of a monthly payment, the balance, and the interest rate. No I don’t know the formula off the top of my head, but there are a lot of computer programs that do, and will allow you to input basic information about your debts and spit out the order in which to pay them off or ’stack’ them.

Tip number one would be not paying a lot for a program; if the goal is spending less repaying your debt and getting out of debt faster burning a bunch of money on a program doesn’t make sense. There are free tools out there to figure this information out, and sometimes professionals will offer that information free of charge or at a reduced fee as well.

One thing debt stacking does do is to avoid what is called ‘the shotgun approach’ to repaying debt. This is where one month you put a little extra on one bill, and next month you do another. Using that approach is a great way to maximize how long you stay in debt.

Tip number two, which is true of any debt repayment strategy, is stick to the plan. The benefits of debt stacking can be great, and include very reduced interest on one’s debts. These benefits drop fast though for every month you don’t make the payments in the manner suggested. If you cannot do this by yourself debt consolidation with a credit councilor or debt consolidation service might make more sense.

Debt stacking can be really helpful in repaying debt, and save you a ton of money. It is also usually free and because generally you are not modifying your repayment plan significantly it can help build your credit rating as well. The key is keeping to the plan, and knowing your limits. As always though the plan only works if it works for your.

Too Much Credit Photo by: Andres Rueda (flickr)

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Is it time to throw out your debit card?

Filed under: Banks, Debt, Debt Consolidation
Tags: , , , — Written by: Lyuda
March 12, 2010

Chip on Debit Card
Photo by: Declan Jewell (Flickr)

The only thing about as bad as fees you can’t afford to pay due to economic hard times is fees that you don’t even realize you’re paying. Thanks to declining returns on services customers do opt for however that’s exactly the kind of fees banks are starting to love. An easy way to rope you into fees is bank debit cards, and even if you have never had a problem with one you may want to take a look now.

The first way these lock you into fees is you pretty much require overdraft protection to use one. Many argue that if you manage your account well and treat a debit card transaction like a check you won’t get into trouble. Unfortunately this is not true at all. Banks use a number of tricks in how they process transactions that make it impossible to be certain when a charge will take place, or for what amount. One bank manager I talked to said he was frustrated because he honestly couldn’t understand how they process these transactions; he said he always leaves a couple hundred dollars just in case, even though he is very sure of what money comes out of his account. These cards are seriously designed to encourage Non-sufficient funds fees with balances that do not consistently update and a ‘courtesy’ of letting you overdraw your account by hundreds of dollars before they decline a charge. A courtesy that can result in hundreds of dollars worth of fees; a postage stamp could cost you more than forty dollars!

Another hidden debit card fee is annual membership to some ‘rewards’ program. Typically the rewards aren’t amazing, and the ‘points’ earned are no more consistent than the order in which debit card transactions are processed. In almost any situation you’d see a lot more rewards by opting out of this program and just saving the money in a savings account. A similar ‘rewards’ program is to acquire points for ‘being green’. In reality this one is more about saving the bank from paper costs than it is about the environment, but it can also keep you less informed about your account balances.

Frequently also these days there is a charge just to have a debit card, or to use one. If you receive an updated notice in the mail regarding your card make sure to see if there is a new annual or monthly fee, or even a new transaction fee. Careful management of funds can only happen when you know for sure what fees may post to your account. A new 35-cent fee for a specific type of transaction could have you literally seeing a bright red 35-dollar insufficient funds charge!

Many people, especially younger people who have grown up with debit cards, find it hard to manage without them. It does take getting used to but it’s worth the cash saved, and avoiding disastrous NSF fees. Keeping enough money on hand, and keeping a low fee credit card ONLY for emergencies makes a lot more sense then letting the bank borrow your money while you essentially pay THEM interest on it in subtle fees. If you really can’t live without the convince of a card then make sure you always know what fees are charged, opt out of high interest overdraft protection, and keep a safety net of at least a couple hundred dollars in your account in case an unsuspected fee posts to your account.

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Bi-Weekly Mortgages Can Save You Money

Filed under: Debt Consolidation
Written by: UWSA Staff
November 17, 2008

Did you know that by paying a mortgage bi-weekly you can condense a 30 year mortgage to 24 years? Many consumers spend thousands of dollars extra on interest, which they could spend otherwise, or invest for their retirement. If you would like to investigate this valuable personal finance tool, talk to your lending institution about your options. Here’s what you need to know:

Why Bi-Weekly Payments?

They eliminate your debt faster by paying half of your monthly mortgage payment every two weeks. There are 52 weeks in the year, so at the end of the year you will have paid the equivalent of 13 monthly payments instead of 12. This will take years off your mortgage, and because you are putting more money towards the principal, you pay less interest.

Prepaying on the principal

There are a couple of options. If your mortgage has a prepay provision, you can simply apply more money towards your principal each month. Technically this isn’t a bi-weekly mortgage, but the same rules apply; the more you pay towards your principal, the faster your mortgage will be paid, and you will pay less interest. This is a good option if you are already maximizing your contributions to a tax advantaged retirement account, and you have the income to invest in your home.

Refinancing your mortgage

The 2nd option would be to talk to your bank about refinancing your mortgage. This will require a new mortgage, which will mean closing costs, but you will save in the long run. This is an excellent option if you have equity in your home, and you would like to pay down some higher interest debt, or invest in updating your home.

Summary

Bi-weekly payments are a great way to pay off your debt faster without noticing much difference in your monthly payments. They also work on your other debts, including credit card debt, and car loans. It is important to read the fine print and make sure that your lender will apply the payments towards the principal, instead of the next months interest. Take the time and discuss it with your lender. You could save thousands, perhaps even hundreds of thousands of dollars in interest.

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What Happens To My Mortgage if My Bank Goes Bust?

Filed under: Debt Consolidation
Written by: UWSA Staff
November 7, 2008

Recently a number of banks have been filing for bankruptcy or have been taken over by other banks. Many people are concerned about what that might mean for the mortgage that bank holds, and are confused what happens next. There are a few common points involved in understanding how this works.

  • How Bankruptcy Works
  • Debt As An Asset
  • Can A Bank Buy A Mortgage And Change the Terms?
  • The Truth in Lending Act

How bankruptcy works.

Bankruptcy essentially means that a company or individual can no longer afford to pay their debts. That doesn’t necessarily mean that all their debts are forgiven or disappear. (In the case of banks, their assets are either auctioned off, or in some cases, outright assigned to other banks by the government.)

Debt As an Asset

When you have a mortgage with a bank, it is a debt for you. (For the bank, though, it’s an asset; it’s something that brings in money.) Even when mortgage holders can’t pay their bills, and the bank in turn is unable to pay their own bills, every mortgage the bank holds still has some kind of value. If nothing else, there is the possibility of the bank foreclosing on the collateral property in order to sell it. When a bank declares bankruptcy, its assets – including the mortgages it hold – are either auctioned off or assigned to other banks to help pay for its debts.

Can a Bank Buy A Mortgage And Change the Terms?

The answer to this is often in the mortgage contract, which is a really good reason to make sure you read your mortgage contract and consult your attorney before signing one. In most cases, as long as you are paid up and following the terms laid out in your mortgage, a company cannot change it. However, if you become delinquent, there are often provisions that allow the new owner to change the terms, as could the original bank if you were to default. Some people assume that if their lender is overloaded with debt and declares bankruptcy, their mortgage disappears. This is rarely true, and assuming so without proof in writing could make for a very big financial pitfall.

The Truth in Lending Act

Recently, some of the troubled lenders have been investigated for telling borrowers incorrect terms about their mortgage. (Many mortgage holders who thought they had a traditional 30-year mortgage in fact had an adjustable rate mortgage, or one with a balloon payment. ) Every mortgage contract must conform to the Truth in Lending Act, which among other things requires lenders must plainly state the actual interest rate in the contract.

Summary

The old adage holds true: you should always read your contract, especially in an environment where mortgage companies are being investigated for lying to consumers about the mortgage terms. Even if your lender is not one of the many currently facing bankruptcy, you should know what terms might change if your mortgage were to be sold or if you were to default. For most people with mortgage debt, as long as you are still in good standing with your current lender, it would be unlikely for the terms of your mortgage to change. For owners not in good standing, it would be very good to contact the new company that holds your mortgage very quickly. Often times, mortgages in default can be sold very cheaply to companies that are interested in taking ownership of the collateral property, not a repayment of the loan, which they may have purchased for pennies on the dollar.

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How Debt Stacking Can Help You Eliminate Debt

Filed under: Debt Consolidation
Written by: UWSA Staff
November 5, 2008

Many people today are worried about excessive debt, especially with news of higher unemployment (http://www.bls.gov/CPS/) and fewer raises. A lot of folks are trying to accelerate their debt, but feel it is futile, as additional payments don’t significantly reduce their debt. There’s a right way to accelerate your debt that many are unfamiliar with; it’s called debt stacking. It accelerates your debt payments with no additional charges, and without necessarily even paying more than the minimum monthly payment.

Most people who try to accelerate the process of paying of their debt use the “shotgun” approach. For instance, one month they will pay 100 dollars on one account, then a different account the following month. The problem with this is twofold. Firstly, it doesn’t actively target the accounts with the highest rates and fees that are keeping you in debt longer by taking more of your income for the interest and fees that could be more effectively applied to principal. Furthermore, it doesn’t consider that accelerating large debts make keep you paying added fees on small ones for a long period of time, which could be avoided by simply picking off the small debts quickly. It all comes down to getting out of debt faster and paying as little as possible in interest.

The first step to debt stacking is to make a list of all your debts, the minimum monthly payments, and the interest rates. It’s important to note which debts are fixed debts, for instance a 5-year car loan, and which are revolving, like credit cards, or in store credit accounts. Whether you work out the debt stacking yourself or use a debt-stacking program, you still need this information.

If you really want to kiss your debt goodbye, then it makes sense to set aside at least a little extra every month to help accelerate your debt. If that isn’t possible or doesn’t interest you, then you can just keep paying the minimum monthly payment. The key is that once you’ve made your list, you put it into order according to which debts to pay first and which ones to pay last. Once you’ve paid one off, you take the money you had been applying to the monthly payment of the first debt and apply it to the next one on the list along with the minimum payment for that debt.

The question now is how to put your debts in order. There are a few ways to do this, and it’s somewhat subjective. Some people simply sort the list so that the highest interest debts are first and lowest interest debts are last. Others use debt calculators to determine how long each debt will take to pay off, and put the shortest ones at the top so that they know the fastest way to get out of debt. Also, there are computer programs that can look at this in more detail by making projections based on all the combinations of payments the fastest possible way.

Summary

Debt stacking isn’t the same as debt consolidation, and it’s often not as fast or as dramatic in terms of freeing up money. That said, debt stacking could be used in conjunction with debt consolidation. Consolidating the highest interest debt into a fixed loan is a great way to combine these two programs. Either way, debt stacking is an effective way to accelerate the repayment of debt that doesn’t require a high priced credit counselor or an excellent credit score to accomplish.

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Save or Pay Debt

Filed under: Debt Consolidation
Written by: UWSA Staff
October 21, 2008

What makes more sense, paying down debt or saving for retirement?

Especially in today’s climate where many are seeing their retirement savings reduced by the falling stock market, and the debt level of the average American is approaching all time highs, many are faced with a question; should I pay off my bills or put more into savings? There’s a bit of math to really answering this question, and some other considerations, which can affect the answer.

The kind of debt

First let’s consider the kinds of debt we could be talking about. For some a hundred or so thousand in student loans seems like an immense amount of debt. In truth though a twenty thousand in credit card debt could affect your financial situation a lot more dramatically. You can write off interest on student loans, you cannot on credit cards. Further because of the fees and revolving nature of credit cards they can amount to thousands more in costs over a long period of time. With low interest, non-revolving debt it can make a lot of sense to invest as well especially when you factor in the tax advantages of many savings programs, and ability to get ‘free money’ in the form of an employer match, or other tax advantages investing incentives.

The Interest Rate

Much of this also requires a look at the interest rate. Even assuming a rate of return on your savings of as much as 12%, which is what the S&P 500 has averaged since 1926; if you’re paying 25% to your credit card company you’re losing money. In fact if you’re getting 12 percent your money about doubles about every 6 years, while at 25 percent your credit card company is doubling the money they lent you about every 3.6 years, and that’s assuming that you’re not charging it back up!

The kind of savings

Even if you don’t actually have any debt you could still be losing money. Inflation averages 3 percent historically and recently it’s been as high as 4.1, excluding increases in gas and food prices. If your investments are not keeping pace with inflation you’re losing buying power; essentially you’re not making any money, and possibly losing it. This is called inflation risk (as opposed to market risk; when the market goes down, which is what many novice investors tend to think about). So say you’ve got an investment averaging 12 percent, and a 9 percent interest credit card. You could still be in effect losing more than 1 percent of the buying power of your money.

How long until you retire?

Bottom line saving is about the math as much as it is the risks. If you are already nearing retirement you may not have enough time for your savings to begin growing enough to outpace the debt you are paying off. Young investors however may be able to afford more investment risk, ideally for a higher return, and out pace the costs of debt. Either way however debt is eating money every month or that’s extra money you could be saving.

Summary

You have to really look at your projected, as well as historic, rate of return on your investments and compare those to what you’ll be giving to the companies, which hold your debts. There are several on line calculators that can help you accomplish that. If you’re up to your ears in debt and haven’t started saving it’s time to get serious and look at ways to eliminate your debt quickly such as debt consolidation, or debt stacking. To be truly saving you have to be saving more money than you’re losing, and the bigger the difference between the two the faster your savings will grow which is critical to retiring well.

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